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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2021
Or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 001-12215
Quest Diagnostics Incorporated
| | | | | | | | | | | | | | | | | |
| Delaware | | | 16-1387862 |
| (State of Incorporation) | | | (I.R.S. Employer Identification Number) |
| 500 Plaza Drive | | | |
| Secaucus, | NJ | 07094 | | | |
| (973) | 520-2700 | | | |
| | | | | | | | |
| Securities registered pursuant to Section 12(b) of the Act: |
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered |
| Common Stock, $.01 par value | DGX | New York Stock Exchange |
| | | | | |
| 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 X No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes No X
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 X No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Yes X No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | |
| Large accelerated filer | ☒ | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [☐ ]
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. [☒]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No X
As of June 30, 2021, the aggregate market value of the approximately 122 million shares of voting and non-voting common equity held by non-affiliates of the registrant was approximately $16.1 billion, based on the closing price on such date of the registrant's Common Stock on the New York Stock Exchange.
As of January 31, 2022, there were outstanding 119,454,781 shares of the registrant’s common stock, $.01 par value.
| | | | | |
| Documents Incorporated by Reference | Part of Form 10-K into which incorporated |
| Document |
Portions of the registrant's Proxy Statement to be filed by April 30, 2022 | Part III |
Such Proxy Statement, except for the portions thereof which have been specifically incorporated by reference, shall not be deemed “filed” as part of this report on Form 10-K.
TABLE OF CONTENTS
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| Item | Page |
| Item 1. | | |
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| Item 1A. | | |
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| Item 1B. | | |
| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
| Item 5. | | |
| Item 6. | | |
| Item 7. | | |
| Item 7A. | | |
| Item 8. | | |
| Item 9. | | |
| Item 9A. | | |
| Item 9B. | | |
| Item 9C. | | |
| Item 10. | | |
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| Item 13. | | |
| Item 14. | | |
| Item 15. | | |
| Item 16. | | |
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The discussion in Item 1 below includes several defined terms:
ACO - Accountable Care Organization
CAP - The College of American Pathologists
CLIA - Clinical Laboratory Improvement Act
CMS - Centers for Medicare and Medicaid Services
DCE - Direct Contract Entity
FDA - U.S. Food and Drug Administration
FQHC - Federally Qualified Health Center
HHS - U. S. Department of Health and Human Services
IDN - Independent Delivery Network (including hospitals and hospital health systems)
IPA - Independent Physician Association
LDT - Laboratory-Developed Test
PAMA - The Protecting Access to Medicare Act of 2014
The discussion also includes several tables, indexed in the following guide.
| | | | | | | | |
| Guide to Tables |
| Services Portfolio | Table 1 | |
| Approaches to Accelerate Growth | Table 2 | |
| Key Professional Laboratory Services Offerings | Table 3 | |
| Consumer-Centric Initiatives | Table 4 | |
| Consumer-Initiated Testing | Table 5 | |
| Major Themes to Drive Operational Excellence | Table 6 | |
| Our Strengths | Table 7 | |
| Assets and Capabilities | Table 8 | |
| Clinical Franchises | Table 9 | |
| 2021 Net Revenues | Table 10 | |
| Key Trends | Table 11 | |
| Reducing Healthcare Costs and Improving Care | Table 12 | |
| Customers | Table 13 | |
| Potential Factors Considered When Selecting a Diagnostics Information Services Provider | Table 14 | |
| 2021 Medicare and Medicaid Revenues as % of Consolidated Net Revenues | Table 15 | |
| Key Regulatory Schemes | Table 16 | |
| Information Available at Our Corporate Governance Webpage | Table 17 | |
| Information Available at Our Corporate Responsibility Webpage | Table 18 | |
| Executive Officers | Table 19 | |
Item 1. Business
INTRODUCTION
Quest Diagnostics Incorporated is the world's leading provider of diagnostic information services. We play a crucial role in the healthcare ecosystem, empowering people to take action to improve health outcomes. Derived from the world's largest database of clinical lab results, our diagnostic insights reveal new avenues to identify and treat disease, inspire healthy behaviors and improve healthcare management. In the right hands and with the right context, our diagnostic insights can inspire actions that transform lives.
Quest Diagnostics was incorporated in Delaware in 1990; its predecessor companies date back to 1967. We conduct business through our headquarters in Secaucus, New Jersey, and our laboratories, patient service centers, offices and other facilities around the United States and in selected locations outside the United States. Unless the context otherwise requires, the terms “Quest Diagnostics,” the “Company,” “we” and “our” mean Quest Diagnostics Incorporated and its consolidated subsidiaries.
The patients we serve comprise approximately one-third of the adult population of the United States annually, and approximately one-half of the adult population in the United States over a three-year period. We estimate that annually we serve approximately half of the physicians and half of the hospitals in the United States.
During 2021, we generated net revenues of $10.8 billion. Additional financial information concerning Quest Diagnostics for each of the years ended December 31, 2021, 2020 and 2019 is included in the consolidated financial statements and notes thereto in “Financial Statements and Supplementary Data” in Part II, Item 8.
Our vision, aspirational goals and values are set forth below.
We believe that our vision, aspirational goals and strategy align very well with, and our strong value proposition supports, the triple aim of healthcare: improving medical quality and the patient experience while reducing the cost of care.
Quest Diagnostics is at the forefront of the response to the COVID-19 pandemic, playing a pivotal role to broaden access to laboratory insights to help people lead healthier and safer lives. We provide both molecular diagnostic and antibody serology tests to aid in the diagnosis of COVID-19 and the detection of immune response to the virus, and have performed approximately 63 million of these tests. We have built up and maintain the testing capacity to handle surges in COVID-19 testing demands, including using our national courier, air fleet and logistics network to balance volume across approximately two dozen COVID-19 testing laboratories, and also through our laboratory referral partner program. We are working with federal, state and local governments, healthcare organizations, payers, suppliers, retailers, trade associations and other laboratories in the effort to bring as much COVID-19 testing as possible to the American people. We are also providing data on COVID-19 testing that we conduct to federal, state and local public health authorities, including the federal Centers for Disease Control and Prevention, and participate in studies with government and private institutions, aiding COVID-19 public health response and research. All of our employees, including our dedicated laboratory professionals, phlebotomists, air fleet team, and couriers take tremendous pride in the role we play and work tirelessly to help patients and communities access quality COVID-19 testing.
We have seen how underserved communities are being disproportionately impacted by COVID-19 with tragic consequences. With the Quest Diagnostics Foundation, we launched Quest for Health Equity, an initiative to reduce health disparities in underserved communities in the U.S. This initiative is providing a combination of testing services, education programs, alliances and financial support to efforts to address health disparities. Since its inception, we have launched over 25 programs across the U.S. and Puerto Rico, including supporting COVID-19 testing and vaccination events, educating young students on healthy nutrition choices and expanding research and mentorship opportunities for black and Hispanic scholars.
Our approach to fighting the COVID-19 pandemic has been rooted in our vision of empowering better health through diagnostic insights. We believe that the challenges we are facing from the COVID-19 pandemic have brought us together, made us a stronger company and will help us capture the substantial opportunities in front of us.
OUR STRATEGY
We have a two-point business strategy, reviewed by our Board of Directors, to achieve our vision and our goals.
Accelerate Growth
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Our strategy to accelerate revenue growth is based on the Company’s portfolio of services.
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| Services Portfolio (Table 1) |
| Activity | Key Characteristics | At A Glance | Quest Value Proposition |
| General Diagnostics | Testing services generating strong cash flows and steady growth | • Routine and non-routine testing services • Largest revenue stream • Essential portion of healthcare delivery | • Scale
• Operational excellence
• Access and convenience
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| Advanced Diagnostics | Testing services targeting faster growth through innovation testing model | • Genetic and advanced molecular testing services • An important part of precision medicine • Innovation-based competitors | • Rich clinical, scientific and medical innovation expertise
• Quality and reliability of new assays
• Ability to manage potential new regulatory requirements |
| Diagnostic Services | Laboratory and data-related healthcare opportunities targeting faster growth | • Enables partners to deliver healthcare more efficiently (e.g., risk assessment; Professional Laboratory Services; Employer Population Health) • Services to support population health (e.g., data analytics; extended care services) | • Extensive diagnostic capability
• Large and growing database and analytics expertise
• Partnerships with industry leaders across healthcare landscape |
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We have identified the following five approaches to accelerate growth. |
| Approaches to Accelerate Growth (Table 2) |
| 1. Delivering annual revenue growth of more than 2% through accretive, strategic acquisitions |
| Plus organic growth through: |
| 2. Capitalizing on increased health plan access |
| 3. Increasing share with IDNs |
| 4. Growing Advanced Diagnostics |
| 5. Building consumer-initiated testing |
1. Growing through acquisitions. We endeavor to grow revenue each year by more than 2% through accretive, strategic acquisitions (our target is based on our revenues excluding the revenues from our COVID -19 testing). Acquisition opportunities may include IDN outreach businesses, regional laboratory consolidation and businesses that will provide us with new capabilities. Our approach to acquisitions, and the key acquisitions we consummated during 2021, are discussed below under the heading Deliver disciplined capital deployment.
2. Capitalizing on increased health plan access. We are focused on opportunities to partner with health plans. We strengthen our relationships with health plans and increase the volume of our services for their members by focusing on driving value and providing strong value propositions for members and clinicians. This includes working with payers to reduce the cost of care, improve the customer experience and drive better outcomes for populations. For example, we strive to build information platforms to help health plans manage utilization and population health, keep laboratory testing in network and provide an alternative to high-cost labs. We also offer extended care services to help close gaps in care designed to be attractive to payers, for example through our Quest HealthConnect offerings. In 2021, we made progress with value-based programs with UnitedHealthcare and broadened redirection and network leakage efforts with Anthem. We also renewed our longstanding
relationships with Aetna (remaining a preferred laboratory provider and partner in Aetna's network) and EmblemHealth (one of the nation's largest non-profit health insurers). In addition, we expanded access, including with Highmark Delaware and other plans.
3. Increasing share with IDNs. We believe that the growing market challenges faced by IDNs, including continued consolidation, price transparency, cost and utilization pressure, evolving healthcare payment models, capital needs, changing technology and limited resources, provide us with an opportunity to partner with them more effectively as they consider their laboratory testing strategy and drive demand for our expertise. We have deployed a dedicated team to strengthen our relationships with IDNs, including with respect to their reference testing. We target three specific segments: reference testing, outreach testing and lab management. We provide reference testing for approximately half of the hospitals in the U.S. and are a leading provider of this testing in the country. Our industry-leading Professional Laboratory Services, highlighted in Table 3, provides a suite of solutions to help IDNs build and execute their laboratory strategy, improve quality, reduce the cost of care and focus on core competencies. We purchase outreach testing businesses from IDNs that decide to exit that business. In 2021, we recorded our highest level of Professional Laboratory Services revenues to date and, as discussed below under the heading Deliver disciplined capital deployment, acquired the outreach testing business of Mercy.
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| Key Professional Laboratory Services Offerings (Table 3) |
| Lab management outsourcing | Advanced data solutions |
| Test menu optimization and spend consolidation | Reference testing, including advanced diagnostics |
| Supply chain management and purchasing | Blood utilization management |
4. Growing Advanced Diagnostics. We are a leading provider of Advanced Diagnostics, with an array of offerings across the spectrum. We aim to accelerate the growth of our Advanced Diagnostics offerings to a growth rate of at least 8% per year. We have been investing in our Advanced Diagnostics offerings, including to enhance our innovation capabilities and to strengthen our service offering and sales force, to make our Advanced Diagnostics offerings more attractive and accessible to IDNs and clinicians. In addition, we have invested in reducing the cost of next-generation sequencing and combining that with the power of our Blueprint Genetics® data analytics capabilities. We are seeking to apply the capabilities gained by these efforts to other areas where we can make a meaningful difference in health care, including consumer genetics and offerings to pharmaceutical companies, IDNs and health plans. In 2021, we expanded our offerings with the addition of Biocept Inc.'s liquid biopsy test for non-small cell lung cancer. We also saw strong growth in non-invasive prenatal testing and a solid contribution in specialty genetics from Blueprint Genetics.
5. Building consumer-initiated testing. For many years, we have been focused on the consumer, and have taken strong steps to be recognized as the consumer-friendly provider of choice of diagnostic information services. Our strong consumer focus is highlighted in Table 4. We will continue to focus on improving the consumer experience, including through improved digitization and other enhancements of our operations. For example, in 2021 we improved the functionality of our MyQuest® app, taking into account consumer feedback.
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| Increasing consumer expectations inform our design for our consumer experience. |
| Consumer-Centric Initiatives (Table 4) |
| Connectivity and access to information | • >21.5 million registered users in our MyQuest® health portal and mobile connectivity solution, up nearly 7 million from a year ago.
• Quest lab results available for Android users through the CommonHealth app.
• MyQuest® supports Health Records using the Apple Health app.
• Using MyQuest,® consumers can manage healthcare for a group of individuals. |
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| Reminders | • Consumers whose physicians have ordered a test for them electronically can receive email reminders to complete the test.
• Consumers who have made appointments can receive appointment reminders via text messaging. |
| Enhanced experience | • Electronic check-in at patient service centers.
• Improved on-line pre-registration and appointment scheduling.
• Real-time payment determination for payers. |
| Convenient access | • Partnerships with Walmart and Safeway to expand convenient access to testing services at select Walmart and Safeway locations across the United States (approximately 230 locations at year end). |
| Expanded access to basic healthcare services | • Partnership with Walmart to expand access to basic healthcare services. |
| Self-collection technology | • Proprietary, consumer-friendly self-collection technology offered to consumers at home. |
| Satisfaction | • We are measuring consumer satisfaction, including Net Promoter Score. |
In 2018, we launched QuestDirect®, our consumer-initiated testing offering that permits consumers to request their own lab tests, to allow consumers to take control of their health and to better understand their own health through access to personal diagnostic information. In an evolving healthcare environment, consumers are increasingly engaged in their health care and want control, a dynamic experience and convenience. We believe that by building on the foundation of our strong consumer focus we can capture growing opportunities in consumer-initiated testing. In 2021, we continued the strong growth in QuestDirect® and launched our comprehensive consumer health profile, which offers consumers a picture of their own health through a battery of tests and biometric measurements that provides a personalized health quotient score that can be used to track health progress over time. We also are extensively engaged with telehealth providers, supporting their offerings as a diagnostic information services provider.
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We are focusing on consumer interest to experience health care in a different way
and empowering consumers to make important decisions about their health |
| Consumer-Initiated Testing (Table 5) |
| Consumer-initiated testing | • Consumers can choose from approximately 50 different test packages focused on consumer interests, such as general health, men's and women's health, digestive health, heart health, infectious disease, sexually transmitted disease, COVID-19 and Lyme disease. In 2021, we expanded our offerings to include Insure® ONETM for colorectal cancer screening. |
| Self-collection technology | • In 2021, we expanded our proprietary, consumer-friendly self-collection technology offered to consumers at home. |
| Convenient access | • Access to services in our patient service centers and in select Walmart stores |
| Convenient payment | • Introduced flexible payment options in 2021 |
Drive operational excellence
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| We strive to enhance operational excellence and improve our quality and efficiency across every portion of our value chain and operations, from the time that we interact with a potential customer until the time we receive payment. |
| Major Themes to Drive Operational Excellence (Table 6) |
| Reduce denials and patient concessions | Standardize and automate |
| Digitize the customer experience | Optimize |
Improving our operations will yield many benefits, including: enhancing customer experience; improving our quality and competitiveness; strengthening our foundation for growth; and increasing employee engagement and shareholder value. We are building a superior experience, at lower cost, for all of our customers, including consumers, health plans, IDNs and clinicians. We endeavor to improve our processes and effectiveness at the same time. We are guided by a service dashboard that focuses throughout our operations on quality for consumers, healthcare providers and employees, including medical quality, on-time delivery, competitive costs and employee safety.
During 2021, we made strong progress on our improvement initiatives. We completed the consolidation and integration of Northeast U.S. regional operations into our new 250,000 square foot, highly automated, flagship laboratory in Clifton, New Jersey. We also commenced consolidation of our urinalysis testing onto a new highly automated platform that we expect will generate substantial savings once implemented. We are taking advantage of robotic process automation technologies. In addition, we also increased patient use of appointment scheduling, reduced payor denials and improved patient collection at the time of service. We also are seeing increased patient and physician acceptance of the digitization of our service offerings, with more self-service options and a greater percentage of our volume moving to digital, paperless transactions.
Our cost excellence program, Invigorate, includes structured plans to drive savings and improve productivity across the value chain, including in such areas as revenue services, information technology and procurement. We currently aim annually to achieve savings and productivity improvements of 3% of our costs. In 2021, we exceeded our goal.
OUR STRENGTHS
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| We offer high value diagnostic information services and diagnostic solutions that are attractive to our customers. |
| Our Strengths (Table 7) |
| Quality | Strong Operating Principles |
| Assets and Capabilities to Deliver Value | Health Information Technology Solutions and
Information Assets |
| Innovation | Medical and Scientific Expertise |
| Collaboration | Customer Focus |
Quality
Our goal is to provide every patient with services and products of superior quality. We strive to accomplish that through commitment, leadership, and establishing rigorous processes which we measure and continually seek to improve, and by using the Quest Management System, which provides best-in-class business performance tools to create and implement effective and sustainable quality processes. The Quest Diagnostics Quality Program includes policies and procedures to document, measure and monitor the effectiveness of our laboratory operations in providing and improving quality and meeting applicable regulatory requirements. The Quality Program is designed so that the quality of laboratory services is monitored objectively and evaluated systematically to deliver superior quality care, identify opportunities to improve patient care and resolve identified problems. To help achieve our goal of becoming recognized as the undisputed quality leader in the diagnostics information services industry, we have implemented our Quality System Framework, which serves as a reference
guide for our employees and describes our Quality System Elements, which provide the structure for each laboratory to achieve and maintain quality processes. We also have a robust Supplier Quality Program designed to ensure we have a high-quality supplier network and to raise the bar of quality expectations across that network. Being chosen by UnitedHealthcare as a participant in the UnitedHealthcare Preferred Lab Network reflects the strength of our quality. For additional information about our commitment to quality, see "General - Quality Assurance" on page 25.
Strong operating principles
We have a foundation of three strong operating principles:
•strengthen organizational capabilities;
•remain focused on diagnostic information services; and
•deliver disciplined capital deployment.
Strengthen organizational capabilities. We continuously strive to strengthen our organizational capabilities to support our two-point strategy, enable growth and productivity, better focus on our customers, speed decision-making and empower employees. Highlights include:
•Align for Growth, Execution and Efficiency. Our organization is designed to align around future growth opportunities, coordinate business units for seamless execution and leverage our company-wide infrastructure to gain more capability, value and efficiency. We relied on this organizational design to allow us to develop a coordinated and sustained strategy to respond to the unprecedented challenges we face responding to the COVID-19 pandemic. The value creation side of our business includes product and commercial marketing and is organized by clinical franchise and focuses on customer solutions for the marketplace, including new test development and diagnostic insights. The value delivery side includes sales, laboratory operations, field operations, logistics and client services.
•Quest Management System. This system provides a foundation for day-to-day management, and includes best-in-class business performance tools to help develop new capabilities to improve our Company. The system enables us to run the Company with a common language, approach and philosophy, and supports our efforts to maintain a high-performance culture, with employees focused on behaviors to foster our agility, transparency, customer focus, collaboration and performance orientation.
Remain focused on diagnostic information services. We maintain a sharp focus on providing diagnostic information services. During 2021, we sold to IQVIA Holdings Inc. our 40% minority stake in Q2 Solutions,® our clinical trials central laboratory services joint venture, and in connection with the sale we entered a multi-year agreement to continue to support Q2 Solutions as its strategic preferred laboratory partner.
Deliver disciplined capital deployment. Our disciplined capital deployment framework includes investment in our business, dividends and share repurchases. The framework is grounded in maintaining an investment grade credit rating. We expect to return a majority of our free cash flow to investors through a combination of dividends and share repurchases. Consistent with that expectation, in February 2022 we announced that we increased our quarterly common stock cash dividend by approximately 6.5%, from $0.62 per common share to $0.66 per common share. This represents our eleventh increase in the dividend since 2011. For many years, we have maintained a common stock repurchase program. Since the beginning of 2013, we have returned approximately $5.7 billion to stockholders through repurchases of our common stock. Our share repurchases, dividends and capital expenditures in each of the last three years are presented in our consolidated financial statements (Part II, Item 8 of this Report).
The Company's strategy includes generating growth through value-creating, strategically-aligned acquisitions using disciplined investment criteria. We screen potential acquisitions using guidelines that assess strategic fit and financial considerations, including value creation, return on invested capital and impact on our earnings. In 2021, we consummated the acquisition of the outreach laboratory services business of Mercy, one of the most highly-integrated, multi-state health care systems, with operations serving providers and patients in Arkansas, Kansas, Missouri and Oklahoma. We also acquired assets of Labtech Diagnostics LLC, an independent clinical laboratory serving physicians and patients primarily in South Carolina, North Carolina, Georgia and Florida, and a couple of other small independent regional labs. Our significant acquisitions in each of the last three years are further discussed in Note 5 to the audited consolidated financial statements (Part II, Item 8 of this Report).
We will continue to invest in our business in a disciplined manner, including focusing on enhancing our solid foundation of strategic assets and capabilities, accelerating growth and driving operational excellence. Our near-term investments in growth are likely to focus on the approaches to accelerate growth set forth in table 2 above. Our near-term investments to drive operational excellence are likely to focus on improving the customer experience and gaining efficiency, systems standardization, digital enablement of our processes and footprint optimization.
Assets and capabilities to deliver value
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| We use our unmatched size, scale and capabilities to deliver a very attractive value proposition to our customers. |
| Assets and Capabilities (Table 8) |
| Connectivity | ● Provide healthcare connectivity solutions to >445,000 clinician and IDN accounts and interface with >800 electronic health records systems |
| Data | ● The largest private database of de-identifiable laboratory test results: >60 billion patient data points |
| Logistics | ● Strong logistics capabilities • make >75,000 stops daily • approximately 4,000 courier vehicles • >20 aircraft serving the U.S.
|
Medical and Scientific Staff | ● One of the largest medical and scientific staffs in the industry to provide interpretive consultation • >650 M.D.s and Ph.D.s, many of whom are recognized leaders in their field • Genetic counselors
|
Other Healthcare Professionals | ● Approximately 24,000 phlebotomists, paramedics, nurses and other health and wellness professionals
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Consumer Access | ● >7,100 patient access points, including phlebotomists in physician offices and the most extensive patient service center network in the U.S. with >2,100 locations |
Health Plan Participation | ● Access to approximately 90% of U.S. insured lives
|
Processing Volume | ● Processed approximately 218 million test requisitions in 2021
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Range of Testing | ● Industry-leading test menu across clinical sub-specialty areas and diagnostic technologies
|
Patents | ● Own or control approximately 1,100 issued and over 450 pending patents worldwide in 2021
|
Innovation
We are a leading innovator in diagnostic information services. We develop and introduce new tests, including many with a focus on personalized and targeted medicine, and new services. Our capabilities include discovery, technology development and clinical validation of diagnostic tests. We also partner with other developers of new technologies, services and tests to transfer their innovations to the marketplace, using our in-house expertise (e.g., strength in assay development and commercialization of testing services). These developers include large commercial manufacturers, the academic community, pharmaceutical and biotechnology firms, emerging medical technology companies and others that develop and commercialize novel diagnostics, pharmaceutical and device technologies. We maintain relationships with advisers and consultants who are leaders in key fields of science and medicine. As the industry leader with the largest and broadest U.S. network, we believe we are the distribution channel of choice for developers of new solutions.
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| Our clinical franchises enable us to perform like a boutique while maintaining our scale advantages, and work with our research and development and commercial organizations to identify/deliver new and improved solutions. |
| Clinical Franchises (Table 9) |
| Cardiovascular, Metabolic and Endocrinology | Cancer Diagnostics |
| General Health and Wellness | Drug Monitoring and Toxicology |
| Infectious Diseases and Immunology | Sports Science and Human Performance |
| Neurology | Women’s and Reproductive Health |
We seek innovations and solutions that help healthcare providers, IDNs, health plans and other healthcare market participants care for their patients through better testing for predisposition, screening, monitoring, diagnosis, prognosis and treatment choices, and that deliver high clinical value to the medical community and reduce the overall cost of healthcare. Starting with a clinical focus on a specific disease state or clinical problem, we take advantage of advanced technology for more precise, comprehensive and actionable information. We seek to develop innovations and solutions that help to determine a patient's genotype or gene expression profile relative to a particular disease and its potential therapies, because they can help healthcare providers to determine a patient's susceptibility to disease or to tailor medical care to an individual's needs. This would include determining if a medication might be an optimum choice for a particular person, or tailoring the right dosage once the proper medicine is prescribed. We endeavor to improve test processes, including through increased automation. In addition, we aim to develop holistic solutions responsive to challenges that healthcare providers and patients face, by developing solutions of tests, information and services focused on specific clinical challenges, and taking advantage of the latest healthcare data capabilities. We also look for innovations and solutions that are less invasive than currently available options, and to increase the choices that healthcare providers and patients have for the collection of diagnostic samples. We seek innovation in the ways we bring solutions to customers, and in the customer experience, including enhanced services and end-to-end solutions for convenience and support. We make innovative solutions available to community physicians through our connectivity solutions, operational footprint and by making complex results actionable. We plan to expand our innovative solutions through research and development, as well as partnerships with academic institutions, other technology and healthcare leaders and public health agencies.
Since the beginning of the COVID-19 pandemic, we have secured an Emergency Use Authorization from the FDA for pooled specimen testing in connection with molecular diagnostic COVID-19 testing. With government and private sector partners, we developed and built "pop-up" COVID-19 testing sites that offered a new, efficient model for consumer access to testing at a critical time. During 2021, we introduced a new COVID-19 semi-quantitative serology test service that aids in providing insight into an individual's immune response as a result of a recent or prior infection with SARS-CoV-2, including assessing blood levels of antibodies. In addition, we licensed the patented ceramide-analysis technology of Zora Biosciences Oy and announced plans to develop, and offer through our Cardiometabolic Center of Excellence at Cleveland Heartlab, a test service as an aid in identifying patients at risk for cardiovascular-related disease and death. These initiatives, along with other developments highlighted below under the headings "Collaboration," Medical and Scientific Expertise," and "Healthcare Information Technology Solutions and Information Assets," demonstrate our agility and strength in innovation.
Collaboration
We believe that strategic relationships, including with healthcare providers, public health authorities, consumer-focused entities and others, can position us for growth at the center of healthcare and that healthcare companies that can partner effectively with others will be successful in the long term. We collaborate with partners that can help us to achieve our vision of empowering better health through diagnostic insights and have relationships across the spectrum of healthcare, including with world class healthcare and consumer-focused leaders, to foster important advances in healthcare, including in precision medicine and healthcare delivery. We plan to continue to pursue strategic relationships to help accelerate growth and drive operational excellence. In 2021, we announced our collaboration with Paige to unlock the potential of artificial intelligence to improve and speed the diagnosis of cancer and other diseases that rely on pathologic assessment. We also collaborated with CIC Health, Ginko Bioworks and Battelle Memorial Institute to develop solutions to make testing easy, fast and affordable for school systems and other group settings (e.g., the travel and entertainment industry) across the country.
Medical and Scientific Expertise
We have strong medical and scientific expertise and aspire to be a trusted authority in diagnostic medicine, provide insights and tools to support public and personal health, lead and facilitate scientific discussion and inspire innovation. Our medical and scientific experts regularly provide presentations, symposia and webinars regarding diagnostic testing and participate on scientific committees determining guidelines for diagnostic usage. They also publish research that demonstrates the clinical value and importance of diagnostic testing, including in connection with our research and development efforts, in peer-reviewed journals, textbooks and other publications. For over 30 years, the Company has published the Quest Diagnostics Drug Testing Index,TM a series of reports on national workplace drug positivity trends based on the Company's employer workplace drug testing data, that is widely cited by employers, the federal government and the media to help identify and quantify drug abuse among the nation's workforce. The Company also publishes Quest Diagnostics Health Trends,® a series of scientific reports that provide insights into health topics, based on analysis of objective clinical laboratory data, to empower better patient care, population health management and public health policy. Our role at the forefront of the response to the COVID-19 pandemic demonstrated this strength. We have secured over 20 Emergency Use Authorizations from the FDA for innovations in connection with COVID-19 testing and specimen collection, including regarding unobserved nasal specimen self-collection, combined COVID-19 and respiratory virus tests, COVID-19 at-home specimen collection by consumers, and methods to increase testing capacity and expand the testing supply base. In addition to a Health Trends® report on children in the U.S. with detectable levels of lead in their blood, we published numerous Health Trends® reports on COVID-19, including during 2021 additional reports addressing the "hidden pandemic": signs of addiction missed during the pandemic; the sharp decline in cancer diagnoses during the first year of the pandemic; decreases in hepatitis C testing and treatment during the first months of the pandemic; and Blacks and Hispanic/Latinx less confident in their ability to access COVID-19 vaccines, treatment and healthcare than white Americans. We also expanded our engagement with the Centers for Disease Control and Prevention to provide genomic sequencing of emerging COVID-19 variants, to aid public health response to COVID-19.
Health Information Technology Solutions and Information Assets
We have a history of providing leading information technology for diagnostic information services, including for patients, clinicians and healthcare organizations. We were the first national diagnostic information services provider to offer online patient appointment scheduling and a patient connectivity solution. Our MyQuest® patient healthcare portal, with 21.5 million registered users at year-end 2021, enables patients to manage healthcare and medical information for themselves and a circle of others and, among other things, use their smartphone or computer to order a test, find a Quest Diagnostics location, schedule appointments, receive appointment reminders, and receive and archive their test results. During the COVID-19 pandemic, we collaborated with CLEAR to integrate CLEAR's safe and secure "Health Pass" technology with the Company's advanced COVID-19 testing capabilities to foster safer public environments and help reduce public health risk. We also are a founding member of the Synaptic Healthcare Alliance, which is working to create a platform, powered by blockchain technology, that enables a culture of innovation, removes friction and solves shared challenges impacting constituents across healthcare today.
We also have significant information assets and offer a robust portfolio of powerful analytics that inspire action and deliver value to an array of customers. We offer an array of Quanum® solutions based on data insights, including retrospective analytics solutions for healthcare professionals and practices, health plans, IDNs, pharmaceutical companies and public health organizations. We believe that solutions can tap the potential of large amounts of clinical information to: enhance the customer experience; deliver more precise, comprehensive solutions and actionable information; provide increased and interactive insights and analytics; foster greater adherence to clinical and reimbursement guidelines; and advance the development of precision medicine. We believe that the breadth and depth of our data, combined with our powerful analytics capabilities, enables us to take advantage of important data-based opportunities in diagnostics, and provides us a competitive advantage.
Customer Focus
Our brand idea -- Action from Insight® -- reflects our commitment to a superior customer experience. The customer is at the center of everything we do; we strive to give them reason to put their trust in us. We use customer insights in developing our approach, listening to the voice of customers to identify and implement solutions and processes that will result in a superior customer experience. We also maintain our Everyday Excellence program, which includes guiding principles to support a superior customer experience, inspiring our employees to be their best every day, with every person and with every customer interaction.
BUSINESS OPERATIONS
The Company is made up of two businesses: Diagnostic Information Services and Diagnostic Solutions. Our Diagnostic Information Services business develops and delivers diagnostic information services, providing insights that empower and enable a broad range of customers, including those discussed in table 13. Our Diagnostic Solutions group includes our risk assessment services business, which offers solutions for insurers, and our healthcare information technology businesses, which offers solutions for healthcare providers. Our services primarily are provided under the Quest Diagnostics brand, but we also provide services under other brands, including AmeriPath,® Dermpath Diagnostics,® ExamOne,® and Quanum.®
We are the leading provider in the United States, where we conduct substantially all of our business, of clinical laboratory and anatomic pathology testing, and related services. We see opportunities to bring our experience and expertise in diagnostic information services to markets outside the United States, including leveraging existing facilities to serve new markets. We have laboratory facilities in Finland, Mexico and Puerto Rico. We are a founding member, with other leading diagnostic laboratories outside the United States, of the Global Diagnostics Network,TM a strategic working group of diagnostic laboratories committed to unleashing and sharing local innovation to increase global access to diagnostic science, information and services and generating enhanced diagnostic insights to improve the delivery of global healthcare. The Company and fellow members of the Network are focused on response to the COVID-19 pandemic and preparedness for future global infectious diseases.
Diagnostic Information Services
Background - clinical testing. Clinical testing is an essential element in the delivery of healthcare services. Clinical testing is used for predisposition, screening, monitoring, diagnosis, prognosis and treatment choices of diseases and other medical conditions. Clinical testing is generally categorized as clinical laboratory testing and anatomic pathology services. Anatomic pathology involves the diagnosis of cancer and other diseases and medical conditions through examination of tissue and cell samples taken from patients.
Clinical laboratory testing, which can be characterized as routine, non-routine or advanced, generally is performed on whole blood, serum, plasma and other body fluids, such as urine, and specimens such as microbiology samples. Clinical laboratory tests which can be performed by most clinical laboratories are considered routine. Routine testing measures various important bodily health parameters such as the functions of the kidney, heart, liver, thyroid and other organs. Commonly ordered routine tests include blood chemistries, urinalysis, allergy tests and complete blood cell counts. Non-routine tests may require professional “hands-on” attention from highly-skilled technical personnel, generally require more sophisticated data analysis, technology, equipment or materials, may be performed less frequently than routine tests and may be reimbursed at higher levels than routine tests. It may not be practical, from a cost-effectiveness or infrastructure perspective, for many IDNs, ACOs, DCEs, commercial laboratories or physician office laboratories to develop and perform a broad menu of non-routine tests, or to perform low-volume non-routine testing in-house. Such tests generally are outsourced to a clinical testing laboratory which can perform these non-routine tests. Some non-routine tests are advanced. Advanced tests include procedures in the areas of molecular diagnostics (including next-generation sequencing), oncology, neurology, companion diagnostics and non-invasive pre-natal and other germline genetic testing.
Our services. We are the world's leading provider of diagnostic information services. We provide information and insights based on the industry-leading menu of routine, non-routine and advanced clinical testing and anatomic pathology testing, and other diagnostic information services. We have strong testing capabilities, including services for the predisposition, diagnosis, treatment and monitoring of cancers and other diseases, and offer advanced tests in many fields, including endocrinology, immunology, neurology and oncology. Increasingly, we are focused on providing solutions and insights to our customers, based on the testing that we perform, the data that we gather and our extensive medical, information and connectivity assets. We believe that offering services, solutions and insights based on a full range of tests, information assets and other capabilities strengthens our market offering, market position and reputation.
We offer the broadest access in the United States to clinical testing. We maintain a nationwide network of laboratories, including advanced laboratories (such as our world-renowned Quest Diagnostics Nichols Institute®) as well as rapid response laboratories (smaller facilities where we can quickly perform an abbreviated menu of routine tests for customers that require rapid turnaround times). We operate 24 hours a day, 365 days a year. Our nationwide network also includes patient service centers, phlebotomists in physician offices, and our connectivity resources, including call centers and mobile paramedics, nurses and other health and wellness professionals. Our large in-house staff of medical and scientific experts, including medical directors, scientific directors, genetic counselors and board-certified geneticists, provide medical and scientific consultation to healthcare providers and patients regarding our tests and test results, and help them best utilize our services to improve outcomes and enhance satisfaction. We also provide testing (including anatomic pathology) services and medical director services at IDN laboratories.
We are a leading provider of diagnostic information services for infectious disease, such as COVID-19 (including molecular diagnostic and serology antibody offerings), tuberculosis (e.g., our T.SPOT.TB and Quantiferon offerings) and tick-borne disease (e.g., our Accutix® offering). We strive to be the first to provide diagnostic solutions for emerging infectious diseases (e.g., our offerings for Zika, West Nile Virus, SARS and Influenza A H1N1). We have leading positions in drug monitoring and toxicology, in neurology diagnostics, in advanced cardiovascular diagnostic information services (e.g., our CardioIQ® and Cleveland HeartLab® offerings through our Cardiometabolic Center of ExcellenceTM), and in cancer diagnostics (e.g., our QuestVantage® and Med FusionTM offerings). We are a leader in providing testing for the detection of employee use of drugs of abuse, offering a full range of solutions, including urine, hair, blood and oral fluid tests. We are the largest workplace drug testing provider certified by the U.S. Department of Health and Human Services to perform drug testing using electronic custody and control forms for federally-mandated, safety-sensitive workers.
We are a leading provider of employer population health services, including biometric screenings, flu shots and related preventative services that leverage clinical data to improve population health outcomes and reduce healthcare spend. Our solutions enable employers to leverage screening insights to identify chronic disease risks, connect employees to needed in-network care, and empower better health. Our offerings include connecting participants to the right care at the right time, such as (i) a program designed to prevent diabetes and other chronic conditions, (ii) a program that enables participants to engage with a board-certified physician about their results and to be guided about actions based on those results and (iii) a mental health assessment program that links participants to virtual support. We also collaborate with Catapult Health, the leading national provider of employer-sponsored preventative checkups, to help organizations facilitate virtual telehealth access to clinical services for their employees and adult dependents, with emphasis on reducing risks related to preventable chronic diseases. These services are sold directly to employers and through reseller partnerships with health plans. In response to the COVID-19 pandemic, we developed and offered COVID-19 return to work services, to assist organizations as they developed plans for safer workplaces.
We offer Quanum® health information technology solutions, including our products and national healthcare provider network, to help healthcare organizations and clinicians empower better health by leveraging the power of our significant information assets, including many years of test result data, and our technology prowess, including our history of providing leading information technology for diagnostic information services. Our portfolio of offerings is designed to address analytic, clinical and financial needs. The solutions help healthcare organizations and clinicians analyze and put in context data, and enable them to connect across the healthcare system and engage with their stakeholders. They can enter, share and access clinical information without costly information technology implementation or significant workflow disruption.
We offer an array of population health solutions to clinicians, health plans, and IDNs. Our services build on the power of our information assets and data capabilities and help our customers deliver better care to their patient populations by identifying gaps in care in a population, providing clinical solutions to close the gaps and fostering consumer engagement with a solution. For example, Quest Lab StewardshipTM employs machine learning to help optimize medically-appropriate laboratory test utilization. Our extended care services, including home-based health risk assessments and related services, help deliver better care to their patient populations by identifying and filling gaps in care for their patient populations and by enabling them to deliver the most effective healthcare to the right populations and individuals. These services leverage the power of our assets (e.g., our extensive clinical data and data analytics services) and capabilities (e.g., call centers, patient service centers and mobile workforce, including professionals) and focus on extending the reach of clinician offices beyond their traditional four walls to assess the health of their populations, and doing so when and where it is convenient for consumers. Once gaps are identified, we engage patients in our retail sites, in home or by telephone, including through our call centers and our mobile base capabilities, including highly-trained healthcare professionals. We also offer services such as diabetic retinopathy and bone density examinations.
We offer services to pharmaceutical companies, including clinical trials testing. We have expertise in developing laboratory tests for FDA submission as companion diagnostics and laboratory developed tests for complementary diagnostics, and offer an array of assets and services to support the development of companion diagnostics, including our robust data set and patient services network. For example, in 2021, we introduced Ki-67 IHC MIB-1 pharmDx, the first companion diagnostic for Eli Lilly and Company's Verzenio® (abemaciclib), a CDK4/6 inhibitor for certain people with HR+HER2- High Risk early breast cancer. We also offer Quest Clinical Trials ConnectTM to help accelerate clinical trials (and thus the speed of drugs to market) through better patient recruitment, involvement and management, and improved physician outreach.
We also offer sports teams, including at the professional and collegiate levels, our BluePrint for Athletes® performance tools, based on biomarker testing, designed to optimize high-level athletic performance through actionable insights. This service provides the context for athletes to consider performance variables holistically, including nutritional education and intervention, maximum fitness, injury assessment and training load monitoring as well as sophisticated biometric analysis. During the COVID-19 pandemic, we also expanded our test offerings for athletes to include COVID-19 testing, to foster the country's return to athletic fields.
Diagnostic Solutions
Risk Assessment Services. ExamOne® is the largest provider of risk assessment services to the life insurance industry in North America. Our risk assessment services comprise underwriting support services, including data gathering, paramedical examinations and clinical laboratory testing and analytics, designed to assist life insurance companies objectively to evaluate the mortality risks of applicants. Most specimen collections and paramedical examinations are performed by our network of paramedical examiners at the applicant's home or workplace, but they also are offered at hundreds of Company patient service centers and hundreds of additional North American locations.
Healthcare Information Technology. We offer healthcare organizations and clinicians robust health information technology solutions. Our healthcare information technology offerings, including Quanum® Practice Solutions, our Electronic Health Record, Practice Management and Revenue Cycle Management Solutions for healthcare providers, and our award-winning Quanum® Enterprise Content Solutions for IDNs, connect data to decision-making and help clinicians advance clinical and operational strategies. Healthcare organizations use Quanum® Enterprise Content Solutions at over 375 sites in North America. Our Quanum® Electronic Health Record is a cloud-based, mobile-accessible offering that enables clinicians to generate a complete record of a clinical patient encounter, automates and streamlines the clinician's workflow, provides clinical decision support tools, captures patient encounter notes and lab and radiology results and enables secure communication with patients and other clinicians.
THE CLINICAL TESTING INDUSTRY
Key Trends
The healthcare system in the United States is evolving; significant change is taking place in the system. We expect that the evolution of the healthcare industry, including impacts of the COVID-19 pandemic, which include the increased adoption of telemedicine, will continue, and that industry change is likely to be extensive. There are a number of key trends that are having, and that we expect will continue to have, a significant impact on the diagnostic information services business in the United States and on our business. These trends, discussed in the table below, present both opportunities and risks. We believe that several of the trends, including consolidation, price transparency and consumerization, are favorable to our business.
Because diagnostic information services is an essential healthcare service and because of the key trends discussed below, we believe that the industry will continue to grow over the long term. In addition, we believe that the clinical testing market continued with fundamental changes in 2021. First, we believe that PAMA-driven reimbursement pressure is a catalyst for structural change in the market. Second, we believe that health plans increasingly are focusing on driving better value in laboratory testing services. Third, we believe that ongoing consumerization in healthcare, with increased cost being borne by consumers, is changing consumption of healthcare services. We believe that these changing market fundamentals will benefit lower-cost, high-value providers like Quest and that we are well positioned to grow from the changing market conditions and benefit from the long-term growth expected in the industry.
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| Key Trends (Table 11) |
| PAMA-driven reimbursement pressure | Pursuant to PAMA, reimbursement rates for many clinical laboratory tests provided under Medicare were reduced during 2018 - 2020. PAMA calls for further revision of the Medicare Clinical Laboratory Fee Schedule for years after 2020, based on future surveys of market rates; reimbursement rate reduction from 2023-25 is capped by PAMA at 15% annually.
PAMA's next data collection and reporting period have been delayed, most recently by federal legislation adopted in December 2021, which further delayed the reimbursement rate reductions and reporting requirements until January 1, 2023.
The American Clinical Laboratory Association, of which the Company is a member, initiated a lawsuit charging that in implementing PAMA, CMS failed to follow a Congressional directive to implement a market-based laboratory payment system. The lawsuit is pending.
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| Health plans driving value in lab spending | IDNs, which provide outreach testing and may encourage clinicians to send their outreach testing volume to the IDN's laboratory, historically were able to negotiate higher reimbursement rates with health plans than commercial clinical laboratories for comparable services. In addition, health plans generally reimburse non-participating laboratory testing providers at higher out-of-network rates. We are finding increased interest among health plans in driving better value in spending for laboratory testing. Health plans increasingly are taking steps to encourage the movement of testing volume to high value, lower cost providers like our Company, including by identifying preferred provider partners, plan design changes (e.g., zero-dollar out-of-pocket costs for members using preferred providers) and better aligning reimbursement rates for IDN-based providers and independent commercial laboratories. The UnitedHealthcare Preferred Lab Network, which chose us to participate, is a recent example of a health plan taking these steps.
Health plans also are increasingly adopting policies, practices and procedures based on requirements imposed by government payers such as Medicare and Medicaid in order to influence the utilization and reimbursement of testing services. These policies, practices and procedures are subject to change without notice. |
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| Consumerization | Consumers are our customers. Increasingly, consumers are engaged and interested in, and empowered to manage and take direct responsibility for, their own healthcare. As a result, they are more sophisticated in their understanding of their healthcare needs and their expectations of healthcare providers. Some consumers are interested in selecting their own diagnostics tests, rather than relying upon a healthcare professional to select the tests. In addition, consumers often are bearing increased financial responsibility for their healthcare (e.g., high deductible health plans; rising deductibles). In our experience, consumers are more focused on transparency, ease of doing business and understanding diagnostics information services than they have been in the past. Consumers increasingly are demanding convenience; a superior and personalized experience relevant to their needs; and to be empowered to make their own healthcare decisions. During the COVID-19 pandemic, we are seeing consumers increase their use of telemedicine capabilities, increase their responsibility for their own healthcare (e.g., increased consumer-initiated testing; increased specimen self-collection) and increase their openness to new delivery channels (e.g., retail; convenient "pop-up" test centers). In addition, consumers are seeking prompt, direct access to their test results. Increasingly, consumers are motivated to find high quality service providers with strong digital experience delivery engines, accessible customer service and lower prices, like our Company. |
| Prevention and wellness | We believe that the value of detection, prevention, wellness and personalized care is well recognized. Government agencies and other customers discussed in table 13 increasingly focus on helping the healthy stay healthy, detecting symptoms among those at risk and providing preventive insight and care that helps avoid disease. |
| Medical innovation | Medical advances allow for more accurate and earlier diagnosis and treatment of diseases.
Continuing advances in genomics and proteomics are expected to yield new, more sophisticated and specialized diagnostic tests. These advances also are spurring interest in and demand for precision medicine, which relies on diagnostic and prognostic testing and in which data information services and strategies are used to deliver the most effective healthcare to the right populations and individuals.
Pharmacogenomic testing increasingly is used as a parameter to help speed drug approval processes and to better focus therapy based on patient and tumor-specific genetic markers.
Demand also is growing toward comprehensive care management solutions that serve patients, payers and healthcare providers by improving clinical decision support and access to patient data, and by increasing patient participation in care management and population health management.
Innovation also includes making healthcare services, including laboratory testing services, more convenient for populations and consumers to access, including at home (e.g., telehealth) or in retail settings.
There is increasing focus on access to patient data and data-driven insights. |
| Healthcare industry evolution | Customers discussed in table 13 and other healthcare system participants have been consolidating, converging and diversifying. For example, a number of IDNs are considering establishing or have established health insurance plans, and health insurance providers are considering providing or are providing healthcare services. In recent years, a leading provider of retail medical clinics and pharmacy benefits management services has acquired a leading health insurance provider, a leading health insurance provider has acquired a leading pharmacy benefits manager, and the corporate parent of a leading health insurance company provides a wide array of healthcare services through its non-insurance company subsidiaries. Health plans are entering agreements with other providers of healthcare services, including laboratory testing services providers, to partner on value-based approaches to delivering healthcare to populations.
Consolidation is increasing pricing transparency and bargaining power, and may encourage internalization of clinical testing.
Physicians frequently now are employed by IDNs, ACOs, DCEs or large group practices integrated with IDNs, instead of organizing physician-owned practices, which is impacting the dynamics for whether clinical testing is performed in or outside of an IDN. Physicians and other clinicians also increasingly are being employed by health plans or their affiliates.
Value-based reimbursement is contributing to changes in the healthcare system. ACOs, DCEs and patient-centered medical homes have grown as a means to deliver patient care. Healthcare services increasingly are being provided by non-traditional providers (e.g., physician assistants), in non-traditional venues (e.g., retail medical clinics, urgent care centers) and using new technologies (e.g., telemedicine, digital pathology).
Changes are taking place in the way that some healthcare services are purchased and delivered in the United States. IDNs are under significant pressure, and are evolving. |
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| Pricing transparency | There has been a trend toward greater pricing transparency in healthcare, including in the laboratory testing marketplace. Several states have taken action to foster greater pricing transparency in healthcare. For example, Massachusetts launched a website to help consumers understand the wide variation in healthcare costs. Federal laws effective January 1, 2022 require health care providers to provide good faith estimates of costs to self-pay patients, and provide rights and protections for consumers against surprise billing or balance billing. In addition, the federal government requires providers of COVID-19 testing to post on their websites information regarding test pricing, and has adopted new legislation and issued new regulations designed to increase transparency regarding pricing and quality in healthcare, including requiring providers, group health plans and insurers to disclose cost information to consumers in advance of care being provided.
Increased price transparency, combined with increased patient financial responsibility for medical care, is enhancing purchasing sophistication and fostering changes in behavior in the healthcare marketplace. We believe that increased price transparency should benefit lower cost, high value providers like our Company. |
| Competition | The diagnostic information services industry remains fragmented, is highly competitive and is subject to new competition.
Competition is emerging from new technologies (e.g., digital pathology) and growing from non-traditional competitors (e.g., a government agency or an employer establishing its own clinical laboratory for testing; providers of consumer-initiated testing). Increased IDN acquisitions of physician practices may enhance clinician ties to IDN-affiliated laboratories and may strengthen their competitive position. However, in light of other trends, including continued reimbursement pressure, IDNs may change their approach to providing clinical testing services.
New industry entrants with extensive resources may make acquisitions or expand into our traditional areas of operations. |
Healthcare utilization
| Healthcare utilization in the United States has fluctuated based on a number of factors. These factors include, without limitation, the economy, healthcare benefits design, patients delaying medical care (e.g., due to the COVID-19 pandemic), and increased consumer financial responsibility for, interest in and control of their healthcare.
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| Reimbursement pressure; affordability | There is a strong focus in the United States on controlling the overall cost of healthcare.
Healthcare market participants, including governments, are focused on controlling costs. Examples of cost control approaches include reducing reimbursement for healthcare services, changing reimbursement for healthcare services (e.g., shift from fee for service to capitation), changing medical coverage policies (e.g., healthcare benefits design), denying coverage for services, requiring preauthorization of laboratory testing, requiring co-pays, introducing laboratory spend management utilities and payment and patient care innovations such as ACOs, DCEs and patient-centered medical homes. CMS has set goals for value-based reimbursement to be achieved in Medicare. There is increased market activity regarding alternative payment models, including bundled payment models.
The Health Transformation Alliance, a group of over 50 major U.S. companies, was formed to improve and reform the healthcare system in the United States. The rising cost of healthcare in the United States was a key driver for the formation of this alliance.
While pressure to control healthcare costs poses a risk to our Company, it also creates opportunities, such as an opportunity for increased proper utilization of testing as an efficient means to manage the total cost of healthcare. We believe that it also creates greater opportunities for consolidation and gaining share for high value, lower-cost providers, like our Company, as compared to other providers. |
| Legislative, regulatory and policy environment | Government oversight of and attention to the healthcare industry in the United States is significant and increasing; healthcare payment reform and cost transparency are significant issues.
Legislation introduced in Congress would enable the FDA to regulate LDTs, in vitro diagnostics, software and other items used in the diagnosis of disease. If the legislation becomes law, the FDA could regulate diagnostic tests and components and platforms used as part of these tests. The FDA and HHS also have expressed views regarding the regulation of LDTs. Either new law or a revised approach to regulation of LDTs could have a significant impact on the clinical laboratory testing industry, including regulating LDTs in new ways, while creating avenues of opportunity and competition regarding clinical laboratory testing. New competitors may enter the industry, and competition may come in new forms. |
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| Use of healthcare data; technology | The increased availability of healthcare data, including data made available as a result of next generation DNA sequencing, and the increased ability to effectively analyze that data at population and patient levels, is impacting healthcare practices. It is anticipated that the increased use of data in healthcare, coupled with mobile healthcare IT solutions for doctors and patients, will help to improve patient outcomes and reduce overall healthcare costs. We provide automated next generation genetic sequencing, which will enable genetic screening faster and at lower cost.
Use of healthcare data, including integrated diagnostic and decision support solutions, predictive analytics, and healthcare information technology, is spurring advances in precision medicine, including medical decision making and value, for populations and individuals. The increased focus on data and its use is increasing focus on maintaining the privacy of patient data.
There is a need for technology solutions to harness these opportunities. In addition, new technology, social media and mobile technology are changing the way that healthcare markets interact with each other, and the expectations that they have about how services are provided, what services are provided, and other capabilities of healthcare market participants. These developments are creating new opportunities and new challenges and disrupting the healthcare environment. For example, during the COVID-19 pandemic, telemedicine practices became more commonly used; digital pathology is an emerging technology that may change the practice of pathology. Information technology that includes self-learning or "artificial intelligence" features is growing and may impact the healthcare industry.
Healthcare market participants, including many of our customers discussed in table 13, are striving to leverage interoperability and healthcare data analysis to positively influence the health of patient populations while maintaining patient privacy.
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| Chronic diseases and conditions; gaps in care | We believe that the cost and challenges of identifying, treating and controlling chronic diseases and conditions such as diabetes and heart disease are now well recognized.
As a result of multiple factors, including increased focus on population health management and pressure to reduce the systemic costs associated with such diseases and conditions, there is increased focus on better identifying and attempting to reduce or eliminate the gaps in care historically associated with these diseases and conditions. Healthcare market participants are developing new approaches for this purpose.
As a result of the COVID-19 pandemic, there has been an increase in delays in diagnosis and treatment of chronic diseases and conditions, particularly in underserved communities, increasing potential gaps in care. The COVID-19 pandemic called attention to gaps in care of these conditions in underserved populations; we believe that there also is increased focus on reducing or eliminating these gaps in care. |
| Healthcare services delivery | Healthcare delivery is moving out of hospitals, clinician offices and other traditional locations in which it had been provided. Care is increasingly being provided in new settings, such as outpatient, consumer-focused and home settings. In response to the COVID-19 pandemic, telemedicine practices became more commonly used. In addition, see the discussion of Emerging Retail Healthcare Providers in table 13. This dynamic offers new opportunities and challenges for healthcare providers and reflects not only efforts to take advantage of new technologies, but also the trends of consumerization and affordability, each of which are discussed above in this table. |
The Value of Diagnostic Information Services
There is an increased focus on the affordability of healthcare and on a disease-oriented approach to diagnostics, treatment and management. Healthcare providers, consumers and payers increasingly recognize the value of diagnostic information services as a means to improve health and reduce the overall cost of healthcare through early detection, prevention and treatment. Healthcare providers increasingly rely on diagnostic information services to help identify risk for a disease, to detect the symptoms of disease earlier, to aid in the choice of therapeutic regimen, to monitor patient compliance and to evaluate treatment results. Table 12 highlights how diagnostic information services contribute to improving care and reducing healthcare costs.
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| Reducing Healthcare Costs and Improving Care (Table 12) |
• Identifying patients at risk for disease before they require urgent care, hospital treatment or expensive therapies |
• Helping clinicians to target the right medicines for the right patients at the right time |
• Identifying treatment-related side effects |
| • Assessing early the efficacy of a therapy, enabling changes or discontinuation of ineffective therapies |
| • Enabling population health management by identifying gaps in care and delivery of targeted solutions to individuals who need care |
| • Identifying and proactively managing individuals at risk for chronic diseases, to decrease progression and associated costs and morbidity |
| • Providing telemedicine services along with laboratory testing to help individuals interpret and obtain appropriate advice and referrals into needed care |
Customers
We provide diagnostic information services to a broad range of customers, including those discussed in table 13. As discussed in table 11 above, customers are consolidating, converging and diversifying. In many cases, the customer that orders our services is not responsible for paying for these services. Depending on the billing arrangement and applicable law, the payer may be the patient or a third party, such as a health plan, Medicare or a Medicaid program. Increasingly, patients are bearing greater responsibility for some portion of the payment for the services we provide to them, even if a third party is primarily responsible for payment. In addition, consumers are more frequently taking advantage of offerings like the Company's QuestDirect® offering, and requesting and paying for tests themselves.
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| Customers (Table 13) |
| Health plans including managed care organizations and other health insurance providers | These customers typically reimburse us as a contracted (or out-of-network) provider for services rendered to their members. In certain locations, health plans may delegate to IPAs or other alternative delivery systems (e.g., physician IDN organizations, ACOs, DCEs, patient-centered medical homes) the ability to negotiate for diagnostic information services on behalf of certain members.
Health plans and IPAs often require that diagnostic information services providers accept discounted fee structures or assume all or a portion of the financial risk associated with providing such services through capitated payment arrangements. Under capitated payment arrangements, we provide services at a predetermined monthly reimbursement rate for each covered member, generally regardless of the number or cost of services provided by us. Under some capitated programs, we may provide certain services on a negotiated fee-for-service basis. Reimbursement under programs that do not provide for capitated payments is typically negotiated on a fee-for-service basis.
Reimbursement from our five largest health plans totaled approximately 20%, and no one health plan accounted for 10%, of our consolidated net revenues in 2021. Health plans typically negotiate directly or indirectly with a number of diagnostic information services providers, and represent approximately one-half of our total clinical testing volume and approximately 43% of our net revenues from diagnostic information services. There has been a trend of consolidation among health plans. Some health plans also have narrowed their provider networks. In addition, some health plans have established "preferred provider" networks within their broader networks (e.g., UnitedHealthcare's Preferred Lab Network), in effect distinguishing among contracted providers.
We are also sometimes a member of a “complementary network.” A complementary network generally is a set of contractual arrangements that a third party maintains with various providers that provide discounted fees for the benefit of its customers. A member of a health plan may choose to access a non-contracted provider that is a member of a complementary network; if so, the provider will be reimbursed at a rate negotiated by the complementary network.
We offer to health plans services and programs that leverage our Company's expertise and resources, including our superior patient access, extensive test menu, medical staff, data, information technology solutions, and wellness and population health management capabilities.
Since the beginning of 2019, the Company has had access to a very high percentage of the insured lives in the U.S., including very strong access in key high-population states. We believe that this strong access increases our attractiveness to other customer groups, including clinicians, patients and employers. |
| Clinicians | Clinicians, including primary care physicians, specialists and physician assistants, requiring diagnostic information services for patients are the primary referral source for our services when patients choose their diagnostic information services provider.
In recent years, there has been a marked increase in the number of physician practices owned by IDNs. There also has been a notable increase in some branches of medicine of the establishment of very large "rolled-up" specialty physician practice groups. IDNs that own physician practices may encourage or require the practices to refer outreach testing to the IDN's affiliated laboratory. Large specialty physician groups may encourage their members to refer testing to other members of the group. In each case, referrals to independent diagnostic services providers may be reduced.
Clinicians determine which laboratory to recommend or use based on a variety of factors, including those set forth in table 14. |
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| IDNs | We believe that we are an industry leader in servicing hospitals. We provide services to IDNs throughout the United States, including advanced testing services, in some cases managing or serving as the medical directors of their laboratories (including through our industry-leading Professional Lab Services offering discussed in table 3 above). IDNs generally maintain an on-site laboratory to perform the significant majority of clinical testing for their patients (inpatients and outpatients) and refer certain testing to outside service providers, which typically charge the IDNs on a negotiated fee-for-service basis. Fee schedules for IDN reference testing services often are negotiated on behalf of IDNs by group purchasing organizations.
We also have joint venture arrangements with leading IDNs in several metropolitan areas. These joint venture arrangements, which provide diagnostic information services for affiliated IDNs as well as for unaffiliated clinicians and other local healthcare providers, serve as our principal facilities in their service areas. Typically, we have either a majority ownership interest in, or day-to-day management responsibilities for, our joint venture relationships.
In light of continued pressure to reduce systemic healthcare costs, IDNs may change their approach to providing clinical testing services, including by insourcing tests, seeking ways to improve profitability or to better utilize their laboratory capacity. We believe that our combination of services positions us to be an attractive partner for IDNs, offering a full range of strategic relationships. |
| ACOs and DCEs | An ACO is a network of providers and facilities that share financial risk in providing or arranging for the provision of healthcare. A DCE is a healthcare provider that is contracted directly with Medicare and agrees to assume some level of financial risk for providing Medicare services. ACOs and DCEs have increased in number; their impact on the provision of healthcare services to date has varied.
ACOs and DCEs may exercise operational and financial control over providers across the continuum of care, and may function as a payer. Thus, they may be able to manage the health of a population group within a defined geography, and also may be able to influence the cost and quality of healthcare delivery. They may be encouraged to consider exclusive arrangements with healthcare providers, or to limit service providers.
We are actively engaging with ACOs and DCEs to demonstrate the value of our services. |
| Employers | Employers use tests for drugs of abuse to determine an individual's employability and his or her “fitness for duty.” Companies with high levels of employee hiring, safety conscious environments or regulatory testing requirements provide the highest volumes of testing. Factors such as the general economy, the job market and changes in the legal environment (e.g., marijuana decriminalization) can impact the utilization of drugs-of-abuse testing. Some employers retain third party administrators to handle such testing and related services; we support the needs of third party administrators as well as employers who retain us directly.
Employers also are investing in population health services. We meet their needs by providing nationwide access to our customizable services (discussed above at page 13), directly and through health plan and health improvement providers. These services help employers, employees and others manage healthcare costs, capitalize on trends in personalized health and improve health outcomes. In response to the COVID-19 pandemic, we expanded our offerings to employers to assist their pandemic response to create safer workplaces (discussed above at page 13).
We seek to grow our employer business through offering new and innovative programs to help them with their goals of (1) maintaining a safe and productive workplace, (2) improving healthcare for employees and (3) lowering healthcare costs for employees and employers. |
| Consumers | We are well positioned to provide information and insights to patients to help them take actions to improve their healthcare. The changing expectations of patients about their healthcare and their healthcare transactions are influencing our services and the way we provide them. See the discussions of our consumer strategy at page 5 and consumerization above in table 11. |
| FQHCs | Federally Qualified Health Centers offer a broad array of healthcare services, including to historically underserved populations. We strive to offer an attractive array of services to FQHCs to demonstrate the value of our services. |
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| Emerging Retail Healthcare Providers | In recent years, as the healthcare sector changes, retail providers of healthcare services have emerged and are growing. These providers include "big-box" retailers, pharmacy chains, supermarkets, urgent care centers and Internet-based service providers.
We are taking advantage of opportunities to work with these providers, not only to offer new access partners (e.g., CVS retail locations) and new access points for our services (e.g., our collaboration with Safeway), but also to grow our business by expanding our service offerings (e.g., our joint venture with Walmart). See the discussion of our consumer strategy at page 5. |
| Government Agencies | We provide services on a fee-for-service basis to federal, state and local governmental agencies.
Historically, most Medicare and Medicaid beneficiaries were covered under the traditional Medicare and Medicaid programs administered by the federal government. Over the last several years, the federal government has expanded its contracts with private health insurance plans for Medicare beneficiaries and has encouraged such beneficiaries to switch from the traditional programs to the private programs, called “Medicare Advantage” programs. There has been growth of health insurance providers offering Medicare Advantage programs and of beneficiary enrollment in these programs. States also have mandated that Medicaid beneficiaries enroll in private managed care arrangements. During the COVID-19 pandemic, we provided additional services to and in conjunction with government agencies across the United States in connection with the COVID-19 pandemic. |
| Pharmaceutical companies | We have expertise with laboratory developed tests for companion and complementary diagnostics, and offer an array of assets and services to support the development of companion diagnostics, including our robust data set and patient services network.
We also offer Quest Clinical Trials Connect,TM to help accelerate clinical trials (and thus the speed of drugs to market) through better patient recruitment, involvement and management, and improved physician outreach. |
| Other Laboratories | We provide services on a fee-for-service basis to other commercial clinical laboratories. |
Competition. While there has been consolidation in the diagnostic information services industry in recent years, our industry remains fragmented and highly competitive. We primarily compete with three types of clinical testing providers: commercial clinical laboratories, IDN-affiliated laboratories and physician-office laboratories. Our largest commercial clinical laboratory competitor is Laboratory Corporation of America Holdings, Inc. In addition, we compete with many smaller regional and local commercial clinical laboratories, specialized advanced laboratories and providers of consumer-initiated testing. In anatomic pathology, we compete with anatomic pathology practices, including those in academic institutions and large physician group practices, and providers of emerging digital pathology solutions. There also has been a trend among specialty physician practices to establish their own histology laboratory capabilities and/or bring pathologists into their practices, thereby reducing referrals from these practices and increasing the competitive position of these practices.
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Healthcare providers consider a number of factors when selecting a diagnostic information services provider.
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| Potential Factors Considered When Selecting a Diagnostic Information Services Provider (Table 14) | |
| • Service capability and quality | • Reputation in the medical community | |
• Accuracy, timeliness and consistency in reporting test results | • Healthcare information technology solutions, including connectivity options | |
• Access to medical/scientific thought leaders for consultation | • Patient access, including the number, convenience and geographic coverage of patient service centers | |
| • Patient insurance coverage and experience | • Ability to develop new and useful tests and services | |
| • Number and type of tests performed | • Qualifications of its staff | |
| • Pricing and overall value | • Provider office workflow | |
| • Real time payment determination | • Capabilities to support population health initiatives | 0 |
We believe that providing the most attractive service offering in the industry, including the most comprehensive test menu, innovative test offerings, a positive customer experience, a staff including medical and scientific experts, strong quality, unparalleled access and distribution, and data-powered integrated information technology solutions provide us with a competitive advantage.
We believe that large diagnostic information services providers have a competitive advantage due to their large networks and lower cost structures. These advantages should enable larger providers to serve customers more effectively. In addition, we believe that consolidation in the diagnostic information services industry will continue. However, a significant portion of clinical testing is likely to continue to be performed by IDNs, which generally have affiliations with community clinicians and may have more, or more convenient, locations in a market. As a result, we compete against IDN-affiliated laboratories primarily on the basis of service capability, quality and pricing. In addition, market activity may increase the competitive environment. For example, IDN ownership of physician practices may enhance the ties of the clinicians to IDN-affiliated laboratories, enhancing the competitive position of IDN-affiliated laboratories. ACOs and DCEs and their approach to contracts with healthcare providers also may impact competition to provide diagnostic information services.
The diagnostic information services industry is faced with changing technology, new product introductions and new service offerings. Competitors may compete using advanced technology, including technology that enables more convenient or cost-effective testing. Digital pathology, still in an emerging state, is an example of this. Competitors also may compete on the basis of new service offerings. Competitors also may offer testing to be performed outside of a commercial clinical laboratory, such as (1) point-of-care testing that can be performed by physicians in their offices; (2) testing that can be performed by IDNs in their own laboratories; and (3) home testing that can be carried out without requiring the services of outside providers.
The risk assessment and healthcare information technology industries are highly competitive. We have many competitors, some of which have much more extensive experience in these industries and some of which have greater resources. We compete in the risk assessment business by seeking to provide a wider array of quality, integrated services than our competitors, faster services completion and a superior applicant experience. We compete in the healthcare information technology industry by offering solutions that foster better patient care and improve performance for healthcare providers, including smaller and medium sized physician practices.
GENERAL
Human Capital Management. Creating an inspiring workplace is one of our three corporate goals, and this goal drives our approach to human capital management. Effectively managing our human capital resources is a priority with key components that include culture, safety and well-being programs, employee engagement, and training, development and succession planning. Our Board of Directors actively engages in oversight of our human capital management, including by receiving management reports on key areas, strategies and initiatives. Additional information about our human capital management strategies and initiatives is available in our annual corporate responsibility report.
As of December 31, 2021, we have approximately 49,000 employees, of whom approximately 40,000 are full-time and the remainder are part-time or on-call. Our employee population is more diverse than the U.S. workforce, taken as a whole. Approximately 71% of our employees globally identify as women; approximately 51% of our U.S. employees identify as people of color. A majority of our employees work directly with our customers or in our laboratories. Fewer than 1% of our employees are represented by a union. We believe that our overall relations with our employees are good.
Culture. We strive to foster a strong culture, built on our Code of Ethics, which reinforces our commitment to integrity and aligns with our vision, values, goals and brand. Our Quest Management System, discussed above at page 8, supports our effort to maintain a focus on high performance. We also focus on building and maintaining a collaborative, diverse and inclusive culture in which all employees are empowered to raise and discuss difficult issues and valued for their strengths, experience and unique perspectives (our focus on diversity and inclusion is discussed further below). We encourage our employees to actively participate in their communities, and support their participation, including offering incentives for participation. Our Everyday Excellence program includes guiding principles for our entire organization to support a superior customer experience and inspire employees to be their best every day, with every person and with every customer interaction; the program is integrated into performance assessments and frontline employee behavioral standards. Our Recognition Quest Program reinforces our commitment to recognize above and beyond contributions and to demonstrating how much we value, care for and appreciate one another by regularly celebrating and rewarding one another as we work together.
Safety and Well-Being. The health and safety of our employees is of paramount concern. We use a systematic, risk-based approach to develop tailored incident prevention and response programs designed to keep our employees safe in each of our diverse functional areas, and use data insights and a detailed audit program to foster the effectiveness of our programs. We have a comprehensive curriculum of annual safety training, as well as training for new employees. During the COVID-19 pandemic, our cross-functional Safely Working Together Steering Committee designed and implemented tactics, techniques and procedures to enable our colleagues to continue to work safely. As part of our comprehensive and competitive compensation and benefits program, we also offer innovative initiatives to support the well-being of our employees and their
families through our HealthyQuest program. The cornerstone of HealthyQuest is our Blueprint for Wellness program, which empowers our employees and their dependents with health insights based on lab and biometric data and invites them each year to take the initiative to improve their physical and mental health. We also offer other programs designed to engage employees in managing their health, including access to medical expertise and support programs tailored to their individual needs, helping them to adopt healthier behaviors and access better care at lower costs. These include customized programs for conditions such as type 2 diabetes management, chronic kidney disease, cardiovascular disease, zero-cost lab testing and specialty drugs, and special support for orthopedic surgery and for cancer and other serious diagnoses. For 2022, we enhanced our mental health offering for employees.
Inclusion and Diversity. We understand the need to create an environment where employees can bring their whole selves to work. We aim to harness the unique mix of capabilities, talents, cultures, beliefs and experience of our employees and create a workforce that is demographically diverse at all levels of the organization. Through our CTC Framework (focusing on Culture, Talent and Community), we prioritize diversity across the entire talent lifecycle, with the goals of supporting employees throughout their careers at Quest, ensuring transparency and identifying opportunities for action. In 2021, we continued to focus on inclusion and diversity issues through additional training for leaders and other employees. We also continued, with the Quest Diagnostics Foundation, Quest for Health Equity, our initiative to help reduce health disparities in underserved communities.
Engagement. Since 1997, we have sought to foster the engagement and enablement of our employees, and have regularly surveyed our employees to assess their engagement. Employee engagement has been a metric in the annual incentive plan for our executive officers since 2013. In 2020, we launched a new strategy for gathering employee feedback that utilizes more frequent employee surveys. This approach is designed to build an agile culture, based on continuous feedback that fuels ongoing conversations about priorities, performance, opportunities and growth, to result in a higher performing organization and committed employees. In addition, throughout the COVID-19 pandemic, we have held weekly or bi-weekly meetings among hundreds of company leaders to foster increased communication across the company regarding topics of concern to employees.
Training, Development and Succession Planning. We provide training on a wide array of topics to our employees through live and online formats, including opportunities that can be accessed through their mobile devices. We also offer a number of development opportunities for our employees, such as mentoring and education programs, including a higher education tuition reimbursement or assistance program. In addition, we provide leadership training opportunities for employees at all levels, including a manager essentials curriculum, our Leading Quest Supervisor and Manager Core Program, coaching programs and trainings to strengthen critical leadership skills. We also deliver a number of programs tailored to specific functions to drive a high-performance culture and sharpen the capabilities needed to lead our organization (e.g., our Commercial, Finance, Pathology, R&D, and Product Management Leadership Programs). We have a robust talent assessment and succession planning process to promote business continuity, including at the most senior levels; this planning is linked to our engagement and inclusion and diversity initiatives, to foster those efforts.
Sales and Marketing. Our Diagnostic Information Services business has a unified commercial organization focused on the sale of most of our services. It coordinates closely with our clinical franchises (discussed above under the heading Innovation) and marketing organization. The commercial organization is centrally led, and is organized regionally, in conjunction with our operations organization, to focus on local customer needs and to ensure aligned delivery for our customers. Our commercial organization employs world-class processes and tools and strong management discipline. We provide industry-leading training and development, focus on opportunities with IDNs and specialty physicians, and foster a customer-focused, performance-driven culture. We also maintain distinct sales and marketing organizations for our offerings in Diagnostic Solutions and our employer drugs-of-abuse testing services. In 2021, we launched a new marketing campaign designed to remind customers of the value that we bring to healthcare. Our "Powering Affordable Care" campaign speaks about our leadership in clinical innovation, our ability to enable better clinical outcomes, our improved patient experience and our ability to reduce the cost of care.
Information Technology. We use information systems extensively in virtually all aspects of our business, including clinical testing, test ordering and reporting, billing, customer service, logistics and management of medical data. We endeavor to establish systems that create value and efficiencies for our Company and customers. The successful delivery of our services depends, in part, on the continued and uninterrupted performance of our information technology systems. We take precautionary measures to prevent problems that could affect our information technology systems.
Some of our historic growth has come through acquisitions and, as a result, we continue to use multiple information systems. We have made significant progress implementing common systems in our regional laboratories, and we continue to standardize laboratory information and billing systems across our operations. We expect that our standardization efforts will
take several more years to complete, and will result in significantly more centralized systems, improved operating efficiency, more positive customer experiences and enhanced control over our operational environment. Even after we complete our efforts to standardize our legacy systems, we will need to focus on standardizing systems in connection with future business acquisitions.
Quality Assurance. As discussed further under the heading Quality on page 7, our goal is to provide every patient with services and products of superior quality, and to meet that goal we employ the Quest Management System. Employing root cause analysis, process improvements and rigorous tracking and measuring, we continuously seek to enhance quality, reduce defects, further increase the efficacy and efficiency of our operations and processes, eliminate waste and help standardize operations across our Company.
In our laboratory operations, our quality assurance efforts focus on pre-analytic, analytic and post-analytic processes, including positive patient identification of specimens, appropriate specimen transport, analysis and report accuracy, reference interval establishment and review, statistical process control and personnel training for all of our laboratories and patient service centers. As part of our quality assurance program, we utilize internal proficiency testing, comprehensive quality control and rigorous process audits. We have introduced comprehensive and digitized data analytics software that implements advanced automated quality control procedures, offering both real-time and post-analytic analysis of data at the laboratory and corporate level. We monitor test results to identify trends, biases, instrument failures and population shifts through digitization and data analytics. We also focus on the licensing, credentialing, training and competence of our professional and technical staff. For example, our cytotechnologists and pathologists participate in an internal peer-review evaluation and one or more external individual proficiency testing programs.
We have accreditation or licenses for our clinical laboratory operations from various regulatory agencies or accrediting organizations, such as CMS, CAP and certain states. All of our laboratories participate in external quality surveillance programs, including proficiency testing programs administered by CAP and several state agencies. CAP is an independent, nongovernmental organization of board-certified pathologists approved by CMS to inspect clinical laboratories to determine compliance with the standards required by CLIA. CAP offers an accreditation program to which clinical laboratories may voluntarily subscribe. All of our major laboratories, including our laboratories outside the U.S., and a number of our rapid response laboratories, are accredited by CAP. Accreditation includes on-site inspections and participation in the CAP (or equivalent) proficiency testing program. In addition, some of our laboratories also have International Organization for Standardization (ISO) certification for their quality management systems.
We maintain a robust Supplier Quality Program designed to ensure a high quality supplier network and to raise the bar of quality expectation across that network. We expect suppliers to provide the highest quality products and services and to embrace an ethic of transparent quality collaboration. In our program, we aim to ensure and improve the quality of purchased products and services. Our suppliers are expected to operate under quality management principles that meet industry standards, strive for zero defect manufacturing, use statistical analysis to reduce variation and meet applicable regulatory standards. In choosing suppliers, we evaluate their quality systems and quality performance metrics. Our supplier qualification process is risk-based, with assessments and on-site audits based on risk tiers. Contracts with our suppliers include specific quality, compliance, and change management provisions as appropriate. We use supplier quality engineers who are trained to audit on ISO standards and FDA regulations applicable to suppliers’ processes, and a procurement engineering team to assist with qualification and validation of new supplies and products. We actively manage supplier performance, utilizing a problem reporting and resolution process designed to drive to root cause and corrective actions. We maintain a continuous improvement dialogue with our suppliers, and with operationally critical suppliers deliver a supplier scorecard that supports continuous improvement.
We also maintain quality assurance programs for IDN laboratories that we manage, and for our services offerings outside laboratories.
Intellectual Property Rights. We own significant intellectual property, including patents, patent applications, technology, trade secrets, know-how, copyrights and trademarks in the United States and other countries. From time to time, we also license patents, patent applications, technology, trade secrets, know-how, copyrights or trademarks owned by others; we also may license our intellectual property to others. In the aggregate, our intellectual property assets and licenses are of material importance to our business. We believe, however, that no single patent, technology, trademark, intellectual property asset or license is material to our business as a whole. Our approach is to manage our intellectual property assets, to safeguard them and to maximize their value to our enterprise. We actively defend our important intellectual property assets and pursue protection of our products, processes and other intellectual property where possible.
Enterprise Risk Management Program. We maintain an enterprise risk management program designed to promote a culture of risk awareness throughout the Company's key business, operations and support functions. Our program, which is
integrated with the Company’s governance, performance management and internal control frameworks, entails a formal continuous process that identifies, assesses, mitigates and manages the risks from both internal and external conditions that could significantly impact the Company and influence its business strategy and performance. The program is based on the most recent framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, which focuses on the following risk types:
•Operational risk - risks arising from systems, processes, people and external events that affect the Company’s operational objectives or fundamental reason for its existence, including: product life-cycle and execution; service quality and performance; information management and data protection and security, including cybersecurity; supply chain and business disruption; and other risks, including human capital and reputation.
•Financial risk - risks arising from the Company’s ability to meet its financial obligations pursuant to its strategic and operational objectives, including exposure to broad market and more specific industry risk that could impact liquidity, interest rate, credit, pricing and reimbursement, and also to internal and external financial reporting.
•Legal and compliance risk - risks arising from the regulatory and enforcement environment, legal proceedings and adherence to ethics and compliance policies and procedures.
•Strategic risk - risks that will impede the Company’s plan to achieve its mission and vision and apply its core values, including changes in the broad market and Company's industry, business development and restructuring activities, competitive threats and practices, technology and product innovation, and public policy.
As part of our program, we routinely assess our enterprise level risks, emerging risks, overall Company-level risk tolerance and the effectiveness of risk management, and monitor the progress of and resources applied to risk mitigation; our Board of Directors actively oversees our program. Our primary risk factors are discussed in Risk Factors beginning on page 32.
Billing; Government Reimbursement. We generally bill for diagnostic information services on a fee-for-service basis under one of two types of fee schedules; fees may be negotiated or discounted. The types of fee schedules are:
•“Client” fees charged to physicians, IDNs and institutions for which services are performed on a wholesale basis and which are billed on a monthly basis.
•“Patient” fees charged to individual patients and certain third-party payers on a claim-by-claim basis.
Billing for diagnostic information services is very complicated. Our customers, discussed in table 13, have different billing requirements. Some billing arrangements require us to bill multiple payers, and there are several other factors that complicate billing (e.g., disparity in coverage and information requirements among payers; incomplete or inaccurate billing information provided by ordering clinicians; and lack of access to patients before testing). We maintain compliance policies and procedures for our billing practices, and we audit our practices for compliance with applicable laws and regulations and internal policies and procedures.
With regard to the clinical testing services performed on behalf of Medicare beneficiaries, we generally must bill Medicare directly and must accept the Medicare carrier's fee schedule amount for covered services as payment in full. In addition, state Medicaid programs are prohibited from paying more (and in most instances, pay significantly less) than Medicare. Currently, Medicare does not require the beneficiary to pay a co-payment for diagnostic testing services reimbursed under the Clinical Laboratory Fee Schedule, but generally does require a patient deductible and co-insurance for anatomic pathology services.
Part B of the Medicare program contains fee schedule payment methodologies for clinical testing services performed for covered patients, including a national ceiling on the amount that carriers could pay under their local Medicare clinical testing fee schedules. Historically, the Medicare Clinical Laboratory Fee Schedule and the Medicare Physician Fee Schedule established under that program have been subject to change, including each year. Pursuant to PAMA, reimbursement rates for many clinical laboratory tests provided under Medicare were reduced from 2018 - 2020. PAMA calls for further revision of the Medicare Clinical Laboratory Fee Schedule for years after 2020, based on future surveys of market rates; reimbursement reduction from 2023-25 is capped by PAMA at 15% annually. PAMA's next data collection and reporting period have been delayed, most recently by federal legislation adopted in December 2021, which further delayed the reimbursement rate reductions and reporting requirements until January 1, 2023.
Our net revenues reimbursed under Medicare and Medicaid in 2021 were lower as a percentage of our consolidated net revenues than in recent years (excluding 2020, when we also experienced significant COVID-19 testing). Excluding revenues attributable to COVID-19 testing, approximately 13% of our net revenues were reimbursed under Medicare and Medicaid in 2021, compared to approximately 15% in 2019.
REGULATION
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We are subject to extensive and frequently changing laws and regulations in the United States (at both the federal and state levels) and other jurisdictions in which we conduct business, and to government inspections and audits.
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| Key Regulatory Schemes (Table 16) |
| CLIA and State Clinical Laboratory Licensing | CLIA regulates the operations of virtually all clinical laboratories, requiring that they be certified by the federal government and that they comply with various technical, operational, personnel and quality requirements intended to ensure that the services provided are accurate, reliable and timely.
State laws may require additional personnel qualifications or licenses, quality control, record maintenance, proficiency testing or detailed review of our scientific method validations and technical procedures for certain tests.
Violations of these laws and regulations may result in monetary fines, criminal and civil penalties and/or suspension or exclusion from participation in Medicare, Medicaid and other federal or state healthcare programs. |
| Medicare and Medicaid; Fraud and Abuse | Diagnostic testing services provided under Medicare and Medicaid programs are subject to complex, evolving, stringent and frequently ambiguous federal and state laws and regulations, including those relating to billing, coverage and reimbursement.
Anti-kickback laws and regulations prohibit making payments or furnishing other benefits to influence the referral of tests billed to Medicare, Medicaid or certain other federal or state healthcare programs.
In addition, federal and state anti-self-referral laws generally prohibit Medicare and Medicaid payments for clinical tests referred by physicians who have an ownership or investment interest in, or a compensation arrangement with, the testing laboratory, unless specific exceptions are met.
Some states have similar laws that are not limited in applicability to only Medicare and Medicaid referrals and could also affect tests that are paid for by health plans and other non-governmental payers.
Violations of these laws and regulations may result in monetary fines, criminal and civil penalties and/or suspension or exclusion from participation in Medicare, Medicaid and other federal or state healthcare programs. |
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| FDA | The FDA has regulatory responsibility over, among other areas, instruments, software, test kits, reagents and other devices used by clinical laboratories to perform diagnostic testing in the United States. The FDA also regulates drugs-of-abuse testing for employers and insurers, testing for blood bank purposes and testing of donors of human cells for purposes such as in vitro fertilization.
A number of advanced tests we develop internally are offered as LDTs. The FDA has claimed regulatory authority over all LDTs, but has stated that it exercised enforcement discretion with regard to most LDTs performed by high complexity CLIA-certified laboratories.
Pursuant to the 21st Century Cures Act, the FDA issued final guidance regarding its position on the regulation of clinical decision software, which may be used in connection with LDTs. The guidance attempts to address uncertainty regarding whether FDA approval of certain software is required. It has been used by the FDA, in part, to assert authority over the annotation software aspects of pharmacogenetic testing services.
Legislation introduced in Congress would enable the FDA to regulate LDTs, in vitro diagnostics, software and other items used in the diagnosis of disease. The FDA and the U. S. Department of Health and Human Services also have expressed views regarding the regulation of LDTs. Either new law or a revised approach to regulation of LDTs could have a significant impact on the clinical laboratory testing industry, including regulating LDTs in new ways, while creating avenues of opportunity and competition regarding clinical laboratory testing. New competitors may enter the industry, and competition may come in new forms. |
| Environmental, Health and Safety | We are subject to laws and regulations related to the protection of the environment, the health and safety of employees and the handling, transportation and disposal of medical specimens, infectious and hazardous waste and radioactive materials.
For example, the U.S. Occupational Safety and Health Administration has established extensive requirements relating specifically to workplace safety for healthcare employers in the U.S. This includes requirements to develop and implement multi-faceted programs to protect workers from exposure to blood-borne pathogens, including preventing or minimizing any exposure through needle stick injuries.
For purposes of transportation, some biological materials and laboratory supplies are classified as hazardous materials and are subject to regulation by one or more of the following agencies: the U.S. Department of Transportation, the U.S. Public Health Service, the U.S. Postal Service and the International Air Transport Association. |
| Physicians | Our pathologists are required to hold a valid license to practice medicine in the jurisdiction in which they practice.
Several jurisdictions in which our businesses are located prohibit business corporations from engaging in the practice of medicine. In certain jurisdictions, business corporations are prohibited from employing licensed healthcare professionals to provide services on behalf of the corporation; these laws vary. In some jurisdictions, anatomic pathology services are delivered through physician-owned entities that employ the practicing pathologists. The manner in which licensed physicians can be organized to perform medical services may be governed by the laws of the jurisdictions in which medical services are provided and by the medical boards or other entities authorized by these jurisdictions to oversee the practice of medicine. |
| Privacy and Security of Health and Personal Information | We are subject to laws and regulations regarding protecting the security and privacy of certain healthcare and personal information, including: (a) the federal Health Insurance Portability and Accountability Act and the regulations thereunder, which establish (i) a complex regulatory framework including requirements for safeguarding protected health information and (ii) comprehensive federal standards regarding the uses and disclosures of protected health information; (b) state laws, including the California Consumer Privacy Act and similar laws in other states ; and (c) laws outside the U.S., including the European Union's General Data Protection Regulation.
A healthcare provider may be subject to penalties for non-compliance and may be required to notify individuals or state, federal or county governments if the provider discovers certain breaches of personal information or protected health information. |
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| Drug Testing; Controlled Substances | All U.S. laboratories that perform drug testing for certain public sector employees and employees of certain federally regulated businesses are required to be certified as meeting the detailed performance and quality standards of the Substance Abuse and Mental Health Services Administration.
To obtain access to controlled substances used to perform drugs-of-abuse testing in the United States, laboratories must be licensed by the Drug Enforcement Administration. |
Compliance. We strive to conduct our business in compliance with all applicable laws and regulations. We license and maintain appropriate accreditations for all of our laboratories and, where applicable, patient service centers, as required by federal and state agencies. We have a long-standing and well-established compliance program. The Quality and Compliance Committee of our Board of Directors oversees, and receives periodic management reports regarding, our compliance program. Our program includes detailed policies and procedures and training programs intended to ensure the implementation and observance of all applicable laws and regulations (including regarding billing and reimbursement, and privacy of protected health information and personally identifiable information) and Company policies. Further, we conduct in-depth reviews of procedures and facilities to assure regulatory compliance throughout our operations. We conduct annual training of our employees on these compliance policies and procedures.
As an integral part of our billing compliance program, we investigate reported or suspected failures to comply with federal and state healthcare reimbursement requirements. Any Medicare or Medicaid overpayments resulting from non-compliance are refunded by us. As a result of these efforts, we have periodically identified and reported overpayments, refunded the payers for overpayments and taken appropriate corrective action.
AVAILABLE INFORMATION
The Securities and Exchange Commission (the “SEC”) maintains an internet site, www.sec.gov, that contains annual, quarterly and current reports, proxy and information statements and other information that issuers file electronically with the SEC. We file reports, proxy statements and other information with the SEC; they are publicly available at the SEC's internet site.
Our internet address is www.QuestDiagnostics.com. The information on or accessible through our website is not part of and is not incorporated by reference into this Report. We make available free of charge, on or through our Investor Relations webpage (www.QuestDiagnostics.com/investor), our proxy statements, Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practical after such material is filed with, or furnished to, the SEC.
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| www.QuestDiagnostics.com/investor provides information about our corporate governance. |
| Information Available at Our Corporate Governance Webpage (Table 17) |
• Directors | • Corporate Governance Guidelines |
• Composition of the committees of our Board of Directors | • Code of Ethics |
• Senior management | • Certificate of Incorporation |
• Charters for the committees of our Board of Directors | • Bylaws |
• Information about our corporate political contributions | • Values |
• Statements of beneficial ownership of our equity securities filed by our directors, officers and others under Section 16 of the Exchange Act |
We also maintain a Corporate Responsibility webpage that provides information about our corporate responsibility program, including our focus on environmental, social and governance issues and our annual Corporate Responsibility Report.
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| www.QuestDiagnostics.com/our-company/corporate-responsibility provides information about our corporate responsibility program. |
| Information Available at Our Corporate Responsibility Webpage (Table 18) |
• Corporate Responsibility Reports | • Quest for Health Equity |
• Information about our corporate political contributions | • Quest Diagnostics Foundation |
• Environmental, social and governance resources | • Sustainability |
• Governance, ethics and values | • Community giving |
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
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| Executive Officers (Table 19) |
| Name, Age, Title | Background |
Stephen H. Rusckowski (64)
Chairman of the Board, Chief Executive Officer and President | Mr. Rusckowski joined the Company in May 2012 as Chief Executive Officer and President and became Chairman of the Board on January 1, 2017. From October 2006 until he joined the Company, he was Chief Executive Officer of Philips Healthcare, the largest unit of Royal Philips Electronics, and a member of the Board of Management of Royal Philips Electronics and its Executive Committee. Previously, he was CEO of the Imaging Systems business of Royal Phillips Electronics.
On February 3, 2022, the Company announced that, as part of its ongoing leadership succession planning, effective November 1, 2022, Mr. Rusckowski would step down as Chief Executive Officer and President, and become Executive Chairman and continue to serve on the Company's Board of Directors through March 2023.
Before joining Philips in 2001, Mr. Rusckowski held numerous management positions with the healthcare division of Hewlett-Packard/Agilent Technologies.
Mr. Rusckowski has been a director of the Company since May 2012. He was a director of Xerox Corporation from February 2015 to 2018, and a director of Covidien plc from December 2013 to January 2015. Mr. Rusckowski served as Chairman of the American Clinical Laboratory Association from 2014 to 2017. |
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James E. Davis (59)
Executive Vice President, General Diagnostics; Chief Executive Officer - Elect | In January 2017, he became Executive Vice President, General Diagnostics; previously Mr. Davis was Senior Vice President and Group Executive - Regional Businesses. In January 2015, he assumed responsibility for the general management of the Company's regional Diagnostic Information Services business. Mr. Davis was responsible for our products business from February 2014 until 2016. From February 2014 to January 2015, he was responsible for operations for the Company's Diagnostic Information Services business. Mr. Davis joined Quest Diagnostics in April 2013 as Senior Vice President, Diagnostics Solutions, with responsibility for the healthcare information technology, risk assessment, clinical trials, diagnostic products and employer solutions businesses.
On February 3, 2022, the Company announced that Mr. Davis was appointed Chief Executive Officer - Elect, effective immediately, and that he would become Chief Executive Officer effective November 1, 2022.
Prior to joining Quest Diagnostics, from March 2012 to April 2013, Mr. Davis served as Lead Director, and then as Chief Executive Officer, of InSightec, Inc., a medical device company that designs and develops ultrasound ablation devices that are guided by magnetic resonance imaging systems.
Previously, Mr. Davis held a number of senior positions in General Electric’s healthcare business, including from 2007 to 2012 as Vice President and General Manager of GE Healthcare’s magnetic resonance imaging business. Prior to joining GE Healthcare, Mr. Davis held leadership positions in GE’s aviation business and led the development of strategic and operational improvement initiatives for clients of McKinsey & Company, Inc. |
Catherine T. Doherty (59)
Senior Vice President and Group Executive - Clinical Franchise Solutions and Marketing | Since January 2013, Ms. Doherty has been responsible for overseeing the development of clinical franchise solutions in the areas of general health and wellness, cardiovascular, metabolic and endocrinology, infectious disease and immunology, and prescription drug monitoring and toxicology, as well as enterprise-wide marketing. Ms. Doherty is also responsible for the employer solutions and risk assessment businesses, and since February 2020, our sports diagnostics franchise. Additionally, in October 2018, QuestDirect®, our consumer initiated testing platform was launched under her leadership. She also was responsible for clinical franchise solutions in the areas of neurology and women's health from January 2013 to January 2017 and for the healthcare information technology business from February 2014 to January 2017.
Prior to January 2013, Ms. Doherty held a variety of positions of increasing responsibility since joining the Company in 1990, including Senior Vice President, Physician Services; Vice President, Hospital Services; Vice President, Office of the Chairman; Vice President, Finance and Administration for the Hospital business; Vice President, Communications and Investor Relations; and Chief Accounting Officer. |
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Carrie Eglinton Manner (47)
Senior Vice President, Advanced Diagnostics | Ms. Eglinton Manner joined the Company in January 2017. She is responsible for the Company's advanced testing activities, including overseeing the development of clinical franchise solutions in the areas of neurology, oncology, pathology and women's health, as well as the Company's global business and pharmaceutical/diagnostic development services. Ms. Eglinton Manner has served as a director of Repligen Corporation since June 2020.
Previously, Ms. Eglinton Manner spent over 20 years in various leadership roles in healthcare businesses at General Electric. From 2015 to 2016, she served as President and CEO of the Detection and Guidance Solutions business, delivering advanced x-ray technologies spanning the continuum of healthcare. From 2013 to 2015, Ms. Eglinton Manner served as President and CEO of OEC Surgical Mobile C-arm systems. She was President and CEO of General Electric's diagnostic pathology laboratory services business from 2012 to 2013, and President of the Maternal Infant Care Business from 2009 to 2012. |
Mark J. Guinan (60)
Executive Vice President and Chief Financial Officer
| Mr. Guinan joined the Company in July 2013. From 2010 until joining Quest Diagnostics in 2013, he served as Chief Financial Officer for Hill-Rom Holdings Inc., a manufacturer and provider of medical technologies and related services for the healthcare industry. Mr. Guinan has served as a director of Myovant Sciences, Ltd. since July 2018.
On February 3, 2022, the Company announced that Mr. Guinan would retire in 2022.
Previously, he had served in a number of finance and operations roles in a long career at Johnson & Johnson including 2009 to 2010 as Vice President, Chief Procurement Officer, and 2005 to 2009 as Vice President, Group Finance Pharmaceuticals. Before joining Johnson & Johnson in 1997, he held a number of financial roles at Procter & Gamble. |
Michael E. Prevoznik (60)
Senior Vice President and General Counsel | Mr. Prevoznik joined the Company as Vice President and General Counsel in August 1999. In 2003, he assumed responsibility for governmental affairs. From 1999 until April 2009, Mr. Prevoznik also had responsibility for the Company's Compliance Department.
In addition, from April 2011 to January 2017, he had management responsibility for the Company's diagnostic information services activities outside the U.S., and from April 2011 to January 2013, he had management responsibility for the Company's clinical trials business.
Prior to joining the Company, Mr. Prevoznik served in positions of increasing responsibility within the compliance organization at SmithKline Beecham, most recently as Vice President, Compliance, with responsibility for coordinating all SmithKline Beecham compliance activities worldwide. |
Item 1A. Risk Factors
You should carefully consider all of the information set forth in this Report, including the following risk factors, before deciding to invest in any of our securities. The risks below are not the only ones that we face. Additional risks not presently known to us, or that we presently deem immaterial, may also negatively impact us. Our business, consolidated financial condition, revenues, results of operations, profitability, reputation or cash flows, or the price of our common stock, could be materially impacted by any of these factors.
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This Report also includes forward-looking statements that involve risks or uncertainties. Our results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks we face described below and elsewhere. See “Cautionary Factors that May Affect Future Results” on page 42. |
RISKS RELATED TO OUR BUSINESS
The U.S. healthcare system is evolving and medical laboratory testing market fundamentals are changing, and our business could be adversely impacted if we fail to adapt.
The U.S. healthcare system continues to evolve. Significant change is taking place in the healthcare system, including as discussed above under the heading The Clinical Testing Industry, beginning on page 15. For example, value-based reimbursement is increasing (e.g., UnitedHealthcare's Preferred Lab Network); CMS has set goals for value-based reimbursement to be achieved. Patients are encouraged to take increased interest in and responsibility for, and often are bearing increased responsibility for payment for, their healthcare. Healthcare industry participants are evolving and consolidating. Healthcare services increasingly are being provided by non-traditional providers (e.g., physician assistants), in non-traditional venues (e.g., retail medical clinics, urgent care centers) and using new technologies (e.g., telemedicine, digital pathology). Utilization of the healthcare system is being influenced by several factors and may result in a decline in the demand for diagnostic information services.
In addition, we believe that clinical testing market fundamentals are changing. We believe that PAMA-driven reimbursement pressure remains a catalyst for structural change in the market. We also believe that health plans and consumers increasingly are focusing on driving better value in laboratory testing services. We expect that the evolution of the healthcare industry will continue, and that industry change is likely to be extensive.
The clinical testing business is highly competitive, and if we fail to provide an appropriately priced level of service or otherwise fail to compete effectively it could have a material adverse effect on our revenues and profitability.
The clinical testing business remains a fragmented and highly competitive industry. We primarily compete with three types of clinical testing providers: other commercial clinical laboratories, IDN-affiliated laboratories and physician-office laboratories. We also compete with other providers, including anatomic pathology practices, large physician group practices and providers of consumer-initiated testing. IDNs generally maintain on-site laboratories to perform testing on their patients (inpatient or outpatient). In addition, many IDNs compete with commercial clinical laboratories for outreach (non-IDN patients) testing. IDNs may seek to leverage their relationships with community clinicians and encourage the clinicians to send their outreach testing to the IDN's laboratory. As a result of this affiliation between IDNs and community clinicians, we compete against IDN-affiliated laboratories primarily based on quality and scope of service as well as pricing. In addition, IDNs that own physician practices may encourage or require the practices to refer testing to the IDN's laboratory. In recent years, there has been a trend of IDNs acquiring physician practices, increasing the percentage of physician practices owned by IDNs. Increased IDN ownership of physician practices may enhance clinician ties to IDN-affiliated laboratories and may strengthen their competitive position. The formation of ACOs and DCEs and their approach to contracts with healthcare providers also may increase competition to provide diagnostic information services. In addition, new players have recently started to provide clinical lab testing services (e.g., employers; government agencies).
The diagnostic information services industry also is faced with changing technology and new product introductions. Competitors may compete using advanced technology, including technology that enables more convenient or cost-effective testing. Digital pathology, still in an emerging state, is an example of this. Competitors also may compete on the basis of new service offerings. Competitors also may offer testing to be performed outside of a commercial clinical laboratory, such as (1) point-of-care testing that can be performed by physicians in their offices; (2) advanced testing that can be performed by IDNs in their own laboratories; and (3) home testing that can be carried out without requiring the services of outside providers.
Government payers, such as Medicare and Medicaid, have taken steps to reduce the utilization and reimbursement of healthcare services, including clinical testing services.
We face efforts by government payers to reduce utilization of and reimbursement for diagnostic information services. One example of this is increased use of prior authorization requirements. We expect efforts to reduce reimbursements, to impose more stringent cost controls and to reduce utilization of clinical test services will continue.
Pursuant to PAMA, reimbursement rates for many clinical laboratory tests provided under Medicare were reduced from 2018 - 2020. PAMA calls for further revision of the Medicare Clinical Laboratory Fee Schedule for years after 2020, based on future surveys of market rates; reimbursement rate reduction from 2023-25 is capped by PAMA at 15% annually. PAMA's next data collection and reporting period have been delayed, most recently by federal legislation adopted in December 2021, which further delayed the reimbursement rate reductions and reporting requirements until January 1, 2023.
In addition, CMS has adopted policies limiting or excluding coverage for clinical tests that we perform. We also provide physician services that are reimbursed by Medicare under a physician fee schedule, which is subject to adjustment on an annual basis. Medicaid reimbursement varies by state and is subject to administrative and billing requirements and budget pressures.
In addition, over the last several years, the federal government has expanded its contracts with private health insurance plans for Medicare beneficiaries, called “Medicare Advantage” programs, and has encouraged such beneficiaries to switch from the traditional programs to the private programs. There has been growth of health insurance plans offering Medicare Advantage programs, and of beneficiary enrollment in these programs. States have mandated that Medicaid beneficiaries enroll in private managed care arrangements. In addition, state budget pressures have encouraged states to consider several courses of action that may impact our business, such as delaying payments, reducing reimbursement, restricting coverage eligibility, denying claims and service coverage restrictions.
Reimbursement for Medicare services also is subject to annual reduction under the Budget Control Act of 2011, the Statutory Pay-As-You-Go Act of 2010 and the Physician Fee Schedule.
From time to time, the federal government has considered whether competitive bidding could be used to provide clinical testing services for Medicare beneficiaries at attractive rates while maintaining quality and access to care. Congress periodically considers cost-saving initiatives. These initiatives have included coinsurance for clinical testing services, co-payments for clinical testing and further laboratory physician fee schedule reductions.
Other steps taken to reduce utilization and reimbursement include requirements to obtain diagnosis codes to obtain payment, increased documentation requirements, limiting the allowable number of tests or ordering frequency, expanded prior authorization programs and otherwise increasing payment denials.
Steps to reduce utilization and reimbursement also discourage innovation and access to innovative solutions that we may offer.
Health plans and other third parties have taken steps to reduce the utilization and reimbursement of health services, including clinical testing services.
We face efforts by non-governmental third-party payers, including health plans, to reduce utilization of and reimbursement for clinical testing services. Examples include increased use of prior authorization requirements and increased denial of coverage for services. There is increased market activity regarding alternative payment models, including bundled payment models. We expect continuing efforts by third-party payers, including in their rules, practices and policies, to reduce reimbursements, to impose more stringent cost controls and to reduce utilization of clinical testing services. ACOs, DCEs and IDNs also may undertake efforts to reduce utilization of, or reimbursement for, diagnostic information services.
The healthcare industry has experienced a trend of consolidation among health insurance plans, resulting in fewer but larger insurance plans with significant bargaining power to negotiate fee arrangements with healthcare providers, including clinical testing providers. The increased consolidation among health plans also has increased pricing transparency and their bargaining power and the potential adverse impact of ceasing to be a contracted provider with any such insurer. Health plans, and independent physician associations, may demand that clinical testing providers accept discounted fee structures or assume all or a portion of the financial risk associated with providing testing services to their members through capitated payment arrangements. Some health plans also are reviewing test coding, evaluating coverage decisions and requiring preauthorization of certain testing. There are also an increasing number of patients enrolling in consumer driven products and high deductible plans that involve greater patient cost-sharing.
Other steps taken to reduce utilization and reimbursement include requirements to obtain diagnosis codes to obtain payment, increased documentation requirements, limiting the allowable number of tests or ordering frequency, expanded prior authorization programs and otherwise increasing payment denials.
Steps to reduce utilization and reimbursement also discourage innovation and access to innovative solutions that we may offer.
Failure to develop, or acquire licenses for, new tests, technology and services could negatively impact our testing volume and revenues.
The diagnostic information services industry is faced with changing technology and new product introductions. Other companies or individuals, including our competitors, may obtain patents or other property rights that would prevent, limit or interfere with our ability to develop, perform or sell our solutions or operate our business or increase our costs. In addition, they could introduce new tests, technologies or services that may result in a decrease in the demand for our services or cause us to reduce the prices of our services. Our success in continuing to introduce new solutions, technology and services will depend, in part, on our ability to license new and improved technologies on favorable terms. We may be unable to develop or introduce new solutions or services. Other companies or individuals, including our competitors, may obtain patents or other property rights on tests or processes that we may be performing, that could prevent, limit or interfere with our ability to develop, perform or sell our tests or operate our business. We also may be unable to continue to negotiate acceptable licensing arrangements, and arrangements that we do conclude may not yield commercially successful clinical tests. If we are unable to license these testing methods at competitive rates, our research and development costs may increase as a result. In addition, if we are unable to develop and introduce, or license, new solutions, technology and services to expand our advanced testing capabilities, our services may become outdated when compared with our competition.
Failure to establish, and perform to, appropriate quality standards, or to assure that the appropriate standard of quality is observed in the performance of our diagnostic information services, could adversely affect the results of our operations and adversely impact our reputation.
The provision of diagnostic information services involves certain inherent risks. The services that we provide are intended to provide information in providing patient care. Therefore, users of our services may have a greater sensitivity to errors than the users of services or products that are intended for other purposes.
Negligence in performing our services can lead to injury or other adverse events. We may be sued under physician liability or other liability law for acts or omissions by our pathologists, laboratory personnel and IDN employees who are under the supervision of our IDN-based pathologists. We are subject to the attendant risk of substantial damages awards and risk to our reputation.
RISKS RELATED TO CHANGE IN PUBLIC POLICY
AND THE REGULATORY AND LEGAL ENVIRONMENT
We are subject to numerous legal and regulatory requirements governing our activities, and we may face substantial fines and penalties, and our business activities may be impacted, if we fail to comply.
Our business is subject to or impacted by extensive and frequently changing laws and regulations in the United States (including at both the federal and state levels) and the other jurisdictions in which we engage in business. While we seek to conduct our business in compliance with all applicable laws, many of the laws and regulations applicable to us are vague or indefinite and have not been interpreted by the courts, including many of those relating to:
•billing and reimbursement of clinical testing;
•certification or licensure of clinical laboratories;
•the anti-self-referral and anti-kickback laws and regulations;
•the laws and regulations administered by the FDA;
•the corporate practice of medicine;
•operational, personnel and quality requirements intended to ensure that clinical testing services are accurate, reliable and timely;
•physician fee splitting;
•relationships with physicians and IDNs;
•safety and health of laboratory employees; and
•handling, transportation and disposal of medical specimens, infectious and hazardous waste and radioactive materials.
These laws and regulations may be interpreted or applied by a prosecutorial, regulatory or judicial authority in a manner that could require us to make changes in our operations, including our pricing and/or billing practices. We may not be able to maintain, renew or secure required permits, licenses or any other regulatory approvals needed to operate our business or commercialize our services. If we fail to comply with applicable laws and regulations, or if we fail to maintain, renew or obtain necessary permits, licenses and approvals, we could suffer civil and criminal penalties, fines, exclusion from participation in
governmental healthcare programs and the loss of various licenses, certificates and authorizations necessary to operate our business, as well as incur additional liabilities from third-party claims. If any of the foregoing were to occur, our reputation could be damaged and important business relationships with third parties could be adversely affected.
We regularly receive requests for information, and occasionally subpoenas, from governmental authorities. We also are subject from time to time to qui tam claims brought by former employees or other “whistleblowers.” The federal and state governments continue aggressive enforcement efforts against perceived healthcare fraud. Legislative provisions relating to healthcare fraud and abuse provide government enforcement personnel substantial funding, powers, penalties and remedies to pursue suspected cases of fraud and abuse. In addition, the government has substantial leverage in negotiating settlements since the amount of potential damages far exceeds the rates at which we are reimbursed for our services, and the government has the remedy of excluding a non-compliant provider from participation in the Medicare and Medicaid programs. Regardless of merit or eventual outcome, these types of investigations and related litigation can result in:
•diversion of management time and attention;
•expenditure of large amounts of cash on legal fees, costs and payment of damages;
•increases to our administrative, billing or other operating costs;
•limitations on our ability to continue some of our operations;
•enforcement actions, fines and penalties or the assertion of private litigation claims and damages;
•decreases to the amount of reimbursement related to diagnostic information services performed;
•adverse affects to important business relationships with third parties;
•decreased demand for our services; and/or
•injury to our reputation.
Changes in applicable laws and regulations may result in existing practices becoming more restricted, or subject our existing or proposed services to additional costs, delay, modification, withdrawal or reconsideration. Such changes also could require us to modify our business objectives.
Our business could be adversely impacted by the FDA's approach to regulation.
The FDA has regulatory responsibility over, among other areas, instruments, software, test kits, reagents and other devices used by clinical laboratories to perform diagnostic testing in the U.S. A number of tests we develop internally are offered as LDTs. The FDA has claimed regulatory authority over all LDTs, but has stated that it exercised enforcement discretion with regard to most LDTs performed by high complexity CLIA-certified laboratories.
As the FDA moves to regulate more clinical laboratory testing, its approach to regulation is impacting industry practices and participants, new competitors may enter the industry, and competition may come in new forms.
Legislation introduced in Congress would enable the FDA to regulate LDTs, in vitro diagnostics, software and other items used in the diagnosis of disease. The FDA and the U. S. Department of Health and Human Services also have expressed views regarding the regulation of LDTs. Either new law or a revised approach to regulation of LDTs could have a significant impact on the clinical laboratory testing industry, including regulating LDTs in new ways, while creating avenues of opportunity and competition regarding clinical laboratory testing. New competitors may enter the industry, and competition may come in new forms.
Pursuant to the 21st Century Cures Act, the FDA issued final guidance regarding its position on the regulation of clinical decision software, which may be used in connection with LDTs. The guidance attempts to clarify whether FDA approval of certain software is required. It has been used by the FDA, in part, to assert authority over the annotation software aspects of pharmacogenetic testing services.
Failure to accurately bill for our services, or to comply with applicable laws relating to government healthcare programs, could have a material adverse effect on our business.
Billing for diagnostic information services is complex and subject to extensive and non-uniform rules and administrative requirements. Depending on the billing arrangement and applicable law, we bill various payers, such as patients, insurance companies, Medicare, Medicaid, clinicians, IDNs and employer groups. The majority of billing and related operations for our Company are being provided by a third party under the Company's oversight. Failure to accurately bill for our services could have a material adverse effect on our business. In addition, failure to comply with applicable laws relating to billing government healthcare programs may result in various consequences, including: civil and criminal fines and penalties,
exclusion from participation in governmental healthcare programs and the loss of various licenses, certificates and authorizations necessary to operate our business, as well as incur additional liabilities from third-party claims, all of which could have a material adverse effect on our business. Certain violations of these laws may also provide the basis for a civil remedy under the federal False Claims Act, including fines and damages of up to three times the amount claimed. The qui tam provisions of the federal False Claims Act and similar provisions in certain state false claims acts allow private individuals to bring lawsuits against healthcare companies on behalf of government payers, private payers and/or patients alleging inappropriate billing practices.
Although we believe that we are in compliance, in all material respects, with applicable laws and regulations, there can be no assurance that a regulatory agency or tribunal would not reach a different conclusion. The federal or state government may bring claims based on our current practices, which we believe are lawful. The federal and state governments have substantial leverage in negotiating settlements since the amount of potential damages and fines far exceeds the rates at which we are reimbursed, and the government has the remedy of excluding a non-compliant provider from participation in the Medicare and Medicaid programs. We believe that federal and state governments continue aggressive enforcement efforts against perceived healthcare fraud. Legislative provisions relating to healthcare fraud and abuse provide government enforcement personnel with substantial funding, powers, penalties and remedies to pursue suspected cases of fraud and abuse.
We are subject to numerous political, legal, operational and other risks as a result of our international operations which could impact our business in many ways.
Our international operations increase our exposure to risks inherent in doing business in non-U.S. markets, which may vary by market and include: intellectual property legal protections and remedies; weak legal systems which may, among other things, affect our ability to enforce contractual rights; trade regulations and procedures and actions affecting approval, production, pricing, reimbursement and marketing of services; and challenges based on differing languages and cultures. International operations also require us to devote management resources to implement our controls and systems in new markets, and to comply with the U.S. Foreign Corrupt Practices Act and similar anti-corruption laws in non-U.S. jurisdictions.
We may be unable to obtain, maintain or enforce our intellectual property rights and may be subject to intellectual property litigation that could adversely impact our business.
We may be unable to obtain or maintain adequate patent or other proprietary rights for our solutions or services or to successfully enforce our proprietary rights. In addition, we may be subject to intellectual property litigation, and we may be found to infringe on the proprietary rights of others, which could force us to do one or more of the following:
•cease developing, performing or selling solutions or services that incorporate the challenged intellectual property;
•obtain and pay for licenses from the holder of the infringed intellectual property right;
•redesign or re-engineer our tests;
•change our business processes; or
•pay substantial damages, court costs and attorneys' fees, including potentially increased damages for any infringement held to be willful.
Adverse results in material litigation could have an adverse financial impact and an adverse impact on our client base and reputation.
We are involved in various legal proceedings arising in the ordinary course of business including, among other things, disputes as to intellectual property, professional liability and employee-related matters, as well as inquiries from governmental
agencies and Medicare or Medicaid carriers. Some proceedings against us involve claims that are substantial in amount and could divert management's attention from operations. These proceedings also may result in substantial monetary damages.
U.S. Government rules and regulations concerning mandatory COVID-19 vaccination of U.S.-based employees of companies that work on or in support of federal government contracts, or other COVID-19 vaccine mandates, could have a material adverse impact on our business and consolidated results of operations.
In September 2021, President Biden issued an executive order requiring all employers with U.S. Government contracts to ensure that their U.S.-based employees, contractors and subcontractors, that work on or in support of U.S. government contracts, are fully vaccinated against COVID-19 as required by the executive order. The executive order is being challenged in courts and is currently not in effect. However, other federal, state and local government vaccine mandates are in effect; some of these mandates have application to the Company (directly or indirectly), others do not have application to the Company. Further, additional vaccine and testing mandates have been and may in the future be announced by private parties (such as contract counterparties) and in other jurisdictions in which we operate; such mandates may conflict with each other. Requirements to mandate COVID-19 vaccination of all or significant portions of our workforce could result in labor disruptions, employee attrition, difficulty in satisfying future labor needs and sanctions or penalties.
RISKS RELATED TO OUR INDEBTEDNESS
Our outstanding debt may impair our financial and operating flexibility.
As of December 31, 2021, we had approximately $4.0 billion of debt outstanding. Other than credit facilities in the normal course of business, we do not have any off-balance sheet financing arrangements in place or available. Our debt agreements contain various restrictive covenants. These restrictions could limit our ability to use operating cash flow in other areas of our business because we must use a portion of these funds to make principal and interest payments on our debt. We have obtained ratings on our public debt from Standard and Poor's, Moody's Investor Services and Fitch Ratings. There can be no assurance that any rating so assigned will remain for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency if in that rating agency's judgment future circumstances relating to the basis of the rating, such as adverse changes in our Company or our industry, so warrant. If such ratings are lowered, our borrowing costs could increase. Changes in our credit ratings, however, do not require repayment or acceleration of any of our debt.
Borrowings under our credit facilities may be made at interest rates that are based on the London Interbank Offered Rate (“LIBOR”), which is a widely used benchmark for establishing interest rates globally. As a result of concerns regarding the accuracy of the calculation of LIBOR, the United Kingdom’s Financial Conduct Authority announced that it intends to no longer compel member banks to submit rates used to calculate LIBOR after December 31, 2021. These reforms may cause LIBOR to cease to exist as a reference rate. A committee established by the Federal Reserve Board announced a new index, based on overnight repurchase agreements collateralized by U.S. Treasury securities, as an alternative to LIBOR; other jurisdictions have proposed different alternatives. At this time, it is not possible to predict the replacement rate for U.S. dollar LIBOR (which is the LIBOR rate that we most frequently rely on), and the consequences to us cannot be predicted. While we expect to be able to transition all LIBOR-based instruments and contracts to an alternative reference rate upon the cessation of LIBOR, there is no guarantee that we will be able to do so. Changes in market interest rates may negatively influence our financing costs and the valuation of derivative instruments.
We or our subsidiaries may incur additional indebtedness in the future. Our ability to make principal and interest payments will depend on our ability to generate cash in the future. If we incur additional debt, a greater portion of our cash flows may be needed to satisfy our debt service obligations and if we do not generate sufficient cash to meet our debt service requirements, we may need to seek additional financing. In that case, it may be more difficult, or we may be unable, to obtain financing on terms that are acceptable to us. As a result, we would be more vulnerable to general adverse economic, industry and capital markets conditions as well as the other risks associated with indebtedness.
RISKS RELATED TO OUR OPERATIONS
The development of new technologies (including artificial intelligence technologies) may impact the healthcare industry, and the development of new, more cost-effective solutions that can be performed by our customers or by patients, and the continued internalization of testing by IDNs or clinicians, could negatively impact our testing volume and revenues.
The diagnostic information services industry is faced with changing technology and new product introductions, including technology that enables more convenient or cost-effective testing. For example, digital pathology is an emerging
technology that may change the practice of pathology. Information technology that includes self-learning or "artificial intelligence" features is growing and may impact the healthcare industry.
Competitors also may offer testing to be performed outside of a commercial clinical laboratory, such as (1) point-of-care testing that can be performed by clinicians in their offices; (2) complex testing that can be performed by IDNs in their own laboratories; and (3) home testing that can be carried out without requiring the services of outside providers. Advances in technology also may lead to the need for less frequent testing. Further, diagnostic tests approved or cleared by the FDA for home use are automatically deemed to be “waived” tests under CLIA and may be performed by consumers in their homes; test kit manufacturers could seek to increase sales to patients of such test kits.
Some traditional customers for anatomic pathology services, including specialty physicians that generate biopsies through surgical procedures, such as dermatologists, gastroenterologists, urologists and oncologists, are consolidating, have added in-office histology labs or have retained pathologists to read cases on site. IDNs also are internalizing clinical laboratory testing, including some non-routine and advanced testing. Internalization of testing may reduce demand for services previously referred to outside service providers, such as the Company.
Hardware and software failures or delays in our information technology systems, including failures resulting from our systems conversions or otherwise, could disrupt our operations and cause the loss of confidential information, customers and business opportunities or otherwise adversely impact our business.
IT systems are used extensively in virtually all aspects of our business, including clinical testing, test reporting, billing, customer service, logistics and management of medical data. Our success depends, in part, on the continued and uninterrupted performance of our IT systems. A failure or delay in our IT systems could impede our ability to serve our customers and patients and protect their confidential data. Despite redundancy and backup measures and precautions that we have implemented, our IT systems may be vulnerable to damage, disruptions and shutdown from a variety of sources, including telecommunications or network failures, system conversion or standardization initiatives, human acts and natural disasters. These issues can also arise as a result of failures by third parties with whom we do business and over which we have limited control. Any disruption or failure of our IT systems could have a material impact on our ability to serve our customers and patients, including negatively affecting our reputation in the marketplace.
Our business could be negatively affected if we are unable to continue to strengthen our efficiency.
It is important that we continue to strengthen our efficiency to promote our competitive position and to enable us to mitigate the impact on our profitability of steps taken by government payers and health insurers to reduce the utilization and reimbursement of healthcare services, including diagnostic information services.
Our business operations and reputation may be materially impaired if we do not comply with privacy laws or information security policies.
In our business, we collect, generate, process or maintain sensitive information, such as patient data and other personal information. If we do use or not adequately safeguard that information in compliance with applicable requirements under federal, state and international laws, or if it were disclosed to persons or entities that should not have access to it, our business could be materially impaired, our reputation could suffer and we could be subject to fines, penalties and litigation. In the event of a data security breach, we may be subject to notification obligations, litigation and governmental investigation or sanctions, and may suffer reputational damage, which could have an adverse impact on our business.
We are subject to laws and regulations regarding protecting the security and privacy of certain healthcare and personal information, including: (a) the federal Health Insurance Portability and Accountability Act and the regulations thereunder, which establish (i) a complex regulatory framework including requirements for safeguarding protected health information and (ii) comprehensive federal standards regarding the uses and disclosures of protected health information; (b) state laws, including the California Consumer Privacy Act and similar laws in other states; and (c) laws outside the U.S., including the European Union's General Data Protection Regulation.
The IT systems that we rely on may be subject to unauthorized tampering, cyberattack or other security breach.
Our IT systems have been and are subject to potential cyberattacks, tampering or other security breaches. These attacks, if successful, could result in shutdowns or significant disruptions of our IT systems and/or in unauthorized persons exfiltrating and misappropriating intellectual property and other confidential information, including patient and employee data that we collect, transmit and store on and through our IT systems.
External actors may develop and deploy viruses, other malicious software programs, ransomware attacks, distributed denial of service attacks or other attempts to harm or obtain unauthorized access to our systems. External actors may also deploy programs targeting our employees which are designed to attack our IT systems or otherwise exploit security vulnerabilities through programs such as electronic spamming, phishing, smishing, spear phishing or similar tactics. As a result of the difficulty in detecting many of these attacks, intrusions and breaches, failures or losses may be repeated or compounded before they are discovered or rectified, which could further increase these costs and consequences.
Although the Company has robust security measures implemented, which are monitored and routinely tested both by internal resources and external parties, cyber threats against us continue to evolve and may not be recognized until after an incident. In August 2021, ReproSource, our subsidiary, experienced a data security incident in which an unauthorized party may have accessed or acquired protected health information and personally identifiable information of ReproSource patients (in connection with the incident, ReproSource discovered and contained ransomware). The Company’s other systems were not impacted or compromised by this incident. Although the attacks we have experienced have not materially disrupted, interrupted, damaged or shutdown the Company's IT systems, or materially disrupted the Company's performance of its business, the mitigation or remediation efforts that we have undertaken, and may undertake in the future, require the attention of management and expenditures of resources, which can be significant. There can be no assurance that the Company can anticipate all evolving future attacks, viruses or intrusions, implement adequate preventative measures, or remediate any security vulnerabilities. If our IT systems are successfully attacked, it could result in major disruption of our business, compromise confidential information, and result in litigation and potential liability for the Company, government investigation, significant damage to our reputation or otherwise adversely affect our business.
In addition, third parties to whom we outsource certain of our services or functions, or with whom we interface, store or process confidential patient and employee data or other confidential information, as well as those third parties’ providers, are also subject to the risks outlined above. For example, in June 2019, the Company reported that Retrieval-Masters Creditors Bureau, Inc./American Medical Collection Agency (“AMCA”), informed the Company about a data security incident involving AMCA. AMCA, which provided debt collection services for a company that provides revenue management services to the Company, informed the Company in May 2019 that AMCA had learned that an unauthorized user had access to AMCA’s system during 2018 and 2019. AMCA’s affected system included financial, medical and other personal information. The Company’s systems or databases were not involved in this incident. A breach or attack affecting third parties with whom we engage could also harm our business, results of operations and reputation and subject us to liability.
We have taken, and continue to take, precautionary measures to reduce the risk of, and detect and respond to, future cyber threats, and prevent or minimize vulnerabilities in our IT systems, including the loss or theft of intellectual property, patient and employee data or other confidential information that we obtain and store on our systems. We also have taken, and will continue to take, measures to assess the cybersecurity protections used by third parties to whom we outsource certain of our services or functions, or with whom we interface, store or process confidential patient and employee data or other confidential information. In addition, we collaborate with government agencies regarding potential cyber threats and have worked with firms that have cyber security expertise to evaluate our systems and the attacks we experience and strengthen our systems. There can be no assurances that our precautionary measures or measures used by our third party providers will prevent, contain or successfully defend against cyber or information security threats that could have a significant impact on our business, results of operations and reputation and subject us to liability.
Our ability to attract and retain qualified employees is critical to the success of our business and the failure to do so may materially adversely affect our performance.
The supply of qualified technical, managerial and other personnel, including phlebotomists and processors, is currently constrained; competition for qualified employees, even across different industries, is intense, including as individuals leave the job market. We may lose, or fail to attract and retain, key management personnel, or qualified skilled technical, professional or other employees.
Business development activities are inherently risky and integrating our operations with businesses we acquire may be difficult.
We plan selectively to enhance our business from time to time through business development activities, such as acquisitions, licensing arrangements, investments and alliances. However, these plans are subject to the availability of appropriate opportunities and competition from other companies seeking similar opportunities. Moreover, the success of any such effort may be affected by a number of factors, including our ability to properly assess and value the potential business opportunity, and to integrate it into our business. The success of our strategic alliances depends not only on our contributions and capabilities, but also on the property, resources, efforts and skills contributed by our strategic partners. Further, disputes may arise with strategic partners, due to conflicting priorities or conflicts of interests.
Acquisitions are not all the same (e.g., asset acquisitions differ from acquisitions of equity interests); different acquisitions offer different risks. Acquisitions may involve the integration of a separate company that has different systems, processes, policies and cultures. Integration of acquisitions involves a number of risks including the diversion of management's attention to the assimilation of the operations of assets or businesses we have acquired, difficulties in the integration of operations and systems and the realization of potential operating synergies, the assimilation and retention of the personnel of the acquired businesses, challenges in retaining the customers of the combined businesses, and potential adverse effects on operating results. The process of combining acquisitions may be disruptive to our businesses and may cause an interruption of, or a loss of momentum in, such businesses as a result of the following difficulties, among others:
•loss of key customers or employees;
•difficulty in standardizing information and other systems;
•difficulty in consolidating facilities and infrastructure;
•failure to maintain the quality or timeliness of services that our Company has historically provided;
•diversion of management's attention from the day-to-day business of our Company as a result of the need to deal with the foregoing disruptions and difficulties; and
•the added costs of dealing with such disruptions.
If we are unable successfully to integrate strategic acquisitions in a timely manner, our business and our growth strategies could be negatively affected. Even if we are able to successfully complete the integration of the operations of other assets or businesses we may acquire in the future, we may not be able to realize all or any of the benefits that we expect to result from such integration, either in monetary terms or in a timely manner.
Our operations may be adversely impacted by the effects of natural disasters such as hurricanes and earthquakes, public health emergencies and health pandemics, hostilities or acts of terrorism and other criminal activities.
We operate facilities across the United States, and consumers frequently visit our facilities in person. The ability of our employees and consumers to access our facilities may be adversely impacted by the effects of extreme weather events and natural disasters, such as hurricanes, earthquakes, tropical storms, floods, fires, earthquakes or other extreme weather conditions, including major winter storms, droughts and heat waves, whether as a result of climate change or otherwise; public health emergencies and health pandemics; hostilities or acts of terrorism or other activities. Although we maintain a business continuity program to prepare for and respond to such events, because of their unpredictable nature, these events may limit or interrupt our ability to conduct operations. Additionally, such events may interrupt our ability to transport specimens, to receive materials from our suppliers or otherwise to provide our services. These events also may result in a decline in the number of patients who seek clinical testing services or in our employees' ability to perform their job duties.
The COVID-19 pandemic has significantly affected our consolidated results of operations, financial position and cash flows, and may continue to do so.
A pandemic caused by a novel strain of coronavirus (COVID-19) continues to severely impact the economy of the United States and other countries around the world. Federal, state and local governmental authorities in the United States have implemented numerous policies and initiatives to try and reduce the transmission of COVID-19, such as travel bans and restrictions, quarantines, shelter-in-place orders, business shutdowns, and vaccination and masking mandates. These policies and initiatives have resulted in, among other things, a significant reduction in physician office visits, the cancellation of elective medical procedures, customers closing or severely curtailing their operations (voluntarily or in response to government orders), increased unemployment, constrained labor supply and loss of healthcare insurance, and the adoption of work-from-home policies, all of which have had, and we believe will continue to have, an impact on our consolidated results of operations, financial position and cash flows.
Due to the COVID-19 pandemic, we have experienced significant volatility, including periods of material decline compared to prior year periods, in testing volume in our base business (which excludes COVID-19 molecular and antibody testing) and this volatility, including periods of material decline, could continue. Although we also have experienced heavy demand for COVID-19 molecular testing as a result of the COVID-19 pandemic, which has had a positive impact on our overall testing volume, the duration and level of the demand for, and reimbursement for, COVID-19 molecular testing is uncertain.
We may also experience an adverse impact on cash collections and labor supply and supply chain disruptions, including shortages, delays and price increases in testing equipment and supplies, as a result of the impact of the COVID-19 pandemic. A number of suppliers and manufacturers we rely upon have been experiencing and may continue to experience disruptions and delays, as a result of ongoing raw material and labor shortages, supply challenges, and business limitations or shutdowns resulting from the COVID-19 pandemic, which may prevent us from obtaining equipment and supplies in a timely manner or at a reasonable price. The COVID-19 pandemic has also caused significant disruptions in transport and logistics services as a result of facility closures, labor shortages or other challenges, which may affect our ability to transport specimens, receive supplies or materials from our suppliers or otherwise provide our services. These conditions may continue or deteriorate in the future. Any of these events could have an adverse impact on our business, consolidated results of operation, financial position and cash flows.
We believe the COVID-19 pandemic’s adverse impact on our consolidated results of operations, financial position and cash flows will be primarily driven by: the severity and duration of the COVID-19 pandemic (including any variants); the COVID-19 pandemic’s impact on the U.S. healthcare system and the U.S. economy; the timing, scope and effectiveness of federal, state and local governmental responses; and effective and comprehensive COVID-19 vaccination across the U.S. These primary drivers are beyond our knowledge and control and will change over time, and as a result, at this time we cannot reasonably estimate the adverse impact the COVID-19 pandemic will have on our businesses, consolidated results of operations, financial position and cash flows, and the adverse impact may be material.
Our business also may be impacted by changes in the severity of the COVID-19 pandemic at different times in the various cities and regions where we operate and offer services, and by challenges faced in implementing nationwide COVID-19 vaccinations, including the degree to which the public is vaccinated and the effectiveness of vaccines at preventing infection or illness in connection with new or existing variants of COVID-19. Even after the COVID-19 pandemic has moderated and business conditions have eased, we may continue to experience similar adverse effects to our businesses, consolidated results of operations, financial position and cash flows arising from long-term changes in behavior by consumers or other healthcare system participants and resulting from a recessionary economic environment that may persist. The impact that the COVID-19 pandemic will have on our businesses, consolidated results of operations, financial position and cash flows could exacerbate other risks identified in this Report.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
Some statements and disclosures in this document are forward-looking statements. Forward-looking statements include all statements that do not relate solely to historical or current facts and can be identified by the use of words such as “may,” “believe,” “will,” “expect,” “project,” “estimate,” “anticipate,” “plan” or “continue.” These forward-looking statements are based on our current plans and expectations and are subject to a number of risks and uncertainties that could cause our plans and expectations, including actual results, to differ materially from the forward-looking statements. Investors are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this document. The following important factors could cause our actual financial results to differ materially from those projected, forecasted or estimated by us in forward-looking statements:
(a) Heightened competition from commercial clinical testing companies, IDNs, physicians and others.
(b) Increased pricing pressure from customers, including payers and patients.
(c) A decline in economic conditions.
(d) Impact of changes in payment mix, including increased patient financial responsibility and any shift from fee-for-service to discounted, capitated or bundled fee arrangements.
(e) Adverse actions by government or other third-party payers, including healthcare reform that focuses on reducing healthcare costs but does not recognize the value and importance to healthcare of clinical testing or innovative solutions, unilateral reduction of fee schedules payable to us, unilateral recoupment of amounts allegedly owed and competitive bidding.
(f) The impact upon our testing volume and collected revenue or general or administrative expenses resulting from compliance with policies and requirements imposed by Medicare, Medicaid and other third-party payers. These include:
(1) the requirements of government and other payers to provide diagnosis codes and other information for many tests;
(2) inability to obtain from patients a valid advance consent form for tests that cannot be billed without prior receipt of the form;
(3) the impact of additional or expanded limited coverage policies and limits on the allowable number of test units or ordering frequency of same; and
(4) the impact of increased prior authorization programs.
(g) Adverse results from pending or future government investigations, lawsuits or private actions. These include, in particular, monetary damages, loss or suspension of licenses, and/or suspension or exclusion from the Medicare and Medicaid programs and/or criminal penalties.
(h) Failure to efficiently integrate acquired businesses and to manage the costs related to any such integration, or to retain key technical, professional or management personnel.
(i) Denial, suspension or revocation of CLIA certification or other licenses for any of our clinical laboratories under the CLIA standards, revocation or suspension of the right to bill the Medicare and Medicaid programs or other adverse regulatory actions by federal, state and local agencies.
(j) Changes in and complexity of federal, state or local laws or regulations, including changes that result in new or increased federal or state regulation of commercial clinical laboratories, tests developed by commercial clinical laboratories or other products or services that we offer or activities in which we are engaged, including regulation by the FDA.
(k) Inability to achieve expected benefits from our acquisitions of other businesses.
(l) Inability to achieve additional benefits from our business performance tools and efficiency initiatives.
(m) Adverse publicity and news coverage about the diagnostic information services industry or us.
(n) Failure of the Company to maintain, defend and secure its financial, accounting, technology, customer data and other operational systems from cyberattacks, IT system outages, telecommunications failures, malicious human acts and failure of the systems of third parties upon which the Company relies.
(o) Development of technologies that substantially alter the practice of clinical testing, including technology changes that lead to the development of more convenient or cost-effective testing, or testing to be performed outside of a commercial clinical laboratory, such as (1) point-of-care testing that can be performed by physicians in their offices, (2) advanced testing that can be performed by IDNs in their own laboratories or (3) home testing that can be carried out without requiring the services of clinical laboratories.
(p) Negative developments regarding intellectual property and other property rights that could prevent, limit or interfere with our ability to develop, perform or sell our tests or operate our business. These include:
(1) issuance of patents or other property rights to our competitors or others; and
(2) inability to obtain or maintain adequate patent or other proprietary rights for our products and services or to successfully enforce our proprietary rights.
(q) Development of tests by our competitors or others which we may not be able to license, or usage (or theft) of our technology or similar technologies or our trade secrets or other intellectual property by competitors, any of which could negatively affect our competitive position.
(r) Regulatory delay or inability to commercialize newly developed or licensed tests or technologies or to obtain appropriate reimbursements for such tests.
(s) The complexity of billing and revenue recognition for clinical laboratory testing.
(t) Increases in interest rates and negative changes in our credit ratings from Standard & Poor's, Moody's Investor Services or Fitch Ratings causing an unfavorable impact on our cost of or access to capital.
(u) Inability to hire or retain qualified employees, including key senior management personnel.
(v) Terrorist and other criminal activities, hurricanes, earthquakes or other natural disasters, and public health emergencies and health pandemics, which could affect our customers or suppliers, transportation or systems, or our facilities, and for which insurance may not adequately reimburse us.
(w) Difficulties and uncertainties in the discovery, development, regulatory environment and/or marketing of new services or solutions or new uses of existing tests.
(x) Failure to adapt to changes in the healthcare system (including the medical laboratory testing market) and healthcare delivery, including those stemming from PAMA, trends in utilization of the healthcare system and increased patient financial responsibility for services.
(y) Results and consequences of governmental inquiries.
(z) Difficulty in implementing, or lack of success with, our strategic plan.
(aa) The impact of healthcare data analysis on our industry and the ability of our Company to adapt to that impact.
(bb) Failure to adequately operationalize appropriate controls around use of our data, including risk of non-compliance with privacy law requirements.
(cc) The COVID-19 pandemic.
Item 1B. Unresolved Staff Comments
There are no unresolved SEC comments that require disclosure.
Item 2. Properties
Our executive offices are located at 500 Plaza Drive, Secaucus, New Jersey. We maintain clinical testing laboratories throughout the continental United States; in several instances a joint venture of which we are a partner maintains the laboratory. We also maintain offices, data centers, call centers, distribution centers and patient service centers at locations throughout the United States. In addition, we maintain offices, patient service centers and clinical laboratories in locations outside the United States, including in Finland, Puerto Rico and Mexico. Our properties that are not owned are leased on terms and for durations that are reflective of commercial standards in the communities where these properties are located. We believe that, in general, our facilities are suitable and adequate for our current and anticipated future levels of operation and are adequately maintained. We believe that if we were unable to renew a lease on any of our facilities, we could find alternative space at competitive market rates and relocate our operations to such new location without material disruption to our business. Several of our principal facilities are highlighted below.
| | | | | | | | |
| Location | | Leased or Owned |
3600 Northgate Blvd., Sacramento, California 95834 (laboratory) | | Leased |
8401 Fallbrook Avenue, West Hills, California 91304 (laboratory) | | Leased |
33608 Ortega Hwy., San Juan Capistrano, California 92675 (laboratory) | | Owned |
4151C East Fowler Avenue, Tampa, Florida 33617 (laboratory) | | Owned |
1777 Montreal Circle, Tucker, Georgia 30084-6802 (laboratory) | | Owned |
506 E State Parkway, Schaumburg, Illinois 60173 (laboratory) | | Owned |
1355 Mittle Blvd., Wood Dale, Illinois 60191 (laboratory) | | Leased |
200 Forest Street, Marlborough, Massachusetts 01752 (laboratories) | | Leased |
800 Business Center Drive, Horsham, Pennsylvania 19044 (laboratory) | | Leased |
4770 Regent Blvd., Irving, Texas 75063 (laboratory) | | Leased |
14225 Newbrook Drive, Chantilly, Virginia 22021 (laboratory) | | Leased |
10101 Renner Blvd., Lenexa, Kansas 66219 (laboratory) | | Owned |
4380 Federal Drive, Greensboro, North Carolina 27410 (laboratory) | | Leased |
2501 South State Hwy 121, Lewisville, Texas 75067 (laboratory) | | Leased |
6700 Euclid Avenue, Cleveland, Ohio 44103 (laboratory) | | Leased |
| One Insights Drive, Clifton, NJ 07012 (laboratory) | | Owned |
Item 3. Legal Proceedings
See Note 18 to the Consolidated Financial Statements (Part II, Item 8 of this Report) for information regarding legal proceedings in which we are involved.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is listed and traded on the New York Stock Exchange under the symbol “DGX.” As of February 1, 2022, we had approximately 2,500 record holders of our common stock; we believe that the number of beneficial holders of our common stock exceeds the number of record holders.
The table below sets forth the information with respect to purchases made by or on behalf of the Company of its common stock during the fourth quarter of 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ISSUER PURCHASES OF EQUITY SECURITIES | | |
| Period | | Total Number of
Shares
Purchased | | Average Price
Paid per Share | | Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in thousands) | | |
| October 1, 2021 – October 31, 2021 | | | | | | | | | | |
| Share Repurchase Program (A) | | — | | | $ | — | | | — | | | $ | 1,306,502 | | | |
| Employee Transactions (B) | | — | | | $ | — | | | N/A | | N/A | | |
| November 1, 2021 – November 30, 2021 | | | | | | | | | | |
| Share Repurchase Program (A) | | 1,946,598 | | | $ | 178.26 | | | 1,946,598 | | | $ | 959,502 | | (C) | |
| Employee Transactions (B) | | 461 | | | $ | 148.57 | | | N/A | | N/A | | |
| December 1, 2021 – December 31, 2021 | | | | | | | | | | |
| Share Repurchase Program (A) | | 1,609,900 | | | $ | 163.73 | | | 1,609,900 | | | $ | 695,906 | | | |
| Employee Transactions (B) | | — | | | $ | — | | | N/A | | N/A | | |
| Total | | | | | | | | | | |
| Share Repurchase Program (A) | | 3,556,498 | | | $ | 171.68 | | | 3,556,498 | | | $ | 695,906 | | (C) | |
| Employee Transactions (B) | | 461 | | | $ | 148.57 | | | N/A | | N/A | | |
(A)In each of February 2021 and March 2021, our Board of Directors increased the size of our share repurchase program by $1 billion. Since the share repurchase program's inception in May 2003, our Board of Directors has authorized $11 billion of share repurchases of our common stock through December 31, 2021. The share repurchase authority has no set expiration or termination date. In February 2022, our Board of Directors authorized the Company to repurchase an additional $1 billion of our common stock, which is in addition to the $0.7 billion that was available as of December 31, 2021 under our share repurchase program.
(B)Includes: (1) shares delivered or attested to in satisfaction of the exercise price and/or tax withholding obligations by holders of stock options (granted under the Company's Amended and Restated Employee Long-Term Incentive Plan) who exercised options; and (2) shares withheld (under the terms of grants under the Amended and Restated Employee Long-Term Incentive Plan) to offset tax withholding obligations that occur upon the delivery of outstanding common shares underlying restricted share units and performance share units.
(C)Includes the reclassification of $300 million from additional paid-in capital to treasury stock and the final delivery of 1,640,193 shares associated with the completion of the April 2021 accelerated share repurchase agreements ("ASRs"). See Note 16 to the audited consolidated financial statements for further information regarding the ASRs.
Performance Graph
Set forth below is a line graph comparing the cumulative total shareholder return on Quest Diagnostics' common stock since December 31, 2016 based on the market price of the Company's common stock and assuming reinvestment of dividends, with the cumulative total shareholder return of companies on the Standard & Poor's (S&P) 500 Stock Index and the S&P 500 Health Care (Sector) Index.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Closing DGX Price | | Total Shareholder Return | | Performance Graph Values |
| Date | | | DGX | | S&P 500 | | S&P 500 Health Care (Sector) | | DGX | | S&P 500 | | S&P 500 Health Care (Sector) |
| 12/31/2017 | | $ | 98.49 | | | 9.16 | % | | 21.83 | % | | 22.08 | % | | $ | 109.16 | | | $ | 121.83 | | | $ | 122.08 | |
| 12/31/2018 | | $ | 83.27 | | | (13.84) | % | | (4.38) | % | | 6.47 | % | | $ | 94.05 | | | $ | 116.49 | | | $ | 129.97 | |
| 12/30/2019 | | $ | 106.79 | | | 31.15 | % | | 31.49 | % | | 20.82 | % | | $ | 123.34 | | | $ | 153.17 | | | $ | 157.04 | |
| 12/29/2020 | | $ | 119.17 | | | 14.04 | % | | 18.40 | % | | 13.45 | % | | $ | 140.66 | | | $ | 181.35 | | | $ | 178.15 | |
| 12/31/2021 | | $ | 173.01 | | | 47.86 | % | | 28.71 | % | | 26.13 | % | | $ | 207.97 | | | $ | 233.41 | | | $ | 224.71 | |
Item 6 [Reserved]
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
See Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 8. Financial Statements and Supplementary Data
See Item 15(a)1 and Item 15(a)2.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Conclusion Regarding Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended). Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report.
Report of Management on Internal Control Over Financial Reporting
Changes in Internal Control
During the fourth quarter of 2021, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended) that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
On February 24, 2022, the Company's Board of Directors increased the Company's share repurchase authorization by $1 billion. The increased authority is an addition to the $0.7 billion that was available as of December 31, 2021 under the Company's share repurchase program.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Our Code of Ethics applies to all employees, executive officers and directors, including our Chief Executive Officer, Chief Financial Officer and Corporate Controller. You can find our Code of Ethics on our corporate governance website, www.QuestDiagnostics.com/investor. We will post any amendments to the Code of Ethics, and any waivers that are required to be disclosed by the rules of either the SEC or the New York Stock Exchange, on our website.
Information regarding the Company's executive officers is contained in Part I, Item 1 of this Report under “Information about our Executive Officers.” Information regarding the directors and executive officers of the Company appearing in our Proxy Statement to be filed by April 30, 2022 (“Proxy Statement”) under the captions “Proposal No. 1 - Election of Directors,” “Director Independence,” “Board Committees” and "Delinquent Section 16(a) Reports" is incorporated by reference herein.
Item 11. Executive Compensation
Information appearing in our Proxy Statement under the captions “2021 Director Compensation Table,” “Compensation Discussion and Analysis,” “Information Regarding Executive Compensation” and “Compensation Committee Report” is incorporated by reference herein.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders' Matters
Information regarding security ownership of certain beneficial owners and management appearing in our Proxy Statement under the captions “Stock Ownership Information” and "Equity Compensation Plan Information" is incorporated by reference herein.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information regarding certain relationships and related transactions appearing in our Proxy Statement under the captions “Related Person Transactions” and “Director Independence” is incorporated by reference herein.
Item 14. Principal Accounting Fees and Services
Information regarding principal accountant fees and services appearing in our Proxy Statement under the caption “Audit" (excluding the information under the subheading “Audit and Finance Committee Report”) is incorporated by reference herein.
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a)Documents filed as part of this Report.
1.Index to financial statements and supplementary data filed as part of this Report.
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| Item | Page |
| Financial Statements | |
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| |
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| |
| |
| |
| |
2.Financial Statement Schedule.
3.Exhibits
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Exhibit Number | Description |
| 3.1 | |
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| 3.2 | |
| |
| 4.1 | |
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| 4.2 | |
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| 4.3 | |
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| 4.4 | |
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| 4.5 | |
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| 4.6 | |
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| 4.7 | |
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| 4.8 | |
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| 4.9 | |
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| 4.10 | |
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| 4.11 | |
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| 4.12 | |
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| 4.13 | |
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| 4.14 | |
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| 4.15 | |
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| 4.16 | |
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| 4.17 | |
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| 4.18 | |
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| 4.19 | |
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| 4.20 | |
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| 4.21 | |
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| 4.22 | |
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| 4.23 | |
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| 4.24 | |
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| 4.25 | |
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| 4.26 | |
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| 4.27 | |
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| 4.28 | |
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| 4.29 | |
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| 4.30 | |
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| 4.31 | |
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| 4.32 | |
| |
| 10.1‡ | |
| |
| | | | | |
| 10.2‡ | |
| |
| 10.3‡ | |
| |
| 10.4‡ |
|
| |
| 10.5‡ | |
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| 10.6‡ | |
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| 10.7‡ | |
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| 10.8‡ | |
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| 10.9‡ | |
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| 10.10‡ | |
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| 10.11‡ | |
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| 10.12‡ | |
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| 10.13‡ | |
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| 10.14‡ | |
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| 10.15‡ | |
| |
| | | | | |
| 10.16‡ | |
| |
| 10.17‡ | |
| |
| 10.18‡ | |
| |
| 21.1* | |
| |
| 22* | |
| |
| 23.1* | |
| |
| 24.1* | |
| |
| 31.1* | |
| |
| 31.2* | |
| |
| 32.1** | |
| |
| 32.2** | |
| |
| 99.1 | |
| |
| 99.2 | |
| |
| 99.3 | Sixth Amended and Restated Credit and Security Agreement, dated as of October 27, 2017 among Quest Diagnostics Receivables Inc., as Borrower, Quest Diagnostics Incorporated, as Initial Servicer, MUFG Bank, Ltd. (formerly known as The Bank of Tokyo Mitsubishi UFJ, Ltd.), as Administrative Agent, the Lenders party thereto, the financial institutions party thereto as agents for the conduit lenders (filed as an Exhibit to the Company’s current report on Form 8-K (Date of Report: May 4, 2020) and incorporated herein by reference) (Commission File Number 001-12215) |
| |
| 99.4 | |
| |
| 99.5 | |
| |
| | | | | |
| 99.6 | |
| |
| 99.7 | |
| |
| 99.8 | |
| |
| 99.9* | |
| |
| 99.10* | Amendment and Restatement Agreement, dated as of November 23, 2021, relating to the Second Amended and Restated Credit Agreement, dated as of March 22, 2018, among Quest Diagnostics Incorporated, as Borrower, the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and other agents party thereto and which includes, as Exhibit A, the Third Restated Credit Agreement |
| |
| 101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
| | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document - dgx-20211231.xsd |
| | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document - dgx-20211231_cal.xml |
| | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document - dgx-20211231_def.xml |
| | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document - dgx-20211231_lab.xml |
| | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document - dgx-20211231_pre.xml |
| |
| 104 | The cover page from this annual report on Form 10-K, formatted in Inline XBRL. |
| |
| * | Filed herewith. |
| |
| ** | Furnished herewith. |
| |
| ‡ | Management contract or compensatory plan or arrangement required to be filed as an Exhibit to this Form 10-K pursuant to Item 15(b) of Form 10-K. |
(b)Exhibits filed as part of this Report.
The exhibit index in (a) above is incorporated herein by reference.
(c)None.
Item 16. Form 10-K Summary
None.
Signatures
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 28, 2022.
| | | | | | | | |
| QUEST DIAGNOSTICS INCORPORATED |
| (Registrant) |
| | |
| By: | /s/Stephen H. Rusckowski |
| | Stephen H. Rusckowski |
| | Chairman of the Board, Chief Executive Officer and President |
Each individual whose signature appears below constitutes and appoints Michael E. Prevoznik and William J. O'Shaughnessy, Jr., and each of them singly, his or her true and lawful attorneys-in-fact and agents with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K filed with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all the said attorneys-in-fact and agents or any of them or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on February 28, 2022.
| | | | | | | | |
| Signature | | Capacity |
/s/Stephen H. Rusckowski Stephen H. Rusckowski | | Chairman of the Board, Chief Executive Officer and President
(Principal Executive Officer) |
| | |
/s/Mark J. Guinan Mark J. Guinan | | Executive Vice President and Chief Financial Officer
(Principal Financial Officer) |
| | |
/s/Michael J. Deppe Michael J. Deppe | | Vice President, Corporate Controller and Chief Accounting Officer
(Principal Accounting Officer) |
| | |
/s/Tracey C. Doi Tracey C. Doi | | Director |
| | |
/s/Vicky B. Gregg Vicky B. Gregg | | Director |
| | |
/s/Wright L. Lassiter, III Wright L. Lassiter, III | | Director |
| | |
/s/Timothy L. Main Timothy L. Main | | Director |
| | |
/s/Denise M. Morrison Denise M. Morrison | | Director |
| | |
/s/Gary M. Pfeiffer Gary M. Pfeiffer | | Director |
| | |
/s/Timothy M. Ring Timothy M. Ring | | Director |
| | |
/s/Helen I. Torley Helen I. Torley | |
Director |
| | |
/s/Gail R. Wilensky Gail R. Wilensky | | Director |
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our Company
Diagnostic Information Services
Quest Diagnostics empowers people to take action to improve health outcomes. We use our extensive database of clinical lab results to derive diagnostic insights that reveal new avenues to identify and treat disease, inspire healthy behaviors and improve healthcare management. Our diagnostic information services business ("DIS") provides information and insights based on the industry-leading menu of routine, non-routine and advanced clinical testing and anatomic pathology testing, and other diagnostic information services. We provide services to a broad range of customers, including patients, clinicians, hospitals, independent delivery networks ("IDNs"), health plans, employers, accountable care organizations ("ACOs"), and direct contract entities ("DCEs"). We offer the broadest access in the United States to diagnostic information services through our nationwide network of laboratories, patient service centers and phlebotomists in physician offices and our connectivity resources, including call centers and mobile paramedics, nurses and other health and wellness professionals. We are the world's leading provider of diagnostic information services. We provide interpretive consultation with one of the largest medical and scientific staffs in the industry. Our DIS business makes up greater than 95% of our consolidated net revenues. During 2021, we processed approximately 218 million test requisitions through our extensive laboratory network.
The clinical testing that we perform is an essential element in the delivery of healthcare services. Clinicians use clinical testing for predisposition, screening, monitoring, diagnosis, prognosis and treatment choices of diseases and other medical conditions. The United States clinical testing industry consists of two segments. One segment includes hospital inpatient and outpatient testing. The second segment includes testing of persons who are not hospital patients, including testing done in commercial clinical laboratories, physician-office laboratories and other locations, as well as hospital outreach (non-hospital patients) and consumer-initiated testing.
The clinical testing industry is subject to seasonal fluctuations in operating results and cash flows. Typically, testing volume declines during vacation and major holiday periods, reducing net revenues and operating cash flows below annual averages. Testing volume is also subject to declines due to severe weather or other events (such as public health emergencies and health pandemics), which can deter patients from having testing performed and which can vary in duration and severity from year to year. Additionally, orders for clinical testing generated from clinician offices, hospitals, employers and consumers can be affected by factors such as changes in the United States economy and regulatory environment, which affect the number of unemployed and uninsured, and design changes in healthcare plans, which affect utilization as well as patient responsibility for healthcare costs.
We assess our revenue performance for the DIS business based upon, among other factors, volume (measured by test requisitions) and revenue per requisition. Each requisition accompanies patient specimens, indicating the test(s) to be performed and the party to be billed for the test(s). Revenue per requisition is impacted by various factors, including, among other items, the impact of fee schedule changes (i.e. unit price), test mix, payer mix, and the number of tests per requisition. Management uses number of requisitions and revenue per requisition data to assist with assessing the growth and performance of the business, including understanding trends affecting number of requisitions, pricing and test mix. Therefore, we believe that information related to changes in these metrics from period to period are useful information for investors as it allows them to assess the performance of the business.
Diagnostic Solutions
In our Diagnostic Solutions ("DS") businesses, which represent the balance of our consolidated net revenues, we offer a variety of solutions for life insurers and healthcare organizations and clinicians. We are the leading provider of risk assessment services for the life insurance industry. In addition, we offer healthcare organizations and clinicians robust information technology solutions.
2021 Highlights
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (dollars in millions, except per share data) |
| | | | | |
| Net revenues | $10,788 | | $9,437 | | $7,726 |
| Base business revenues (a) | $8,018 | | $6,714 | | $7,726 |
| COVID-19 testing revenues | $2,770 | | $2,723 | | $— |
| | | | | |
| DIS revenues | $10,494 | | $9,139 | | $7,405 |
| Revenue per requisition change | (1.6)% | | 16.2% | | (1.3)% |
| Requisition volume change | 16.5% | | 6.6% | | 4.3% |
| Organic requisition volume change | 13.6% | | 4.5% | | 3.1% |
| DS revenues | $294 | | $298 | | $321 |
| Income from continuing operations attributable to Quest Diagnostics | $1,995 | | $1,431 | | $838 |
| Diluted earnings per share from continuing operations | $15.55 | | $10.47 | | $6.13 |
| Net cash provided by operating activities | $2,233 | | $2,005 | | $1,243 |
(a) Excludes COVID-19 testing.
The impact that the COVID-19 pandemic had on our DIS revenues, including requisition volume and revenue per requisition are discussed further below under "Impact of COVID-19" and "Results of Operations".
For further discussion of the year-over-year changes for the year ended December 31, 2021 compared to the year ended December 31, 2020, see "Results of Operations" below.
Impact of COVID-19
As a novel strain of coronavirus (COVID-19) continues to impact the economy of the United States and other countries around the world, we are committed to being a part of the coordinated public and private sector response to this unprecedented challenge. We have made substantial investments to expand and maintain the amount of COVID-19 testing available to the country. We have been effectively managing challenges in the global supply chain; and, at this point, we have sufficient supplies to conduct our business.
During 2020 and 2021, our testing volume and revenues were materially impacted by the COVID-19 pandemic.
Beginning in March 2020, we experienced a material decline in base testing volume (which excludes COVID-19 testing) due to the COVID-19 pandemic. The decrease in base testing volume was driven by federal, state and local governmental policies and initiatives designed to reduce the transmission of COVID-19, a significant reduction in physician office visits, the cancellation of elective medical procedures, customers closing or severely curtailing their operations (voluntarily or in response to government orders), increased unemployment and loss of healthcare insurance and the adoption of work-from-home policies, all of which have had, and may continue to have, an impact on our operating results, financial position and cash flows.
During May and June 2020, we began to experience a recovery in base testing volume, which continued in 2021. The recovery has been driven by people returning to the healthcare system as well as contributions from new Professional Laboratory Services arrangements. For the first, second, third and fourth quarters of 2021, our base testing volume, excluding volume associated with recent acquisitions, was 2.8% below, 1.9% above, 3.8% above and 4.8% above our historical first, second, third and fourth quarter of 2019 levels, respectively. Recent agreements associated with our Professional Laboratory Services offerings contributed 5.2%, 5.8%, 5.2% and 5.6% volume growth for the first, second, third and fourth quarters of 2021 compared to 2019, respectively. Unless there is a change in the severity of the COVID-19 pandemic, we believe that there will be a continued return to healthcare with, in some cases, patients pursuing care delayed during the COVID-19 pandemic.
Beginning in the second quarter of 2020, we experienced growing demand for COVID-19 testing services and we expanded our capacity throughout 2020 in order to satisfy the demand, which has had a significant impact on our testing volumes. During 2021, demand for our COVID-19 testing has generally fluctuated in line with changes in the prevalence of the virus and related variants. We expect demand to trend down in 2022 and beyond.
Additionally, our revenue per requisition has been positively impacted by COVID-19 molecular testing. In April 2020 the Centers for Medicare and Medicaid Services ("CMS") announced that it would increase the reimbursement for certain COVID-19 molecular tests making use of high-throughput technologies developed by the private sector that allow for increased testing capacity, faster results, and more effective means of combating the spread of the virus to $100 per test, effective April 14, 2020. Beginning January 1, 2021, Medicare changed the base reimbursement rate for COVID-19 diagnostic tests run on high-throughput technologies to $75 per test with an additional payment of $25 per test if the laboratory (1) completes the test in two calendar days or less and (2) completes the majority of its COVID-19 tests that use high throughput technology in two calendar days or less for all of its patients in the previous month. Certain healthcare insurers have now moved to a similar reimbursement model for COVID-19 molecular tests.
We believe the COVID-19 pandemic’s impact on our consolidated results of operations, financial position and cash flows will be primarily driven by: the severity and duration of the COVID-19 pandemic (including any variants); healthcare insurer, government, and client payer reimbursement rates for COVID-19 molecular testing; the COVID-19 pandemic’s impact on the U.S. healthcare system and the U.S. economy; the timing, scope and effectiveness of federal, state and local governmental responses to the COVID-19 pandemic; and effective and comprehensive COVID-19 vaccination across the U.S. We may also be impacted by changes in the severity of the COVID-19 pandemic at different times in the various cities and regions where we operate and offer services, and by challenges faced in implementing nationwide COVID-19 vaccinations, including the degree to which the public is vaccinated and the effectiveness of vaccines at preventing infection or illness in connection with new or existing variants of COVID-19. Even as the COVID-19 pandemic moderates over time and the business and social distancing restrictions ease, we may continue to experience similar effects to our businesses, consolidated results of operations, financial position and cash flows arising from long-term changes in behavior by consumers or other healthcare system participants and resulting from a recessionary economic environment that may persist. In the longer term, given the many challenges that hospitals will face, we may have more opportunities to partner with hospitals to help achieve their laboratory strategies, and the COVID-19 pandemic may also be a further catalyst for consolidation in the laboratory testing industry.
Medicare Sequestration
Reimbursement for Medicare services is subject to annual reduction (sequestration) of 2% under the Budget Control Act of 2011. Beginning in May 2020, there has been a suspension of sequestration, which has resulted in a small benefit to us in the form of higher reimbursement rates for diagnostic testing services performed on behalf of Medicare beneficiaries. During December 2021, the suspension of Medicare sequestration was further extended through March 31, 2022 and it was reduced to 1% from April 1, 2022 to June 30, 2022, with the full annual 2% reduction in rates resuming thereafter.
Two Point Strategy
Our two point strategy and our operating principles are described in detail in "Item 1. Business". We continued to execute our strategy and leverage our operating principles during 2021 as follows:
Acquisition of the Outreach Services Business of Mercy Health
On June 1, 2021, we completed the acquisition of the outreach laboratory services business of Mercy Health, which serves providers and patients in Arkansas, Kansas, Missouri and Oklahoma, in an all-cash transaction for $225 million. The acquired business is included in our DIS business.
For further details, see Note 5 to the audited consolidated financial statements.
Acquisition of Assets of Labtech Diagnostics, LLC ("Labtech")
On December 13, 2021, we completed the acquisition of assets of Labtech, an independent clinical diagnostics laboratory provider serving physicians and patients primarily in South Carolina, North Carolina, Florida and Georgia, in an all cash transaction for $85 million, which consisted of cash consideration of $80 million and contingent consideration initially estimated at $5 million. The contingent consideration arrangement is dependent upon the achievement of certain testing volume benchmarks. The acquired business is included in our DIS business.
For further details, see Note 5 to the audited consolidated financial statements.
Investments to Accelerate Growth
In addition to our normal expenditures to operate the business, we have been making additional investments to accelerate growth, particularly in the advanced diagnostics and consumer-initiated testing areas which we believe represent long term growth opportunities for us. During 2021, such investments totaled approximately $70 million and, during 2022, such investments are expected to approximate $160 million.
Sale of Ownership Interest in Q2 Solutions® ("Q2 Solutions") to IQVIA Holdings, Inc. ("IQVIA")
On April 1, 2021, we sold our 40% ownership interest in Q2 Solutions, our clinical trials central laboratory services joint venture, to IQVIA, our joint venture partner, for $760 million in an all-cash transaction. The sales price is subject to customary post-closing adjustments. Prior to the transaction, we accounted for our minority interest as an equity method investment. As a result of the transaction, during the year ended December 31, 2021, we recorded a $314 million pre-tax gain in other income, net in the consolidated statement of operations based on the difference between the net sales proceeds and the carrying value of the investment, including $20 million of cumulative translation losses which were previously recorded in accumulated other comprehensive loss. During the year ended December 31, 2021, we also recorded $55 million of income tax expense related to the gain, consisting of $127 million of current income tax expense, partially offset by $72 million of deferred income tax benefit.
Under a multi-year agreement, we will remain the strategic preferred laboratory provider for Q2 Solutions' clients, providing a range of lab testing capabilities to augment Q2 Solutions' core offerings and extend its industry leading suite of services.
For further details, see Note 6 to the audited consolidated financial statements.
Accelerated Share Repurchase Agreements ("ASRs")
In April 2021, we entered into ASRs with several financial institutions to repurchase our common stock as part of our share repurchase program. Each of the ASRs was structured to permit us to purchase shares immediately with the final purchase price of those shares determined by the volume-weighted average price of our common stock during the repurchase period, less a fixed discount. During the year ended December 31, 2021, we paid $1.5 billion to the financial institutions and received 10.7 million shares of our common stock under the ASRs.
For further details regarding the ASRs and our repurchases of our common stock, see Note 16 to the audited consolidated financial statements.
Invigorate Program
We are engaged in a multi-year program called Invigorate, which is designed to reduce our cost structure and improve our performance. We currently aim annually to achieve savings and productivity improvements of approximately 3% of our costs and in 2021 we exceeded that goal.
Invigorate has consisted of several flagship programs, with structured plans in each, to drive savings and improve performance across the customer value chain. These flagship programs include: organization excellence; information
technology excellence; procurement excellence; field and customer service excellence; lab excellence; and revenue services excellence. In addition to these programs, we have identified key themes to change how we operate including reducing denials and patient price concessions; further digitizing our business; standardization and automation; and optimization initiatives in our lab network and patient service center network. We believe that our efforts to standardize our information technology systems, equipment and data also foster our efforts to strengthen our foundation for growth and support the value creation initiatives of our clinical franchises by enhancing our operational flexibility, empowering and enhancing the customer experience, facilitating the delivery of actionable insights and bolstering our large data platform.
For the year ended December 31, 2021, we incurred $56 million of pre-tax charges under our Invigorate program primarily consisting of systems conversion and integration costs, all of which result in cash expenditures. Additional restructuring charges may be incurred in future periods as we identify additional opportunities to achieve further productivity improvements and savings.
Outlook and Trends
The healthcare system in the United States is evolving; significant change is taking place in the system. We expect that the evolution of the healthcare industry, including impacts of the COVID-19 pandemic, such as increased adoption of telemedicine, will continue, and that industry change is likely to be extensive. There are a number of key trends that are having, and that we expect will continue to have, a significant impact on the diagnostic information services business in the United States and on our business. We believe that several of the trends, including consolidation, price transparency and consumerization, are favorable to our business.
Healthcare market participants, including governments, are focusing on controlling costs, including potentially by reducing reimbursement for healthcare services, changing reimbursement for healthcare services (including but not limited to a shift from fee-for-service to capitation), changing medical coverage policies (e.g., healthcare benefits design), denying coverage for services, requiring preauthorization of laboratory testing, requiring co-pays, introducing laboratory spend management utilities and payment and patient care innovations such as ACOs, DCEs and patient-centered medical homes. In recent years, there has been an ongoing trend of rising patient responsibility (including attributable to payer denials) which has resulted in an increase in our reserves for patient price concessions. As health plans and government programs require greater levels of patient cost-sharing, our patient price concessions may continue to be negatively impacted and adversely impact our results of operations. As previously mentioned, there could be a shift to capitation arrangements where we agree to a predetermined monthly reimbursement rate for each member enrolled in a restricted plan, generally regardless of the number or cost of services provided by us. In both 2021 and 2020, we derived approximately 3% of our consolidated net revenues from capitated payment arrangements. In both 2021 and 2020, we derived approximately 8% of our testing volume from capitated payment arrangements.
Historically, the Medicare Clinical Laboratory Fee Schedule ("CLFS") and the Medicare Physician Fee Schedule established under Part B of the Medicare program have been subject to change, including each year. Pursuant to the Protecting Access to Medicare Act ("PAMA"), CMS promulgated revised reimbursement schedules for 2018-2020 for clinical laboratory testing services provided under Medicare. Under the revised Medicare Clinical Laboratory Fee Schedule (in 2021 CLFS revenues comprised 7% of our consolidated net revenues), reimbursement rates for clinical laboratory testing were reduced from 2018 - 2020. PAMA calls for further revision of the CLFS for years after 2020, based on future surveys of market rates; reimbursement reduction from 2023 - 2025 is capped by PAMA at 15% annually. PAMA's next data collection and reporting period have been delayed, most recently by federal legislation adopted in 2021, which further delayed the reimbursement rate reductions and reporting requirements until 2023. Overall, we expect total reimbursement rate pressure (i.e., unit price changes) for 2022 from all payers on a combined basis to be less than 1%.
In addition, the trend of consolidating, converging and diversifying among our customers, payers and other healthcare industry participants has continued and may result in increased price transparency and bargaining power, and may encourage internalization of clinical testing. We also believe that PAMA, among other factors, may be a further catalyst for consolidation as diagnostic information services providers realize lower Medicare reimbursement rates and large diagnostic information services providers may be able to increase their share of the overall diagnostic information services industry due to their large networks and lower cost structures.
For a discussion of the impact of the COVID-19 pandemic on our business, see "Impact of COVID-19" above.
We believe that inflation generally has not had a material adverse effect on our results of operations or financial condition. Given the current environment, we expect wage inflation (excluding the impact of changes in performance-based compensation) of 3% to 4% during 2022.
For additional information on our key trends, which present both opportunities and risks, see "Item 1. Business: The Clinical Testing Industry."
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions and select accounting policies that affect our reported financial results and the disclosure of contingent assets and liabilities.
Our revenues are primarily comprised of a high volume of relatively low-dollar transactions, and about one-half of our total costs and expenses consist of employee compensation and benefits. Due to the nature of our business, several of our accounting policies involve significant estimates and judgments:
•revenues and accounts receivable associated with DIS;
•reserves for general and professional liability claims;
•reserves for other legal proceedings; and
•accounting for and recoverability of goodwill.
Revenues and accounts receivable associated with DIS
The process for estimating revenues and the ultimate collection of receivables associated with our DIS business involves significant assumptions and judgments. We recognize as revenue the amount of consideration to which we expect to be entitled primarily upon completion of the testing process (when results are reported) or when services have been rendered. We estimate the amount of consideration we expect to be entitled to receive from customer groups in exchange for providing services using the portfolio approach. These estimates include the impact of contractual allowances (including payer denials), and patient price concessions, as discussed below. The portfolios determined using the portfolio approach consist of the following customers:
•Healthcare Insurers
•Government Payers
•Client Payers
•Patients
We have a standardized approach to estimate the amount of consideration that we expect to be entitled to, including the impact of contractual allowances (including payer denials), and patient price concessions. Historical collection and payer reimbursement experience (along with the period of time that the receivables have been outstanding) is an integral part of the estimation process related to revenues and receivables. Adjustments to our estimated contractual allowances and implicit patient price concessions are recorded in the current period as changes in estimates. Further adjustments to the allowances, based on actual receipts, may be recorded upon settlement.
We regularly assess the state of our billing operations in order to identify issues which may impact the collectability of receivables or revenue estimates. We believe that the collectability of our receivables is directly linked to the quality of our billing processes, most notably those related to obtaining the correct information in order to bill effectively for the services we provide. As such, we strive to implement “best practices” and endeavor to increase the use of electronic ordering to reduce the number of requisitions that we receive from healthcare providers with missing or incorrect billing information. We believe that our collection and revenue estimation processes, along with our close monitoring of our billing operations, help to reduce the risk associated with material adjustments to reserve estimates. However, changes to our estimate of the impact of contractual allowances (including payer denials) and patient price concessions could have a material impact on our results of operations and financial condition in the period that the estimates are adjusted.
The following table shows the approximate percentage of our total requisition volume and net revenues associated with our DIS business during 2021 applicable to each customer group:
| | | | | | | | | | | |
| % of | | % of |
| Total | | Consolidated |
| Volume | | Net Revenues |
| | | |
| Healthcare insurers | 46% | | 42% |
| Government payers | 10 | | 10 |
| Client payers | 39 | | 33 |
| Patients * | 2 | | 12 |
| Total DIS | 97% | | 97% |
*Patients revenue includes coinsurance and deductible responsibilities but volume associated with such revenue is reported under Healthcare insurers.
The following table shows net accounts receivable as of December 31, 2021 applicable to each customer group:
| | | | | |
| % of |
| Consolidated |
| Net Accounts |
| Receivable |
| |
| Healthcare insurers | 32% |
| Government payers | 6 |
| Client payers | 38 |
| Patients (including coinsurance and deductible responsibilities) | 21 |
| Total DIS | 97% |
Healthcare insurers
Reimbursements from healthcare insurers are based on fee-for-service schedules and on capitated payment rates. Under fee-for-service arrangements, healthcare insurers are billed at our list price. Net revenues recognized consist of amounts billed net of contractual allowances for differences between amounts billed and the estimated consideration we expect to receive from such payers, which considers historical denial and collection experience and the terms of our contractual arrangements.
Substantially all of the accounts receivable due from healthcare insurers represent amounts billed under fee-for-service arrangements. Collection of our net revenues from healthcare insurers is normally a function of providing complete and correct billing information to the healthcare insurers within the various filing deadlines and generally occurs within 30 to 60 days of billing. Provided we have billed healthcare insurers accurately with complete information prior to the established filing deadline, there has historically been little to no credit risk. If there has been a delay in billing, we determine if the amounts in question will likely go past the filing deadline, and if so, we will reserve accordingly for the billing.
Under capitated arrangements with healthcare insurers, we recognize revenue based on a predetermined monthly reimbursement rate for each member of an insurer's health plan regardless of the number or cost of services provided by us. Under capitated payment arrangements, the healthcare insurers typically reimburse us in the same month services are performed, essentially giving rise to no outstanding accounts receivable at the end of a reporting period. If any capitated payments are not received on a timely basis, we determine the cause and make a separate determination as to whether or not the collection of the amount from the healthcare insurer is at risk and, if so, would reserve accordingly.
Government payers
Reimbursements from government payers are based on fee-for-service schedules set by governmental authorities, including traditional Medicare and Medicaid. Net revenues recognized consist of amounts billed net of contractual allowances for differences between amounts billed and the estimated consideration we expect to receive from such payers, which considers historical denial and collection experience.
Collection of our net revenues from government payers is normally a function of providing the complete and correct billing information within the various filing deadlines. Collection generally occurs within 30 days of billing. Provided we have billed government payers accurately with complete information prior to the established filing deadline, there has historically been little to no credit risk. If there has been a delay in billing, we determine if the amounts in question will likely go past the filing deadline, and, if so, we will reserve for the billing accordingly.
Client payers
Client payers include physicians, hospitals, ACOs, DCEs, IDNs, employers, other commercial laboratories and institutions for which services are performed on a wholesale basis, and are billed based on a negotiated fee schedule. Credit risk and ability to pay are more of a consideration for these payers than healthcare insurers and government payers. Collection of consideration we expect to receive generally occurs within 60 to 90 days of billing.
We principally estimate the allowance for credit losses for client payers based on historical collection experience, the current credit worthiness of the customers, current economic conditions, expectations of future economic conditions and the period of time that the receivables have been outstanding. To the extent that any individual client payers are identified that have deteriorated in credit quality, we establish allowances based on the individual risk characteristics of such customers.
Patients
Uninsured patients are billed based on established patient fee schedules or fees negotiated with physicians on behalf of their patients. Insured patients (includes coinsurance and deductible responsibilities) are billed based on fees negotiated with healthcare insurers. Collection of billings from patients is subject to credit risk and ability of the patients to pay. Net revenues consist of amounts billed net of discounts provided to uninsured patients in accordance with our policies and implicit price concessions. Implicit price concessions represent differences between amounts billed and the estimated consideration we expect to receive from patients, which considers historical collection experience (along with the period of time that the receivables have been outstanding) and other factors including current market conditions. Patient billings are generally fully reserved for when the related service reaches 210 days outstanding. Balances are automatically written off when they are sent to collection agencies. Allowances are further adjusted for estimated recoveries of amounts sent to collection agencies based on historical collection experience, which is regularly monitored. Collection of consideration we expect to receive generally occurs within 30 to 60 days of billing.
Reserves for general and professional liability claims
As a general matter, providers of diagnostic information services may be subject to lawsuits alleging negligence or other similar claims. These suits could involve claims for substantial damages. Any professional liability litigation could also have an adverse impact on our client base and reputation. We maintain various liability insurance coverages for claims that could result from providing, or failing to provide, clinical testing services, including inaccurate testing results, and other exposures. Our insurance coverage limits our maximum exposure on individual claims; however, we are essentially self-insured for a significant portion of these claims. While the basis for claims reserves is actuarially determined losses based upon our historical and projected loss experience, the process of analyzing, assessing and establishing reserve estimates relative to these types of claims involves a high degree of judgment. Although we believe that our present reserves and insurance coverage are sufficient to cover currently estimated exposures, it is possible that we may incur liabilities in excess of our recorded reserves or insurance coverage. Changes in the facts and circumstances associated with claims could have a material impact on our results of operations (principally costs of services), cash flows and financial condition in the period that reserve estimates are adjusted or paid. See Note 18 to the audited consolidated financial statements for a discussion of our reserves for general and professional liability claims.
Reserves for other legal proceedings
Our businesses are subject to or impacted by extensive and frequently changing laws and regulations, including inspections and audits by governmental agencies, in the United States (at both the federal and state levels) and the other jurisdictions in which we conduct business. Although we believe that we are in compliance, in all material respects, with applicable laws and regulations, there can be no assurance that a regulatory agency would not reach a different conclusion. Any noncompliance by us with applicable laws and regulations could have a material adverse effect on our results of operations. In addition, these laws and regulations may be interpreted or applied by a prosecutorial, regulatory or judicial authority in a manner that could require us to make changes in our operations, including our pricing and/or billing practices. In addition, certain federal and state statutes, including the qui tam provisions of federal and state false claims acts, allow private individuals to bring lawsuits against healthcare companies on behalf of government or private payers alleging inappropriate billing practices. We are aware of certain pending lawsuits including class action lawsuits, and have received subpoenas related to billing practices. See Note 18 to the audited consolidated financial statements for a discussion of the various legal proceedings that we are involved in.
The process of analyzing, assessing and establishing reserve estimates relative to legal proceedings involves a high degree of judgment. Management has established reserves for legal proceedings in accordance with generally accepted accounting principles in the United States. Changes in facts and circumstances related to such proceedings could lead to significant adjustments to reserve estimates for such matters and could have a material impact on our results of operations, cash flows and financial condition in the period that reserve estimates are adjusted or paid.
Accounting for and recoverability of goodwill
We do not amortize goodwill, but evaluate the recoverability and measure the potential impairment of our goodwill annually, or more frequently, in the case of other events that indicate a potential impairment. We identified the following reporting units for goodwill impairment testing in 2021:
•DIS business;
•Risk assessment services business, which is part of our DS businesses
The DIS reporting unit components have been aggregated into a single reporting unit because they have similar economic characteristics, including similarities in financial performance, nature of products or services, nature of production processes and types of customers.
On a quarterly basis, we perform a review of our business to determine if events or changes in circumstances have occurred which could have a material adverse effect on our fair value and our goodwill. If such events or changes in circumstances were deemed to have occurred, we would perform an impairment test of goodwill and record any noted impairment loss.
The annual impairment test for goodwill includes an option to perform a qualitative assessment of whether it is more likely than not that a reporting unit's fair value is less than its carrying value; the qualitative analysis may be performed prior to, or as an alternative to, performing a quantitative goodwill impairment test. In evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying value, we assess relevant events and circumstances, such as: (a) macroeconomic conditions; (b) industry and market considerations; (c) cost factors; (d) overall financial performance; (e) other relevant entity-specific events; (f) events affecting a reporting unit; and (g) a sustained decrease in share price. If, after assessing the totality of events or circumstances, we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then we are required to perform the quantitative goodwill impairment test. Otherwise, no further analysis is required. Additionally, our policy is to update the fair value calculation of our reporting units and perform the quantitative goodwill impairment test on a periodic basis.
The quantitative impairment test involves the comparison of the fair value of the reporting unit to its carrying value. If the carrying value is greater than our estimate of fair value, an impairment loss will be recognized in the amount of the excess. We calculate the fair value of each reporting unit using either (i) a discounted cash flows analysis that converts future cash flow amounts into a single discounted present value amount or (ii) a market approach. We assess the valuation methodology based upon the relevance and availability of the data at the time we perform the valuation. The discounted cash flows analysis includes several unobservable inputs related to our own assumptions. The assumptions and estimates used in the discounted cash flows model are based upon the best available information in the circumstances and include a forecast of expected future cash flows, long-term growth rates, discount rates that are commensurate with economic risks, assumed income tax rates and
estimates of capital expenditures and working capital. The fair values of the reporting units could be different if, for example, forecasted revenue growth rates, economic conditions, government regulations or actions by payers to control utilization of or reimbursement for healthcare services, turn out to be different than our assumptions or estimates. Changes in the assumed discount rates due to changes in interest rates could also affect the estimated fair values of the reporting units. We use a discount rate that considers a weighted average cost of capital plus an appropriate risk premium based upon the reporting unit being valued. Our analysis also considers publicly available information regarding our market capitalization, as well as (i) the financial projections and future prospects of our business, including its growth opportunities and likely operational improvements, and (ii) comparable sales prices, if available. We believe our estimation methods are reasonable and reflect common valuation practices.
We perform our annual impairment test during the fourth quarter of the fiscal year. For the year ended December 31, 2021, we performed the qualitative assessment for our DIS and risk assessment services reporting units. Based on the totality of the information available for each reporting unit, we concluded that it was more likely than not that the estimated fair values were greater than the carrying values of the reporting units, and as such, no further analysis was required. As a sensitivity, in conjunction with the most recent quantitative test performed for the year ended December 31, 2020, if the estimated fair values of each of our reporting units decreased by 10%, we would have concluded that our goodwill was not impaired.
Results of Operations
For a comparison of results of operations for the year ended December 31, 2020 compared to December 31, 2019, along with the results of operations for the year ended December 31, 2019, see "Item 7 - Management's Discussion and Analysis of Financial Condition and Result of Operations" of our Annual Report on Form 10-K for the year ended December 31, 2020. See "Available Information."
Basis of Presentation
Our DIS business currently represents our one reportable business segment. The DIS business for the years ended December 31, 2021 and 2020 accounted for greater than 95% of our consolidated net revenues. Our other operating segments consist of our DS businesses. For further details regarding our business segment information, see Note 19 to the audited consolidated financial statements.
Results of Operations
The following table sets forth certain results of operations data for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| 2021 | | 2020 | | | | $ Change | | | | % Change | | |
| (dollars in millions, except per share data) | | |
| Net revenues: | | | | | | | | | | | | | |
| DIS business | $ | 10,494 | | | $ | 9,139 | | | | | $ | 1,355 | | | | | 14.8 | % | | |
| DS businesses | 294 | | | 298 | | | | | (4) | | | | | (1.3) | | | |
| Total net revenues | $ | 10,788 | | | $ | 9,437 | | | | | $ | 1,351 | | | | | 14.3 | % | | |
| | | | | | | | | | | | | |
| Operating costs and expenses and other operating income: | | | | | | | | |
| Cost of services | $ | 6,579 | | | $ | 5,804 | | | | | $ | 775 | | | | | 13.4 | % | | |
| Selling, general and administrative | 1,727 | | | 1,550 | | | | | 177 | | | | | 11.4 | | | |
| Amortization of intangible assets | 103 | | | 103 | | | | | — | | | | | — | | | |
| | | | | | | | | | | | | |
| Other operating (income) expense, net | (2) | | | 9 | | | | | (11) | | | | | NM | | |
| Total operating costs and expenses, net | $ | 8,407 | | | $ | 7,466 | | | | | $ | 941 | | | | | 12.6 | % | | |
| | | | | | | | | | | | | |
| Operating income | $ | 2,381 | | | $ | 1,971 | | | | | $ | 410 | | | | | 20.8 | % | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | | | | | |
| |
| Other income (expense): | | | | | | | | | | | | | |
Interest expense, net | $ | (151) | | | $ | (163) | | | | | $ | 12 | | | | | (7.2) | % | | |
| Other income, net | 369 | | | 76 | | | | | 293 | | | | | NM | | |
| Total non-operating income (expense), net | $ | 218 | | | $ | (87) | | | | | $ | 305 | | | | | NM | | |
| | | | | | | | | | | | | |
| Income tax expense | $ | (597) | | | $ | (460) | | | | | $ | (137) | | | | | 29.6 | % | | |
Effective income tax rate | 23.0 | % | | 24.5 | % | | | | | | | | | | |
| | | | | | | | | | | | | |
Equity in earnings of equity method investees, net of taxes | $ | 78 | | | $ | 75 | | | | | $ | 3 | | | | | 4.7 | % | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Net income attributable to Quest Diagnostics | $ | 1,995 | | | $ | 1,431 | | | | | $ | 564 | | | | | 39.4 | % | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Diluted earnings per share attributable to Quest Diagnostics’ common stockholders | $ | 15.55 | | | $ | 10.47 | | | | | $ | 5.08 | | | | | 48.5 | % | | |
NM - Not Meaningful
The following table sets forth certain results of operations data as a percentage of net revenues for the periods presented:
| | | | | | | | | | | | | | | |
| 2021 | | 2020 | | |
| | | | | |
| Net revenues: | | | | | |
| DIS business | 97.3 | % | | 96.8 | % | | |
| DS businesses | 2.7 | | | 3.2 | | | |
| Total net revenues | 100.0 | % | | 100.0 | % | | |
| | | | | |
Operating costs and expenses and other operating income: | | | | | |
| Cost of services | 61.0 | % | | 61.5 | % | | |
| Selling, general and administrative | 16.0 | | | 16.4 | | | |
| Amortization of intangible assets | 1.0 | | | 1.1 | | | |
| | | | | |
| | | | | |
| Other operating (income) expense, net | (0.1) | | | 0.1 | | | |
Total operating costs and expenses, net | 77.9 | % | | 79.1 | % | | |
| | | | | |
| Operating income | 22.1 | % | | 20.9 | % | | |
| | | | | |
| | | | | |
Operating Results
Results for the year ended December 31, 2021 were affected by certain items that on a net basis increased diluted earnings per share by $1.31 as follows:
•a pre-tax gain recorded in other income, net of $314 million, or $2.02 per diluted share, on the sale of our 40% ownership interest in Q2 Solutions;
•a net pre-tax gain of $23 million (a $39 million gain recorded in other income, net, partially offset by $16 million of costs recorded in selling, general and administrative expenses), or $0.16 per diluted share, primarily representing changes in the carrying value of our strategic investments, and a gain recognized by an equity method investee to adjust certain of its investments to fair value, partially offset by costs associated with donations, contributions and other financial support through Quest for Health Equity (our initiative with the Quest Diagnostics Foundation to reduce health disparities in underserved communities), and a non-cash impairment charge to the carrying value of an equity method investment; and
•excess tax benefits associated with stock-based compensation arrangements of $19 million, or $0.14 per diluted share, recorded in income tax expense; partially offset by
•pre-tax amortization expense of $105 million ($103 million in amortization of intangible assets and $2 million in equity in earnings of equity method investees, net of taxes) or $0.62 per diluted share;
•pre-tax charges of $61 million ($30 million in cost of services and $31 million in selling, general and administrative expenses), or $0.36 per diluted share, primarily associated with systems conversions and integration incurred in connection with further restructuring and integrating our business; and
•pre-tax charges of $4 million in cost of services, or $0.03 per diluted share, representing the impact of certain items resulting from the COVID-19 pandemic, including incremental costs incurred to protect the health and safety of our employees and customers.
For the year ended December 31, 2021, diluted earnings per share benefited from the impact of the ASRs on our weighted average shares outstanding as compared to the prior year.
Results for the year ended December 31, 2020 were affected by certain items that on a net basis decreased diluted earnings per share by $0.71 as follows:
•pre-tax amortization expense of $114 million ($103 million in amortization of intangible assets and $11 million in equity in earnings of equity method investees, net of taxes) or $0.63 per diluted share;
•net pre-tax charges of $72 million ($57 million of charges in cost of services, $10 million of charges in selling, general and administrative expenses and $9 million of charges in other operating (income) expense, net, partially offset by a $4 million gain in equity in earnings of equity method investees, net of taxes), or $0.39 per diluted share, representing the impact of certain items resulting from the COVID-19 pandemic, principally including expense associated with payments to eligible employees to help offset expenses they incurred as a result of COVID-19, incremental costs incurred primarily to protect the health and safety of our employees and customers, and certain asset impairment charges; and
•pre-tax charges of $58 million ($27 million in cost of services and $31 million in selling, general and administrative expenses), or $0.32 per diluted share, primarily associated with systems conversions and integration incurred in connection with further restructuring and integrating our business; partially offset by
•a pre-tax gain of $70 million, or $0.46 per diluted share, recognized in other income, net, based on the difference between the fair value and the carrying value of an equity interest;
•excess tax benefits associated with stock-based compensation arrangements of $23 million, or $0.17 per diluted share, recorded in income tax expense; and
•a net pre-tax gain of $2 million (a $14 million gain in equity in earnings of equity method investees, net of taxes, partially offset by a $10 million loss in other income, net, and $2 million of charges in selling, general and administrative expenses) primarily due to a gain recognized by an equity method investee to adjust certain of its investments to fair value, a loss on retirement of debt, and, to a lesser extent, costs associated with Quest for Health Equity.
Net Revenues
Net revenues for the year ended December 31, 2021 increased by 14.3% compared to the prior year.
DIS revenues for the year ended December 31, 2021 increased by 14.8% compared to the prior year. For the year ended December 31, 2021:
•Organic revenue and acquisitions contributed approximately 13.0% and 1.8%, respectively, to DIS revenue growth compared to the prior year. Organic revenue growth was driven by growth in the base business and, to a lesser extent, demand for COVID-19 molecular testing.
•Revenues in the base business (including the impact of recent acquisitions) increased by 20.4% compared to the prior year, which was negatively impacted as a result of the COVID-19 pandemic. Compared to historical levels in 2019, revenues in the base business, excluding revenue associated with recent acquisitions, increased by 0.4%. Recent agreements associated with our Professional Laboratory Services offerings contributed 2.3% revenue growth compared to 2019.
•DIS volume increased by 16.5% with organic volume and acquisitions contributing approximately 13.6% and 2.9%, respectively. Organic volume growth was driven by growth in the base business.
•Testing volume in the base business (including the impact of recent acquisitions) continued to recover and was up 19.7% compared to the prior year, which was negatively impacted as a result of the COVID-19 pandemic. Compared to historical levels in 2019, testing volume in the base business, excluding volume associated with recent acquisitions, increased by 2.0%. Recent agreements associated with our Professional Laboratory Services offerings contributed 5.5% volume growth compared to 2019.
•Revenue per requisition decreased by 1.6% compared to the prior year primarily due to growth in our Professional Laboratory Services engagements, which carry a lower revenue per requisition than the average for the remainder of the DIS business, and pricing pressure of approximately 1.1%, partially offset by favorable test mix.
Cost of Services
Cost of services consists principally of costs for obtaining, transporting and testing specimens as well as facility costs used for the delivery of our services.
Cost of services increased by $775 million for the year ended December 31, 2021 compared to the prior year. The increase was primarily driven by higher variable expenses related to increased testing volumes, higher compensation and benefits costs (primarily related to wage increases), and, to a lesser extent, additional operating costs associated with our acquisitions.
Selling, General and Administrative Expenses ("SG&A")
SG&A consists principally of the costs associated with our sales and marketing efforts, billing operations, credit loss expense and general management and administrative support, as well as administrative facility costs.
SG&A increased by $177 million for the year ended December 31, 2021, compared to the prior year, primarily driven by higher variable expenses to support our increase in testing volumes, investments in our strategic growth initiatives and higher compensation and benefit costs (including headcount and wage increases).
Amortization of Intangible Assets
For the year ended December 31, 2021, amortization expense was flat compared to the prior year.
Other Operating (Income) Expense, Net
Other operating (income) expense, net includes miscellaneous income and expense items and other charges related to operating activities.
For the year ended December 31, 2020, other operating (income) expense, net primarily represents impairment charges due to the impact of the COVID-19 pandemic.
Interest Expense, Net
Interest expense, net decreased by $12 million for the year ended December 31, 2021 compared to the prior year, primarily due to lower average outstanding indebtedness and, to a lesser extent, lower interest rates due to recent refinancing transactions, including the termination of our interest rate swap agreements in April 2020, which resulted in a deferred gain that is being amortized as a reduction of interest expense, net over the remaining term of the associated debt.
Other Income, Net
Other income, net represents miscellaneous income and expense items related to non-operating activities, such as gains and losses associated with investments and other non-operating assets.
For the year ended December 31, 2021, other income, net included a $314 million pre-tax gain on the sale of our 40% ownership interest in Q2 Solutions, our clinical trials central laboratory services joint venture, to IQVIA, our joint venture partner (see Note 6 to the audited consolidated financial statements), $39 million in gains associated with changes in the carrying value of our strategic investments, and $17 million in gains associated with investments in our deferred compensation plans.
For the year ended December 31, 2020, other income, net included a $70 million gain recognized as a result of the remeasurement of our previously held equity interest in Mid America Clinical Laboratories, LLC ("MACL") to fair value (see Note 5 to the audited consolidated financial statements) and $15 million in gains associated with investments in our deferred compensation plans, partially offset by a $9 million loss on the retirement of debt, principally due to premiums paid.
Income Tax Expense
Income tax expense for the years ended December 31, 2021 and 2020 was $597 million and $460 million, respectively. The increase in income tax expense compared to the prior year was primarily driven by an increase in income before income taxes and equity in earnings of equity method investees.
The effective income tax rate for the years ended December 31, 2021 and 2020 was 23.0% and 24.5%, respectively. The effective income tax rate for the year ended December 31, 2021 benefited from a lower effective income tax rate, 17.6%, on the gain on the sale of our 40% ownership interest in Q2 Solutions. The effective income tax rate for the year ended December 31, 2020 benefited from a lower effective income tax rate, 11.8%, associated with a $70 million gain recognized as a result of the remeasurement of our previously held equity interest in MACL to fair value. In addition, the effective income tax rates benefited from $19 million and $23 million of excess tax benefits associated with stock-based compensation arrangements for the years ended December 31, 2021 and 2020, respectively.
Equity in Earnings of Equity Method Investees, Net of Taxes
For the year ended December 31, 2021, there was a $3 million increase in equity in earnings of equity method investees, net of taxes, compared to the prior year primarily due to the demand for COVID-19 testing services and recovery in the base business of the investees, partially offset by lower equity earnings as a result of the sale of our 40% ownership interest in Q2 Solutions.
Quantitative and Qualitative Disclosures About Market Risk
We address our exposure to market risks, principally the risk of changes in interest rates, through a controlled program of risk management that includes the use of derivative financial instruments. We do not hold or issue derivative financial instruments for speculative purposes. We seek to mitigate the variability in cash outflows that result from changes in interest rates by maintaining a balanced mix of fixed-rate and variable-rate debt obligations. In order to achieve this objective, we have historically entered into interest rate swap agreements. Interest rate swap agreements involve the periodic exchange of payments without the exchange of underlying principal or notional amounts. Net settlements are recognized as an adjustment to interest expense, net. We believe that our exposures to foreign exchange impacts and changes in commodity prices are not material to our consolidated results of operations, financial position or cash flows. For further details regarding our significant accounting policies on interest rate risk and foreign currency, see Note 2 to the audited consolidated financial statements.
As of December 31, 2021 and 2020, the fair value of our debt was estimated at approximately $4.4 billion and $4.6 billion, respectively, principally using quoted prices in active markets and yields for the same or similar types of borrowings, taking into account the underlying terms of the debt instruments. As of December 31, 2021 and 2020, the estimated fair value exceeded the carrying value of the debt by $403 million and $597 million, respectively. A hypothetical 10% increase in interest rates (representing 23 basis points as of December 31, 2021 and 17 basis points as of December 31, 2020) would potentially reduce the estimated fair value of our debt by approximately $89 million and $82 million as of December 31, 2021 and 2020, respectively.
Borrowings under our secured receivables credit facility and our senior unsecured revolving credit facility are subject to variable interest rates. Interest on our secured receivables credit facility is based on either commercial paper rates for highly rated issuers, or London Interbank Offered Rate ("LIBOR"), plus a spread. As of December 31, 2021, interest on our senior unsecured revolving credit facility is based on certain published rates plus an applicable margin based on changes in our public debt ratings. As such, our borrowing cost under this credit arrangement is subject to fluctuations in interest rates and changes in our public debt ratings. As of December 31, 2021, the borrowing rates under these debt instruments were: for our secured receivables credit facility, commercial paper rates for highly-rated issuers or LIBOR, plus a spread of 0.725% to 0.80%; and for our senior unsecured revolving credit facility, LIBOR plus 1.00%. As of December 31, 2021, there were no borrowings outstanding under either our $600 million secured receivables credit facility or our $750 million senior unsecured revolving credit facility.
A hypothetical 10% change to the variable rate component of our variable rate indebtedness would not materially change our annual interest expense.
For further details regarding our outstanding debt and our financial instruments and hedging activities, see Notes 13 and 15, respectively, to the audited consolidated financial statements.
Risk Associated with Investment Portfolio
Our investment portfolio primarily includes equity investments comprised mostly of strategic holdings in companies concentrated in the life sciences and healthcare industries. Equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) with readily determinable fair values are measured at fair value in prepaid expenses and other current assets in our consolidated balance sheet with changes in fair value recorded in current earnings in our consolidated statement of operations. Equity investments that do not have readily determinable fair values (which consist of investments in preferred and common shares of private companies) are measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes. During the year ended December 31, 2021, certain of our equity investments became publicly-traded and, based on the readily determinable fair values of such investments, we recognized gains of $39 million in other income, net in our consolidated statement of operations. For further details, see Notes 2 and 7 to the audited consolidated financial statements.
We regularly evaluate equity investments that do not have readily determinable fair values to determine if there are any indicators that the investments are impaired. The carrying value of our equity investments that do not have readily determinable fair values was $4 million as of December 31, 2021.
We do not hedge our equity price risk. As of December 31, 2021, a 10% change in the fair values of our equity investments with readily determinable fair values would have impacted our consolidated income before income taxes and equity in earnings of equity method investees by $4 million. The impact of an adverse movement in equity prices on our holdings in privately held companies cannot be easily quantified, as our ability to realize returns on investments depends on,
among other things, the enterprises’ ability to raise additional capital or derive cash inflows from continuing operations or through liquidity events such as initial public offerings, mergers or private sales.
In conjunction with the preparation of our audited consolidated financial statements for the year ended December 31, 2021, we considered whether the carrying values of our investments were impaired and concluded that no such impairment existed.
Liquidity and Capital Resources
| | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | $ Change | | |
| (dollars in millions) |
| Net cash provided by operating activities | $ | 2,233 | | | $ | 2,005 | | | $ | 228 | | | |
| Net cash provided by (used in) investing activities | 21 | | | (772) | | | 793 | | | |
| Net cash used in financing activities | (2,540) | | | (1,267) | | | (1,273) | | | |
| Net change in cash and cash equivalents and restricted cash | $ | (286) | | | $ | (34) | | | $ | (252) | | | |
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly-liquid short-term investments. Cash and cash equivalents as of December 31, 2021 and 2020 totaled $872 million and $1,158 million, respectively.
As of December 31, 2021, approximately 5% of our $872 million of consolidated cash and cash equivalents were held outside of the United States.
Cash Flows from Operating Activities
Net cash provided by operating activities for the year ended December 31, 2021 was $2,233 million, and increased $228 million compared to the prior year primarily as a result of:
•higher operating income in 2021 as compared to 2020; and,
•the timing of movements in our working capital accounts; partially offset by
•a $349 million increase in income tax payments due to higher income in 2021 as compared to 2020, as well as timing of payments; and
•higher performance-based compensation payments in 2021 compared to 2020.
Days sales outstanding ("DSO"), a measure of billing and collection efficiency, was 48 days as of December 31, 2021 and 46 days as of December 31, 2020. Recent changes in our DSO are partially due to fluctuations in our monthly revenue due to the impact of the COVID-19 pandemic.
Cash Flows from Investing Activities
Net cash provided by investing activities for the year ended December 31, 2021 was $21 million, compared to net cash used in investing activities of $772 million for the year ended December 31, 2020. This $793 million change in cash provided by (used in) investing activities was primarily a result of $755 million of net cash proceeds received during 2021 from the sale of our 40% ownership interest in Q2 Solutions.
Cash Flows from Financing Activities
Net cash used in financing activities for the year ended December 31, 2021 was $2,540 million, compared to $1,267 million for the year ended December 31, 2020. This $1,273 million increase in cash used in financing activities was primarily a result of:
•a $1,874 million increase in repurchases of our common stock (see "Share Repurchases" for further details); and, to a lesser extent,
•a $103 million change in bank overdrafts, which are generally settled in cash the following day;
•a $60 million decrease in proceeds from the exercise of stock options, which was a result of a decrease in the volume of stock options exercised compared to the prior year; and
•a $41 million increase in distributions to noncontrolling interest partners; partially offset by
•$805 million of net debt repayments (repayments of debt less proceeds from borrowings) in 2020 compared to $2 million of net debt repayments in 2021.
During the year ended December 31, 2021, there were no borrowings or repayments under our secured receivables credit facility or senior unsecured revolving credit facility.
During January 2020, we redeemed in full the outstanding indebtedness under our senior notes due January 2020 and senior notes due March 2020 using net proceeds from the issuance, in December 2019, of the $800 million aggregate principal amount of 2.95% senior notes due June 2030, along with cash on hand. During May 2020, we completed the issuance of the $550 million aggregate principal amount of 2.80% senior notes due June 2031, the net proceeds from which were used during November 2020, along with cash on hand, to redeem in full the outstanding indebtedness under our senior notes due April 2021. Additionally, during the year ended December 31, 2020, we borrowed $100 million under our secured receivables credit facility and $100 million under our senior unsecured revolving credit facility, both of which were repaid prior to December 31, 2020.
For details regarding our debt and related transactions, see Note 13 to the audited consolidated financial statements.
Dividend Program
During each of the four quarters of 2021, our Board of Directors declared a quarterly cash dividend of $0.62 per common share. During each of the four quarters of 2020, our Board of Directors declared a quarterly cash dividend of $0.56 per common share. On February 3, 2022, we announced that our Board of Directors authorized a 6.5% increase in our quarterly cash dividend from $0.62 to $0.66 per share, or $2.64 per share annually, commencing with the dividend payable in April 2022.
Share Repurchases
In each of February and March 2021, our Board of Directors increased the size of our share repurchase program by $1 billion. As of December 31, 2021, $0.7 billion remained available under our share repurchase authorization. In February 2022, our Board of Directors authorized us to repurchase an additional $1 billion of our common stock.
For the year ended December 31, 2021, we repurchased 16.0 million shares of our common stock for $2.2 billion, including 10.7 million shares repurchased under ASRs. See "2021 Highlights" above for further details.
For the year ended December 31, 2020, we repurchased 2.7 million shares of our common stock for $325 million.
For further details regarding our share repurchases, see Note 16 to the audited consolidated financial statements.
Contractual Obligations and Commitments
A description of the terms of our indebtedness and related debt service requirements is contained in Note 13 to the audited consolidated financial statements.
A discussion of our lease obligations is contained in Note 14 to the audited consolidated financial statements.
A discussion of our noncancellable commitments to purchase products or services is contained in Note 18 to the audited consolidated financial statements.
Equity Method Investees
Our equity method investees primarily consist of our diagnostic information services joint venture and investments in funds that purchase strategic holdings in private companies in the healthcare industry. Such investees are accounted for under the equity method of accounting. Our investment in equity method investees is less than 5% of our consolidated total assets. Our proportionate share of income before income taxes associated with our equity method investees is less than 5% of our consolidated income from continuing operations before income taxes and equity in earnings of equity method investees. We have no material unconditional obligations or guarantees to, or in support of, our equity method investees and their operations.
In conjunction with the preparation of our audited consolidated financial statements for the year ended December 31, 2021, we considered whether the carrying values of our equity method investments were impaired and during the year ended December 31, 2021 we recorded an $8 million impairment charge for one of the investments.
Requirements and Capital Resources
We estimate that we will invest approximately $400 million during 2022 for capital expenditures, to support and grow our existing operations, principally related to investments in information technology; laboratory equipment and facilities, including laboratory automations and footprint optimizations; and investments in our advanced diagnostics and consumer growth strategies.
As of December 31, 2021, we had $1.3 billion of borrowing capacity available under our existing credit facilities, including $530 million available under our secured receivables credit facility and $750 million available under our senior unsecured revolving credit facility. There were no outstanding borrowings under these credit facilities as of December 31, 2021. In support of our risk management program, $70 million in letters of credit under the secured receivables credit facility were outstanding as of December 31, 2021. During the fourth quarter of 2021, we amended both our $600 million secured receivables credit facility and our $750 million senior unsecured revolving credit facility to extend the maturity dates for each underlying commitment, while maintaining the borrowing capacity. The secured receivables credit facility includes a $250 million loan commitment which matures in October 2022, and a $250 million loan commitment and a $100 million letter of credit facility which mature in October 2023. The senior unsecured revolving credit facility matures in November 2026. For further details regarding our credit facilities, see Note 13 to the audited consolidated financial statements.
Our secured receivables credit facility is subject to customary affirmative and negative covenants, and certain financial covenants with respect to the receivables that comprise the borrowing base and secure the borrowings under the facility. Our senior unsecured revolving credit facility is also subject to certain financial covenants and limitations on indebtedness. As of December 31, 2021, we were in compliance with all such applicable financial covenants.
We have assessed the impact of the cessation of LIBOR and have identified and evaluated financial instruments and other contracts that refer to LIBOR. Our underlying exposure to LIBOR includes our existing credit facilities (see discussion above) under which we had no outstanding borrowings as of December 31, 2021. We expect to be able to transition all LIBOR-based instruments and contracts to an alternative reference rate on or before the cessation of LIBOR and we do not believe that the cessation of LIBOR, or its replacement with an alternative reference rate or rates, will have a material impact on us.
We believe that our cash and cash equivalents and cash from operations, together with our borrowing capacity under our credit facilities, will provide sufficient financial flexibility to fund seasonal and other working capital requirements, capital expenditures, debt service requirements and other obligations, cash dividends on common shares, share repurchases and additional growth opportunities for the foreseeable future. However, should it become necessary, we believe that our credit profile should provide us with access to additional financing in order to fund normal business operations, make interest payments, fund growth opportunities and satisfy upcoming debt maturities.
Impact of New Accounting Standards
The adoption of new accounting standards is discussed in Note 2 to the audited consolidated financial statements.
The impacts of recent accounting pronouncements not yet effective on our audited consolidated financial statements are discussed in Note 2 to the audited consolidated financial statements.
REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of the Company, including its Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2021 based on criteria for effective internal control over financial reporting described in “Internal Control - Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has determined that the Company's internal control over financial reporting as of December 31, 2021 is effective.
The Company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorization of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited the financial statements included in this annual report, audited the Company's internal control over financial reporting as of December 31, 2021 and issued their audit report on the Company's internal control over financial reporting included herein.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Quest Diagnostics Incorporated
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Quest Diagnostics Incorporated and its subsidiaries (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, including the related notes and financial statement schedule of valuation accounts and reserves for each of the three years in the period ended December 31, 2021 listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of Diagnostic Information Services (DIS) Business Accounts Receivable - Contractual Allowances
As described in Note 3 to the consolidated financial statements, management estimates the amount of consideration it expects to be entitled to receive from customer groups in exchange for providing services using the portfolio approach. These estimates include the impact of contractual allowances (including payer denials) and patient price concessions. The portfolio approach includes the following groups of customers: healthcare insurers, government payers, client payers and patients (32%, 6%, 38% and 21% of consolidated net accounts receivable as of December 31, 2021, respectively, as disclosed by management). The DIS business accounted for 97% of consolidated net accounts receivable ($1,438 million) as of December 31, 2021. Net revenues and accounts receivable recognized from healthcare insurers and government payers consist of amounts billed net of contractual allowances for differences between amounts billed and the estimated consideration the Company expects to receive from such payers, which considers historical denial and collection experience and, additionally for healthcare insurers, the terms of the Company’s contractual arrangements. As disclosed by management, the process for estimating revenues and the ultimate collection of receivables associated with the DIS business involves significant assumptions and judgments.
The principal considerations for our determination that performing procedures relating to the valuation of DIS business accounts receivable - contractual allowances is a critical audit matter are the estimate of net collectible accounts receivable, specifically contractual allowances, involves significant judgment and estimation on the part of management; this in turn led to significant auditor judgment, subjectivity and effort in performing procedures to evaluate the audit evidence related to the contractual allowances.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the valuation of DIS business accounts receivable, which included controls over management’s methodology and data used to estimate contractual allowances. These procedures also included, among others, testing management's process for developing the estimate for contractual allowances, including (i) evaluating the appropriateness of the methodology, (ii) testing the completeness and accuracy of the historical contractual allowance and collection data from the Company’s billing system, which is an input to the methodology, and (iii) evaluating the reasonableness of management’s assumptions used to estimate contractual allowances by comparing actual cash collected to the prior year estimate (net accounts receivable).
| | | | | |
| /s/ | PricewaterhouseCoopers LLP |
| |
| Florham Park, New Jersey |
| February 28, 2022 |
We have served as the Company’s auditor since 1995.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2021 AND 2020
(in millions, except per share data)
| | | | | | | | | | | |
| 2021 | | 2020 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 872 | | | $ | 1,158 | |
Accounts receivable, net of allowance for credit losses of $31 and $28 as of December 31, 2021 and 2020, respectively | 1,438 | | | 1,520 | |
| Inventories | 208 | | | 223 | |
| Prepaid expenses and other current assets | 223 | | | 157 | |
| | | |
| Total current assets | 2,741 | | | 3,058 | |
| Property, plant and equipment, net | 1,707 | | | 1,627 | |
| Operating lease right-of-use assets | 597 | | | 604 | |
| Goodwill | 7,095 | | | 6,873 | |
| Intangible assets, net | 1,167 | | | 1,167 | |
| Investments in equity method investees | 141 | | | 521 | |
| Other assets | 163 | | | 176 | |
| | | |
| Total assets | $ | 13,611 | | | $ | 14,026 | |
| | | |
| Liabilities and Stockholders’ Equity | | | |
| Current liabilities: | | | |
| Accounts payable and accrued expenses | $ | 1,600 | | | $ | 1,633 | |
| Current portion of long-term debt | 2 | | | 2 | |
| Current portion of long-term operating lease liabilities | 151 | | | 141 | |
| Total current liabilities | 1,753 | | | 1,776 | |
| Long-term debt | 4,010 | | | 4,013 | |
| Long-term operating lease liabilities | 494 | | | 499 | |
| Other liabilities | 792 | | | 847 | |
| | | |
| Commitments and contingencies | | | |
| Redeemable noncontrolling interest | 79 | | | 82 | |
| Stockholders’ equity: | | | |
| Quest Diagnostics stockholders’ equity: | | | |
Common stock, par value $0.01 per share; 600 shares authorized as of both December 31, 2021 and 2020; 162 and 217 shares issued as of December 31, 2021 and 2020, respectively | 2 | | | 2 | |
| Additional paid-in capital | 2,260 | | | 2,841 | |
| Retained earnings | 7,649 | | | 9,303 | |
| Accumulated other comprehensive loss | (14) | | | (21) | |
Treasury stock, at cost; 43 and 84 shares as of December 31, 2021 and 2020, respectively | (3,453) | | | (5,366) | |
| Total Quest Diagnostics stockholders’ equity | 6,444 | | | 6,759 | |
| Noncontrolling interests | 39 | | | 50 | |
| Total stockholders’ equity | 6,483 | | | 6,809 | |
| Total liabilities and stockholders’ equity | $ | 13,611 | | | $ | 14,026 | |
The accompanying notes are an integral part of these statements.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
(in millions, except per share data)
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| | | | | |
| Net revenues | $ | 10,788 | | | $ | 9,437 | | | $ | 7,726 | |
| | | | | |
| Operating costs and expenses and other operating expense (income): | | | | | |
| Cost of services | 6,579 | | | 5,804 | | | 5,037 | |
| Selling, general and administrative | 1,727 | | | 1,550 | | | 1,457 | |
| Amortization of intangible assets | 103 | | | 103 | | | 96 | |
| Other operating (income) expense, net | (2) | | | 9 | | | (95) | |
| Total operating costs and expenses, net | 8,407 | | | 7,466 | | | 6,495 | |
| | | | | |
| Operating income | 2,381 | | | 1,971 | | | 1,231 | |
| | | | | |
| Other income (expense): | | | | | |
| Interest expense, net | (151) | | | (163) | | | (175) | |
| Other income, net | 369 | | | 76 | | | 20 | |
| Total non-operating income (expense), net | 218 | | | (87) | | | (155) | |
| | | | | |
Income from continuing operations before income taxes and equity in earnings of equity method investees | 2,599 | | | 1,884 | | | 1,076 | |
| Income tax expense | (597) | | | (460) | | | (247) | |
Equity in earnings of equity method investees, net of taxes | 78 | | | 75 | | | 57 | |
| | | | | |
| | | | | |
| Income from continuing operations | 2,080 | | | 1,499 | | | 886 | |
| Income from discontinued operations, net of taxes | — | | | — | | | 20 | |
| Net income | 2,080 | | | 1,499 | | | 906 | |
| Less: Net income attributable to noncontrolling interests | 85 | | | 68 | | | 48 | |
| Net income attributable to Quest Diagnostics | $ | 1,995 | | | $ | 1,431 | | | $ | 858 | |
| | | | | |
| Amounts attributable to Quest Diagnostics’ common stockholders: | | | | | |
| Income from continuing operations | $ | 1,995 | | | $ | 1,431 | | | $ | 838 | |
| Income from discontinued operations, net of taxes | — | | | — | | | 20 | |
| Net income | $ | 1,995 | | | $ | 1,431 | | | $ | 858 | |
| | | | | |
Earnings per share attributable to Quest Diagnostics’ common stockholders - basic: | | | | | |
| Income from continuing operations | $ | 15.85 | | | $ | 10.62 | | | $ | 6.21 | |
| Income from discontinued operations | — | | | — | | | 0.15 | |
| Net income | $ | 15.85 | | | $ | 10.62 | | | $ | 6.36 | |
| | | | | |
Earnings per share attributable to Quest Diagnostics’ common stockholders - diluted: | | | | | |
| Income from continuing operations | $ | 15.55 | | | $ | 10.47 | | | $ | 6.13 | |
| Income from discontinued operations | — | | | — | | | 0.15 | |
| Net income | $ | 15.55 | | | $ | 10.47 | | | $ | 6.28 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
The accompanying notes are an integral part of these statements.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
(in millions)
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| | | | | |
| Net income | $ | 2,080 | | | $ | 1,499 | | | $ | 906 | |
| | | | | |
| Other comprehensive income (loss): | | | | | |
| Foreign currency translation adjustment | 13 | | | 15 | | | 7 | |
| Net change in available-for-sale debt securities, net of taxes | (7) | | | — | | | 8 | |
| Net deferred gain on cash flow hedges, net of taxes | 1 | | | 3 | | | 5 | |
| | | | | |
| Other comprehensive income | 7 | | | 18 | | | 20 | |
| | | | | |
| Comprehensive income | 2,087 | | | 1,517 | | | 926 | |
| Less: Comprehensive income attributable to noncontrolling interests | 85 | | | 68 | | | 48 | |
| Comprehensive income attributable to Quest Diagnostics | $ | 2,002 | | | $ | 1,449 | | | $ | 878 | |
The accompanying notes are an integral part of these statements.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
(in millions)
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 2,080 | | | $ | 1,499 | | | $ | 906 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 408 | | | 361 | | | 329 | |
| Provision for credit losses | 4 | | | 19 | | | 11 | |
| Deferred income tax (benefit) provision | (57) | | | 85 | | | 15 | |
| Stock-based compensation expense | 79 | | | 97 | | | 56 | |
| Gain on disposition of joint venture | (314) | | | — | | | — | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Losses (gains) on sale of property, plant and equipment | 9 | | | 3 | | | (70) | |
| Other, net | (63) | | | (81) | | | (39) | |
| Changes in operating assets and liabilities: | | | | | |
| Accounts receivable | 81 | | | (455) | | | (63) | |
| Accounts payable and accrued expenses | 35 | | | 452 | | | 73 | |
| | | | | |
| Income taxes payable | (20) | | | 22 | | | 29 | |
| Termination of interest rate swap agreements | — | | | 40 | | | — | |
| Other assets and liabilities, net | (9) | | | (37) | | | (4) | |
| Net cash provided by operating activities | 2,233 | | | 2,005 | | | 1,243 | |
| | | | | |
| Cash flows from investing activities: | | | | | |
| Business acquisitions, net of cash acquired | (331) | | | (330) | | | (58) | |
| Proceeds from disposition of joint venture | 755 | | | — | | | — | |
| | | | | |
| Proceeds from disposition of property, plant, and equipment | 3 | | | 3 | | | 91 | |
| Capital expenditures | (403) | | | (418) | | | (400) | |
| | | | | |
| Increase in investments and other assets, net | (3) | | | (27) | | | (44) | |
| Net cash provided by (used in) investing activities | 21 | | | (772) | | | (411) | |
| | | | | |
| Cash flows from financing activities: | | | | | |
| Proceeds from borrowings | — | | | 749 | | | 2,281 | |
| Repayments of debt | (2) | | | (1,554) | | | (1,449) | |
| Purchases of treasury stock | (2,199) | | | (325) | | | (353) | |
| Exercise of stock options | 129 | | | 189 | | | 119 | |
Employee payroll tax withholdings on stock issued under stock-based compensation plans | (22) | | | (15) | | | (16) | |
| Dividends paid | (309) | | | (297) | | | (286) | |
| Distributions to noncontrolling interest partners | (99) | | | (58) | | | (54) | |
| | | | | |
| | | | | |
| | | | | |
| Other financing activities, net | (38) | | | 44 | | | (17) | |
| Net cash (used in) provided by financing activities | (2,540) | | | (1,267) | | | 225 | |
| | | | | |
| Net change in cash and cash equivalents and restricted cash | (286) | | | (34) | | | 1,057 | |
| | | | | |
| Cash and cash equivalents and restricted cash, beginning of year | 1,158 | | | 1,192 | | | 135 | |
| Cash and cash equivalents and restricted cash, end of year | $ | 872 | | | $ | 1,158 | | | $ | 1,192 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
The accompanying notes are an integral part of these statements.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
(in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quest Diagnostics Stockholders’ Equity | | | | | |
| Shares of
Common
Stock Out-
standing | Common
Stock | Additional
Paid-In
Capital | Retained
Earnings | Accumulated
Other
Comprehensive
Loss | Treasury
Stock, at
Cost | Non-
controlling
Interests | Total Stock-holders’
Equity | | | Redeemable Non-controlling Interest |
| Balance, December 31, 2018 | 135 | | $ | 2 | | $ | 2,667 | | $ | 7,602 | | $ | (59) | | $ | (4,996) | | $ | 51 | | $ | 5,267 | | | | $ | 77 | |
| Net income | | | | 858 | | | | 42 | | 900 | | | | 6 | |
| Other comprehensive income, net of tax | | | | | 20 | | | | 20 | | | | |
| Dividends declared | | | | (286) | | | | | (286) | | | | |
Distributions to noncontrolling interest partners | | | | | | | (47) | | (47) | | | | (7) | |
Issuance of common stock under benefit plans | | | 9 | | | | 15 | | | 24 | | | | |
Stock-based compensation expense | | | 55 | | | | 1 | | | 56 | | | | |
| Exercise of stock options | 2 | | | 7 | | | | 112 | | | 119 | | | | |
Shares to cover employee payroll tax withholdings on stock issued under stock-based compensation plans | | | (16) | | | | | | (16) | | | | |
| | | | | | | | | | | |
| Purchases of treasury stock | (4) | | | | | | (350) | | | (350) | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Balance, December 31, 2019 | 133 | | $ | 2 | | $ | 2,722 | | $ | 8,174 | | $ | (39) | | $ | (5,218) | | $ | 46 | | $ | 5,687 | | | | $ | 76 | |
| Net income | | | | 1,431 | | | | 53 | | 1,484 | | | | 15 | |
| Other comprehensive income, net of tax | | | | | 18 | | | | 18 | | | | |
| Dividends declared | | | | (302) | | | | | (302) | | | | |
Distributions to noncontrolling interest partners | | | | | | | (49) | | (49) | | | | (9) | |
Issuance of common stock under benefit plans | 1 | | | 11 | | | | 14 | | | 25 | | | | |
Stock-based compensation expense | | | 97 | | | | | | 97 | | | | |
| Exercise of stock options | 2 | | | 26 | | | | 163 | | | 189 | | | | |
Shares to cover employee payroll tax withholdings on stock issued under stock-based compensation plans | | | (15) | | | | | | (15) | | | | |
| | | | | | | | | | | |
| Purchases of treasury stock | (3) | | | | | | (325) | | | (325) | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Balance, December 31, 2020 | 133 | | $ | 2 | | $ | 2,841 | | $ | 9,303 | | $ | (21) | | $ | (5,366) | | $ | 50 | | $ | 6,809 | | | | $ | 82 | |
Net income | | | | 1,995 | | | | 72 | | 2,067 | | | | 13 | |
| Other comprehensive income, net of tax | | | | | 7 | | | | 7 | | | | |
Dividends declared | | | | (307) | | | | | (307) | | | | |
Distributions to noncontrolling interest partners | | | | | | | (83) | | (83) | | | | (16) | |
Issuance of common stock under benefit plans | | | (21) | | | | 47 | | | 26 | | | | |
Stock-based compensation expense | | | 79 | | | | | | 79 | | | | |
Exercise of stock options | 2 | | | 20 | | | | 109 | | | 129 | | | | |
Shares to cover employee payroll tax withholdings on stock issued under stock-based compensation plans | | | (10) | | | | (12) | | | (22) | | | | |
Purchases of treasury stock | (16) | | | | | | (2,222) | | | (2,222) | | | | |
| | | | | | | | | | | |
| Retirement of treasury stock | | | (649) | | (3,342) | | | 3,991 | | | — | | | | |
| | | | | | | | | | | |
| Balance, December 31, 2021 | 119 | | $ | 2 | | $ | 2,260 | | $ | 7,649 | | $ | (14) | | $ | (3,453) | | $ | 39 | | $ | 6,483 | | | | $ | 79 | |
The accompanying notes are an integral part of these statements.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions unless otherwise indicated)
1. DESCRIPTION OF BUSINESS
Background
Quest Diagnostics Incorporated and its subsidiaries ("Quest Diagnostics" or the "Company") empower people to take action to improve health outcomes. The Company uses its extensive database of clinical lab results to derive diagnostic insights that reveal new avenues to identify and treat disease, inspire healthy behaviors and improve healthcare management. The Company's diagnostic information services business ("DIS") provides information and insights based on the industry-leading menu of routine, non-routine and advanced clinical testing and anatomic pathology testing, and other diagnostic information services. The Company provides services to a broad range of customers, including patients, clinicians, hospitals, independent delivery networks ("IDNs"), health plans, employers, accountable care organizations ("ACOs"), and direct contract entities ("DCEs"). The Company offers the broadest access in the United States to diagnostic information services through its nationwide network of laboratories, patient service centers and phlebotomists in physician offices and the Company's connectivity resources, including call centers and mobile paramedics, nurses and other health and wellness professionals. The Company is the world's leading provider of diagnostic information services. The Company provides interpretive consultation with one of the largest medical and scientific staffs in the industry. The Company's Diagnostic Solutions businesses ("DS") are the leading provider of risk assessment services for the life insurance industry and offer healthcare organizations and clinicians robust information technology solutions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of all entities controlled by the Company through its direct or indirect ownership of a majority voting interest. Additionally, the consolidated financial statements include the accounts of variable interest entities (“VIEs”) in which the Company has a variable interest and for which the Company is the “primary beneficiary” as it has both: (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (2) the obligation to absorb losses of the VIE that potentially could be significant to the VIE or the right to receive benefits from the VIE that potentially could be significant to the VIE. All significant intercompany accounts and transactions are eliminated in consolidation.
Income attributable to the minority interest in the Company's majority owned and controlled consolidated subsidiaries is recorded as net income attributable to noncontrolling interests in the consolidated statements of operations and the noncontrolling interest is reflected as a separate component of consolidated stockholders' equity in the consolidated balance sheet.
Basis of Presentation
During the third quarter of 2006, the Company completed the wind down of Nichols Institute Diagnostics ("NID"), a test kit manufacturing subsidiary. The accompanying consolidated statements of operations and related disclosures report the results of NID as discontinued operations through 2019, at which point certain income tax contingencies related to NID were resolved. See Note 20 for a further discussion of discontinued operations.
Equity Method Investments
Investments in entities which the Company does not control, but in which it has a substantial ownership interest (generally between 20% and 49%) and can exercise significant influence, are accounted for using the equity method of accounting. These investments are classified as investments in equity method investees in the consolidated balance sheet. The Company records its pro rata share of the earnings, adjusted for accretion of basis difference, of these investments in equity in earnings of equity method investees, net of taxes in the consolidated statements of operations. The Company reviews its investments in equity method investees for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“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. Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes as revenue the amount that reflects the consideration to which it expects to be entitled in exchange for goods sold or services rendered primarily upon completion of the testing process (when results are reported) or when services have been rendered (see Note 3). Net revenues from Medicare and Medicaid programs were approximately 10%, 11% and 15% of the Company's consolidated net revenues for the years ended December 31, 2021, 2020 and 2019, respectively.
Taxes on Income
The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Current and deferred income taxes are measured based on the tax laws that are enacted as of the balance sheet date of the relevant reporting period. Deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax bases using tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted. Tax benefits from uncertain tax positions are recognized only if the tax position is more likely than not to be sustained upon examination by taxing authorities based on the technical merits of the position.
Earnings Per Share
The Company's unvested restricted stock units that contain non-forfeitable rights to dividends are participating securities and, therefore, are included in the earnings allocation in computing earnings per share using the two-class method. Basic earnings per common share is calculated by dividing net income attributable to Quest Diagnostics, adjusted for earnings allocated to participating securities, by the weighted average number of common shares outstanding. Diluted earnings per common share is calculated by dividing net income attributable to Quest Diagnostics, adjusted for earnings allocated to participating securities, by the weighted average number of common shares outstanding after giving effect to all potentially dilutive common shares outstanding during the period. Potentially dilutive common shares include the dilutive effect of outstanding stock options and performance share units granted under the Company's Amended and Restated Employee Long-Term Incentive Plan (“ELTIP”) and its Amended and Restated Non-Employee Director Long-Term Incentive Plan (“DLTIP”), as well as the dilutive effect of accelerated share repurchase agreements ("ASRs"), if applicable. Earnings allocable to participating securities include the portion of dividends declared as well as the portion of undistributed earnings during the period allocable to participating securities.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
Stock-Based Compensation
The Company measures stock-based compensation for equity awards at fair value on the date of grant and records stock-based compensation as a charge to earnings net of the estimated impact of forfeited awards. As such, the Company recognizes stock-based compensation cost only for those stock-based awards that are estimated to ultimately vest over their requisite service period, based on the vesting provisions of the individual grants. The cumulative effect on current and prior periods of a change in the estimated forfeiture rate is recognized as compensation cost in earnings in the period of the change. The terms of the Company's performance share units allow the recipients of such awards to earn a variable number of shares based on the achievement of the performance goals, which are based on the financial performance of the Company and the total shareholder return of the Company relative to an index of peer companies ("relative TSR"), specified in the awards. For performance share units with a goal based on the financial performance of the Company, stock-based compensation expense is recognized based on management's best estimates of the achievement of the performance goals specified in such awards and the resulting number of shares that will be earned. The cumulative effect on current and prior periods of a change in the estimated number of performance share units expected to be earned for these awards is recognized as compensation cost in earnings in the period of the change. For performance share units with a market-based relative TSR goal, stock-based compensation expense is recognized based on the estimated fair value of the award regardless of the actual number of shares earned. For further details regarding stock-based compensation, see Note 17.
Fair Value Measurements
The Company determines fair value measurements used in its consolidated financial statements based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants exclusive of any transaction costs, as determined by either the principal market or the most advantageous market.
Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy. The basis for fair value measurements for each level within the hierarchy is described below with Level 1 having the highest priority and Level 3 having the lowest.
Level 1: Quoted prices in active markets for identical assets or liabilities.
Level 2: Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.
Level 3: Valuations derived from valuation techniques in which one or more significant inputs are unobservable.
Foreign Currency
The Company predominately uses the U.S. dollar as its functional currency. The functional currency of the Company's foreign operating subsidiaries generally is the applicable local currency. Assets and liabilities denominated in non-U.S. dollars are translated into U.S. dollars at exchange rates as of the end of the reporting period. Income and expense items are translated at the average monthly exchange rates during the year. Resulting translation adjustments are recorded as a component of accumulated other comprehensive loss within stockholders' equity. Gains and losses from foreign currency transactions, which are denominated in a currency other than the functional currency, are included within other operating (income) expense, net in the consolidated statements of operations. Foreign currency transaction gains and losses have historically not been material. The Company may be exposed to market risk for changes in foreign exchange rates primarily under certain intercompany receivables and payables. From time to time, the Company uses foreign exchange forward contracts to mitigate the exposure of the eventual net cash inflows or outflows resulting from these intercompany transactions. The Company's foreign exchange exposure is not material to the Company's consolidated financial condition. The Company does not hedge its net investment in non-U.S. subsidiaries because it views those investments as long-term in nature.
Cash and Cash Equivalents
Cash and cash equivalents include all highly-liquid investments with original maturities, at the time acquired by the Company, of three months or less.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk are principally cash, cash equivalents, short-term investments, accounts receivable and derivative financial instruments. The Company's policy is to place its cash, cash equivalents and short-term investments in highly-rated financial instruments and institutions. Concentration of credit risk with respect to accounts receivable is mitigated by the diversity of the Company's payers and their dispersion across many different geographic regions, and credit risk is concentrated among certain payers who are large buyers of the Company's services. To reduce risk, the Company routinely assesses the financial strength of these payers and, consequently, believes that its accounts receivable credit risk exposure, with respect to these payers, is limited. While the Company has receivables due from federal and state governmental agencies, the Company does not believe that such receivables represent a credit risk since the related healthcare programs are funded by federal and state governments, and payment is primarily dependent on submitting appropriate documentation timely. As of both December 31, 2021 and 2020, receivables due from government payers under the Medicare and Medicaid programs represented approximately 6% of the Company's consolidated net accounts receivable. The portion of the Company's accounts receivable due from patients comprises the largest portion of credit risk. As of December 31, 2021 and 2020, receivables due from patients represented approximately 21% and 11%, respectively, of the Company's consolidated net accounts receivable. The Company applies assumptions and judgments including historical collection experience (including the period of time that the receivables have been outstanding) for assessing collectability and determining net revenues and accounts receivable from patients.
Accounts Receivable and Allowance for Credit Losses
Accounts receivable are reported net of allowances for credit losses.
When estimating its allowance for credit losses, the Company pools its trade receivables based on the following customer types: healthcare insurers, government payers, client payers and patients, which are described in Note 3. The Company principally estimates the allowance for credit losses by pool based on historical collection experience, the current credit worthiness of the customers, current economic conditions, expectations of future economic conditions and the period of time that the receivables have been outstanding. To the extent that any individual payers are identified that have deteriorated in credit quality, the Company removes the customers from their respective pools and establishes allowances based on the individual risk characteristics of such customers.
Inventories
Inventories, which consist principally of finished goods testing supplies and reagents, are valued at the lower of cost (first in, first out method) or net realizable value.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Major renewals and improvements are capitalized, while maintenance and repairs are expensed as incurred. Costs incurred for computer software developed or obtained for internal use are capitalized for application development activities and expensed as incurred for preliminary project activities and post-implementation activities. Capitalized costs include external direct costs of materials and services consumed in developing or obtaining internal-use software, payroll and payroll-related costs for employees who are directly associated with the internal-use software project, and interest costs incurred, when material, while developing internal-use software. Capitalization of such costs ceases when the project is substantially complete and ready for its intended purpose. Costs for maintenance and training are expensed as incurred. The Company capitalizes interest on borrowings during the active construction period of major capital projects. Capitalized interest is added to the cost of the underlying assets and is amortized over the expected useful lives of the assets. Depreciation and amortization are provided on the straight-line method over expected useful asset lives as of December 31, 2021 as follows:
•buildings and improvements, ranging up to thirty-one and a half years;
•laboratory equipment and furniture and fixtures, ranging from five to twelve years;
•leasehold improvements, the lesser of the useful life of the improvement or the remaining life of the building or lease, as applicable; and
•computer software developed or obtained for internal use, five to ten years.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
Goodwill
Goodwill represents the excess of the fair value of the acquiree (including the fair value of non-controlling interests) over the recognized bases of the net identifiable assets acquired and includes the future economic benefits from other assets that could not be individually identified and separately recognized. Goodwill is not amortized, but instead is periodically reviewed for impairment and an impairment charge is recorded in the periods in which the recorded carrying value of goodwill exceeds its fair value.
On a quarterly basis, the Company performs a review of its business to determine if events or changes in circumstances have occurred which could have a material adverse effect on the fair value of the Company and its goodwill. If such events or changes in circumstances were deemed to have occurred, the Company would perform an impairment test of goodwill as of the end of the quarter and record any noted impairment loss.
The goodwill test is performed at least annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The annual impairment test includes an option to perform a qualitative assessment of whether it is more likely than not that a reporting unit's fair value is less than its carrying value; the qualitative test may be performed prior to, or as an alternative to, performing a quantitative goodwill impairment test. If, after assessing the totality of events or circumstances, the Company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then the Company is required to perform the quantitative goodwill impairment test. Otherwise, no further analysis is required. Additionally, the Company's policy is to update the fair value calculation of its reporting units and perform the quantitative goodwill impairment test on a periodic basis.
The quantitative impairment test involves the comparison of the fair value of the reporting unit to its carrying value. The Company calculates the fair value of each reporting unit using either (i) a discounted cash flows analysis that converts future cash flow amounts into a single discounted present value amount or (ii) a market approach. The Company assesses the valuation methodology based upon the relevance and availability of the data at the time that the valuation is performed. The Company compares the estimate of fair value for the reporting unit to the carrying value of the reporting unit. If the carrying value is greater than the estimate of fair value, an impairment loss will be recognized in the amount of the excess.
The Company performs its annual impairment test during the fourth quarter of the fiscal year. For the year ended December 31, 2021, the Company performed a qualitative impairment test and, based on the totality of information available for the reporting units, the Company concluded that it was more-likely-than-not that the estimated fair values of the reporting units were greater than the carrying values of the reporting units and, as such, no further analysis was required. For the year ended December 31, 2020, in accordance with its policy to perform the quantitative test on a periodic basis, the Company updated the fair value calculation of its reporting units, performed the quantitative impairment test and concluded that goodwill was not impaired.
Intangible Assets
Intangible assets are recognized at fair value, as an asset apart from goodwill if the asset (i) arises from contractual or other legal rights, or (ii) is separable. Intangible assets, principally representing the cost of customer-related intangibles, non-competition agreements and technology acquired, are capitalized and amortized on the straight-line method over their expected useful lives, which generally range from five to twenty years. Intangible assets with indefinite useful lives, consisting principally of acquired tradenames, are not amortized, but instead are periodically reviewed for impairment.
The Company reviews indefinite-lived intangible assets periodically for impairment and an impairment charge is recorded in the periods in which the recorded carrying value of an indefinite-lived intangible asset is more than its estimated fair value. The indefinite-lived intangible asset impairment test is performed at least annually, or more frequently in the case of other events that indicate a potential impairment.
Based upon the Company’s most recent annual impairment tests completed during the fourth quarters of the years ended December 31, 2021 and 2020, the Company concluded that indefinite-lived intangible assets were not impaired.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
The Company reviews the recoverability of its long-lived assets (including amortizable intangible assets), other than goodwill and indefinite-lived intangible assets, when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. Evaluation of possible impairment is based on the Company's ability to recover the asset from the expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are less than the carrying amount of such asset, an impairment loss is recognized for the difference between the estimated fair value and carrying amount of the asset.
Investments
The Company's investments (except for those accounted for under the equity method of accounting) include:
•Equity investments with readily determinable fair values, including investments comprised mostly of strategic holdings in companies concentrated in the life sciences and healthcare industries (such investments, which previously did not have readily determinable fair values, became publicly-traded during the year ended December 31, 2021); as well as participant-directed investments of deferred employee compensation and related Company matching contributions held in trusts pursuant to the Company's supplemental deferred compensation plans (see Note 17). These investments are measured at fair value with both realized and unrealized gains and losses recorded in current earnings within other income, net in the consolidated statements of operations. For the years ended December 31, 2021, 2020 and 2019, gains from all equity investments with readily determinable fair values totaled $56 million, $8 million, and $10 million, respectively. The carrying values of these investments was $121 million at December 31, 2021, of which $44 million was included in prepaid expenses and other current assets and $77 million was included in other assets in the consolidated balance sheet. The carrying values of these investments was $67 million at December 31, 2020, which was included in other assets in the consolidated balance sheet.
•Equity investments that do not have readily determinable fair values, which consist of investments in preferred and common shares of privately held companies. These investments are measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes. The Company regularly evaluates these equity investments to determine if there are any indicators that the investment is impaired; no impairment charges were recognized related to these investments for the years ended December 31, 2021, 2020 and 2019. The carrying value of these investments was $4 million and $25 million at December 31, 2021 and 2020, respectively. Such amounts were included in other assets in the consolidated balance sheet.
•Available-for-sale debt securities of privately-held companies. These investments are measured at fair value with unrealized gains and losses presented in other comprehensive income (loss). The carrying amount of these investments was $1 million and $12 million at December 31, 2021 and 2020, respectively. Such amounts were included in other assets in the consolidated balance sheet.
Derivative Financial Instruments
The Company uses derivative financial instruments, from time to time, to manage its exposure to market risks for changes in interest rates and foreign currencies. This strategy includes the use of interest rate swap agreements, forward-starting interest rate swap agreements, interest rate lock agreements and foreign currency forward contracts to manage its exposure to movements in interest and currency rates. The Company has established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. These policies prohibit holding or issuing derivative financial instruments for speculative purposes. The Company does not enter into derivative financial instruments that contain credit risk-related contingent features or requirements to post collateral.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
Interest Rate Risk
The Company is exposed to interest rate risk on its cash and cash equivalents and its debt obligations. Interest income earned on cash and cash equivalents may fluctuate as interest rates change; however, due to their relatively short maturities, the Company does not hedge these assets or their investment cash flows and the impact of interest rate risk is not material. The Company's debt obligations consist of fixed-rate debt instruments and, from time to time, variable-rate debt instruments. The Company's primary objective is to achieve the lowest overall cost of funding while managing the variability in cash outflows within an acceptable range. In order to achieve this objective, the Company has historically entered into interest rate swap agreements. Interest rate swap agreements involve the periodic exchange of payments without the exchange of underlying principal or notional amounts. Net settlements between the counterparties are recognized as an adjustment to interest expense, net.
The Company accounts for these derivatives as either an asset or liability measured at its fair value. The fair value is based upon model-derived valuations in which all significant inputs are observable in active markets including certain financial information and certain assumptions regarding past, present and future market conditions. For a derivative instrument that has been formally designated as a fair value hedge, fair value gains or losses on the derivative instrument along with offsetting fair value gains or losses on the hedged item that are attributable to the risk being hedged are reported in other income, net in the consolidated statements of operations. For derivatives that have been formally designated as a cash flow hedge, the change in the fair value of the derivatives is recorded in accumulated other comprehensive loss. Upon maturity or early termination of an effective interest rate swap agreement designated as a cash flow hedge, unrealized gains or losses are deferred in stockholders' equity, as a component of accumulated other comprehensive loss, and are amortized as an adjustment to interest expense over the period during which the hedged forecasted transaction affects earnings, which is when the Company recognizes interest expense on the hedged cash flows. At inception and quarterly thereafter, the Company formally assesses whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in the fair value or cash flows of the hedged item. After the initial quantitative assessment, this analysis is initially performed on a qualitative basis and, if it is determined that the hedging relationship was and continues to be highly effective, no further analysis is required. All components of each derivative financial instrument's gain or loss are included in the assessment of hedge effectiveness. If it is determined that a derivative ceases to be a highly effective hedge, the Company discontinues hedge accounting and any deferred gains or losses related to a discontinued cash flow hedge shall continue to be reported in accumulated other comprehensive loss, unless it is probable that the forecasted transaction will not occur. If it is probable that the forecasted transaction will not occur by the originally specified time period, the Company discontinues hedge accounting and any deferred gains or losses reported in accumulated other comprehensive loss are classified into earnings immediately.
Comprehensive Income (Loss)
Comprehensive income (loss) encompasses all changes in stockholders' equity (except those arising from transactions with stockholders) and includes:
•Foreign currency translation adjustments;
•Net deferred gains (losses) on cash flow hedges, which represent deferred gains (losses), net of tax, on interest rate-related derivative financial instruments designated as cash flow hedges, net of amounts reclassified to interest expense (see Notes 15 and 16); and
•Net changes in available-for-sale debt securities, which represent unrealized holding gains (losses), net of tax, on available-for-sale debt securities.
Advertising Costs
Advertising costs are expensed as incurred. For the years ended December 31, 2021, 2020 and 2019, advertising costs were $78 million, $38 million and $18 million, respectively.
New Accounting Standards
New Accounting Standards To Be Adopted
In March 2020, the Financial Accounting Standards Board issued a new accounting standard which provides temporary optional guidance to ease the potential burden in accounting for reference rate reform due to the risk of cessation of
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
the London Interbank Offered Rate ("LIBOR"). The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The pronouncement is effective immediately and can be applied through December 31, 2022. The adoption of this standard is not expected to have a material impact on the Company’s consolidated results of operations, financial position or cash flows.
3. REVENUE RECOGNITION
DIS
Net revenues in the Company’s DIS business accounted for greater than 95% of the Company’s consolidated net revenues for the years ended December 31, 2021, 2020 and 2019 and are primarily comprised of a high volume of relatively low-dollar transactions. The DIS business, which provides clinical testing services and other services, satisfies its performance obligation and recognizes revenues primarily upon completion of the testing process (when results are reported) or when services have been rendered. The Company estimates the amount of consideration it expects to be entitled to receive from customer groups in exchange for providing services using the portfolio approach. These estimates include the impact of contractual allowances (including payer denials), and patient price concessions, as discussed below. The portfolios determined using the portfolio approach consist of the following groups of customers: healthcare insurers, government payers (Medicare and Medicaid programs), client payers and patients. Contracts with customers in the DIS business do not contain significant financing components based on the typical period of time between performance of services and collection of consideration.
The process for estimating revenues and the ultimate collection of accounts receivable involves significant judgment and estimation. The Company follows a standard process, which considers historical denial and collection experience and other factors (including the period of time that the receivables have been outstanding), to estimate contractual allowances and implicit price concessions, recording adjustments in the current period as changes in estimates. Further adjustments to the allowances, based on actual receipts, may be recorded upon settlement.
The following are descriptions of the DIS business’ portfolios:
Healthcare Insurers
Reimbursements from healthcare insurers are based on negotiated fee-for-service schedules and on capitated payment rates. Under fee-for-service arrangements, healthcare insurers are billed at the Company's list price. Net revenues recognized consist of amounts billed net of contractual allowances for differences between amounts billed and the estimated consideration the Company expects to receive from such payers, which considers historical denial and collection experience and the terms of the Company’s contractual arrangements.
Collection of the Company's net revenues from healthcare insurers is normally a function of providing complete and correct billing information to the healthcare insurers within the various filing deadlines and generally occurs within 30 to 60 days of billing. Provided the Company has billed healthcare insurers accurately with complete information prior to the established filing deadline, there has historically been little to no credit risk. If there has been a delay in billing, the Company determines if the amounts in question will likely go past the filing deadline, and if so, it will reserve accordingly for the billing.
Under capitated arrangements with healthcare insurers, the Company recognizes revenue based on a predetermined monthly reimbursement rate for each member of an insurer's health plan regardless of the number or cost of services provided by the Company. Healthcare insurers typically reimburse the Company under capitated arrangements in the same month services are performed, essentially giving rise to no outstanding accounts receivable at the end of a reporting period. If any capitated payments are not received on a timely basis, the Company determines the cause and makes a separate determination as to whether or not the collection of the amount from the healthcare insurer is at risk and, if so, would reserve accordingly.
Government Payers
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
Reimbursements from government payers are based on fee-for-service schedules set by governmental authorities, including traditional Medicare and Medicaid. Net revenues recognized consist of amounts billed net of contractual allowances for differences between amounts billed and the estimated consideration the Company expects to receive from such payers, which considers historical denial and collection experience and other factors.
Collection of the Company's net revenues from government payers is normally a function of providing the complete and correct billing information within the various filing deadlines and generally occurs within 30 days of billing. Provided the Company has billed government payers accurately with complete information prior to the established filing deadline, there has historically been little to no credit risk. If there has been a delay in billing, the Company determines if the amounts in question will likely go past the filing deadline, and, if so, it will reserve for the billing accordingly.
Client Payers
Client payers include physicians, hospitals, ACOs, DCEs, IDNs, employers, other commercial laboratories and institutions for which services are performed on a wholesale basis, and are billed based on negotiated fee schedules. Credit risk and ability to pay are more of a consideration for these payers than healthcare insurers and government payers. Collection of consideration the Company expects to receive generally occurs within 60 to 90 days of billing.
The Company principally estimates the allowance for credit losses for client payers based on historical collection experience, the current credit worthiness of the customers, current economic conditions, expectations of future economic conditions and the period of time that the receivables have been outstanding. To the extent that any individual client payers are identified that have deteriorated in credit quality, the Company establishes allowances based on the individual risk characteristics of such customers.
Patients
Uninsured patients are billed based on established patient fee schedules or fees negotiated with physicians on behalf of their patients. Insured patients (includes coinsurance and deductible responsibilities) are billed based on fees negotiated with healthcare insurers. Collection of billings from patients is subject to credit risk and ability of the patients to pay. Net revenues consist of amounts billed net of discounts provided to uninsured patients in accordance with the Company’s policies and implicit price concessions. Implicit price concessions represent differences between amounts billed and the estimated consideration the Company expects to receive from patients, which considers historical collection experience (including the period of time that the receivables have been outstanding) and other factors including current market conditions. Patient billings are generally fully reserved for when the related service reaches 210 days outstanding. Balances are automatically written off when they are sent to collection agencies. Allowances are further adjusted for estimated recoveries of amounts sent to collection agencies based on historical collection experience, which is regularly monitored. Collection of consideration the Company expects to receive generally occurs within 30 to 60 days of billing.
DS
The Company’s DS businesses primarily satisfy their performance obligations and recognize revenues when delivery has occurred or services have been rendered. Collection of consideration the Company expects to receive generally occurs within 30 to 60 days of billing.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
The approximate percentage of net revenue by type of customer was as follows:
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2021 | | 2020 | | 2019 | | |
| Healthcare insurers: | | | | | | | |
| Fee-for-service | 39 | % | | 34 | % | | 33 | % | | |
| Capitated | 3 | | | 3 | | | 3 | | | |
| Total healthcare insurers | 42 | | | 37 | | | 36 | | | |
| Government payers | 10 | | | 11 | | | 15 | | | |
| Client payers | 33 | | | 38 | | | 32 | | | |
| Patients | 12 | | | 11 | | | 13 | | | |
| Total DIS | 97 | | | 97 | | | 96 | | | |
| DS | 3 | | | 3 | | | 4 | | | |
| Net revenues | 100 | % | | 100 | % | | 100 | % | | |
For the years ended December 31, 2021, 2020 and 2019, substantially all of the Company’s services were provided within the United States, see Note 19.
The approximate percentage of net accounts receivable by type of customer as of December 31, 2021 and 2020 was as follows:
| | | | | | | | | | | |
| 2021 | | 2020 |
| | | |
| Healthcare insurers | 32% | | 34% |
| Government payers | 6 | | 6 |
| Client payers | 38 | | 46 |
| Patients (including coinsurance and deductible responsibilities) | 21 | | 11 |
| Total DIS | 97 | | 97 |
| DS | 3 | | 3 |
| Net accounts receivable | 100% | | 100% |
The following table summarizes the activity for the Company's allowance for credit losses during the years ended December 31, 2021 and 2020, which principally relates to client payers:
| | | | | | | |
| Allowance for Credit Losses | | |
| | | |
| Balance, January 1, 2020 | $ | 15 | | | |
| Provision for credit losses | 19 | | |
| Write-offs of accounts receivable, net of recoveries | (6) | | | |
| Balance, December 31, 2020 | 28 | | | |
| Provision for credit losses | 4 | | | |
| Write-offs of accounts receivable, net of recoveries | (1) | | | |
Balance, December 31, 2021 | $ | 31 | | | |
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
4. EARNINGS PER SHARE
The computation of basic and diluted earnings per common share is as follows (in millions, except per share data):
| | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
| Amounts attributable to Quest Diagnostics’ common stockholders: | | | | | |
| Income from continuing operations | $ | 1,995 | | | $ | 1,431 | | | $ | 838 | |
| Income from discontinued operations, net of taxes | — | | | — | | | 20 | |
| Net income attributable to Quest Diagnostics' common stockholders | $ | 1,995 | | | $ | 1,431 | | | $ | 858 | |
| | | | | |
| Income from continuing operations | $ | 1,995 | | | $ | 1,431 | | | $ | 838 | |
| Less: Earnings allocated to participating securities | 7 | | | 6 | | | 3 | |
Earnings available to Quest Diagnostics’ common stockholders – basic and diluted | $ | 1,988 | | | $ | 1,425 | | | $ | 835 | |
| | | | | |
| Weighted average common shares outstanding – basic | 125 | | | 134 | | | 134 | |
| Effect of dilutive securities: | | | | | |
| Stock options and performance share units | 3 | | | 2 | | | 2 | |
| Weighted average common shares outstanding – diluted | 128 | | | 136 | | | 136 | |
| | | | | |
Earnings per share attributable to Quest Diagnostics’ common stockholders - basic: | | | | | |
| Income from continuing operations | $ | 15.85 | | | $ | 10.62 | | | $ | 6.21 | |
| Income from discontinued operations | — | | | — | | | 0.15 | |
| Net income | $ | 15.85 | | | $ | 10.62 | | | $ | 6.36 | |
| | | | | |
| Earnings per share attributable to Quest Diagnostics’ common stockholders - diluted: | | | | | |
| Income from continuing operations | $ | 15.55 | | | $ | 10.47 | | | $ | 6.13 | |
| Income from discontinued operations | — | | | — | | | 0.15 | |
| Net income | $ | 15.55 | | | $ | 10.47 | | | $ | 6.28 | |
In April 2021, the Company entered into ASRs with several financial institutions to repurchase $1.5 billion of the Company's common stock as part of the Company's share repurchase program. See Note 16 for further details.
The following securities were not included in the calculation of diluted earnings per share due to their antidilutive effect:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| | | | | |
| Stock options and performance share units | — | | | 1 | | | 3 | |
5. BUSINESS ACQUISITIONS
2021 Acquisitions
During 2021, the Company completed acquisitions for an aggregate purchase price of $336 million, net of cash acquired, including the acquisitions discussed below. The 2021 acquisitions resulted in goodwill of $228 million, of which $223 million is deductible for tax purposes. These acquisitions also resulted in $104 million of intangible assets, principally comprised of customer-related intangible assets.
Acquisition of the outreach laboratory services business of Mercy Health
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
On June 1, 2021, the Company completed the acquisition of the outreach laboratory services business of Mercy Health ("Mercy Health"), which serves providers and patients in Arkansas, Kansas, Missouri and Oklahoma, in an all-cash transaction for $225 million. Based on the preliminary purchase price allocation, which may be revised as additional information becomes available during the measurement period, the assets acquired primarily consist of $54 million of customer-related intangible assets and $171 million of tax-deductible goodwill. The intangible assets are being amortized over a useful life of 15 years.
Acquisition of assets of Labtech Diagnostics, LLC ("Labtech")
On December 13, 2021, the Company completed the acquisition of assets of Labtech, an independent clinical diagnostic laboratory provider serving physicians and patients primarily in South Carolina, North Carolina, Florida and Georgia, in an all cash transaction for $85 million, which consisted of cash consideration of $80 million and contingent consideration initially estimated at $5 million. The contingent consideration arrangement is dependent upon the achievement of certain testing volume benchmarks. Based on the preliminary purchase price allocation, which may be revised as additional information becomes available during the measurement period, the assets acquired and liabilities assumed consist of $41 million of intangible assets, $40 million of goodwill (of which $35 million is tax deductible), $11 million of property, plant and equipment, $9 million of finance lease liabilities, $6 million of operating lease right-of-use assets, $6 million of operating lease liabilities, and $2 million of inventories. The intangible assets consist primarily of customer-related assets which are being amortized over a useful life of 15 years.
2020 Acquisitions
During 2020, the Company completed acquisitions for an aggregate purchase price of $330 million, net of cash acquired, including the acquisitions discussed below. The 2020 acquisitions resulted in goodwill of $247 million, of which $210 million is deductible for tax purposes. These acquisitions also resulted in $146 million of intangible assets, principally comprised of customer-related and technology intangible assets. Net revenues attributable to the 2020 acquisitions were $127 million for the year ended December 31, 2020.
Acquisition of Blueprint Genetics Oy
On January 21, 2020, the Company completed the acquisition of Blueprint Genetics Oy ("Blueprint Genetics"), in an all cash transaction for $108 million, net of $3 million cash acquired. Blueprint Genetics is a leading specialty genetic testing company with expertise in gene variant interpretation based on next generation sequencing and proprietary bioinformatics. Through the acquisition, the Company acquired all of Blueprint Genetics' operations. Based on the purchase price allocation, the assets acquired and liabilities assumed primarily consist of $66 million of tax-deductible goodwill, $43 million of intangible assets, and $2 million of property, plant and equipment and working capital. The intangible assets primarily consist of technology and customer-related assets which are being amortized over a useful life of 10 years and 15 years, respectively.
Acquisition of the Outreach Laboratory Services Business of Memorial Hermann Health System
On April 6, 2020, the Company completed the acquisition of select assets which constitute substantially all of the operations of Memorial Hermann Diagnostic Laboratories, the outreach laboratory division of Memorial Hermann Health System ("Memorial Hermann"), in an all cash transaction for $120 million. Memorial Hermann is a not-for-profit health system in Southeast Texas. Based on the purchase price allocation, the assets acquired primarily consist of $27 million of customer-related intangible assets and $93 million of tax-deductible goodwill. The intangible assets are being amortized over a useful life of 15 years.
Acquisition of the Remaining 56% Interest in Mid America Clinical Laboratories, LLC
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
On August 1, 2020, the Company completed the acquisition of the remaining 56% interest in Mid America Clinical Laboratories, LLC ("MACL") from its joint venture partners in an all cash transaction for $93 million, net of $18 million cash acquired. MACL is the largest independent clinical laboratory provider in Indiana. Prior to the acquisition, the Company accounted for its 44% interest in MACL as an equity method investment, which was remeasured to its fair value of $87 million on the acquisition date, resulting in a gain of $70 million that was recognized in other income, net in the consolidated statements of operations. The fair value of the previously held equity interest was determined using a discounted cash flow analysis that took into account, among other items, MACL's expected future cash flows, long-term growth rate (1.5%), and a discount rate commensurate with economic risk (7.5%). Based on the purchase price allocation, the assets acquired and liabilities assumed consist of $84 million of goodwill (of which $47 million is tax-deductible), $74 million of intangible assets, $11 million of working capital and $11 million of property, plant and equipment. The intangible assets consist of customer-related assets which are being amortized over a useful life of 15 years. As a result of the acquisition, MACL became a wholly owned subsidiary of the Company.
2019 Acquisitions
During 2019, the Company completed acquisitions for an aggregate purchase price of $63 million, including the acquisition discussed below. The 2019 acquisitions resulted in goodwill of $43 million, of which $36 million is deductible for tax purposes. These acquisitions also resulted in $21 million of intangible assets, principally comprised of customer-related intangible assets.
Acquisition of the Clinical Laboratory Services Business of Boyce & Bynum Pathology Laboratories, P.C.
On February 11, 2019, the Company completed the acquisition of certain assets of the clinical laboratory services business of Boyce & Bynum Pathology Laboratories, P.C. in an all cash transaction for $61 million, which consisted of cash consideration of $55 million and contingent consideration initially estimated at $6 million. The contingent consideration arrangement was dependent upon the achievement of certain testing volume benchmarks. During 2019, the liability was reduced to $0 as a result of updated testing volume forecasts for the earn-out period compared to the testing volume target included in the contingent consideration arrangement, resulting in a $6 million gain recorded in other operating (income) expense, net. Based on the purchase price allocation, the assets acquired principally consist of $41 million of goodwill (of which $35 million is tax deductible) and $20 million of customer-related intangible assets. The intangible assets are being amortized over a useful life of 15 years.
General Information
The acquisitions described above were accounted for under the acquisition method of accounting. As such, the assets acquired and liabilities assumed are recorded based on their estimated fair values as of the closing date. Supplemental pro forma combined financial information has not been presented as the impact of the acquisitions is not material to the Company's consolidated financial statements. The goodwill recorded primarily includes the expected synergies resulting from combining the operations of the acquired entities with those of the Company and the value associated with an assembled workforce and other intangible assets that do not qualify for separate recognition. All of the goodwill acquired in connection with these acquisitions has been allocated to the Company's DIS business. For further details regarding business segment information, see Note 19.
6. DISPOSITION
On April 1, 2021, the Company sold its 40% ownership interest in Q2 Solutions® ("Q2 Solutions"), its clinical trials central laboratory services joint venture, to IQVIA Holdings, Inc. ("IQVIA"), its joint venture partner, for $760 million in an all-cash transaction. The sales price is subject to customary post-closing adjustments. Prior to the transaction, the Company accounted for its minority interest as an equity method investment. As a result of the transaction, during the year ended December 31, 2021, the Company recorded a $314 million pre-tax gain in other income, net in the consolidated statement of operations based on the difference between the net sales proceeds and the carrying value of the investment, including $20 million of cumulative translation losses which were previously recorded in accumulated other comprehensive loss. During the year ended December 31, 2021, the Company also recorded $55 million of income tax expense related to the gain, consisting of $127 million of current income tax expense, partially offset by $72 million of deferred income tax benefit.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
Under a multi-year agreement, the Company will remain the strategic preferred laboratory provider for Q2 Solutions' clients, providing a range of lab testing capabilities to augment Q2 Solutions' core offerings and extend its industry leading suite of services.
7. FAIR VALUE MEASUREMENTS
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table provides a summary of the recognized assets and liabilities that are measured at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Basis of Fair Value Measurements |
| | | | | | | |
| Total | | Level 1 | | Level 2 | | Level 3 |
| December 31, 2021 | | | | | | | |
| Assets: | | | | | | | |
| Deferred compensation trading securities | $ | 77 | | | $ | 77 | | | $ | — | | | $ | — | |
| Cash surrender value of life insurance policies | 57 | | | — | | | 57 | | | — | |
| | | | | | | |
| Equity investments | 44 | | | 44 | | | — | | | — | |
| Available-for-sale debt securities | 1 | | | — | | | — | | | 1 | |
| | | | | | | |
| | | | | | | |
| Total | $ | 179 | | | $ | 121 | | | $ | 57 | | | $ | 1 | |
| | | | | | | |
| Liabilities: | | | | | | | |
| Deferred compensation liabilities | $ | 143 | | | $ | — | | | $ | 143 | | | $ | — | |
| | | | | | | |
| Contingent consideration | 5 | | | — | | | — | | | 5 | |
| | | | | | | |
| | | | | | | |
| Total | $ | 148 | | | $ | — | | | $ | 143 | | | $ | 5 | |
| | | | | | | |
| Redeemable noncontrolling interest | $ | 79 | | | $ | — | | | $ | — | | | $ | 79 | |
| | | | | | | |
| December 31, 2020 | | | | | | | |
| Assets: | | | | | | | |
| Deferred compensation trading securities | $ | 67 | | | $ | 67 | | | $ | — | | | $ | — | |
| Cash surrender value of life insurance policies | 50 | | | — | | | 50 | | | — | |
| | | | | | | |
| | | | | | | |
| Available-for-sale debt securities | 12 | | | — | | | — | | | 12 | |
| | | | | | | |
| Total | $ | 129 | | | $ | 67 | | | $ | 50 | | | $ | 12 | |
| | | | | | | |
| Liabilities: | | | | | | | |
| Deferred compensation liabilities | $ | 126 | | | $ | — | | | $ | 126 | | | $ | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Redeemable noncontrolling interest | $ | 82 | | | $ | — | | | $ | — | | | $ | 82 | |
The Company offers certain employees the opportunity to participate in a non-qualified supplemental deferred compensation plan. A participant's deferrals, together with Company matching credits, are invested in a variety of participant-directed stock and bond mutual funds that are classified as trading securities. The trading securities are classified within Level 1 of the fair value hierarchy because the changes in the fair value of these securities are measured using quoted prices in active markets based on the market price per unit multiplied by the number of units held, exclusive of any transaction costs. A corresponding adjustment for changes in fair value of the trading securities is also reflected in the changes in fair value of the deferred compensation obligation. The deferred compensation liabilities are classified within Level 2 of the fair value hierarchy because their inputs are derived principally from observable market data by correlation to the trading securities.
The Company offers certain employees the opportunity to participate in a non-qualified deferred compensation program. A participant's deferrals, together with Company matching credits, are “invested” at the direction of the employee in
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
a hypothetical portfolio of investments which are tracked by an administrator. The Company purchases life insurance policies, with the Company named as beneficiary of the policies, for the purpose of funding the program's liability. Changes in the cash surrender value of the life insurance policies are based upon earnings and changes in the value of the underlying investments. Changes in the fair value of the deferred compensation obligation are derived using quoted prices in active markets based on the market price per unit multiplied by the number of units. The cash surrender value and the deferred compensation obligation are classified within Level 2 of the fair value hierarchy because their inputs are derived principally from observable market data by correlation to the hypothetical investments. Deferrals under the plan currently may only be made by participants who made deferrals under the plan in 2017.
The Company's investment portfolio primarily includes equity investments comprised mostly of strategic holdings in companies concentrated in the life sciences and healthcare industries. Equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) with readily determinable fair values are measured at fair value in prepaid expenses and other current assets in the Company's consolidated balance sheet. Equity investments that do not have readily determinable fair values (which consist of investments in preferred and common shares of private companies) are measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes. During the year ended December 31, 2021, certain of the Company's equity investments became publicly traded. Such equity investments are now classified within Level 1 of the fair value hierarchy because the changes in the fair values of the securities are measured using quoted prices in active markets based on the market price per share multiplied by the number of shares held, exclusive of any transaction costs.
The Company's available-for-sale debt securities are measured at fair value using discounted cash flows. These fair value measurements are classified within Level 3 of the fair value hierarchy as the fair value is based on significant inputs that are not observable. Significant inputs include cash flows projections and a discount rate.
In connection with the acquisition of Labtech (see Note 5), the Company has a contingent consideration obligation of up to $20 million that is to be paid based on the achievement of certain testing volume benchmarks. As of December 31, 2021, the fair value of the contingent consideration liability totaled $5 million, which was measured at fair value using an option-pricing method and classified within Level 3 of the fair value hierarchy as the fair value was determined based on significant inputs that are not observable. Significant inputs include management’s estimate of volume and other market inputs, including comparable company revenue volatility (7.5%) and a discount rate (2.5%).
The following table provides a reconciliation of the beginning and ending balances of liabilities using significant unobservable inputs (Level 3):
| | | | | | | | | |
| Contingent Consideration | | | | |
| | | | | |
| Balance, December 31, 2019 | $ | 7 | | | | | |
| | | | | |
| Settlements | (6) | | | | | |
| Total fair value adjustments included in earnings - realized/unrealized | (1) | | | | | |
| | | | | |
| | | | | |
| | | | | |
| Balance, December 31, 2020 | — | | | | | |
| | | | | |
| Purchases, additions and issuances | 5 | | | | | |
| | | | | |
| | | | | |
| Balance, December 31, 2021 | $ | 5 | | | | | |
The $1 million net gain included in earnings associated with the changes in the fair value of contingent consideration for the year ended December 31, 2020 is reported in other operating (income) expense, net.
In connection with the sale of an 18.9% noncontrolling interest in a subsidiary to UMass Memorial Medical Center ("UMass") on July 1, 2015, the Company granted UMass the right to require the Company to purchase all of its interest in the subsidiary at fair value commencing July 1, 2020. As of December 31, 2021, the redeemable noncontrolling interest was presented at its fair value. The fair value measurement of the redeemable noncontrolling interest is classified within Level 3 of the fair value hierarchy because the fair value is based on a discounted cash flow analysis that takes into account, among other items, the joint venture's expected future cash flows, long-term growth rates, and a discount rate commensurate with economic risk.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
During the year ended December 31, 2021, the Company recorded an $8 million impairment charge, which is included in equity in earnings of equity method investees, net of taxes, in order to adjust to fair value an investment that is accounted for under the equity method of accounting. Following the impairment charge, the carrying value of the investment is not material. The fair value measurement was classified within Level 3 of the fair value hierarchy as it was based on significant inputs that are not observable, including cash flow projections.
The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable and accrued expenses approximate fair value based on the short maturities of these instruments. As of December 31, 2021 and 2020, the fair value of the Company’s debt was estimated at $4.4 billion and $4.6 billion, respectively. Principally all of the Company's debt is classified within Level 1 of the fair value hierarchy because the fair value of the debt is estimated based on rates currently offered to the Company with identical terms and maturities, using quoted active market prices and yields, taking into account the underlying terms of the debt instruments.
8. TAXES ON INCOME
The Company's pre-tax income from continuing operations before equity in earnings of equity method investees consisted of approximately 2.5 billion, $1.9 billion and $1.1 billion from U.S. operations and pre-tax income (loss) of $148 million, $(7) million and $15 million from foreign operations for the years ended December 31, 2021, 2020 and 2019, respectively.
Pre-tax income from continuing operations before equity in earnings of equity method investees for U.S. and foreign operations include pre-tax gains of $171 million and $143 million, respectively, from the sale of the Company's 40% ownership interest in Q2 Solutions. During the year ended December 31, 2021, the Company also recorded $55 million of income tax expense related to the gain, consisting of $127 million of current income tax expense, partially offset by $72 million of deferred income tax benefit.
The components of income tax expense (benefit) for 2021, 2020 and 2019 were as follows:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Current: | | | | | |
| Federal | $ | 528 | | | $ | 300 | | | $ | 176 | |
| State and local | 123 | | | 74 | | | 53 | |
| Foreign | 3 | | | 1 | | | 3 | |
| Deferred: | | | | | |
| Federal | (61) | | | 55 | | | 21 | |
| State and local | 5 | | | 29 | | | (4) | |
| Foreign | (1) | | | 1 | | | (2) | |
| Total | $ | 597 | | | $ | 460 | | | $ | 247 | |
A reconciliation of the federal statutory income tax rate to the Company's effective income tax rate for 2021, 2020 and 2019 was as follows:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| | | | | |
| Tax provision at statutory rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
| State and local income taxes, net of federal benefit | 4.1 | | | 4.5 | | | 4.6 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Impact of noncontrolling interests | (0.8) | | | (0.9) | | | (1.1) | |
| | | | | |
| Excess tax benefits on stock-based compensation arrangements | (0.7) | | | (1.2) | | | (1.2) | |
| Return to provision true-ups | (0.8) | | | (0.7) | | | (1.4) | |
| | | | | |
| | | | | |
| Impact of equity earnings | 0.6 | | | 0.8 | | | 1.1 | |
| Changes in reserves for uncertain tax positions | 0.4 | | | 0.9 | | | 1.7 | |
| Change in valuation allowances associated with certain net operating losses | — | | | 0.2 | | | (1.1) | |
| Other, net | (0.8) | | | (0.1) | | | (0.6) | |
| Effective tax rate | 23.0 | % | | 24.5 | % | | 23.0 | % |
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
For the year ended December 31, 2019, the Company recognized a $12 million net income tax benefit due to the release of valuation allowances associated with certain net operating loss carryforwards.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets (liabilities) as of December 31, 2021 and 2020 were as follows:
| | | | | | | | | | | |
| 2021 | | 2020 |
| Non-current deferred tax assets (liabilities): | | | |
| Accounts receivable reserves | $ | 89 | | | $ | 71 | |
| Liabilities not currently deductible | 180 | | | 146 | |
| Stock-based compensation | 32 | | | 47 | |
| | | |
| Basis differences in investments, joint ventures and subsidiaries | (12) | | | (81) | |
| Net operating loss carryforwards, net of valuation allowance | 42 | | | 61 | |
| Operating lease right-of-use assets | (150) | | | (151) | |
| Operating lease liabilities | 162 | | | 161 | |
| Depreciation and amortization | (633) | | | (604) | |
| Total non-current deferred tax liabilities, net | $ | (290) | | | $ | (350) | |
As of December 31, 2021 and 2020, non-current deferred tax liabilities of $290 million and $350 million, respectively, are included in other liabilities in the consolidated balance sheet.
As of December 31, 2021, the Company had estimated net operating loss carryforwards for federal and state income tax purposes of $31 million and $676 million, respectively, which expire at various dates through 2041. Estimated net operating loss carryforwards for foreign income tax purposes are $70 million as of December 31, 2021, some of which can be carried forward indefinitely while others expire at various dates through 2041. As of December 31, 2021 and 2020, deferred tax assets associated with net operating loss carryforwards of $71 million and $94 million, respectively, have each been reduced by valuation allowances of $29 million and $33 million, respectively.
Income taxes payable, including those classified as long-term in other liabilities in the consolidated balance sheet as of December 31, 2021 and 2020, were $106 million and $135 million, respectively. Prepaid income taxes were $36 million and $2 million as of December 31, 2021 and 2020, respectively, and were recorded in prepaid expenses and other current assets in the consolidated balance sheet.
The total amount of unrecognized tax benefits as of and for the years ended December 31, 2021, 2020 and 2019 consisted of the following:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| | | | | |
| Balance, beginning of year | $ | 93 | | | $ | 88 | | | $ | 107 | |
| Additions: | | | | | |
| For tax positions of current year | 1 | | | 2 | | | 2 | |
| For tax positions of prior years | 30 | | | 25 | | | 16 | |
| Reductions: | | | | | |
| Changes in judgment | (6) | | | (9) | | | (3) | |
| Expirations of statutes of limitations | (8) | | | (4) | | | (2) | |
| Settlements | — | | | (9) | | | (32) | |
| Balance, end of year | $ | 110 | | | $ | 93 | | | $ | 88 | |
The contingent liabilities for tax positions primarily relate to uncertainties associated with the realization of tax benefits derived from the allocation of income and expense among state jurisdictions, the characterization and timing of certain tax deductions associated with business combinations, certain tax credits and the deductibility of certain expenses and settlement payments.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
The total amount of unrecognized tax benefits as of December 31, 2021, that, if recognized, would affect the effective income tax rate is $90 million. Based upon the expiration of statutes of limitations, settlements and/or the conclusion of tax examinations, the Company believes it is reasonably possible that the total amount of unrecognized tax benefits may decrease by up to $15 million within the next twelve months.
Accruals for interest expense on contingent tax liabilities are classified in income tax expense in the consolidated statements of operations. Accruals for penalties have historically been immaterial. Interest (income) expense included in income tax expense in each of the years ended December 31, 2021, 2020 and 2019 was approximately $(2) million, $6 million and $5 million, respectively. As of December 31, 2021 and 2020, the Company had approximately $20 million and $21 million, respectively, accrued, net of the benefit of a federal and state deduction, for the payment of interest on uncertain tax positions.
The recognition and measurement of certain tax benefits includes estimates and judgment by management and inherently involves subjectivity. Changes in estimates may create volatility in the Company's effective tax rate in future periods and may be due to settlements with various tax authorities (either favorable or unfavorable), the expiration of the statute of limitations on certain tax positions and obtaining new information about particular tax positions that may cause management to change its estimates.
In the regular course of business, various federal, state, local and foreign tax authorities conduct examinations of the Company's income tax filings and the Company generally remains subject to examination until the statute of limitations expires for the respective jurisdiction. The Internal Revenue Service has either completed its examinations of the Company's consolidated federal income tax returns or the statute of limitations has expired up through and including the 2016 tax year. At this time, the Company does not believe that there will be any material additional payments beyond its recorded contingent liability reserves that may be required as a result of these tax audits. As of December 31, 2021, a summary of the tax years that remain subject to examination, awaiting approval, are under appeal, or are otherwise unresolved for the Company's major jurisdictions are:
United States - federal 2017 - 2020
United States - various states 2002 - 2020
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
9. SUPPLEMENTAL CASH FLOW AND OTHER DATA
Supplemental cash flow and other data for the years ended December 31, 2021, 2020 and 2019 was as follows:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| | | | | |
| Depreciation expense | $ | 305 | | | $ | 258 | | | $ | 233 | |
| Amortization expense | 103 | | | 103 | | | 96 | |
| Depreciation and amortization expense | $ | 408 | | | $ | 361 | | | $ | 329 | |
| | | | | |
| Interest expense | $ | (152) | | | $ | (166) | | | $ | (180) | |
| Interest income | 1 | | | 3 | | | 5 | |
| Interest expense, net | $ | (151) | | | $ | (163) | | | $ | (175) | |
| | | | | |
| Interest paid | $ | 159 | | | $ | 201 | | | $ | 192 | |
| Income taxes paid | $ | 709 | | | $ | 360 | | | $ | 202 | |
| | | | | |
| Accounts payable associated with capital expenditures | $ | 26 | | | $ | 46 | | | $ | 26 | |
| Accounts payable associated with purchases of treasury stock | $ | 23 | | | $ | — | | | $ | — | |
| Dividend payable | $ | 74 | | | $ | 76 | | | $ | 71 | |
| | | | | |
| Dividends received from equity method investees | $ | 60 | | | $ | 54 | | | $ | 48 | |
| | | | | |
| Businesses acquired: | | | | | |
| Fair value of assets acquired | $ | 354 | | | $ | 368 | | | $ | 63 | |
| Fair value of liabilities assumed | 18 | | | 17 | | | — | |
| Fair value of net assets acquired | 336 | | | 351 | | | 63 | |
| Merger consideration payable | (5) | | | — | | | (5) | |
| Cash paid for business acquisitions | 331 | | | 351 | | | 58 | |
| Less: Cash acquired | — | | | 21 | | | — | |
| Business acquisitions, net of cash acquired | $ | 331 | | | $ | 330 | | | $ | 58 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | 2021 | | 2020 | | 2019 |
| Leases: | | | | | | | | |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | |
| Operating cash flows from operating leases | | | | $ | 185 | | | $ | 185 | | | $ | 180 | |
| Operating cash flows from finance leases | | | | $ | 2 | | | $ | 3 | | | $ | 3 | |
| Financing cash flows from finance leases | | | | $ | 2 | | | $ | 3 | | | $ | 4 | |
| Leased assets obtained in exchange for new operating lease liabilities | | | | $ | 150 | | | $ | 219 | | | $ | 164 | |
| Leased assets obtained in exchange for new finance lease liabilities | | | | $ | — | | | $ | — | | | $ | 1 | |
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
10. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of December 31, 2021 and 2020 consisted of the following:
| | | | | | | | | | | |
| 2021 | | 2020 |
| | | |
| Land | $ | 43 | | | $ | 42 | |
| Buildings and improvements | 532 | | | 526 | |
| Laboratory equipment and furniture and fixtures | 2,009 | | | 1,974 | |
| Leasehold improvements | 705 | | | 666 | |
| Computer software developed or obtained for internal use | 1,292 | | | 1,209 | |
| Construction-in-progress | 214 | | | 202 | |
| 4,795 | | | 4,619 | |
| Less: Accumulated depreciation and amortization | (3,088) | | | (2,992) | |
| Total | $ | 1,707 | | | $ | 1,627 | |
For the year ended December 31, 2019, the Company recognized a $73 million gain in other operating (income) expense, net on the sale and leaseback of a property.
11. GOODWILL AND INTANGIBLE ASSETS
The changes in goodwill for the years ended December 31, 2021 and 2020 were as follows:
| | | | | | | | | | | |
| 2021 | | 2020 |
| | | |
| Balance, beginning of year | $ | 6,873 | | | $ | 6,619 | |
| Goodwill acquired during the year | 228 | | | 247 | |
| Adjustments to goodwill | (6) | | | 7 | |
| Balance, end of year | $ | 7,095 | | | $ | 6,873 | |
Principally all of the Company’s goodwill as of December 31, 2021 and 2020 was associated with its DIS business.
For the year ended December 31, 2021, goodwill acquired during the period was principally associated with the acquisitions of the assets of Mercy Health and assets of Labtech (see Note 5). For the year ended December 31, 2021, adjustments to goodwill related to foreign currency translation.
For the year ended December 31, 2020, goodwill acquired during the period was principally associated with the acquisitions of Blueprint Genetics, assets of Memorial Hermann and MACL (see Note 5). For the year ended December 31, 2020, adjustments to goodwill related to foreign currency translation.
Intangible assets as of December 31, 2021 and 2020 consisted of the following:
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Weighted
Average
Amortization
Period (in years) | | 2021 | | 2020 |
| | Cost | | Accumulated
Amortization | | Net | | Cost | | Accumulated
Amortization | | Net |
| Amortizing intangible assets: | | | | | | | | | | |
| Customer-related | 17 | | $ | 1,581 | | | $ | (726) | | | $ | 855 | | | $ | 1,479 | | | $ | (638) | | | $ | 841 | |
| Non-compete agreements | 9 | | 3 | | | (2) | | | 1 | | | 3 | | | (2) | | | 1 | |
| Technology | 14 | | 141 | | | (74) | | | 67 | | | 141 | | | (65) | | | 76 | |
| Other | 5 | | 109 | | | (101) | | | 8 | | | 108 | | | (95) | | | 13 | |
| Total | 17 | | 1,834 | | | (903) | | | 931 | | | 1,731 | | | (800) | | | 931 | |
| | | | | | | | | | | | | |
Intangible assets not subject to amortization: | | | | | | | | |
Trade names | | | 235 | | | — | | | 235 | | | 235 | | | — | | | 235 | |
| Other | | | 1 | | | — | | | 1 | | | 1 | | | — | | | 1 | |
Total intangible assets | | | $ | 2,070 | | | $ | (903) | | | $ | 1,167 | | | $ | 1,967 | | | $ | (800) | | | $ | 1,167 | |
The estimated amortization expense related to amortizable intangible assets for each of the five succeeding fiscal years and thereafter as of December 31, 2021 is as follows:
| | | | | |
| Year Ending December 31, | |
| 2022 | $ | 105 | |
| 2023 | 103 | |
| 2024 | 100 | |
| 2025 | 98 | |
| 2026 | 93 | |
| Thereafter | 432 | |
| Total | $ | 931 | |
12. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses as of December 31, 2021 and 2020 consisted of the following:
| | | | | | | | | | | |
| 2021 | | 2020 |
| | | |
| Accrued wages and benefits (including incentive compensation) | $ | 518 | | | $ | 502 | |
| Accrued expenses | 460 | | | 356 | |
| Trade accounts payable | 357 | | | 446 | |
| Overdrafts | 116 | | | 153 | |
| Dividend payable | 74 | | 76 | |
| Accrued insurance | 34 | | | 31 | |
| Accrued interest | 26 | | | 26 | |
| Income taxes payable | 10 | | | 43 | |
| Merger consideration payable | 5 | | | — | |
| Total | $ | 1,600 | | | $ | 1,633 | |
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
13. DEBT
Long-term debt (including finance lease obligations) as of December 31, 2021 and 2020 consisted of the following:
| | | | | | | | | | | |
| 2021 | | 2020 |
| | | |
4.25% Senior Notes due April 2024 | $ | 311 | | | $ | 316 | |
3.50% Senior Notes due March 2025 | 616 | | | 622 | |
3.45% Senior Notes due June 2026 | 510 | | | 512 | |
4.20% Senior Notes due June 2029 | 499 | | | 499 | |
2.95% Senior Notes due June 2030 | 798 | | | 798 | |
2.80% Senior Notes due June 2031 | 549 | | | 549 | |
6.95% Senior Notes due July 2037 | 175 | | | 175 | |
5.75% Senior Notes due January 2040 | 245 | | | 245 | |
4.70% Senior Notes due March 2045 | 300 | | | 300 | |
| Other | 34 | | | 27 | |
| Debt issuance costs | (25) | | | (28) | |
| Total long-term debt | 4,012 | | | 4,015 | |
| Less: Current portion of long-term debt | 2 | | | 2 | |
| Total long-term debt, net of current portion | $ | 4,010 | | | $ | 4,013 | |
Secured Receivables Credit Facility
During October 2021, the Company amended its $600 million secured receivables credit facility (the “Secured Receivables Credit Facility”), previously amended in October 2020, to extend the maturity dates for each underlying commitment by one year, while maintaining the borrowing capacity under the facility at $600 million. Under the Secured Receivables Credit Facility, the Company can borrow against a $250 million loan commitment maturing October 2022 and a $250 million loan commitment maturing October 2023, and can issue up to $100 million of letters of credit (see Note 18) through October 2023. Borrowings under the Secured Receivables Credit Facility are collateralized by certain domestic receivables. As of December 31, 2021, interest on the borrowings under the Secured Receivables Credit Facility was based on either commercial paper rates for highly-rated issuers or LIBOR, plus a spread of 0.725% to 0.80%. The Secured Receivables Credit Facility is subject to customary affirmative and negative covenants and certain financial covenants with respect to the receivables that comprise the borrowing base and secure the borrowings under the facility. As of both December 31, 2021 and 2020, there were no outstanding borrowings under the Secured Receivables Credit Facility.
Senior Unsecured Revolving Credit Facility
During November 2021, the Company amended and restated the agreement for its $750 million senior unsecured revolving credit facility (the “Credit Facility” or "Senior Unsecured Revolving Credit Facility") to extend the maturity date to November 2026 while maintaining the borrowing capacity under the facility at $750 million. Under the Credit Facility, the Company can issue letters of credit totaling $150 million (see Note 18). Issued letters of credit reduce the available borrowing capacity under the Credit Facility. Interest on the Credit Facility is based on certain published rates plus an applicable margin based on changes in the Company's public debt ratings. At the option of the Company, it may elect to lock into LIBOR-based interest rates for periods up to six months. Interest on any outstanding amounts not covered under LIBOR-based interest rate contracts is based on an alternate base rate, which is calculated by reference to the prime rate, the federal funds rate or an adjusted LIBOR rate. As of December 31, 2021, the Company's borrowing rate for LIBOR-based loans under the Credit Facility was LIBOR plus 1.00%. The Credit Facility contains various covenants, including the maintenance of a financial leverage ratio, which could impact the Company's ability to, among other things, incur additional indebtedness. As of both December 31, 2021 and 2020, there were no outstanding borrowings under the Senior Unsecured Revolving Credit Facility.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
Senior Notes Offerings
In May 2020, the Company completed a senior notes offering, consisting of $550 million aggregate principal amount of 2.80% senior notes due June 2031 (the “2031 Senior Notes”), which were issued at an original issue discount of $1 million. The Company incurred $5 million of debt issuance costs associated with the 2031 Senior Notes, which are included as a reduction to the carrying amount of long-term debt and which are being amortized over the term of the related debt.
During November 2020, the net proceeds from the 2031 Senior Notes, along with cash on hand, were used to redeem in full the outstanding indebtedness under the Company's senior notes due April 2021.
During January 2020, the Company redeemed in full the outstanding indebtedness under the Company's senior notes due January 2020 and senior notes due March 2020, using the net proceeds from the issuance, in December 2019, of the senior notes due June 2030.
For the year ended December 31, 2020, the Company recorded a loss on retirement of debt, principally comprised of premiums paid, of $9 million in other income, net.
All of the senior notes are unsecured obligations of the Company and rank equally with the Company's other senior unsecured obligations. None of the Company's senior notes have a sinking fund requirement.
The Company may redeem its outstanding senior notes prior to scheduled maturity, as a whole or in part, at a redemption price equal to the present value of the remaining scheduled payments of principal and interest, except for certain notes for which the Company also has an option to redeem such instruments at par value on or after dates specified in the indentures governing the notes ("the par value redemption option"). For notes with the par value redemption option, if such notes are redeemed prior to the specified dates, the redemption price calculations exclude any interest that would have been due after such dates.
Maturities of Long-Term Debt
As of December 31, 2021, long-term debt matures as follows:
| | | | | |
| Year Ending December 31, | |
| 2022 | $ | 2 | |
| 2023 | 2 | |
| 2024 | 303 | |
| 2025 | 603 | |
| 2026 | 503 | |
| Thereafter | 2,596 | |
| Total maturities of long-term debt | 4,009 | |
| Unamortized discount | (10) | |
| Debt issuance costs | (25) | |
| Fair value basis adjustments attributable to hedged debt | 38 | |
| Total long-term debt | 4,012 | |
| Less: Current portion of long-term debt | 2 | |
| Total long-term debt, net of current portion | $ | 4,010 | |
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
14. LEASES
The Company determines if an arrangement is or contains a lease at contract inception. The Company leases office space, patient service centers, clinical laboratories, warehouses, logistic hubs and equipment primarily through operating leases, with a limited number of finance leases. A right-of-use asset, representing the underlying asset during the lease term, and a lease liability, representing the payment obligation arising from the lease, are recognized on the balance sheet at lease commencement based on the present value of the payment obligation. For operating leases, expense is recognized on a straight-line basis over the lease term. For finance leases, interest expense on the lease liability is recognized using the effective interest method and amortization of the right-of-use asset is recognized on a straight-line basis over the shorter of the estimated useful life of the asset or the lease term. Short-term leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. For the years ended December 31, 2021, 2020, and 2019, lease expense associated with short-term leases was not material.
The Company primarily uses its collateralized incremental borrowing rate in determining the present value of lease payments as the Company's leases generally do not provide an implicit rate. Such incremental borrowing rates, which take into account interest rates offered to companies that have similar credit ratings to the Company, are determined using a portfolio approach which groups the Company’s leases based on tenor.
The Company has lease agreements with (i) right-of-use asset payments and (ii) non-lease components (i.e., payments related to maintenance fees, utilities, etc.) which have been combined and accounted for as a single lease component.
The Company's leases have remaining terms of less than 1 year to 15 years, some of which include options to extend the leases for up to 15 years. The Company's lease terms may include renewal options that are reasonably certain to be exercised and termination options that are reasonably certain not to be exercised. Certain leases also include options to purchase the leased property.
Certain of the Company's lease agreements include rental payments adjusted periodically for inflation or a market rate which are included in the lease liabilities.
The Company's assets and liabilities for its lease agreements as of December 31, 2021 and 2020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| Leases | | Balance Sheet Classification | | 2021 | | 2020 | | | | |
| Assets | | | | | | | | | | |
| Operating | | Operating lease right-of-use assets | | $ | 597 | | | $ | 604 | | | | | |
| Finance | | Property, plant and equipment, net (a) | | 29 | | | 22 | | | | | |
| Total lease assets | | | | $ | 626 | | | $ | 626 | | | | | |
| | | | | | | | | | |
| Liabilities | | | | | | | | | | |
| Current: | | | | | | | | | | |
| Operating | | Current portion of long-term operating lease liabilities | | $ | 151 | | | $ | 141 | | | | | |
| Finance | | Current portion of long-term debt | | 2 | | | 2 | | | | | |
| Non-current: | | | | | | | | | | |
| Operating | | Long-term operating lease liabilities | | 494 | | | 499 | | | | | |
| Finance | | Long-term debt | | 32 | | | 25 | | | | | |
| Total lease liabilities | | | | $ | 679 | | | $ | 667 | | | | | |
(a) Finance lease assets as of December 31, 2021 and 2020 were recorded net of accumulated amortization of $8 million and $14 million, respectively.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
Components of lease cost for the years ended December 31, 2021, 2020 and 2019 were as follows:
| | | | | | | | | | | | | | | | | |
| Lease cost | | 2021 | | 2020 | 2019 | | |
| | | | | | | |
| Operating lease cost (a) | | $ | 321 | | | $ | 300 | | $ | 294 | | | |
| Finance lease cost: | | | | | | | |
| | | | | | | |
| Amortization of leased assets | | 2 | | | 6 | 7 | | | |
| Interest on lease liabilities | | 2 | | | 3 | 3 | | |
| Net lease cost | | $ | 325 | | | $ | 309 | | $ | 304 | | | |
(a) Includes short-term leases and variable lease costs (primarily usage-based maintenance fees and utilities related to real estate leases and certain equipment-related and vehicle-related costs) of $140 million, $120 million and $120 million for the years ended December 31, 2021, 2020 and 2019, respectively.
The maturity of the Company's lease liabilities as of December 31, 2021 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| Maturity of lease liabilities | | Operating leases | | Finance leases | | Total | | | | |
| 2022 | | $ | 169 | | | $ | 4 | | | $ | 173 | | | | | |
| 2023 | | 153 | | | 4 | | | 157 | | | | | |
| 2024 | | 116 | | | 5 | | | 121 | | | | | |
| 2025 | | 83 | | | 5 | | | 88 | | | | | |
| 2026 | | 54 | | | 5 | | | 59 | | | | | |
| Thereafter | | 139 | | | 27 | | | 166 | | | | | |
| Total lease payments | | 714 | | | 50 | | | 764 | | | | | |
| Less: Interest | | 69 | | | 16 | | | 85 | | | | | |
| Present value of lease liabilities | | $ | 645 | | | $ | 34 | | | $ | 679 | | | | | |
Lease term and discount rate as of December 31, 2021 and 2020 were as follows:
| | | | | | | | | | | |
| Lease term and discount rate | 2021 | | 2020 |
| Weighted-average remaining lease term (years): | | | |
| Operating leases | 6 | | 6 |
| Finance leases | 11 | | 13 |
| | | |
| Weighted-average discount rate: | | | |
| Operating leases | 3.0 | % | | 3.2 | % |
| Finance leases | 6.9 | % | | 8.1 | % |
The Company's discount rates for its operating leases were primarily determined using the Company's incremental borrowing rate. The Company's weighted-average discount rate for its finance leases principally reflects the implicit interest rate on a lease obligation assumed in a business combination.
See Note 9 for cash flow information on cash paid for amounts included in the measurement of lease liabilities, leased assets obtained in exchange for new operating lease liabilities, and leased assets obtained in exchange for new finance lease liabilities for the years ended December 31, 2021, 2020 and 2019.
15. FINANCIAL INSTRUMENTS
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
Interest Rate Derivatives – Cash Flow Hedges
From time to time, the Company has entered into various interest rate lock agreements and forward-starting interest rate swap agreements to hedge part of the Company's interest rate exposure associated with the variability in future cash flows attributable to changes in interest rates.
Interest Rate Derivatives – Fair Value Hedges
Historically, the Company has entered into various fixed-to-variable interest rate swap agreements in order to convert a portion of the Company's long-term debt into variable interest rate debt. All such fixed-to-variable interest rate swap agreements have been terminated and proceeds from the terminations have been reflected as basis adjustments to the hedged debt instruments and are being amortized as a reduction of interest expense, net over the remaining terms of such debt instruments.
As of December 31, 2021 and 2020, the following amounts were recorded on the consolidated balance sheets related to cumulative basis adjustments for fair value hedges included in the carrying amount of long-term debt:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Carrying Amount of Hedged Long-Term Debt | | Hedge Accounting Basis Adjustment (a) | | Carrying Amount of Hedged Long-Term Debt | | Hedge Accounting Basis Adjustment (a) |
| Balance Sheet Classification | | December 31, 2021 | | December 31, 2021 | | December 31, 2020 | | December 31, 2020 |
| Long-term debt | | $ | — | | | $ | 38 | | | $ | — | | | $ | 51 | |
(a) As of both December 31, 2021 and 2020, the entire balance is associated with remaining unamortized hedging adjustments on discounted relationships.
The following table presents the effect of fair value hedge accounting on the consolidated statements of operations for the years ended December 31, 2021, 2020 and 2019, respectively:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| | | 2021 | | 2020 | | 2019 |
| | Other income, net | | Other income, net | | Other income, net |
| Total for line item in which the effects of fair value hedges are recorded | | $ | 369 | | | $ | 76 | | | $ | 20 | |
| | | | | | |
| Gain (loss) on fair value hedging relationships: | | | | | | |
| Hedged items (Long-term debt) | | $ | — | | | $ | (68) | | | $ | (65) | |
| Derivatives designated as hedging instruments | | $ | — | | | $ | 68 | | | $ | 65 | |
16. STOCKHOLDERS’ EQUITY AND REDEEMABLE NONCONTROLLING INTEREST
Stockholders' Equity
Series Preferred Stock
Quest Diagnostics is authorized to issue up to 10 million shares of Series Preferred Stock, par value $1.00 per share. The Company's Board of Directors has the authority to issue such shares without stockholder approval and to determine the designations, preferences, rights and restrictions of such shares. No shares are currently outstanding.
Common Stock
Under the Company's Restated Certificate of Incorporation the number of authorized shares of common stock, par value $0.01 per share, is 600 million shares.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
Changes in Accumulated Other Comprehensive Loss by Component
Comprehensive income (loss) includes:
•Foreign currency translation adjustments;
•Net deferred gains (losses) on cash flow hedges, which represent deferred gains (losses), net of tax, on interest rate-related derivative financial instruments designated as cash flow hedges, net of amounts reclassified to interest expense (see Note 15); and
•Net changes in available-for-sale debt securities, which represent unrealized holding gains (losses), net of tax, on available-for-sale debt securities.
For the years ended December 31, 2021, 2020, and 2019, the tax effects related to the deferred gains (losses) on cash flow hedges and net changes in available-for-sale debt securities were not material. Foreign currency translation adjustments related to indefinite investments in non-U.S. subsidiaries are not adjusted for income taxes.
The changes in accumulated other comprehensive loss by component for 2021, 2020 and 2019 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Foreign
Currency
Translation
Adjustments | | Net Changes in Available-for-Sale Debt Securities | | Net Deferred Losses on Cash Flow Hedges, net of tax | | Other | | Accumulated Other Comprehensive Loss |
| | | | | | | | | |
| Balance, December 31, 2018 | $ | (49) | | | $ | — | | | $ | (9) | | | $ | (1) | | | $ | (59) | |
| Other comprehensive income before reclassifications | 7 | | | 8 | | | 3 | | | — | | | 18 | |
Amounts reclassified from accumulated other comprehensive loss | — | | | — | | | 2 | | | — | | | 2 | |
| Net current period other comprehensive income | 7 | | | 8 | | | 5 | | | — | | | 20 | |
| | | | | | | | | |
| Balance, December 31, 2019 | (42) | | | 8 | | | (4) | | | (1) | | | (39) | |
| Other comprehensive income before reclassifications | 12 | | | — | | | 1 | | | — | | | 13 | |
Amounts reclassified from accumulated other comprehensive loss | 3 | | | — | | | 2 | | | — | | | 5 | |
| Net current period other comprehensive income | 15 | | | — | | | 3 | | | — | | | 18 | |
| | | | | | | | | |
| Balance, December 31, 2020 | (27) | | | 8 | | | (1) | | | (1) | | | (21) | |
| Other comprehensive loss before reclassifications | (7) | | | (7) | | | — | | | — | | | (14) | |
| Amounts reclassified from accumulated other comprehensive loss | 20 | | | — | | | 1 | | | — | | | 21 | |
| Net current period other comprehensive income (loss) | 13 | | | (7) | | | 1 | | | — | | | 7 | |
| | | | | | | | | |
| Balance, December 31, 2021 | $ | (14) | | | $ | 1 | | | $ | — | | | $ | (1) | | | $ | (14) | |
On April 1, 2021, the Company sold its 40% ownership interest in Q2 Solutions, its clinical trials central laboratory services joint venture, to IQVIA, its joint venture partner. As a result of the transaction, during the year ended December 31, 2021, $20 million of cumulative translation losses were reclassified from accumulated other comprehensive loss to other income, net. See Note 6 for further details.
Additionally, for the year ended December 31, 2020, $3 million of cumulative translation losses were reclassified from accumulated other comprehensive loss to other operating (income) expense, net as a result of the sale of foreign subsidiaries.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
For the years ended December 31, 2021, 2020 and 2019, the gross deferred losses on cash flow hedges were reclassified from accumulated other comprehensive loss to interest expense, net.
Dividend Program
During each of the four quarters of 2021, the Company's Board of Directors declared a quarterly cash dividend of $0.62 per common share. During each of the four quarters of 2020, the Company's Board of Directors declared a quarterly cash dividend of $0.56 per common share. During each of the four quarters of 2019, the Company's Board of Directors declared a quarterly cash dividend of $0.53 per common share. On February 3, 2022, the Company announced that its Board of Directors authorized a 6.5% increase in its quarterly cash dividend from $0.62 to $0.66 per share, or $2.64 per share annually, commencing with the dividend payable in April 2022.
Share Repurchase Program
In each of February 2021 and March 2021, the Company's Board of Directors increased the size of its share repurchase program by $1 billion. As of December 31, 2021, $0.7 billion remained available under the Company’s share repurchase authorization. In February 2022, the Company's Board of Directors authorized the Company to repurchase an additional $1 billion of the Company's common stock. The share repurchase authorization has no set expiration or termination date.
Share Repurchases
For the year ended December 31, 2021, the Company repurchased 16.0 million shares of its common stock for $2.2 billion, including shares repurchased under ASRs. The repurchases during the year included an accrual of $23 million recorded in accounts payable and accrued expenses in the consolidated balance sheet for share repurchases not settled until after December 31, 2021.
In April 2021, the Company entered into ASRs with several financial institutions to repurchase its common stock as part of a share repurchase program. Each of the ASRs was structured to permit the Company to purchase shares immediately with the final purchase price of those shares determined by the volume-weighted average price of the Company's common stock during the repurchase period, less a fixed discount, and was accounted for as two transactions: (1) a treasury stock repurchase and (2) a forward contract. During the year ended December 31, 2021, the Company paid $1.5 billion to the financial institutions and received 10.7 million shares of its common stock under the ASRs.
For the year ended December 31, 2020, the Company repurchased 2.7 million shares of its common stock for $325 million.
For the year ended December 31, 2019, the Company repurchased 3.5 million shares of its common stock for $350 million.
Shares Reissued from Treasury Stock
For the years ended December 31, 2021, 2020 and 2019, the Company reissued 2 million shares, 3 million shares and 2 million shares, respectively, from treasury stock for shares issued under the Employee Stock Purchase Plan ("ESPP") and stock-based compensation program.
Treasury Stock Retirement
During the year ended December 31, 2021, the Company retired 55 million shares of treasury stock. In accordance with the Company's policy, the amount paid to repurchase the shares in excess of par value was allocated between retained earnings and additional paid-in capital based on a pro-rata allocation of additional paid-in capital at the time of the share retirement.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
Redeemable Noncontrolling Interest
In connection with the sale of an 18.9% noncontrolling interest in a subsidiary to UMass on July 1, 2015, the Company granted UMass the right to require the Company to purchase all of its interest in the subsidiary at fair value commencing July 1, 2020. The subsidiary performs diagnostic information services in a defined territory within the state of Massachusetts. Since the redemption of the noncontrolling interest is outside of the Company's control, it has been presented outside of stockholders' equity at the greater of its carrying amount or its fair value. The Company records changes in the fair value of the noncontrolling interest immediately as they occur. As of December 31, 2021 and 2020, the redeemable noncontrolling interest was $79 million and $82 million, respectively, and was presented at its fair value.
17. STOCK OWNERSHIP AND COMPENSATION PLANS
Employee and Non-employee Directors Stock Ownership Programs
The ELTIP provides for three types of awards: (a) stock options, (b) stock appreciation rights and (c) stock awards. The ELTIP provides for the grant to eligible employees of either non-qualified or incentive stock options, or both, to purchase shares of Company common stock at an exercise price no less than the fair market value of the Company's common stock on the date of grant. Grants of stock appreciation rights allow eligible employees to receive a payment based on the appreciation of Company common stock in cash, shares of Company common stock or a combination thereof. The stock appreciation rights are granted at an exercise price no less than the fair market value of the Company's common stock on the date of grant. Stock options and stock appreciation rights granted under the ELTIP expire on the date designated by the Board of Directors but in no event more than ten years from date of grant. No stock appreciation rights have been granted under the ELTIP. Under the ELTIP, awards are subject to forfeiture if employment terminates prior to the end of the vesting period prescribed by the Board of Directors. For all award types, the vesting period is generally over three years from the date of grant. For performance share units, the actual amount of shares earned is based on the achievement of the performance goals specified in the awards. The performance goals for awards granted for 2019 were based on the financial performance of the Company. The performance goals for awards granted in 2020 and 2021 were based on the financial performance of the Company, as well as relative TSR. The maximum number of shares of Company common stock in respect of which awards may be granted under the ELTIP is approximately 79 million shares.
The DLTIP provides for the grant to non-employee directors of non-qualified stock options to purchase shares of Company common stock at an exercise price no less than the fair market value of the Company's common stock on the date of grant. The DLTIP also permits awards of restricted stock and restricted stock units to non-employee directors. Stock options granted under the DLTIP expire on the date designated by the Board of Directors but in no event more than ten years from date of grant. For all award types, the vesting period is generally over three years from the date of grant, regardless of whether the award recipient remains a director of the Company. The maximum number of shares that may be issued under the DLTIP is 2.4 million shares. For the years ended December 31, 2021, 2020 and 2019, grants under the DLTIP totaled 12 thousand shares, 14 thousand shares and 14 thousand shares, respectively.
The Company's practice has been to issue shares related to its stock-based compensation program from shares of its common stock held in treasury or by issuing new shares of its common stock. In January 2021, the Company began to issue shares related to its ESPP and stock-based compensation program solely from common stock held in treasury. See Note 16 for further information regarding the Company's share repurchase program.
The fair value of each stock option award granted was estimated on the date of grant using a Black-Scholes option-valuation model. The expected volatility under the Black-Scholes option-valuation model was based on historical volatilities of the Company's common stock. The dividend yield was based on the approved annual dividend rate in effect and current market price of the underlying common stock at the time of grant. The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the time of grant for bonds with maturities consistent with the expected holding period of the related award. The expected holding period was estimated using the historical stock option exercise behavior of employees. The Black-Scholes option-valuation model also incorporates the average market price of the Company's common stock at the date of grant.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
The weighted average assumptions used in valuing stock options granted in the periods presented were:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| | | | | |
| Fair value at grant date | $21.82 | | $17.25 | | $14.30 |
| Expected volatility | 25.6% | | 20.3% | | 20.4% |
| Dividend yield | 2.0% | | 2.0% | | 2.4% |
| Risk-free interest rate | 0.6% | | 1.5% | | 2.5% |
| Expected holding period, in years | 4.8 | | 5.0 | | 5.2 |
The following summarizes the activity relative to stock option awards for 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
|
Shares | |
Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term
(in years) | |
Aggregate Intrinsic Value |
| | | | | | | |
| Options outstanding, beginning of year | 6.5 | | | $ | 90.32 | | | | | |
| Options granted | 0.9 | | | 122.18 | | | | | |
| Options exercised | (1.5) | | | 84.09 | | | | | |
| Options forfeited and canceled | (0.2) | | | 107.50 | | | | | |
| Options outstanding, end of year | 5.7 | | | $ | 96.44 | | | 6.5 | | $ | 433 | |
| | | | | | | |
| Exercisable, end of year | 3.7 | | | $ | 89.17 | | | 5.5 | | $ | 309 | |
| Vested and expected to vest, end of year | 5.6 | | | $ | 96.22 | | | 6.4 | | $ | 430 | |
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company's closing common stock price on the last trading day of 2021 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2021. This amount changes based on the fair market value of the Company's common stock. Total intrinsic value of options exercised in 2021, 2020 and 2019 was $83 million, $113 million and $62 million, respectively.
As of December 31, 2021, there was $7 million of unrecognized stock-based compensation cost related to nonvested stock options which is expected to be recognized over a weighted average period of 1.6 years.
The fair value of restricted stock awards and restricted stock units is the average market price of the Company's common stock at the date of grant. For performance share units with a goal based on the financial performance of the Company, the fair value is based on the average market price of the Company's common stock at the date of grant, adjusted for the present value of dividends expected to be paid on the Company's common stock during the vesting period. For performance share units with a market-based relative TSR goal, the fair value is estimated on the date of grant using a Monte Carlo valuation model. The expected volatility under the Monte Carlo valuation model is based on the historical volatility of the common stock of the Company and the common stock of the companies in the peer index. The dividend yield is based on the approved annual dividend rate in effect and current market price of the underlying common stock at the time of grant. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for bonds with maturities consistent with the performance period of the related award.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
The weighted average assumptions used in valuing performance share units with a market-based relative TSR goal in the periods presented were:
| | | | | | | | | | | |
| 2021 | | 2020 |
| | | |
| Fair value at grant date | $150.15 | | $144.03 |
| Expected volatility | 30.2% | | 20.1% |
| Dividend yield | 2.0% | | 2.0% |
| Risk-free interest rate | 0.2% | | 1.4% |
The following summarizes the activity relative to stock awards, including restricted stock units and performance share units, for 2021, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Shares | | Weighted
Average
Grant Date
Fair Value | | Shares | | Weighted
Average
Grant Date
Fair Value | | Shares | | Weighted
Average
Grant Date
Fair Value |
| | | | | | | | | | | |
| Shares outstanding, beginning of year | 1.0 | | | $ | 100.12 | | | 1.0 | | | $ | 93.30 | | | 1.1 | | | $ | 88.13 | |
| Shares granted | 0.5 | | | 122.78 | | | 0.4 | | | 112.43 | | | 0.4 | | | 86.28 | |
| Shares vested | (0.5) | | | 103.41 | | | (0.4) | | | 96.36 | | | (0.4) | | | 75.58 | |
| Shares forfeited and canceled | — | | | — | | | — | | | — | | | (0.1) | | | 94.09 | |
| | | | | | | | | | | |
| Shares outstanding, end of year | 1.0 | | | $ | 107.46 | | | 1.0 | | | $ | 100.12 | | | 1.0 | | | $ | 93.30 | |
As of December 31, 2021, there was $27 million of unrecognized stock-based compensation cost related to nonvested stock awards, which is expected to be recognized over a weighted average period of 1.5 years. Total fair value of shares vested was $59 million, $37 million and $40 million for the years ended December 31, 2021, 2020 and 2019, respectively. For performance share units with a goal based on financial performance of the Company, the amount of unrecognized stock-based compensation cost is subject to change based on changes, if any, to management's best estimates of the achievement of the performance goals specified in such awards and the resulting number of shares that will be earned at the end of the performance periods.
For the years ended December 31, 2021, 2020 and 2019, stock-based compensation expense totaled $79 million, $97 million and $56 million, respectively. Income tax benefits recognized in the consolidated statements of operations related to stock-based compensation expense totaled $32 million, $39 million and $27 million for the years ended December 31, 2021, 2020 and 2019, respectively, which includes excess tax benefits associated with stock-based compensation arrangements of $19 million, $23 million and $13 million for the years ended December 31, 2021, 2020 and 2019, respectively.
Employee Stock Purchase Plan
Under the Company's ESPP, substantially all employees can elect to have up to 10% of their annual wages withheld to purchase Quest Diagnostics common stock. The purchase price of the stock is 95% of the market price of the Company's common stock on the last business day of each calendar month. Under the ESPP, the maximum number of shares of Quest Diagnostics common stock which may be purchased by eligible employees is 9 million. Approximately 200 thousand shares, 225 thousand shares and 269 thousand shares of common stock were purchased by eligible employees in 2021, 2020 and 2019, respectively.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
Defined Contribution Plans
The Company maintains qualified defined contribution plans covering substantially all of its employees. The maximum Company matching contribution is 5% of eligible employee compensation. During 2020, the Company temporarily suspended matching contributions for certain qualified defined contribution plans; matching contributions were reinstated in the third quarter of 2020. The Company's expense for contributions to its defined contribution plans aggregated $93 million, $64 million and $84 million for 2021, 2020 and 2019, respectively.
Supplemental Deferred Compensation Plans
The Company has a supplemental deferred compensation plan that is an unfunded, non-qualified plan that provides for certain management and highly compensated employees to defer up to 50% of their salary in excess of their defined contribution plan limits and for certain eligible employees, up to 95% of their variable incentive compensation. The maximum Company matching contribution is 5% of eligible employee compensation. During 2020, the Company temporarily suspended matching contributions; matching contributions were reinstated in the third quarter of 2020. The compensation deferred under this plan, together with Company matching amounts, are credited with earnings or losses measured by the mirrored rate of return on investments elected by plan participants. Each plan participant is fully vested in all deferred compensation, Company match and earnings credited to their account. The amounts accrued under the Company's deferred compensation plans were $77 million and $67 million as of December 31, 2021 and 2020, respectively. Although the Company is currently contributing all participant deferrals and matching amounts to a trust, the funds in this trust, totaling $77 million and $67 million as of December 31, 2021 and 2020, respectively, are general assets of the Company and are subject to any claims of the Company's creditors.
The Company also offers certain employees the opportunity to participate in a non-qualified deferred compensation program. The Company matches employee contributions equal to 25%, up to a maximum of $5 thousand per plan year. A participant's deferrals, together with Company matching credits, are “invested” at the direction of the employee in a hypothetical portfolio of investments which are tracked by an administrator. Each participant is fully vested in their deferred compensation and vests in Company matching contributions over a period of four years at 25% per year. This plan was amended effective January 1, 2018 so that future deferrals under the plan may only be made by participants who made deferrals under the plan in 2017. The amounts accrued under this plan were $66 million and $59 million as of December 31, 2021 and 2020, respectively. The Company purchases life insurance policies, with the Company named as beneficiary of the policies, for the purpose of funding the program's liability. The cash surrender value of such life insurance policies was $57 million and $50 million as of December 31, 2021 and 2020, respectively.
For each of the years ended December 31, 2021, 2020 and 2019, the Company's expense for matching contributions to these plans was not material.
18. COMMITMENTS AND CONTINGENCIES
Letters of Credit and Contractual Obligations
The Company can issue letters of credit under its Secured Receivables Credit Facility and Senior Unsecured Revolving Credit Facility (see Note 13). In support of its risk management program, to ensure the Company’s performance or payment to third parties, $70 million in letters of credit under the Secured Receivables Credit Facility were outstanding as of December 31, 2021. The letters of credit primarily represent collateral for current and future automobile liability and workers’ compensation loss payments.
The Company has certain noncancelable commitments, primarily under take-or-pay arrangements, to purchase products or services from various suppliers, mainly for consulting and other service agreements, and standing orders to purchase reagents and other laboratory supplies. As of December 31, 2021, the approximate total future purchase commitments are $252 million, of which $53 million are expected to be incurred in 2022, $87 million are expected to be incurred in 2023 through 2024 and the balance thereafter.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
Billing and Collection Agreement
In September 2016, the Company entered into a ten-year agreement with a third party to outsource its billing and related operations for the majority of the Company’s revenues. Services under the agreement commenced during the fourth quarter of 2016. The agreement includes an annual fee, which is subject to adjustment based on certain changes in the Company's requisition volume and the achievement of various performance metrics.
Contingent Lease Obligations
The Company remains subject to contingent obligations under certain real estate leases, including real estate leases that were entered into by certain predecessor companies of a subsidiary prior to the Company's acquisition of the subsidiary. While over the course of many years, the title to certain properties and interest in the subject leases have been transferred to third parties and the subject leases have been amended several times by such third parties, the lessors have not formally released the subsidiary predecessor companies from their original obligations under the leases and therefore remain contingently liable in the event of default. The remaining terms of the lease obligations and the Company's corresponding indemnifications range up to 26 years. The lease payments under certain leases are subject to market value adjustments and contingent rental payments and therefore, the total contingent obligations under the leases cannot be precisely determined but are likely to total several hundred million dollars. A claim against the Company would be made only upon the current lessee's default and, in certain cases, after a series of claims and corresponding defaults by third parties that precede the Company in the order of liability. The Company also has certain indemnification rights from other parties to recover losses in the event of default on the lease obligations. The Company believes that the likelihood of its performance under these contingent obligations is remote and no liability has been recorded for any potential payments under the contingent lease obligations.
Certain Legal Matters
The Company may incur losses associated with these proceedings and investigations, but it is not possible to estimate the amount of loss or range of loss, if any, that might result from adverse judgments, settlements, fines, penalties, or other resolution of these proceedings and investigations based on the stage of these proceedings and investigations, the absence of specific allegations as to alleged damages, the uncertainty as to the certification of a class or classes and the size of any certified class, if applicable, and/or the lack of resolution of significant factual and legal issues. The Company has insurance coverage rights in place (limited in amount; subject to deductible) for certain potential costs and liabilities related to these proceedings and investigations.
401(k) Plan Lawsuit
In 2020, two putative class action lawsuits were filed in the U.S. District Court for New Jersey against the Company and other defendants with respect to the Company’s 401(k) plan. The complaint alleges, among other things, that the fiduciaries of the 401(k) plan breached their duties by failing to disclose the expenses and risks of plan investment options, allowing unreasonable administration expenses to be charged to plan participants, and selecting and retaining high cost and poor performing investments. In October 2020, the court consolidated the two lawsuits under the caption In re: Quest Diagnostics ERISA Litigation and plaintiffs filed a consolidated amended complaint. In May 2021, the court denied the Company's motion to dismiss the complaint.
AMCA Data Security Incident
On June 3, 2019, the Company reported that Retrieval-Masters Creditors Bureau, Inc./American Medical Collection Agency (“AMCA”) had informed the Company and Optum360 LLC that an unauthorized user had access to AMCA’s system between August 1, 2018 and March 30, 2019 (the “AMCA Data Security Incident”). Optum360 provides revenue management services to the Company, and AMCA provided debt collection services to Optum360. AMCA first informed the Company of the AMCA Data Security Incident on May 14, 2019. AMCA’s affected system included financial information (e.g., credit card numbers and bank account information), medical information and other personal information (e.g., social security numbers). Test results were not included. Neither Optum360’s nor the Company’s systems or databases were involved in the incident. AMCA also informed the Company that information pertaining to other laboratories’ customers was also affected. Following announcement of the AMCA Data Security Incident, AMCA sought protection under the U.S. bankruptcy laws. The bankruptcy proceeding has been dismissed.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
Numerous putative class action lawsuits were filed against the Company related to the AMCA Data Security Incident. The U.S. Judicial Panel on Multidistrict Litigation transferred the cases still pending to, and consolidated them for pre-trial proceedings in, the U.S. District Court for New Jersey. In November 2019, the plaintiffs in the multidistrict proceeding filed a consolidated putative class action complaint against the Company and Optum360 that named additional individuals as plaintiffs and that asserted a variety of common law and statutory claims in connection with the AMCA Data Security Incident. In January 2020, the Company moved to dismiss the consolidated complaint; the motion to dismiss is pending.
In addition, certain federal and state governmental authorities are investigating, or otherwise seeking information and/or documents from the Company related to the AMCA Data Security Incident and related matters, including the Office for Civil Rights of the U.S. Department of Health and Human Services, Attorneys General offices from numerous states and the District of Columbia, and certain U.S. senators.
Other Legal Matters
In the normal course of business, the Company has been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with the Company's activities as a provider of diagnostic testing, information and services. These actions could involve claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages, and could have an adverse impact on the Company's client base and reputation.
The Company is also involved, from time to time, in other reviews, investigations and proceedings by governmental agencies regarding the Company's business which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief.
In addition, certain federal and state statutes, including the qui tam provisions of the federal False Claims Act, allow private individuals to bring lawsuits against healthcare companies on behalf of the government or private payers. The Company is aware of lawsuits, and from time to time has received subpoenas, related to billing or other practices based on the False Claims Act or other federal and state statutes, regulations or other laws. The Company understands that there may be other pending qui tam claims brought by former employees or other "whistle blowers" as to which the Company cannot determine the extent of any potential liability.
Management cannot predict the outcome of such matters. Although management does not anticipate that the ultimate outcome of such matters will have a material adverse effect on the Company's financial condition, given the high degree of judgment involved in establishing loss estimates related to these types of matters, the outcome of such matters may be material to the Company's consolidated results of operations or cash flows in the period in which the impact of such matters is determined or paid.
These matters are in different stages. Some of these matters are in their early stages. Matters may involve responding to and cooperating with various government investigations and related subpoenas. As of December 31, 2021, the Company does not believe that material losses related to legal matters are probable.
Reserves for legal matters totaled $4 million and $1 million as of December 31, 2021 and December 31, 2020, respectively.
Reserves for General and Professional Liability Claims
As a general matter, providers of clinical testing services may be subject to lawsuits alleging negligence or other similar legal claims. These suits could involve claims for substantial damages. Any professional liability litigation could also have an adverse impact on the Company's client base and reputation. The Company maintains various liability insurance coverages for, among other things, claims that could result from providing, or failing to provide, clinical testing services, including inaccurate testing results, and other exposures. The Company's insurance coverage limits its maximum exposure on individual claims; however, the Company is essentially self-insured for a significant portion of these claims. Reserves for such matters, including those associated with both asserted and incurred but not reported claims, are established on an undiscounted basis by considering actuarially determined losses based upon the Company's historical and projected loss experience. Such reserves totaled $159 million and $138 million as of December 31, 2021 and December 31, 2020, respectively. Management believes that established reserves and present insurance coverage are sufficient to cover currently estimated exposures.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
19. BUSINESS SEGMENT INFORMATION
The Company's DIS business is the only reportable segment based on the manner in which the Chief Executive Officer, who is the Company's chief operating decision maker ("CODM"), assesses performance and allocates resources across the organization. The DIS business provides diagnostic information services to a broad range of customers, including patients, clinicians, hospitals, IDNs, health plans, employers, ACOs, and DCEs. The Company is the world's leading provider of diagnostic information services, which includes providing information and insights based on the industry-leading menu of routine, non-routine and advanced clinical testing and anatomic pathology testing, and other diagnostic information services. The DIS business accounted for greater than 95% of net revenues in 2021, 2020 and 2019.
All other operating segments include the Company's DS businesses, which consist of its risk assessment services and healthcare information technology businesses. The Company's DS businesses are the leading provider of risk assessment services for the life insurance industry and offer healthcare organizations and clinicians robust information technology solutions.
As of December 31, 2021, substantially all of the Company’s services were provided within the United States, and substantially all of the Company’s assets were located within the United States.
The following table is a summary of segment information for the years ended December 31, 2021, 2020 and 2019. Segment asset information is not presented since it is not used by the CODM at the operating segment level. Operating earnings (loss) of each segment represents net revenues less directly identifiable expenses to arrive at operating income (loss) for the segment. General corporate activities included in the table below are comprised of general management and administrative corporate expenses, amortization and impairment of intangibles assets and other operating income and expenses, net of certain general corporate activity costs that are allocated to the DIS and DS businesses. The accounting policies of the segments are the same as those of the Company as set forth in Note 2.
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Net revenues: | | | | | |
| DIS business | $ | 10,494 | | | $ | 9,139 | | | $ | 7,405 | |
| All other operating segments | 294 | | | 298 | | | 321 | |
| Total net revenues | $ | 10,788 | | | $ | 9,437 | | | $ | 7,726 | |
| | | | | |
| Operating earnings (loss): | | | | | |
| DIS business | $ | 2,646 | | | $ | 2,201 | | | $ | 1,298 | |
| All other operating segments | 29 | | | 39 | | | 42 | |
| General corporate activities | (294) | | | (269) | | | (109) | |
| Total operating income | 2,381 | | | 1,971 | | | 1,231 | |
| Non-operating income (expense), net | 218 | | | (87) | | | (155) | |
Income from continuing operations before income taxes and equity in earnings of equity method investees | 2,599 | | | 1,884 | | | 1,076 | |
| Income tax expense | (597) | | | (460) | | | (247) | |
| Equity in earnings of equity method investees, net of taxes | 78 | | | 75 | | | 57 | |
| Income from continuing operations | 2,080 | | | 1,499 | | | 886 | |
| Income from discontinued operations, net of taxes | — | | | — | | | 20 | |
| Net income | 2,080 | | | 1,499 | | | 906 | |
| Less: Net income attributable to noncontrolling interests | 85 | | | 68 | | | 48 | |
| Net income attributable to Quest Diagnostics | $ | 1,995 | | | $ | 1,431 | | | $ | 858 | |
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
Depreciation and amortization expense for the years ended December 31, 2021, 2020 and 2019 were as follows:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| | | | | |
| DIS business | $ | 294 | | | $ | 249 | | | $ | 226 | |
| All other operating segments | 10 | | | 8 | | | 6 | |
| General corporate | 104 | | | 104 | | | 97 | |
| | | | | |
| | | | | |
| | | | | |
| Total depreciation and amortization | $ | 408 | | | $ | 361 | | | $ | 329 | |
Capital expenditures for the years ended December 31, 2021, 2020 and 2019 were as follows:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| | | | | |
| DIS business | $ | 379 | | | $ | 394 | | | $ | 373 | |
| All other operating segments | 14 | | | 15 | | | 20 | |
| General corporate | 10 | | | 9 | | | 7 | |
| | | | | |
| | | | | |
| | | | | |
| Total capital expenditures | $ | 403 | | | $ | 418 | | | $ | 400 | |
Net revenues by major service for the years ended December 31, 2021, 2020 and 2019 were as follows:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| | | | | |
| Routine clinical testing and other services | $ | 4,293 | | | $ | 3,836 | | | $ | 4,206 | |
| COVID-19 testing services | 2,770 | | | 2,723 | | | — | |
| Gene-based and esoteric (including advanced diagnostics) testing services | 2,878 | | | 2,098 | | | 2,620 | |
| Anatomic pathology testing services | 553 | | | 482 | | | 579 | |
| All other | 294 | | | 298 | | | 321 | |
| Total net revenues | $ | 10,788 | | | $ | 9,437 | | | $ | 7,726 | |
20. DISCONTINUED OPERATIONS
Discontinued operations, net of taxes, for the year ended December 31, 2019 includes discrete tax benefits of $20 million associated with the favorable resolution of certain tax contingencies related to NID. In addition, net cash provided by operating activities in the consolidated statement of cash flows for the year ended December 31, 2019 included a $28 million refund from the taxing authorities related to discontinued operations.
21. SUBSEQUENT EVENTS
Acquisition of Pack Health, LLC
On February 1, 2022, the Company acquired Pack Health, LLC ("Pack Health"), a patient engagement company that helps individuals adopt healthier behaviors to improve outcomes, in an all cash transaction for $105 million with up to $20 million of contingent consideration if certain revenue benchmarks are achieved.
The preliminary purchase price allocation for the acquisition, which will be accounted for as a business combination, is not provided as the appraisal necessary to assess the fair values of assets acquired and liabilities assumed is not yet complete, but a significant portion of the purchase price is expected to be allocated to intangible assets and goodwill.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
SCHEDULE II - VALUATION ACCOUNTS AND RESERVES
(in millions)
| | | | | | | | | | | | | | | | | | | | | | | |
| Balance at
Beginning of Year | | Provision for Credit Losses | | Net Deductions
and Other | | Balance at
End of Year |
| 2021 | | | | | | | |
| Allowance for credit losses | $ | 28 | | | $ | 4 | | | $ | 1 | | (a) | $ | 31 | |
| | | | | | | |
| 2020 | | | | | | | |
| Allowance for credit losses | $ | 15 | | | $ | 19 | | | $ | 6 | | (a) | $ | 28 | |
| | | | | | | |
| 2019 | | | | | | | |
| Doubtful accounts and allowances | $ | 15 | | | $ | 11 | | | $ | 11 | | (a) | $ | 15 | |
(a)Primarily represents the write-off of accounts receivable, net of recoveries.
__________________________________________________________________________
THIRD AMENDED AND RESTATED CREDIT AGREEMENT
Dated as of November 23, 2021
among
QUEST DIAGNOSTICS INCORPORATED,
as Borrower,
THE LENDERS IDENTIFIED HEREIN,
JPMORGAN CHASE BANK, N.A.,
as Administrative Agent,
and
MORGAN STANLEY SENIOR FUNDING, INC.,
as Syndication Agent
________________________________________________________
JPMORGAN CHASE BANK, N.A.,
MORGAN STANLEY SENIOR FUNDING, INC.,
MIZUHO BANK, LTD., and
WELLS FARGO SECURITIES, LLC,
as Joint Lead Arrangers and Joint Bookrunners
and
MIZUHO BANK, LTD. and
WELLS FARGO BANK, N.A.
as Documentation Agents
__________________________________________________________________________
[CS&M Ref. No. 6702-376]
| | | | | |
| SECTION 1 DEFINITIONS AND ACCOUNTING TERMS | |
1.1 Definitions. | |
1.2 Other Interpretive Provisions. | |
1.3 Accounting Terms/Calculation of Financial Covenants. | |
1.4 Rounding. | |
1.5 Exchange Rates; Currency Equivalents. | |
1.6 Additional Alternative Currencies. | |
1.7 Change of Currency. | |
1.8 References to Agreements and Laws. | |
1.9 Letter of Credit Amounts. | |
1.10 Interest Rates; LIBOR Notification. | |
| |
| SECTION 2 CREDIT FACILITIES | |
2.1 Revolving Loans. | |
2.2 Letter of Credit Subfacility. | |
2.3 Swing Line Loans Subfacility. | |
2.4 Continuations and Conversions. | |
2.5 Minimum Amounts. | |
2.6 Defaulting Lenders. | |
2.7 Incremental Facilities. | |
2.8 Extension of Revolving Maturity Date. | |
| |
| SECTION 3 GENERAL PROVISIONS APPLICABLE TO LOANS AND LETTERS OF CREDIT | |
3.1 Interest. | |
3.2 Place and Manner of Payments. | |
3.3 Prepayments. | |
3.4 Fees. | |
3.5 Payment in Full at Maturity. | |
3.6 Computations of Interest and Fees. | |
3.7 Pro Rata Treatment. | |
3.8 Sharing of Payments. | |
3.9 Capital Adequacy. | |
3.10 Alternate Rate of Interest. | |
3.11 Illegality. | |
3.12 Requirements of Law. | |
3.13 Taxes. | |
3.14 Compensation. | |
3.15 Determination and Survival of Provisions. | |
3.16 Notification by Lenders. | |
3.17 Mitigation; Mandatory Assignment. | |
| |
| SECTION 4 [Reserved] | |
| |
| | | | | |
| SECTION 5 CONDITIONS PRECEDENT | |
5.1 Conditions to Effectiveness. | |
5.2 Conditions to All Extensions of Credit. | |
| |
| SECTION 6 REPRESENTATIONS AND WARRANTIES | |
6.1 Organization and Good Standing. | |
6.2 Due Authorization. | |
6.3 Enforceable Obligations. | |
6.4 No Conflicts. | |
6.5 Consents. | |
6.6 Financial Condition. | |
6.7 Material Adverse Effect. | |
6.8 Disclosure. | |
6.9 No Default. | |
6.10 Litigation. | |
6.11 Taxes. | |
6.12 Compliance with Law. | |
6.13 Licensing and Accreditation. | |
6.14 Insurance. | |
6.15 Use of Proceeds. | |
6.16 Government Regulation. | |
6.17 ERISA. | |
6.18 Environmental Matters. | |
6.19 Intellectual Property. | |
6.20 Subsidiaries. | |
6.21 Anti-Corruption Laws and Sanctions. | |
6.22 Affected Financial Institution. | |
| |
| SECTION 7 AFFIRMATIVE COVENANTS | |
7.1 Information Covenants. | |
7.2 Financial Covenant. | |
7.3 Preservation of Existence and Franchises. | |
7.4 Compliance with Law. | |
7.5 Payment of Taxes. | |
7.6 Insurance. | |
7.7 Maintenance of Property. | |
7.8 Use of Proceeds. | |
7.9 Audits/Inspections. | |
7.10 Subsidiary Guarantees. | |
7.11 Compliance Program. | |
| |
| SECTION 8 NEGATIVE COVENANTS | |
8.1 Indebtedness of Subsidiaries. | |
8.2 Liens. | |
8.3 Sale and Leaseback Transactions. | |
| | | | | |
8.4 Nature of Business. | |
8.5 Fundamental Changes. | |
8.6 Transactions with Affiliates. | |
| |
| SECTION 9 EVENTS OF DEFAULT | |
9.1 Events of Default. | |
9.2 Acceleration; Remedies. | |
9.3 Allocation of Payments After Event of Default. | |
| |
| SECTION 10 AGENCY PROVISIONS | |
10.1 Appointment. | |
10.2 Delegation of Duties. | |
10.3 Exculpatory Provisions. | |
10.4 Reliance on Communications. | |
10.5 Notice of Default. | |
10.6 Non-Reliance on Administrative Agent and Other Lenders. | |
10.7 Indemnification. | |
10.8 Administrative Agent in Its Individual Capacity. | |
10.9 Successor Agent. | |
10.10 Agent May File Proofs of Claim. | |
10.11 Certain Lender Representations, Etc. | |
| |
| SECTION 11 MISCELLANEOUS | |
11.1 Notices, Etc. | |
11.2 Right of Set-Off. | |
11.3 Benefit of Agreement. | |
11.4 No Waiver; Remedies Cumulative. | |
11.5 Payment of Expenses; Indemnification. | |
11.6 Amendments, Waivers and Consents. | |
11.7 Counterparts. | |
11.8 Headings. | |
11.9 Survival of Indemnification. | |
11.10 Governing Law; Venue; Jurisdiction. | |
11.11 Waiver of Jury Trial; Waiver of Consequential Damages. | |
11.12 Severability. | |
11.13 Further Assurances. | |
11.14 Confidentiality. | |
11.15 Non-Public Information. | |
11.16 Entirety. | |
11.17 Binding Effect; Continuing Agreement. | |
11.18 PATRIOT Act Notice. | |
11.19 No Advisory or Fiduciary Responsibility. | |
11.20 Judgment Currency. | |
11.21 Acknowledgment and Consent to Bail-In of Affected Financial Institutions. | |
SCHEDULES
Schedule 1.1(a) Commitment Percentages/Lending Offices
Schedule 2.2 Existing Letters of Credit
Schedule 6.10 Litigation
Schedule 8.1 Indebtedness
Schedule 8.2 Liens
Schedule 8.6 Affiliate Transactions
Schedule 11.1 Notices
EXHIBITS
Exhibit 2.1(b) Form of Notice of Borrowing
Exhibit 2.1(e) Form of Revolving Note
Exhibit 2.3(b) Form of Swing Line Loan Request
Exhibit 2.3(d) Form of Swing Line Loan Note
Exhibit 2.4 Form of Notice of Continuation/Conversion
Exhibit 3.13(f) Form of Tax Certificate
Exhibit 7.1(c) Form of Officer’s Certificate
Exhibit 7.10 Form of Guarantee
Exhibit 11.3(b) Form of Assignment and Assumption
THIRD AMENDED AND RESTATED CREDIT AGREEMENT, dated as of November 23, 2021 (as amended, amended and restated, supplemented or otherwise modified from time to time, this “Credit Agreement”), by and among QUEST DIAGNOSTICS INCORPORATED, a Delaware corporation, as Borrower, the various financial institutions and other Persons from time to time parties hereto, as Lenders, JPMORGAN CHASE BANK, N.A., as Administrative Agent, MORGAN STANLEY SENIOR FUNDING, INC., as syndication agent (in such capacity, the “Syndication Agent”), and MIZUHO BANK, LTD. and WELLS FARGO BANK, N.A., as documentation agents (in such capacities, the “Documentation Agents”).
WHEREAS, for purposes of providing financing for the working capital and general corporate needs of the Borrower and its Subsidiaries, including acquisitions, the Borrower requested a $750,000,000 revolving credit facility (the “Revolving Credit Facility”); and
WHEREAS, on the Prior Closing Date, the Lenders agreed, on the terms and subject to the conditions hereinafter set forth, to provide the Revolving Credit Facility;
NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree that, subject to the satisfaction of the conditions set forth in Section 5.1, the Existing Credit Agreement shall be and hereby is amended and restated in its entirety as follows:
SECTION 1
DEFINITIONS AND ACCOUNTING TERMS
1.1Definitions.
As used herein, the following terms shall have the meanings herein specified unless the context otherwise requires:
“Adjusted Daily Simple SONIA Rate” means, with respect to any Borrowing denominated in Sterling, an interest rate per annum equal to the Daily Simple SONIA Rate; provided that if the Adjusted Daily Simple SONIA Rate as so determined would be less than the Floor, such rate shall be deemed to be equal to the Floor for the purposes of this Credit Agreement.
“Adjusted EURIBO Rate” means, with respect to any Term Benchmark Borrowing denominated in Euros for any Interest Period, an interest rate per annum equal to (a) the EURIBO Rate for such Interest Period multiplied by (b) the Statutory Reserve Rate; provided that if the Adjusted EURIBO Rate as so determined would be less than the Floor, such rate shall be deemed to be equal to the Floor for the purposes of this Credit Agreement.
“Adjusted LIBO Rate” means, for any Interest Period, with respect to an Interest Period for a LIBOR Loan denominated in Dollars, an interest rate per annum (rounded upwards, if necessary, to the next 1/100 of 1%) equal to (a) the LIBO Rate for such Interest Period multiplied by (b) the Statutory Reserve Rate; provided that if the Adjusted LIBO Rate as so determined would be less than the Floor, such rate shall be deemed to be equal to the Floor for the purposes of this Credit Agreement.
“Administrative Agent” means JPMorgan (or any successor thereto) or any successor administrative agent appointed pursuant to Section 10.9.
“Administrative Questionnaire” means an Administrative Questionnaire in a form supplied by the Administrative Agent.
“Affected Financial Institution” means (a) any EEA Financial Institution or (b) any UK Financial Institution.
“Affiliate” means, with respect to any Person, any other Person directly or indirectly controlling (including but not limited to all directors and officers of such Person), controlled by or under direct or indirect common control with such Person. A Person shall be deemed to control a corporation if such Person possesses, directly or indirectly, the power (a) to vote 10% or more of the securities having ordinary voting power for the election of directors of such corporation or (b) to direct or cause direction of the management and policies of such corporation, whether through the ownership of voting securities, by contract or otherwise.
“Agency Services Address” means, with respect to any currency, the Administrative Agent’s address and, as appropriate, account as set forth on Schedule 11.1 with respect to such currency, or such other address or account with respect to such currency as the Administrative Agent may from time to time designate by written notice to the Borrower and the Lenders.
“Agent-Related Person” means the Administrative Agent (including any successor administrative agent) and its Related Parties.
“Agents” means the Administrative Agent, the Syndication Agent and the Documentation Agents.
“Agreed Currencies” means Dollars and each Alternative Currency.
“Agreement Currency” has the meaning set forth in Section 11.20.
“Alternative Currency” means Euro, Sterling and each other currency (other than Dollars) that is approved in accordance with Section 1.6.
“Amendment and Restatement Agreement” means the Amendment and Restatement Agreement, dated as of November 23, 2021, among the Borrower, the Lenders party thereto and the Administrative Agent.
“Anti-Corruption Laws” means all laws, rules, and regulations of any jurisdiction applicable to the Borrower or its Subsidiaries from time to time concerning or relating to bribery, money laundering or corruption.
“Applicable Percentage” means the appropriate applicable percentage corresponding to the Debt Rating of the Borrower in effect from time to time as described below:
| | | | | | | | | | | | | | | | | |
| Pricing Level | Debt Rating | Applicable Percentage for Term Benchmark Revolving Loans and RFR Loans | Applicable Percentage for Base Rate Revolving Loans | Applicable Percentage for Letter of Credit Fees | Applicable Percentage for Facility Fee on the Revolving Commitments |
| I | A from S&P/ A2 from Moody’s | 0.630% | 0% | 0.630% | 0.070% |
| II | A- from S&P/ A3 from Moody’s | 0.785% | 0% | 0.785% | 0.090% |
| III | BBB+ from S&P/ Baa1 from Moody’s | 0.900% | 0% | 0.900% | 0.100% |
| IV | BBB from S&P/ Baa2 from Moody’s | 1.000% | 0% | 1.000% | 0.125% |
| V | BBB- from S&P/ Baa3 from Moody’s | 1.100% | 0.100% | 1.100% | 0.150% |
| VI | ≤ BB+ or unrated by S&P/ ≤ Ba1 or unrated by Moody’s | 1.275% | 0.275% | 1.275% | 0.225% |
The Applicable Percentage for Revolving Loans that are Term Benchmark Loans, RFR Loans and Base Rate Loans, for Letter of Credit Fees and for Facility Fees shall, in each case, be determined and adjusted on the date (each a “Calculation Date”) one Business Day after the date on which the Borrower’s Debt Rating is upgraded or downgraded in a manner which requires a change in the then applicable pricing level set forth above. If at any time there is a split in the Borrower’s Debt Ratings between S&P and Moody’s, the Applicable Percentages shall be determined by the higher of the two Debt Ratings (i.e., the lower pricing); provided that if the two Debt Ratings are more than one level apart, the Applicable Percentage shall be based on the Debt Rating which is one level lower than the higher Debt Rating. Each Applicable Percentage shall be effective from one Calculation Date until the next Calculation Date. Any adjustment in the Applicable Percentage shall be applicable to all existing Revolving Loans that are Term Benchmark Loans, RFR Loans and Base Rate Loans and to all existing Letters of Credit as well as any new Revolving Loans, that are Term Benchmark Loans, RFR Loans or Base Rate Loans, made or any new Letters of Credit issued.
“Applicable Time” means, with respect to any borrowings and payments in any Alternative Currency, the local time in the place of settlement for such Alternative Currency as may be determined by the Administrative Agent (and notified to the Borrower in writing) to be necessary for timely settlement on the relevant date in accordance with normal banking procedures in the place of payment.
“Approved Fund” means any Fund that is administered or managed by (i) a Lender, (ii) an Affiliate of a Lender or (iii) an entity or an Affiliate of an entity that administers or manages a Lender.
“Assignee Group” means two or more Eligible Assignees that are Affiliates of one another or two or more Approved Funds managed by the same investment advisor.
“Assignment and Assumption” means an Assignment and Assumption substantially in the form of Exhibit 11.3(b).
“Attorney Costs” means all reasonable and documented out-of-pocket fees and disbursements of any law firm or other external counsel.
“Attributable Debt” means, with respect to a Sale and Leaseback Transaction, an amount equal to the lesser of: (a) the fair market value of the Property subject thereto (as determined in good faith by the Borrower’s board of directors) and (b) the present value of the total net amount of rent payments to be made under the lease during its remaining term, discounted at the rate of interest set forth or implicit in the terms of the lease, compounded semiannually.
“Authorized Officer” means any of the chief executive officer, president, chief financial officer, corporate controller, treasurer or assistant treasurer of the Borrower.
“Available Tenor” means, as of any date of determination and with respect to the then-current Benchmark for any Agreed Currency, as applicable, any tenor for such Benchmark (or component thereof) or payment period for interest calculated with reference to such Benchmark (or component thereof), as applicable, that is or may be used for determining the length of an Interest Period for any term rate or otherwise, for determining any frequency of making payments of interest calculated pursuant to this Credit Agreement as of such date and not including, for the avoidance of doubt, any tenor for such Benchmark that is then-removed from the definition of “Interest Period” pursuant to clause (g) of Section 3.10.
“Bail-In Action” means the exercise of any Write-Down and Conversion Powers by the applicable Resolution Authority in respect of any liability of an Affected Financial Institution.
“Bail-In Legislation” means (a) with respect to any EEA Member Country implementing Article 55 of Directive 2014/59/EU of the European Parliament and of the Council of the European Union, the implementing law, regulation, rule or requirement for such EEA Member Country from time to time which is described in the EU Bail-In Legislation Schedule and (b) with respect to the United Kingdom, Part I of the United Kingdom Banking Act 2009 (as amended from time to time) and any other law, regulation or rule applicable in the United Kingdom relating to the resolution of unsound or failing banks, investment firms or other financial institutions or their affiliates (other than through liquidation, administration or other insolvency proceedings).
“Bankruptcy Code” means the Bankruptcy Code in Title 11 of the United States Code, as amended, modified, succeeded or replaced from time to time.
“Bankruptcy Event” means, with respect to any Person, that such Person has become the subject of a bankruptcy or insolvency proceeding, or has had a receiver, conservator, trustee, administrator, custodian, assignee for the benefit of creditors or similar Person charged with the
reorganization or liquidation of its business appointed for it, or, in the good faith determination of the Administrative Agent, has taken any action in furtherance of, or indicating its consent to, approval of or acquiescence in, any such proceeding or appointment; provided that a Bankruptcy Event shall not result solely by virtue of any ownership interest, or the acquisition of any ownership interest, in such Person by a Governmental Authority; provided, further, that such ownership interest does not result in or provide such Person with immunity from the jurisdiction of courts within the United States of America or from the enforcement of judgments or writs of attachment on its assets or permit such Person (or such Governmental Authority) to reject, repudiate, disavow or disaffirm any agreements made by such Person.
“Base Rate” means, for any day, a rate per annum equal to the greatest of (a) the Prime Rate in effect on such day, (b) the NYFRB Rate in effect on such day plus ½ of 1% per annum and (c) the Adjusted LIBO Rate on such day (or if such day is not a Business Day, the immediately preceding Business Day) for a deposit in Dollars with a maturity of one month plus 1% per annum. For purposes of clause (c) above, the Adjusted LIBO Rate for any day shall be based on the Screen Rate at approximately 11:00 a.m., London time, on such day for deposits in Dollars with a maturity of one month; provided that if such rate shall be less than zero, such rate shall be deemed to be zero for all purposes of this Credit Agreement. Any change in the Base Rate due to a change in the Prime Rate, the NYFRB Rate or the Adjusted LIBO Rate shall be effective from and including the effective date of such change in the Prime Rate, the NYFRB Rate or the Adjusted LIBO Rate, as the case may be. If the Base Rate is being used as an alternate rate of interest pursuant to Section 3.10 (for the avoidance of doubt, only until any amendment has become effective pursuant to Section 3.10(b)), then the Base Rate shall be the greater of clauses (a) and (b) above and shall be determined without reference to clause (c) above.
“Base Rate Loan” means any Loan bearing interest at a rate determined by reference to the Base Rate. Base Rate Loans may be denominated only in Dollars.
“Benchmark” means, initially, with respect to any (i) RFR Loan, the applicable Relevant Rate or (ii) Term Benchmark Loan, the Relevant Rate for such Agreed Currency; provided that if a Benchmark Transition Event, a Term SOFR Transition Event, an Early Opt-in Election or an Other Benchmark Rate Election, as applicable, and its related Benchmark Replacement Date have occurred with respect to the applicable Relevant Rate or the then-current Benchmark for such Agreed Currency, then “Benchmark” means the applicable Benchmark Replacement to the extent that such Benchmark Replacement has replaced such prior benchmark rate pursuant to clause (b) or clause (c) of Section 3.10.
“Benchmark Replacement” means, for any Available Tenor, the first alternative set forth in the order below that can be determined by the Administrative Agent (in consultation with the Borrower) for the applicable Benchmark Replacement Date; provided that, in the case of any Loan denominated in an Alternative Currency or in the case of an Other Benchmark Rate Election, “Benchmark Replacement” shall mean the alternative set forth in clause (3) below:
(1) in the case of any Loan denominated in Dollars, the sum of: (a) Term SOFR and (b) the related Benchmark Replacement Adjustment;
(2) in the case of any Loan denominated in Dollars, the sum of: (a) Daily Simple SOFR and (b) the related Benchmark Replacement Adjustment;
(3) the sum of: (a) the alternate benchmark rate that has been reasonably selected by the Administrative Agent and the Borrower as the replacement for the then-current Benchmark for the applicable Corresponding Tenor giving due consideration to (i) any selection or recommendation of a replacement benchmark rate or the mechanism for determining such a rate by the Relevant Governmental Body, (ii) any evolving or then-prevailing market convention for determining a benchmark rate as a replacement for the then-current Benchmark for syndicated credit facilities denominated in the applicable Agreed Currency at such time in the United States and (b) the related Benchmark Replacement Adjustment;
provided that, in the case of clause (1), Term SOFR is displayed on a screen or other information service that publishes such rate from time to time as selected by the Administrative Agent in its reasonable discretion; provided further that, in the case of clause (3), when such clause is used to determine the Benchmark Replacement in connection with the occurrence of an Other Benchmark Rate Election, the alternate benchmark rate selected by the Administrative Agent and the Borrower shall be the term benchmark rate that is used in lieu of a LIBOR-based rate in the relevant other Dollar-denominated syndicated credit facilities referenced in clause (a) of the “Other Benchmark Rate Election” definition; provided further that, notwithstanding anything to the contrary in this Credit Agreement or in any other Credit Document, upon the occurrence of a Term SOFR Transition Event, and the delivery of a Term SOFR Notice, on the applicable Benchmark Replacement Date the “Benchmark Replacement” shall revert to and shall be deemed to be the sum of (a) Term SOFR and (b) the related Benchmark Replacement Adjustment, as set forth in clause (1) of this definition (subject to the first proviso above).
If the Benchmark Replacement as determined pursuant to clause (1), (2) or (3) above would be less than the Floor, the Benchmark Replacement will be deemed to be the Floor for the purposes of this Credit Agreement and the other Credit Documents.
“Benchmark Replacement Adjustment” means, with respect to any replacement of the then-current Benchmark with an Unadjusted Benchmark Replacement for any applicable Interest Period and Available Tenor for any setting of such Unadjusted Benchmark Replacement:
(1) for purposes of clauses (1) and (2) of the definition of “Benchmark Replacement,” the first alternative set forth in the order below that can be determined by the Administrative Agent (in consultation with the Borrower):
(a) the spread adjustment, or method for calculating or determining such spread adjustment (which may be a positive or negative value or zero), as of the Reference Time such Benchmark Replacement is first set for such Interest Period that has been selected or recommended by the Relevant Governmental Body for the replacement of such Benchmark with the applicable Unadjusted Benchmark Replacement for the applicable Corresponding Tenor;
(b) the spread adjustment (which may be a positive or negative value or zero) as of the Reference Time such Benchmark Replacement is first set for such Interest Period that would apply to the fallback rate for a derivative transaction referencing the ISDA Definitions to be effective upon an index cessation event with respect to such Benchmark for the applicable Corresponding Tenor; and
(2) for purposes of clause (3) of the definition of “Benchmark Replacement,” the spread adjustment, or method for calculating or determining such spread adjustment (which may be a positive or negative value or zero), that has been selected by the Administrative Agent and the Borrower for the applicable Corresponding Tenor giving due consideration to (i) any selection or recommendation of a spread adjustment, or method for calculating or determining such spread adjustment, for the replacement of such Benchmark with the applicable Unadjusted Benchmark Replacement by the Relevant Governmental Body on the applicable Benchmark Replacement Date and/or (ii) any evolving or then-prevailing market convention for determining a spread adjustment, or method for calculating or determining such spread adjustment, for the replacement of such Benchmark with the applicable Unadjusted Benchmark Replacement for syndicated credit facilities denominated in the applicable Agreed Currency at such time;
provided that, in the case of clause (1) above, such adjustment is displayed on a screen or other information service that publishes such Benchmark Replacement Adjustment from time to time as selected by the Administrative Agent in its reasonable discretion (in consultation with the Borrower).
“Benchmark Replacement Conforming Changes” means, with respect to any Benchmark Replacement, any technical, administrative or operational changes (including changes to the definition of “Base Rate,” the definition of “Business Day,” the definition of “Interest Period,” the definition of “RFR Business Day,” timing and frequency of determining rates and making payments of interest, timing of borrowing requests or prepayment, conversion or continuation notices, length of lookback periods, the applicability of breakage provisions, and other technical, administrative or operational matters) that the Administrative Agent, in consultation with the Borrower, decides may be appropriate to reflect the adoption and implementation of such Benchmark Replacement and to permit the administration thereof by the Administrative Agent in a manner substantially consistent with market practice (or, if the Administrative Agent decides that adoption of any portion of such market practice is not administratively feasible or if the Administrative Agent determines that no market practice for the administration of such Benchmark Replacement exists, in such other manner of administration as the Administrative Agent decides is reasonably necessary in connection with the administration of this Credit Agreement and the other Credit Documents).
“Benchmark Replacement Date” means, with respect to any Benchmark, the earliest to occur of the following events with respect to such then-current Benchmark:
(1) in the case of clause (1) or (2) of the definition of “Benchmark Transition Event,” the later of (a) the date of the public statement or publication of information referenced therein and (b) the date on which the administrator of such Benchmark (or the published component used in the calculation thereof) permanently or indefinitely ceases to provide all Available Tenors of such Benchmark (or such component thereof);
(2) in the case of clause (3) of the definition of “Benchmark Transition Event,” the first date on which such Benchmark (or the published component used in the calculation thereof) has been determined and announced by the regulatory supervisor for the administrator of such Benchmark (or such component thereof) to be no longer representative; provided, that such non-representativeness will be determined by reference to the most recent statement or publication referenced in such clause (c) and even if any Available Tenor of such Benchmark (or such component thereof) continues to be provided on such date;
(3) in the case of a Term SOFR Transition Event, the date that is thirty (30) days after the date a Term SOFR Notice is provided to the Lenders and the Borrower pursuant to Section 3.10(c); or
(4) in the case of an Early Opt-in Election or an Other Benchmark Rate Election, the sixth (6th) Business Day after the date notice of such Early Opt-in Election or Other Benchmark Rate Election, as applicable, is provided to the Lenders, so long as the Administrative Agent has not received, by 5:00 p.m. (New York City time) on the fifth (5th) Business Day after the date notice of such Early Opt-in Election or Other Benchmark Rate Election, as applicable, is provided to the Lenders, written notice of objection to such Early Opt-in Election or Other Benchmark Rate Election, as applicable, from Lenders comprising the Required Lenders.
For the avoidance of doubt, (i) if the event giving rise to the Benchmark Replacement Date occurs on the same day as, but earlier than, the Reference Time in respect of any determination, the Benchmark Replacement Date will be deemed to have occurred prior to the Reference Time for such determination and (ii) the “Benchmark Replacement Date” will be deemed to have occurred in the case of clause (1) or (2) with respect to any Benchmark upon the occurrence of the applicable event or events set forth therein with respect to all then-current Available Tenors of such Benchmark (or the published component used in the calculation thereof).
“Benchmark Transition Event” means, with respect to any Benchmark, the occurrence of one or more of the following events with respect to such then-current Benchmark:
(1) a public statement or publication of information by or on behalf of the administrator of such Benchmark (or the published component used in the calculation thereof) announcing that such administrator has ceased or will cease to provide all Available Tenors of such Benchmark (or such component thereof), permanently or indefinitely, provided that, at the time of such statement or publication, there is no successor administrator that will continue to provide any Available Tenor of such Benchmark (or such component thereof);
(2) a public statement or publication of information by the regulatory supervisor for the administrator of such Benchmark (or the published component used in the calculation thereof), the Federal Reserve Board, the NYFRB, the central bank for the Agreed
Currency applicable to such Benchmark, an insolvency official with jurisdiction over the administrator for such Benchmark (or such component), a resolution authority with jurisdiction over the administrator for such Benchmark (or such component) or a court or an entity with similar insolvency or resolution authority over the administrator for such Benchmark (or such component), in each case, which states that the administrator of such Benchmark (or such component) has ceased or will cease to provide all Available Tenors of such Benchmark (or such component thereof) permanently or indefinitely; provided that, at the time of such statement or publication, there is no successor administrator that will continue to provide any Available Tenor of such Benchmark (or such component thereof); or
(3) a public statement or publication of information by the regulatory supervisor for the administrator of such Benchmark (or the published component used in the calculation thereof) announcing that all Available Tenors of such Benchmark (or such component thereof) are no longer, or as of a specified future date will no longer be, representative.
For the avoidance of doubt, a “Benchmark Transition Event” will be deemed to have occurred with respect to any Benchmark if a public statement or publication of information set forth above has occurred with respect to each then-current Available Tenor of such Benchmark (or the published component used in the calculation thereof).
“Benchmark Unavailability Period” means, with respect to any Benchmark, the period (if any) (x) beginning at the time that a Benchmark Replacement Date pursuant to clauses (1) or (2) of that definition has occurred if, at such time, no Benchmark Replacement has replaced such then-current Benchmark for all purposes hereunder and under any Credit Document in accordance with Section 3.10 and (y) ending at the time that a Benchmark Replacement has replaced such then-current Benchmark for all purposes hereunder and under any Credit Document in accordance with Section 3.10.
“Beneficial Ownership Certification” means a certification regarding beneficial ownership or control as required by the Beneficial Ownership Regulation.
“Beneficial Ownership Regulation” means 31 C.F.R. § 1010.230.
“Benefit Plan” means any of (a) an “employee benefit plan” (as defined in ERISA) that is subject to Title I of ERISA, (b) a “plan” as defined in and subject to Section 4975 of the Code or (c) any Person whose assets include (for purposes of ERISA Section 3(42) or otherwise for purposes of Title I of ERISA or Section 4975 of the Code) the assets of any such “employee benefit plan” or “plan”.
“Borrower” means Quest Diagnostics Incorporated, a Delaware corporation, together with any successors and permitted assigns.
“Borrower Materials” has the meaning set forth in Section 7.1(h).
“Borrowing” means (a) Revolving Borrowing or (b) a Swing Line Loan.
“Borrowing Minimum” means (a) in the case of a borrowing of Revolving Loans denominated in Dollars, $10,000,000, (b) in the case of a borrowing of Revolving Loans denominated in Euro, EUR10,000,000, (c) in the case of a borrowing of Revolving Loans denominated in Sterling, £10,000,000 and (d) in the case of a borrowing of Revolving Loans denominated in any other Alternative Currency, the smallest amount of such Alternative Currency that is an integral multiple of 1,000,000 units of such currency and that has a Dollar Equivalent in excess of $10,000,000.
“Borrowing Multiple” means (a) in the case of a borrowing of Revolving Loans denominated in Dollars, $1,000,000, (b) in the case of a borrowing of Revolving Loans denominated in Euro, EUR1,000,000, (c) in the case of a borrowing of Revolving Loans denominated in Sterling, £1,000,000 and (d) in the case of a borrowing of Revolving Loans denominated in any other Alternative Currency, 1,000,000 units of such currency.
“Business Day” means, any day (other than a Saturday or a Sunday) on which banks are open for business in New York City; provided that, the term “Business Day” shall mean (a) in relation to Loans denominated in Sterling and in relation to the calculation or computation of LIBOR, any day (other than a Saturday or a Sunday) on which banks are open for business in London, (b) in relation to Loans denominated in Euros and in relation to the calculation or computation of EURIBOR, any day which is a TARGET Day and (c) in relation to RFR Loans and any interest rate settings, fundings, disbursements, settlements or payments of any such RFR Loan, or any other dealings in the applicable Agreed Currency of such RFR Loan, any such day that is only an RFR Business Day.
“Calculation Date” has the meaning set forth in the definition of “Applicable Percentage”.
“CAP” means the College of American Pathologists.
“Capital Lease” means, as applied to any Person, any lease of any Property (whether real, personal or mixed) by that Person as lessee which, in accordance with GAAP, is or should be accounted for as a capital lease on the balance sheet of that Person and the amount of such obligation shall be the capitalized amount thereof determined in accordance with GAAP.
“Capital Stock” means (a) in the case of a corporation, all classes of capital stock of such corporation, (b) in the case of a partnership, partnership interests (whether general or limited), (c) in the case of a limited liability company, membership interests and (d) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person.
“Cash and Cash Equivalents” means:
(a) cash and cash equivalents, in accordance with GAAP, and the following items to the extent that they are excluded from cash and cash equivalents in accordance with GAAP;
(b) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America (or by any agency thereof to the extent such obligations are backed by the full faith and credit of the United States of America), in each case maturing within one year from the date of acquisition thereof;
(c) investments in commercial paper maturing within 270 days from the date of acquisition thereof and having, at such date of acquisition, the highest credit rating obtainable from S&P or from Moody’s;
(d) investments in certificates of deposit, banker’s acceptances and time deposits maturing within 180 days from the date of acquisition thereof issued or guaranteed by or placed with, and money market deposit accounts issued or offered by, any domestic office of any commercial bank organized under the laws of the United States of America or any State thereof which has a combined capital and surplus and undivided profits of not less than $500,000,000;
(e) fully collateralized repurchase agreements with a term of not more than 30 days for securities described in clause (b) above and entered into with a financial institution satisfying the criteria described in clause (d) above; and
(f) money market funds that (i) comply with the criteria set forth in SEC Rule 2a-7 under the Investment Company Act of 1940, and (ii) are rated AAA by S&P and Aaa by Moody’s.
“Central Bank Rate” means, the greater of (A) (i) for any Loan denominated in (a) Sterling, the Bank of England (or any successor thereto)’s “Bank Rate” as published by the Bank of England (or any successor thereto) from time to time, (b) Euro, one of the following three rates as may be selected by the Administrative Agent in its reasonable discretion: (1) the fixed rate for the main refinancing operations of the European Central Bank (or any successor thereto), or, if that rate is not published, the minimum bid rate for the main refinancing operations of the European Central Bank (or any successor thereto), each as published by the European Central Bank (or any successor thereto) from time to time, (2) the rate for the marginal lending facility of the European Central Bank (or any successor thereto), as published by the European Central Bank (or any successor thereto) from time to time or (3) the rate for the deposit facility of the central banking system of the Participating Member States, as published by the European Central Bank (or any successor thereto) from time to time, and (c) any other Alternative Currency determined after the Restatement Effective Date, a central bank rate as determined by the Administrative Agent in its reasonable discretion plus (ii) the applicable Central Bank Rate Adjustment, and (B) 0.00%.
“Central Bank Rate Adjustment” means, for any day, for any Loan denominated in (a) Euros, a rate equal to the difference (which may be a positive or negative value or zero) of (i) the average of the EURIBO Rate for the five most recent Business Days preceding such day for which the applicable Screen Rate was available (excluding, from such averaging, the highest and the lowest EURIBO Rate applicable during such period of five Business Days) minus (ii) the Central Bank Rate in respect of Euro in effect on the last Business Day in such period, (b) Sterling, a rate equal to the difference (which may be a positive or negative value or zero) of (i) the average of SONIA for the five most recent RFR Business Days preceding such day for which SONIA was available (excluding, from such averaging, the highest and the lowest SONIA applicable during such period of five RFR Business Days) minus (ii) the Central Bank Rate in respect of Sterling in effect on the last RFR Business Day in such period, and (c) any other Alternative Currency determined after the Restatement Effective Date, a Central Bank Rate Adjustment as determined by the Administrative Agent in its reasonable discretion (in consultation with the Borrower). For purposes of this definition, (x) the term Central Bank Rate shall be determined disregarding clause (B) of the definition of such term and (y) the EURIBO Rate on any day shall be based on the applicable Screen Rate on such day at approximately the time referred to in the definition of such term for deposits in the applicable Agreed Currency for a maturity of one month.
“Change in Law” means the occurrence, after the date of this Credit Agreement, of any of the following: (a) the adoption or taking effect of any rule, regulation, treaty or other law, (b) any change in any rule, regulation, treaty or other law or in the administration, interpretation, implementation or application thereof by any Governmental Authority or (c) the making or issuance of any request, rule, guideline or directive (whether or not having the force of law) of any Governmental Authority; provided that, for all purposes of this Credit Agreement and notwithstanding anything herein to the contrary, (i) the Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, rules, guidelines or directives thereunder or issued in connection therewith and (ii) all requests, rules, guidelines or directives promulgated by the Bank for International Settlements, the Basel Committee on Banking Supervision (or any successor or similar authority) or the United States or foreign regulatory authorities, in each case pursuant to Basel III, shall in each case be deemed to be a “Change in Law”, regardless of the date enacted, adopted, promulgated or issued. Notwithstanding the foregoing, no Lender shall be entitled to seek compensation for costs imposed in accordance with the previous sentence if it shall not be the general policy of such Lender at such time to seek compensation from investment grade borrowers with the same or similar ratings under yield protection provisions in credit agreements with such borrowers that provide for such compensation.
“Change of Control” means either of the following events:
(a) any “person” or “group” (within the meaning of Section 13(d) or 14(d) of the Exchange Act) has become, directly or indirectly, the “beneficial owner” (as defined in Rules 13d3 and 13d5 under the Exchange Act), by way of merger, consolidation or otherwise, of 35% or more of the Voting Stock of the Borrower on a fullydiluted basis, after giving effect to the conversion and exercise of all outstanding warrants, options and other securities of the Borrower convertible into or exercisable for Voting Stock of the Borrower (whether or not such securities are then currently convertible or exercisable); or
(b) during any period of twelve calendar months, individuals who at the beginning of such period constituted the board of directors of the Borrower together with any new members of such board of directors whose elections by such board or board of directors or whose nomination for election by the stockholders of the Borrower was approved by a vote of a majority of the members of such board of directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved cease for any reason to constitute a majority of the directors of the Borrower then in office.
“CLIA” means the Clinical Laboratory Improvement Amendment as set forth at 42 U.S.C. 263a and the regulations promulgated thereunder, as amended.
“CMS” means the Centers for Medicare and Medicaid Services of HHS, any successor thereof and any predecessor thereof, including the HCFA.
“Code” means the Internal Revenue Code of 1986, as amended, modified, succeeded or replaced from time to time.
“Commitments” means, without duplication, (a) the Revolving Commitment of each Lender, (b) the LOC Commitment of each Issuing Lender, (c) any Incremental Term Commitment of an Incremental Term Lender and (d) any Incremental Revolving Commitment of an Incremental Revolving Lender.
“Corresponding Tenor” with respect to any Available Tenor means, as applicable, either a tenor (including overnight) or an interest payment period having approximately the same length (disregarding business day adjustment) as such Available Tenor.
“Credit Agreement” has the meaning set forth in the preamble.
“Credit Documents” means this Credit Agreement, the Amendment and Restatement Agreement, the Notes, any Incremental Facility Agreement, the LOC Documents, any Notice of Borrowing, any Swing Line Loan Request, any guarantee agreement delivered pursuant to Section 7.10 and any Issuing Lender Agreement, as such documents may be amended, modified, supplemented or restated from time to time.
“Credit Exposure” has the meaning set forth in the definition of “Required Lenders”.
“Daily Simple SONIA Rate” means, for any day (an “RFR Interest Day”), an interest rate per annum equal to, for any Loan denominated in Sterling, SONIA for the day that is 4 RFR Business Days prior to (A) if such RFR Interest Day is an RFR Business Day, such RFR Interest Day or (B) if such RFR Interest Day is not an RFR Business Day, the RFR Business Day immediately preceding such RFR Interest Day.
“Daily Simple SOFR” means, for any day, SOFR, with the conventions for this rate (which may include a lookback) being established by the Administrative Agent in accordance with the conventions for this rate selected or recommended by the Relevant Governmental Body for determining “Daily Simple SOFR” for business loans; provided, that if the Administrative Agent decides that any such convention is not administratively feasible for the Administrative Agent, then the Administrative Agent may establish another convention in its reasonable discretion.
“Debt Rating” means the longterm senior unsecured, noncredit enhanced debt rating of the Borrower from S&P and Moody’s.
“Default” means any event, act or condition which with notice or lapse of time, or both, would constitute an Event of Default.
“Defaulting Lender” means any Revolving Lender that (a) has failed, within two Business Days of the date required to be funded or paid, (i) to fund any portion of its Loans, (ii) to fund any portion of its participations in Letters of Credit or Swing Line Loans or (iii) to pay to any Financing Party any other amount required to be paid by it hereunder, unless, in the case of clause (i) above, such Lender notifies the Administrative Agent in writing that such failure is the result of such Lender’s good faith determination that a condition precedent to funding (specifically identified in such writing, including, if applicable, by reference to a specific Default) has not been satisfied, (b) has notified the Borrower or any Financing Party in writing, or has made a public statement, to the effect that it does not intend or expect to comply with any of its funding obligations under this Credit Agreement (unless such writing or public statement indicates that such position is based on such Lender’s good-faith determination that a condition precedent (specifically identified in such writing, including, if applicable, by reference to a specific Default) to funding a Loan cannot be satisfied) or generally under other agreements in
which it commits to extend credit, (c) has failed, within three Business Days after request by a Financing Party made in good faith, to provide a certification in writing from an authorized officer of such Lender that it will comply with its obligations to fund prospective Loans and participations in then outstanding Letters of Credit and Swing Line Loans, provided that such Lender shall cease to be a Defaulting Lender pursuant to this clause (c) upon such Financing Party’s receipt of such certification in form and substance reasonably satisfactory to it and the Administrative Agent, or (d) has become, or has a Revolving Lender Parent that has become, the subject of a Bankruptcy Event or a Bail-In Action.
“Dividends” means any payment of dividends or any other distribution upon any shares of any class of Capital Stock of the Borrower.
“Documentation Agents” has the meaning set forth in the preamble.
“Dodd-Frank Act” has the meaning set forth in the definition of “Change in Law”.
“Dollar Equivalent” means, at any time, (a) with respect to any amount denominated in Dollars, such amount, and (b) with respect to any amount denominated in any Alternative Currency, the equivalent amount thereof in Dollars as determined by the Administrative Agent at such time on the basis of the Exchange Rate (determined in respect of the most recent Revaluation Date) for the purchase of Dollars with such Alternative Currency.
“Dollars” and “$” means dollars in lawful currency of the United States of America.
“Domestic Subsidiary” means each direct and indirect Subsidiary of the Borrower that is domiciled or organized under the laws of any State of the United States or the District of Columbia.
“Early Opt-in Election” means, if the then current Benchmark with respect to Dollars is the LIBO Rate, the occurrence of:
(1) a notification by the Administrative Agent to (or the request by the Borrower to the Administrative Agent to notify) each of the other parties hereto that at least five currently outstanding Dollar denominated syndicated credit facilities at such time contain (as a result of amendment or as originally executed) a SOFR-based rate (including SOFR, a term SOFR or any other rate based upon SOFR) as a benchmark rate (and such syndicated credit facilities are identified in such notice and are publicly available for review), and
(2) the joint election by the Administrative Agent and the Borrower to trigger a fallback from the LIBO Rate and the provision, as applicable, by the Administrative Agent of written notice of such election to the Borrower and the Lenders.
“EBITDA” means, for any period, with respect to the Borrower and its Subsidiaries on a consolidated basis, (a) Net Income for such period (excluding the effect of any extraordinary or other non-recurring gains and losses (including any gain or loss from the sale of Property)) plus (b) an amount which, in the determination of Net Income for such period, has been deducted for (i) Interest Expense for such period, (ii) total Federal, state, foreign or other income or franchise
taxes for such period, (iii) all depreciation and amortization for such period, (iv) other items of expense during such period that do not involve a cash payment at any time (other than the provision for bad debt in connection with uncollectible accounts receivable), (v) cash charges during such period for which the Borrower and its Subsidiaries are reimbursed by a third party during such period, (vi) special or restructuring items during any such period included in Net Income that do not involve a cash payment during such period (collectively, “NonCash Items”) and (vii) expenses charged pursuant to FASB ASC 718, as promulgated in accordance with GAAP, during such period minus (c) any actual cash payments during the applicable period related to NonCash Items expensed or reserved under clauses (v) and (vi) above plus (d) Tender Costs during such period.
“EEA Financial Institution” means (a) any credit institution or investment firm established in any EEA Member Country that is subject to the supervision of an EEA Resolution Authority, (b) any entity established in an EEA Member Country that is a parent of an institution described in clause (a) above or (c) any financial institution established in an EEA Member Country that is a subsidiary of an institution described in clause (a) or (b) above and is subject to consolidated supervision with its parent.
“EEA Member Country” means any member state of the European Union, Iceland, Liechtenstein and Norway.
“EEA Resolution Authority” means any public administrative authority or any Person entrusted with public administrative authority of any EEA Member Country (including any delegee) having responsibility for the resolution of any EEA Financial Institution.
“Electronic Signature” means an electronic sound, symbol, or process attached to, or associated with, a contract or other record and adopted by a Person with the intent to sign, authenticate or accept such contract or record.
“Eligible Assignee” means (a) a Lender, (b) an Affiliate of a Lender, (c) an Approved Fund and (d) any other Person approved by the Administrative Agent, each Issuing Lender, the Swing Line Lender and the Borrower (such approval not to be unreasonably withheld); provided that (i) the Borrower’s approval shall not be required during the existence and continuation of an Event of Default, (ii) neither the Borrower nor an Affiliate of the Borrower shall qualify as an Eligible Assignee, (iii) no competitor of the Borrower identified in a letter dated the Restatement Effective Date of the Borrower to the Administrative Agent (as such letter may be amended, amended and restated, supplemented or otherwise modified by the Borrower from time to time to identify additional Persons engaged in the business in which the Borrower is engaged), which letter shall be made available to the Administrative Agent, shall qualify as an Eligible Assignee, and (iv) no consent of any Issuing Lender shall be required with respect to any Incremental Term Commitment or Incremental Term Loan.
“EMU Legislation” means the legislative measures of the European Council for the introduction of, changeover to or operation of a single or unified European currency.
“Environmental Laws” means any current or future legally enforceable requirement of any Governmental Authority pertaining to (a) the protection of the indoor or outdoor environment, (b) the conservation, management, or use of natural resources and wildlife, (c) the
protection or use of surface water and groundwater, (d) the management, manufacture, possession, presence, use, generation, transportation, treatment, storage, disposal, release, threatened release, abatement, removal, remediation or handling of, or exposure to, any hazardous or toxic substance or material or (e) pollution (including any release to land surface water and groundwater) and includes, without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 USC 9601 et seq., Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976 and Hazardous and Solid Waste Amendments of 1984, 42 USC 6901 et seq., Federal Water Pollution Control Act, as amended by the Clean Water Act of 1977, 33 USC 1251 et seq., Clean Air Act of 1966, as amended, 42 USC 7401 et seq., Toxic Substances Control Act of 1976, 15 USC 2601 et seq., Hazardous Materials Transportation Act, 49 USC App. 1801 et seq., Occupational Safety and Health Act of 1970, as amended, 29 USC 651 et seq., Oil Pollution Act of 1990, 33 USC 2701 et seq., Emergency Planning and Community Right-to-Know Act of 1986, 42 USC 11001 et seq., National Environmental Policy Act of 1969, 42 USC 4321 et seq., Safe Drinking Water Act of 1974, as amended, 42 USC 300(f) et seq., any analogous implementing or successor law, and any amendment, rule, regulation, order, or directive issued thereunder.
“Environmental Liability” means any liability, obligation, loss, claim, action, order or cost, contingent or otherwise (including any liability for damages, costs of environmental remediation, fines, penalties and indemnities), directly or indirectly resulting from or based upon (a) violation of any Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the release or threatened release of any Hazardous Materials or (e) any contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing.
“ERISA” means the Employee Retirement Income Security Act of 1974, as amended, and any successor statute thereto, as interpreted by the rules and regulations thereunder, all as the same may be in effect from time to time. References to sections of ERISA shall be construed also to refer to any successor sections.
“ERISA Affiliate” means an entity, whether or not incorporated, which is treated as a single employer with the Borrower under Sections 414(b) or (c) of the Code and solely for purposes of Section 302 of ERISA and Section 412 of the Code under Section 414 of the Code.
“ERISA Event” means (a) with respect to any Single Employer or Multiple Employer Plan, the occurrence of a reportable event within the meaning of Section 4043 of ERISA (unless the 30-day notice requirement with respect to such event was waived by the PBGC) or a substantial cessation of operations within the meaning of Section 4062(e) of ERISA; (b) the withdrawal of the Borrower or any ERISA Affiliate from a Multiple Employer Plan during a plan year in which it was a substantial employer (as such term is defined in Section 4001(a)(2) of ERISA), or the termination of a Multiple Employer Plan; (c) the distribution of a notice of intent to terminate or the actual termination of a Plan pursuant to Section 4041(a)(2) of ERISA; (d) the institution of proceedings to terminate or the actual termination of any Plan by the PBGC under Section 4042 of ERISA; (e) any event or condition which might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan; (f) the complete or partial withdrawal of the Borrower or any ERISA Affiliate from a Multiemployer Plan; or (g) the conditions for imposition of a lien under Section 303(k) of ERISA exist with respect to any Plan.
“EU Bail-In Legislation Schedule” means the EU Bail-In Legislation Schedule published by the Loan Market Association (or any successor Person), as in effect from time to time.
“EURIBO Rate” means, with respect to any Term Benchmark Loan denominated in Euros for any Interest Period, the applicable Screen Rate as of the Specified Time on the Quotation Day.
“EURIBOR Loan” means a Loan bearing interest at a rate determined by reference to the EURIBO Rate. All Loans denominated in Euros shall be EURIBOR Loans.
“Euro” and “EUR” mean the lawful currency of the Participating Member States introduced in accordance with the EMU Legislation.
“Event of Default” means any of the events or circumstances specified in Section 9.1.
“Exchange Act” means the United States Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder, as amended, modified, succeeded or replaced from time to time.
“Exchange Rate” means on any day, for purposes of determining the Dollar Equivalent of any other currency, the rate at which such other currency may be exchanged into Dollars at the time of determination on such day as set forth on the Bloomberg WCR Page for such currency. In the event that such rate does not appear on any Bloomberg WCR Page, the Exchange Rate shall be determined by reference to such other publicly available service for displaying exchange rates as may be agreed upon by the Administrative Agent and the Borrower or, in the absence of such an agreement, such Exchange Rate shall instead be the arithmetic average of the spot rates of exchange of the Administrative Agent in the market where its foreign currency exchange operations in respect of such currency are then being conducted, at or about such time as the Administrative Agent shall elect after determining that such rates shall be the basis for determining the Exchange Rate, on such date for the purchase of Dollars for delivery two Business Days later; provided that if at the time of any such determination, for any reason, no such spot rate is being quoted, the Administrative Agent may use any reasonable method it deems appropriate to determine such rate, and such determination shall be conclusive absent manifest error.
“Existing Credit Agreement” means this Credit Agreement, as in effect immediately prior to the occurrence of the Restatement Effective Date.
“Existing Letters of Credit” means the outstanding letters of credit originally issued or deemed issued under the Existing Credit Agreement that are identified on Schedule 2.2.
“Extending Lender” has the meaning set forth in Section 2.8(a).
“Extension Confirmation Date” has the meaning set forth in Section 2.8(b).
“Extension Effective Date” has the meaning set forth in Section 2.8(b).
“Extension of Credit” means, as to any Lender, the making or extension of a Loan by such Lender (or a participation therein by a Lender) or the issuance or extension or increase in the face amount of, or participation in, a Letter of Credit by such Lender.
“Extension Request” has the meaning set forth in Section 2.8(a).
“Facility Fee” has the meaning set forth in Section 3.4(a).
“FAS 842” has the meaning set forth in Section 1.3(a).
“FATCA” means Sections 1471 through 1474 of the Code (or any amended or successor version that is substantively comparable thereto) and any regulations or official interpretations thereof, any agreements entered into pursuant to Section 1471(b)(1) of the Code and any fiscal or regulatory legislation, rules or practices adopted pursuant to any intergovernmental agreement, treaty or convention among Governmental Authorities and implementing such Sections of the Code.
“FCA” has the meaning assigned to such term in Section 1.10.
“Federal Funds Rate” means, for any day, the rate calculated by the NYFRB based on such day’s federal funds transactions by depository institutions (as determined in such manner as shall set forth on the Federal Reserve Board of New York’s Website from time to time) and published on the next succeeding Business Day by the NYFRB as the effective federal funds rate; provided that if such rate shall be less than zero, such rate shall be deemed to be zero for all purposes of this Credit Agreement.
“Federal Reserve Bank of New York’s Website” means the website of the NYFRB at http://www.newyorkfed.org, or any successor source.
“Fee Letters” means the JPMorgan Fee Letter, the Morgan Stanley Fee Letter, the Mizuho Fee Letter and the Wells Fargo Fee Letter, as such documents may be amended, modified, supplemented or restated from time to time.
“Financing Party” means the Administrative Agent, each Issuing Lender, the Swing Line Lender and each other Lender.
“Floor” means the benchmark rate floor, if any, provided in this Credit Agreement (as of the execution and delivery of this Credit Agreement, the modification, amendment or renewal of this Credit Agreement or otherwise) with respect to the Adjusted LIBO Rate, the Adjusted EURIBO Rate or the Adjusted Daily Simple SONIA Rate, as applicable. For the avoidance of doubt the initial Floor for each of the Adjusted LIBO Rate, the Adjusted EURIBO Rate and the Adjusted Daily Simple SONIA Rate shall be 0.00%.
“Foreign Currency Sublimit” has the meaning set forth in Section 2.1(a).
“Foreign Subsidiary” means each direct and indirect Subsidiary of the Borrower that is not a Domestic Subsidiary.
“Fund” means any Person (other than a natural person) that is (or will be) engaged in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of its business.
“Funded Debt” means, without duplication, the sum of (a) all Indebtedness of the Borrower and its Subsidiaries for borrowed money, (b) all purchase money Indebtedness of the Borrower and its Subsidiaries, (c) the principal portion of all obligations of the Borrower and its Subsidiaries under Capital Leases, (d) all drawn but unreimbursed amounts under all letters of credit (other than letters of credit supporting trade payables in the ordinary course of business) issued for the account of the Borrower or any of its Subsidiaries, (e) all Funded Debt of another Person secured by a Lien on any Property of the Borrower and its Subsidiaries whether or not such Funded Debt has been assumed by a Borrower or any of its Subsidiaries, (f) all Funded Debt of any partnership or unincorporated joint venture to the extent the Borrower or one of its Subsidiaries is legally obligated with respect thereto and (g) the amount of principal attributable under any outstanding Synthetic Lease. It is understood and agreed that Indebtedness incurred pursuant to Hedging Agreements is not Funded Debt.
“GAAP” means generally accepted accounting principles in the United States applied on a consistent basis and subject to Section 1.3.
“Government Acts” has the meaning set forth in Section 2.2(j)(i).
“Governmental Authority” means the government of the United States of America or any other nation or any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government, including any applicable supra-national bodies (such as the European Union or the European Central Bank).
“Granting Lender” has the meaning set forth in Section 11.3(g).
“Guarantee Obligations” means, with respect to any Person, without duplication, any obligations (other than endorsements in the ordinary course of business of negotiable instruments for deposit or collection) guaranteeing any Indebtedness of any other Person in any manner, whether direct or indirect, and including without limitation any obligation, whether or not contingent, (a) to purchase any such Indebtedness or other obligation or any Property constituting security therefor, (b) to advance or provide funds or other support for the payment or purchase of such Indebtedness or obligation or to maintain working capital, solvency or other balance sheet condition of such other Person (including, without limitation, maintenance agreements, comfort letters, take or pay arrangements, put agreements or similar agreements or arrangements) for the benefit of the holder of Indebtedness of such other Person, (c) to lease or purchase Property, securities or services primarily for the purpose of assuring the owner of such Indebtedness or (d) to otherwise assure or hold harmless the owner of such Indebtedness or obligation against loss in respect thereof. The amount of any Guarantee Obligation hereunder shall (subject to any limitations set forth therein) be deemed to be an amount equal to the outstanding principal amount (or maximum principal amount, if larger) of the Indebtedness in respect of which such Guarantee Obligation is made.
“Hazardous Materials” means any substance, material or waste defined in or regulated under any Environmental Laws.
“HCFA” means the United States Health Care Financing Administration and any successor thereto, including CMS.
“Hedging Agreements” means, collectively, interest rate protection agreements, foreign currency exchange agreements, commodity purchase or option agreements or other interest or exchange rate or commodity price hedging agreements.
“HHS” means the United States Department of Health and Human Services and any successor thereof.
“HIPAA” means the Health Insurance Portability and Accountability Act of 1996, Pub. L. 104-191, Aug. 21, 1996, 110 Stat. 1936 and regulations promulgated thereunder, as amended from time to time.
“Incremental Commitment” means an Incremental Revolving Commitment or an Incremental Term Commitment.
“Incremental Committed Amount” has the meaning set forth in Section 2.7(a).
“Incremental Facility Agreement” means an Incremental Facility Agreement, in form and substance reasonably satisfactory to the Administrative Agent, among the Borrower, the Administrative Agent and one or more Incremental Lenders, establishing Incremental Term Commitments of any Series or Incremental Revolving Commitments and effecting such other amendments hereto and to the other Credit Documents as are contemplated by Section 2.7.
“Incremental Lender” means an Incremental Revolving Lender or an Incremental Term Lender.
“Incremental Revolving Commitment” means, with respect to any Lender, the commitment, if any, of such Lender, established pursuant to an Incremental Facility Agreement and Section 2.7, to make Revolving Loans and to acquire participations in Letters of Credit and Swing Line Loans hereunder, expressed as an amount representing the maximum aggregate permitted amount of such Lender’s Revolving Exposure under such Incremental Facility Agreement.
“Incremental Revolving Lender” means a Lender with an Incremental Revolving Commitment.
“Incremental Term Commitment” means, with respect to any Lender, the commitment, if any, of such Lender, established pursuant to an Incremental Facility Agreement and Section 2.7, to make Incremental Term Loans of any Series hereunder, expressed as an amount representing the maximum principal amount of the Incremental Term Loans of such Series to be made by such Lender.
“Incremental Term Lender” means a Lender with an Incremental Term Commitment or an outstanding Incremental Term Loan.
“Incremental Term Loan” means a Loan made by an Incremental Term Lender to the Borrower pursuant to Section 2.7.
“Incremental Term Maturity Date” means, with respect to Incremental Term Loans of any Series, the scheduled date on which such Incremental Term Loans shall become due and payable in full hereunder, as specified in the applicable Incremental Facility Agreement.
“Indebtedness” of any Person means, without duplication, (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, or upon which interest payments are customarily made, (c) all obligations of such Person under conditional sale or other title retention agreements relating to Property purchased by such Person to the extent of the value of such Property (other than customary reservations or retentions of title under agreements with suppliers entered into in the ordinary course of business), (d) all obligations, other than intercompany items, of such Person issued or assumed as the deferred purchase price of property or services purchased by such Person which would appear as liabilities on a balance sheet of such Person, (e) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on, or payable out of the proceeds of production from, property owned or acquired by such Person, whether or not the obligations secured thereby have been assumed, (f) all Guarantee Obligations of such Person, (g) the principal portion of all obligations of such Person under (i) Capital Leases and (ii) any synthetic lease, tax retention operating lease, off-balance sheet loan or similar offbalance sheet financing product of such Person where such transaction is considered borrowed money indebtedness for tax purposes but is classified as an operating lease in accordance with GAAP, (h) all obligations of such Person to repurchase any securities which repurchase obligation is related to the issuance thereof, including, without limitation, obligations commonly known as residual equity appreciation potential shares, (i) all net obligations of such Person in respect of Hedging Agreements, (j) the maximum amount of all performance and standby letters of credit issued or bankers’ acceptance facilities created for the account of such Person and, without duplication, all drafts drawn thereunder (to the extent unreimbursed) and (k) the aggregate amount of uncollected accounts receivable of such Person subject at such time to a sale of receivables (or similar transaction) regardless of whether such transaction is effected without recourse to such Person or in a manner that would not be reflected on the balance sheet of such Person in accordance with GAAP. The Indebtedness of any Person shall include the Indebtedness of any partnership or unincorporated joint venture in which such Person is legally obligated.
“Indemnified Liabilities” has the meaning set forth in Section 11.5(c)(i).
“Indemnitees” has the meaning set forth in Section 11.5(c)(i).
“Information” has the meaning set forth in Section 11.14.
“Intellectual Property” has the meaning set forth in Section 6.19.
“Interest Expense” means, with respect to the Borrower and its Subsidiaries on a consolidated basis for any period, all interest expense, including, without duplication, the interest component under Capital Leases, as determined in accordance with GAAP.
“Interest Payment Date” means (a) as to Base Rate Loans and Swing Line Loans, the last day of each calendar quarter and the applicable Maturity Date and, in the case of Swing Line Loans, the date on which the principal of such Loans is due and payable as provided in Section 2.3, (b) as to RFR Loans, (x) the date that is on the numerically corresponding day in the calendar month that is one month after the borrowing of such Loan and each one-month anniversary thereafter (or, in each case, if there is no such numerically corresponding day in such month, then the last day of such month) and (y) the applicable Maturity Date and (c) as to Term Benchmark Loans, the last day of each Interest Period applicable to the Borrowing of which such
Loan is a part and, in the case of a Term Benchmark Loan with an Interest Period of more than three months’ duration, each day prior to the last day of such Interest Period that occurs at intervals of three months’ duration after the first day of such Interest Period, and the applicable Maturity Date. If an Interest Payment Date falls on a date which is not a Business Day, such Interest Payment Date shall be deemed to be the next succeeding Business Day, except that in the case of Term Benchmark Loans where the next succeeding Business Day falls in the next succeeding calendar month, then such Interest Payment Date shall be deemed to be the next preceding Business Day.
“Interest Period” means with respect to any Term Benchmark Loan, the period commencing on the date of such Borrowing and ending on the numerically corresponding day in the calendar month that is one, three or six months thereafter (in each case, subject to the availability for the Benchmark applicable to the relevant Loan or Commitment for any Agreed Currency), as the Borrower may elect; provided, that (i) if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day, (ii) any Interest Period that commences on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the last calendar month of such Interest Period) shall end on the last Business Day of the last calendar month of such Interest Period and (iii) no tenor that has been removed from this definition pursuant to Section 3.10(g) shall be available for specification in such Notice of Borrowing or Notice of Continuation/Conversion unless and until such tenor shall have been reinstated in accordance with Section 3.10(g). For purposes hereof, the date of a Borrowing initially shall be the date on which such Borrowing is made and, in the case of a Revolving Borrowing, thereafter shall be the effective date of the most recent conversion or continuation of such Borrowing.
“ISDA Definitions” means the 2006 ISDA Definitions published by the International Swaps and Derivatives Association, Inc. or any successor thereto, as amended or supplemented from time to time, or any successor definitional booklet for interest rate derivatives published from time to time by the International Swaps and Derivatives Association, Inc. or such successor thereto.
“Issuing Lender” means (a) JPMorgan, Morgan Stanley Bank, N.A., Mizuho Bank, Ltd., Wells Fargo Bank, N.A. and (b) each other Lender designated by the Borrower as an “Issuing Lender” hereunder that has agreed to such designation (and is reasonably acceptable to the Administrative Agent), each in its capacity as an issuer of one or more Letters of Credit hereunder, in each case, so long as such Person shall remain an Issuing Lender hereunder. Any Issuing Lender may, in its discretion and, in the case of Letters of Credit issued for the benefit of a U.S. Person, subject to the Borrower’s prior written consent, arrange for one or more Letters of Credit to be issued by Affiliates of such Issuing Lender, in which case the term “Issuing Lender” shall include any such Affiliate with respect to Letters of Credit issued by such Affiliate (it being agreed that such Issuing Lender shall, or shall cause such Affiliate to, comply with the requirements of Section 2.2 with respect to such Letters of Credit).
“Issuing Lender Agreement” has the meaning set forth in Section 2.2(l).
“Issuing Lender Fees” has the meaning set forth in Section 3.4(b)(ii).
“JPMorgan” means JPMorgan Chase Bank, N.A.
“JPMorgan Engagement Letter” means that certain letter agreement dated as of November 10, 2021, between the Borrower and JPMorgan.
“JPMorgan Fee Letter” means that certain letter agreement dated as of November 23, 2021, between the Borrower and JPMorgan.
“Judgment Currency” has the meaning set forth in Section 11.20.
“Laws” means, collectively, all international, foreign, federal, state and local statutes, treaties, rules, guidelines, regulations, ordinances, codes and administrative or judicial precedents or authorities, including the interpretation or administration thereof by any Governmental Authority charged with the enforcement, interpretation or administration thereof, and all applicable administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any Governmental Authority, in each case whether or not having the force of law.
“Lead Arrangers” means JPMorgan, Morgan Stanley, Mizuho Bank, Ltd. and Wells Fargo Securities, LLC.
“Lender” means any of the Persons identified as a “Lender” on the signature pages hereto, any Eligible Assignee which may become a Lender by way of assignment in accordance with the terms hereof and any Incremental Lender, in each case, together with their successors and permitted assigns. Unless the context otherwise requires, the term “Lenders” includes the Swing Line Lender and the Issuing Lenders.
“Lender-Related Person” has the meaning set forth in Section 11.5(b).
“Lending Office” means, as to any Lender, the office or offices of such Lender described as such on Schedule 1.1(a), or such other office or offices as a Lender may from time notify to the Borrower and the Administrative Agent.
“Letter of Credit” means any letter of credit issued for the account of the Borrower by an Issuing Lender pursuant to Section 2.2, as such letter of credit may be amended, modified, extended, renewed or replaced.
“Letter of Credit Exchange Rate” means, with respect to any drawing under a Letter of Credit denominated in an Alternative Currency, the rate specified by the applicable Issuing Lender as the rate at which it was (or would have been) able, at or about the time of such drawing, to exchange Dollars into such Alternative Currency for purposes of obtaining an amount of such Alternative Currency equal to the amount of such drawing.
“Letter of Credit Fees” has the meaning set forth in Section 3.4(b)(i).
“Leverage Increase Election” has the meaning set forth in Section 7.2.
“Leverage Increase Period” has the meaning set forth in Section 7.2.
“Leverage Ratio” means, as of the last day of each fiscal quarter, the ratio of (a)(i) Funded Debt on such date minus (ii) the aggregate amount of any unrestricted Cash and Cash Equivalents held by the Borrower on a consolidated basis on such date to (b) EBITDA for the twelve month period ending on such date.
“LIBO Rate” means, with respect to any LIBOR Loan for any Interest Period, the applicable Screen Rate as of the Specified Time on the Quotation Day.
“LIBOR” has the meaning assigned to such term in Section 1.10.
“LIBOR Loan” means a Loan bearing interest at a rate determined by reference to the Adjusted LIBO Rate. All LIBOR Loans shall be denominated in Dollars.
“Lien” means any mortgage, pledge, hypothecation, assignment, deposit arrangement, security interest, encumbrance, lien (statutory or otherwise), preference, priority or charge of any kind, including, without limitation, any agreement to give any of the foregoing, any conditional sale or other title retention agreement, and any lease in the nature thereof (other than operating leases).
“Loan” or “Loans” means the Revolving Loans, the Swing Line Loans (or any portion thereof), any Incremental Term Loans and any Incremental Revolving Loans, individually or collectively, as appropriate.
“Loan Participant” has the meaning set forth in Section 11.3(d).
“LOC Commitment” means the commitment of each Issuing Lender to issue Letters of Credit for the account of the Borrower in an aggregate face amount outstanding (together with the amounts of any unreimbursed drawings thereon) at any time of up to the applicable LOC Committed Amount.
“LOC Committed Amount” means (a) on the Restatement Effective Date, as to each Issuing Lender specified in clause (a) of the definition “Issuing Lender” individually, $37,500,000 (or such different amount as may be agreed among the Borrower and each such Issuing Lender), and (b) at any time, as to all Issuing Lenders collectively, $150,000,000.
“LOC Documents” means, with respect to any Letter of Credit, such Letter of Credit, any amendments thereto, any documents delivered in connection therewith, any application therefor, and any agreements, instruments, guarantees or other documents (whether general in application or applicable only to such Letter of Credit) governing or providing for (a) the rights and obligations of the parties concerned or at risk or (b) any collateral security for such obligations.
“LOC Obligations” means, at any time, the sum of (a) the sum of the Dollar Equivalents of the maximum amounts which are, or at any time thereafter may become, available to be drawn under Letters of Credit then outstanding, assuming compliance with all requirements for drawings referred to in such Letters of Credit plus (b) the sum of the Dollar Equivalents of the aggregate amounts of all drawings under Letters of Credit honored by any Issuing Lender but not theretofore reimbursed. The LOC Obligation of any Revolving Lender at any time shall be its Revolving Loan Commitment Percentage of the total LOC Obligations at such time, adjusted to give effect to any reallocation under Section 2.6(c) of the LOC Obligations of any Defaulting Lender in effect at such time.
“Local Time” means (a) with respect to Loans denominated in Dollars or any Letter of Credit, New York City time and (b) with respect to Loans denominated in Sterling, Euros or an Alternative Currency, London time.
“Mandatory Borrowing” has the meaning set forth in Section 2.2(e)(i).
“Material Acquisition” means any acquisition or a series of related acquisitions (other than solely among the Borrower and its Subsidiaries or Affiliates) of (a) Capital Stock in any Person if, after giving effect thereto, such Person will become a Subsidiary or (b) assets comprising all or substantially all the assets of (or all or substantially all the assets constituting a business unit, division, product line or line of business of) any Person; provided that the aggregate consideration therefor (including Indebtedness assumed in connection therewith, all obligations in respect of deferred purchase price (including obligations under any purchase price adjustment but excluding earnout or similar payments) and all other consideration payable in connection therewith (including payment obligations in respect of noncompetition agreements or other arrangements representing acquisition consideration)) exceeds $100,000,000.
“Material Adverse Effect” means a material adverse effect on (a) the business, operations or financial condition of the Borrower and its Subsidiaries taken as a whole, (b) the ability of the Borrower to perform its obligations under this Credit Agreement or any of the other Credit Documents or (c) the validity or enforceability of this Credit Agreement, any of the other Credit Documents, or the rights and remedies of the Lenders hereunder or thereunder taken as a whole.
“Material Debt” means, without duplication (1) any obligation of the Borrower for money borrowed, (2) any obligation of the Borrower evidenced by bonds, debentures, notes or other similar instruments, (3) any reimbursement obligation of the Borrower in respect of letters of credit or other similar instruments which support financial obligations which would otherwise become Indebtedness and (4) any obligation of the Borrower under Capital Leases, in an aggregate principal amount, if and to the extent the aggregate amount of all obligations referred to in such clauses (1) through (4) is greater than $50,000,000; provided, however, that “Material Debt” shall not include any obligation of the Borrower to any Subsidiary or to any Person with respect to which the Borrower is a Subsidiary; provided, further, that “Material Debt” shall not include any Obligations.
“Maturity Date” means the Revolving Maturity Date or the Incremental Term Maturity Date with respect to Incremental Term Loans of any Series, as the context requires.
“Medicaid” means the entitlement program under Title XIX of the Social Security Act that provides federal grants to states for medical assistance based on specific eligibility criteria.
“Medicaid Provider Agreement” means an agreement entered into between a state agency or other such entity administering the Medicaid program and a health care provider or supplier under which the health care provider or supplier agrees to provide services for Medicaid patients in accordance with the terms of the agreement and Medicaid Regulations.
“Medicaid Regulations” means, collectively, (a) all federal statutes (whether set forth in Title XIX of the Social Security Act or elsewhere) affecting Medicaid and any statutes succeeding thereto, (b) all applicable provisions of all federal rules, regulations, manuals and orders and administrative, reimbursement and other guidelines having the force of law of all
Governmental Authorities promulgated pursuant to or in connection with the statutes described in clause (a) above, (c) all state statutes and plans for medical assistance enacted in connection with the statutes and provisions described in clauses (a) and (b) above and (d) all applicable provisions of all rules, regulations, manuals and orders and administrative, reimbursement and other guidelines having the force of law of all Governmental Authorities promulgated pursuant to or in connection with the statutes described in clause (c) above and all state administrative, reimbursement and other guidelines of all Governmental Authorities having the force of law promulgated pursuant to or in connection with the statutes described in clause (b) above, in each case, as may be amended, supplemented or otherwise modified from time to time.
“Medical Reimbursement Programs” means the Medicare, Medicaid and TRICARE programs and any other healthcare program operated by or financed in whole or in part by any foreign, domestic, federal, state or local government and any other non-government funded third party payor programs.
“Medicare” means that government-sponsored entitlement program under Title XVIII of the Social Security Act that provides for a health insurance system for eligible elderly and disabled individuals.
“Medicare Provider Agreement” means an agreement entered into between CMS or other such entity administering the Medicare program on behalf of CMS, and a health care provider or supplier under which the health care provider or supplier agrees to provide services for Medicare patients in accordance with the terms of the agreement and Medicare Regulations.
“Medicare Regulations” means, collectively, all federal statutes (whether set forth in Title XVIII of the Social Security Act or elsewhere) affecting the health insurance program for the aged and disabled established by Title XVIII of the Social Security Act and any statutes succeeding thereto; together with all applicable provisions of all rules, regulations, manuals and orders and administrative, reimbursement and other guidelines having the force of law of all Governmental Authorities (including, without limitation, the HHS, CMS, the OIG, or any Person succeeding to the functions of any of the foregoing) promulgated pursuant to or in connection with any of the foregoing having the force of law, as each may be amended, supplemented or otherwise modified from time to time.
“Mizuho Fee Letter” means that certain letter agreement dated as of November 23, 2021, between the Borrower and Mizuho Bank, Ltd.
“MNPI” means material information concerning the Borrower and its Subsidiaries and their securities that has not been disseminated in a manner making it available to investors generally, within the meaning of Regulation FD under the Securities Act and the Exchange Act.
“Moody’s” means Moody’s Investors Service, Inc., or any successor or assignee of the business of such company in the business of rating securities.
“Morgan Stanley” means Morgan Stanley Senior Funding, Inc.
“Morgan Stanley Fee Letter” means that certain letter agreement dated as of November 23, 2021, between the Borrower and Morgan Stanley Bank, N.A.
“Multiemployer Plan” means a Plan which is a multiemployer plan as defined in Section 3(37) or 4001(a)(3) of ERISA to which the Borrower or any ERISA Affiliate is making or accruing an obligation to make contributions or has made or accrued an obligation to make contributions.
“Multiple Employer Plan” means a Plan covered by Title IV of ERISA (other than a Multiemployer Plan) in which the Borrower or any ERISA Affiliate and at least one employer other than the Borrower or any ERISA Affiliate are contributing sponsors.
“Net Income” means, for any period, the net income after taxes for such period of the Borrower and its Subsidiaries on a consolidated basis, determined in accordance with GAAP and without duplication.
“Net Worth” means, as of any date of determination, the consolidated stockholder’s equity of the Borrower and its Subsidiaries calculated on a consolidated basis in accordance with GAAP.
“Non-Cash Items” has the meaning set forth in the definition of “EBITDA”.
“Non-Consenting Lender” has the meaning set forth in Section 11.6.
“Non-Defaulting Lender” means, at any time, any Lender that is not a Defaulting Lender at such time.
“Non-Extending Lender” has the meaning set forth in Section 2.8(a).
“Note” or “Notes” means the Revolving Notes, the Swing Line Loan Note and any promissory notes of the Borrower in favor of any Incremental Lender evidencing any Incremental Commitment, as such promissory notes may be amended, modified, supplemented, extended, renewed or replaced from time to time, individually or collectively, as appropriate.
“Notice of Borrowing” means a request by the Borrower for a Loan, in the form of Exhibit 2.1(b).
“Notice of Continuation/Conversion” means a request by the Borrower to continue an existing Term Benchmark Loan to a new Interest Period or to convert a Term Benchmark Loan denominated in Dollars to a Base Rate Loan or a Base Rate Loan to a Term Benchmark Loan denominated in Dollars, in the form of Exhibit 2.4.
“NYFRB” means the Federal Reserve Bank of New York.
“NYFRB Rate” means, for any day, the greater of (a) the Federal Funds Rate in effect on such day and (b) the Overnight Bank Funding Rate in effect on such day (or for any day that is not a Business Day, on the immediately preceding Business Day); provided that if none of such rates are published for any day that is a Business Day, the term “NYFRB Rate” shall mean the rate for a federal funds transaction quoted at 11:00 a.m., New York City time, on such day received by the Administrative Agent from a federal funds broker of recognized standing selected by it; provided further that if any of the aforesaid rates shall be less than zero, the term “NYFRB Rate” shall be deemed to be zero for all purposes of this Credit Agreement.
“Obligations” means, without duplication, (a) the due and punctual payment by the Borrower of (i) the principal of and interest (including interest accruing during the pendency of any bankruptcy, insolvency, receivership or other similar proceeding, regardless of whether allowed or allowable in such proceeding) on the Loans, when and as due, whether at maturity, by acceleration, upon one or more dates set for prepayment or otherwise, (ii) each payment required to be made by the Borrower under this Credit Agreement in respect of any Letter of Credit, when and as due, including payments in respect of reimbursement of disbursements, interest thereon and obligations to provide cash collateral, and (iii) all other monetary obligations of the Borrower under this Credit Agreement and each of the other Credit Documents (including obligations to pay fees and expense reimbursement and indemnification obligations), whether primary, secondary, direct, contingent, fixed or otherwise (including monetary obligations incurred during the pendency of any bankruptcy, insolvency, receivership or other similar proceeding, regardless of whether allowed or allowable in such proceeding) and (b) the due and punctual performance of all other obligations of the Borrower under or pursuant to this Credit Agreement and each of the other Credit Documents.
“OIG” means the Office of Inspector General of HHS and any successor thereof.
“Original Indebtedness” has the meaning set forth in the definition of “Refinancing Indebtedness”.
“Other Benchmark Rate Election” means, with respect to any Loan denominated in Dollars, if the then-current Benchmark is the LIBO Rate, the occurrence of:
(a) a request by the Borrower to the Administrative Agent to notify each of the other parties hereto that, at the determination of the Borrower, Dollar-denominated syndicated credit facilities at such time contain (as a result of amendment or as originally executed), in lieu of a LIBOR-based rate, a term benchmark rate as a benchmark rate, and
(b) the Administrative Agent, in its sole discretion, and the Borrower jointly elect to trigger a fallback from the LIBO Rate and the provision, as applicable, by the Administrative Agent of written notice of such election to the Borrower and the Lenders.
“Other Taxes” has the meaning set forth in Section 3.13(b).
“Overnight Bank Funding Rate” means, for any day, the rate comprised of both overnight federal funds and overnight eurocurrency borrowings by U.S.-managed banking offices of depository institutions, as such composite rate shall be determined by the NYFRB as set forth on its public website from time to time, and published on the next succeeding Business Day by the NYFRB as an overnight bank funding rate (from and after such date as the NYFRB shall commence to publish such composite rate).
“Overnight Rate” means, for any day, (a) with respect to any amount denominated in Dollars, the greater of (i) the Federal Funds Rate and (ii) the Overnight Bank Funding Rate, and (b) with respect to any amount denominated in an Alternative Currency, the rate of interest per annum at which overnight deposits in the applicable Alternative Currency, in an amount approximately equal to the amount with respect to which such rate is being determined, would be offered for such day by a branch or Affiliate of JPMorgan in the applicable offshore interbank market for such currency to major banks in such interbank market.
“Participant Register” has the meaning set forth in Section 11.3(d).
“Participants” means Lenders with a Revolving Loan Commitment Percentage greater than zero.
“Participating Member State” means each state so described in any EMU Legislation.
“Participation Interest” means the Extension of Credit by a Revolving Lender by way of a purchase of a participation in (a) Letters of Credit or LOC Obligations as provided in Section 2.2, (b) Swing Line Loans as provided in Section 2.3 or (c) any Loans as provided in Section 3.8.
“PATRIOT Act” means the USA PATRIOT Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)), as amended and supplemented from time to time.
“Payment” has the meaning assigned to it in Section 10.11(d)(i).
“Payment Notice” has the meaning assigned to it in Section 10.11(d)(ii).
“PBGC” means the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA and any successor thereto.
“Permitted Liens” means (a) Liens securing Obligations, if any, (b) Liens for taxes not yet due or Liens for taxes being contested in good faith by appropriate proceedings for which adequate reserves determined in accordance with GAAP have been established (and as to which the Property subject to any such Lien is not yet subject to foreclosure, sale, collection, levy or loss on account thereof), (c) Liens in respect of Property imposed by law arising in the ordinary course of business such as materialmen’s, mechanics’, warehousemen’s, carrier’s, landlords’ and other nonconsensual statutory Liens which are not yet due and payable or which are being contested in good faith by appropriate proceedings for which adequate reserves determined in accordance with GAAP have been established (and as to which the Property subject to any such Lien is not yet subject to foreclosure, sale or loss on account thereof), (d) Liens (other than Liens imposed under ERISA) consisting of pledges or deposits made in the ordinary course of business to secure payment of worker’s compensation insurance, unemployment insurance, pensions or social security programs, (e) Liens arising from good faith deposits in connection with or to secure performance of tenders, bids, leases, government contracts, performance and return-of-money bonds and other similar obligations incurred in the ordinary course of business (other than obligations in respect of the payment of borrowed money), (f) Liens arising from good faith deposits in connection with or to secure performance of statutory obligations and surety and appeal bonds, (g) easements, rights-of-way, restrictions (including zoning restrictions), matters of plat, minor defects or irregularities in title and other similar charges or encumbrances not, in any material respect, impairing the use of the encumbered Property for its intended purposes, (h) judgment Liens in respect of judgments that would not constitute an Event of Default, (i) Liens arising by virtue of any statutory or common law provision relating to banker’s liens, rights of setoff or similar rights as to deposit accounts or other funds maintained with a creditor depository institution and (j) Liens with respect to lease filings for notice purposes only.
“Permitted Receivables Financing” means any transaction entered into pursuant to documentation in which (a) the Borrower or one or more Domestic Subsidiaries sells, conveys or otherwise transfers to Quest Receivables and (b) Quest Receivables sells, conveys or otherwise transfers to any other Person or grants a security interest to any Person in, any Receivables (whether now existing or hereafter acquired) of the Borrower or such Domestic Subsidiaries, and
any assets related thereto including all collateral securing such Receivables, all contracts and all Guarantee Obligations or other obligations in respect of such Receivables, all proceeds of such Receivables and all other assets that are customarily transferred or in respect of which security interests are customarily granted in connection with asset securitization transactions involving Receivables; provided that the purchasers or lenders in such transaction shall have no recourse to the Borrower or any Subsidiary other than recourse of types and in amounts customary in “true sale” receivables securitizations.
“Person” means any individual, partnership, joint venture, firm, corporation, limited liability company, association, trust or other enterprise (whether or not incorporated), or any Governmental Authority.
“Plan” means any employee benefit plan (as defined in Section 3(3) of ERISA) covered by ERISA that is sponsored, maintained or contributed to by the Borrower or any ERISA Affiliate.
“Platform” has the meaning given thereto in Section 7.1(h).
“Prime Rate” means the rate of interest per annum publicly announced from time to time by JPMorgan as its prime rate in effect at its principal office in New York City. Each change in the Prime Rate shall be effective from and including the date such change is publicly announced as being effective.
“Prior Closing Date” means March 22, 2018.
“Property” means any right, title or interest in or to any property or asset of any kind whatsoever, whether real, personal or mixed and whether tangible or intangible.
“PTE” means a prohibited transaction class exemption issued by the U.S. Department of Labor, as any such exemption may be amended from time to time.
“Public Lender” has the meaning given thereto in Section 7.1(h).
“Quest Receivables” means Quest Diagnostics Receivables Incorporated, a Delaware corporation, a wholly-owned, bankruptcy-remote, special purpose Subsidiary of the Borrower.
“Quotation Day” means with respect to any applicable currency for any Interest Period, the day two Business Days prior to the first day of such Interest Period, in each case unless market practice differs for loans such as the applicable Loans priced by reference to rates quoted in the Relevant Interbank Market, in which case the Quotation Day for such currency shall be determined by the Administrative Agent (and notified to the Borrower in writing) in accordance with market practice for such loans priced by reference to rates quoted in the Relevant Interbank Market (and if quotations would normally be given by leading banks for such loans priced by reference to rates quoted in the Relevant Interbank Market on more than one day, the Quotation Day shall be the last of those days).
“Receivable” means the indebtedness and payment obligations of any Person to the Borrower or any Domestic Subsidiary or acquired by the Borrower or any Domestic Subsidiary (including obligations constituting an account or general intangible or evidenced by a note, instrument, contract, security agreement, chattel paper or other evidence of indebtedness or security) arising from a sale of merchandise or the provision of services in the ordinary course of business by the Borrower or any Domestic Subsidiary or the Person from which such indebtedness and payment obligation were acquired by the Borrower or any Domestic Subsidiary, including (a) any right to payment for goods sold or for services rendered and (b) the
right to payment of any interest, sales taxes, finance charges, returned check or late charges and other obligations of such Person with respect thereto.
“Reference Time” with respect to any setting of the then-current Benchmark means (1) if such Benchmark is the LIBO Rate, 11:00 a.m. (London time) on the day that is two London banking days preceding the date of such setting, (2) if such Benchmark is the EURIBO Rate, 11:00 a.m. Brussels time two TARGET Days preceding the date of such setting, (3) if such Benchmark is SONIA, then four Business Days prior to such setting or (4) if such Benchmark is none of the LIBO Rate, the EURIBO Rate or SONIA, the time determined by the Administrative Agent in its reasonable discretion (and notified to the Borrower in writing).
“Refinancing Indebtedness” means, in respect of any Indebtedness (the “Original Indebtedness”), any Indebtedness that extends, renews or refinances such Original Indebtedness (or any Refinancing Indebtedness in respect thereof); provided that (a) the principal amount of such Refinancing Indebtedness shall not exceed the principal amount of such Original Indebtedness; (b) the stated final maturity of such Refinancing Indebtedness shall not be earlier than that of such Original Indebtedness; (c) such Refinancing Indebtedness shall not be required to be repaid, prepaid, redeemed, repurchased or defeased, whether on one or more fixed dates, upon the occurrence of one or more events or at the option of any holder thereof (except, in each case, upon the occurrence of an event of default or a change in control or as and to the extent such repayment, prepayment, redemption, repurchase or defeasance would have been required pursuant to the terms of such Original Indebtedness) prior to the earlier of (i) the maturity of such Original Indebtedness and (ii) the date 180 days after the latest Maturity Date, to each case as in effect on the date of such extension, renewal or refinancing; (d) such Refinancing Indebtedness shall not constitute an obligation (including pursuant to a guarantee) of any Subsidiary that shall not have been (or, in the case of after-acquired Subsidiaries, shall not have been required to become) an obligor in respect of such Original Indebtedness; (e) if such Original Indebtedness shall have been subordinated to the obligations under this Credit Agreement, such Refinancing Indebtedness shall also be subordinated to the obligations hereunder on terms not less favorable in any material respect to the Lenders; and (f) such Refinancing Indebtedness shall not be secured by any Lien on any asset other than the assets that secured such Original Indebtedness (or would have been required to secure such Original Indebtedness pursuant to the terms thereof).
“Register” has the meaning set forth in Section 11.3(c).
“Regulation T, U or X” means Regulation T, U or X, respectively, of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor to all or a portion thereof.
“Related Parties” means, with respect to any specified Person, such Person’s Affiliates and the directors, officers, employees, partners, members, agents and advisors of such Person and of such Person’s Affiliates.
“Relevant Governmental Body” means (i) with respect to a Benchmark Replacement in respect of Loans denominated in Dollars, the Federal Reserve Board and/or the NYFRB, or a committee officially endorsed or convened by the Federal Reserve Board and/or the NYFRB or, in each case, any successor thereto, (ii) with respect to a Benchmark Replacement in respect of Loans denominated in Sterling, the Bank of England, or a committee officially endorsed or convened by the Bank of England or, in each case, any successor thereto, (iii) with respect to a Benchmark Replacement in respect of Loans denominated in Euros, the European Central Bank, or a committee officially endorsed or convened by the European Central Bank or, in each case, any successor thereto, and (iv) with respect to a Benchmark Replacement in respect of Loans denominated in any other currency, (a) the central bank for the currency in which such Benchmark Replacement is denominated or any central bank or other supervisor which is responsible for supervising either (1) such Benchmark Replacement or (2) the administrator of such Benchmark Replacement or (b) any working group or committee officially endorsed or convened by (1) the central bank for the currency in which such Benchmark Replacement is denominated, (2) any central bank or other supervisor that is responsible for supervising either (A) such Benchmark Replacement or (B) the administrator of such Benchmark Replacement, (3) a group of those central banks or other supervisors or (4) the Financial Stability Board or any part thereof.
“Relevant Interbank Market” means (a) with respect to any currency other than Euros, the London interbank market, and (b) with respect to Euros, the European interbank market.
“Relevant Rate” means (i) with respect to any Term Benchmark Loan denominated in Dollars, the LIBO Rate, (ii) with respect to any Term Benchmark Loan denominated in Euros, the EURIBO Rate or (iii) with respect to any Loan denominated in Sterling, the Daily Simple SONIA Rate.
“Required Lenders” means Lenders whose aggregate Credit Exposure (as hereinafter defined) constitutes more than 50% of the Credit Exposure of all Lenders at such time. For purposes hereof, the term “Credit Exposure” as applied to each Lender shall mean (a) at any time prior to the termination of the Commitments, the sum of the Revolving Loan Commitment Percentage of such Lender multiplied by the Revolving Committed Amount, and (b) at any time after the termination of the Commitments, the sum of (i) the principal balance of the outstanding Loans of such Lender plus (ii) such Lender’s Participation Interests in the face amount of the outstanding Letters of Credit and outstanding Swing Line Loans.
“Requirement of Law” means, as to any Person, the articles or certificate of incorporation and by-laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or final, non-appealable determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or to which any of its material Property is subject.
“Resolution Authority” means an EEA Resolution Authority or, with respect to any UK Financial Institution, a UK Resolution Authority.
“Restatement Effective Date” means the date on which the conditions set forth in Section 5.1 shall have been satisfied (or waived in accordance with Section 11.6).
“Revaluation Date” means (a) with respect to any Loan, each of the following: (i) each date of a borrowing of a Loan denominated in an Alternative Currency, and (ii) each date of a continuation of a Term Benchmark Loan denominated in an Alternative Currency pursuant to Section 2.4, and (b) with respect to any Letter of Credit, each of the following: (i) each date of issuance, extension or renewal of a Letter of Credit denominated in an Alternative Currency and the last Business Day of each subsequent calendar quarter, (ii) each date of an amendment of any Letter of Credit denominated in an Alternative Currency having the effect of increasing the amount thereof, and (iii) each date of any payment by any Issuing Lender under any Letter of Credit denominated in an Alternative Currency.
“Revolving Borrowing” means Revolving Loans of the same Type and Agreed Currency, made, converted or continued on the same date and, in the case of Term Benchmark Loans, as to which a single Interest Period is in effect.
“Revolving Commitment” means, with respect to each Lender, the commitment, if any, of such Lender to make Revolving Loans and to acquire Participation Interests in Letters of Credit and Swing Line Loans hereunder, expressed as an amount representing the maximum aggregate permitted amount of such Lender’s Revolving Exposure hereunder, as such commitment may be (a) reduced from time to time pursuant to Section 2.1(d), (b) increased from time to time pursuant to Section 2.7 and (c) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 11.3. The initial amount of each Lender’s Revolving Commitment is set forth on Schedule 1.1(a), or in the Assignment and Assumption or the Incremental Facility Agreement pursuant to which such Lender shall have assumed its Revolving Commitment, as applicable.
“Revolving Committed Amount” means $750,000,000 or such other amount to which the Revolving Committed Amount may be reduced pursuant to Section 2.1(d) or increased pursuant to Section 2.7.
“Revolving Credit Facility” has the meaning set forth in the recitals.
“Revolving Exposure” means, with respect to any Lender at any time, the sum of the Dollar Equivalents of such Lender’s outstanding Revolving Loans and such Lender’s LOC Obligations and Swing Line Exposure at such time.
“Revolving Lender” means a Lender with a Revolving Commitment or Revolving Exposure.
“Revolving Lender Parent” means, with respect to any Revolving Lender, any Person in respect of which such Lender is a subsidiary.
“Revolving Loan Commitment Percentage” means, for each Lender, at any time, the percentage identified as its Revolving Loan Commitment Percentage on Schedule 1.1(a), as such percentage may be modified in connection with any assignment made in accordance with the provisions of Section 11.3 and with the establishment of any Incremental Revolving Commitments (or if the Revolving Commitments have been terminated or expired, such Lender’s Revolving Commitment most recently in effect, giving effect to any assignments); provided that for purposes of Section 2.6, if any Defaulting Lender exists at such time, the Revolving Loan Commitment Percentages shall be calculated disregarding such Defaulting Lender’s Revolving Commitment.
“Revolving Loans” means the revolving loans made to the Borrower pursuant to Section 2.1(a).
“Revolving Maturity Date” means the fifth anniversary of the Restatement Effective Date, as such date may be extended pursuant to Section 2.8.
“Revolving Notes” means any promissory notes of the Borrower in favor of any of the Lenders evidencing the Revolving Loans provided pursuant to Section 2.1, individually or collectively, as appropriate, as such promissory notes may be amended, modified, supplemented, extended, renewed or replaced from time to time and as evidenced in the form of Exhibit 2.1(e).
“RFR Business Day” means, for any Loan denominated in Sterling, any day except for (i) a Saturday, (ii) a Sunday or (iii) a day on which banks are closed for general business in London.
“RFR Interest Day” has the meaning specified in the definition of “Daily Simple SONIA Rate”.
“RFR Loan” means a Loan that bears interest at a rate based on the Adjusted Daily Simple SONIA Rate. All Loans denominated in Sterling shall be RFR Loans.
“S&P” means Standard & Poor’s Financial Services LLC, a division of S&P Global Inc., and its successors.
“Sale and Leaseback Transaction” means any arrangement with any Person providing for the leasing by the Borrower or one of its Subsidiaries of any Property that has been or is to be sold or transferred by the Borrower or any of its Subsidiaries to such Person, as the case may be.
“Same Day Funds” means (a) with respect to disbursements and payments in Dollars, immediately available funds, and (b) with respect to disbursements and payments in an Alternative Currency, same day or other funds as may be determined by the Administrative Agent or each applicable Issuing Lender, as the case may be, to be customary in the place of disbursement or payment for the settlement of international banking transactions in the relevant Alternative Currency.
“Sanctioned Country” means, at any time, a country, region or territory which is the target of any countrywide, region-wide or territory-wide Sanctions.
“Sanctioned Person” means, at any time, (a) any Person listed in any Sanctions-related list of designated Persons maintained by the Office of Foreign Assets Control of the U.S. Department of the Treasury, the U.S. Department of State or by the United Nations Security Council, the European Union or Her Majesty’s Treasury of the United Kingdom, (b) any Person operating, organized or resident in a Sanctioned Country or (c) any Person owned by controlled by any such Person described in the foregoing clause (a) or (b).
“Sanctions” means economic or financial sanctions or trade embargoes imposed, administered or enforced from time to time by (a) the Office of Foreign Assets Control of the U.S. Department of the Treasury or the U.S. Department of State, (b) the United Nations Security Council, (c) the European Union or (d) Her Majesty’s Treasury of the United Kingdom.
“Screen Rate” means (a) in respect of the LIBO Rate for any Interest Period or with respect to any determination of the Base Rate pursuant to clause (c) of the definition thereof, a rate per annum equal to the London interbank offered rate as administered by the ICE Benchmark Administration (or any other Person that takes over the administration of such rate) for deposits in Dollars for a period equal in length to such Interest Period as displayed on the applicable Bloomberg L.P. “BBAM” screen page that displays such rate (or, in the event such rate does not appear on a page of the Bloomberg L.P. screen, on the appropriate page of such other information service that publishes such rate as shall be selected by the Administrative Agent from time to time in its reasonable discretion) and (b) in respect of the EURIBO Rate for any Interest Period, the euro interbank offered rate administered by the European Money Markets Institute (or any other person which takes over the administration of that rate) for the relevant period displayed on the applicable Bloomberg L.P. “BBAM” screen page (or, in the event such rate does not appear on a page of the Bloomberg L.P. screen, on the appropriate page of such other information service that publishes such rate as shall be selected by the Administrative Agent from time to time in its reasonable discretion).
“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder, as amended, modified, succeeded or replaced from time to time.
“Series” has the meaning set forth in Section 2.7(b).
“Single Employer Plan” means any Plan which is covered by Title IV of ERISA, but which is not a Multiemployer Plan or a Multiple Employer Plan, that is maintained for employees of the Borrower or ERISA Affiliate.
“Social Security Act” means the Social Security Act as set forth in Title 42 of the United States Code, as amended, and any successor statute thereto, as interpreted by the rules and regulations issued thereunder, in each case as in effect from time to time. References to sections of the Social Security Act shall be construed also to refer to any successor sections.
“SOFR” means, with respect to any Business Day, a rate per annum equal to the secured overnight financing rate for such Business Day published by the SOFR Administrator on the SOFR Administrator’s Website on the immediately succeeding Business Day.
“SOFR Administrator” means the NYFRB (or a successor administrator of the secured overnight financing rate).
“SOFR Administrator’s Website” means the NYFRB’s website, currently at http://www.newyorkfed.org, or any successor source for the secured overnight financing rate identified as such by the SOFR Administrator from time to time.
“SONIA” means, with respect to any Business Day, a rate per annum equal to the Sterling Overnight Index Average for such Business Day published by the SONIA Administrator on the SONIA Administrator’s Website on the immediately succeeding Business Day.
“SONIA Administrator” means the Bank of England (or any successor administrator of the Sterling Overnight Index Average).
“SONIA Administrator’s Website” means the Bank of England’s website, currently at http://www.bankofengland.co.uk, or any successor source for the Sterling Overnight Index Average identified as such by the SONIA Administrator from time to time.
“SPC” has the meaning set forth in Section 11.3(g).
“Specified Time” means (a) with respect to the LIBO Rate, 11:00 a.m., London time, and (b) with respect to the EURIBO Rate, 11:00 a.m., Frankfurt time.
“Statutory Reserve Rate” means a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentage (including any marginal, special, emergency or supplemental reserves), expressed as a decimal, established by the Federal Reserve Board to which the Administrative Agent is subject with respect to the Adjusted EURIBO Rate or Adjusted LIBOR Rate, as applicable, for eurocurrency funding (currently referred to as “Eurocurrency liabilities” in Regulation D) or any other reserve ratio or analogous requirement of any central banking or financial regulatory authority imposed in respect of the maintenance of the Commitments or the funding of Loans. Such reserve percentage shall include those imposed pursuant to Regulation D. Term Benchmark Loans shall be deemed to constitute eurocurrency funding and to be subject to such reserve requirements without benefit of or credit for proration, exemptions or offsets that may be available from time to time to any Lender under Regulation D or any comparable regulation. The Statutory Reserve Rate shall be adjusted automatically on and as of the effective date of any change in any reserve percentage.
“Sterling” and “£” mean the lawful currency of the United Kingdom.
“Subsidiary” means, as to any Person at any time, (a) any corporation more than 50% of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at the time, any class or classes of such corporation shall have or might have voting power by reason of the occurrence of any contingency) is at such time owned directly or indirectly by such Person and (b) any partnership, association, joint venture or other entity in which such Person directly or indirectly has more than a 50% equity interest at such time.
“Swing Line Exposure” means, at any time, the aggregate principal amount of all Swing Line Loans outstanding at such time. The Swing Line Exposure of any Revolving Lender at any time shall be its Revolving Loan Commitment Percentage of the total Swing Line Exposure at such time.
“Swing Line Lender” means JPMorgan.
“Swing Line Loan Note” means the promissory note of the Borrower in favor of the Swing Line Lender evidencing the Swing Line Loans provided pursuant to Section 2.3, as such promissory note may be amended, modified, supplemented, extended, renewed or replaced from time to time in and as evidenced by the form of Exhibit 2.3(d).
“Swing Line Loan Request” means a request by the Borrower for a Swing Line Loan in substantially the form of Exhibit 2.3(b).
“Swing Line Loan” and “Swing Line Loans” have the meanings set forth in Section 2.3(a).
“Swing Line Subfacility Amount” have the meaning set forth in Section 2.3(a).
“Syndication Agent” has the meaning set forth in the preamble.
“Synthetic Lease” means any synthetic lease, tax retention operating lease, off-balance sheet loan or similar offbalance sheet financing product where such transaction is considered borrowed money indebtedness for tax purposes but is classified as an operating lease in accordance with GAAP.
“TARGET Day” means any day on which the Trans-European Automated Real-time Gross Settlement Express Transfer (TARGET) payment system (or, if such payment system ceases to be operative, such other payment system (if any) determined by the Administrative Agent (and notified to the Borrower in writing) to be a suitable replacement) is open for the settlement of payments in Euros.
“Taxes” has the meaning set forth in Section 3.13(a).
“Tender Costs” means the costs incurred by the Borrower in connection with any tender for outstanding indebtedness of the Borrower and the termination of the interest rate swap contracts related thereto, in an aggregate amount not to exceed $100,000,000 during the term of this Credit Agreement.
“Term Benchmark” when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Adjusted EURIBO Rate or the Adjusted LIBO Rate.
“Term SOFR” means, for the applicable Corresponding Tenor as of the applicable Reference Time, the forward-looking term rate based on SOFR that has been selected or recommended by the Relevant Governmental Body.
“Term SOFR Notice” means a notification by the Administrative Agent to the Lenders and the Borrower of the occurrence of a Term SOFR Transition Event.
“Term SOFR Transition Event” means the determination by the Administrative Agent that (a) Term SOFR has been recommended for use by the Relevant Governmental Body, (b) the administration of Term SOFR is administratively feasible for the Administrative Agent and (c) a Benchmark Transition Event or an Early Opt-in Election, as applicable (and, for the avoidance of doubt, not in the case of an Other Benchmark Rate Election), has previously occurred resulting in a Benchmark Replacement in accordance with Section 3.10 that is not Term SOFR.
“Total Assets” means all items that in accordance with GAAP would be classified as assets of the Borrower and its Subsidiaries on a consolidated basis.
“TRICARE” means the United States Department of Defense health care program for service families including, but not limited to, TRICARE Prime, TRICARE Extra and TRICARE Standard, and any successor to or predecessor thereof.
“Type”, when used in reference to any Loan or Borrowing, refers to whether the rate of interest on such Loan, or on the Loans comprising such Borrowing, is determined by reference to the Adjusted LIBO Rate, the Adjusted EURIBO Rate, the Base Rate or the Adjusted Daily Simple SONIA Rate.
“UK Financial Institution” means any BRRD Undertaking (as such term is defined under the PRA Rulebook (as amended form time to time) promulgated by the United Kingdom Prudential Regulation Authority) or any person falling within IFPRU 11.6 of the FCA Handbook (as amended from time to time) promulgated by the United Kingdom Financial Conduct Authority, which includes certain credit institutions and investment firms, and certain affiliates of such credit institutions or investment firms.
“UK Resolution Authority” means the Bank of England or any other public administrative authority having responsibility for the resolution of any UK Financial Institution.
“Unadjusted Benchmark Replacement” means the Benchmark Replacement excluding the Benchmark Replacement Adjustment; provided that, if the Unadjusted Benchmark Replacement as so determined would be less than zero, the Unadjusted Benchmark Replacement will be deemed to be zero for the purposes of this Credit Agreement.
“Upfront Fee” has the meaning set forth in Section 5.1(d).
“Voting Stock” means all classes of the Capital Stock of such Person then outstanding and normally entitled to vote in the election of directors (or similar governing authority).
“Wells Fargo Fee Letter” means that certain letter agreement dated as of November 23, 2021, between the Borrower and Wells Fargo Bank, N.A.
“Write-Down and Conversion Powers” means, (a) with respect to any EEA Resolution Authority, the write-down and conversion powers of such EEA Resolution Authority from time to time under the Bail-In Legislation for the applicable EEA Member Country, which write-down and conversion powers are described in the EU Bail-In Legislation Schedule, and (b) with respect to the United Kingdom, any powers of the applicable Resolution Authority under the Bail-In Legislation to cancel, reduce, modify or change the form of a liability of any UK Financial Institution or any contract or instrument under which that liability arises, to convert all or part of that liability into shares, securities or obligations of that person or any other person, to provide that any such contract or instrument is to have effect as if a right had been exercised under it or to suspend any obligation in respect of that liability or any of the powers under that Bail-In Legislation that are related to or ancillary to any of those powers.
1.2Other Interpretive Provisions.
With reference to this Credit Agreement and each other Credit Document, unless otherwise specified herein or in such other Credit Document:
(a)The meanings of defined terms are equally applicable to the singular and plural forms of the defined terms.
(b)(i) The words “herein”, “hereto”, “hereof” and “hereunder” and words of similar import when used in any Credit Document shall refer to such Credit Document as a whole and not to any particular provisions thereof.
(ii)Article, Section, Exhibit and Schedule references are to the Credit Document in which such reference appears.
(iii)The term “including” is by way of example and not limitation.
(iv)The term “documents” includes any and all instruments, documents, agreements, certificates, notices, reports, financial statements and other writings, however evidenced, whether in physical or electronic form.
(c)In the computation of periods of time from a specified date to a later specified date, the word “from” means “from and including”; the words “to” and “until” each mean “to but excluding”; and the word “through” means “to and including”.
(d)Section headings herein and in the other Credit Documents are included for convenience of reference only and shall not affect the interpretation of this Credit Agreement or any other Credit Document.
(e)References to “the date hereof” or “the date of this Credit Agreement”, or phrases of similar import, herein shall mean November 23, 2021.
1.3Accounting Terms/Calculation of Financial Covenants.
(a)Except as otherwise expressly provided herein, all accounting terms used herein shall be interpreted, and all financial statements, certificates and reports as to financial matters required to be delivered to the Lenders hereunder shall be prepared, in accordance with GAAP applied on a consistent basis. Except as otherwise expressly provided herein, all accounting terms used herein shall be construed in accordance with GAAP as in effect from time to time; provided that if the Borrower, by notice to the Administrative Agent, shall request an amendment to any provision hereof to eliminate the effect of any change occurring after the date hereof in GAAP or in the application thereof on the operation of such provision (or if the Administrative Agent or the Required Lenders, by notice to the Borrower, shall request an amendment to any provision hereof for such purpose), regardless of whether any such notice is given before or after such change in GAAP or in the application thereof, then such provision shall be interpreted on the basis of GAAP as in effect and applied immediately before such change shall have become effective until such notice shall have been withdrawn or such provision amended in accordance herewith. Following the delivery of any such notice, the Borrower, the Administrative Agent and the Lenders agree to negotiate in good faith to amend this Credit Agreement in an appropriate manner to eliminate the effect of any such change. Notwithstanding any other provision contained herein, all terms of an accounting or financial nature used herein shall be construed, and all computations of amounts and ratios referred to herein shall be made, without giving effect to (i) any election under Statement of Financial Accounting Standards 159, The Fair Value Option for Financial Assets and Financial Liabilities, or any successor thereto (including pursuant to the Accounting Standards Codification) to value any Indebtedness of the Borrower or any Subsidiary at “fair value”, as defined therein, and (ii) any change in accounting for leases pursuant to GAAP resulting from the adoption of Financial Accountings Standards Board Accounting Standards Update No. 2016-02, Leases (Topic 842) (“FAS 842”), to the extent such adoption would require (x) treating any lease (or similar arrangement conveying the right to use) as a capital lease where such lease (or similar arrangement) would not have been required to be
so treated under GAAP as in effect on the date hereof or (y) recognizing liabilities on the balance sheet with respect to operating leases under FAS 842.
(b)Notwithstanding anything herein to the contrary, for the purposes of calculating the financial covenant set forth in Section 7.2, (i) income statement items (positive or negative) attributable to any Person or Property acquired by the Borrower or one of its Subsidiaries and Indebtedness incurred in connection with such acquisition shall, without duplication, be treated as if such Person or Property had been acquired or such Indebtedness incurred as of the first day of the twelve month period ending as of the most recently completed fiscal quarter of the Borrower for which financial statements have been delivered pursuant to Section 7.1(a) or (b) (or, prior to the delivery of the first financial statements pursuant to Section 7.1(a) or (b), as of the first day of the twelve month period ending as of the date of the most recent balance sheet delivered to the Lenders prior to the Restatement Effective Date) and (ii) income statement items (positive or negative) attributable to Property disposed of by the Borrower or one of its Subsidiaries and Indebtedness retired in connection with such disposition shall, without duplication, be treated as if such disposition had occurred as of the first day of the twelve month period referred to in the preceding clause (i).
1.4Rounding.
Any financial ratio required to be maintained by the Borrower pursuant to this Credit Agreement shall be calculated by dividing the appropriate component by the other component, carrying the result to one place more than the number of places by which such ratio is expressed herein and rounding the result up or down to the nearest number (with a rounding-up if there is no nearest number).
1.5Exchange Rates; Currency Equivalents.
The Administrative Agent shall determine the Exchange Rates as of each Revaluation Date to be used for calculating Dollar Equivalent amounts of Loans and Letters of Credit denominated in Alternative Currencies. Such Exchange Rates shall become effective as of such Revaluation Date and shall be the Exchange Rates employed in converting any amounts between the applicable currencies until the next Revaluation Date to occur in respect of the applicable Loan or Letter of Credit. Except for purposes of financial statements delivered by the Borrower hereunder or calculating the financial covenant hereunder or except as otherwise provided herein, the applicable amount of any currency (other than Dollars) for purposes of the Credit Documents shall be such Dollar Equivalent amount at the applicable Exchange Rate on the date of such determination.
1.6Additional Alternative Currencies.
(a)The Borrower may from time to time request that Loans be made in a currency other than those specifically listed in the definition of “Alternative Currency”; provided that (a) such requested currency is a lawful currency (other than Dollars) that is readily available and freely transferable and convertible into Dollars, (b) such currency may be used by any Lender to make Loans hereunder and/or to permit the Borrower to borrow and repay the principal thereof and to pay the interest thereon without any central bank or other governmental authorization in the country of issue of such currency, unless such authorization has been obtained and is in full force and effect, and (c) prior to any such request, the Borrower, the Administrative Agent and the Revolving Lenders shall have amended this Credit Agreement to provide for an interest rate agreed to by the Borrower, the Administrative Agent and the Revolving Lenders and to include such other administrative requirements as may be necessary to implement such interest rate. In the case of any such request with respect to the making of Loans in any such currency, such
request shall be subject to the approval of the Administrative Agent and each of the Revolving Lenders.
(b)Any such request shall be made to the Administrative Agent not later than 20 Business Days prior to the date of the desired making of Loans (or such other time or date as may be agreed by the Administrative Agent). In the case of any such request, the Administrative Agent shall promptly notify each Revolving Lender thereof. Each Revolving Lender shall notify the Administrative Agent, not later than 10 Business Days after receipt of such request whether it consents, in its sole discretion, to the making of Loans in such requested currency.
(c)Any failure by a Revolving Lender to respond to such request within the time period specified in the preceding sentence shall be deemed to be a refusal by such Lender to permit Loans to be made in such requested currency. If the Administrative Agent and all the Revolving Lenders consent to making Loans in such requested currency, the Administrative Agent shall so notify the Borrower and such currency shall thereupon be deemed to be an Alternative Currency hereunder for purposes of any borrowings of Loans. If the Administrative Agent shall fail to obtain consent to any request for an additional currency under this Section 1.6, the Administrative Agent shall promptly so notify the Borrower.
1.7Change of Currency.
(a)Each obligation of the Borrower to make a payment denominated in the national currency unit of any member state of the European Union that adopts the Euro as its lawful currency after the Restatement Effective Date shall be redenominated into Euro at the time of such adoption (in accordance with the EMU Legislation). If, in relation to the currency of any such member state, the basis of accrual of interest expressed in this Credit Agreement in respect of that currency shall be inconsistent with any convention or practice in the London interbank market for the basis of accrual of interest in respect of the Euro, such expressed basis shall be replaced by such convention or practice with effect from the date on which such member state adopts the Euro as its lawful currency; provided that if any borrowing in the currency of such member state is outstanding immediately prior to such date, such replacement shall take effect, with respect to such borrowing, at the end of the then current Interest Period.
(b)Each provision of this Credit Agreement shall be subject to such reasonable changes of construction as the Administrative Agent may from time to time specify to be appropriate to reflect the adoption of the Euro by any member state of the European Union and any relevant market conventions or practices relating to the Euro.
(c)Each provision of this Credit Agreement also shall be subject to such reasonable changes of construction as the Administrative Agent may from time to time specify to be appropriate to reflect a change in currency of any other country and any relevant market conventions or practices relating to the change in currency.
1.8References to Agreements and Laws.
Unless otherwise expressly provided herein, (a) references to organizational documents, agreements (including the Credit Documents) and other contractual instruments shall be deemed to include all subsequent amendments, restatements, extensions, supplements and other modifications thereto, but only to the extent that such amendments, restatements, extensions, supplements and other modifications are not prohibited by any Credit Document and (b) references to any law shall include all statutory and regulatory provisions (having the force of law) consolidating, amending, replacing, supplementing or interpreting such law.
1.9Letter of Credit Amounts.
Unless otherwise specified, all references herein to the amount of a Letter of Credit at any time shall be deemed to mean the maximum face amount of such Letter of Credit after giving effect to all increases thereof contemplated by such Letter of Credit or the LOC Documents related thereto, whether or not such maximum face amount is in effect at such time.
1.10Interest Rates; LIBOR Notification.
The interest rate on a Loan denominated in Dollars or an Alternative Currency may be derived from an interest rate benchmark that is, or may in the future become, the subject of regulatory reform. Regulators have signaled the need to use alternative benchmark reference rates for some of these interest rate benchmarks and, as a result, such interest rate benchmarks may cease to comply with applicable laws and regulations, may be permanently discontinued, and/or the basis on which they are calculated may change. The London interbank offered rate (“LIBOR”) is intended to represent the rate at which contributing banks may obtain short-term borrowings from each other in the London interbank market. On March 5, 2021, the U.K. Financial Conduct Authority (“FCA”) publicly announced that: (a) immediately after December 31, 2021, publication of all seven euro LIBOR settings, the overnight, 1-week, 2-month and 12-month British Pound Sterling LIBOR settings, and the 1-week and 2-month U.S. Dollar LIBOR settings will permanently cease; immediately after June 30, 2023, publication of the overnight and 12-month U.S. Dollar LIBOR settings will permanently cease; immediately after December 31, 2021, the 1-month, 3-month and 6-month British Pound Sterling LIBOR settings will cease to be provided or, subject to consultation by the FCA, be provided on a changed methodology (or “synthetic”) basis and no longer be representative of the underlying market and economic reality they are intended to measure and that representativeness will not be restored; and immediately after June 30, 2023, the 1-month, 3-month and 6-month U.S. Dollar LIBOR settings will cease to be provided or, subject to the FCA’s consideration of the case, be provided on a synthetic basis and no longer be representative of the underlying market and economic reality they are intended to measure and that representativeness will not be restored. There is no assurance that dates announced by the FCA will not change or that the administrator of LIBOR and/or regulators will not take further action that could impact the availability, composition, or characteristics of LIBOR or the currencies and/or tenors for which LIBOR is published. Each party to this Credit Agreement should consult its own advisors to stay informed of any such developments. Public and private sector industry initiatives are currently underway to identify new or alternative reference rates to be used in place of LIBOR. Upon the occurrence of a Benchmark Transition Event, a Term SOFR Transition Event, an Early Opt-In Election or an Other Benchmark Rate
Election, Section 3.10(b) and Section 3.10(c) provide a mechanism for determining an alternative rate of interest. The Administrative Agent will promptly notify the Borrower, pursuant to Section 3.10(e), of any change to the reference rate upon which the interest rate on Term Benchmark Loans is based. However, the Administrative Agent does not warrant or accept any responsibility for, and shall not have any liability with respect to, the administration, submission, performance or any other matter related to the Daily Simple SONIA Rate, LIBOR or other rates in the definition of “LIBO Rate” (or “EURIBO Rate”) or with respect to any alternative or successor rate thereto, or replacement rate thereof (including, without limitation, (i) any such alternative, successor or replacement rate implemented pursuant to Section 3.10(b) or Section 3.10(c), whether upon the occurrence of a Benchmark Transition Event, a Term SOFR Transition Event, an Early Opt-in Election or an Other Benchmark Rate Election, and (ii) the implementation of any Benchmark Replacement Conforming Changes pursuant to Section 3.10(d)), including without limitation, whether the composition or characteristics of any such alternative, successor or replacement reference rate will be similar to, or produce the same value or economic equivalence of, the Daily Simple SONIA Rate, the LIBO Rate (or the EURIBO Rate) or have the same volume or liquidity as did the London interbank offered rate prior to its discontinuance or unavailability (excluding, in each case, in the event of bad faith, gross negligence or willful misconduct on the part of the Administrative Agent (as determined by a court of competent jurisdiction in a final, non-appealable judgment)). The Administrative Agent and its affiliates and/or other related entities may engage in transactions that affect the calculation of any Daily Simple SONIA Rate, any alternative, successor or alternative rate (including any Benchmark Replacement) and/or any relevant adjustments thereto, in each case, in a manner adverse to the Borrower. The Administrative Agent may select information sources or services in its reasonable discretion to ascertain Daily Simple SONIA Rate, LIBO Rate or EURIBO Rate, any component thereof, or rates referenced in the definition thereof, in each case pursuant to the terms of this Credit Agreement, and shall have no liability to the Borrower, any Lender or any other person or entity for damages of any kind, including direct or indirect, special, punitive, incidental or consequential damages, costs, losses or expenses (whether in tort, contract or otherwise and whether at law or in equity), for any error or calculation of any such rate (or component thereof) provided by any such information source or service.
SECTION 2
CREDIT FACILITIES
2.1Revolving Loans.
(a)Revolving Loan Commitment. Subject to the terms and conditions set forth herein, including but not limited to Section 5.2, each Lender severally agrees to make Revolving Loans to the Borrower, in Dollars or in one or more Alternative Currencies, in an amount equal to its Revolving Loan Commitment Percentage, if any, of any borrowing of Revolving Loans, at
any time and from time to time, during the period from and including the Restatement Effective Date to but not including the Revolving Maturity Date (or such earlier date if the Commitments have been terminated as provided herein); provided, however, that, after giving effect to any borrowing of Revolving Loans, the sum of (i) the aggregate amount of the Dollar Equivalent of Revolving Loans outstanding plus (ii) the aggregate amount of the Dollar Equivalent of LOC Obligations outstanding plus (iii) the aggregate amount of Swing Line Loans outstanding shall not exceed the Revolving Committed Amount, and the aggregate amount of the Dollar Equivalent of Revolving Loans and LOC Obligations denominated in Alternative Currencies at any time shall not exceed $100,000,000 (the “Foreign Currency Sublimit”). Subject to the terms of this Credit Agreement, the Borrower may borrow, repay and reborrow Revolving Loans.
(b)Method of Borrowing for Revolving Loans. By no later than (i) 11:00 a.m., Local Time, on the date of the requested borrowing of Revolving Loans that will be made as Base Rate Loans, (ii) 1:00 p.m., Local Time, three Business Days prior to the date of the requested borrowing of Revolving Loans that will be made as Term Benchmark Loans denominated in Dollars, (iii) 12:00 p.m., New York City time, three Business Days prior to the date of the requested borrowing of Revolving Loans that will be made as Term Benchmark Loans denominated in Euros, or (iv) 11:00 a.m., New York City time, four RFR Business Days prior to the date of the requested borrowing of Revolving Loans that will be made as RFR Loans denominated in Sterling, the Borrower shall provide written notice, submitted by fax, email or hand delivery, to the Administrative Agent in the form of Exhibit 2.1(b) (or, in the case of any borrowing of Revolving Loans denominated in Dollars, by telephonic notification, confirmed promptly by written notice, submitted by fax, email or hand delivery, to the Administrative Agent in the form of Exhibit 2.1(b)), each of such telephonic notice and such written Notice of Borrowing setting forth (A) the amount requested, (B) whether such Revolving Loans shall accrue interest at the Base Rate, the Adjusted Daily Simple SONIA Rate, the Adjusted LIBO Rate or the Adjusted EURIBO Rate, (C) with respect to Revolving Loans that will be Term Benchmark Loans, the Interest Period applicable thereto, (D) with respect to Revolving Loans that will be Term Benchmark Loans or RFR Loans, the applicable currency thereof, (E) certification that the Borrower has complied in all respects with Section 5.2 and (F) in the case of a Revolving Loan borrowing requested to finance the reimbursement of a Letter of Credit as provided in Section 2.2(d), the identity of the Issuing Lender that has issued such Letter of Credit. Each such notice must be received by the Administrative Agent not later than (i) three Business Days prior to the requested date of any borrowing of, conversion to or continuation of Term Benchmark Loans denominated in Dollars or of any conversion of Term Benchmark Loans denominated in Dollars to Base Rate Loans, (ii) three Business Days prior to the requested date of any borrowing or continuation of Term Benchmark Loans denominated in Euros, (iii) four RFR Business Days prior to the requested date of any borrowing of RFR Loans and (iv) on the requested date of any borrowing of Base Rate Loans.
(c)Funding of Loans. Upon receipt of a Notice of Borrowing, the Administrative Agent shall promptly inform the Lenders as to the terms thereof. Each Lender shall make its Revolving Loan Commitment Percentage of the requested borrowing of Revolving Loans available to the Administrative Agent in Same Day Funds at the Agency Services Address for the applicable currency not later than 1:00 p.m., Local Time, in each case on the Business Day specified in the Notice of Borrowing. The amount of the requested Revolving Loans will then be made available to the Borrower by the Administrative Agent as directed by the Borrower in writing, to the extent the amount of such Revolving Loans are made available to the Administrative Agent.
No Lender shall be responsible for the failure or delay by any other Lender in its obligation to make Revolving Loans hereunder; provided, however, that the failure of any Lender to fulfill its obligations hereunder shall not relieve any other Lender of its obligations hereunder. Unless the Administrative Agent shall have been notified by any Lender prior to the time of any such Revolving Loan that such Lender does not intend to make available to the Administrative Agent its portion of the Revolving Loans to be made on such date, the Administrative Agent may assume that such Lender has made such amount available to the Administrative Agent on the date of such Revolving Loans, and the Administrative Agent in reliance upon such assumption may (in its sole discretion but without any obligation to do so) make available to the Borrower a corresponding amount. If such Lender’s portion of the Revolving Loans is not in fact made available to the Administrative Agent, the Administrative Agent shall be able to recover from such Lender an amount equal to such corresponding amount which the Administrative Agent has made available to the Borrower. If such Lender does not pay such amount upon the Administrative Agent’s demand therefor, the Administrative Agent will promptly notify the Borrower, and the Borrower shall immediately pay such amount to the Administrative Agent. The Administrative Agent shall also be entitled to recover from such Lender or the Borrower, as the case may be, interest on such amount in respect of each day from the date an amount equal to such corresponding amount was made available by the Administrative Agent to the Borrower to the date such corresponding amount is recovered by the Administrative Agent at a per annum rate equal to (i) from the Borrower, at the applicable rate for such Revolving Loan pursuant to the Notice of Borrowing or (ii) from such Lender, at the Overnight Rate plus any administrative, processing or similar fees customarily charged by the Administrative Agent in connection with the foregoing.
(d)Reductions of Revolving Committed Amount. Upon at least three Business Days’ prior written notice, the Borrower shall have the right to permanently reduce, without premium or penalty, all or part of the aggregate unused amount of the Revolving Committed Amount at any time or from time to time; provided that (i) each partial reduction shall be in an aggregate amount at least equal to $10,000,000 and in integral multiples of $1,000,000 above such amount and (ii) no reduction shall be made which would reduce the Revolving Committed Amount to an amount less than the aggregate amount of the Dollar Equivalent of outstanding Revolving Loans plus the aggregate amount of the Dollar Equivalent of outstanding LOC Obligations plus the aggregate amount of outstanding Swing Line Loans. Any reduction in (or termination of) the Revolving Committed Amount pursuant to this Section 2.1(d) shall be permanent and may not be reinstated. The Administrative Agent shall immediately notify the Lenders of any reduction in the Revolving Committed Amount pursuant to this Section 2.1(d).
(e)Revolving Notes. The Revolving Loans made by each Lender shall be evidenced by a duly executed promissory note of the Borrower to each Lender that requests a Revolving Note in substantially the form of Exhibit 2.1(e).
2.2Letter of Credit Subfacility.
(a)Issuance. Subject to the terms and conditions hereof and of the LOC Documents, if any, and any other terms and conditions relating to the Borrower which the applicable Issuing
Lender may reasonably require (so long as such terms and conditions do not impose any financial obligation on or require any Lien (not otherwise contemplated by this Credit Agreement) to be given by the Borrower or any of its Subsidiaries or conflict with any obligation of, or detract from any action which may be taken by, the Borrower under this Credit Agreement), each Issuing Lender agrees, in reliance upon the agreements of the other Lenders set forth in this Section 2.2, from time to time upon request, to issue (from the Restatement Effective Date to thirty days prior to the Revolving Maturity Date and in a form reasonably acceptable to such Issuing Lender), in Dollars or, to the extent specified by the Borrower in the applicable request for issuance, in one or more Alternative Currencies, and Participants shall participate in, Letters of Credit for the account of the Borrower; provided, however, that, after giving effect to the issuance (or drawdown or extension) of any Letter of Credit, (i) the aggregate amount of the Dollar Equivalent of LOC Obligations for such Issuing Lender shall not at any time exceed the LOC Committed Amount of such Issuing Lender, (ii) the aggregate amount of the Dollar Equivalent of LOC Obligations shall not at any time exceed the aggregate LOC Committed Amount for all Issuing Lenders, (iii) the sum of (A) the aggregate amount of the Dollar Equivalent of outstanding LOC Obligations, plus (B) the aggregate amount of the Dollar Equivalent of Revolving Loans outstanding, plus (C) the aggregate amount of Swing Line Loans outstanding shall not exceed the Revolving Committed Amount and (iv) the aggregate amount of the Dollar Equivalent of Revolving Loans and LOC Obligations denominated in Alternative Currencies at any time shall not exceed the Foreign Currency Sublimit. Each Issuing Lender may require the issuance and expiry date of each Letter of Credit issued by it to be a Business Day. Each Letter of Credit shall be a standby letter of credit issued to support the obligations (including pension or insurance obligations), contingent or otherwise, of the Borrower or any of its Subsidiaries. No Letter of Credit shall have an original expiry date after the earlier of (x) one year from the date of issuance and (y) five Business Days prior to the Revolving Maturity Date, provided that any Letter of Credit may contain customary automatic renewal provisions agreed upon by the Borrower and the relevant Issuing Lender pursuant to which the expiration date of such Letter of Credit shall automatically be extended for a period of up to 12 months (but not to a date later than the date set forth in clause (y) above), subject to a right on the part of such Issuing Lender to prevent any such renewal from occurring by giving notice to the beneficiary in advance of any such renewal. Each Letter of Credit shall comply with the related LOC Documents. The Borrower shall promptly examine a copy of each Letter of Credit and each amendment thereto that is delivered to it and, in the event of any claim of noncompliance with the Borrower’s instructions or other irregularity, the Borrower will immediately notify the relevant Issuing Lender.
(b)Notice and Reports. The request for the issuance of a Letter of Credit (or the amendment, renewal or extension of an outstanding Letter of Credit (other than an automatic renewal permitted pursuant to paragraph (a) of this Section)) shall be submitted to the Administrative Agent for distribution by the Administrative Agent to the relevant Issuing Lender as specified by the Borrower by hand delivery, fax or email at least three Business Days prior to the requested date of issuance for the Administrative Agent to coordinate with the respective Issuing Lenders. Each Issuing Lender will, at least quarterly and more frequently upon request, provide to the Administrative Agent for dissemination to the Lenders a report specifying the Letters of Credit which are then issued and outstanding. Each Issuing Lender will further provide to the Administrative Agent, promptly upon request, copies of the Letters of Credit and the other LOC Documents. For the avoidance of any doubt, the Borrower shall be entitled at all times to select which Issuing Lender will be used to issue a Letter of Credit.
(c)Participations. Each Participant, upon issuance of a Letter of Credit, shall be deemed to have purchased without recourse a risk participation from the relevant Issuing Lender in such Letter of Credit and each LOC Document related thereto and the rights and obligations arising thereunder and any collateral relating thereto, in each case in an amount equal to its Revolving Loan Commitment Percentage of the obligations under such Letter of Credit, and shall absolutely, unconditionally and irrevocably assume, as primary obligor and not as surety, and be obligated to pay to such Issuing Lender therefor and discharge when due, its Revolving Loan Commitment Percentage of the obligations arising under such Letter of Credit. Without limiting the scope and nature of each Participant’s participation in any Letter of Credit, to the extent that any Issuing Lender has not been reimbursed as required hereunder or under any such Letter of Credit or pursuant to a Mandatory Borrowing under Section 2.2(e)(i), each such Participant shall fund its Participation Interest in such unreimbursed drawing in accordance with the terms of Section 2.2(e)(ii). Each Participant acknowledges and agrees that its obligation to acquire participations pursuant to this paragraph in respect of Letters of Credit is absolute and unconditional and shall not be affected by any circumstance whatsoever, including any amendment, renewal or extension of any Letter of Credit (provided that such Letter of Credit shall expire no later than the date set forth in paragraph (a) of this Section), the occurrence and continuance of a Default, any reduction or termination of the Commitments or any force majeure or other event that under any rule of law or uniform practices to which any Letter of Credit is subject permits a drawing to be made under such Letter of Credit after the expiration thereof or of the Commitments, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever. Each Participant further acknowledges and agrees that, in issuing, amending, renewing or extending any Letter of Credit, the relevant Issuing Lender shall be entitled to rely, and shall not incur any liability for relying, upon the representations and warranties of the Borrower deemed made pursuant to Section 5.2. Any such reimbursement shall not relieve or otherwise impair the obligation of the Borrower to reimburse the relevant Issuing Lender under any Letter of Credit, together with interest as hereinafter provided.
(d)Reimbursement by Borrower. In the event of any drawing under any Letter of Credit, the relevant Issuing Lender will promptly notify the Borrower. Unless the Borrower shall notify such Issuing Lender of its intent to otherwise reimburse such Issuing Lender and shall reimburse such Issuing Lender in same day funds in the currency of such drawing within one hour of receipt of notice of such drawing from such Issuing Lender, (i) if such drawing relates to a Letter of Credit denominated in an Alternative Currency, automatically and with no further action, the obligation of the Borrower to reimburse such drawing shall be permanently converted into an obligation to reimburse the Dollar Equivalent of such drawing, calculated using the Letter of Credit Exchange Rate applicable to such drawing and (ii) the Borrower shall be deemed to have requested a Revolving Loan borrowing in Dollars at the Base Rate in the amount of such drawing or Dollar Equivalent thereof, as the case may be, the proceeds of which will be used to satisfy the Borrower’s reimbursement obligations. Pending the satisfaction of the Borrower’s reimbursement obligations through the making of Revolving Loans pursuant to Section 2.2(e)(i), the unreimbursed amount of such drawing or the Dollar Equivalent thereof, as the case may be, will bear interest, payable from time to time on demand or, if no demand has been made, on the date on which the Borrower reimburses the applicable Letter of Credit in full, at the rate applicable to Base Rate Loans, for the accounts of the relevant Issuing Lender and the Participants, as their interests may appear. The Borrower’s reimbursement obligations hereunder shall be absolute, unconditional and irrevocable under all circumstances irrespective of (but without waiver of) (i) any rights of set-off, counterclaim or defense to payment the applicable account party or the Borrower may claim or have against any Issuing Lender, the Administrative Agent, the Lenders, the beneficiary of the Letter of Credit drawn upon or any other Person, including without limitation, any defense based on any failure of the applicable account party or the Borrower to receive consideration, (ii) the legality, validity, regularity or unenforceability of
any Letter of Credit, this Credit Agreement or any other Credit Document, (iii) any draft or other document presented under a Letter of Credit proving to be forged, fraudulent or invalid in any respect or any statement therein being untrue or inaccurate in any respect, or (iv) any force majeure or other event that under any rule of law or uniform practices to which any Letter of Credit is subject permits a drawing to be made under such Letter of Credit after the stated expiration date thereof or of the Commitments.
(e)Reimbursement by Lenders.
(i)Reimbursement with Revolving Loans. On any day on which the Borrower shall have requested, or been deemed to have requested, a Revolving Loan borrowing to reimburse a drawing under a Letter of Credit (as set forth in clause (d) above), the Administrative Agent shall give notice to the Lenders, and a Revolving Loan borrowing in the amount of the Borrower’s reimbursement obligation comprised solely of Base Rate Loans (each such borrowing, a “Mandatory Borrowing”) shall be made from all Revolving Lenders (without giving effect to any termination of the Commitments pursuant to Section 9.2) pro rata based on each Revolving Lender’s respective Revolving Loan Commitment Percentage and the proceeds thereof shall be paid directly to the relevant Issuing Lender for application to the respective LOC Obligations. Each applicable Lender hereby irrevocably agrees to make such Revolving Loans upon any such request or deemed request on account of each such Mandatory Borrowing in the amount and in the manner specified in the preceding sentence and in accordance with the terms of Section 2.2(e)(iii) notwithstanding (A) the amount of Mandatory Borrowing may not comply with the minimum amount for borrowings of Revolving Loans otherwise required hereunder, (B) whether any conditions specified in Section 5.2 are then satisfied or waived, (C) whether a Default or Event of Default then exists, (D) failure of any such request or deemed request for Revolving Loans to be made by the time otherwise required hereunder, (E) the date of such Mandatory Borrowing, (F) any reduction in the Revolving Committed Amount or any termination of the Commitments, or (G) any set-off, counterclaim, recoupment, defense or other right which such Lender may have against any Issuing Lender, the Borrower or any other Person for any reason whatsoever.
(ii)Reimbursement Through Funding of Participation Interests. In the event that any Mandatory Borrowing cannot for any reason be made on the date otherwise required above (including, without limitation, as a result of the commencement of a proceeding under the Bankruptcy Code with respect to the Borrower), the relevant Issuing Lender will promptly notify the Participants of the Dollar amount of any unreimbursed drawing (determined as provided above and adjusted for any payments received from the Borrower on or after the date of such drawing and prior to the funding of the Participation Interests therein) and each Participant shall fund its Participation Interest in such unreimbursed drawing by paying to the relevant Issuing Lender, in Dollars and in immediately available funds, the amount of such Participant’s Revolving Loan Commitment Percentage of such unreimbursed drawing. Each Participant’s obligation to make such payment to such Issuing Lender, and the right of such Issuing Lender to receive the same, shall be absolute and unconditional, shall not be affected by any circumstance whatsoever and without regard to (A) the termination of this Credit Agreement or the Commitments hereunder, (B) the existence of a Default or Event of Default, (C) the acceleration of the obligations hereunder and (D) any set-off, counterclaim, recoupment, defense or other right which such Participant may have against such Issuing Lender, the Borrower or any other Person for any reason whatsoever. Simultaneously with the making of each such payment by a Participant to any Issuing Lender, such Participant shall, automatically and without any further action on the part of the relevant Issuing Lender or such Participant, acquire a participation in an amount equal to such payment (excluding the portion of such payment constituting interest owing to
such Issuing Lender) in the related unreimbursed LOC Obligation and in the interest thereon and in the related LOC Documents, and shall have a claim against the Borrower with respect thereto.
(iii)Funding of Mandatory Borrowing or Participation Interest. Each Revolving Lender and each Participant shall upon any notice pursuant to Section 2.2(e)(i) or Section 2.2(e)(ii), respectively, make its Revolving Loan Commitment Percentage of the unreimbursed drawing or Dollar Equivalent thereof, as the case may be, available to the Administrative Agent, for the benefit of the relevant Issuing Lender, by 1:00 p.m., Local Time, on the day of the notice if notice is given on or before 11:00 a.m. or by 1:00 p.m., Local Time, the next Business Day if notice is given after 11:00 a.m., in Dollars in immediately available funds at the Agency Services Address. The Administrative Agent shall remit the funds so received to such Issuing Lender.
(f)Modification and Extension. The issuance of any supplement, modification, amendment, renewal, or extensions to any Letter of Credit shall, for purposes hereof, be treated in all respects the same as the issuance of a new Letter of Credit hereunder.
(g)Applicability of ISP98. Unless otherwise expressly agreed by the relevant Issuing Lender and the Borrower when a Letter of Credit is issued, the rules of the “International Standby Practices 1998” published by the Institute of International Banking Law & Practice (or such later version thereof as may be in effect at the time of issuance) shall apply to each Letter of Credit.
(h)Responsibility of Issuing Lenders.
(i)It is expressly understood and agreed as between the Lenders that the obligations of each Issuing Lender hereunder to the Participants are only those expressly set forth in this Credit Agreement and that each Issuing Lender shall be entitled to assume that the conditions precedent set forth in Section 5.2 have been satisfied unless it shall have acquired actual knowledge that any such condition precedent has not been satisfied; provided, however, that nothing set forth in this Section 2.2 shall be deemed to prejudice the right of any Participant to recover from any Issuing Lender any amounts made available by such Participant to such Issuing Lender pursuant to this Section 2.2 in the event that it is determined by a court of competent jurisdiction by a final and non-appealable judgment that the payment with respect to a Letter of Credit constituted gross negligence or willful misconduct on the part of such Issuing Lender.
(ii)No Issuing Lender shall be under any obligation to issue any Letter of Credit if (a) any order, judgment or decree of any Governmental Authority or arbitrator shall by its terms purport to enjoin or restrain such Issuing Lender from issuing such Letter of Credit, (b) any Requirement of Law applicable to such Issuing Lender or any request or directive (whether or not having the force of law) from any Governmental Authority with jurisdiction over such Issuing Lender shall prohibit, or request that such Issuing Lender refrain from, the issuance of letters of credit generally or such Letter of Credit in particular or shall impose upon such Issuing Lender with respect to such Letter of Credit any restriction, reserve or capital requirement (for which such Issuing Lender is not otherwise compensated hereunder) not in effect on the Restatement Effective Date, or shall impose upon any Issuing Lender any unreimbursed loss, cost or expense which was not applicable on the Restatement Effective Date and which such Issuing Lender in good faith deems material to it, or (c) the issuance of such Letter of Credit would violate one or more policies of such Issuing Lender.
(i)Conflict with LOC Documents. In the event of any conflict between this Credit Agreement and any LOC Document, this Credit Agreement shall govern.
(j)Indemnification of Issuing Lenders.
(i)In addition to its other obligations under this Credit Agreement, the Borrower hereby agrees to protect, indemnify, pay and hold harmless each Issuing Lender from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including Attorney Costs) that any Issuing Lender may incur or be subject to as a consequence, direct or indirect, of (A) the issuance of any Letter of Credit or (B) the failure of any Issuing Lender to honor a drawing under a Letter of Credit as a result of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto Governmental Authority (all such acts or omissions, herein called “Government Acts”).
(ii)As between the Borrower and each Issuing Lender, the Borrower shall assume all risks of the acts, omissions or misuse of any Letter of Credit by the beneficiary thereof. No Issuing Lender shall be responsible for (except in the case of (A), (B) and (C) below if such Issuing Lender has actual knowledge to the contrary): (A) the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for and issuance of any Letter of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (B) the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, that may prove to be invalid or ineffective for any reason; (C) failure of the beneficiary of a Letter of Credit to comply fully with conditions required in order to draw upon a Letter of Credit; (D) errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher; (E) any loss or delay in the transmission or otherwise of any document required in order to make a drawing under a Letter of Credit or of the proceeds thereof and (F) any consequences arising from causes beyond the control of such Issuing Lender, including, without limitation, any Government Acts. None of the above shall affect, impair, or prevent the vesting of any Issuing Lender’s rights or powers hereunder.
(iii)In furtherance and extension and not in limitation of the specific provisions hereinabove set forth, any action taken or omitted by any Issuing Lender, under or in connection with any Letter of Credit or the related certificates, if taken or omitted in good faith, shall not put such Issuing Lender under any resulting liability to the Borrower. It is the intention of the parties that this Credit Agreement shall be construed and applied to protect and indemnify each Issuing Lender against any and all risks involved in the issuance of the Letters of Credit, all of which risks are hereby assumed by the Borrower, including, without limitation, any and all risks of the acts or omissions, whether rightful or wrongful, of any present or future Government Acts. No Issuing Lender shall, in any way, be liable for any failure by any Issuing Lender or anyone else to pay any drawing under any Letter of Credit as a result of any Government Acts or any other cause beyond the control of such Issuing Lender.
(iv)None of the Administrative Agent, the Lenders or the Issuing Lenders, or any of their Related Parties, shall have any liability or responsibility by reason of or in connection with the issuance or transfer of any Letter of Credit or any payment or failure to make any payment thereunder (irrespective of any of the circumstances referred to in the preceding sentence), or any error, omission, interruption, loss or delay in transmission or delivery of any draft, notice or other communication under or relating to any Letter of Credit (including any document required to make a drawing thereunder), any error in interpretation of technical terms or any consequence arising from causes beyond the control of any Issuing Lender; provided that the foregoing shall not be construed to excuse any Issuing Lender from liability to the Borrower to the extent of any direct damages (as opposed to special, indirect, consequential or punitive damages, claims in respect of which are hereby waived by the Borrower to the extent permitted by applicable law) suffered by the Borrower that are caused by such Issuing Lender’s failure to exercise care when determining whether drafts and other documents presented under a Letter of Credit comply with the terms thereof. The parties hereto expressly agree that, in the absence of gross negligence or willful misconduct on the part of any Issuing Lender (as finally determined by a court of competent jurisdiction), such Issuing Lender shall be deemed to have exercised care in each such determination. In furtherance of the foregoing and without limiting the generality thereof, the parties agree that, with respect to documents presented which appear on their face to be in substantial compliance with the terms of a Letter of Credit, the relevant Issuing Lender may, in its sole discretion, either accept and make payment upon such documents without responsibility for further investigation, regardless of any notice or information to the contrary, or refuse to accept and make payment upon such documents if such documents are not in strict compliance with the terms of such Letter of Credit.
(v)Nothing in this subsection (j) is intended to limit the reimbursement obligation of the Borrower contained in this Section 2.2. The obligations of the Borrower under this subsection (j) shall survive the termination of this Credit Agreement. No act or omission of any current or prior beneficiary of a Letter of Credit shall in any way affect or impair the rights of any Issuing Lender to enforce any right, power or benefit under this Credit Agreement.
(vi)Notwithstanding anything to the contrary contained in this subsection (j), the Borrower shall have no obligation to indemnify any Issuing Lender in respect of any liability incurred by such Issuing Lender arising out of the gross negligence, willful misconduct or bad faith of such Issuing Lender, as determined by a court of competent jurisdiction by a final and non-appealable judgment.
(k)Designation of other Persons as Account Parties. Notwithstanding anything to the contrary set forth in this Credit Agreement, including without limitation Section 2.2(a) hereof, a Letter of Credit issued hereunder may contain a statement to the effect that such Letter of Credit is issued for the account of a Subsidiary of the Borrower; provided that notwithstanding such statement, the Borrower shall be the actual account party for all purposes of this Credit Agreement for such Letter of Credit and such statement shall not affect the Borrower’s reimbursement obligations hereunder with respect to such Letter of Credit.
(l)Designation of Additional Issuing Lenders. From time to time, the Borrower may by notice to the Administrative Agent and the Lenders designate as additional Issuing Lenders one or more Lenders that agree to serve in such capacity as provided below. The acceptance by a Lender of any appointment as an Issuing Lender hereunder shall be evidenced by an agreement (an “Issuing Lender Agreement”), which shall be in a form satisfactory to the Borrower and the Administrative Agent, shall set forth the LOC Commitment of such Lender and shall be executed by such Lender, the Borrower and the Administrative Agent and, from and after the effective date of such agreement, (i) such Lender shall have all the rights and obligations of an Issuing Lender under this Credit Agreement and the other Credit Documents and (ii) references herein and in the other Credit Documents to the term “Issuing Lender” shall be deemed to include such Lender in its capacity as an Issuing Lender.
(m)Termination of an Issuing Lender. An Issuing Lender may be terminated as Issuing Lender by written agreement among the Borrower, the Administrative Agent and such Issuing Lender. The Administrative Agent shall notify the Lenders of any such termination of an Issuing Lender. At the time any such termination shall become effective, the Borrower shall pay all unpaid fees accrued for the account of the terminated Issuing Lender pursuant to Section 3.4(b). After the termination of an Issuing Lender hereunder, the terminated Issuing Lender shall remain a party hereto and shall continue to have all the rights and obligations of an Issuing Lender under this Credit Agreement and the other Credit Documents with respect to Letters of Credit issued by it prior to such termination, but shall not be required to amend, renew (other than automatic renewal pursuant to the terms of such Letter of Credit) or extend any such Letter of Credit or to issue additional Letters of Credit. The termination of any Issuing Lender shall not affect the LOC Commitment of any other Lender.
(n)Existing Letters of Credit. As of the Restatement Effective Date, without further action on the part of any Person, each Existing Letter of Credit shall be automatically deemed to be a Letter of Credit issued hereunder for all purposes of this Credit Agreement, and the original issuing lender of each such Letter of Credit shall be the Issuing Lender thereof for all purposes hereof.
2.3Swing Line Loans Subfacility.
(a)Swing Line Loans. The Administrative Agent, the Swing Line Lender and the Lenders agree that in order to facilitate the administration of this Credit Agreement and the other Credit Documents, the Swing Line Lender may (but shall have absolutely no obligation to) make loans (each a “Swing Line Loan” and collectively, the “Swing Line Loans”) to the Borrower, in Dollars, at any time and from time to time, during the period from and including the Restatement Effective Date to but not including the Revolving Maturity Date (or such earlier date on which the Commitments have been terminated as provided herein) on the terms and subject to the conditions set forth herein and in the other Credit Documents; provided that, after giving effect to the issuance of any such Swing Line Loan, (i) the aggregate principal amount of the Swing Line Loans outstanding at any one time shall not exceed $50,000,000 (the “Swing Line Subfacility Amount”) at any time and (ii) the sum of (A) the aggregate amount of Swing Line Loans outstanding, plus (B) the aggregate amount of the Dollar Equivalent of Revolving Loans outstanding, plus (C) the aggregate amount of the Dollar Equivalent of LOC Obligations outstanding shall not exceed the Revolving Committed Amount. Subject to the terms of this Credit Agreement, the Borrower may borrow, repay and reborrow Swing Line Loans.
(b)Method of Borrowing and Funding Swing Line Loans. By no later than 1:00 p.m., Local Time, on the date of the requested borrowing of Swing Line Loans, the Borrower shall provide telephone notice to the Swing Line Lender, followed promptly by a written Swing Line Loan Request in the form of Exhibit 2.3(b) (which may be submitted by fax), setting forth (i) the amount of the requested Swing Line Loan and (ii) the date of the requested Swing Line Loan and complying in all respects with Section 5.2. If the Swing Line Lender elects to make such Swing Line Loans, the Swing Line Lender shall initiate the transfer of funds representing the Swing Line Loan advance to the Borrower by 3:00 p.m., Local Time, on the Business Day of the requested borrowing.
(c)Repayment and Participations of Swing Line Loans. The Borrower agrees to repay each Swing Line Loan immediately upon the existence of a Default or Event of Default or otherwise on the earlier of the Revolving Maturity Date and the first date after such Swing Line Loan is made that is the 15th or last day of a calendar month and is at least three Business Days after such Swing Line Loan is made; provided that on each date that a borrowing of Revolving Loans denominated in Dollars is made, the Borrower shall repay all Swing Line Loans that were outstanding on the date such borrowing was requested. Each repayment of a Swing Line Loan may be accomplished by requesting Revolving Loans which request is not subject to the conditions set forth in Section 5.2. In the event that the Borrower shall fail to timely repay any Swing Line Loan, and in any event upon (i) a request by the Swing Line Lender, (ii) the occurrence of an Event of Default described in Section 9.1(f) or (iii) the acceleration of any Loan or termination of any Commitment pursuant to Section 9.2, each Revolving Lender shall promptly irrevocably and unconditionally purchase from the Swing Line Lender, without recourse or warranty, an undivided interest and participation in such Swing Line Loan in an amount equal to such other Lender’s Revolving Loan Commitment Percentage thereof, by directly purchasing a participation in such Swing Line Loan in such amount (regardless of whether the conditions precedent thereto set forth in Section 5.2 are then satisfied, whether or not the Borrower has submitted a Notice of Borrowing and whether or not the Commitments are then in effect, any Event of Default exists or all the Loans have been accelerated) and paying the proceeds thereof to the Swing Line Lender at the Agency Services Address, or at such other address as the Swing Line Lender may designate, in Dollars and in immediately available funds. If such Participant does not pay such amount forthwith upon the Swing Line Lender’s demand therefor, and until such time as such Participant makes the required payment, the Swing Line Lender shall be deemed to continue to have outstanding Swing Line Loans in the amount of such
unpaid participation obligation for all purposes of the Credit Documents other than those provisions requiring the other Participants to purchase a participation therein. Further, such Participant shall be deemed to have assigned any and all payments made of principal and interest on its Loans, and any other amounts due to it hereunder to the Swing Line Lender to fund Swing Line Loans in the amount of the participation in Swing Line Loans that such Participant failed to purchase pursuant to this Section 2.3(c) until such amount has been purchased (as a result of such assignment or otherwise).
(d)Swing Line Loan Note. The Swing Line Loans made by the Swing Line Lender shall, if requested by the Swing Line Lender, be evidenced by a duly executed promissory note of the Borrower to the Swing Line Lender in substantially the form of Exhibit 2.3(d).
2.4Continuations and Conversions.
Subject to the terms below, the Borrower shall have the option, on any Business Day, to continue existing Term Benchmark Loans for a subsequent Interest Period, to convert Base Rate Loans into Term Benchmark Loans denominated in Dollars or to convert Term Benchmark Loans denominated in Dollars into Base Rate Loans. By no later than 11:00 a.m., Local Time, (a) on the date of the requested conversion of a Term Benchmark Loan denominated in Dollars to a Base Rate Loan or (b) three Business Days prior to the date of the requested continuation of a Term Benchmark Loan denominated in Dollars or conversion of a Base Rate Loan to a Term Benchmark Loan denominated in Dollars or (c) three Business Days prior to the date of the requested continuation of a Term Benchmark Loan denominated in Euros, the Borrower shall provide a written Notice of Continuation/Conversion, in the form of Exhibit 2.4, submitted by hand delivery, fax or email, to the Administrative Agent (or, in the case of a continuation or conversion of Loans denominated in Dollars to Loans denominated in Dollars, telephonic notice, confirmed promptly by hand delivery, fax or email to the Administrative Agent of a written Notice of Continuation/Conversion, in the form of Exhibit 2.4) setting forth (i) whether the Borrower wishes to continue or convert such Loans and (ii) if the request is to continue a Term Benchmark Loan or convert a Base Rate Loan to a Term Benchmark Loan, the Interest Period applicable thereto. Notwithstanding anything herein to the contrary, (A) except as provided in Section 3.11, Term Benchmark Loans may only be continued or converted into Base Rate Loans on the last day of the Interest Period applicable thereto, (B) Term Benchmark Loans may not be continued nor may Base Rate Loans be converted into Term Benchmark Loans during the existence and continuation of an Event of Default, (C) any request to continue a Term Benchmark Loan that fails to comply with the terms hereof or any failure to request a continuation of a Term Benchmark Loan at the end of an Interest Period shall constitute a conversion to a Base Rate Loan on the last day of the applicable Interest Period; provided, however, that in the case of a failure to timely request a continuation of Term Benchmark Loans denominated in an Alternative Currency or if any such request fails to comply with the terms hereof, such Loans shall be continued as Term Benchmark Loans in their original currency with an Interest Period of one month, and (D) any failure to state the Interest Period with respect to the continuation of a Term Benchmark Loan or the conversion of a Base Rate Loan to a Term Benchmark Loan shall constitute a request for a one month Interest Period. No Revolving Loans may be converted into or continued as Revolving Loans denominated in a different currency, but instead must be prepaid in the original currency of such Revolving Loans and reborrowed in the other currency. It is understood and agreed that Swing Line Loans may not be continued or converted.
2.5Minimum Amounts.
Each request for a borrowing, conversion or continuation shall be subject to the requirements that (a) each Term Benchmark Loan and RFR Loan shall be in an aggregate amount that is an integral multiple of the Borrowing Multiple and not less than the Borrowing Minimum, (b) each Base Rate Loan shall be in a minimum amount of the lesser of $5,000,000 (and in integral multiples of $1,000,000 in excess thereof) or the remaining available Revolving Committed Amount, (c) each Swing Line Loan shall be in a minimum amount of the lesser of $1,000,000 (and in integral multiples of $100,000 in excess thereof) or the remaining available Swing Line Subfacility Amount and (d) no more than 10 Term Benchmark Loans and RFR Loans shall be outstanding hereunder at any one time. For the purposes of this Section 2.5, all Term Benchmark Loans denominated in the same currency with the same Interest Periods that begin and end on the same date shall be considered as one Term Benchmark Loan, but Term Benchmark Loans with different Interest Periods, even if they begin on the same date, shall be considered as separate Term Benchmark Loans.
2.6Defaulting Lenders.
Notwithstanding any provision of this Credit Agreement to the contrary, if any Revolving Lender becomes a Defaulting Lender, then the following provisions shall apply for so long as such Revolving Lender is a Defaulting Lender:
(a)Facility Fees shall cease to accrue on the Revolving Commitment of such Defaulting Lender pursuant to Section 3.4(a);
(b)the Revolving Commitment and Revolving Exposure of such Defaulting Lender shall not be included in determining whether the Required Lenders or any other requisite Lenders have taken or may take any action hereunder or under any other Credit Document (including any consent to any amendment, waiver or other modification pursuant to Section 11.6); provided that any amendment, waiver or other modification requiring the consent of all Lenders or all Lenders affected thereby shall, except as otherwise provided in Section 11.6, require the consent of such Defaulting Lender in accordance with the terms hereof;
(c)if any Swing Line Exposure or LOC Obligation exists at the time such Revolving Lender becomes a Defaulting Lender then:
(i)the Swing Line Exposure and LOC Obligations of such Defaulting Lender shall be reallocated among the Non-Defaulting Lenders in accordance with their respective Revolving Loan Commitment Percentages but only to the extent that the sum of all Non-Defaulting Lenders’ Revolving Exposures plus such Defaulting Lender’s Swing Line Exposure and LOC Obligations does not exceed the sum of all Non-Defaulting Lenders’ Revolving Commitments;
(ii)if the reallocation described in clause (i) above cannot, or can only partially, be effected, the Borrower shall, within one Business Day following notice by the Administrative Agent (A) first, prepay the portion of such Defaulting Lender’s Swing Line Exposure that has not been reallocated and (B) second, cash collateralize for the benefit of the Issuing Lenders the portion of such Defaulting Lender’s LOC Obligations that has not been reallocated for so long as such LOC Obligations are outstanding by depositing cash in such amount in an account with the Administrative Agent, in the name of the Administrative Agent and for the benefit of the Lenders;
(iii)if the Borrower cash collateralizes any portion of such Defaulting Lender’s LOC Obligations pursuant to clause (ii) above, the Borrower shall not be required to pay Letter of Credit Fees to such Defaulting Lender pursuant to Section 3.4(b) with respect to such portion of such Defaulting Lender’s LOC Obligations for so long as such Defaulting Lender’s LOC Obligations are cash collateralized;
(iv)if any portion of the LOC Obligations of such Defaulting Lender is reallocated pursuant to clause (i) above, then the fees payable to the Lenders pursuant to Sections 3.4(a) and 3.4(b) shall be adjusted to give effect to such reallocation; and
(v)if such Defaulting Lender’s LOC Obligations or Swing Line Exposure or any portion thereof are not repaid or reallocated or cash collateralized pursuant to clause (i) or (ii) above, then, without prejudice to any rights or remedies of any Issuing Lender or any other Lender hereunder, all Facility Fees that otherwise would have been payable to such Defaulting Lender (solely with respect to the portion of such Defaulting Lender’s Commitment utilized by such LOC Obligations and Swing Line Exposure) and Letter of Credit Fees payable under Section 3.4(b) with respect to such Defaulting Lender’s LOC Obligations shall be payable to the relevant Issuing Lender and the Swing Line Lender, as its interests may appear, until and to the extent that such LOC Obligation and Swing Line Exposure is reallocated and/or cash collateralized or repaid.
In the event that (x) any event described in Section 9.1(f) with respect to a Revolving Lender Parent shall have occurred following the Restatement Effective Date and for so long as such Event of Default under Section 9.1(f) shall continue or (y) any Issuing Lender has a good faith belief that any Revolving Lender has defaulted in fulfilling its obligations under one or more other agreements in which such Lender commits to extend credit, no Issuing Lender shall be required to issue, amend, renew or extend any Letter of Credit unless such Issuing Lender shall have entered into arrangements with the Borrower or such Revolving Lender satisfactory to such Issuing Lender to defease any risk to it in respect of such Lender hereunder.
In the event that the Administrative Agent, the Borrower, the Swing Line Lender and the Issuing Lenders agree that a Defaulting Lender has adequately remedied all matters that caused such Lender to be a Defaulting Lender, then (i) the Swing Line Exposure and LOC Obligation of the Revolving Lenders shall be readjusted to reflect the inclusion of such Lender’s Revolving Commitment, (ii) on such date such Lender shall purchase at par such of the Revolving Loans of the other Revolving Lenders (other than Swing Line Loans) as the Administrative Agent shall determine may be necessary in order for such Revolving Lender to hold such Loans in accordance with its Revolving Loan Commitment Percentage and (iii) any and all cash collateral provided by the Borrower in respect of such Defaulting Lender’s Swing Line Exposure or LOC
Obligations in accordance with Section 2.6(c)(ii) above shall be immediately released to the Borrower and the Administrative Agent and the Lenders shall promptly execute such documents as may be necessary to give effect to such release.
2.7Incremental Facilities.
(a)The Borrower may on one or more occasions, by written notice to the Administrative Agent and with the consent of the Administrative Agent and the Incremental Lenders, request (i) during the period from and including the Restatement Effective Date to but not including the Revolving Maturity Date (or any earlier date on which the Commitments have been terminated as provided herein), the establishment of Incremental Revolving Commitments and/or (ii) the establishment of Incremental Term Commitments, provided that the aggregate principal amount of all the Incremental Commitments established hereunder shall not exceed $500,000,000 (the “Incremental Committed Amount”). Each such notice shall specify (A) the date on which the Borrower proposes that the Incremental Revolving Commitments or the Incremental Term Commitments, as applicable, shall be effective, which shall be a date not less than 10 Business Days (or such shorter period as may be agreed to by the Administrative Agent) after the date on which such notice is delivered to the Administrative Agent and (B) the amount of the Incremental Revolving Commitments or Incremental Term Commitments, as applicable, being requested (it being agreed that (x) any Lender approached to provide any Incremental Revolving Commitment or Incremental Term Commitment may elect or decline, in its sole discretion, to provide such Incremental Revolving Commitment or Incremental Term Commitment and (y) any Person that the Borrower proposes to become an Incremental Lender, if such Person is not then a Lender, must be an Eligible Assignee).
(b)The terms and conditions of any Incremental Revolving Commitment and loans and other extensions of credit to be made thereunder shall be identical to those of the Revolving Commitments and Loans and other extensions of credit made hereunder, and shall be treated as a single class with such Revolving Commitments and Loans. The terms and conditions of any Incremental Term Commitments and the Incremental Term Loans to be made thereunder shall be as set forth in the applicable Incremental Facility Agreement; provided that (i) no Incremental Term Maturity Date shall be earlier than, and no Incremental Term Loans shall require any repayment or prepayment of any principal amount thereof (other than amortization payments not in excess of 1% per annum of the initial principal amount of such Incremental Term Loans) prior to, the Revolving Maturity Date, (ii) Incremental Term Loans shall not have the benefit of any guarantees or collateral that do not equally benefit the Revolving Commitments and Loans and (iii) Incremental Term Loans shall not have the benefit of any representation or warranty, covenant or event of default other than those set forth herein. Any Incremental Term Commitments established pursuant to an Incremental Facility Agreement that have identical terms and conditions, and any Incremental Term Loans made thereunder, shall be designated as a separate series (each a “Series”) of Incremental Term Commitments and Incremental Term Loans for all purposes of this Credit Agreement.
(c)The Incremental Commitments shall be effected pursuant to one or more Incremental Facility Agreements executed and delivered by the Borrower, each Incremental Lender providing such Incremental Commitments and the Administrative Agent; provided that no Incremental Commitments shall become effective unless (i) no Default or Event of Default shall have occurred and be continuing on the date of effectiveness thereof, both immediately prior to and immediately after giving effect to such Incremental Commitments and the making of Loans and issuance of Letters of Credit thereunder on such date, (ii) on the date of effectiveness thereof, the representations and warranties of the Borrower set forth in the Credit Documents shall be true and correct (A) in the case of the representations and warranties qualified as to materiality, in all respects and (B) otherwise, in all material respects, in each case on and as of such date, except in the case of any such representation and warranty that expressly relates to a prior date, in which case such representation and warranty shall be so true and correct on and as of such prior date, (iii) after giving effect to such Incremental Commitments and the making of Loans and other extensions of credit thereunder on the date of effectiveness thereof, the Borrower shall be in pro forma compliance with the financial covenant set forth in Section 7.2, (iv) the Borrower shall make any payments required to be made pursuant to Section 3.14 in connection with such Incremental Commitments and the related transactions under this Section and (v) the Borrower shall have delivered to the Administrative Agent such legal opinions, board resolutions, secretary’s certificates, officer’s certificates and other documents as shall reasonably be requested by the Administrative Agent in connection with any such transaction. Each Incremental Facility Agreement may, without the consent of any Lender, effect such amendments to this Credit Agreement and the other Credit Documents as may be necessary or appropriate, in the opinion of the Administrative Agent, to give effect to the provisions of this Section.
(d)Upon the effectiveness of an Incremental Commitment of any Incremental Lender, (i) such Incremental Lender shall be deemed to be a “Lender” (and a Lender in respect of Commitments and Loans of the applicable class) hereunder, and henceforth shall be entitled to all the rights of, and benefits accruing to, Lenders (or Lenders in respect of Commitments and Loans of the applicable class) hereunder and shall be bound by all agreements, acknowledgements and other obligations of Lenders (or Lenders in respect of Commitments and Loans of the applicable class) hereunder and under the other Credit Documents, and (ii) in the case of any Incremental Revolving Commitment, (A) in the case of an Incremental Lender that does not already have a Revolving Commitment, such Incremental Revolving Commitment shall constitute the Revolving Commitment of such Incremental Lender and (B) in the case of an Incremental Lender that already has a Revolving Commitment, the Revolving Commitment of such Incremental Lender shall be increased by the amount of such Incremental Revolving Commitment, in each case, subject to further increase or reduction from time to time as set forth in the definition of the term “Revolving Commitment”. For the avoidance of doubt, upon the effectiveness of any Incremental Revolving Commitment, the Revolving Exposure of the Incremental Revolving Lender holding such Incremental Revolving Commitment, and the Revolving Loan Commitment Percentages of all the Revolving Lenders, shall automatically be adjusted to give effect thereto.
(e)On the date of effectiveness of any Incremental Revolving Commitments, each Revolving Lender shall assign to each Incremental Revolving Lender holding such Incremental Revolving Commitment, and each such Incremental Revolving Lender shall purchase from each Revolving Lender, at the principal amount thereof (together with accrued interest), such interests in the Revolving Loans and participations in Letters of Credit and Swing Line Loans outstanding on such date as shall be necessary in order that, after giving effect to all such assignments and purchases, such Revolving Loans and participations in Letters of Credit and Swing Line Loans will be held by all the Revolving Lenders (including such Incremental Revolving Lenders)
ratably in accordance with their Revolving Loan Commitment Percentages after giving effect to the effectiveness of such Incremental Revolving Commitment.
(f)Subject to the terms and conditions set forth herein and in the applicable Incremental Facility Agreement, each Incremental Term Lender holding an Incremental Term Commitment of any Series shall make a loan to the Borrower in an amount equal to such Incremental Term Commitment on the date specified in such Incremental Facility Agreement.
(g)The Administrative Agent shall notify the Lenders promptly upon receipt by the Administrative Agent of any notice from the Borrower referred to in this Section and of the effectiveness of any Incremental Commitments, in each case advising the Lenders of the details thereof and, in the case of effectiveness of any Incremental Revolving Commitments, of the Revolving Loan Commitment Percentages of the Revolving Lenders after giving effect thereto and of the assignments required to be made pursuant to Section 2.7(e).
2.8Extension of Revolving Maturity Date.
(a)Not earlier than 12 months after the Restatement Effective Date, nor later than 30 days prior to the Revolving Maturity Date (provided, that the Borrower may not exercise such right more than twice), the Borrower may, upon notice to the Administrative Agent (which shall promptly notify the Lenders), request a one-year extension of the Revolving Maturity Date then in effect (an “Extension Request”); provided that the Revolving Maturity Date may not be extended more than once in any 12-month period. Within 10 Business Days after the delivery of such Extension Request, each Lender shall notify the Administrative Agent and the Borrower whether or not it consents to such Extension Request (which consent may be given or withheld in such Lender’s sole and absolute discretion) (each Lender agreeing to a requested extension being called an “Extending Lender” and each Lender declining to agree to a requested extension being called a “Non-Extending Lender”). Any Lender with a then effective Commitment may consent to an Extension Request irrespective of whether such Lender previously had not been an Extending Lender with respect to a previous Extension Request. Any Lender not responding within the above specified time period shall be deemed not to have consented to such Extension Request. The Administrative Agent shall promptly notify the Borrower and the Lenders of the Lenders’ responses.
(b)The Revolving Maturity Date shall be extended only if the Required Lenders (calculated excluding any Defaulting Lender and prior to giving effect to any replacements of Lenders permitted herein) have consented to the Extension Request. For each such Extension Request, if so approved, (i) the Revolving Maturity Date, as to Extending Lenders (irrespective of whether such Lender previously had been a Non-Extending Lender), shall be extended to the same date in the following year after giving effect to any prior extensions (such existing Revolving Maturity Date being the “Extension Effective Date”) and (ii) the Revolving Maturity Date, as to any Non-Extending Lender, shall remain the Revolving Maturity Date in effect for such Non-Extending Lender prior to the Extension Effective Date. With respect to any previously Non-Extending Lender who is an Extending Lender with respect to a current Extension Request, by giving its consent, such Extending Lender shall be approving an extension of more than one year. Non-Extending Lenders shall remain Lenders until the Revolving Maturity Date applicable to such Lenders, at which time their Commitments shall terminate and the Borrower shall repay all Loans owing to such Lenders, together with any accrued interest thereon and any accrued fees and other amounts payable to or for the account of such Non-Extending Lenders hereunder, and shall make such other prepayments of the Loans as shall be required in order that, after giving effect to the termination of the Commitments of, and all payments to, Non-Extending Lenders pursuant to this Section, (i) no Lender’s Credit Exposure shall exceed such Lender’s Commitment and (ii) the Credit Exposures shall not exceed the total Commitments. The Administrative Agent and the Borrower shall promptly confirm to the
Lenders such extension of the Revolving Maturity Date, specifying the date of such confirmation (the “Extension Confirmation Date”), the Extension Effective Date, and the extended Revolving Maturity Date with respect to the Extending Lenders. As condition precedents to such extension, the Borrower shall deliver to the Administrative Agent (i) such evidence of authorization, reaffirmations and legal opinions as the Administrative Agent may reasonably request and (ii) a certificate of the Borrower dated as of the Extension Confirmation Date signed by an Authorized Officer of the Borrower certifying that before and after giving effect to such extension, the representations and warranties contained in Section 6 made by it are true and correct (A) in the case of the representations and warranties qualified as to materiality, in all respects and (B) otherwise, in all material respects, in each case on and as of the Extension Confirmation Date, except in the case of any such representation and warranty that expressly relates to a prior date, in which case such representation and warranty shall be so true and correct on and as of such earlier date.
(c)Notwithstanding anything to the contrary in this Section 2.8, the Revolving Maturity Date may not be extended with respect to any Issuing Lender without the prior written consent of such Issuing Lender (it being understood and agreed that, in the event any Issuing Lender shall not have consented to any such extension, (i) such Issuing Lender shall continue to have all the rights and obligations of an Issuing Lender hereunder through the applicable existing Revolving Maturity Date and thereafter shall have no obligation to issue, amend, extend or renew any Letter of Credit (but shall continue to be entitled to the benefits hereunder as to Letters of Credit issued prior to such time) and (ii) the Borrower shall cause the LOC Obligations attributable to Letters of Credit issued by such Issuing Lender to be zero no later than the day on which such LOC Obligations would have been required to have been reduced to zero in accordance with the terms hereof without giving effect to the effectiveness of the extension of the applicable existing Revolving Maturity Date pursuant to this Section 2.8 (and, in any event, no later than such existing Revolving Maturity Date) together with any accrued interest thereon, on the existing Revolving Maturity Date).
(d)In connection with any extension of the Revolving Maturity Date under this Section 2.8, the Administrative Agent and the Borrower may, without the consent of any Lender or Issuing Lender, effect such amendments to this Credit Agreement and the other Credit Documents as may be necessary or appropriate, in the opinion of the Administrative Agent and the Borrower, to give effect to the provisions of this Section 2.8.
SECTION 3
GENERAL PROVISIONS APPLICABLE
TO LOANS AND LETTERS OF CREDIT
3.1Interest.
(a)Interest Rate. Subject to Section 3.1(b), (i) each Base Rate Loan shall accrue interest at the Base Rate plus the Applicable Percentage, (ii) each Term Benchmark Loan denominated in Dollars shall accrue interest at the Adjusted LIBO Rate for the Interest Period in effect for such Loan plus the Applicable Percentage, (iii) each Term Benchmark Loan denominated in Euros shall accrue interest at the Adjusted EURIBO Rate for the Interest Period in effect for such Loan plus the Applicable Percentage, (iv) each RFR Loan shall accrue interest at the Adjusted Daily Simple SONIA Rate plus the Applicable Percentage and (v) each Swing Line Loan shall accrue interest at the Base Rate plus the Applicable Percentage.
(b)Default Rate of Interest. Upon the occurrence, and during the continuation, of an Event of Default pursuant to Section 9.1(a), the principal of and, to the extent permitted by law, interest on the Loans and any other amounts owing hereunder or under the other Credit Documents (including without limitation fees and expenses) but not paid when due shall bear interest, payable on demand, at a per annum rate equal to (i) in the case of overdue principal of any Loan, 2% plus the rate which would otherwise be applicable, or (ii) in the case of any other amount, the Base Rate plus the Applicable Percentage plus 2% per annum.
(c)Interest Payments. Except as set forth in clause (b) above, interest on Loans shall be due and payable in arrears on each Interest Payment Date.
3.2Place and Manner of Payments.
All payments to be made by the Borrower shall be made without condition or deduction for any counterclaim, defense, recoupment or setoff. Except as otherwise expressly provided herein and except with respect to principal of and interest on Loans and drawings under Letters of Credit denominated in an Alternative Currency, all payments by the Borrower hereunder shall be made to the Administrative Agent, for the account of the respective Lenders or the relevant Issuing Lender, as applicable, to which such payment is owed, at the applicable Agency Services Address in Dollars and in Same Day Funds not later than 2:00 p.m. on the date specified herein. Except as otherwise expressly provided herein, all payments by the Borrower hereunder with respect to principal and interest on Loans or in respect of drawings under Letters of Credit denominated in an Alternative Currency shall be made to the Administrative Agent for the account of the respective Lenders (or for the account of the relevant Issuing Lender, as applicable) to which such payment is owed, at the applicable Agency Services Address in such Alternative Currency and in Same Day Funds not later than the Applicable Time specified by the Administrative Agent to the Borrower in writing on the dates specified herein. Without limiting the generality of the foregoing, the Administrative Agent may require that any payments due under this Credit Agreement be made in the United States. If, for any reason, the Borrower is prohibited by any Law from making any required payment hereunder in an Alternative Currency, the Borrower shall make such payment in Dollars in the Dollar Equivalent of the Alternative Currency payment amount. The Administrative Agent will promptly distribute to each Lender its pro rata share of such payment (based upon the applicable Commitments of the Lenders) in like funds as received by wire transfer to such Lender’s Lending Office. All payments received by the Administrative Agent (i) after 2:00 p.m. New York City time, in the case of payments in Dollars, or (ii) after the Applicable Time specified by the Administrative Agent in writing to the Borrower in the case of payments in an Alternative Currency, shall in each case be deemed received on the next succeeding Business Day and any applicable interest or fee shall continue to
accrue. If any payment to be made by the Borrower shall come due on a day other than a Business Day, payment shall be made on the next following Business Day, and such extension of time shall be reflected in computing interest or fees, as the case may be.
3.3Prepayments.
(a)Voluntary Prepayments. The Borrower shall have the right to prepay Loans in whole or in part from time to time without premium or penalty; provided, however, that the Borrower shall notify the Administrative Agent (and, in the case of prepayment of Swing Line Loans, the Swing Line Lender) by telephone (confirmed by telecopy or electronic mail) of any prepayment hereunder (i) (A) in the case of prepayment of Term Benchmark Loans denominated in Dollars, not later than 3:00 p.m., New York City time, three Business Days before the date of prepayment, (B) in the case of prepayment of Term Benchmark Loans denominated in Euros, not later than 3:00 p.m., New York City time, three Business Days before the date of prepayment, (C) in the case of prepayment of RFR Loans, not later than four RFR Business Days before the date of prepayment and (D) in the case of prepayment of Base Rate Loans, not later than 11:00 a.m., New York City time, on the date of prepayment, and (ii) each such partial prepayment of Term Benchmark Loans, Base Rate Loans or Swing Line Loans shall be in an amount that would be permitted in the case of a borrowing of such Loans in the currency thereof as provided in Section 2.5. Amounts prepaid pursuant to this Section 3.3(a) shall be applied as the Borrower may elect; however, if the Borrower fails to specify, such prepayment will be applied in the manner set forth in Section 3.3(c) below.
(b)Mandatory Prepayments. If at any time (i) the sum of the aggregate amount of the Dollar Equivalent of outstanding Revolving Loans plus the aggregate amount of the Dollar Equivalent of outstanding LOC Obligations plus the aggregate amount of outstanding Swing Line Loans exceeds the Revolving Committed Amount, (ii) the aggregate amount of the Dollar Equivalent of outstanding LOC Obligations exceeds the LOC Committed Amount or (iii) the aggregate amount of the Dollar Equivalent of Revolving Loans and LOC Obligations in Alternative Currencies exceeds the Foreign Currency Sublimit, the Borrower shall immediately make a principal payment to the Administrative Agent (or with respect to LOC Obligations an amount to be held as cash collateral) in a manner and in an amount (and in the applicable currency) necessary to be in compliance with Sections 2.1, 2.2 and 2.3, as applicable and as directed by the Administrative Agent (any such prepayment with respect to clause (i) above to be applied as set forth in Section 3.3(c) below).
(c)Application of Prepayments. All amounts paid pursuant to Section 3.3(b)(i) and, solely if the Borrower has not otherwise elected an application of such amounts as contemplated in Section 3.3(a), all amounts paid pursuant to Section 3.3(a) shall be applied first to Swing Line Loans, second, to Revolving Loans (first to Base Rate Loans and then to Term Benchmark Loans in direct order of Interest Period maturities) and third, to a cash collateral account in respect of LOC Obligations. All prepayments under this Section 3.3 shall be subject to Section 3.14.
3.4Fees.
(a)Facility Fees. In consideration of the commitments under the Revolving Credit Facility being made available by the Lenders hereunder, the Borrower agrees to pay to the Administrative Agent a per annum fee (the “Facility Fee”) in Dollars for the pro rata benefit of each Revolving Lender (based upon such Lender’s pro rata committed portion of the Revolving Committed Amount), which Facility Fee shall be calculated by multiplying, at any time of determination, the Applicable Percentage then in effect for the Facility Fee, by the daily average amount of the Revolving Committed Amount (whether or not drawn or available to be drawn) during the fiscal quarter or other relevant period for which such Facility Fee is being calculated. The Facility Fee shall accrue from the Restatement Effective Date and shall be due and payable in arrears on the last day of each fiscal quarter of the Borrower for such fiscal quarter, or period ended thereon, and on the Revolving Maturity Date, with the first such payment to be made on the last day of the first full fiscal quarter following the Restatement Effective Date.
(b)Letter of Credit Fees.
(i)Letter of Credit Fees. In consideration of the issuance of Letters of Credit hereunder, the Borrower agrees to pay to the Administrative Agent, for the pro rata benefit of each Revolving Lender (based on each Lender’s Revolving Loan Commitment Percentage), a per annum fee (the “Letter of Credit Fees”) in Dollars for each Letter of Credit equal to the Applicable Percentage for Letter of Credit Fees on the average daily maximum amount available to be drawn under each such Letter of Credit (whether or not such maximum amount is then in effect under such Letter of Credit) from the date of issuance to the date of expiration. The Letter of Credit Fees will be payable in arrears on the third Business Day following the last day of March, June, September and December of each fiscal year of the Borrower for such fiscal quarter, or period ended thereon, and on the Revolving Maturity Date, with the first such payment to be made on the third Business Day following the last day of the first full fiscal quarter following the Restatement Effective Date.
(ii)Issuing Lender Fees. In addition to the Letter of Credit Fees payable pursuant to subsection (i) above, the Borrower shall pay to each Issuing Lender for its own account, without sharing by the other Lenders, (A) the customary, incidental and/or out of pocket charges from time to time of such Issuing Lender for its services in connection with the issuance, amendment, payment, transfer, administration, cancellation and conversion of, and drawings under, Letters of Credit and (B) with respect to each Letter of Credit, a letter of credit fronting fee in Dollars at a rate per annum agreed to between the Borrower and such Issuing Lender of the face amount of each Letter of Credit, payable quarterly on the third Business Day following the last day of March, June, September and December of each fiscal year of the Borrower for such fiscal quarter, and on the Revolving Maturity Date (collectively, the “Issuing Lender Fees”).
(c)Administrative Fees. The Borrower agrees to pay to the Administrative Agent, for its own account, an annual fee in Dollars as agreed to between the Borrower and the Administrative Agent as set forth in the JPMorgan Engagement Letter.
3.5Payment in Full at Maturity.
On the Revolving Maturity Date, the entire outstanding principal balance of all Revolving Loans, all Swing Line Loans and all LOC Obligations, together with accrued but unpaid interest and all other sums owing with respect thereto, shall be due and payable in full, unless accelerated sooner pursuant to Section 9.2.
3.6Computations of Interest and Fees.
(a)All computations of interest and fees hereunder shall be made on the basis of the actual number of days elapsed over a year of 360 days; provided that in the case of (i) Base Rate Loans and Swing Line Loans that are based upon the Prime Rate, interest shall be computed on the basis of the actual number of days elapsed over a year of 365 or 366 days, as the case may be, (ii) Loans denominated in Sterling, interest shall be computed on the basis of a year of 365 days and (iii) Loans denominated in Alternative Currencies, other than Sterling, as to which market practice differs from the foregoing, interest shall be computed in accordance with such market practice. Interest shall accrue from and include the date of borrowing (or continuation or conversion) but exclude the date of payment.
(b)It is the intent of the Lenders and the Borrower to conform to and contract in strict compliance with applicable usury law from time to time in effect. All agreements between the Lenders and the Borrower are hereby limited by the provisions of this paragraph, which shall override and control all such agreements, whether now existing or hereafter arising and whether written or oral. In no way, nor in any event or contingency (including but not limited to prepayment or acceleration of the maturity of any obligation), shall the interest taken, reserved, contracted for, charged, or received under this Credit Agreement, under the Notes or otherwise, exceed the maximum nonusurious amount permissible under applicable law. If, from any possible construction of any of the Credit Documents or any other document, interest would otherwise be payable in excess of the maximum nonusurious amount, any such construction shall be subject to the provisions of this paragraph and such documents shall be automatically reduced to the maximum nonusurious amount permitted under applicable law, without the necessity of execution of any amendment or new document. If any Lender shall ever receive anything of value which is characterized as interest on the Loans under applicable law and which would, apart from this provision, be in excess of the maximum nonusurious amount, an amount equal to the amount which would have been excessive interest shall, without penalty, be applied to the reduction of the principal amount owing on the Loans and not to the payment of interest, or refunded to the Borrower or the other payor thereof if and to the extent such amount which would have been excessive exceeds such unpaid principal amount of the Loans. The right to demand payment of the Loans or any other Indebtedness evidenced by any of the Credit Documents does not include the right to accelerate the payment of any interest which has not otherwise accrued on the date of such demand, and the Lenders do not intend to charge or receive any unearned interest in the event of such demand. All interest paid or agreed to be paid to the Lenders with respect to the Loans shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and spread throughout the full stated term (including any renewal or extension) of the Loans so that the amount of interest on account of such Indebtedness does not exceed the maximum nonusurious amount permitted by applicable law.
3.7Pro Rata Treatment.
Except to the extent otherwise provided herein:
(a)Revolving Loans. Except as otherwise provided herein, each Revolving Loan borrowing (including, without limitation, each Mandatory Borrowing), each payment or prepayment of principal of any Revolving Loan, each payment of fees (other than the Issuing Lender Fees retained by each Issuing Lender for its own account and fees under the JPMorgan Engagement Letter and JPMorgan Fee Letter retained by the Administrative Agent for its own account), each reduction of the Revolving Committed Amount and each conversion or continuation of any Revolving Loan shall (except as otherwise provided in Section 3.11) be allocated pro rata among the relevant Lenders in accordance with the respective Revolving Loan Commitment Percentages of such Lenders, as applicable (or, if the Commitments of such Lenders have expired or been terminated, in accordance with the respective principal amounts of the outstanding Revolving Loans and Participation Interests of such Lenders); provided that, if any Lender shall have failed to pay its applicable pro rata share of any Revolving Loan, then any amount to which such Lender would otherwise be entitled pursuant to this subsection (a) shall instead be payable to the Administrative Agent until the share of such Loan not funded by such Lender has been repaid; provided further, that in the event any amount paid to any Lender pursuant to this subsection (a) is recovered from or must otherwise be returned by the Administrative Agent, each Lender shall, upon the request of the Administrative Agent, repay to the Administrative Agent the amount so paid to such Lender, with interest for the period commencing on the date such payment is returned by the Administrative Agent until the date the Administrative Agent receives such repayment at a rate per annum equal to (i) if the applicable Loan is denominated in Dollars, during the period to but excluding the date two Business Days after such request, the Federal Funds Rate, and thereafter, the Base Rate plus 2% per annum and (ii) if the applicable Loan is denominated in an Alternative Currency, during the period to but excluding the date two Business Days after such request, at the customary rate for the applicable currency set by the Administrative Agent for the correction of errors among banks, and thereafter, the Adjusted LIBO Rate or the EURIBO Rate, as applicable, plus 2% per annum.
(b)Letters of Credit. Except as otherwise provided herein, each payment of unreimbursed drawings in respect of LOC Obligations shall be allocated to each Participant pro rata in accordance with its Revolving Loan Commitment Percentage; provided that, if any Participant shall have failed to pay its applicable pro rata share of any drawing under any Letter of Credit, then any amount to which such Participant would otherwise be entitled pursuant to this subsection (b) shall instead be payable to the relevant Issuing Lender until the share of such unreimbursed drawing not funded by such Lender has been repaid; provided further, that in the event any amount paid to any Participant pursuant to this subsection (b) is recovered from or must otherwise be returned by any Issuing Lender, each Participant shall, upon the request of such Issuing Lender, repay to the Administrative Agent for the account of such Issuing Lender the amount so paid to such Participant, with interest for the period commencing on the date such payment is returned by such Issuing Lender until the date such Issuing Lender receives such repayment at a rate per annum equal to (i) if the applicable drawing under a Letter of Credit is denominated in Dollars, during the period to but excluding the date two Business Days after such request, the Federal Funds Rate, and thereafter, the Base Rate plus 2% per annum and (ii) if the applicable drawing under a Letter of Credit is denominated in an Alternative Currency, during the period to but excluding the date two
Business Days after such request, at the customary rate for the applicable currency set by the Administrative Agent for the correction of errors among banks, and thereafter, the Adjusted LIBO Rate or the EURIBO Rate, as applicable, plus 2% per annum.
(c)Swing Line Loans. The Swing Line Lender shall receive, for its own account, all payments or prepayments of principal and interest with respect to the Swing Line Loans; provided, however, upon the funding of the Participants’ participation interests with respect to a Swing Line Loan pursuant to Section 2.3(c), such Participants shall be entitled to receive their pro rata share of any payment or prepayment of principal and interest with respect to such Swing Line Loan.
3.8Sharing of Payments.
The Lenders agree among themselves that, except to the extent otherwise provided herein, in the event that any Lender shall obtain payment in respect of any Loan, unreimbursed drawing with respect to any LOC Obligations or any other obligation owing to such Lender under this Credit Agreement through the exercise of a right of setoff, banker’s lien or counterclaim, or pursuant to a secured claim under Section 506 of the Bankruptcy Code or other security or interest arising from, or in lieu of, such secured claim, received by such Lender under any applicable bankruptcy, insolvency or other similar law or otherwise, or by any other means, in excess of its pro rata share of such payment as provided for in this Credit Agreement, such Lender shall promptly pay in cash or purchase from the other Lenders a participation in such Loans, LOC Obligations, and other obligations in such amounts, and make such other adjustments from time to time, as shall be equitable to the end that all Lenders share such payment in accordance with their respective ratable shares as provided for in this Credit Agreement. The Lenders further agree among themselves that if payment to a Lender obtained by such Lender through the exercise of a right of setoff, banker’s lien, counterclaim or other event as aforesaid shall be rescinded or must otherwise be restored, each Lender which shall have shared the benefit of such payment shall, by payment in cash or a repurchase of a participation theretofore sold, return its share of that benefit (together with its share of any accrued interest payable with respect thereto) to each Lender whose payment shall have been rescinded or otherwise restored. The Borrower agrees that any Lender so purchasing such a participation may, to the fullest extent permitted by law, exercise all rights of payment, including setoff, banker’s lien or counterclaim, with respect to such participation as fully as if such Lender were a holder of such Loan, LOC Obligation or other obligation in the amount of such participation. Except as otherwise expressly provided in this Credit Agreement, if any Lender or the Administrative Agent shall fail to remit to any other Lender an amount payable by such Lender or the Administrative Agent to such other Lender pursuant to this Credit Agreement on the date when such amount is due, such payments shall be made together with interest thereon for each date from the date such amount is due until the date such amount is paid to the Administrative Agent or such other Lender at a rate per annum equal to the Federal Funds Rate. If under any applicable bankruptcy, insolvency or other similar law, any Lender receives a secured claim in lieu of a setoff to which this Section 3.8 applies, such Lender shall, to the extent practicable, exercise its rights in respect of such secured claim in a manner consistent with the rights of the Lenders under this Section 3.8 to share in the benefits of any recovery on such secured claim.
3.9Capital Adequacy.
If, after the date thereof, any Lender determines that a Change in Law has or would have the effect of reducing the rate of return on the capital or assets of such Lender or any corporation controlling such Lender as a consequence of such Lender’s obligations hereunder (taking into consideration its policies with respect to capital adequacy and liquidity and such Lender’s desired return on capital), then from time to time upon demand of such Lender (with a copy of such demand to the Administrative Agent), the Borrower shall pay to such Lender such additional amounts as will compensate such Lender for such reduction.
3.10Alternate Rate of Interest.
(a)Subject to clauses (b), (c), (d), (e), (g) and (h) of this Section 3.10, if:
(i)the Administrative Agent determines (which determination shall be conclusive absent manifest error) (A) prior to the commencement of any Interest Period for a Term Benchmark Loan, that adequate and reasonable means do not exist for ascertaining the Adjusted LIBO Rate, the LIBO Rate or the Adjusted EURIBO Rate or the EURIBO Rate (including because the applicable Screen Rate is not available or published on a current basis), for the applicable Agreed Currency and such Interest Period or (B) at any time, that adequate and reasonable means do not exist for ascertaining the Daily Simple SONIA Rate or SONIA for the applicable Agreed Currency; or
(ii)the Administrative Agent is advised by the Required Lenders that (A) prior to the commencement of any Interest Period for a Term Benchmark Borrowing, the Adjusted LIBO Rate, the LIBO Rate or the Adjusted EURIBO Rate or the EURIBO Rate for the applicable Agreed Currency and such Interest Period will not adequately and fairly reflect the cost to such Lenders (or Lender) of making or maintaining their Loans (or its Loan) included in such Borrowing for the applicable Agreed Currency and such Interest Period or (B) at any time, the applicable Daily Simple SONIA Rate or SONIA for the applicable Agreed Currency will not adequately and fairly reflect the cost to such Lenders (or Lender) of making or maintaining their Loans (or its Loan) included in such Borrowing for the applicable Agreed Currency;
then the Administrative Agent shall give notice thereof to the Borrower and the Lenders by telephone, telecopy or electronic mail as promptly as practicable thereafter and, until the Administrative Agent notifies the Borrower and the Lenders that the circumstances giving rise to such notice no longer exist, (A) any Notice of Continuation/Conversion that requests the conversion of any Revolving Borrowing to, or continuation of any Revolving Borrowing as, a Term Benchmark Borrowing shall be ineffective, (B) if any Notice of Borrowing requests a Term Benchmark Borrowing in Dollars, such Borrowing shall be made as a Base Rate Borrowing and (C) if any Notice of Borrowing requests a Term Benchmark Loan or an RFR Loan for the relevant rate above in an Alternative Currency, then such request shall be ineffective; provided that if only one Type of Borrowings is affected, then all other Types of Borrowings shall be permitted. Furthermore, if any Term Benchmark Loan or RFR Loan in any Agreed Currency is outstanding on the date of the Borrower’s receipt of the notice from the Administrative Agent referred to in this Section 3.10 with respect to a Relevant Rate applicable to such Term Benchmark Loan or RFR Loan, then until the Administrative Agent notifies the Borrower and the Lenders that the circumstances giving rise to such notice no longer exist, (i) if such Term Benchmark Loan is denominated in Dollars, then on the last day of the Interest Period applicable to such Loan (or the next succeeding Business Day if such day is not a Business Day),
such Loan shall be converted by the Administrative Agent to, and shall constitute, a Base Rate Loan denominated in Dollars on such day, (ii) if such Term Benchmark Loan is denominated in any Agreed Currency other than Dollars, then such Loan shall, on the last day of the Interest Period applicable to such Loan (or the next succeeding Business Day if such day is not a Business Day) bear interest at the Central Bank Rate for the applicable Agreed Currency plus the Applicable Percentage; provided that, if the Administrative Agent determines (which determination shall be conclusive and binding absent manifest error) that the Central Bank Rate for the applicable Agreed Currency cannot be determined, any outstanding affected Term Benchmark Loans denominated in any Agreed Currency other than Dollars shall, at the Borrower’s election prior to such day: (A) be prepaid by the Borrower on such day or (B) solely for the purpose of calculating the interest rate applicable to such Term Benchmark Loan, such Term Benchmark Loan denominated in any Agreed Currency other than Dollars shall be deemed to be a Term Benchmark Loan denominated in Dollars and shall accrue interest at the same interest rate applicable to Term Benchmark Loans denominated in Dollars at such time or (iii) if such RFR Loan is denominated in any Agreed Currency other than Dollars, then such Loan shall bear interest at the Central Bank Rate for the applicable Agreed Currency plus the Applicable Percentage; provided that, if the Administrative Agent determines (which determination shall be conclusive and binding absent manifest error) that the Central Bank Rate for the applicable Agreed Currency cannot be determined, any outstanding affected RFR Loans denominated in any Agreed Currency other than Dollars, at the Borrower’s election, shall either (A) be converted into Base Rate Loans denominated in Dollars (in an amount equal to the Dollar Equivalent of such Alternative Currency) immediately or (B) be prepaid in full immediately.
(b)Notwithstanding anything to the contrary herein or in any other Credit Document, if a Benchmark Transition Event or an Early Opt-in Election or an Other Benchmark Rate Election, as applicable, and its related Benchmark Replacement Date have occurred prior to the Reference Time in respect of any setting of the then-current Benchmark, then (x) if a Benchmark Replacement is determined in accordance with clause (1) or (2) of the definition of “Benchmark Replacement” with respect to Dollars for such Benchmark Replacement Date, such Benchmark Replacement will replace such Benchmark for all purposes hereunder and under any Credit Document in respect of such Benchmark setting and subsequent Benchmark settings without any amendment to, or further action or consent of any other party to, this Credit Agreement or any other Credit Document and (y) if a Benchmark Replacement is determined in accordance with clause (3) of the definition of “Benchmark Replacement” with respect to any Agreed Currency for such Benchmark Replacement Date, such Benchmark Replacement will replace such Benchmark for all purposes hereunder and under any Credit Document in respect of any Benchmark setting at or after 5:00 p.m. (New York City time) on the fifth (5th) Business Day after the date notice of such Benchmark Replacement is provided to the Lenders without any amendment to, or further action or consent of any other party to, this Credit Agreement or any other Credit Document so long as the Administrative Agent has not received, by such time, written notice of objection to such Benchmark Replacement from Lenders comprising the Required Lenders.
(c)Notwithstanding anything to the contrary herein or in any other Credit Document and subject to the proviso below in this paragraph, with respect to a Loan denominated in Dollars, if a Term SOFR Transition Event and its related Benchmark Replacement Date have occurred prior to the Reference Time in respect of any setting of the then-current Benchmark, then the applicable Benchmark Replacement will replace the then-current Benchmark for all purposes hereunder or under any Credit Document in respect of such Benchmark setting and subsequent Benchmark settings, without any amendment to, or further action or consent of any other party to, this Credit Agreement or any other Credit Document; provided that, this clause (c) shall not be effective unless the Administrative Agent has delivered to the Lenders and the Borrower a Term SOFR Notice. For the avoidance of doubt, the Administrative Agent shall not be required to deliver a Term SOFR Notice after the occurrence of a Term SOFR Transition Event and may do so in its sole discretion.
(d)In connection with the implementation of a Benchmark Replacement, the Administrative Agent will have the right to make Benchmark Replacement Conforming Changes from time to time and, notwithstanding anything to the contrary herein or in any other Credit Document, any amendments implementing such Benchmark Replacement Conforming Changes will become effective without any further action or consent of any other party to this Credit Agreement or any other Credit Document (other than the Administrative Agent and the Borrower).
(e)The Administrative Agent will promptly notify the Borrower and the Lenders of (i) any occurrence of a Term SOFR Transition Event, a Benchmark Transition Event, an Early Opt-in Election or an Other Benchmark Rate Election, as applicable, and its related Benchmark Replacement Date, (ii) the implementation of any Benchmark Replacement, (iii) the effectiveness of any Benchmark Replacement Conforming Changes, (iv) the removal or reinstatement of any tenor of a Benchmark pursuant to clause (g) below and (v) the commencement or conclusion of any Benchmark Unavailability Period. Any reasonable determination, decision or election that may be made by the Administrative Agent or, if applicable, any Lender (or group of Lenders) pursuant to this Section 3.10, including any determination with respect to a tenor, rate or adjustment or of the occurrence or non-occurrence of an event, circumstance or date and any decision to take or refrain from taking any action or any selection, will be conclusive and binding absent manifest error and may be made in its or their sole discretion and without consent from any other party to this Credit Agreement or any other Credit Document, except, in each case, as expressly required pursuant to this Section 3.10.
(f)To the extent administratively and operationally feasible, the Administrative Agent shall use commercially reasonable efforts to cooperate with the Borrower’s requests to ensure that any Benchmark Replacement and any Benchmark Replacement Changes meet the standards set forth in Proposed Treasury Regulation Section 1.1001-6 (or any successor or final version of such regulation or other official guidance issued by the U.S. Internal Revenue Service) so as not to be treated as a “modification” (and therefore an exchange) of this Agreement for purposes of Treasury Regulation Section 1.1001-3, it being understood that for these purposes, the substantially equivalent fair market value requirement of Proposed Treasury Regulation Section 1.1001-6(b)(2) shall be deemed satisfied, and it being further understood that the Administrative Agent shall not be required to take any action under this provision that would cause it any commercially unreasonable burden, as determined in good faith by the Administrative Agent.
(g)Notwithstanding anything to the contrary herein or in any other Credit Document, at any time (including in connection with the implementation of a Benchmark Replacement), (i) if the then-current Benchmark is a term rate (including Term SOFR, LIBO Rate or EURIBO Rate) and either (A) any tenor for such Benchmark is not displayed on a screen or other information service that publishes such rate from time to time as selected by the Administrative Agent in its reasonable discretion or (B) the regulatory supervisor for the administrator of such Benchmark has provided a public statement or publication of information announcing that any tenor for such Benchmark is or will be no longer representative, then the Administrative Agent may modify the definition of “Interest Period” for any Benchmark settings at or after such time to remove such unavailable or non-representative tenor and (ii) if a tenor that was removed pursuant to clause (i) above either (A) is subsequently displayed on a screen or information service for a Benchmark (including a Benchmark Replacement) or (B) is not, or is no longer, subject to an announcement that it is or will no longer be representative for a Benchmark (including a Benchmark Replacement), then the Administrative Agent may modify the definition of “Interest Period” for all Benchmark settings at or after such time to reinstate such previously removed tenor.
(h)Upon the Borrower’s receipt of notice of the commencement of a Benchmark Unavailability Period, the Borrower may revoke any request for a Term Benchmark Loan or RFR Loan or any request for the conversion to or continuation of Term Benchmark Loans to be made, converted or continued during any Benchmark Unavailability Period and, failing that, either (x) the Borrower will be deemed to have converted any request for a Term Benchmark Borrowing denominated in Dollars into a request for a Borrowing of or conversion to Base Rate Loans or (y) any Term Benchmark Loan or RFR Loan denominated in an Alternative Currency shall be ineffective. During any Benchmark Unavailability Period or at any time that a tenor for the then-current Benchmark is not an Available Tenor, the component of the Base Rate based upon the then-current Benchmark or such tenor for such Benchmark, as applicable, will not be used in any determination of the Base Rate. Furthermore, if any Term Benchmark Loan or RFR Loan in any Agreed Currency is outstanding on the date of the Borrower’s receipt of notice of the commencement of a Benchmark Unavailability Period with respect to a Relevant Rate applicable to such Term Benchmark Loan or RFR Loan, then until such time as a Benchmark Replacement for such Agreed Currency is implemented pursuant to this Section 3.10, (i) if such Term Benchmark Loan is denominated in Dollars, then on the last day of the Interest Period applicable to such Loan (or the next succeeding Business Day if such day is not a Business Day), such Loan shall be converted by the Administrative Agent to, and shall constitute, a Base Rate Loan denominated in Dollars on such day, (ii) if such Term Benchmark Loan is denominated in any Agreed Currency other than Dollars, then such Loan shall, on the last day of the Interest Period applicable to such Loan (or the next succeeding Business Day if such day is not a Business Day) bear interest at the Central Bank Rate for the applicable Agreed Currency plus the Applicable Percentage; provided that, if the Administrative Agent determines (which determination shall be conclusive and binding absent manifest error) that the Central Bank Rate for the applicable Agreed Currency cannot be determined, any outstanding affected Term Benchmark Loans denominated in any Agreed Currency other than Dollars shall, at the Borrower’s election prior to such day: (A) be prepaid by the Borrower on such day or (B) solely for the purpose of calculating the interest rate applicable to such Term Benchmark Loan, such Term Benchmark Loan denominated in any Agreed Currency other than Dollars shall be deemed to be a Term Benchmark Loan denominated in Dollars and shall accrue interest at the same interest rate applicable to Term Benchmark Loans denominated in Dollars at such time or (iii) if such RFR Loan is denominated in any Agreed Currency other than Dollars, then such Loan shall bear interest at the Central Bank Rate for the applicable Agreed Currency plus the Applicable Percentage; provided that, if the Administrative Agent determines (which determination shall be conclusive and binding absent manifest error) that the Central Bank Rate for the applicable
Agreed Currency cannot be determined, any outstanding affected RFR Loans denominated in any Agreed Currency, at the Borrower’s election, shall either (A) be converted into Base Rate Loans denominated in Dollars (in an amount equal to the Dollar Equivalent of such Alternative Currency) immediately or (B) be prepaid in full immediately.
3.11Illegality.
If any Lender determines that any Requirement of Law has made it unlawful, or that any Governmental Authority has asserted that it is unlawful, for any Lender or its applicable Lending Office to make, maintain or fund LIBOR Loans or EURIBOR Loans, or materially restricts the authority of such Lender to purchase or sell, or to take deposits of, the applicable currency in the applicable offshore market for such currency, or to determine or charge interest rates based upon the LIBO Rate or EURIBO Rate, as applicable, then, on notice thereof by such Lender to the Borrower through the Administrative Agent, any obligation of such Lender to make or continue LIBOR Loans or EURIBOR Loans or to convert Base Rate Loans to LIBOR Loans, as applicable, shall be suspended until such Lender notifies the Administrative Agent and the Borrower that the circumstances giving rise to such determination no longer exist. Upon receipt of such notice, the Borrower shall, upon demand from such Lender (with a copy to the Administrative Agent), prepay or, if applicable, convert all Term Benchmark Loans of such Lender to Base Rate Loans in the Dollar Equivalent of such Term Benchmark Loans, either on the last day of the Interest Period thereof, if such Lender may lawfully continue to maintain such Term Benchmark Loans to such day, or immediately, if such Lender may not lawfully continue to maintain such Term Benchmark Loans. Upon any such prepayment or conversion, the Borrower shall also pay interest on the amount so prepaid or converted, together with any amounts due with respect thereto pursuant to Section 3.14. Each Lender agrees to designate a different Lending Office if such designation will avoid the need for such notice and will not, in the good faith judgment of such Lender, otherwise be materially disadvantageous to such Lender.
3.12Requirements of Law.
If any Lender determines that as a result of any Change in Law, or such Lender’s compliance therewith, there shall be any increase in the cost to such Lender of agreeing to make or making, funding or maintaining Loans or (as the case may be) issuing, participating in or maintaining any Letters of Credit (or of maintaining its obligation to participate in or to issue any Letter of Credit), or a reduction in the amount received or receivable by such Lender in connection with any of the foregoing (excluding for purposes of this Section 3.12 any such increased costs or reduction in amount resulting from (i) taxes other than capital taxes imposed on such Lender’s loans, loan principal, letters of credit, commitments, or other obligations, or its deposits, reserves, other liabilities or capital attributable thereto and (ii) reserve requirements utilized in the determination of the LIBO Rate or EURIBO Rate, as applicable), then from time to time, within 10 days of demand of such Lender (with a copy of such demand to the Administrative Agent), the Borrower shall pay to such Lender such additional amounts as will compensate such Lender for such increased cost or reduction in yield.
3.13Taxes.
(a)Any and all payments by or on behalf of the Borrower to or for the account of the Administrative Agent or any Lender under any Credit Document shall be made free and clear of and without deduction for any and all present or future income, stamp or other taxes, duties, levies, imposts, deductions, assessments, fees or other charges imposed by any Governmental Authority, withholdings or similar charges, and all liabilities with respect thereto, but excluding, in the case of the Administrative Agent and each Lender, (x) any branch profit taxes or taxes imposed on or measured by its net income, (y) franchise taxes imposed on it (in lieu of net income taxes), in each case by the jurisdiction (or any political subdivision thereof) under the laws of which the Administrative Agent or such Lender, as the case may be, is organized or maintains its Lending Office, and (z) any taxes imposed by FATCA (all such non-excluded present or future income, stamp or other taxes, duties, levies, imposts, deductions, assessments, fees or other charges imposed by any Governmental Authority, withholdings or similar charges, and liabilities being hereinafter referred to as “Taxes”). If the Borrower shall be required by any Requirement of Law to deduct any Taxes or Other Taxes from or in respect of any sum payable under any Credit Document to the Administrative Agent or any Lender, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 3.13(a)), the Administrative Agent or such Lender, as the case may be, receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions, (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other Governmental Authority in accordance with applicable Requirements of Law and (iv) within 30 days after the date of such payment, the Borrower shall furnish to the Administrative Agent (which shall forward the same to such Lender) the original or a certified copy of a receipt evidencing payment thereof, to the extent such receipt is issued therefor, or other written proof of payment thereof that is reasonably satisfactory to the Administrative Agent.
(b)In addition, the Borrower agrees to pay any and all present or future stamp, court or documentary taxes and any other excise or property taxes or charges or similar levies which arise from any payment made under any Credit Document or from the execution, delivery, performance, enforcement or registration of, or otherwise with respect to, any Credit Document (hereinafter referred to as “Other Taxes”).
(c)[Reserved].
(d)The Borrower agrees to indemnify the Administrative Agent and each Lender for (i) the full amount of Taxes and Other Taxes (including any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section 3.13(d)) paid by the Administrative Agent and such Lender and (ii) any liability (including penalties, interest and reasonable expenses) arising therefrom or with respect thereto.
(e)In the case of any payment hereunder or under any other Credit Document by or on behalf of the Borrower through an account or branch outside the United States, or on behalf of the Borrower by a payor that is not a United States person, if the Borrower determines that no taxes are payable in respect thereof, the Borrower shall furnish, or shall cause such payor to furnish, to the Administrative Agent, an opinion of counsel reasonably acceptable to the Administrative Agent stating that such payment is exempt from Taxes. For purposes of this subsection (e), the terms “United States” and “United States person” shall have the meanings specified in Section 7701 of the Code.
(f)Each Lender that is not a “United States person” within the meaning of Section 7701(a)(30) of the Code shall deliver to the Borrower and the Administrative Agent, on or prior to the date on which such Lender becomes a Lender under this Credit Agreement, (i) two duly signed completed copies of either IRS Form W-8BEN or any successor thereto, including IRS Form W-8BEN-E (relating to such Lender and entitling it to an exemption from, or reduction of, withholding tax on all payments to be made to such Lender by the Borrower pursuant to this Credit Agreement), IRS Form W-8ECI or any successor thereto (relating to all payments to be made to such Lender by the Borrower pursuant to this Credit Agreement), or IRS Form W-8IMY or any successor thereto (relating to all payments to be made to such Lender by the Borrower pursuant to this Credit Agreement) as appropriate, or such other evidence satisfactory to the Borrower and the Administrative Agent that such Lender is entitled to an exemption from, or reduction of, United States withholding tax and (ii) in the case of a foreign Lender claiming exemption from United States withholding tax under Section 871(h) or 881(c) of the Code with respect to payments of “portfolio interest”, a “Certificate of Non-Bank Status for Foreign Entities” substantially in the form of Exhibit 3.13(f) together with the applicable IRS Form W-8, or any subsequent versions thereof or successors thereto, properly completed and duly executed by such foreign Lender claiming complete exemption from, or a reduced rate of, United States withholding tax on payments under this Credit Agreement and the other Credit Documents. Each Lender that is a “United States person” within the meaning of Section 7701(a)(30) of the Code shall deliver to the Borrower and the Administrative Agent, on or prior to the date on which such Lender becomes a Lender under this Credit Agreement two duly signed completed copies of IRS Form W9 or any successor thereto or such other evidence satisfactory to the Borrower and the Administrative Agent that such Lender is entitled to an exemption from, or reduction of, United States withholding tax. If a payment made to a Lender under any Credit Document would be subject to United States withholding tax imposed by FATCA if such Lender were to fail to comply with the applicable reporting requirements of FATCA (including those contained in Section 1471(b) or 1472(b) of the Code, as applicable), such Lender shall deliver to the Borrower and Administrative Agent, at the time or times prescribed by law and at such time or times reasonably requested by the Borrower or the Administrative Agent, such documentation prescribed by applicable law (including as prescribed by Section 1471(b)(3)(C)(i) of the Code) and such additional documentation reasonably requested by the Borrower or the Administrative Agent as may be necessary for the Borrower or the Administrative Agent to comply with its obligations under FATCA, to determine whether such Lender has or has not complied with such Lender’s obligations under FATCA and, as necessary, to determine the amount to deduct and withhold from such payment. Solely for purposes of this Section 3.13(f), “FATCA” shall include any amendments made to FATCA after the Restatement Effective Date. Thereafter and from time to time, each such Lender shall (i) promptly submit to the Administrative Agent such additional duly completed and signed copies of one of such forms (or such successor forms as shall be adopted from time to time by the relevant United States taxing authorities), as appropriate, as may reasonably be requested by the Borrower or the Administrative Agent and then be available under then current United States laws and regulations to avoid, or such evidence as is satisfactory to the Borrower and the Administrative Agent of any available exemption from or reduction of, United States withholding taxes in respect of all payments to be made to such Lender by the Borrower pursuant to this Credit Agreement, (ii) promptly notify the Administrative Agent of any change in circumstances which would modify or render invalid any claimed exemption or reduction (or it is determined the earlier claimed exemption was incorrectly claimed for any reason), (iii) promptly update any previously delivered form or certification that has expired or become obsolete or inaccurate in any respect (or promptly notify the Borrower and Administrative Agent of its legal inability to do so) and (iv) take such steps as shall not be materially disadvantageous to it, in the reasonable judgment of such Lender, and as may be reasonably necessary (including the re-designation of its Lending Office) to avoid any Requirement of Law that the Borrower make any deduction or withholding for taxes from amounts payable to such Lender. If payments to any Lender, at the time such Lender (i) acquires the applicable interest in a Loan or Commitment
(other than pursuant to an assignment request by the Borrower under Section 3.17) or (ii) changes its Lending Office, are subject to United States withholding tax at a rate in excess of zero pursuant to a law in effect at that time, withholding tax at such rate shall be considered excluded from Taxes for purposes of any indemnity or gross up unless and until a lesser rate applies, whereupon withholding tax at such rate only shall be considered excluded from Taxes for periods thereafter; provided, however, that, if at the date (i) of any assignment pursuant to which such Lender becomes a party to this Credit Agreement or (ii) such Lender changes its Lending Office, such Lender’s assignor (or such Lender immediately before it changed its Lending Office) was entitled to payments under subsection (a) of this Section 3.13 in respect of United States withholding tax at such date, then, to such extent, the term Taxes shall include (in addition to withholding taxes that may be imposed in the future or other amounts otherwise includable in Taxes) United States withholding tax, if any, applicable with respect to such Lender on such date. If such Lender fails to deliver the above forms or other evidence, then the Borrower or the Administrative Agent may withhold from any interest payment to such Lender an amount equal to the applicable withholding tax imposed by the Code, without reduction. If any Governmental Authority asserts that the Borrower or the Administrative Agent did not properly withhold any tax or other amount from payments made in respect of such Lender, such Lender shall indemnify the Borrower or the Administrative Agent therefor, including all penalties and interest, any taxes imposed by any jurisdiction on the amounts payable to the Borrower or the Administrative Agent under this Section 3.13(f), and costs and expenses (including Attorney Costs) of the Borrower or the Administrative Agent. For any period with respect to which a Lender has failed to provide the Administrative Agent with the above forms or other evidence (other than if such failure is due to a change in the applicable law, or in the interpretation or application thereof, occurring after the date on which such form or other evidence originally was required to be provided or if such form or other evidence otherwise is not required), such Lender shall not be entitled to indemnification under subsection (d) of this Section 3.13 nor shall the Borrower be required to make additional payments under subsection (a) of this Section 3.13 with respect to Taxes imposed by the United States by reason of such failure; provided, however, that should a Lender become subject to Taxes because of its failure to deliver such form or other evidence required hereunder, the Borrower shall take such steps as such Lender shall reasonably request to assist such Lender in recovering such Taxes. The obligation of the Lenders under this Section 3.13(f) shall survive the payment of all Obligations and the resignation or replacement of the Administrative Agent.
(g)In the event that an additional payment is made under Section 3.13(a) for the account of any Lender and such Lender, in its reasonable judgment, determines that it has finally and irrevocably received or been granted a credit against or release or remission for, or repayment of, any tax paid or payable by it in respect of or calculated with reference to the deduction or withholding giving rise to such payment, such Lender shall, to the extent that it determines that it can do so without prejudice to the retention of the amount of such credit, relief, remission or repayment, pay to the Borrower such amount as such Lender shall, in its reasonable judgment, have determined to be attributable to such deduction or withholding and which will leave such Lender (after such payment) in no worse position than it would have been in if the Borrower had not been required to make such deduction or withholding. Nothing herein contained shall interfere with the right of a Lender to arrange its tax affairs in whatever manner it thinks fit nor oblige any Lender to claim any tax credit or to disclose any information relating to its tax affairs or any computations in respect thereof or require any Lender to do anything that would prejudice its ability to benefit from any other credits, reliefs, remissions or repayments to which it may be entitled.
(h)For purposes of determining withholding tax imposed under FATCA, from and after the Restatement Effective Date, the Borrower and the Administrative Agent shall treat (and the Lenders hereby authorize the Administrative Agent to treat) this Credit Agreement as not qualifying as a “grandfathered obligation” within the meaning of Treasury Regulation Section 1.1471-2(b)(2)(i).
(i)Solely for purposes of this Section 3.13, the term “Credit Document” includes the Fee Letters.
3.14Compensation.
Upon the written demand of any Lender, the Borrower shall promptly compensate such Lender for and hold such Lender harmless from any loss, cost or expense incurred by it as a result of:
(a)any continuation, conversion, payment or prepayment of any Term Benchmark Loan or RFR Loan, on a day other than the last day of the Interest Period for such Term Benchmark Loan or on the Interest Payment Date of such RFR Loan, as applicable (whether voluntary, mandatory, automatic, by reason of acceleration, or otherwise);
(b)any failure by the Borrower (for a reason other than the failure of such Lender to make a Term Benchmark Loan or RFR Loan) to prepay, borrow, continue or convert any Term Benchmark Loan or RFR Loan on the date or in the amount previously requested by the Borrower; or
(c)any assignment required pursuant to Section 2.7(e), Section 3.17 or Section 11.6.
The amount each such Lender shall be compensated pursuant to this Section 3.14 shall include, without limitation, (i) any loss incurred by such Lender in connection with the re-employment of funds paid, prepaid or repaid, or not borrowed or paid, as the case may be, and (ii) any reasonable and documented out-of-pocket expenses (including Attorney Costs) incurred and reasonably attributable thereto.
With respect to Term Benchmark Loans, for purposes of calculating amounts payable by the Borrower to the Lenders under this Section 3.14, each Lender may deem itself to have funded each Term Benchmark Loan made by it at the LIBO Rate or EURIBO Rate, as applicable, for such Term Benchmark Loan by a matching deposit or other borrowing in the applicable offshore interbank markets for such currency for a comparable amount and for a comparable period, whether or not such Term Benchmark Loan was in fact so funded.
3.15Determination and Survival of Provisions.
All determinations by the Administrative Agent or a Lender of amounts owing under Sections 3.9 through 3.14, inclusive, shall, absent manifest error, be conclusive and binding on the parties hereto. In determining such amount, the Administrative Agent or such Lender may use any reasonable averaging and attribution methods. Section 3.9 through 3.14, inclusive, shall survive the termination of this Credit Agreement and the payment of all Obligations.
3.16Notification by Lenders.
Each Lender shall notify the Borrower of any event that will entitle such Lender to compensation under Section 3.9, 3.12, 3.13 or 3.14 as promptly as practicable, but in any event within 90 days after such Lender obtains actual knowledge thereof; provided, however, that if any Lender fails to give such notice within 90 days after it obtains actual knowledge of such an event, such Lender shall, with respect to compensation payable pursuant to Section 3.9, 3.12, 3.13 or 3.14 in respect of any costs resulting from such event, only be entitled to payment under Section 3.9, 3.12, 3.13 or 3.14 for costs incurred from and after the date 90 days prior to the date that such Lender gives such notice; provided further that, if the event giving rise to such Lender’s right to compensation under Section 3.9, 3.12, 3.13 or 3.14 is retroactive in effect, then the 90-day period referred to above shall be extended to include the period of retroactive effect thereof. If requested by the Borrower, each Lender will furnish to the Borrower within 10 Business Days of the time the Lender requests compensation under Section 3.9, 3.12, 3.13 or 3.14, a certificate setting forth the basis, amount and reasonable detail of computation of each request by such Lender for compensation under Section 3.9, 3.12, 3.13 or 3.14, which certificate shall, except for demonstrable error, be final, conclusive and binding for all purposes.
3.17Mitigation; Mandatory Assignment.
Each Lender shall use reasonable efforts to avoid or mitigate any increased cost or suspension of the availability of an interest rate under Sections 3.9 through and including 3.14 above to the greatest extent practicable (including transferring the Loans to another Lending Office or Affiliate of a Lender) unless, in the reasonable opinion of such Lender, such efforts would be likely to have an adverse effect upon it. In the event (a) a Lender makes a request to the Borrower for additional payments in accordance with Section 3.9, 3.12, 3.13 or 3.14, or delivers a notice under Section 3.10 or 3.11 or (b) any Lender shall be a Defaulting Lender, then, provided that no Default or Event of Default has occurred and is continuing at such time, the Borrower may, (a) in the case of a Lender that makes a request to the Borrower for additional payments in accordance with Section 3.9, 3.12, 3.13 or 3.14, or delivers a notice under Section 3.10 or 3.11, at its own expense (such expense to include, without limitation, any transfer fee payable to the Administrative Agent under Section 11.3(b)), and (b) in the case of a Defaulting Lender, at the replacement Lender’s expense (such expense to include, without limitation, any transfer fee payable to the Administrative Agent under Section 11.3(b)), and, in each case, in its sole discretion, require such Lender or Defaulting Lender, as the case may be, to transfer and assign in whole (but not in part), without recourse (in accordance with and subject to the terms and conditions of Section 11.3(b)), all of its interests, rights and obligations under this Credit Agreement to an Eligible Assignee which shall assume such assigned obligations (which assignee may be another Lender, if a Lender accepts such assignment); provided that (a) such
assignment shall not conflict with any law, rule or regulation or order of any court or other Governmental Authority and (b) the Borrower or such assignee shall have paid to the assigning Lender in immediately available funds the principal of and interest accrued to the date of such payment on the portion of the Loans hereunder held by such assigning Lender and all other amounts owed to such assigning Lender hereunder, including amounts owed pursuant to Sections 3.9, 3.12, 3.13 or 3.14 hereof.
SECTION 4
[RESERVED]
SECTION 5
CONDITIONS PRECEDENT
5.1Conditions to Effectiveness.
The effectiveness of this Credit Agreement shall be subject to the satisfaction of the following conditions:
(a)The Administrative Agent shall have received duly executed counterparts of the Amendment and Restatement Agreement that, when taken together, bear the signatures of the Borrower, each Lender and the Administrative Agent.
(b)The Administrative Agent shall have received a written opinion of Shearman & Sterling LLP and a written opinion of the Deputy General Counsel of the Borrower, each (A) dated the Restatement Effective Date, (B) addressed to the Administrative Agent on behalf of the Lenders and (C) in form and substance consistent with the opinions delivered by Shearman & Sterling LLP and the Deputy General Counsel of the Borrower, respectively, on the Prior Closing Date, but giving effect to the amendment and restatement of the Existing Credit Agreement in the form hereof.
(c)The Administrative Agent shall have received such customary documents and certificates as the Administrative Agent or its counsel may reasonably request relating to the organization, existence and good standing of the Borrower and the authorization of the transactions contemplated hereby by the Borrower, all in form and substance reasonably satisfactory to the Administrative Agent, consistent with those delivered on the Prior Closing Date and giving effect to the Amendment and Restatement Agreement.
(d)The Administrative Agent shall have received payment from the Borrower, for the account of each Lender that executes and delivers a counterpart signature page to the Amendment and Restatement Agreement, of an upfront fee (the “Upfront Fee”) in an amount equal to (i) 0.06% of the amount of the Revolving Commitment of such Lender that does not exceed its Revolving Commitment under the Existing Credit Agreement plus (ii) 0.10% of the amount by which the Revolving Commitment of such Lender exceeds its Revolving Commitment (if any) under the Existing Credit Agreement. The Upfront Fee shall be payable in immediately available funds and, once paid, shall not be refundable.
(e)The Administrative Agent shall have received, in immediately available funds, payment of all interest and fees accrued to the Restatement Effective Date under the Existing Credit Agreement, as well as costs, fees, out-of-pocket expenses, compensation and other amounts then due and payable in connection with the Existing Credit Agreement, the Amendment and Restatement Agreement or the transactions contemplated thereby, including, to the extent invoiced, all amounts payable under Section 6 of the Amendment and Restatement Agreement.
(f)(i) The Lenders shall have received all documentation and other information required by bank regulatory authorities under applicable “know your customer” and anti-money laundering rules and regulations, including the PATRIOT Act to the extent requested at least five days prior to the Restatement Effective Date and (ii) to the extent the Borrower qualifies as a “legal entity customer” under the Beneficial Ownership Regulation, any Lender that has requested, in a written notice to the Borrower, a Beneficial Ownership Certification in relation to the Borrower shall have received such Beneficial Ownership Certification (provided that, upon the execution and delivery by such Lender of its signature page to this Credit Agreement, the condition set forth in this clause (ii) shall be deemed to be satisfied).
(g)The representations set forth in paragraphs (b) and (c) of Section 3 of the Amendment and Restatement Agreement and in Section 6 of this Credit Agreement shall be true and correct on and as of the Restatement Effective Date and the Administrative Agent shall have received a certificate of an Authorized Officer of the Borrower, dated the Restatement Effective Date, to such effect.
The Administrative Agent shall notify the Borrower and the Lenders of the Restatement Effective Date and such notice shall be conclusive and binding.
5.2Conditions to All Extensions of Credit.
In addition to the conditions precedent stated in Section 5.1, the Lenders shall not be obligated to make Loans nor shall any Issuing Lender be required to issue, extend or increase the amount of a Letter of Credit, in each case on or after the Restatement Effective Date unless as of the date thereof:
(a)Notice. The Borrower shall have delivered (i) in the case of any Loan, to the Administrative Agent, an appropriate Notice of Borrowing, duly executed and completed, by the time specified in Section 2.1, and (ii) in the case of any Letter of Credit, to the Administrative Agent for distribution by the Administrative Agent to the relevant Issuing Lender as specified by the Borrower, an appropriate request for issuance of a Letter of Credit in accordance with the provisions of Section 2.2 and (iii) in the case of any Swing Line Loan, to the Swing Line Lender, a Swing Line Loan Request, duly executed and completed, by the time specified in Section 2.3.
(b)Representations and Warranties. The representations and warranties made by the Borrower in this Credit Agreement or any Credit Document (other than, in the case of any Extension of Credit made after the Restatement Effective Date, the representations and warranties set forth in Sections 6.7 and 6.10) are true and correct (i) in the case of any representation and warranty that is qualified by materiality, in all respects and (ii) otherwise, in all material respects, at and as of the date of such Extension of Credit except to the extent they expressly and exclusively relate to an earlier date in which case such representations and warranties shall be true and correct (x) in the case of any representation and warranty that is qualified by materiality, in all respects and (y) otherwise, in all material respects, as of such earlier date.
(c)No Default. No Default or Event of Default shall exist and be continuing either prior to or after giving effect to such Extension of Credit.
(d)Availability. Immediately after giving effect to the making of a Loan (and the application of the proceeds thereof) or to the issuance of a Letter of Credit, as the case may be, (i) the sum of the Dollar Equivalent of outstanding Revolving Loans plus the Dollar Equivalent of outstanding LOC Obligations plus outstanding Swing Line Loans shall not exceed the Revolving Committed Amount and (ii) the sum of the Dollar Equivalent of outstanding LOC Obligations shall not exceed the LOC Committed Amount.
The delivery of each Notice of Borrowing, each request for a Letter of Credit and each Swing Line Loan Request shall constitute a representation and warranty by the Borrower of the correctness of the matters specified in subsections (b), (c) and (d) above.
SECTION 6
REPRESENTATIONS AND WARRANTIES
The Borrower hereby represents to the Administrative Agent and each Lender that:
6.1Organization and Good Standing.
The Borrower and each Domestic Subsidiary (a) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, unless, solely with respect to each Domestic Subsidiary, the failure to be so duly organized, validly existing and in good standing would not have or would not reasonably be expected to have a Material Adverse Effect, (b) is duly qualified and in good standing as a foreign organization and authorized to do business in every other jurisdiction where its ownership or operation of property or the conduct of its business would require it to be qualified, in good standing and authorized, unless the failure to be so qualified, in good standing or authorized would not have or would not reasonably be expected to have a Material Adverse Effect and (c) has the power and authority to
own and operate its properties and to carry on its business as now conducted and as currently proposed to be conducted.
6.2Due Authorization.
The Borrower (a) has the power and authority to execute, deliver and perform this Credit Agreement and the other Credit Documents to which it is a party and to incur the obligations herein and therein provided for and (b) has duly taken all necessary action to authorize, and is duly authorized, to execute, deliver and perform this Credit Agreement and the other Credit Documents to which it is a party.
6.3Enforceable Obligations.
The Borrower has duly executed this Credit Agreement and each other Credit Document to which the Borrower is a party and this Credit Agreement and such other Credit Documents constitute legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms, except as may be limited by bankruptcy or insolvency laws or similar laws affecting creditors’ rights generally or by general equitable principles.
6.4No Conflicts.
Neither the execution and delivery of this Credit Agreement and the other Credit Documents to which it is a party, nor the consummation of the transactions contemplated herein and therein, nor the performance of or compliance with the terms and provisions hereof and thereof by the Borrower will (a) violate, contravene or conflict with any provision of the Borrower’s organizational documents, (b) violate, contravene or conflict with any Requirement of Law (including, without limitation, Regulations T, U or X), order, writ, judgment, injunction, decree, license or permit applicable to the Borrower which violation would have or would reasonably be expected to have a Material Adverse Effect, (c) violate, contravene or conflict with contractual provisions of, or cause an event of default under, any indenture, loan agreement, mortgage, deed of trust, or other material contract, agreement or instrument to which the Borrower or any Domestic Subsidiary is a party or by which it or its properties may be bound which violation would have or would reasonably be expected to have a Material Adverse Effect, or (d) result in or require the creation of any Lien upon or with respect to the Properties of the Borrower or any Domestic Subsidiary.
6.5Consents.
Except for consents, approvals and authorizations which have been obtained or the absence of which would not have or would not reasonably be expected to have a Material Adverse Effect, no consent, approval, authorization or order of, or filing, registration or qualification with, any Governmental Authority, equity owner or third party in respect of the Borrower is required in connection with the execution, delivery or performance of this Credit Agreement or any of the other Credit Documents, or the consummation of any transaction contemplated herein or therein by the Borrower.
6.6Financial Condition.
The Borrower has heretofore furnished to the Lenders its consolidated balance sheet and income statement, together with related consolidated statements of operations, cash flows and changes in stockholders’ equity as of and for the fiscal year ended December 31, 2020, audited by and accompanied by the opinion of PricewaterhouseCoopers LLP, independent registered public accountants. Such financial statements, and the financial statements that shall at any time have been delivered to the Administrative Agent and the Lenders pursuant to Sections 7.1(a) and (b): (a) have been prepared in accordance with GAAP and (b) present fairly the consolidated financial condition, results of operations and cash flows of the Borrower and its Subsidiaries as of such date and for such periods. Since December 31, 2020, there has been no sale, transfer or other disposition by the Borrower or any of its Subsidiaries of any material part of the business or property of the Borrower and its Subsidiaries, taken as a whole, or purchase or other acquisition by any such Person of any business or property (including any Capital Stock of any other Person) material in relation to the consolidated financial condition of the Borrower and its Subsidiaries, taken as a whole, in each case, which is not (i) reflected in the most recent financial statements delivered to the Lenders prior to the date hereof or pursuant to Section 7.1(a) or (b) or in the notes thereto or (ii) otherwise permitted by the terms of this Credit Agreement and communicated to the Administrative Agent and the Lenders.
6.7Material Adverse Effect.
Since December 31, 2020, there has been no event or condition that has resulted or could reasonably be expected to result in a material adverse change in or affecting the business, operations or financial condition of the Borrower and its Subsidiaries, taken as a whole, other than as disclosed to the Lenders or in the Borrower’s filings with the Securities and Exchange Commission prior to the Restatement Effective Date.
6.8Disclosure.
(a)Neither this Credit Agreement, nor any other Credit Document, nor any financial statements delivered to the Administrative Agent or the Lenders nor any other document, certificate or statement furnished to the Administrative Agent or the Lenders by or on behalf of the Borrower in connection with the transactions contemplated hereby, taken as a whole, contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained therein or herein not materially misleading.
(b)As of the Restatement Effective Date, to the best knowledge of the Borrower, the information included in the Beneficial Ownership Certification provided on or prior to the Restatement Effective Date to any Lender in connection with this Credit Agreement (if any) is true and correct in all respects.
6.9No Default.
No Default or Event of Default has occurred and is continuing or would result from the consummation of the transactions contemplated by this Credit Agreement and the other Credit Documents.
6.10Litigation.
Except as set forth in Schedule 6.10 or as disclosed in the Borrower’s filings with the Securities and Exchange Commission prior to the Restatement Effective Date, no litigation, investigation, claim, criminal prosecution, civil investigative demand, imposition of criminal or civil fines and penalties, or any other proceeding of or before any arbitrator or Governmental Authority is pending or, to the knowledge of the Borrower, threatened by or against the Borrower or any of its Subsidiaries or against any of its or their respective Properties (a) with respect to the Credit Documents or any Extension of Credit or any of the transactions contemplated hereby or (b) which would reasonably be expected to have a Material Adverse Effect.
6.11Taxes.
The Borrower and each of its Subsidiaries has filed, or caused to be filed, all material tax returns (federal, state, local and foreign) required to be filed and has paid (a) all amounts of taxes shown thereon to be due (including interest and penalties) and (b) all other material taxes, fees, assessments and other governmental charges (including mortgage recording taxes, documentary stamp taxes and intangibles taxes) owing by it, except for such taxes (i) that are not yet delinquent or (ii) that are being contested in good faith and by proper proceedings, and against which adequate reserves are being maintained in accordance with GAAP.
6.12Compliance with Law.
Except to the extent the same would not reasonably be expected to have a Material Adverse Effect:
(a)The Borrower and each of its Subsidiaries is in compliance with all Requirements of Law (including, without limitation, Environmental Laws, ERISA, HIPAA, Medicaid Regulations and Medicare Regulations) and all material orders, writs, injunctions and decrees applicable to it, or to its Properties.
(b)(i) Neither the Borrower nor any of its Subsidiaries nor any individual employed by the Borrower or any of its Subsidiaries has been, or may reasonably be expected to be, excluded or suspended from participation in any Medical Reimbursement Program for their corporate or individual actions or failures to act and (ii) there is no member of management continuing to be employed by the Borrower or any of its Subsidiaries who has been, or may reasonably be expected to have, individual criminal culpability for healthcare matters under investigation by any Governmental Authority unless such member of management has been, within a reasonable period of time after discovery of such actual or potential culpability, either suspended or removed from positions of responsibility related to those activities under challenge by the Governmental Authority.
(c)Current billing policies, arrangements, protocols and instructions comply with all material requirements of Medical Reimbursement Programs and are administered by properly trained personnel.
(d)Current medical director compensation arrangements and other arrangements with referring physicians comply with state and federal self-referral and anti-kickback laws, including without limitation 42 U.S.C. Section 1320a-7b(b)(1) - (b)(2) and 42 U.S.C. Section 1395nn.
6.13Licensing and Accreditation.
Except to the extent the same would not be reasonably expected to have a Material Adverse Effect, the Borrower and each of its Domestic Subsidiaries has, to the extent applicable, (a) obtained and maintains in good standing all required licenses, permits, authorizations and approvals of each Governmental Authority necessary to the conduct of its business, (b) to the extent prudent and customary in the industry in which it is engaged, has obtained and maintains accreditation from all generally recognized accrediting agencies (including, but not limited to, CAP), (c) has obtained and maintains CLIA certification, (d) has entered into and maintains in good standing its Medicare Provider Agreements and its Medicaid Provider Agreements and (e) has ensured that all such required licenses, certifications and accreditations are in full force and effect and have not been revoked or suspended or otherwise limited.
6.14Insurance.
The properties of the Borrower and each of its Subsidiaries are insured with financially sound and reputable insurance companies that are not Affiliates of the Borrower (except to the extent that self-insurance is maintained in reasonable amounts), in such amounts, with such deductibles and covering such risks, as is reasonable and prudent.
6.15Use of Proceeds.
The proceeds of the Loans have been and will be used solely for the purposes specified in Section 7.8.
6.16Government Regulation.
(a)“Margin stock” within the meaning of Regulation U does not constitute more than 25% of the value of the consolidated assets of the Borrower and its Subsidiaries. None of the transactions contemplated by the Credit Documents (including, without limitation, the direct or indirect use of the proceeds of the Loans) will violate or result in a violation of Regulations T, U or X.
(b)The Borrower is not subject to regulation under the Investment Company Act of 1940, as amended.
6.17ERISA.
Except as would not reasonably be expected to result in a Material Adverse Effect:
(a)(i) No ERISA Event has occurred, and, to the best knowledge of the Borrower and each ERISA Affiliate, no event or condition has occurred or exists as a result of which any ERISA Event could reasonably be expected to occur, with respect to
any Plan, (ii) no Plan (other than a Multiemployer Plan) has failed to meet the “minimum funding standard” (as such term is defined in Section 302 of ERISA and Section 412 of the Code) applicable to such Plan, in each instance, whether or not waived, and no application for a funding waiver or an extension of any amortization period pursuant to Section 412 of the Code has been made with respect to any Plan, (iii) each Plan has been maintained, operated, and funded in compliance with its own terms and in material compliance with the provisions of ERISA, the Code, and any other applicable federal or state laws and (iv) no Lien in favor of the PBGC or a Plan has arisen or is reasonably likely to arise on account of any Plan.
(b)Neither the Borrower nor any ERISA Affiliate has incurred, or, to the best of each such party’s knowledge, is reasonably expected to incur, any liability under Title IV of ERISA with respect to any Single Employer Plan, other than for the payment of premiums arising in the ordinary course of business, or any withdrawal liability under ERISA to any Multiemployer Plan or Multiple Employer Plan. Neither the Borrower nor any ERISA Affiliate has received any notification that any Multiemployer Plan is insolvent (within the meaning of Section 4245 of ERISA), or has been terminated (within the meaning of Title IV of ERISA), and no Multiemployer Plan is, to the best of each such Person’s knowledge, reasonably expected to be insolvent or terminated. Neither the Borrower nor any ERISA Affiliate has engaged in a transaction that could be subject to Sections 4069 or 4212(c) of ERISA.
6.18Environmental Matters.
Except with respect to matters that would not reasonably be expected to result in a Material Adverse Effect, neither the Borrower nor any of its Subsidiaries (i) has failed to comply with any Environmental Law or to obtain, maintain or comply with any permit, license or other approval required under any Environmental Law, (ii) has become subject to any Environmental Liability, (iii) has received notice of any claim with respect to any Environmental Liability or (iv) knows of any basis for any Environmental Liability.
6.19Intellectual Property.
The Borrower and each of its Subsidiaries owns, or has the legal right to use, all material patents, trademarks, copyrights and other intellectual property rights (the “Intellectual Property”) necessary for each of them to conduct its business as currently conducted other than as would not be reasonably expected to have a Material Adverse Effect. To the knowledge of the Borrower and its Subsidiaries, (i) no claim has been asserted and is pending before any Governmental Authority by any Person against the Borrower or any of its Subsidiaries challenging the use, validity or effectiveness of any Intellectual Property owned by the Borrower or any of its Subsidiaries and (ii) the use of any Intellectual Property by the Borrower and its Subsidiaries does not infringe on the rights of any Person, in the case of each of (i) and (ii) except for claims and infringements that, in the aggregate, would not have or reasonably be expected to have a Material Adverse Effect.
6.20Subsidiaries.
As of the Restatement Effective Date and unless the Borrower shall have complied with its obligations under Section 7.10, there are no Domestic Subsidiaries of the Borrower that, individually or together with their Subsidiaries, guarantee Material Debt of the Borrower.
6.21Anti-Corruption Laws and Sanctions.
The Borrower has implemented and maintains in effect policies and procedures designed to ensure compliance by the Borrower, its Subsidiaries and their respective directors, officers, employees and agents with Anti-Corruption Laws and applicable Sanctions, and the Borrower, its Subsidiaries and their respective officers and employees and to the knowledge of the Borrower its directors and agents, are in compliance with Anti-Corruption Laws and applicable Sanctions in all material respects. None of (a) the Borrower, any Subsidiary or, to the knowledge of the Borrower, any of their respective directors, officers or employees, or (b) to the knowledge of the Borrower, any agent of the Borrower or any Subsidiary that will act in any capacity in connection with or benefit from the credit facility established hereby, is a Sanctioned Person. No Loan or Letter of Credit, use of the proceeds of any Loan or any Letter of Credit or other transaction contemplated by this Credit Agreement will result in a violation by any party hereto of Anti-Corruption Laws or applicable Sanctions.
6.22Affected Financial Institution.
The Borrower is not is an Affected Financial Institution.
SECTION 7
AFFIRMATIVE COVENANTS
The Borrower hereby covenants and agrees that so long as this Credit Agreement is in effect and until the Loans and LOC Obligations, together with interest and fees and other obligations then due and payable hereunder, have been paid in full (other than contingent obligations for which no claim has been made) and the Commitments and Letters of Credit hereunder shall have terminated or expired (or, in the case of Letters of Credit, the LOC Obligations have been cash collateralized), as applicable:
7.1Information Covenants.
The Borrower will furnish, or cause to be furnished, to the Administrative Agent for the benefit of each of the Lenders:
(a)Annual Financial Statements. As soon as available, and in any event within 95 days after the close of each fiscal year of the Borrower, a consolidated balance sheet and income statement of the Borrower and its Subsidiaries, as of the end of such fiscal year, together with related consolidated statements of operations, cash flows and changes in stockholders’ equity for such fiscal year, setting forth in comparative form consolidated figures for the preceding fiscal year, all such consolidated financial information described above to be audited by independent certified public accountants of
recognized national standing and whose opinion shall be to the effect that such financial statements fairly present in all material respects the consolidated financial position, results of operations and cash flows of the Borrower and its Subsidiaries as at the end of, and for, such fiscal year in accordance with GAAP and shall not be limited as to the scope of the audit or qualified in any manner. Notwithstanding the above, it is understood and agreed that filing of the Borrower’s applicable Form 10-K shall satisfy the requirements of this Section 7.1(a).
(b)Quarterly Financial Statements. As soon as available, and in any event within 50 days after the close of each of the first three fiscal quarters of the Borrower, a consolidated balance sheet and income statement of the Borrower and its Subsidiaries, as of the end of such fiscal quarter, together with related consolidated statements of operations, cash flows and changes in stockholders’ equity for such fiscal quarter setting forth in each case in comparative form the corresponding consolidated statements of operations and cash flows for the corresponding period of the preceding fiscal year, and accompanied by a certificate of an Authorized Officer of the Borrower to the effect that such quarterly financial statements fairly present in all material respects the consolidated financial condition of the Borrower and its Subsidiaries and in accordance with GAAP, subject to changes resulting from audit and normal year-end audit adjustments. Notwithstanding the above, it is understood and agreed that filing of the Borrower’s applicable Form 10-Q shall satisfy the requirements of this Section 7.1(b).
(c)Officer’s Certificate. At the time of delivery of the financial statements provided for in Sections 7.1(a) and 7.1(b) above, a certificate of an Authorized Officer of the Borrower substantially in the form of Exhibit 7.1(c), (i) demonstrating compliance with the financial covenant contained in Section 7.2 by calculation thereof as of the end of each such fiscal period, and (ii) stating that no Default or Event of Default exists, or if any Default or Event of Default does exist, specifying the nature and extent thereof and what action the Borrower proposes to take with respect thereto.
(d)Reports. Promptly upon transmission or receipt thereof, copies of all financial statements, proxy statements, notices and reports which the Borrower or any of its Subsidiaries shall send to shareholders of the Borrower generally and, upon request of the Administrative Agent, copies of any filings and registrations with, and reports to or from, any Governmental Authority which has regulatory authority with respect to the Borrower and its Subsidiaries.
(e)Notices. Upon the Borrower obtaining knowledge thereof, the Borrower will give written notice to the Administrative Agent promptly (and in any event within five Business Days) of (i) the occurrence of any Default or Event of Default, specifying the nature and existence thereof and what action the Borrower proposes to take with respect thereto, (ii) the occurrence of any of the following with respect to the Borrower or any of its Subsidiaries (A) the pendency or commencement of any litigation, arbitration or governmental proceeding against the Borrower or any of its Subsidiaries which has had or would reasonably be expected to have a Material Adverse Effect or (B) material noncompliance with, or the institution of any proceedings against the Borrower or any of its Subsidiaries with respect to, or the receipt of written notice by such Person of potential liability or responsibility for violation, or alleged violation of, any Requirement of Law (including, without limitation, Environmental Laws) the violation of which has had or would reasonably be expected to have a Material Adverse Effect, (iii) any change to any Debt Rating of the Borrower, (iv) any change in the information provided in the Beneficial Ownership Certification delivered to any Lender (if any) that would result in a change to the list of beneficial owners identified in such certification and (v) any proceeding against the Borrower or any of its Subsidiaries to suspend, revoke or
terminate any Medicaid Provider Agreement or Medicare Provider Agreement, or to exclude the Borrower or any of its Subsidiaries from any Medical Reimbursement Program, which is reasonably expected to have a Material Adverse Effect.
(f)ERISA. Upon the Borrower or any ERISA Affiliate obtaining knowledge thereof, such Person shall give written notice to the Administrative Agent promptly (and in any event within 10 Business Days) of the occurrence of any of the following events which has had or would be reasonably expected to have a Material Adverse Effect: (i) any ERISA Event, (ii) with respect to any Multiemployer Plan, the receipt of notice as prescribed in ERISA or otherwise of any withdrawal liability assessed against the Borrower or any ERISA Affiliate (within the meaning of Title IV of ERISA), (iii) the failure to make full payment on or before the due date (including extensions) thereof of all amounts which the Borrower or any ERISA Affiliate is required to contribute to each Plan pursuant to its terms and as required to meet the “minimum funding standard” (as such term is defined in Section 302 of ERISA and Section 412 of the Code) applicable to such Plan or (iv) any change in the funding status of any Plan that would reasonably be expected to have a Material Adverse Effect; in each case together with a description of any such event or condition or a copy of any such notice and a statement by an Authorized Officer of the Borrower briefly setting forth the details regarding such event, condition, or notice, and the action, if any, which has been or is being taken or is proposed to be taken by such Person with respect thereto. Promptly upon request, the Borrower shall furnish the Administrative Agent with such additional information concerning any Plan as may be reasonably requested, including, but not limited to, copies of each annual report/return (Form 5500 series), as well as all schedules and attachments thereto required to be filed with the Department of Labor pursuant to ERISA and the Code, respectively, for each “plan year” (within the meaning of Section 3(39) of ERISA).
(g)Other Information. With reasonable promptness upon any such request, (x) such other information regarding the business, properties or financial condition of the Borrower and its Subsidiaries as the Administrative Agent may reasonably request and (y) information and documentation reasonably requested by the Administrative Agent or any Lender for purposes of compliance with applicable “know your customer” and anti-money laundering rules and regulations, including the Patriot Act and the Beneficial Ownership Regulation.
(h)Public/Private Information. The Borrower hereby acknowledges that (i) the Administrative Agent will make available to the Lenders materials and/or information provided by or on behalf of the Borrower hereunder (collectively, “Borrower Materials”) by posting the Borrower Materials on IntraLinks or another similar electronic system (the “Platform”) and (ii) certain of the Lenders may be “public-side”
Lenders (i.e., Lenders that do not wish to receive MNPI) (each, a “Public Lender”). The Borrower hereby agrees that (A) all Borrower Materials that are to be made available to the Public Lenders shall be clearly and conspicuously marked “PUBLIC” which, at a minimum, shall mean that the word “PUBLIC” shall appear prominently on the first page thereof, (B) by marking Borrower Materials “PUBLIC”, the Borrower shall be deemed to have authorized the Administrative Agent and the Lenders to treat such Borrower Materials as either publicly available information or not material information (although it may be sensitive and proprietary) with respect to the Borrower or its securities for purposes of United States federal and state securities laws, (C) all Borrower Materials marked “PUBLIC” are permitted to be made available through a portion of the Platform designated as “Public” and (D) the Administrative Agent shall be entitled to treat any Borrower Materials that are not marked “PUBLIC” as being suitable only for posting on a portion of the Platform not marked “Public”. Notwithstanding the foregoing, the Borrower shall be under no obligation to mark any Borrower Materials “PUBLIC”.
(i)Electronic Delivery. Documents required to be delivered pursuant to Section 7.1(a) or (b) (to the extent any such documents are included in materials otherwise filed with the Securities and Exchange Commission) may be delivered electronically and if so delivered, shall be deemed to have been delivered on the date (i) on which the Borrower posts such documents, or provides a link thereto on the Borrower’s website on the Internet at the website address listed on Schedule 11.1 or (ii) on which such documents are posted on the Borrower’s behalf on an Internet or intranet website, if any, to which each Lender and the Administrative Agent have access (whether a commercial, third-party website or whether sponsored by the Administrative Agent); provided that: (A) the Borrower shall deliver paper copies of such documents to the Administrative Agent or any Lender that requests the Borrower to deliver such paper copies until a written request to cease delivering paper copies is given by the Administrative Agent or such Lender and (B) the Borrower shall notify (which may be facsimile or electronic mail) the Administrative Agent and each Lender of the posting of any such documents and provide to the Administrative Agent by electronic mail electronic versions (i.e., soft copies) of such documents. Except for such compliance certificates, the Administrative Agent shall have no obligation to request the delivery or to maintain copies of the documents referred to above, and in any event shall have no responsibility to monitor compliance by the Borrower with any such request for delivery, and each Lender shall be solely responsible for requesting delivery to it or maintaining its copies of such documents.
7.2Financial Covenant.
The Leverage Ratio, as of the last day of each fiscal quarter of the Borrower, shall be less than or equal to 4.00 to 1.00; provided that, following the consummation of a Material Acquisition that, on a pro forma basis, would result in an increase in the Leverage Ratio, if the Borrower shall so elect by a notice delivered to the Administrative Agent within 30 days following such completion (a “Leverage Increase Election”), such maximum Leverage Ratio shall be increased to 4.50 to 1.00 at the end of and for the fiscal quarter during which such Material Acquisition shall have been consummated and at the end of and for each of the following three consecutive fiscal quarters, it being understood and agreed that the Borrower shall have the right, in its sole and absolute discretion, to decide (by written notice to the Administrative Agent) that such increased Leverage Ratio shall be in effect for a shorter period of time (the period during which any such increase in the Leverage Ratio shall actually be in effect (taking into account such Borrower’s election to shorten the period during which the increased Leverage Ratio shall be in effect) being called a “Leverage Increase Period”). Notwithstanding the foregoing, after the Borrower elects to make a Leverage Increase Election the Borrower may not make a subsequent Leverage Increase Election until two fiscal quarters
have elapsed since the end of the prior Leverage Increase Period. The Borrower may terminate any Leverage Increase Period by a notice delivered to the Administrative Agent whereupon, on the last day of the fiscal quarter during which such notice was given and on the last day of each fiscal quarter thereafter until another Leverage Increase Period has commenced as provided in this Section, the maximum Leverage Ratio shall be 4.00 to 1.00.
7.3Preservation of Existence and Franchises.
The Borrower will, and will cause its Subsidiaries to, maintain and preserve its existence and any rights, franchises, Intellectual Property and authority that are used or useful in the conduct of business except as permitted by Section 8.4, in each case to the extent and in the manner customary for companies in similar businesses, except where the failure to do so would not reasonably be expected to cause a Material Adverse Effect.
7.4Compliance with Law.
Except to the extent the failure to do so would not reasonably be expected to have a Material Adverse Effect, the Borrower will, and will cause each of its Subsidiaries to, (a) comply with all Requirements of Law, and all applicable restrictions imposed by all Governmental Authorities, applicable to it and its Property (including, without limitation, Environmental Laws and ERISA), (b) conform with and duly observe in all material respects all laws, rules and regulations and all other valid requirements of any regulatory authority with respect to the conduct of its business, including without limitation, HIPAA, Medicare Regulations, Medicaid Regulations, and all laws, rules and regulations of Governmental Authorities, pertaining to the business of the Borrower and the Domestic Subsidiaries, (c) obtain and maintain all licenses, permits, certifications and approvals of all applicable Governmental Authorities as are required for the conduct of its business as currently conducted and herein contemplated, including without limitation professional licenses, CLIA certifications, Medicare Provider Agreements and Medicaid Provider Agreements, (d) ensure that (i) billing policies, arrangements, protocols and instructions will comply with reimbursement requirements under Medicare, Medicaid and other Medical Reimbursement Programs and will be administered by properly trained personnel, (ii) medical director compensation arrangements and other arrangements with referring physicians will comply with applicable state and federal self-referral and anti-kickback laws, including without limitation 42 U.S.C. Section 1320a-7b(b)(1) - (b)(2) 42 U.S.C. and 42 U.S.C. Section 1395nn and (iii) no event or related events occur that result in the exclusion of the Borrower or any of its Subsidiaries from participation in any Medical Reimbursement Program and (e) make commercially reasonable efforts to implement policies that are consistent with HIPAA on or before the date that the Borrower and the Domestic Subsidiaries are required to comply therewith. The Borrower will maintain in effect and enforce policies and procedures designed to ensure compliance by the Borrower, its Subsidiaries and their respective directors, officers, employees and agents with Anti-Corruption Laws and applicable Sanctions.
7.5Payment of Taxes.
The Borrower will, and will cause its Subsidiaries to, pay, settle or discharge all material taxes, assessments and governmental charges or levies imposed upon it, or upon its income or profits, or upon any of its properties, before they shall become delinquent; provided, however, that the Borrower and its Subsidiaries shall not be required to pay any such tax, assessment, charge or levy which is being contested in good faith by appropriate proceedings and as to which adequate reserves have been established in accordance with GAAP, unless the failure to make any such payment (i) would give rise to an immediate right to foreclose or collect on a Lien securing such amounts or (ii) would reasonably be expected to have a Material Adverse Effect.
7.6Insurance.
The Borrower will, and will cause each of its Subsidiaries to, at all times maintain in full force and effect insurance (including worker’s compensation, liability, casualty and business interruption insurance) with reputable national companies that are not Affiliates of the Borrower (except to the extent that self-insurance is maintained in reasonable amounts), in such amounts, covering such risks and liabilities as is reasonable and prudent.
7.7Maintenance of Property.
The Borrower will, and will cause its Subsidiaries to, maintain and preserve its properties and equipment that are used or useful in the conduct of business in good repair, working order and condition, normal wear and tear excepted, and will make, or cause to be made, in such properties and equipment from time to time all repairs, renewals, replacements, extensions, additions, betterments and improvements thereto as may be needed or proper, in each case to the extent and in the manner customary for companies in similar businesses, except where the failure to do so would not reasonably be expected to cause a Material Adverse Effect.
7.8Use of Proceeds.
(a)The Borrower will use the proceeds of the Loans and the issuance of the Letters of Credit solely for working capital and other general corporate purposes of the Borrower and its Subsidiaries, including acquisitions.
(b)The Borrower will not request any Loan or Letter of Credit, and the Borrower shall not use, and shall procure that its Subsidiaries and its or their respective directors, officers, employees and agents shall not use, the proceeds of any Loan or Letter of Credit (A) in furtherance of an offer, payment, promise to pay, or authorization of the payment or giving of money, or anything else of value, to any Person in violation of any Anti-Corruption Laws, (B) for the purpose of funding, financing or facilitating any activities, business or transaction of or with any Sanctioned Person, or in any Sanctioned Country, or (C) in any manner that would result in the violation of any Sanctions applicable to any party hereto.
7.9Audits/Inspections.
Upon reasonable notice and during normal business hours, but not more than once per calendar year, the Borrower will, and will cause each of its Subsidiaries to, permit representatives appointed by the Administrative Agent or any Lender, including, without limitation, independent accountants, agents, attorneys and appraisers, to visit and inspect the Borrower’s or any Subsidiary’s Property, including its books and records, its accounts receivable and inventory, its facilities and its other business assets, and to make photocopies or photographs
thereof and to write down and record any information such representative obtains and shall permit the Administrative Agent, any Lender or its representatives to investigate and verify the accuracy of information provided to the Administrative Agent or the Lenders and to discuss all such matters with the officers, employees and representatives of the Borrower and/or its Subsidiaries; provided, however, during the existence of a Default or Event of Default, the Administrative Agent and the Lenders may request as many inspections as reasonable under the circumstances. Any expenses incurred in connection with this Section 7.9 shall be for the account of the Lenders unless an Event of Default exists, in which case such reasonable and documented out-of-pocket expenses shall be for the account of the Borrower. Any representatives appointed by the Administrative Agent shall sign a confidentiality agreement reasonably acceptable to the Borrower prior to any visit, investigation, inspection or verification permitted by this Section 7.9. Notwithstanding the foregoing, neither the Borrower nor any of its Subsidiaries shall be required to (i) disclose documents where such disclosure could result in the loss of attorney-client privilege or a violation of applicable Laws or (ii) violate any confidentiality agreement with a Person other than the Borrower or a Subsidiary binding on it.
7.10Subsidiary Guarantees.
If at any time any Domestic Subsidiary of the Borrower shall guarantee or otherwise become liable for any Material Debt of the Borrower, the Borrower shall so notify the Administrative Agent and promptly thereafter (but in any event within 10 days) shall cause such Domestic Subsidiary to (i) enter into a guarantee agreement, substantially in the form attached as Exhibit 7.10 hereto and (ii) deliver such other documentation as the Administrative Agent may reasonably request in connection with the foregoing, including, without limitation, certified resolutions and other organizational and authorizing documents of such Subsidiary and favorable opinions of counsel to such Subsidiary (which shall cover, among other things, the legality, validity, binding effect and enforceability of the guarantee agreement referred to above), all in form, content and scope reasonably satisfactory to the Administrative Agent. The Borrower further agrees to countersign any such guarantee agreement in the space provided therein.
7.11Compliance Program.
The Borrower will, and will cause each of its Domestic Subsidiaries that operates a clinical laboratory to, maintain, and be operated in accordance with, a compliance program which is reasonably designed to provide effective internal controls that promote adherence to applicable federal and state law and the program requirements of federal and state health plans, and which includes the implementation of internal audits and monitoring on a regular basis to monitor compliance with the requirements of the compliance program and applicable law, regulations and company policies.
SECTION 8
NEGATIVE COVENANTS
The Borrower hereby covenants and agrees that so long as this Credit Agreement is in effect and until the Loans and LOC Obligations, together with interest, fees and other obligations then due and payable hereunder, have been paid in full (other than contingent obligations for which no claim has been made) and the Commitments and Letters of Credit hereunder shall have terminated or expired (or, in the case of Letters of Credit, the LOC Obligations have been cash collateralized):
8.1Indebtedness of Subsidiaries.
The Borrower will not permit any of its Subsidiaries to create, incur, assume or permit to exist any Indebtedness, other than:
(a)Guarantee Obligations under guarantee agreements entered into pursuant to Section 7.10;
(b)Indebtedness existing on the Restatement Effective Date as set forth on Schedule 8.1;
(c)Indebtedness in respect of current accounts payable and accrued expenses incurred in the ordinary course of business;
(d)Indebtedness owing by a Subsidiary of the Borrower to the Borrower or another Subsidiary of the Borrower; provided that no such Indebtedness shall be assigned or pledged to a Person other than the Borrower or a Subsidiary;
(e)purchase money Indebtedness (including Capital Leases) to finance the purchase of any Property; provided that (i) the total of all such Indebtedness shall not exceed an aggregate principal amount of $175,000,000 at any one time outstanding, (ii) such Indebtedness when incurred shall not exceed the purchase price of the asset(s) financed and (iii) no such Indebtedness shall be refinanced for a principal amount in excess of the principal balance outstanding thereon at the time of such refinancing;
(f)Indebtedness arising from Permitted Receivables Financings in an amount not to exceed $1,000,000,000 in the aggregate at any one time outstanding;
(g)Indebtedness evidenced by Hedging Agreements entered into in the ordinary course of business and not for speculative purposes;
(h)any guarantees of Indebtedness of the Borrower by its Domestic Subsidiaries; provided that in the case of any guarantee by a Domestic Subsidiary of Material Debt of the Borrower, such Domestic Subsidiary becomes a guarantor of the Obligations as required by Section 7.10;
(i)Indebtedness of any Person that becomes a Subsidiary after the Restatement Effective Date, and Indebtedness secured by any Property acquired by a Subsidiary after the Restatement Effective Date; provided that such Indebtedness exists at the time such Person becomes a Subsidiary or such Property is acquired, is not created in contemplation thereof or in connection therewith and is not assumed or guaranteed by any Subsidiary of the Borrower (unless such assumption or guarantee is permitted by another clause of this Section 8.1);
(j)Indebtedness incurred after the Restatement Effective Date by Foreign Subsidiaries in an amount not to exceed $400,000,000 (or, the Dollar Equivalent thereof and measured for purposes of this clause (j), solely on the date of incurrence thereof) in the aggregate at any time outstanding;
(k)Refinancing Indebtedness in respect of Indebtedness permitted under clauses (b) and (i) above; and
(l)other secured or unsecured Indebtedness; provided, that at the time any such Indebtedness is incurred and after giving effect thereto, the aggregate amount of such Indebtedness and all outstanding Indebtedness theretofore incurred under this clause (l) does not exceed 15% of Net Worth at such time.
8.2Liens.
The Borrower will not, nor will it permit its Subsidiaries to, create, incur, assume or permit to exist any Lien with respect to any of its Property of any kind (whether real or personal, tangible or intangible), whether now owned or after acquired, other than:
(a)Permitted Liens;
(b)Liens existing on the Restatement Effective Date and identified on Schedule 8.2;
(c)Liens in connection with Indebtedness of the type permitted by Section 8.1(e) incurred by any Subsidiary on the assets financed with such Indebtedness or by Section 8.1(k) (but only in the case of Indebtedness permitted by Section 8.1(k) to the extent the refinanced Indebtedness was secured by Liens on the applicable asset);
(d)Liens upon Property acquired (or the Property of a Subsidiary that is acquired) after the Restatement Effective Date by the Borrower or its Subsidiaries, which Liens existed on such Property before the time of such acquisition and were not created in anticipation thereof; provided, however; that (A) no such Lien shall extend to or cover any Property other than the Property so acquired and improvements thereon and proceeds thereof, and (B) the Indebtedness secured by any such Lien is permitted under Section 8.1(i);
(e)Liens in connection with Permitted Receivables Financings;
(f)Liens on Property of non-wholly owned Subsidiaries of the Borrower incurred to finance working capital;
(g)Liens on Property of Foreign Subsidiaries securing Indebtedness of the type permitted by Section 8.1(j) incurred by Foreign Subsidiaries;
(h)other Liens securing Indebtedness or other obligations; provided, that at the time any such Lien is incurred and after giving effect thereto, the aggregate amount of Indebtedness and other obligations secured thereby under this clause (h) does not exceed 15% of Net Worth at such time; and
(i)renewals and extensions of the foregoing so long as such Liens (i) do not cover any additional Property, (ii) do not secure additional Indebtedness and (iii) are not otherwise prohibited by this Credit Agreement.
8.3Sale and Leaseback Transactions.
The Borrower will not, and will not permit any of its Subsidiaries to, enter into any Sale and Leaseback Transactions unless, after giving effect thereto, all Attributable Debt in respect of such Sale and Leaseback Transactions (measured, in the case of each such Sale and Leaseback Transaction at the time it is entered into by the Borrower or its Subsidiary) does not exceed 15% of Net Worth.
8.4Nature of Business.
The Borrower will not, nor will it permit its Subsidiaries to, alter the character of its business from that conducted as of the Restatement Effective Date or engage in any substantial manner in any business other than (a) the business conducted by the Borrower and its Subsidiaries as of the Restatement Effective Date and (b) other healthcare-related businesses and businesses reasonably related thereto; provided, that any business incidental, reasonably related or ancillary to the business conducted by the Borrower and the Subsidiaries, taken as a whole, on the Restatement Effective Date or reasonable extensions thereof shall be permitted hereunder.
8.5Fundamental Changes.
The Borrower will not enter into any transaction of merger or consolidation, or liquidate, wind up or dissolve itself, or suffer any such liquidation, winding-up or dissolution, or convey, sell, lease, transfer or otherwise voluntarily dispose of, in one transaction or a series of transactions, all or substantially all of its business or assets, whether now owned or hereafter acquired; provided that the Borrower may merge with a Subsidiary of the Borrower or any other Person if (a) the Borrower is the surviving Person and (b) at the time thereof and immediately after giving effect thereto no Default or Event of Default shall have occurred and be continuing or would result from such merger or consolidation.
8.6Transactions with Affiliates.
The Borrower will not, nor will it permit its Subsidiaries to, enter into any transaction or series of transactions, whether or not in the ordinary course of business, with any officer, director, shareholder or Affiliate other than on terms and conditions substantially as favorable as would be obtainable in a comparable arm’s-length transaction with a Person other than an officer, director, shareholder, Subsidiary or Affiliate, except that, notwithstanding the foregoing, each of the following shall be permitted: (a) transactions between or among the Borrower and its
Subsidiaries and transactions between or among Subsidiaries, (b) advances to employees in the ordinary course of business, (c) Dividends, (d) fees, compensation and other benefits paid to, and customary indemnity and reimbursement provided on behalf of, officers, directors and employees of the Borrower or any of its Subsidiaries in the ordinary course of business, (e) any employment agreements entered into by the Borrower or any of its Subsidiaries in the ordinary course of business, (f) any Permitted Receivables Financing and (g) transactions and agreements in existence on the Restatement Effective Date and listed on Schedule 8.6 and, in each case, any amendment thereto.
SECTION 9
EVENTS OF DEFAULT
9.1Events of Default.
An Event of Default shall exist upon the occurrence, and during the continuation, of any of the following specified events (each an “Event of Default”):
(a)Payment. The Borrower shall default in the payment (i) when due of any principal of any of the Loans or any reimbursement obligation arising from drawings under Letters of Credit or (ii) within three Business Days of when due of any interest on the Loans or any fees or other amounts owing hereunder.
(b)Representations. Any representation, warranty or statement made or deemed to be made by the Borrower herein, in any of the other Credit Documents, or in any statement or certificate delivered or required to be delivered pursuant hereto or thereto shall prove untrue in any material respect on the date as of which it was made or deemed to have been made.
(c)Covenants. The Borrower shall:
(i)default in the due performance or observance of any term, covenant or agreement contained in Sections 7.2, Section 7.3 or Section 7.10 or Section 8;
(ii)default in the due performance or observance by it of any term, covenant or agreement contained in Section 7.1 (excepting Section 7.1(e) for which the unremedied period shall only be five Business Days) and such default shall continue unremedied for a period of ten Business Days; or
(iii)default in the due performance or observance by it of any term, covenant or agreement (other than those referred to in subsections (a), (b), (c)(i) or (c)(ii) of this Section 9.1) contained in this Credit Agreement and such default shall continue unremedied for a period of at least 30 days after the earlier of an Authorized Officer of the Borrower becoming aware of such default or notice thereof given by the Administrative Agent.
(d)Other Credit Documents. (i) The Borrower shall default in the due performance or observance of any term, covenant or agreement in any of the other Credit Documents and such default shall continue unremedied for a period of at least 30 days after the earlier of an Authorized Officer of the Borrower becoming aware of such default or notice thereof given by the Administrative Agent, (ii) any Credit Document shall fail to be in full force and effect or the Borrower, or any future guarantor party thereto, shall so assert or (iii) any Credit Document shall fail to give the Administrative Agent and/or the Lenders the rights, powers and privileges purported to be created by such Credit Document.
(e)[Reserved].
(f)Bankruptcy, etc. The occurrence of any of the following with respect to the Borrower or any Domestic Subsidiary: (i) a court or governmental agency having jurisdiction in the premises shall enter a decree or order for relief in respect of the Borrower or such Domestic Subsidiary in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or appoint a receiver, liquidator, assignee, custodian, trustee, sequestrator, administrator or similar official of the Borrower or such Domestic Subsidiary or for any substantial part of its Property or ordering the winding up or liquidation of, or an administrator in respect of, its affairs, (ii) an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect is commenced against the Borrower or any Domestic Subsidiary and such petition remains unstayed and in effect for a period of 60 consecutive days, (iii) the Borrower or any Domestic Subsidiary shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consent to the entry of an order for relief in an involuntary case under any such law, or consent to the appointment or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator, administrator or similar official of such Person or any substantial part of its Property or make any general assignment for the benefit of creditors or (iv) the Borrower or any Domestic Subsidiary shall fail generally, or shall admit in writing its inability, to pay its debts as they become due or any action shall be taken by such Person in furtherance of any of the aforesaid purposes.
(g)Defaults under Other Indebtedness. With respect to any Indebtedness in excess of $200,000,000 (other than Indebtedness outstanding under this Credit Agreement) of the Borrower or any of its Subsidiaries (A) such Person shall (x) default in any payment (beyond the applicable grace period with respect thereto, if any) with respect to any such Indebtedness or (y) default (after giving effect to any applicable grace period) in the observance or performance of any covenant or agreement relating to such Indebtedness or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event or condition shall occur or condition exist, the effect of which default or other event or condition is to cause, or permit, the holder or holders of such Indebtedness (or trustee or agent on behalf of such holders, if any) to require any such Indebtedness to become due prior to its stated maturity, (B) any such Indebtedness shall be declared due and payable, or required to be prepaid other than by a regularly scheduled required prepayment prior to the stated maturity thereof or (C) any such Indebtedness shall mature and remain unpaid.
(h)Judgments. One or more judgments, orders, or decrees shall be entered against any one or more of the Borrower and its Subsidiaries involving a liability of $200,000,000 or more, in the aggregate, (to the extent not paid, covered by insurance provided by a carrier who has acknowledged coverage or covered by an indemnification from Corning Incorporated or SmithKline Beecham PLC) and such judgments, orders or decrees (i) are the subject of any enforcement proceeding commenced by any creditor or (ii) shall continue unsatisfied, undischarged and unstayed for a period ending on the first to occur of (A) the last day on which such judgment, order or decree becomes final and non-appealable or (B) 60 days.
(i)ERISA. The occurrence of any of the following events or conditions which individually or in the aggregate has had or would reasonably be expected to have a Material Adverse Effect: (i) any Plan (other than a Multiemployer Plan) shall fail to meet the “minimum funding standard” (as such term is defined in Section 302 of ERISA and Section 412 of the Code) applicable to each Plan, in each instance, whether or not waived, or any Lien shall arise on the assets of the Borrower or any ERISA Affiliate in favor of the PBGC or a Plan, other than a Multiemployer Plan, (ii) an ERISA Event shall occur or (iii) the Borrower or any ERISA Affiliate fails to pay when due, after the expiration of any applicable grace period, any installment payment with respect to its withdrawal liability under Section 4201 of ERISA under a Multiemployer Plan in an aggregate amount in excess of $200,000,000.
(j)Ownership. There shall occur a Change of Control.
9.2Acceleration; Remedies.
Upon the occurrence and during the continuation of an Event of Default, the Administrative Agent may or shall, upon the request and direction of the Required Lenders, take the following actions without prejudice to the rights of the Administrative Agent or any Lender to enforce its claims against the Borrower, except as otherwise specifically provided for herein:
(a)Termination of Commitments. Declare the Commitments terminated whereupon the Commitments shall be immediately terminated.
(b)Acceleration of Loans. Declare the unpaid principal of and any accrued interest in respect of all Loans, any reimbursement obligations arising from drawings under Letters of Credit and any and all other Indebtedness or obligations of any and every kind owing by the Borrower to any of the Lenders under the Credit Documents to be due whereupon the same shall be immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower.
(c)Cash Collateral. Direct the Borrower to pay (and the Borrower agrees that upon receipt of such notice, or upon the occurrence of an Event of Default under Section 9.1(f), it will immediately pay) to the Administrative Agent additional cash, to be held by the Administrative Agent, for the benefit of the Lenders, in a cash collateral account as additional security for the LOC Obligations in respect of subsequent drawings under all then outstanding Letters of Credit in an amount equal to the maximum aggregate amount which may be drawn under all Letters of Credits then outstanding.
(d)Enforcement of Rights. To the extent permitted by law, enforce any and all rights and interests created and existing under the Credit Documents, including, without limitation, all rights of set-off.
Notwithstanding the foregoing, if an Event of Default specified in Section 9.1(f) shall occur, then the Commitments shall automatically terminate and all Loans, all reimbursement obligations under Letters of Credit, all accrued interest in respect thereof, all accrued and unpaid fees and other indebtedness or obligations owing to the Lenders hereunder shall immediately become due and payable without the giving of any notice or other action by the Administrative Agent or the Lenders, which notice or other action is expressly waived by the Borrower.
Notwithstanding the fact that enforcement powers reside primarily with the Administrative Agent, each Lender has, to the extent permitted by law, a separate right of payment and shall be considered a separate “creditor” holding a separate “claim” within the meaning of Section 101(5) of the Bankruptcy Code or any other insolvency statute. Notwithstanding the foregoing, no Lender shall have any right individually to enforce any guarantee agreement delivered pursuant to Section 7.10, it being understood and agreed that all powers, rights and remedies thereunder may be exercised solely by the Administrative Agent on behalf of the Lenders and the relevant Issuing Lender in accordance with the terms thereof. Upon the execution of any guarantee pursuant to Section 7.10, each Lender will be deemed, by its acceptance of the benefits of such guarantee, to have agreed to the foregoing provisions.
9.3Allocation of Payments After Event of Default.
Notwithstanding any other provisions of this Credit Agreement, after the exercise of any remedies by the Administrative Agent or the Lenders pursuant to Section 9.2 (or after any Event of Default that causes the Commitments to terminate and/or all of the Obligations to be due hereunder), all amounts collected or received by the Administrative Agent or any Lender on account of amounts outstanding under any of the Credit Documents shall be paid over or delivered as follows:
FIRST, to the payment of all reasonable and documented out-of-pocket costs and expenses (including without limitation reasonable and documented out-of-pocket Attorney Costs) of the Administrative Agent in connection with enforcing the rights of the Lenders under the Credit Documents, pro rata as set forth below;
SECOND, to payment of any fees owed to the Administrative Agent, any Issuing Lender, the Swing Line Lender or any Lender, pro rata as set forth below;
THIRD, to the payment of all accrued interest payable to the Lenders hereunder, pro rata as set forth below;
FOURTH, to the payment of the outstanding principal amount of the Loans and unreimbursed drawings under Letters of Credit, and to the payment or cash collateralization of the outstanding LOC Obligations, pro rata as set forth below;
FIFTH, to all other obligations which shall have become due and payable under the Credit Documents and not repaid pursuant to clauses “FIRST” through “FOURTH” above; and
SIXTH, to the payment of the surplus, if any, to whoever may be lawfully entitled to receive such surplus.
In carrying out the foregoing, (a) amounts received shall be applied in the numerical order provided until exhausted prior to application to the next succeeding category; (b) each of the Lenders shall receive an amount equal to its pro rata share (based on the proportion that the then-outstanding Loans, and LOC Obligations held by such Lender bears to the aggregate then-outstanding Loans and LOC Obligations of amounts available to be applied; and (c) to the extent that any amounts available for distribution pursuant to clause “FOURTH” above are attributable to the issued but undrawn amount of outstanding Letters of Credit, such amounts shall be held by the Administrative Agent in a cash collateral account and applied (i) first, to reimburse the Issuing Lenders from time to time for any drawings under such Letters of Credit and (ii) then, following the expiration of all Letters of Credit, to all other obligations of the types described in clauses “FOURTH” and “FIFTH” above in the manner provided in this Section 9.3.
SECTION 10
AGENCY PROVISIONS
10.1Appointment.
(a)Each Lender hereby irrevocably appoints, designates and authorizes the Administrative Agent to take such action on its behalf under the provisions of this Credit Agreement and each other Credit Document and to exercise such powers and perform such duties as are expressly delegated to it by the terms of this Credit Agreement or any other Credit Document, together with such powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary contained elsewhere herein or in any other Credit Document, the Administrative Agent shall not have any duties or responsibilities, except those expressly set forth herein which duties shall be administrative in nature, nor shall the Administrative Agent have or be deemed to have any fiduciary or trustee relationship with any Lender or participant, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Credit Agreement or any other Credit Document or otherwise exist against the Administrative Agent. Without limiting the generality of the foregoing sentence, the use of the term “agent” herein and in the other Credit Documents with reference to the Administrative Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable law. Instead, such term is used merely as a matter of market custom, and is intended to create or reflect only an administrative relationship between independent contracting parties.
(b)Each Issuing Lender shall have all of the benefits and immunities (i) provided to the Administrative Agent in this Section 10 with respect to any acts taken by or omissions of any Issuing Lender in connection with Letters of Credit issued by it or proposed to be issued by it and the application and agreements for letters of credit pertaining to the Letters of Credit as fully as if the term “Administrative Agent” as used in this Section 10 included such Issuing Lender with respect to such acts or omissions and (ii) as additionally provided herein with respect to any Issuing Lender.
(c)Anything herein to the contrary notwithstanding, none of the Joint Bookrunners, Syndication Agent, Documentation Agents or Lead Arrangers listed on the cover page hereof shall have any powers, duties or obligations whatsoever under this Credit Agreement or the other Credit Documents, except in its capacity, as applicable, as Administrative Agent, a Lender or an Issuing Lender.
10.2Delegation of Duties.
The Administrative Agent may execute any of its duties under this Credit Agreement or any other Credit Document by or through Affiliates, agents, employees or attorneys-in-fact and shall be entitled to advice of counsel and other consultants or experts concerning all matters pertaining to such duties. The Administrative Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects with reasonable care.
10.3Exculpatory Provisions.
No Agent-Related Person shall (a) be liable for any action taken or omitted to be taken by any of them under or in connection with this Credit Agreement or any other Credit Document or the transactions contemplated hereby (except for its own gross negligence or willful misconduct in connection with its duties expressly set forth herein) or (b) be responsible in any manner to any Lender or participant for any recital, statement, representation or warranty made by the Borrower or any officer thereof, contained herein or in any other Credit Document, or in any certificate, report, statement or other document referred to or provided for in, or received by the Administrative Agent under or in connection with, this Credit Agreement or any other Credit Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Credit Agreement or any other Credit Document, or for any failure of the Borrower or any other party to any Credit Document to perform its obligations hereunder or thereunder. No Agent-Related Person shall be under any obligation to any Lender or participant to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Credit Agreement or any other Credit Document, or to inspect the properties, books or records of the Borrower or any of its Affiliates.
10.4Reliance on Communications.
(a)The Administrative Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, communication, signature, resolution, representation, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to the Borrower), independent accountants and other experts selected by the Administrative Agent. The Administrative Agent may deem and treat each Lender as the owner of its interests hereunder for all purposes unless a written notice of assignment, negotiation or transfer thereof shall have been delivered to the Administrative Agent in accordance with Section 11.3(b). The Administrative Agent shall be fully justified in failing or refusing to take any action
under any Credit Document unless it shall first receive such advice or concurrence of the Required Lenders as it deems appropriate and, if it so requests, it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Credit Agreement or any other Credit Document in accordance with a request or consent of the Required Lenders or all the Lenders, if required hereunder, and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders and participants, and their respective successors and assigns. Where this Credit Agreement expressly permits or prohibits an action unless the Required Lenders otherwise determine, the Administrative Agent shall, and in all other instances, the Administrative Agent may, but shall not be required to, initiate any solicitation for the consent or a vote of the Lenders.
(b)For purposes of determining compliance with the conditions specified in Section 5.1, each Lender that has signed this Credit Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter either sent by the Administrative Agent to such Lender for consent, approval, acceptance or satisfaction, or required thereunder to be consented to or approved by or acceptable or satisfactory to a Lender.
10.5Notice of Default.
The Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default, except with respect to defaults in the payment of principal, interest and fees required to be paid to the Administrative Agent for the account of the Lenders, unless the Administrative Agent shall have received written notice from a Lender or the Borrower referring to this Credit Agreement, describing such Default or Event of Default and stating that such notice is a “notice of default.” The Administrative Agent will notify the Lenders of its receipt of any such notice. The Administrative Agent shall take such action with respect to such Default or Event of Default as may be reasonably directed by the Required Lenders in accordance with Section 9.2; provided, however, that unless and until the Administrative Agent has received any such direction, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable or in the best interest of the Lenders.
10.6Non-Reliance on Administrative Agent and Other Lenders.
Each Lender and Issuing Lender acknowledges that no Agent-Related Person has made any representation or warranty to it, and that no act by the Administrative Agent hereinafter taken, including any consent to and acceptance of any assignment or review of the affairs of the Borrower or any of its Affiliates, shall be deemed to constitute any representation or warranty by any Agent-Related Person to any Lender as to any matter, including whether Agent-Related Persons have disclosed material information in their possession. Each Lender and Issuing Lender represents to the Administrative Agent that it has, independently and without reliance upon any Agent-Related Person, any Issuing Lender or any other Lender and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, Property, financial and other condition and creditworthiness of the Borrower and its Affiliates, and all applicable bank or other regulatory laws relating to the transactions contemplated hereby, and made its own decision to enter into this Credit Agreement and to extend credit to the Borrower hereunder. Each Lender and Issuing
Lender also represents that it will, independently and without reliance upon any Agent-Related Person, any Issuing Lender or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Credit Agreement and the other Credit Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, Property, financial and other condition and creditworthiness of the Borrower. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Administrative Agent herein, the Administrative Agent shall not have any duty or responsibility to provide any Lender or Issuing Lender with any credit or other information concerning the business, prospects, operations, Property, financial and other condition or creditworthiness of the Borrower or any of its Affiliates which may come into the possession of any Agent-Related Person.
10.7Indemnification.
(a)To the extent that the Borrower for any reason fails to indefeasibly pay any amount required under Section 11.5 to be paid by it to the Administrative Agent (or any sub-agent thereof), the relevant Issuing Lender or any Agent-Related Person of any of the foregoing, each Lender severally, not jointly, agrees to pay to the Administrative Agent (or any such sub-agent), each relevant Issuing Lender or such Agent-Related Person, as the case may be, such Lender’s Revolving Loan Commitment Percentage (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount; provided that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against the Administrative Agent (or any such sub-agent) or such Issuing Lender in its capacity as such, or against any Agent-Related Person of any of the foregoing acting for the Administrative Agent (or any such sub-agent) or such Issuing Lender in connection with such capacity.
(b)Each Lender shall severally indemnify the Administrative Agent for (i) any Taxes attributable to such Lender and paid by the Administrative Agent (but only to the extent the Borrower has not already indemnified the Administrative Agent for such Taxes and without limiting the obligation of the Borrower to do so), (ii) any taxes attributable to such Lender that are excluded from the definition of Taxes in Section 3.13(a) or 3.13(f) and that are paid by the Administrative Agent, (iii) any taxes attributable to such Lender’s failure to comply with the provisions of Section 11.3(d) relating to the maintenance of a Participant Register and (iv) any liability arising from or with respect to any taxes described in clauses (i), (ii) or (iii) above (including any taxes imposed or asserted by any jurisdiction on amounts payable under this Section 10.7(b), penalties, interest and reasonable expenses).
10.8Administrative Agent in Its Individual Capacity.
JPMorgan and its Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire Capital Stock of and generally engage in any kind of banking, trust, financial advisory, underwriting or other business with the Borrower and its Affiliates as though JPMorgan were not the Administrative Agent or an Issuing Lender hereunder and without notice to or consent of the Lenders. The Lenders and Issuing Lenders acknowledge that, pursuant to such activities, JPMorgan or its Affiliates may receive information regarding the Borrower or its Affiliates (including information that may be subject to confidentiality obligations in favor of the Borrower or such Affiliate) and that the Administrative Agent shall be under no obligation to provide such information to them. With respect to its Loans, JPMorgan shall have the same rights and powers under this Credit Agreement as any other Lender and may exercise such rights and powers as though it were not the Administrative Agent or an Issuing Lender, and the terms “Lender” and “Lenders” include JPMorgan in its individual capacity.
10.9Successor Agent.
The Administrative Agent may resign as Administrative Agent upon 30 days’ notice to the Lenders. If the Administrative Agent resigns under this Credit Agreement, the Required Lenders shall appoint from among the Lenders a successor administrative agent for the Lenders (such appointment, absent the existence of an Event of Default, to be subject to the consent of the Borrower, which consent of the Borrower shall not be unreasonably withheld or delayed). If no successor administrative agent is appointed prior to the effective date of the resignation of the Administrative Agent, the Administrative Agent may appoint, after consulting with the Lenders and the Borrower, a successor administrative agent from among the Lenders. Upon the acceptance of its appointment as successor administrative agent hereunder, such successor administrative agent shall succeed to all the rights, powers and duties of the retiring Administrative Agent and the term “Administrative Agent” shall mean such successor administrative agent and the retiring Administrative Agent’s appointment, powers and duties as Administrative Agent shall be terminated. After any retiring Administrative Agent’s resignation hereunder as Administrative Agent, the provisions of this Section 10 and Sections 11.5 and 11.9 shall continue to inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Credit Agreement. If no successor administrative agent has accepted appointment as Administrative Agent by the date which is 30 days following a retiring Administrative Agent’s notice of resignation, the retiring Administrative Agent’s resignation shall nevertheless thereupon become effective and the Lenders shall perform all of the duties of the Administrative Agent hereunder until such time, if any, as the Required Lenders appoint a successor agent as provided for above.
10.10Agent May File Proofs of Claim.
In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Borrower or any of its Subsidiaries, the Administrative Agent (irrespective of whether the principal of any Loan shall then be due and payable as herein expressed or by declaration or otherwise and irrespective of whether the Administrative Agent shall have made any demand on the Borrower) shall be entitled and empowered, by intervention in such proceeding or otherwise:
(a)to file and prove a claim for the whole amount of the principal and interest owing and unpaid in respect of the Loans and all other Obligations that are owing and unpaid and to file such other documents as may be necessary or advisable in order to have the claims of the Lenders and the Administrative Agent (including any claim for the reasonable and documented out-of-pocket compensation, expenses, disbursements and advances of the Lenders and the Administrative Agent and their respective agents and counsel and all other amounts due the Lenders and the Administrative Agent) allowed in such judicial proceeding; and
(b)to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same;
and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Lender to make such payments to the Administrative Agent and, in the event that the Administrative Agent shall consent to the making of such payments directly to the Lenders, to pay to the Administrative Agent any amount due for the reasonable and documented out-of-pocket compensation, expenses, disbursements and advances of the Administrative Agent and its agents and counsel, and any other amounts due the Administrative Agent under the Credit Documents.
Nothing contained herein shall be deemed to authorize the Administrative Agent to authorize or consent to or accept or adopt on behalf of any Lender any plan of reorganization, arrangement, adjustment or composition affecting the Obligations or the rights of any Lender or to authorize the Administrative Agent to vote in respect of the claim of any Lender in any such proceeding.
10.11Certain Lender Representations, Etc.
(a)Each Lender represents and warrants, as of the date such Person became a Lender party hereto, to, and covenants, from the date such Person became a Lender party hereto to the date such Person ceases being a Lender party hereto, for the benefit of the Administrative Agent and the institutions named as Joint Lead Arrangers, Joint Bookrunners, Syndication Agent and Documentation Agents listed on the cover page hereof and their respective Affiliates, and not, for the avoidance of doubt, to or for the benefit of the Borrower or any of its Subsidiaries, that at least one of the following is and will be true:
(i)such Lender is not using “plan assets” (within the meaning of 29 CFR § 2510.3-101, as modified by Section 3(42) of ERISA) of one or more Benefit Plans in connection with the Commitments,
(ii)the transaction exemption set forth in one or more PTEs, such as PTE 84-14 (a class exemption for certain transactions determined by independent qualified professional asset managers), PTE 95-60 (a class exemption for certain transactions involving insurance company general accounts), PTE 90-1 (a class exemption for certain transactions involving insurance company pooled separate accounts), PTE 91-38 (a class exemption for certain transactions involving bank collective investment funds) or PTE 96-23 (a class exemption for certain transactions determined by in-house asset managers), is applicable with respect to such Lender’s entrance into, participation in, administration of and performance of the Commitments and this Credit Agreement,
(iii)(A) such Lender is an investment fund managed by a “Qualified Professional Asset Manager” (within the meaning of Part VI of PTE 84-14), (B) such Qualified Professional Asset Manager made the investment decision on behalf of such Lender to enter into, participate in, administer and perform the Commitments and this Credit Agreement, (C) the entrance into, participation in, administration of and performance of the Commitments and this Credit Agreement satisfies the requirements of sub-sections (b) through (g) of Part I of PTE 84-14 and (D) to the best knowledge of such Lender, the requirements of subsection (a) of Part I of PTE 84-14 are satisfied with respect to such Lender’s entrance into, participation in, administration of and performance of the Commitments and this Credit Agreement, or
(iv)such other representation, warranty and covenant as may be agreed in writing between the Administrative Agent, in its sole discretion, and such Lender.
(b)In addition, unless clause (i) of the immediately preceding paragraph is true with respect to such Lender or such Lender has not provided another representation, warranty and covenant as provided in clause (iv) of the immediately preceding paragraph, such Lender further represents and warrants, as of the date such Person became a Lender party hereto, to, and covenants, from the date such Person became a Lender party hereto to the date such Person ceases being a Lender party hereto, for the benefit of, the Administrative Agent and the institutions named as Bookrunners, Syndication Agent, Documentation Agents or Lead Arrangers on the cover page hereof and their respective Affiliates, and not, for the avoidance of doubt, to or for the benefit of the Borrower or any of its Subsidiaries, that:
(i)none of the Administrative Agent or any of the institutions named as Joint Lead Arrangers, Joint Bookrunners, Syndication Agent and Documentation Agents on the cover page hereof or their respective Affiliates is a fiduciary with respect to the assets of such Lender (including in connection with the reservation or exercise of any rights by any Person under this Credit Agreement or any documents related to hereto or thereto),
(ii)the Person making the investment decision on behalf of such Lender with respect to the entrance into, participation in, administration of and performance of the Commitments and this Credit Agreement is independent (within the meaning of 29 CFR § 2510.3-21) and is a bank, an insurance carrier, an investment adviser, a broker-dealer or other person that holds, or has under management or control, total assets of at least $50,000,000, in each case as described in 29 CFR § 2510.3-21(c)(1)(i)(A)-(E),
(iii)the Person making the investment decision on behalf of such Lender with respect to the entrance into, participation in, administration of and performance of the Commitments and this Credit Agreement is capable of evaluating investment risks independently, both in general and with regard to particular transactions and investment strategies,
(iv)the Person making the investment decision on behalf of such Lender with respect to the entrance into, participation in, administration of and performance of the Commitments and this Credit Agreement is a fiduciary under ERISA or the Code, or both, with respect to the Commitments and this Credit Agreement and is responsible for exercising independent judgment in evaluating the transactions hereunder, and
(v)no fee or other compensation is being paid directly to the Administrative Agent or any of the institutions named as Joint Lead Arrangers, Joint Bookrunners, Syndication Agent and Documentation Agents on the cover page of this Credit Agreement or their respective Affiliates for investment advice (as opposed to other services) in connection with the Commitments or this Credit Agreement.
(c)The Administrative Agent and the institutions named as Joint Lead Arrangers, Joint Bookrunners, Syndication Agent and Documentation Agents on the cover page of this Credit Agreement hereby inform the Lenders that each such Person is not undertaking to provide impartial investment advice, or to give advice in a fiduciary capacity, in connection with the transactions contemplated hereby, and that such Person has a financial interest in the transactions contemplated hereby in that such Person or an Affiliate thereof (i) may receive interest or other payments with respect to the Commitments and this Credit Agreement, (ii) may recognize a gain if it extended the Commitments for an amount less than the amount being paid for an interest in the Commitments by such Lender or (iii) may receive fees or other payments in connection with the transactions contemplated hereby or otherwise, including structuring fees, commitment fees, arrangement fees, facility fees, upfront fees, underwriting fees, ticking fees, agency fees, administrative agent or collateral agent fees, utilization fees, minimum usage fees, letter of credit fees, fronting fees, deal-away or alternate transaction fees, amendment fees, processing fees, term out premiums, banker’s acceptance fees, breakage or other early termination fees or fees similar to the foregoing.
(d)(i) Each Lender hereby agrees that (x) if the Administrative Agent notifies such Lender that the Administrative Agent has determined in its sole discretion that any funds received by such Lender from the Administrative Agent or any of its Affiliates (whether as a payment, prepayment or repayment of principal, interest, fees or otherwise; individually and collectively, a “Payment”) were erroneously transmitted to such Lender (whether or not known to such Lender), and demands the return of such Payment (or a portion thereof), such Lender shall promptly, but in no event later than one Business Day thereafter, return to the Administrative Agent the amount of any such Payment (or portion thereof) as to which such a demand was made in same day funds, together with interest thereon in respect of each day from and including the date such Payment (or portion thereof) was received by such Lender to the date such amount is repaid to the Administrative Agent at the greater of the NYFRB Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation from time to time in effect, and (y) to the extent permitted by applicable law, such Lender shall not assert, and hereby waives, as to the Administrative Agent, any claim, counterclaim, defense or right of set-off or recoupment with respect to any demand, claim or counterclaim by the Administrative Agent for the return of any Payments received, including without limitation any defense based on “discharge for value” or any similar doctrine. A notice of the Administrative Agent to any Lender under this Section 10.11(d) shall be conclusive, absent manifest error.
(ii)Each Lender hereby further agrees that if it receives a Payment from the Administrative Agent or any of its Affiliates (x) that is in a different amount than, or on a different date from, that specified in a notice of payment sent by the Administrative Agent (or any of its Affiliates) with respect to such Payment (a “Payment Notice”) or (y) that was not preceded or accompanied by a Payment Notice, it shall be on notice, in each such case, that an error has been made with respect to such Payment. Each Lender agrees that, in each such case, or if it otherwise becomes aware a Payment (or portion thereof) may have been sent in error, such Lender shall promptly notify the Administrative Agent of such occurrence and, upon demand from the Administrative Agent, it shall promptly, but in no event later than one Business Day thereafter, return to the Administrative Agent the amount of any such Payment (or portion thereof) as to which such a demand was made in same day funds, together with interest thereon in respect of each day from and including the date such Payment (or portion thereof) was received by such Lender to the date such amount is repaid to the Administrative Agent at the greater of the NYFRB Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation from time to time in effect.
(iii)The Borrower hereby agrees that (x) in the event an erroneous Payment (or portion thereof) are not recovered from any Lender that has received such Payment (or portion thereof) for any reason, the Administrative Agent shall be subrogated to all the rights of such Lender with respect to such amount and (y) an erroneous Payment shall not pay, prepay, repay, discharge or otherwise satisfy any Obligations owed by the Borrower, except, in each case, to the extent such erroneous Payment is, and solely with respect to the amount of such erroneous Payment that is, comprised of funds received by the Administrative Agent or any of its Affiliates from the Borrower.
(iv)Each party’s obligations under this Section 10.11(d) shall survive the resignation or replacement of the Administrative Agent or any transfer of rights or obligations by, or the replacement of, a Lender, the termination of the Commitments or the repayment, satisfaction or discharge of all Obligations under any Credit Document.
SECTION 11
MISCELLANEOUS
11.1Notices, Etc.
(a)General. Unless otherwise expressly provided herein, all notices and other communications provided for hereunder shall be in writing (including by facsimile transmission). All such written notices shall be mailed by certified or registered mail, faxed or delivered to the applicable address, facsimile number or (subject to subsection (c) below) electronic mail address, and all notices and other communications expressly permitted hereunder to be given by telephone shall be made to the applicable telephone number, as follows:
(i)if to the Borrower, to the address, facsimile number, electronic mail address or telephone number specified for the Borrower on Schedule 11.1 or to such other address, facsimile number, electronic mail address or telephone number as shall be designated by such party in a notice to the other parties;
(ii)if to the Administrative Agent or to the Swing Line Lender, to JPMorgan Chase Bank, N.A., 10 South Dearborn, Floor L2, Suite IL1-0480, Chicago, IL 60603-2300, Attention of Selena Shofner (Email: selena.shofner@chase.com) with copy(s) to JPMorgan Chase Bank, N.A., Middle Market Servicing, 10 South Dearborn, Floor L2, Suite IL10480, Chicago, IL 60603-2300, Attention of Commercial Banking Group (Facsimile No. (844) 490-5663) (Email: jpm.agency.cri@jpmorgan.com; jpm.agency.servicing.1@jpmorgan.com);
(iii)if to JPMorgan, in its capacity as an Issuing Lender, to JPMorgan Chase Bank, N.A., 10 South Dearborn, Floor L2, Suite IL10480, Chicago, IL 60603-2300, Attention of LC Agency Team (Telephone No. (800) 364-1969) (Facsimile No. (856) 294-5267) (Email: chicago.lc.agency.activity.team@jpmchase.com);
(iv)if to Morgan Stanley Bank, N.A., in its capacity as an Issuing Lender, to Morgan Stanley Bank, N.A., 1000 Lancaster Street, Baltimore, MD 21202, United States, Attention of Morgan Stanley Loan Servicing (Facsimile No. (718) 233-2140) (Email: msloanservicing@morganstanley.com);
(v)if to Mizuho Bank, Ltd., in its capacity as an Issuing Lender, to Mizuho Bank, Ltd., 1800 Plaza Ten, Harborside Financial Ctr., Jersey City, NJ 07311, United States, Attention of Shirly Wu (Facsimile No. (201) 626-9941) (Email: LAU_USCorp2@mizuhocbus.com);
(vi)if to Wells Fargo Bank, N.A., in its capacity as an Issuing Lender, to Wells Fargo Bank, N.A., 401 N. Research Pkwy., Winston-Salem, NC 27101, United States, Attention of SBLC New (Email: SLBC-New@wellsfargo.com); and
(vii)if to any other Lender, to the address, facsimile number, electronic mail address or telephone number specified in its Administrative Questionnaire provided by the Administrative Agent or to such other address, facsimile number, electronic mail address or telephone number as shall be designated by such party in a notice to the Borrower and the Administrative Agent.
Notices sent by hand or overnight courier service, or mailed by certified or registered mail, shall be deemed to have been given when received; notices sent by facsimile shall be deemed to have been given when sent (except that, if not given during normal business hours for the recipient, such notices shall be deemed to have been given at the opening of business on the next Business Day for the recipient). Notices delivered through electronic communications to the extent provided in subsection (b) below, shall be effective as provided in such subsection (b).
(b)Electronic Communications. Notices and other communications to the Lenders hereunder may be delivered or furnished by electronic communication (including email and Internet or intranet websites) pursuant to procedures approved by the Administrative Agent, provided that the foregoing shall not apply to notices to any Lender pursuant to Section 2 if such Lender has notified the Administrative Agent that it is incapable of receiving notices under such
Section 2 by electronic communication. The Administrative Agent or the Borrower may, in its discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it, provided that approval of such procedures may be limited to particular notices or communications. Unless the Administrative Agent otherwise prescribes, (i) notices and other communications sent to an e-mail address shall be deemed received upon the sender’s receipt of an acknowledgement from the intended recipient (such as by the “return receipt requested” function, as available, return e-mail or other written acknowledgement), provided that if such notice or other communication is not sent during the normal business hours of the recipient, such notice or communication shall be deemed to have been sent at the opening of business on the next Business Day for the recipient, and (ii) notices or communications posted to an Internet or intranet website shall be deemed received upon the deemed receipt by the intended recipient at its e-mail address as described in the foregoing clause (i) of notification that such notice or communication is available and identifying the website address therefor.
(c)The Platform. THE PLATFORM IS PROVIDED “AS IS” AND “AS AVAILABLE.” THE AGENT-RELATED PERSONS DO NOT WARRANT THE ACCURACY OR COMPLETENESS OF THE BORROWER MATERIALS OR THE ADEQUACY OF THE PLATFORM, AND EXPRESSLY DISCLAIM LIABILITY FOR ERRORS IN OR OMISSIONS FROM THE BORROWER MATERIALS. NO WARRANTY OF ANY KIND, EXPRESS, IMPLIED OR STATUTORY, INCLUDING ANY WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON-INFRINGEMENT OF THIRD PARTY RIGHTS OR FREEDOM FROM VIRUSES OR OTHER CODE DEFECTS, IS MADE BY ANY AGENT-RELATED PERSON IN CONNECTION WITH THE BORROWER MATERIALS OR THE PLATFORM. In no event shall the Agent-Related Persons have any liability to the Borrower, any Lender or any other Person for losses, claims, damages, liabilities or expenses of any kind (whether in tort, contract or otherwise) arising out of the Borrower’s or the Administrative Agent’s transmission of Borrower Materials through the Internet, except to the extent that such losses, claims, damages, liabilities or expenses are determined by a court of competent jurisdiction by a final and non-appealable judgment to have resulted from the gross negligence, bad faith or willful misconduct of such Agent-Related Person; provided, however, that in no event shall any Agent-Related Person have any liability to the Borrower, any Lender or any other Person for indirect, special, incidental, consequential or punitive damages (as opposed to direct or actual damages).
(d)Effectiveness of Facsimile or Electronically Transmitted Documents and Signatures. Credit Documents may be transmitted and/or signed by facsimile or other electronic means (e.g. “.pdf” or “.tif”). The effectiveness of any such documents and signatures shall, subject to applicable law, have the same force and effect as manuallysigned originals and shall be binding on the Borrower, the Administrative Agent and the Lenders. The Administrative Agent may also require that any such documents and signatures be confirmed by a manuallysigned original thereof; provided, however, that the failure to request or deliver the same shall not limit the effectiveness of any document or signature transmitted by facsimile or other electronic means (e.g. “.pdf” or “.tif”).
(e)Reliance by Administrative Agent and Lenders. The Administrative Agent and the Lenders shall be entitled to rely and act upon any notices (including telephonic notices) purportedly given by or on behalf of the Borrower even if (i) such notices were not made in a
manner specified herein, were incomplete or were not preceded or followed by any other form of notice specified herein, or (ii) the terms thereof, as understood by the recipient, varied from any confirmation thereof. The Borrower shall indemnify each AgentRelated Person and each Lender from all losses, costs, expenses and liabilities resulting from the reliance by such Person on each notice purportedly given by or on behalf of the Borrower. All telephonic notices to and other communications with the Administrative Agent may be recorded by the Administrative Agent, and each of the parties hereto hereby consents to such recording.
(f)Change of Address, Etc. Each of the Borrower, the Administrative Agent, each Issuing Lender and the Swing Line Lender may change its address, telecopier or telephone number for notices and other communications hereunder by written notice to the other parties hereto. Each other Lender may change its address, telecopier or telephone number for notices and other communications hereunder by notice to the Borrower, the Administrative Agent, each Issuing Lender and the Swing Line Lender. In addition, each Lender agrees to notify the Administrative Agent from time to time to ensure that the Administrative Agent has on record (i) an effective address, contact name, telephone number, telecopier number and electronic mail address to which notices and other communications may be sent and (ii) accurate wire instructions for such Lender.
11.2Right of Set-Off.
In addition to any rights now or hereafter granted under applicable law or otherwise, and not by way of limitation of any such rights, upon the occurrence of an Event of Default and the commencement of remedies described in Section 9.2, each Lender is authorized at any time and from time to time, without presentment, demand, protest or other notice of any kind (all of which rights being hereby expressly waived), to set-off and to appropriate and apply any and all deposits (general or special) and any other indebtedness at any time held or owing by such Lender (including, without limitation, branches, agencies or Affiliates of such Lender wherever located) to or for the credit or the account of the Borrower against obligations and liabilities of the Borrower to the Lenders hereunder, under the Notes, the other Credit Documents or otherwise, irrespective of whether the Administrative Agent or the Lenders shall have made any demand hereunder and although such obligations, liabilities or claims, or any of them, may be contingent or unmatured, and any such set-off shall be deemed to have been made immediately upon the occurrence of an Event of Default even though such charge is made or entered on the books of such Lender subsequent thereto. The Borrower hereby agrees that any Person purchasing a participation in the Loans and Commitments hereunder pursuant to Section 11.3(d) or 3.8 may exercise all rights of set-off with respect to its participation interest as fully as if such Person were a Lender hereunder.
11.3Benefit of Agreement.
(a)Generally. The provisions of this Credit Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that the Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of each Lender and no Lender may assign or otherwise transfer any of its rights or obligations hereunder except (i) to an Eligible Assignee in accordance with the provisions of subsection (b) of this Section, (ii) by way of participation in accordance with the provisions of subsection (d) of this Section, (iii) by way of pledge or assignment of a security interest subject to the restrictions of subsection (f) of this Section or (iv) to an SPC in accordance with the provisions of subsection (g) of this Section (and
any other attempted assignment or transfer by any party hereto shall be null and void). Nothing in this Credit Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby, Loan Participants to the extent provided in subsection (d) of this Section and, to the extent expressly contemplated hereby, the Indemnitees) any legal or equitable right, remedy or claim under or by reason of this Credit Agreement.
(b)Assignments by Lenders. Any Lender may at any time assign to one or more assignees all or a portion of its rights and obligations under this Credit Agreement (including all or a portion of its Commitment and the Loans (including participations in LOC Obligations and in Swing Line Loans) at the time owing to it); provided that any such assignment shall be subject to the following conditions:
(i)Minimum Amounts.
(A)in the case of an assignment of the entire remaining amount of the assigning Lender’s Commitment and the Loans at the time owing to it or in the case of an assignment to a Lender, an Affiliate of a Lender or an Approved Fund, no minimum amount need be assigned; and
(B)in any case not described in subsection (b)(i)(A) of this Section, the aggregate amount of the Commitment (which for this purpose includes Loans outstanding thereunder) or, if the applicable Commitment is not then in effect, the principal outstanding balance of the Loans of the assigning Lender subject to each such assignment, shall not be less than $5,000,000 unless the Administrative Agent and, so long as no Event of Default has occurred and is continuing, the Borrower otherwise consents (each such consent not to be unreasonably withheld or delayed); provided, however, that concurrent assignments to members of an Assignee Group and concurrent assignments from members of an Assignee Group to a single Eligible Assignee (or to an Eligible Assignee and members of its Assignee Group) will be treated as a single assignment for purposes of determining whether such minimum amount has been met.
(ii)Proportionate Amounts. Each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender’s rights and obligations under this Credit Agreement with respect to the Loans or the Commitment assigned, except that this clause (ii) shall not apply to the Swing Line Lender’s rights and obligations in respect of Swing Line Loans;
(iii)Required Consents. No consent shall be required for any assignment except to the extent required by subsection (b)(i)(B) of this Section and as set forth below:
(A)the consent of the Borrower (such consent not to be unreasonably withheld or delayed) shall be required unless (1) an Event of Default has occurred and is continuing at the time of such assignment or
(2) such assignment is to a Lender, an Affiliate of a Lender or an Approved Fund, and such consent shall be deemed given if no objection is received by the assigning Lender and the Administrative Agent from the Borrower within five Business Days after notice of such proposed assignment has been delivered to the Borrower;
(B)the consent of the Administrative Agent (such consent not to be unreasonably withheld or delayed) shall be required for any assignment in respect of the Revolving Credit Facility unless such assignment is to a Lender or an Affiliate of a Lender;
(C)the consent of each Issuing Lender (such consent not to be unreasonably withheld or delayed) shall be required for any assignment that increases the obligation of the assignee to participate in exposure under one or more Letters of Credit (whether or not then outstanding); and
(D)the consent of the Swing Line Lender (such consent not to be unreasonably withheld or delayed) shall be required for any assignment in respect of the Revolving Credit Facility.
(iv)Assignment and Assumption. The parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Assumption, together with a processing and recordation fee in the amount of $3,500; provided, however, that the Administrative Agent may, in its sole discretion, elect to waive such processing and recordation fee in the case of any assignment. The assignee, if it is not a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire.
(v)No Assignment to Borrower. No such assignment shall be made to the Borrower or any of the Borrower’s Affiliates or Subsidiaries.
(vi)No Assignment to Natural Persons. No such assignment shall be made to a natural person.
Subject to acceptance and recording thereof by the Administrative Agent pursuant to subsection (c) of this Section, from and after the effective date specified in each Assignment and Assumption, the assignee thereunder shall be a party to this Credit Agreement and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Lender under this Credit Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Credit Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Lender’s rights and obligations under this Credit Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 3.9, 3.12, 3.13, 3.14 and 11.5 with respect to facts and circumstances occurring prior to the effective date of such assignment). Upon request, the Borrower (at its expense) shall execute and deliver a Note to the assignee Lender. Any assignment or transfer by a Lender of rights or obligations under this Credit Agreement that does not comply with this subsection shall be treated for purposes of this Credit Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with subsection (d) of this Section.
(c)Register. The Administrative Agent, acting solely for this purpose as an agent of the Borrower, shall maintain at the Agency Service Address a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitments of, and principal amounts (and stated interest) of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the “Register”). The entries in the Register shall be conclusive (absent manifest error), and the Borrower, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Credit Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Borrower, at any reasonable time and from time to time upon reasonable prior notice. In addition, the Register shall be available for inspection by any Lender as to entries pertaining to it at any reasonable time and from time to time upon reasonable prior notice.
(d)Participations. Any Lender may at any time, without the consent of, or notice to, the Borrower, any Issuing Lender, the Swing Line Lender or the Administrative Agent, sell participations to any Person (other than a natural person or the Borrower or any of the Borrower’s Affiliates or Subsidiaries or any competitor of the Borrower identified in a letter dated the Restatement Effective Date of the Borrower to the Administrative Agent (as such letter may be amended, amended and restated, supplemented or otherwise modified by the Borrower from time to time to identify additional Persons engaged in the business in which the Borrower is engaged), which letter shall be made available to the Lenders) (each, a “Loan Participant”), in all or a portion of such Lender’s rights and/or obligations under this Credit Agreement (including all or a portion of its Commitment and/or the Loans; provided that (i) such Lender’s obligations under this Credit Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (iii) the Borrower, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations under this Credit Agreement. Each Lender that sells a participation pursuant to this Section 11.3(d) shall, acting as a non-fiduciary agent of the Borrower solely for the purpose of maintaining a register in order to satisfy the requirements of Section 5f.103-1(c) of the United States Treasury Regulations, maintain a register on which it records the name and address of each Loan Participant to which it has sold a participation and the principal amounts (and stated interest) of each such Loan Participant’s interest in the Loans or other rights and obligations of such Lender under this Credit Agreement (the “Participant Register”); provided that no Lender shall have any obligation to disclose all or any portion of the Participant Register to any Person (including the identity of any Loan Participant or any information relating to a Loan Participant’s interest in any Commitments, Loans, Letters of Credit or its other obligations under any this Credit Agreement) except to the extent that such disclosure is necessary to establish that such Commitment, Loan, Letter of Credit or other obligation is in registered form under Section 5f.103-1(c) of the United States Treasury Regulations. The entries in the Participant Register shall be conclusive absent manifest error. Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Credit Agreement and to approve any amendment, modification or waiver of any provision of this Credit Agreement; provided that such agreement or instrument may provide that such Lender will not, without the consent of the Loan Participant, agree to any amendment, waiver or other modification that would change the amount, interest rate or maturity of the Loans or any other matter that requires unanimous consent of all of the Lenders. Subject to subsection (e) of this Section, the Borrower agrees that each Loan Participant shall be entitled to the benefits of Sections 3.9, 3.12, 3.13 and 3.14 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to subsection (b) of this Section. To the extent permitted by law, each Loan Participant also shall be entitled to the benefits of Section 11.2 as though it were a
Lender, provided such Loan Participant agrees to be subject to Section 3.8 as though it were a Lender.
(e)Loan Participant’s Rights. A Loan Participant shall not be entitled to receive any greater payment under Section 3.9, 3.12 or 3.14 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Loan Participant, unless the sale of the participation to such Loan Participant is made with the Borrower’s prior written consent. A Loan Participant that would be a foreign Lender if it were a Lender shall not be entitled to the benefits of Section 3.13 unless the Borrower is notified of the participation sold to such Loan Participant, the participating Lender provides the Borrower with an IRS Form W-8IMY and such Loan Participant agrees, for the benefit of the Borrower, to comply with Section 3.13 as though it were a Lender.
(f)Unrestricted Assignments. Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Credit Agreement (including under its Note(s), if any) to secure obligations of such Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank, and this Section shall not apply to any such pledge or assignment of a security interest; provided that no such pledge or assignment shall release such Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto.
(g)Special Purpose Entities. Notwithstanding anything to the contrary contained herein, so long as any action in accordance with this Section 11.3(g) does not cause increased costs or expenses for the Borrower, any Lender (a “Granting Lender”) may grant to a special purpose funding vehicle (an “SPC”) the option to fund all or any part of any Loan that such Granting Lender would otherwise be obligated to fund pursuant to this Credit Agreement; provided that (i) nothing herein shall constitute a commitment by any SPC to fund any Loan, (ii) if an SPC elects not to exercise such option or otherwise fails to fund all or any part of such Loan, the Granting Lender shall be obligated to fund such Loan pursuant to the terms hereof, (iii) no SPC shall have any voting rights pursuant to Section 11.6 and (iv) with respect to notices, payments and other matters hereunder, the Borrower, the Administrative Agent and the Lenders shall not be obligated to deal with an SPC, but may limit their communications and other dealings relevant to such SPC to the applicable Granting Lender. The funding of a Loan by an SPC hereunder shall utilize the Commitment of the Granting Lender to the same extent that, and as if, such Loan were funded by such Granting Lender. Each party hereto hereby agrees that no SPC shall be liable for any indemnity or payment under this Credit Agreement for which a Lender would otherwise be liable for so long as, and to the extent, the Granting Lender provides such indemnity or makes such payment. Notwithstanding anything to the contrary contained in this Credit Agreement, any SPC may disclose any non-public information relating to its funding of Loans to any rating agency, commercial paper dealer or provider of any surety or guarantee to such SPC so long as such disclosure is clearly designated as being made on a confidential basis. This Section 11.3(g) may not be amended without the prior written consent of each Granting Lender, all or any part of whose Loan is being funded by an SPC at the time of such amendment.
(h)Electronic Execution of Assignments. The words “execution,” “signed,” “signature,” and words of like import in any Assignment and Assumption shall be deemed to include Electronic Signatures or the keeping of records in electronic form, each of which shall be of the same legal effect, validity or enforceability as a manually executed signature or the use of a paper-based recordkeeping system, as the case may be, to the extent and as provided for in any applicable law, including the Federal Electronic Signatures in Global and National Commerce Act, the New York State Electronic Signatures and Records Act, or any other similar state laws based on the Uniform Electronic Transactions Act.
11.4No Waiver; Remedies Cumulative.
No failure or delay on the part of the Administrative Agent or any Lender in exercising any right, power or privilege hereunder or under any other Credit Document and no course of dealing between the Borrower and the Administrative Agent or any Lender shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or under any other Credit Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder or thereunder. The rights and remedies provided herein are cumulative and not exclusive of any rights or remedies which the Administrative Agent or any Lender would otherwise have. No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of the Administrative Agent or the Lenders to any other or further action in any circumstances without notice or demand.
11.5Payment of Expenses; Indemnification.
(a)The Borrower shall pay on demand:
(i)any and all Attorney Costs and reasonable and documented out-of-pocket costs and expenses incurred by the Administrative Agent, the Lead Arrangers and their respective Affiliates in connection with the drafting, negotiation and administration of the Credit Documents and any amendments thereto and the closing of the transactions contemplated thereby; and
(ii)all reasonable and documented out-of-pocket costs and expenses (including fees and disbursements of inhouse and other attorneys, appraisers and consultants) incurred by the Agents or the Lenders in any workout, restructuring or similar arrangements or, after an Event of Default, in connection with the protection, preservation, exercise or enforcement of any of the terms of the Credit Documents or in connection with any foreclosure, collection or bankruptcy proceedings;
provided, however, that Attorney Costs shall in each case be limited to the Attorney Costs of one counsel, but excluding the allocated cost of internal counsel and, if necessary, of a single local counsel in each appropriate jurisdiction (which may include a single special counsel acting in multiple jurisdictions).
The foregoing costs and expenses shall include all reasonable and documented out-of-pocket expenses incurred by the Administrative Agent and the reasonable and documented out-of-pocket cost of independent public accountants and other outside experts retained by the Administrative Agent or any Lender. If requested by the Borrower, the Administrative Agent or a Lender, as applicable, will furnish to the Borrower, within 10 Business Days of such request, a certificate setting forth the basis in reasonable detail with respect to any amounts requested under this Section 11.5(a). All amounts due under this Section 11.5(a) shall be payable within 20 Business Days after demand therefor. The agreements in this Section shall survive the termination of the Commitments and repayment of all Obligations.
(b)Limitation of Liability. To the extent permitted by applicable law, (i) the Borrower shall not assert, and the Borrower hereby waives, any claim against the Administrative Agent, any Lead Arranger, any Syndication Agent, any Documentation Agent, any Issuing Lender and any Lender, and any Related Party of any of the foregoing Persons (each such Person being called a “Lender-Related Person”) for any Liabilities (as defined below) arising from the use by others of any information or other materials obtained through IntraLinks or other similar information transmission systems in connection with the Credit Agreement (except to the extent they are found by a final, non-appealable judgment of a court of competent jurisdiction to arise from the gross negligence, bad faith or willful misconduct of such Lender-Related Person or its Related Parties), and (ii) no party hereto shall assert, and each such party hereby waives, any Liabilities against (x) any Lender-Related Person or (y) the Borrower and any Related Party of the Borrower (each such Person being called a “Company-Related Person”), on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Credit Agreement, any other Credit Document or any agreement or instrument contemplated hereby or thereby, any transactions contemplated hereby or thereby, any Loan or Letter of Credit or the use of the proceeds thereof; provided that, nothing in this Section 11.5(b) shall relieve the Borrower of any obligation it may have to indemnify an Indemnitee, as provided in Section 11.5(c), against any special, indirect, consequential or punitive damages asserted against such Indemnitee by a third party. As used in this Section 11.5(b), “Liabilities” means any losses, claims (including intraparty claims), demands, damages or liabilities of any kind.
(c)Indemnification.
(i)The Borrower shall indemnify and hold harmless each Agent, each Lead Arranger, each Lender and their respective Related Parties of the foregoing (collectively the “Indemnitees”) from and against any and all liabilities, obligations, losses, damages, penalties, claims (including intraparty claims), demands, actions, judgments, suits, costs, reasonable and documented out-of-pocket expenses and disbursements (including Attorney Costs, limited to the reasonable and documented out-of-pocket fees and expenses of one counsel representing all Indemnitees, taken as a whole, but excluding the allocated cost of internal counsel, and, if necessary, of a single local counsel in each appropriate jurisdiction (which may include a single special counsel acting in multiple jurisdictions) for all such Indemnitees, taken as whole (and, in the case of an actual or perceived conflict of interest where any Indemnitee affected by such conflict notifies the Borrower of the existence of such conflict and thereafter retains its own counsel, those of another firm of counsel for each such affected Indemnitee and all other Indemnitees similarly situated))) of any kind or nature whatsoever which may at any time be imposed on, incurred by or asserted against any such Indemnitee in any way relating to or arising out of or in connection with (A) the execution, delivery, enforcement, performance or administration of any Credit Document or any other agreement, letter or instrument delivered in connection with the transactions contemplated thereby or the consummation
of the transactions contemplated thereby, (B) any Commitment or Loan or the use or proposed use of the proceeds therefrom, (C) any actual or alleged presence or release of Hazardous Materials on or from any property currently or formerly owned or operated by the Borrower or any of its Subsidiaries or any Environmental Liability related in any way to the Borrower or any of its Subsidiaries or (D) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory (including any investigation of, preparation for, or defense of any pending or threatened claim, investigation, litigation or proceeding) and regardless of whether commenced by the Borrower, any Indemnitee or any third party and whether any Indemnitee is a party thereto (all the foregoing, collectively, the “Indemnified Liabilities”); provided that such indemnity shall not, as to any Indemnitee, be available (x) to the extent that such liabilities, obligations, losses, damages, penalties, claims, demands, actions, judgments, suits, costs, expenses or disbursements are determined by a final and non-appealable judgment of a court of competent jurisdiction to have resulted from the gross negligence, bad faith or willful misconduct of such Indemnitee or its Related Parties, (y) to any claim brought by the Borrower against any Indemnitee for a material breach of such Indemnitee’s (or its Related Parties’) obligations under this Credit Agreement or the other Credit Documents (to the extent such material breach is determined by a court of competent jurisdiction in a final and non-appealable judgment) or (z) to any liabilities, obligations, losses, damages, penalties, claims, demands, actions, judgments, suits, costs, expenses or disbursements arising from actions, suits or proceedings (including any investigations or inquiries) by any Indemnitee against another Indemnitee (other than actions, suits, proceedings (including any investigations or inquiries) involving (a) alleged conduct or omission by the Borrower or its Affiliates or (b) against the Administrative Agent, any other Agent or any other arranger or bookrunner in its capacity as such). All amounts due under this Section 11.5(c) shall be payable within 10 Business Days after demand therefor. The agreements in this Section shall survive the resignation of the Administrative Agent, the replacement of any Lender, the termination of the Commitments and the repayment, satisfaction or discharge of all the Obligations.
(ii)To the extent that the undertaking to indemnify set forth in Section 11.5(c)(i) may be unenforceable as violative of any applicable law or public policy, the Borrower shall make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities that is permissible under applicable law.
11.6Amendments, Waivers and Consents.
Subject to Section 3.10(b) and (c), neither this Credit Agreement nor any other Credit Document nor any of the terms hereof or thereof may be amended, changed, waived, discharged or terminated unless such amendment, change, waiver, discharge or termination is in writing and signed by the Required Lenders and the Borrower; provided that no such amendment, change, waiver, discharge or termination shall without the consent of each Lender affected thereby:
(a)extend the Maturity Date of any Loan (except as permitted under Section 2.8) or extend or postpone the time for any payment or prepayment of principal of any Loan or unreimbursed drawing of any Letter of Credit;
(b)reduce the rate or amount or extend the time of payment of interest (other than as a result of waiving the applicability of any post-default increase in interest rates) thereon or fees hereunder;
(c)reduce or waive the principal amount of any Loan or unreimbursed drawing of any Letter of Credit;
(d)increase or extend the Commitment of a Lender (it being understood and agreed that a waiver of any Default or Event of Default or a waiver of any mandatory reduction in the Commitments shall not constitute a change in the terms of any Commitment of any Lender);
(e)release the Borrower from its obligations or consent to the assignment or transfer by the Borrower of any of its rights and obligations under (or in respect of) the Credit Documents, or release any Domestic Subsidiary from its obligations under any guarantee agreement delivered pursuant to Section 7.10;
(f)amend, modify or waive any provision of this Section 11.6 or Section 3.7 (or any other provision providing for the pro rata nature of payments or disbursements to Lenders), 3.8 or 9.1(a);
(g)reduce any percentage specified in the definition of Required Lenders; or
(h)amend or otherwise modify the definition of Alternative Currency.
Notwithstanding the above, (i) no provisions of Section 10 may be amended or modified without the consent of the Administrative Agent, (ii) no provisions of Section 2.2 may be amended or modified without the consent of any Issuing Lender and (iii) no provisions of Section 2.3 may be amended or modified without the consent of the Swing Line Lender.
Notwithstanding the fact that the consent of all the Lenders is required in certain circumstances as set forth above, (x) each Lender is entitled to vote as such Lender sees fit on any reorganization plan that affects the Loans or the Letters of Credit, and each Lender acknowledges that the provisions of Section 1126(c) of the Bankruptcy Code supersede the unanimous consent provisions set forth herein and (y) the Required Lenders may consent to allow the Borrower to use cash collateral in the context of a bankruptcy or insolvency proceeding.
If, in connection with any proposed amendment, waiver or consent requiring the consent of a greater percentage of the Lenders than the Required Lenders and the consent of the Required Lenders is obtained, but the consent of one or more other Lenders is not obtained (any such Lender which declares in writing that it will not provide such consent or whose consent is not obtained within the applicable period prescribed for such amendment, waiver or consent being referred to herein as a “Non-Consenting Lender”), then, so long as the Administrative Agent is not a Non-Consenting Lender, the Borrower may, within 45 days of such Lender becoming a Non-Consenting Lender, give notice in writing to the Administrative Agent and such Non-Consenting Lender of the Borrower’s intention to cause such Non-Consenting Lender to sell all of such Non-Consenting Lenders’ interests in its Commitments for an amount equal to the
principal balances thereof and all accrued interest and fees with respect thereto through the date of sale pursuant to one or more Assignment and Assumptions, such sale being without premium or discount. In the event of any such notice, such Non-Consenting Lender shall be required to sell and assign such interests (including all of its related rights and obligations) as provided in this Section. Any such sale of a Non-Consenting Lender’s Commitments must be to an Eligible Assignee and, unless otherwise agreed to by the Administrative Agent, the Borrower shall be solely responsible for sourcing such Eligible Assignee, at no cost or expense to the Administrative Agent or any Lender. Any such assignment to an Eligible Assignee pursuant to this Section shall be in accordance with clause (b)(iv) of Section 11.3. At any time during or after the period during which a proposed amendment, waiver or consent was pending, upon the request of the Borrower, the Administrative Agent shall promptly provide (but in any event within one Business Day) the Borrower with the names, contact information, Commitment percentages, principal balances and any other information reasonably requested for each Lender that, at the time of such request, was either a Non-Consenting Lender or had not yet decided whether or not to approve or consent to such amendment, waiver or consent.
11.7Counterparts.
This Credit Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be an original, but all of which shall constitute one and the same instrument.
11.8Headings.
The headings of the sections and subsections hereof are provided for convenience only and shall not in any way affect the meaning or construction of any provision of this Credit Agreement.
11.9Survival of Indemnification.
All indemnities set forth herein (including those set forth in Sections 3.9, 3.12, 3.13, 3.14 and 11.5), shall survive the execution and delivery of this Credit Agreement, the making of the Loans, the issuance of the Letters of Credit and the repayment of the Loans, LOC Obligations and other obligations and the termination of the Commitments hereunder. All representations and warranties made hereunder and in any other Credit Document or other document delivered pursuant hereto or thereto or in connection herewith or therewith shall survive the execution and delivery hereof and thereof. Such representations and warranties have been or will be relied upon by the Administrative Agent and each Lender, regardless of any investigation made by the Administrative Agent or any Lender or on their behalf and notwithstanding that the Administrative Agent or any Lender may have had notice or knowledge of any Default at the time of any Extension of Credit, and shall continue in full force and effect as long as any Loan or any other Obligations hereunder shall remain unpaid or unsatisfied.
11.10Governing Law; Venue; Jurisdiction.
(a)THIS CREDIT AGREEMENT AND THE OTHER CREDIT DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND
THEREUNDER SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. Except as provided below in this paragraph, (i) each party hereto irrevocably and unconditionally submits, for itself and its property, to the jurisdiction of the Supreme Court of the State of New York sitting in New York County and of the United States District Court of the Southern District of New York, and any appellate court from any thereof, in any suit, action, proceeding, claim or counterclaim arising out of or relating to this Credit Agreement or any other Credit Document, or for recognition or enforcement of any judgment relating to this Credit Agreement or any other Credit Document, and (ii) each party hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such suit, action, proceeding, claim or counterclaim shall be brought only in such New York State or, to the extent permitted by law, in such Federal court, or in the courts (or, to the extent permitted by law, Federal courts) of the State of New Jersey. The Borrower irrevocably consents to the service of process in any suit, action, proceeding, claim or counterclaim with respect to this Credit Agreement or any other Credit Document by the mailing of copies thereof by registered or certified mail, postage prepaid, to it at the address for notices pursuant to Section 11.1, such service to become effective 10 days after such mailing. Nothing herein shall affect the right of a Lender to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against the Borrower in any other jurisdiction. The Borrower agrees that a final judgment in any suit, action, proceeding, claim or counterclaim in any court referred to above shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law; provided that nothing in this Section 11.10(a) is intended to impair the Borrower’s right under applicable law to appeal or seek a stay of any judgment.
(b)The Borrower hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid suits, actions, proceedings, claims or counterclaims arising out of or in connection with this Credit Agreement or any other Credit Document in the courts referred to in subsection (a) hereof and hereby further irrevocably waives and agrees not to plead or claim in any such court that any such suit, action, proceeding, claim or counterclaim brought in any such court has been brought in an inconvenient forum.
11.11Waiver of Jury Trial; Waiver of Consequential Damages.
EACH OF THE PARTIES TO THIS CREDIT AGREEMENT HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY SUIT, ACTION, PROCEEDING, CLAIM OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS CREDIT AGREEMENT, ANY OF THE OTHER CREDIT DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PERSON HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PERSON WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS CREDIT AGREEMENT AND THE OTHER CREDIT DOCUMENTS BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION. Each of the parties hereto agrees not to assert any claim against any other party hereto, any of its Affiliates, or any of their respective directors, officers, employees, attorneys or agents, on any theory of liability, for special, indirect, consequential or punitive damages arising out of or otherwise relating to any of the transactions contemplated herein; provided that nothing contained in this sentence shall limit the Borrower’s indemnity obligations under Section 11.5(c).
11.12Severability.
If any provision of any of the Credit Documents is determined to be illegal, invalid or unenforceable, such provision shall be fully severable and the remaining provisions shall remain in full force and effect and shall be construed without giving effect to the illegal, invalid or unenforceable provisions.
11.13Further Assurances.
The Borrower agrees, upon the reasonable request of the Administrative Agent, to promptly take such actions, as reasonably requested, as is necessary to carry out the intent of this Credit Agreement and the other Credit Documents.
11.14Confidentiality.
Each of the Administrative Agent, the Issuing Lenders and the Lenders agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its Affiliates and to its and its Affiliates’ respective partners, directors, officers, employees, agents, advisors and representatives, excluding equity security departments and their members (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (b) to the extent requested by any regulatory authority purporting to have jurisdiction over it (including any self-regulatory authority, such as the National Association of Insurance Commissioners), (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (d) to any other party hereto, (e) in connection with the exercise of any remedies hereunder or under any other Credit Document or any action or proceeding relating to this Credit Agreement or any other Credit Document or the enforcement of rights hereunder or thereunder, (f) subject to either (x) an agreement containing provisions substantially the same as those of this Section or (y) the standard confidentiality undertaking on an IntraLinks or similar website, to (i) any assignee of or Loan Participant in, or any prospective assignee of or Loan Participant in, any of its rights or obligations under this Credit Agreement, (ii) to any insurance broker or provider of credit insurance or (iii) any actual or prospective counterparty (or its advisors) to any swap or derivative transaction relating to the Borrower and its obligations, (g) with the prior written consent of the Borrower or (h) to the extent such Information (x) becomes publicly available other than as a result of a breach of this Section or (y) becomes available to the Administrative Agent, any Lender or any of their respective Affiliates on a non-confidential basis from a source other than the Borrower, which source is not known by the applicable Agent, Issuing Lender or Lender to have breached any confidentiality obligation by its disclosure of the Information. In addition, the Administrative Agent and the Lenders may disclose the existence of this Credit Agreement and information about this Credit Agreement to market data collectors, credit ratings agencies, similar service providers to the lending industry and service providers to the Administrative Agent and the Lenders in connection with the administration and management of this Credit Agreement, the other Credit Documents and the Loans.
For purposes of this Section, “Information” means all information received from the Borrower or any of its Subsidiaries relating to the Borrower or any Subsidiary or any of their respective businesses, other than any such information that is available to the Administrative Agent or any Lender on a non-confidential basis prior to disclosure by the Borrower or any Subsidiary, provided that, in the case of information received from the Borrower or any Subsidiary after the Restatement Effective Date, such information is clearly identified in writing at the time of delivery as confidential. Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information.
11.15Non-Public Information.
Each Lender acknowledges that all information, including requests for waivers and amendments, furnished by the Borrower or the Administrative Agent pursuant to or in connection with, or in the course of administering, this Credit Agreement will be syndicate-level information, which may contain MNPI. Each Lender represents to and agrees with the Borrower and the Administrative Agent that (i) it has developed compliance procedures regarding the use of MNPI and that it will handle MNPI in accordance with such procedures and applicable law, including Federal, state and foreign securities laws, (ii) it has identified in its Administrative Questionnaire a credit contact who may receive information that may contain MNPI in accordance with its compliance procedures and applicable law, including Federal, state and foreign securities laws and (iii) it will cause at least one individual at or on behalf of such Public Lender to at all times have selected the “Private Side Information” or similar designation on the content declaration screen of the Platform in order to enable such Public Lender or its delegate, in accordance with such Public Lender’s compliance procedures and applicable law, including United States Federal and state securities Laws, to make reference to Borrower Materials that are not made available through the “Public Side Information” portion of the Platform and that may contain MNPI.
11.16Entirety.
This Credit Agreement together with the other Credit Documents, the JPMorgan Engagement Letter and the Fee Letters represent the entire agreement of the parties hereto and thereto, and supersede all prior agreements and understandings, oral or written, if any, including any commitment letters, engagement letters or correspondence relating to the Credit Documents or the transactions contemplated herein and therein; provided, that provisions of commitment letters or engagement letters to which the Borrower and the Agents and their Affiliates are party will survive the execution and delivery of this Credit Agreement to the extent expressly provided therein.
11.17Binding Effect; Continuing Agreement.
(a)This Credit Agreement shall become effective when it shall have been executed and delivered by the Borrower and the Administrative Agent, and the Administrative Agent shall have received copies hereof (faxed or otherwise) which, when taken together, bear the signatures of each Lender, and thereafter this Credit Agreement shall be binding upon and inure to the benefit of the Borrower, the Administrative Agent and each Lender and their respective successors and assigns.
(b)This Credit Agreement shall be a continuing agreement and shall remain in full force and effect until all Loans, LOC Obligations, interest, fees and other Obligations have been paid in full (other than contingent obligations for which no claim has been made) and all Commitments and Letters of Credit have been terminated (or, in the case of Letters of Credit, the LOC Obligations have been cash collateralized). Upon termination, the Borrower shall have no further obligations (other than the indemnification provisions that survive) under the Credit Documents; provided that should any payment, in whole or in part, of the Obligations be rescinded or otherwise required to be restored or returned by the Administrative Agent or any Lender, whether as a result of any proceedings in bankruptcy or reorganization or otherwise, then the Credit Documents shall automatically be reinstated and all amounts required to be restored or returned and all reasonable and documented out-of-pocket costs and expenses incurred by the Administrative Agent or any Lender in connection therewith shall be deemed included as part of the Obligations.
11.18PATRIOT Act Notice.
Each Lender that is subject to the PATRIOT Act and the Administrative Agent (for itself and not on behalf of any Lender) hereby notifies the Borrower that pursuant to the requirements of the PATRIOT Act, it is required to obtain, verify and record information that identifies the Borrower or any future guarantor, which information includes the name and address of the Borrower or any future guarantor and other information that will allow such Lender or the Administrative Agent, as applicable, to identify the Borrower or any future guarantor in accordance with the PATRIOT Act.
11.19No Advisory or Fiduciary Responsibility.
In connection with all aspects of each transaction contemplated hereby (including in connection with any amendment, waiver or other modification hereof or of any other Credit Document), the Borrower acknowledges and agrees, and acknowledges its Affiliates’ understanding, that: (i) (A) the arranging and other services regarding this Credit Agreement provided by the Agents, the Lenders, the Issuing Lenders and the Lead Arrangers are arm’s-length commercial transactions between the Borrower and its Affiliates, on the one hand, and the Agents, the Lenders, the Issuing Lenders and the Lead Arrangers, on the other hand, (B) the Borrower has consulted its own legal, accounting, regulatory and tax advisors to the extent it has deemed appropriate, and (C) the Borrower is capable of evaluating, and understands and accepts, the terms, risks and conditions of the transactions contemplated hereby and by the other Credit Documents; (ii) (A) each of the Agents, the Lenders, the Issuing Lenders and the Lead Arrangers is and has been acting solely as a principal and, except as expressly agreed in writing by the relevant parties, has not been, is not, and will not be acting as an advisor, agent or fiduciary for the Borrower or any of its Affiliates, or any other Person and (B) none of the Agents, the Lenders, the Issuing Lenders or Lead Arrangers has any obligation to the Borrower or any of its Affiliates with respect to the transactions contemplated hereby except those obligations expressly set forth herein and in the other Credit Documents; and (iii) the Agents, the Lenders, the Issuing Lenders and the Lead Arrangers and their respective Affiliates may be engaged in a broad range of transactions that involve interests that differ from those of the Borrower and its Affiliates, and none of the Agents, the Lenders, the Issuing Lenders or the Lead Arrangers has any obligation to disclose any of such interests to the Borrower or any of its Affiliates.
11.20Judgment Currency.
If, for the purposes of obtaining judgment in any court, it is necessary to convert a sum due hereunder or any other Credit Document in one currency into another currency, the rate of exchange used shall be that at which in accordance with normal banking procedures the Administrative Agent could purchase the first currency with such other currency on the Business Day preceding that on which final judgment is given. The obligation of the Borrower in respect of any such sum due from it to any Agent or the Lenders hereunder or under the other Credit Documents shall, notwithstanding any judgment in a currency (the “Judgment Currency”) other than that in which such sum is denominated in accordance with the applicable provisions of this Credit Agreement (the “Agreement Currency”), be discharged only to the extent that on the Business Day following receipt by the Administrative Agent of any sum adjudged to be so due in the Judgment Currency, the Administrative Agent may in accordance with normal banking procedures purchase the Agreement Currency with the Judgment Currency. If the amount of the Agreement Currency so purchased is less than the sum originally due to the Administrative Agent from the Borrower in the Agreement Currency, the Borrower agrees, as a separate obligation and notwithstanding any such judgment, to indemnify the Administrative Agent or the Person to whom such obligation was owing against such loss. If the amount of the Agreement Currency so purchased is greater than the sum originally due to the Administrative Agent in such currency, the Administrative Agent agrees to promptly return the amount of any excess to such Borrower (or to any other Person who may be entitled thereto under applicable law).
11.21Acknowledgment and Consent to Bail-In of Affected Financial Institutions.
Notwithstanding anything to the contrary in any Credit Document or in any other agreement, arrangement or understanding among any such parties, each party hereto acknowledges that any liability of any Affected Financial Institution arising under any Credit Document, to the extent such liability is unsecured, may be subject to the Write-Down and Conversion Powers of the applicable Resolution Authority and agrees and consents to, and acknowledges and agrees to be bound by:
(a)the application of any Write-Down and Conversion Powers by the applicable Resolution Authority to any such liabilities arising hereunder which may be payable to it by any party hereto that is an Affected Financial Institution; and
(b)the effects of any Bail-in Action on any such liability, including, if applicable, (i) a reduction in full or in part or cancellation of any such liability, (ii) a conversion of all, or a portion of, such liability into shares or other instruments of ownership in such Affected Financial Institution, its parent undertaking, or a bridge institution that may be issued to it or otherwise conferred on it, and that such shares or other instruments of ownership will be accepted by it in lieu of any rights with respect to any such liability under this Credit Agreement or any other Credit Document or (iii) the
variation of the terms of such liability in connection with the exercise of the Write-Down and Conversion Powers of the applicable Resolution Authority.
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