Long-Term Debt and Leases

9 Months Ended

Sep. 30, 2021

Long-Term Debt

In April 2021, in connection with the Separation, Organon Finance 1 LLC ("Organon Finance 1"), a subsidiary of Merck, issued €1.25 billion aggregate principal amount of 2.875% senior secured notes due 2028, $2.1 billion aggregate principal amount of 4.125% senior secured notes due 2028 and $2.0 billion aggregate principal amount of 5.125% senior unsecured notes due 2031 (collectively, the “Notes”). Interest payments are due semiannually on October 30 and April 30. As part of the Separation, on June 2, 2021, Organon and a wholly-owned Dutch subsidiary of Organon, (the "Dutch Co-Issuer") assumed the obligations under the Notes as co-issuers, Organon Finance 1 was released as an obligor under the Notes, and certain subsidiaries of Organon agreed to guarantee the Notes. Each series of Notes was issued pursuant to an indenture dated April 22, 2021, between Organon and U.S. Bank National Association. Organon and the Dutch Co-Issuer assumed the obligations under the Notes pursuant to a first supplemental indenture to the relevant indenture, and the guarantors agreed to guarantee the Notes pursuant to a second supplemental indenture to the relevant indenture.

On June 2, 2021, Organon entered into a credit agreement with JPMorgan Chase Bank, N.A., as administrative agent and collateral agent (the “Senior Credit Agreement”), providing for:

•a Term Loan B Facility (“Term Loan B Facility”), consisting of (i) a U.S. dollar denominated senior secured “tranche B” term loan in the amount of $3.0 billion, and (ii) a euro denominated senior secured “tranche B” term loan in the amount of €750 million, in each case with a seven-year term that matures in 2028; and

•a Revolving Credit Facility (“Revolving Credit Facility” and, together with the Term Loan B Facility, the “Senior Credit Facilities”), in an aggregate principal amount of up to $1 billion, with a five-year term that matures in 2026.

Borrowings made under the Senior Credit Agreement initially bear interest, in the case of:

•term loans under the Term Loan B Facility (i) denominated in U.S. Dollars, at 3.00% in excess of Adjusted LIBOR (subject to a floor of 0.50%) or 2.00% in excess of an alternate base rate ("ABR"), at our option and (ii) denominated in euros, at 3.00% in excess of an adjusted Euro Interbank Offer Rate (“Adjusted EURIBOR”) (subject to a floor of 0.00%); and

•revolving loans under the Revolving Credit Facility (i) in U.S. Dollars, at 2.00% in excess of an Adjusted LIBOR (subject to a floor of 0.00%) or 1.00% in excess of ABR, at our option and (ii) in euros, at 2.00% in excess of an Adjusted EURIBOR.

The interest rate on revolving loans under the Revolving Credit Facility is subject to a step-down based on meeting a leverage ratio target. A commitment fee applies to the unused portion of the Revolving Credit Facility, initially equal to 0.50% and subject to a step-down to 0.375% based on meeting a leverage ratio target. There were no outstanding balances under the Revolving Credit Facility as of September 30, 2021.

Interest payments on the term loans are due quarterly on March, June, September and December. Principal payments on the term loans are based on 0.25% of the principal amount outstanding on the Closing Date and due on the last business day of each March, June, September and December, commencing with the last business day of September 2021.

Organon used the net proceeds from the notes offering, together with available cash on its balance sheet and borrowings under senior secured credit facilities, to distribute $9.0 billion to Merck and to pay fees and expenses related to the Separation.

The Senior Credit Agreement contains customary financial covenants, including a total leverage ratio covenant, which measures the ratio of (i) consolidated total debt to (ii) consolidated earnings before interest, taxes, depreciation and amortization, and subject to other adjustments, that must meet certain defined limits which are tested on a quarterly basis beginning September 30, 2021. In addition, the Senior Credit Agreement contains covenants that limit, among other things, Organon’s ability to prepay, redeem or repurchase its subordinated and junior lien debt, incur additional debt, make acquisitions, merge with other entities, pay dividends or distributions, redeem or repurchase equity interests, and create or become subject to liens. As of September 30, 2021, the Company is in compliance with all financial covenants and no default or event of default has occurred.

The following is a summary of Organon's total debt as described above:


($ in millions)	September 30, 2021
Term Loan B Facility:
LIBOR plus 300 bps term loan due 2028	$	2,993
LIBOR plus 300 bps euro-denominated term loan due 2028 (€750 million)	874
4.125% secured notes due 2028	2,100
2.875% euro-denominated secured notes due 2028 (€1.25 billion)	1,461
5.125% notes due 2031	2,000
Other (discounts and debt issuance costs)	(130)
Total principal long-term debt	$	9,298
Less: Current portion of long-term debt	39
Total Long-term debt, net of current portion	$	9,259

During the second quarter of 2021, the Company recorded approximately $118 million of debt issuance costs related to the long-term debt and $19 million of discounts on the term loans. Debt issuance costs and discounts are presented as a reduction of debt on the Condensed Consolidated Balance Sheets and are amortized as a component of interest expense over the term on the related debt using the effective interest method. The unamortized debt issuance costs related to the long-term debt and discounts on the term loans at September 30, 2021 are approximately $130 million.

The estimated fair value of long-term debt (including current portion) at September 30, 2021, was $9.6 billion compared with a carrying value (which includes a reduction for amortized debt issuance costs) of $9.3 billion. Fair value was estimated using inputs other than quoted prices in active markets for identical assets and liabilities that are observable either directly or indirectly for substantially the full term of the asset or liability and would be considered Level 2 in the fair value hierarchy.

The Company made interest payments of $34 million related to its debt instruments during the quarter ended September 30, 2021. The average maturity of the Company's long-term debt at September 30, 2021 is approximately 7.3 years and the weighted-average interest rate on total borrowings for the three months ended September 30, 2021 is 3.9%.

The schedule of principal payments required on long-term debt for the next five years and thereafter is as follows:


($ in millions)
2021	$	10
2022	39
2023	39
2024	39
2025	39
Thereafter	9,262

Leases

The Company has operating leases primarily for real estate. The Company determines if an arrangement is a lease at inception. When evaluating contracts for embedded leases, the Company exercises judgment to determine if there is an explicit or implicit identified asset in the contract and if the Company controls the use of that asset. Embedded leases are immaterial. The lease term includes options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Real estate leases for facilities have a weighted average remaining lease term of 6.1 years and include two leases with an option to extend for 5 years and 1 year, respectively. The Company has made an accounting policy election not to record short-term leases (leases with an initial term of 12 months or less) on the balance sheet. Lease expense associated with short term leases was not material for all periods presented.

Lease expense for operating lease payments is recognized on a straight-line basis over the term of the lease. Operating lease assets and liabilities are recognized based on the present value of lease payments over the lease term. Since most of the Company’s leases do not have a readily determinable implicit discount rate, the Company uses its incremental borrowing rate to calculate the present value of lease payments. On a quarterly basis, an updated incremental borrowing rate is determined based on the weighted average remaining lease term of each asset class and the Company's pretax cost of debt for that same term. The updated rates for each asset class are applied prospectively to new leases. The Company does not separate lease components (e.g. payments for rent, real estate taxes and insurance costs) from non-lease components (e.g. common-area maintenance costs) in the event that the agreement contains both. The Company includes both the lease and non-lease components for purposes of calculating the right-of-use asset and related lease liability (if the non-lease components are fixed). Allocated and actual operating lease cost was $19 million and $10 million for the three months ended September 30, 2021 and 2020, respectively, and $56 million and $32 million for the nine months of September 30, 2021 and 2020, respectively.

None of the Company’s lease agreements contain variable lease payments. Sublease income is immaterial and there are no sale-leaseback transactions. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Cash paid for amounts included in the measurement of operating lease liabilities was $27 million for the nine months ended September 30, 2021. Operating lease assets obtained in exchange for new operating lease liabilities were $288 million, and primarily consists of real estate operating leases entered into in connection with establishing Organon as a standalone Company.

Supplemental balance sheet information related to operating leases is as follows:


($ in millions)	September 30, 2021		December 31, 2020
Assets
Other Assets	$	288	$	31
Liabilities
Accrued and other current liabilities	67		8
Other Noncurrent Liabilities	221		23
	$	288	$	31
Weighted-average remaining lease term (years)	5.3		4.0
Weighted-average discount rate	3.2%		1.9%

Maturities of operating lease liabilities as of September 30, 2021 are as follows:


2021 (excluding the first nine months of 2021)	$	19
2022	75
2023	70
2024	53
2025	36
Thereafter	61
Total lease payments	$	314
Less: Imputed interest	26
	$	288

At September 30, 2021, the Company had entered into a real estate operating lease that had not yet commenced. The obligation associated with this lease totals $7 million.