0000353569-18-000060.txt : 20181107 0000353569-18-000060.hdr.sgml : 20181107 20181107162152 ACCESSION NUMBER: 0000353569-18-000060 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 68 CONFORMED PERIOD OF REPORT: 20180930 FILED AS OF DATE: 20181107 DATE AS OF CHANGE: 20181107 FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUIDEL CORP /DE/ CENTRAL INDEX KEY: 0000353569 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 942573850 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-10961 FILM NUMBER: 181166641 BUSINESS ADDRESS: STREET 1: 12544 HIGH BLUFF DRIVE STREET 2: SUITE 200 CITY: SAN DIEGO STATE: CA ZIP: 92130 BUSINESS PHONE: 8585521100 MAIL ADDRESS: STREET 1: 12544 HIGH BLUFF DRIVE STREET 2: SUITE 200 CITY: SAN DIEGO STATE: CA ZIP: 92130 FORMER COMPANY: FORMER CONFORMED NAME: MONOCLONAL ANTIBODIES INC /DE/ DATE OF NAME CHANGE: 19910210 10-Q 1 qdel-20180930x10q.htm 10-Q Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ____________________________________________________________________________
FORM 10-Q
  ____________________________________________________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
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: 0-10961
 ____________________________________________________________________________ 
QUIDEL CORPORATION
(Exact name of registrant as specified in its charter)
  ____________________________________________________________________________
Delaware
 
94-2573850
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
12544 High Bluff Drive, Suite 200, San Diego, California 92130
(Address of principal executive offices, including zip code)
(858) 552-1100
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
____________________________________________________________________________ 
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
x

 
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 Securities Act.
¨
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 November 1, 2018, 39,337,111 shares of the registrant's common stock were outstanding.
 



INDEX
 
 
 
 


2


PART I    FINANCIAL INFORMATION
 
ITEM 1.    Financial Statements
                     QUIDEL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value; unaudited)
 
September 30, 2018
 
December 31, 2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
38,694

 
$
36,086

Accounts receivable, net
66,845

 
67,046

Inventories
63,309

 
67,078

Assets held for sale

 
146,644

Prepaid expenses and other current assets
31,301

 
14,375

Total current assets
200,149

 
331,229

Property, plant and equipment, net
70,235

 
61,585

Goodwill
337,025

 
337,028

Intangible assets, net
181,985

 
203,827

Other non-current assets
4,490

 
1,582

Total assets
$
793,884

 
$
935,251

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
25,700

 
$
27,279

Accrued payroll and related expenses
17,118

 
15,926

Current portion of contingent consideration
3,848

 
6,293

Current portion of deferred consideration
44,000

 
46,000

Current portion of Revolving Credit Facility

 
10,000

Current portion of Convertible Senior Notes
53,885

 

Current portion of Term Loan

 
10,184

Other current liabilities
13,898

 
12,666

Total current liabilities
158,449

 
128,348

Convertible Senior Notes

 
149,868

Term Loan

 
227,394

Revolving Credit Facility
83,188

 

Deferred consideration
140,845

 
177,158

Contingent consideration
14,904

 
18,008

Other non-current liabilities
8,044

 
7,371

Commitments and contingencies (see Note 9)

 

Stockholders’ equity:
 
 
 
Preferred stock, $.001 par value per share; 5,000 shares authorized; none issued or outstanding at September 30, 2018 and December 31, 2017

 

Common stock, $.001 par value per share; 97,500 shares authorized; 39,326 and 34,540 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively
39

 
35

Additional paid-in capital
359,186

 
239,489

Accumulated other comprehensive loss
(55
)
 

Retained earnings (accumulated deficit)
29,284

 
(12,420
)
Total stockholders’ equity
388,454

 
227,104

Total liabilities and stockholders’ equity
$
793,884

 
$
935,251

See accompanying notes.

3


QUIDEL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data; unaudited)
 
 
Three months ended 
 September 30,
 
Nine months ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
Total revenues
$
117,399

 
$
50,894

 
$
389,697

 
$
162,853

Cost of sales
47,757

 
21,204

 
156,116

 
65,838

Gross profit
69,642

 
29,690

 
233,581

 
97,015

Research and development
13,103

 
7,468

 
39,008

 
22,970

Sales and marketing
26,504

 
13,588

 
82,607

 
40,875

General and administrative
10,620

 
6,580

 
32,652

 
20,483

Acquisition and integration costs
2,521

 
4,591

 
10,923

 
7,022

Total operating expenses
52,748

 
32,227

 
165,190

 
91,350

Operating income (loss)
16,894

 
(2,537
)
 
68,391

 
5,665

Other expense, net:
 
 
 
 
 
 
 
Interest expense, net
(4,786
)
 
(2,784
)
 
(19,475
)
 
(8,387
)
Loss on extinguishment of debt
(1,297
)
 

 
(8,262
)
 

Total other expense, net
(6,083
)
 
(2,784
)
 
(27,737
)
 
(8,387
)
Income (loss) before income taxes
10,811

 
(5,321
)
 
40,654

 
(2,722
)
(Benefit) provision for income taxes
(11
)
 
204

 
(1,050
)
 
355

Net income (loss)
$
10,822

 
$
(5,525
)
 
$
41,704

 
$
(3,077
)
Basic earnings (loss) per share
$
0.28

 
$
(0.16
)
 
$
1.11

 
$
(0.09
)
Diluted earnings (loss) per share
$
0.27

 
$
(0.16
)
 
$
1.08

 
$
(0.09
)
Shares used in basic per share calculation
39,290

 
33,913

 
37,490

 
33,538

Shares used in diluted per share calculation
42,889

 
33,913

 
42,467

 
33,538

See accompanying notes.


4


QUIDEL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands; unaudited)
 
 
Three months ended 
 September 30,
 
Nine months ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
Net income (loss)
$
10,822

 
$
(5,525
)
 
$
41,704

 
$
(3,077
)
Other comprehensive (loss) income, net of tax
 
 
 
 
 
 
 
Changes in cumulative translation adjustment
(61
)
 
14

 
(55
)
 
49

Comprehensive income (loss)
$
10,761

 
$
(5,511
)
 
$
41,649

 
$
(3,028
)
See accompanying notes.


5


    
QUIDEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)

 
Nine months ended September 30,
 
2018
 
2017
OPERATING ACTIVITIES:
 
 
 
Net income (loss)
$
41,704

 
$
(3,077
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation, amortization and other
34,323

 
17,813

Stock-based compensation expense
9,190

 
5,938

Amortization of debt discount and deferred issuance costs
3,355

 
4,129

Change in fair value of acquisition contingencies
745

 

Accretion of interest on deferred consideration
7,686

 

Amortization of inventory step-up to fair value
3,650

 

Change in deferred tax assets and liabilities

 
101

Loss on extinguishment of debt
8,262

 

Changes in assets and liabilities:
 
 
 
Accounts receivable
257

 
(16,582
)
Inventories
155

 
2,751

Income taxes receivable
(6,802
)
 
(1,123
)
Prepaid expenses and other current and non-current assets
(13,526
)
 
(667
)
Accounts payable
633

 
2,128

Accrued payroll and related expenses
(24
)
 
982

Other current and non-current liabilities
3,520

 
4,091

Net cash provided by operating activities:
93,128

 
16,484

INVESTING ACTIVITIES:
 
 
 
Acquisitions of property, equipment and intangibles
(22,875
)
 
(12,767
)
Acquisition of other businesses, net of cash acquired

 
(14,388
)
Proceeds from sale of Summers Ridge Property
146,644

 

Net cash provided by (used for) investing activities:
123,769

 
(27,155
)
FINANCING ACTIVITIES:
 
 
 
Proceeds from issuance of common stock
16,031

 
15,246

Payment of debt issuance costs
(513
)
 

Payments on Revolving Credit Facility
(10,000
)
 

Payments on lease obligation
(93
)
 
(70
)
Repurchases of common stock
(3,790
)
 
(541
)
Payments on acquisition contingent consideration
(6,294
)
 
(498
)
Payments of deferred consideration
(46,000
)
 

Payments of Term Loan
(161,813
)
 

Transaction costs related to debt exchange
(2,002
)
 

Net cash (used for) provided by financing activities:
(214,474
)
 
14,137

Effect of exchange rates on cash
185

 
20

Net increase in cash and cash equivalents
2,608

 
3,486

Cash and cash equivalents, beginning of period
36,086

 
169,508

Cash and cash equivalents, end of period
$
38,694

 
$
172,994

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Purchase of property, equipment and intangibles by incurring current liabilities
$
1,650

 
$
653

Reduction of other current liabilities upon issuance of restricted share units
$

 
$
903

Extinguishment of Convertible Senior Notes through issuance of common stock
$
200,217

 
$

Principal amount of Term Loan exchanged for Revolving Credit Facility
$
83,188

 
$

See accompanying notes.

6


Quidel Corporation
Notes to Consolidated Financial Statements
(Unaudited)
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements of Quidel Corporation and its subsidiaries (the “Company”) have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation (consisting of normal recurring accruals) have been included.
The information at September 30, 2018, and for the three and nine months ended September 30, 2018 and 2017, is unaudited. For further information, refer to the Company’s consolidated financial statements and notes thereto for the year ended December 31, 2017 included in the Company’s 2017 Annual Report on Form 10-K. Operating results for any quarter are historically seasonal in nature and are not necessarily indicative of the results expected for the full year.
For 2018 and 2017, the Company’s fiscal year will end or has ended on December 30, 2018 and December 31, 2017, respectively. For 2018 and 2017, the Company’s third quarter ended on September 30, 2018 and October 1, 2017, respectively. For ease of reference, the calendar quarter end dates are used herein. The three and nine month periods ended September 30, 2018 and 2017 each included 13 and 39 weeks, respectively.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures 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.
Significant Accounting Policies
During the three and nine months ended September 30, 2018, there have been no changes to our significant accounting policies as described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, except as described below.
Revenue Recognition
The Company records revenues primarily from product sales. These revenues are recorded net of rebates and other discounts. These rebates and discounts are estimated at the time of sale, and are largely driven by various customer program offerings, including special pricing agreements, promotions and other volume-based incentives. Revenue is recognized when control of the products is transferred to the customers in an amount that reflects the consideration the Company expects to receive from the customers in exchange for those products and services. This process involves identifying the contract with a customer, determining the performance obligations in the contract and the contract price, allocating the contract price to the distinct performance obligations in the contract and recognizing revenue when the performance obligations have been satisfied. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. A performance obligation is considered to be satisfied once the control of a product is transferred to the customer or the service is provided to the customer, meaning the customer has the ability to use and obtain the benefit of the good or service. The Company recognizes revenue for satisfied performance obligations only when there are no uncertainties regarding payment terms or transfer of control.
A portion of product sales includes revenues for diagnostic kits, which are utilized on leased instrument systems under the Company’s “reagent rental” program. The reagent rental program provides customers the right to use the instruments at no separate cost to the customer in consideration for a multi-year agreement to purchase annual minimum amounts of consumables (“reagents” or “diagnostic kits”). When an instrument is placed with a customer under a reagent rental agreement, the Company

7


retains title to the equipment and it remains capitalized on the Company’s Consolidated Balance Sheets as property, plant and equipment, net. The instrument is depreciated on a straight-line basis over the lower of the lease term or life of the instrument. Depreciation expense is recorded in cost of sales included in the Consolidated Statements of Operations. Instrument and consumables under the reagent rental agreements are deemed two distinct performance obligations. Though the instrument and consumables do not have any use to customers without one another, they are not highly interdependent because they do not significantly affect each other. The Company would be able to fulfill its promise to transfer the instrument even if its customers did not purchase any consumables and the Company would be able to fulfill its promise to provide the consumables even if customers acquired instruments separately. The contract price is allocated between these two performance obligations based on the relative standalone selling prices. The instrument is considered an operating lease and revenue allocated to the instrument will be separately disclosed, if material.
Reclassifications
The Company recorded a reclassification of $1.8 million and $5.1 million for the three and nine months ended September 30, 2017 from amortization of intangible assets from acquired businesses and technology to cost of sales expense as previously reported in the Consolidated Statements of Operations. In addition, the Company recorded a reclassification of $0.7 million and $2.1 million for the three and nine months ended September 30, 2017 from amortization of intangible assets from acquired businesses and technology to sales and marketing expense to conform to current year presentation. These reclassifications did not impact the net income (loss) as previously reported or any prior amounts reported on the Consolidated Balance Sheets, Statements of Cash Flows or Statements of Comprehensive Income (Loss).
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance codified in Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which amends the guidance in former ASC 605, Revenue Recognition (“ASU 2014-09”). The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies are required to use more judgment and make more estimates than under prior authoritative guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The FASB has issued several amendments to the new standard, which include clarification of accounting guidance related to identification of performance obligations, intellectual property licenses and principal vs. agent considerations. ASU 2014-09 and all subsequent amendments (collectively, “ASC 606”) were effective for public entities for annual reporting periods beginning after December 15, 2017, including interim periods therein.
The Company adopted ASC 606 on January 1, 2018, using the modified retrospective transition method applied to those contracts which were not completed as of that date. The cumulative effect of applying the new revenue standard to all incomplete contracts as of January 1, 2018 was not material and, therefore, did not result in an adjustment to retained earnings. The adoption of ASC 606 did not have a material impact on the Company's consolidated financial position, results of operations, equity or cash flows as of the adoption date or for the three and nine months ended September 30, 2018.
In February 2016, the FASB issued guidance codified in ASU 2016-02 (Topic 842), Leases. The guidance requires a lessee to recognize a lease liability for the obligation to make lease payments and a right-to-use asset representing the right to use the underlying asset for the lease term on the balance sheet. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Under ASU 2016-02, the standard will be adopted on a modified retrospective transition basis for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The FASB issued ASU 2018-11 in July 2018 which allows for an alternative method to adopt the lease standard by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. While the Company is continuing to assess the effects of adoption, the Company believes the new standard will have a material effect on the consolidated financial statements and disclosures. We expect substantially all real-estate operating lease commitments to be recognized as lease liabilities with corresponding right-of-use assets upon adoption, resulting in a significant increase in the assets and liabilities on the consolidated balance sheet. The Company is currently evaluating the impact of Topic 842 on the consolidated financial statements as it relates to other aspects of its business.
In January 2017, the FASB issued guidance codified in ASU 2017-04, Intangibles-Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). Under this new guidance, an entity will no longer determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Instead, an entity will compare the

8


fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. The guidance is effective for fiscal years beginning after December 15, 2019 including interim periods therein. The Company is currently evaluating the impact of this guidance and expects to adopt the standard in the first quarter of 2020.
Note 2. Computation of Earnings (Loss) Per Share
Basic earnings (loss) per share ("EPS") is computed by dividing net income (loss) by the weighted-average number of common shares outstanding, including restricted stock units (“RSUs”) vested during the period. Diluted EPS is computed based on the sum of the weighted average number of common shares and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares consist of shares issuable from stock options, unvested RSUs and the 3.25% Convertible Senior Notes due 2020 (“Convertible Senior Notes”). Potentially dilutive common shares from outstanding stock options and unvested RSUs are determined using the average share price for each period under the treasury stock method. Potentially dilutive shares from the Convertible Senior Notes are determined using the if-converted method. Under the provisions of the if-converted method, the Convertible Senior Notes are assumed to be converted and included in the denominator of the EPS calculation and the interest expense, net of tax, recorded in connection with the Convertible Senior Notes is added back to net income (loss).
The Convertible Senior Notes have a dilutive impact when the average market price of the Company’s common stock exceeds the applicable conversion price of the notes. The Senior Convertible Notes became convertible on March 31, 2018 and remained convertible through September 30, 2018. The Senior Convertible Notes were not convertible during the nine months ended September 30, 2017.
The following table reconciles net income (loss) and the weighted-average shares used in computing basic and diluted earnings per share in the respective periods (in thousands):
 
Three month ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Numerator:
 
 
 
 
 
 
 
Net income (loss) used for basic earnings per share
$
10,822

 
$
(5,525
)
 
$
41,704

 
$
(3,077
)
Interest expense on Convertible Senior Notes, net of tax
791

 

 
4,152

 

Net income (loss) used for diluted earnings per share, if-converted method
$
11,613

 
$
(5,525
)
 
$
45,856

 
$
(3,077
)
 
 
 
 
 
 
 
 
Basic weighted-average common shares outstanding
39,290

 
33,913

 
37,490

 
33,538

Potentially dilutive shares issuable from Convertible Senior Notes, if-converted
1,825

 

 
3,193

 

Potentially dilutive shares issuable from stock options and unvested RSUs
1,774

 

 
1,784

 

Diluted weighted-average common shares outstanding, if-converted
42,889

 
33,913

 
42,467

 
33,538

Potentially dilutive shares excluded from calculation due to anti-dilutive effect

 

 
161

 
1,121

Potentially dilutive shares excluded from the calculation above represent stock options when the combined exercise price and unrecognized stock-based compensation are greater than the average market price for the Company’s common stock because their effect is anti-dilutive.     
The number of potentially dilutive shares issuable under the Convertible Senior Notes that would have been included in the diluted EPS calculation if the Company had earnings amounted to 1.8 million shares and 1.2 million shares for the three and nine months ended September 30, 2017, respectively.

9


Note 3. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or net realizable value. Inventories consisted of the following at September 30, 2018 and December 31, 2017, respectively (in thousands):
 
September 30, 2018
 
December 31, 2017
Raw materials
$
23,572

 
$
22,252

Work-in-process (materials, labor and overhead)
20,915

 
22,813

Finished goods (materials, labor and overhead)
18,822

 
22,013

Total inventories
$
63,309

 
$
67,078

Note 4. Other Balance Sheet Accounts    
Prepaid expenses and other current assets consist of the following (in thousands):
 
September 30, 2018
 
December 31, 2017
Receivables under transition service agreements
$
14,288

 
$
7,509

Income taxes receivable
10,593

 
3,806

Prepaid expenses
5,615

 
2,898

Other
805

 
162

Total prepaid expenses and other current assets
$
31,301

 
$
14,375

Other current liabilities consist of the following (in thousands):
 
September 30, 2018
 
December 31, 2017
Customer incentives
$
8,955

 
$
7,165

Accrued interest
855

 
442

Other
4,088

 
5,059

Total other current liabilities
$
13,898

 
$
12,666

Note 5. Income Taxes
The Company calculates its interim income tax provision in accordance with ASC 270, Interim Reporting, and ASC 740, Accounting for Income Taxes (together, “ASC 740”). At the end of each interim period, the Company estimates its annual effective tax rate and applies that rate to its ordinary quarterly earnings to calculate the tax related to ordinary income. The tax effects for other items that are excluded from ordinary income are discretely calculated and recognized in the period in which they occur.
On December 22, 2017, the Tax Cuts and Jobs Act (the "Tax Act") was enacted into legislation, which includes a broad range of provisions affecting businesses. The Tax Act significantly revises how companies compute their U.S. corporate tax liability by, among other provisions, reducing the corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017, implementing a territorial tax system, and requiring a mandatory one-time tax on U.S.-owned undistributed foreign earnings and profits known as the transition tax.
For the three months ended September 30, 2018, the Company recognized an insignificant amount of income tax benefit. For the three months ended September 30, 2017, the Company recognized an income tax expense of $0.2 million. The Company recognized income tax benefit of $1.1 million and income tax expense of $0.4 million for the nine months ended September 30, 2018 and 2017, respectively. The income tax benefit for the three and nine month periods ended September 30, 2018 differed from the income tax expense for the same periods in prior year due primarily to the reduction in the tax rate from the Tax Act, the impacts of the Company's full valuation allowance on U.S. earnings and higher discrete tax benefits recorded during the 2018 periods for excess tax benefits of stock-based compensation.
The Company is subject to periodic audits by domestic and foreign tax authorities. Due to the carryforward of unutilized net operating loss and credit carryovers, the Company's federal tax years from 2009 and forward are subject to examination by

10


the U.S. authorities. The Company's state and foreign tax years for 2001 and forward are subject to examination by applicable tax authorities. The Company believes that it has appropriate support for the income tax positions taken on its tax returns and that its accruals for tax liabilities are adequate for all open years based on an assessment of many factors, including past experience and interpretations of tax laws applied to the facts of each matter.
On December 22, 2017, the Securities and Exchange Commissions issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. As of December 31, 2017, the Company was able to reasonably estimate certain effects of the Tax Act and, therefore, recorded provisional adjustments associated with the deemed repatriation transition tax and rate change revaluation of its deferred tax assets. During the nine months ended September 30, 2018, the Company has made additional provisional measurement-period adjustments related to the Tax Act for which clarifying legislation has been enacted. The primary impact of the measurement period adjustments resulted in a decrease to the Company's net operating loss carryforward as of December 31, 2017, offset by the Company's full evaluation allowance. The Company is still waiting for relevant guidance related to provisions in the Tax Act; therefore, the Company does not consider the measurement period closed as of September 30, 2018. The Company will continue to assess the impact of anticipated IRS guidance when issued, and plans to complete the accounting for the Tax Act within the prescribed measurement period. Any subsequent adjustment to the amounts previously recorded in 2017 (the period of enactment of the Tax Act) will be a tax expense or benefit in the fourth quarter of 2018 when the analysis is complete.
Note 6. Debt
Convertible Senior Notes
In December 2014, the Company issued $172.5 million aggregate principal amount of its Convertible Senior Notes. Debt issuance costs of approximately $5.1 million were primarily comprised of underwriters fees, legal, accounting and other professional fees, of which $4.2 million were recorded as a reduction to long-term debt and are being amortized using the effective interest method to interest expense over the six-year term of the Convertible Senior Notes. The remaining $0.9 million of debt issuance costs were allocated as a component of equity in additional paid-in capital. The implied interest rate of the Convertible Senior Notes was 6.9%, assuming no conversion option. The Convertible Senior Notes mature on December 15, 2020.
The Convertible Senior Notes are convertible into cash, shares of common stock, or a combination of cash and shares of common stock based on an initial conversion rate, subject to adjustment, of 31.1891 shares per $1,000 principal amount of the Convertible Senior Notes (which represents an initial conversion price of approximately $32.06 per share). The conversion will occur in the following circumstances and to the following extent: (1) during any calendar quarter commencing after the calendar quarter ending on March 31, 2015, if the last reported sales price of the Company’s common stock, for at least 20 trading days (whether or not consecutive) in the period of 30 consecutive trading days ending on the last trading day of the calendar quarter immediately preceding the calendar quarter in which the conversion occurs, is more than 130% of the conversion price of the notes in effect on each applicable trading day; (2) during the five consecutive business day period following any five consecutive trading day period in which the trading price per $1,000 principal amount of the Convertible Senior Notes for each such trading day was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such day; or (3) upon the occurrence of specified events described in the indenture for the Convertible Senior Notes. On or after September 15, 2020 until the close of business on the second scheduled trading day immediately preceding the stated maturity date, holders may surrender their notes for conversion at any time, regardless of the foregoing circumstances. If a fundamental change, as defined in the indenture for the Convertible Senior Notes, such as an acquisition, merger or liquidation of the Company, occurs prior to the maturity date, subject to certain limitations, holders of the Convertible Senior Notes may require the Company to repurchase all or a portion of their Convertible Senior Notes for cash at a repurchase price equal to 100% of the principal amount of the Convertible Senior Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the repurchase date.
During the third quarter of 2018, the last reported sales price of the Company’s common stock was greater than 130% of the Convertible Senior Notes conversion price for 20 or more of the 30 consecutive trading days preceding the quarter-end. Consequently, the Convertible Senior Notes were convertible as of September 30, 2018. If the Convertible Senior Notes were converted as of September 30, 2018, the if-converted amount would exceed the principal by $2.2 million. The Convertible Senior Notes may be settled at the Company's option in cash or a combination of cash and shares of common stock. Because the settlement could be in cash, the Convertible Senior Notes have been classified as short-term debt as of September 30, 2018.

11


During the first and second quarters of 2018, the Company entered into separate, privately negotiated exchange agreements with certain holders of the notes. During the third quarter of 2018, certain note holders requested conversion and the Company elected to issue shares of common stock in exchange for the notes. To measure the resulting loss as of the settlement dates, the applicable interest rates were estimated using Level 2 observable inputs and applied to the converted notes using the same methodology as in the issuance date valuation. The following table summarizes information about the settlement of the Convertible Senior Notes (in thousands).
 
Three month ended September 30, 2018
 
Nine months ended September 30, 2018
Principal amount settled
$
35

 
$
108,808

Number of shares of common stock issued
1

 
3,699

Loss on extinguishment of debt
$

 
$
2,303

The Company pays 3.25% interest per annum on the principal amount of the Convertible Senior Notes semi-annually in arrears in cash on June 15 and December 15 of each year. During the nine months ended September 30, 2018, the Company recorded total interest expense of $5.2 million related to the Convertible Senior Notes, of which $2.7 million related to the amortization of the debt discount and issuance costs and $2.5 million related to the coupon due semi-annually. During the nine months ended September 30, 2017, the Company recorded total interest expense of $8.2 million related to the Convertible Senior Notes of which $4.1 million related to the amortization of the debt discount and issuance costs and $4.1 million related to the coupon due semi-annually. 
The following table summarizes information about the equity and liability components of the Convertible Senior Notes (dollars in thousands). The fair values of the respective notes outstanding were measured based on quoted market price and is a Level 2 measurement.
 
September 30, 2018
 
December 31, 2017
Principal amount outstanding
$
58,506

 
$
167,314

Unamortized discount of liability component
(4,075
)
 
(15,356
)
Unamortized debt issuance costs
(546
)
 
(2,090
)
Net carrying amount of liability component
53,885

 
149,868

Less: current portion
(53,885
)
 

Long-term debt
$

 
$
149,868

Carrying value of equity component, net of issuance costs
$
10,093

 
$
29,211

Fair value of outstanding Convertible Senior Notes
$
118,767

 
$
257,245

Remaining amortization period of discount on the liability component
2.3 years

 
3.0 years

Senior Credit Agreement
On October 6, 2017, the Company entered into a Credit Agreement (the “Credit Agreement”), which provided the Company with a $245.0 million senior secured term loan facility (the “Term Loan”) and a $25.0 million Revolving Credit Facility ("Revolving Credit Facility") together (the “Senior Credit Facility”). On the closing date of the Credit Agreement, the Company borrowed the entire amount of the Term Loan and $10.0 million under the Revolving Credit Facility.
During the nine months ended September 30, 2018, the Company used cash on hand of $161.8 million to pay down a portion of the existing Term Loan. Separately, the Company also repaid the entire outstanding $10.0 million balance on its Revolving Credit Facility under the Credit Agreement.
On August 31, 2018, the Company entered into an Amended and Restated Credit Agreement ("Amended and Restated Credit Agreement") to replace the prior Credit Agreement. The Amended and Restated Credit Agreement provides the Company with a $175.0 million Revolving Credit Facility. In connection with the closing of the Amended and Restated Credit Agreement, the Company borrowed $83.2 million under the Revolving Credit Facility to settle the outstanding Term Loan principal of $83.2 million.

12


Due to the early payments on the Term Loan and the modification of the Credit Facility, the Company recorded losses on extinguishment of debt of $1.3 million and $6.0 million during the three and nine months ended September 30, 2018, respectively.
The Amended and Restated Credit Agreement does not include any term loan component and matures on August 31, 2023. Loans will bear interest at a rate equal to (i) the London Interbank Offered Rate (“LIBOR”) plus the “applicable rate” or (ii) the “base rate” (defined as the highest of (a) the Bank of America prime rate, (b) the Federal Funds rate plus one-half of one percent and (c) LIBOR plus one percent) plus the “applicable rate.” The initial applicable rate was 1.00% per annum for base rate loans and 2.00% per annum for LIBOR rate loans, and thereafter will be determined in accordance with a pricing grid based on the Company’s Consolidated Leverage Ratio (as defined in the Credit Agreement) ranging from 1.75% to 2.50% per annum for LIBOR rate loans and from 0.75% to 1.50% per annum for base rate loans. In addition, the Company pays a commitment fee on the unused portion of the Credit Agreement based on the Company’s Consolidated Leverage Ratio ranging from 0.15% to 0.30% per annum.
The Amended and Restated Credit Agreement is guaranteed by certain material domestic subsidiaries of the Company (the “Guarantors”) and is secured by liens on substantially all of the assets of the Company and the Guarantors, excluding real property and certain other types of excluded assets, and contains affirmative and negative covenants that are customary for credit agreements of this nature. The negative covenants include, among other things, limitations on asset sales, mergers, indebtedness, liens, dividends and other distributions, investments and transactions with affiliates. The Credit Agreement contains two financial covenants: (i) maximum Consolidated Leverage Ratio (as defined in the Credit Agreement) as of the last day of each fiscal quarter of 3.50 to 1.00, which ratio may be increased to 4.50 to 1.00 in case of certain qualifying acquisitions; and (ii) a minimum Consolidated Fixed Charge Coverage Ratio (as defined in the Credit Agreement) of 1.25 to 1.00 as of the end of any fiscal quarter for the most recently completed four fiscal quarters. The Company was in compliance with all financial covenants as of September 30, 2018
Interest expense recognized on the Senior Credit Agreement for the three and nine months ended September 30, 2018 totaled $1.1 million and $4.8 million, respectively, for the stated interest and commitment fee. Amortization of debt issuance costs associated with the Senior Credit Agreement was $0.1 million and $0.8 million, respectively, for the three and nine months ended September 30, 2018, and was recorded to interest expense in the Company's Consolidated Statements of Operations.
Note 7. Stockholders’ Equity
Issuances of Common Stock
During the nine months ended September 30, 2018, the Company issued 275,440 shares of common stock in conjunction with the vesting and release of RSUs. The Company also issued 842,967 shares of common stock upon the exercise of stock options and 49,270 shares of common stock in connection with the Company’s employee stock purchase plan (the “ESPP”), resulting in net proceeds to the Company of approximately $16.0 million during the nine months ended September 30, 2018. The Company withheld 81,247 shares of outstanding common stock in connection with payment of minimum tax withholding obligations for certain employees relating to the lapse of restrictions on certain RSUs with a value of approximately $3.8 million during the nine months ended September 30, 2018.
During the nine months ended September 30, 2017, the Company issued 99,669 shares of common stock in conjunction with the vesting and release of RSUs. The Company also issued 954,527 shares of common stock upon the exercise of stock options and 58,099 shares of common stock in connection with the Company’s ESPP, resulting in net proceeds to the Company of approximately $15.2 million during the nine months ended September 30, 2017. The Company withheld 25,079 shares of outstanding common stock in connection with payment of minimum tax withholding obligations for certain employees relating to the lapse of restrictions on certain RSUs with a value of approximately $0.5 million during the nine months ended September 30, 2017.
As discussed in Note 6, during the nine months ended September 30, 2018, the Company issued 3,699,043 shares of common stock in exchange for $108.8 million in aggregate principal of the Convertible Senior Notes.

13


Stock-Based Compensation
The expense related to the Company’s stock-based compensation plans included in the accompanying Consolidated Statements of Operations was as follows (in thousands):
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
 
2018
 
2017
 
2018
 
2017
 
Cost of sales
$
255

 
$
117

 
$
751

 
$
354

 
Research and development
539

 
396

 
1,732

 
1,212

 
Sales and marketing
686

 
434

 
2,199

 
1,341

 
General and administrative
1,295

 
932

 
4,508

 
3,031

 
Total stock-based compensation expense
$
2,775

 
$
1,879

 
$
9,190

 
$
5,938

Total compensation expense recognized for the three and nine months ended September 30, 2018 includes $0.8 million and $2.7 million related to stock options and $2.0 million and $6.5 million related to RSUs. Total compensation expense recognized for the three and nine months ended September 30, 2017 includes $1.0 million and $3.1 million related to stock options and $0.9 million and $2.8 million related to RSUs. As of September 30, 2018, total unrecognized compensation expense related to non-vested stock options was $5.4 million, which is expected to be recognized over a weighted-average period of approximately 1.9 years. As of September 30, 2018, total unrecognized compensation expense related to non-vested restricted stock was $13.2 million, which is expected to be recognized over a weighted-average period of approximately 2.3 years. Compensation expense capitalized to inventory and compensation expense related to the Company’s ESPP were not material for the three and nine months ended September 30, 2018 or 2017.
The estimated fair value of each stock option was determined on the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions for the option grants.
 
Nine months ended September 30,
 
2018
 
2017
Risk-free interest rate
2.49
%
 
2.31
%
Expected option life (in years)
6.29

 
6.63

Volatility rate
36
%
 
36
%
Dividend rate
%
 
%
The weighted-average fair value of stock options granted during the nine months ended September 30, 2018 and 2017 was $18.76 and $8.71, respectively. The Company granted 159,017 and 253,844 stock options during the nine months ended September 30, 2018 and 2017, respectively. The Company granted 231,657 and 335,716 RSUs during the nine months ended September 30, 2018 and 2017, respectively. The fair value of RSUs is determined based on the closing market price of the Company’s common stock on the grant date. The weighted-average fair value of RSUs granted during the nine months ended September 30, 2018 and 2017 was $49.45 and $21.61, respectively.

14


Note 8. Industry and Geographic Information
The Company operates in one reportable segment. Sales to customers outside the U.S. represented $124.3 million (32%) and $21.6 million (13%) of total revenue for the nine months ended September 30, 2018 and 2017, respectively. As of September 30, 2018 and December 31, 2017, accounts receivable due from foreign customers were $10.1 million and $18.8 million, respectively.
The Company had sales to individual customers in excess of 10% of total revenues, as follows:
 
Nine months ended 
 September 30,
 
2018
 
2017
Customer:
 
 
 
A
17
%
 
21
%
B
14
%
 
13
%
C
12
%
 
21
%
 
43
%
 
55
%
As of September 30, 2018 and December 31, 2017, accounts receivable from customers with balances due in excess of 10% of total accounts receivable totaled $38.6 million and $44.4 million, respectively.
Consolidated net revenues by product category for the three and nine months ended September 30, 2018 and 2017 are as follows (in thousands):
 
Three month ended September 30,
 
Nine months ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
Rapid Immunoassay
$
35,366

 
$
36,458

 
$
132,740

 
$
115,974

Cardiac Immunoassay
65,287

 

 
203,581

 

Specialized Diagnostic Solutions
12,294

 
11,655

 
39,859

 
37,731

Molecular Diagnostic Solutions
4,452

 
2,781

 
13,517

 
9,148

Total revenues
$
117,399

 
$
50,894

 
$
389,697

 
$
162,853

Note 9. Commitments and Contingencies
Operating Lease - Summers Ridge Property
On January 5, 2018, the Company entered into a sale and leaseback transaction for the San Diego property on Summers Ridge Road (the "Summers Ridge Property") that was acquired as part of the Triage Business from Alere discussed in Note 11. The Summers Ridge Property was included as assets held for sale on the Consolidated Balance Sheet as of the year ended December 31, 2017. The Company sold the Summers Ridge Property for a net consideration of $146.6 million. In addition, the Company entered into a lease agreement with the buyer to lease two of the four buildings on the Summers Ridge Property for an initial term of 15 years. The Summers Ridge lease is subject to certain must-take provisions related to two additional buildings, consisting of approximately 124,461 square feet, upon the expiration of certain leases with the tenants of the other portion of the Summers Ridge Property. The initial term can be extended by the Company for two additional five-year terms upon satisfaction of certain conditions.
The approximate future minimum lease payments of the Summers Ridge Property are $1.5 million for the remainder of 2018, $6.5 million for 2019, $7.6 million for 2020, $7.8 million for 2021, $8.0 million for 2022, $8.3 million for 2023 and $86.8 million in the aggregate after 2023.
Litigation and Other Legal Proceedings
In Beckman Coulter Inc. v. Quidel Corporation, which was filed in the Superior Court for the County of San Diego, California, on November 27, 2017, Beckman Coulter (“Beckman”) alleges that a provision of an agreement between Quidel and Beckman violates state antitrust laws. Our acquisition of the BNP Business consisted of assets and liabilities relating to a contractual arrangement with Beckman (the “Beckman Agreement”) for the supply of antibodies and other inputs related to,

15


and distribution of, the Triage® BNP Test for the Beckman Coulter Access Family of Immunoassay Systems. The Beckman Agreement further provides that Beckman, for a specified period, cannot research, develop, manufacture or sell an assay for use in the diagnosis of cardiac diseases that measures or detects the presence or absence of BNP or NT-pro-BNP (a related biomarker). In the lawsuit, Beckman asserts that this provision violates certain state antitrust laws and is unenforceable. Beckman contends that it has suffered damages due to this provision and seeks a declaration that this provision is void. Beckman has filed a motion for summary adjudication, which is scheduled to be heard on December 7, 2018. Trial in this matter is currently scheduled to begin on August 30, 2019.
We deny that the contractual provision is unlawful, deny any liability with respect to this matter, and intend to vigorously defend ourselves. There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from this matter including: (1) we are vigorously defending ourselves and believe that we have a number of meritorious legal defenses; (2) there are unresolved questions of law and fact that could be important to the ultimate resolution of this matter; and (3) discovery is in the very early stages. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from this matter or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.
From time to time, the Company is involved in other litigation and proceedings, including matters related to product liability claims, commercial disputes and intellectual property claims, as well as regulatory, employment, and other claims related to our business. The Company accrues for legal claims when, and to the extent that, amounts associated with the claims become probable and are reasonably estimable. The actual costs of resolving legal claims may be substantially higher or lower than the amounts accrued for those claims. For those matters as to which we are not able to estimate a possible loss or range of loss, we are not able to determine whether the loss will have a material adverse effect on our business, financial condition or results of operations or liquidity. No accrual has been recorded as of September 30, 2018 and December 31, 2017 related to such matters as they are not probable and/or reasonably estimable. 
Management believes that all such current legal actions, in the aggregate, will not have a material adverse effect on the Company. However, the resolution of, or increase in any accruals for, one or more matters may have a material adverse effect on the Company's results of operations and cash flows.
The Company also maintains insurance, including coverage for product liability claims, in amounts which management believes are appropriate given the nature of its business.
Note 10. Fair Value Measurements
The following table presents the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of the following periods (in thousands):
 
September 30, 2018
 
December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Contingent consideration
$

 
$

 
$
18,752

 
$
18,752

 
$

 
$

 
$
24,301

 
$
24,301

Deferred consideration

 
184,845

 

 
184,845

 

 
223,158

 

 
223,158

Total liabilities measured at fair value
$

 
$
184,845

 
$
18,752

 
$
203,597

 
$

 
$
223,158

 
$
24,301

 
$
247,459

There were no transfers of assets or liabilities between Level 1, Level 2 and Level 3 categories of the fair value hierarchy during the three and nine month periods ended September 30, 2018 and the year ended December 31, 2017.
In connection with the acquisition of the BNP Business, the Company will pay up to $280.0 million in cash, of which $256.0 million is guaranteed and is considered deferred consideration and $24.0 million is contingent consideration. The fair value of the deferred consideration was determined to be $220.6 million on the acquisition date based on the net present value of cash payments. The discount rate utilized was based on a quoted borrowing rate for a similar liability. The Company recorded $7.7 million for the accretion of interest on the deferred consideration during the nine months ended September 30, 2018. The fair value of contingent consideration on the acquisition date was $19.7 million and was calculated using a discounted probability weighted valuation model. Due to changes in the estimated probabilities and a shorter discounting period related to the BNP Business contingent consideration, the fair value of the contingent consideration liabilities changed during the three and nine months ended September 30, 2018. These changes resulted in a $0.7 million loss recorded to general and administrative expense in the Consolidated Statements of Operations during the nine months ended September 30, 2018.
In conjunction with the acquisitions of BioHelix Corporation in May 2013, AnDiaTec GmbH & Co. KG in August 2013 and Immutopics, Inc. in March 2016, the Company recorded contingent consideration of $0.3 million as of September 30, 2018 and $4.6 million as of December 31, 2017. The Company assesses the fair value of contingent consideration to be settled in

16


cash related to these prior acquisitions using a discounted revenue model. Significant assumptions used in the measurement include revenue projections and discount rates. This fair value measurement of contingent consideration is based on significant inputs not observed in the market and thus represent Level 3 measurements.
Changes in estimated fair value of contingent consideration liabilities from December 31, 2017 through September 30, 2018 are as follows (in thousands):

Contingent consideration liabilities
(Level 3 measurement)
Balance at December 31, 2017
$
24,301

Cash payments
(6,294
)
Loss recorded for fair value adjustments
745

Balance at September 30, 2018
$
18,752

Note 11. Acquisition
On October 6, 2017, the Company closed on the acquisition of the Triage® MeterPro® Cardiovascular (CV) and toxicology business ("Triage Business), and B-type Naturietic Peptide (BNP) assay business run on Beckman Coulter analyzers ("BNP Business" and, together, the "Triage and BNP Businesses") from Alere Inc. ("Alere"). The acquisition has been accounted for in conformity with ASC Topic 805, Business Combinations. In connection with the acquisition of the Triage Business, the Company paid $399.8 million in cash and assumed certain liabilities. These acquisitions enhance the Company's revenue profile and expand the Company's geographic footprint and product portfolio. The Company used proceeds from the Term Loan (defined and discussed in Note 6) of $245.0 million and cash on hand to pay (i) the consideration for the Triage Business and (ii) fees and expenses incurred in connection with the acquisition of the Triage and BNP Businesses. In connection with the acquisition of the BNP Business, the Company: (i) will pay (A) $16.0 million in cash plus up to an additional $24.0 million in contingent consideration, payable in five annual installments of up to $8.0 million, the first of which was due and paid in April 2018, (B) $240.0 million in cash, payable in six annual installments of $40.0 million each, the first of which was due and paid in April 2018 and (C) $0.2 million in cash for certain inventory related adjustments; and (ii) assumed certain liabilities.
The purchase price consideration is as follows (in thousands):
Cash consideration—Triage Business
$
399,798

Deferred consideration—BNP Business
220,550

Contingent consideration—BNP Business
19,700

Inventory related adjustment
205

Net consideration
$
640,253

The fair value of the deferred consideration was determined to be $220.6 million on the acquisition date based on the net present value of cash payments. The discount rate utilized was based on a quoted borrowing rate for a similar liability. The fair value of contingent consideration on the acquisition date of $19.7 million was calculated using a discounted probability weighted valuation model.

17


The components of the purchase price allocation at the acquisition date is as follows (in thousands):
Prepaid expenses and other current assets
$
796

Assets held for sale
146,540

Inventories
52,205

Property, plant and equipment
10,608

Intangible assets
184,900

Goodwill
245,531

Other non-current assets
182

Total assets acquired
$
640,762

Other current liabilities
(509
)
Total net assets and liabilities acquired
$
640,253

Goodwill represents the excess of the total purchase price over the fair value of the underlying net assets, largely arising from synergies expected to be achieved by the combined Company and the expanded revenue profile and product diversity. The goodwill is fully deductible for tax purposes.

The fair value of the identified intangible assets was determined primarily using an income-based approach. Intangible assets are amortized on a straight-line basis over the respective amortization periods. The following sets forth results of the amounts assigned to the identifiable intangible assets acquired (in thousands):
Intangible Asset
 
Amortization period
 
Fair value of assets acquired
Purchased technology
 
10 years
 
$
52,400

Customer relationships
 
7 years
 
115,000

Trademarks
 
10 years
 
17,500

Total intangible assets
 
 
 
$
184,900


18


ITEM 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
In this Quarterly Report, all references to “we,” “our” and “us” refer to Quidel Corporation and its subsidiaries.
Future Uncertainties and Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws that involve material risks, assumptions and uncertainties. Many possible events or factors could affect our future financial results and performance, such that our actual results and performance may differ materially from those that may be described or implied in the forward-looking statements. As such, no forward-looking statement can be guaranteed. Differences in actual results and performance may arise as a result of a number of factors including, without limitation: our reliance on sales of our influenza diagnostic tests; fluctuations in our operating results resulting from the timing of the onset, length and severity of cold and flu seasons, seasonality, government and media attention focused on influenza and the related potential impact on humans from novel influenza viruses, adverse changes in competitive conditions in domestic and international markets, the reimbursement system currently in place and future changes to that system, changes in economic conditions in our domestic and international markets, lower than anticipated market penetration of our products, the quantity of our product in our distributors’ inventory or distribution channels, changes in the buying patterns of our distributors, and changes in the healthcare market and consolidation of our customer base; our development and protection of proprietary technology rights; our development of new technologies, products and markets; our reliance on a limited number of key distributors; intellectual property risks, including but not limited to, infringement litigation; our need for additional funds to finance our capital or operating needs; the financial soundness of our customers and suppliers; acceptance of our products among physicians and other healthcare providers; competition with other providers of diagnostic products; adverse actions or delays in new product reviews or related to currently-marketed products by the U.S. Food and Drug Administration (the “FDA”) or other regulatory authorities or loss of any previously received regulatory approvals or clearances; changes in government policies; our exposure to claims and litigation, including litigation currently pending against us; costs of or our failure to comply with government regulations in addition to FDA regulations; compliance with government regulations relating to the handling, storage and disposal of hazardous substances; third-party reimbursement policies; our failure to comply with laws and regulations relating to billing and payment for healthcare services; our ability to meet demand for our products; interruptions in our supply of raw materials; product defects; business risks not covered by insurance; our exposure to cyber-based attacks and security breaches; competition for and loss of management and key personnel; international risks, including but not limited to, compliance with product registration requirements, exposure to currency exchange fluctuations and foreign currency exchange risk sharing arrangements, longer payment cycles, lower selling prices and greater difficulty in collecting accounts receivable, reduced protection of intellectual property rights, political and economic instability, taxes, and diversion of lower priced international products into U.S. markets; changes in tax rates and exposure to additional tax liabilities or assessments; risks relating to the acquisition and integration of the Triage and BNP Businesses; Alere’s failure to perform under various transition agreements relating to our acquisition of the Triage and BNP Businesses; that we may incur substantial costs to build our information technology infrastructure to transition the Triage and BNP Businesses; that we may have to write off goodwill relating to our acquisition of the Triage and BNP Businesses; our ability to manage our growth strategy; the level of our indebtedness; the amount of, and our ability to repay, renew or extend, our outstanding debt and its impact on our operations and our ability to obtain financing; that substantially the Senior Credit Facility is secured by substantially all of our assets; our prepayment requirements under the Senior Credit Facility; the agreements for our indebtedness place operating and financial restrictions on the Company; that an event of default could trigger acceleration of our outstanding indebtedness; the effect on our operating results from the trigger of the conditional conversion feature of our Convertible Senior Notes; that we may incur additional indebtedness; increases in interest rate relating to our variable rate debt; dilution resulting from future sales of our equity; volatility in our stock price; provisions in our charter documents, Delaware law and the indenture governing our Convertible Senior Notes that might delay or impede stockholder actions with respect to business combinations or similar transactions; and our intention of not paying dividends. Forward-looking statements typically are identified by the use of terms such as “may,” “will,” “should,” “might,” “expect,” “anticipate,” “estimate,” “plan,” “intend,” “goal,” “project,” “strategy,” “future,” and similar words, although some forward-looking statements are expressed differently. Forward-looking statements in this Quarterly Report include, among others, statements concerning: our outlook for the remainder of 2018 regarding our strategy, revenue growth, gross margins and earnings, including the sources of expected growth; that we expect to continue to make substantial expenditures for research and development activities; projected capital expenditures for the remainder of 2018 and our source of funds for such expenditures; the sufficiency of our liquidity and capital resources; our strategy, goals, initiatives and objectives; the impact of new accounting standards; our exposure to, and defenses against, claims and litigation; the sufficiency of our liquidity and our short-term needs for capital; our use of foreign currency hedging agreements; that we may incur additional debt or issue additional equity; that we may enter into agreements to share foreign currency exchange fluctuation risk; and our intention to continue to evaluate technology, product lines and acquisition opportunities. The risks described under “Risk Factors” in Item 1A of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2017, and elsewhere herein and in reports and registration statements that we file with the Securities

19


and Exchange Commission (the “SEC”) from time to time, should be carefully considered. You are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date of this Quarterly Report.
The following should be read in conjunction with the Consolidated Financial Statements and Notes thereto beginning on page 3 of this Quarterly Report. Except as required by law, we undertake no obligation to publicly release the results of any revision or update of these forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
We have a leadership position in the development, manufacturing and marketing of diagnostic testing solutions. These diagnostic testing solutions are separated into our four product categories: rapid immunoassay, cardiac immunoassay, specialized diagnostic solutions and molecular diagnostic solutions. We sell our products directly to end users and distributors, in each case, for professional use in physician offices, hospitals, clinical laboratories, reference laboratories, leading universities, retail clinics, pharmacies and wellness screening centers. We market our products through a network of distributors and a direct sales force.
Outlook
We anticipate continued revenue growth during the remainder of 2018 and a related positive impact on gross margin and earnings. This growth is expected to be driven primarily by the impact of the Triage and BNP Businesses and sales of our Sofia assays and molecular products. In addition, we expect continued and significant investment in research and development activities as we invest in our next generation immunoassay and molecular platforms. We will continue our focus on prudently managing our business and delivering solid financial results, while at the same time striving to continue to introduce new products to the market and maintaining our emphasis on research and development investments for longer term growth. Finally, we will continue to evaluate opportunities to acquire new product lines, technologies and companies.
Three months ended September 30, 2018 compared to the three months ended September 30, 2017
Total Revenues
The following table compares total revenues for the three months ended September 30, 2018 and 2017 (in thousands, except percentages):
 
Three months ended 
 September 30,
 
Increase (Decrease)
 
2018
 
2017
 
$
 
%
Rapid Immunoassay
$
35,366

 
$
36,458

 
$
(1,092
)
 
(3
)%
Cardiac Immunoassay
65,287

 

 
65,287

 
N/A

Specialized Diagnostic Solutions
12,294

 
11,655

 
639

 
5
 %
Molecular Diagnostic Solutions
4,452

 
2,781

 
1,671

 
60
 %
Total revenues
$
117,399

 
$
50,894

 
$
66,505

 
131
 %
For the three months ended September 30, 2018, total revenue increased to $117.4 million from $50.9 million in the prior period. The increase in total revenues was driven by Cardiac Immunoassay revenue from the acquisition of the Triage and BNP Businesses in October 2017. The 60% increase in our Molecular revenues was driven by continued gains on our Solana platform. These increases were partially offset by lower Rapid Immunoassay sales driven primarily due to timing of distributor orders as we enter the the cold and flu season versus prior year.
Gross Profit
Gross profit increased to $69.6 million, or 59% of revenue for the three months ended September 30, 2018, compared to $29.7 million, or 58% of revenue for the three months ended September 30, 2017. The increased gross profit was mainly driven by the addition of the Cardiac Immunoassay products from the acquisition of the Triage and BNP Businesses in October 2017. Gross margin increased by 1% compared to the same period in the prior year due to lower amortization of intangibles on the legacy Quidel business.

20


Operating Expenses
The following table compares operating expenses for the three months ended September 30, 2018 and 2017 (in thousands, except percentages):
 
Three months ended September 30,
 
 
 
 
 
2018
 
2017
 
 
 
 
 
Operating
expenses
 
As a % of
total
revenues
 
Operating
expenses
 
As a % of
total
revenues
 
 Increase (Decrease)
 
$
 
%
Research and development
$
13,103

 
11
%
 
$
7,468

 
15
%
 
$
5,635

 
75
 %
Sales and marketing
$
26,504

 
23
%
 
$
13,588

 
27
%
 
$
12,916

 
95
 %
General and administrative
$
10,620

 
9
%
 
$
6,580

 
13
%
 
$
4,040

 
61
 %
Acquisition and integration costs
$
2,521

 
2
%
 
$
4,591

 
9
%
 
$
(2,070
)
 
(45
)%
Research and Development Expense
Research and development expense for the three months ended September 30, 2018 increased from $7.5 million to $13.1 million due primarily to additional expenses associated with the Triage Business and investments in the Savanna molecular diagnostic platform.
Research and development expenses include direct external costs such as fees paid to third-party contractors and consultants, and internal direct and indirect costs such as compensation and other expenses for research and development personnel, supplies and materials, clinical trials and studies, facility costs and depreciation.
Sales and Marketing Expense
Sales and marketing expense for the three months ended September 30, 2018 increased from $13.6 million to $26.5 million primarily driven by increased expenses associated with the global footprint of the newly acquired Triage and BNP Businesses in October 2017. Additionally, the Company experienced higher compensation costs and fees for professional services.
General and Administrative Expense
General and administrative expense for the three months ended September 30, 2018 increased from $6.6 million to $10.6 million compared with the prior year period primarily due to our global infrastructure created in support of the acquired Triage BNP businesses. The Company also had increased compensation costs and professional fees in the period.
Acquisition and Integration Costs
Acquisition and integration costs for the three months ended September 30, 2018 decreased from $4.6 million to $2.5 million compared with the prior year period, as more of the global operations become fully integrated into the business.
Other Expense, Net
Interest expense, net primarily relates to accretion of interest on the deferred consideration related to the BNP Business, coupon and accretion interest related to our Convertible Senior Notes and interest and amortization of deferred financing costs associated with the Senior Credit Facility. The increase in interest expense of $2.0 million over the last year was primarily due to the interest incurred under the deferred consideration and the Senior Credit Facility entered into in connection with the acquisitions of the Triage and BNP Businesses. Loss on extinguishment of debt of $1.3 million was due to the modification of the Senior Credit Agreement and the resulting write-off of certain previously capitalized costs relating to the Term Loan. See further discussion in Note 6 to the Consolidated Financial Statements in this Quarterly Report.

21


Income Taxes
The income tax benefit was insignificant for the three months ended September 30, 2018. For the three months ended September 30, 2017, income tax expense was $0.2 million. For the three months ended September 30, 2018, we had an insignificant income tax benefit compared to income tax expense in the prior year primarily as a result of the reduction in the tax rate from the Tax Act and higher discrete tax benefits recorded during the 2018 periods for excess tax benefits of stock-based compensation.
Nine months ended September 30, 2018 compared to the nine months ended September 30, 2017
Total Revenues
The following table compares total revenues for the nine months ended September 30, 2018 and 2017 (in thousands, except percentages):
 
For the nine months ended
 
 
 
 
September 30,
 
Increase (Decrease)
 
2018
 
2017
 
$
 
%
Rapid Immunoassay
$
132,740

 
$
115,974

 
$
16,766

 
14
%
Cardiac Immunoassay
203,581

 

 
203,581

 
N/A

Specialized Diagnostic Solutions
39,859

 
37,731

 
2,128

 
6
%
Molecular Diagnostic Solutions
13,517

 
9,148

 
4,369

 
48
%
Total revenues
$
389,697

 
$
162,853

 
$
226,844

 
139
%
For the nine months ended September 30, 2018, total revenue increased to $389.7 million from $162.9 million in the prior year. The increase in total revenues was driven primarily by Cardiac Immunoassay revenue from the acquisition of the Triage and BNP Businesses. The Company also realized increases in Rapid Immunoassay revenues due primarily to growth in Influenza, bolstered by a robust cold and flu season during the first quarter of 2018. Molecular products were up 48% over prior year driven by continued revenue growth on the Solana platform.
Gross Profit
Gross profit increased to $233.6 million, or 60% of revenue for the nine months ended September 30, 2018, compared to $97.0 million, or 60% of revenue for the nine months ended September 30, 2017. The increased gross profit was mainly driven by the addition of the Cardiac Immunoassay products from the acquisition of the Triage and BNP Businesses and increased Influenza revenues in the current year. Gross margin remained consistent with the same period in the prior year.
Operating Expenses
The following table compares operating expenses for the nine months ended September 30, 2018 and 2017 (in thousands, except percentages):
 
For the nine months ended September 30,
 
 
 
 
 
2018
 
2017
 
 
 
 
 
Operating
expenses
 
As a % of
total
revenues
 
Operating
expenses
 
As a % of
total
revenues
 
 Increase (Decrease)
 
$
 
%
Research and development
$
39,008

 
10
%
 
$
22,970

 
14
%
 
$
16,038

 
70
%
Sales and marketing
$
82,607

 
21
%
 
$
40,875

 
25
%
 
$
41,732

 
102
%
General and administrative
$
32,652

 
8
%
 
$
20,483

 
13
%
 
$
12,169

 
59
%
Acquisition and integration costs
$
10,923

 
3
%
 
$
7,022

 
4
%
 
$
3,901

 
56
%
Research and Development Expense
Research and development expense for the nine months ended September 30, 2018 increased from $23.0 million to $39.0 million due primarily to additional expenses associated with the Triage Business and investments in the Savanna molecular diagnostic platform.

22


Research and development expenses include direct external costs such as fees paid to consultants, and internal direct and indirect costs such as compensation and other expenses for research and development personnel, supplies and materials, clinical trials and studies, facility costs and depreciation.
Sales and Marketing Expense
Sales and marketing expense for the nine months ended September 30, 2018 increased $41.7 million to $82.6 million compared with the prior year period, due primarily to increased expenses associated with the newly acquired Triage and BNP Businesses in October 2017. Increases were also driven by higher compensation costs associated with additional headcount and improved company performance.
General and Administrative Expense
General and administrative expense for the nine months ended September 30, 2018 increased from $20.5 million to $32.7 million compared with the prior year period, due to additional costs associated with the Triage and BNP Businesses, higher professional fees and higher compensation costs associated with improved company performance.
Acquisition and Integration Costs
Acquisition and integration costs for the nine months ended September 30, 2018 increased from $7.0 million to $10.9 million driven by integration activities related to the acquisitions of the Triage and BNP Businesses.
Other Expense, net
Interest expense, net was $19.5 million and $8.4 million for the nine months ended September 30, 2018 and 2017, respectively. Interest expense, net primarily relates to accretion of interest on the deferred consideration, coupon and accretion interest related to our Convertible Senior Notes and interest and amortization of deferred financing costs associated with the Senior Credit Facility. The increase in interest expense of $11.1 million over the prior year was primarily due to the accretion of interest on deferred consideration related to the BNP Business and interest incurred under the Senior Credit Facility. These increases were partially offset by lower interest expense associated with the Convertible Senior Note due to conversions during the current year. Loss on extinguishment of debt of $8.3 million for the nine months ended September 30, 2018 relates to the $161.8 million early payment on the Term Loan, the extinguishment of $108.8 million in aggregate principal of the Convertible Senior Notes in exchange for the Company's common stock during the period and the was due to the modification of the Senior Credit Agreement and the resulting write-off of certain previously capitalized costs relating to the Term Loan. See further discussion in Note 6 to the Consolidated Financial Statements in this Quarterly Report.
Income Taxes
For the nine months ended September 30, 2018 and 2017, we recognized income tax benefit of $1.1 million and income tax expense of $0.4 million, respectively. For the nine months ended September 30, 2018, we had an income tax benefit compared to an income tax expense in the prior year primarily as a result of the reduction in the tax rate from the Tax Act, the impacts of the full valuation allowance on U.S. earnings and discrete tax benefits recorded during the period related to stock-based compensation.
The Tax Act significantly revises how companies compute their U.S corporate tax liability by, among other provisions, reducing the corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017, implementing a territorial tax system, and requiring a mandatory one-time tax on U.S.-owned undistributed foreign earnings and profits known as the transition tax.

23



Liquidity and Capital Resources
As of September 30, 2018 and December 31, 2017, the principal sources of liquidity consisted of the following (in thousands): 
 
September 30, 2018
 
December 31, 2017
Cash and cash equivalents
$
38,694

 
$
36,086

Working capital including cash and cash equivalents (1)
$
95,585

 
$
202,881

(1) The Convertible Senior Notes balance of $53.9 million is excluded from working capital amount as such notes may be settled at the Company's option in cash or a combination of cash and shares of common stock.

As of September 30, 2018, we had $38.7 million in cash and cash equivalents, a $2.6 million increase from December 31, 2017. Our cash requirements fluctuate as a result of numerous factors, such as cash generated from operations, progress in research and development projects, competition and technological developments and the time and expenditures required to obtain governmental approval of our products as well as asset acquisitions. In addition, we intend to continue to evaluate candidates for new product lines, company or technology acquisitions or technology licensing. If we decide to proceed with any such transactions, we may need to incur additional debt, or issue additional equity, to successfully complete such transactions.
Our primary source of liquidity, other than our holdings of cash and cash equivalents, has been cash flows from operations, debt financings and proceeds from issuance of common stock. Cash generated from operations provides us with the financial flexibility we need to meet normal operating, investing and financing needs. We anticipate that our current cash and cash equivalents, together with cash provided by operating activities as well as access to funds from our Revolving Credit Facility will be sufficient to fund our near-term capital and operating needs for at least the next 12 months. Normal operating needs include the planned costs to operate our business, including amounts required to fund working capital and capital expenditures. Our primary short-term needs for capital, which are subject to change, include expenditures related to:  
support of commercialization efforts related to our current and future products, including support of our direct sales force and field support resources both in the United States and abroad;
interest on and repayments of our Convertible Senior Notes, Revolving Credit Facility, deferred consideration, contingent consideration and lease obligations;
the continued advancement of research and development efforts;
acquisitions of equipment and other fixed assets for use in our current and future manufacturing and research and development facilities;
the integration of our recent acquisitions; and
potential strategic acquisitions and investments.
Our Convertible Senior Notes due in 2020 have a coupon rate of 3.25% and are convertible as of September 30, 2018. The principal balance outstanding as of September 30, 2018 was $58.5 million. On August 31, 2018, we entered into an amendment to the Credit Agreement to increase the Revolving Credit Facility limit to $175.0 million and transferred the Term Loan principal of $83.2 million to the Revolving Credit Facility. The Revolving Credit Facility matures on August 31, 2023. See Note 6 of the Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report for further discussion of the Convertible Senior Notes and the Revolving Credit Facility.
As of September 30, 2018, we have $203.6 million in fair value of deferred and contingent considerations associated with prior acquisitions to be settled in future periods.
We expect our revenue and operating expenses will significantly impact our cash management decisions. Our future capital requirements and the adequacy of our available funds to service our long-term debt and to fund working capital expenditures and business development efforts will depend on many factors, including:
our ability to successfully integrate our recently acquired businesses;
our ability to realize revenue growth from our new technologies and create innovative products in our markets;
our outstanding debt and covenant restrictions;
our ability to leverage our operating expenses to realize operating profits as we grow revenue;
competing technological and market developments; and

24


the need to enter into collaborations with other companies or acquire other companies or technologies to enhance or complement our product and service offerings.

Cash Flow Summary
 
Nine months ended September 30,
 
2018
 
2017
Net cash provided by operating activities:
$
93,128

 
$
16,484

Net cash provided by (used for) investing activities:
123,769

 
(27,155
)
Net cash (used for) provided by financing activities:
(214,474
)
 
14,137

Effect of exchange rates on cash
185

 
20

Net increase in cash and cash equivalents
$
2,608

 
$
3,486

Cash provided by operating activities of $93.1 million during the nine months ended September 30, 2018 reflects net income of $41.7 million and non-cash adjustments of $67.2 million primarily associated with depreciation, amortization, stock-based compensation, non-cash interest expense, amortization of inventory step-up to fair value and loss on extinguishment of debt. In addition, we used cash for net working capital of $19.3 million, primarily driven by changes in receivables related to our transition services agreements and income taxes receivable. For the nine months ended September 30, 2017, cash provided by operating activities of $16.5 million reflected net loss of $3.1 million and non-cash adjustments of $28.0 million primarily related to depreciation, amortization and stock-based compensation. Additionally, a net working capital use of $12.5 million offset a portion of the increase.
Our investing activities provided $123.8 million during the nine months ended September 30, 2018 primarily from the sale of the Summers Ridge property for approximately $146.6 million. Additionally, we used $22.9 million to acquire production equipment, building improvements and Sofia, Solana and Triage instruments available for lease. Our investing activities used $27.2 million during the nine months ended September 30, 2017, primarily consisting of the acquisition of the InflammaDry and AdenoPlus diagnostic businesses from RPS for approximately $14.4 million and $12.8 million on production equipment, building improvements, intangible assets and Sofia and Solana instruments available for lease.
We are currently planning approximately $10.0 million in capital expenditures for the remainder of 2018. The primary purpose for our capital expenditures is to acquire manufacturing and scientific equipment, to purchase or develop information technology, to acquire Sofia, Solana and Triage instruments and to implement facility improvements. We plan to fund these capital expenditures with the cash on our balance sheet.
Cash used by financing activities was $214.5 million during the nine months ended September 30, 2018 primarily related to payments on the Term Loan of $161.8 million, payments on the Revolving Credit Facility of $10.0 million, payments on deferred consideration of $46.0 million, repurchases of common stock of $3.8 million, $2.0 million of transaction costs related to the exchange of convertible notes for common stock and payments of acquisition contingent consideration of $6.3 million, partially offset by proceeds from issuance of stock of $16.0 million from stock option exercises. Cash provided by financing activities was $14.1 million during the nine months ended September 30, 2017, and was primarily related to proceeds from the issuance of common stock of $15.2 million from stock option exercises. This amount was partially offset by repurchases of common stock of $0.5 million and payments of acquisition related acquisition contingencies of $0.5 million.
Seasonality
Sales of our influenza products are subject to, and significantly affected by, the seasonal demands of the cold and flu seasons, prevalent during the fall and winter. As a result of these seasonal demands, we typically experience lower sales volume in the second and third quarters of the calendar year, and typically have higher sales in the first and fourth quarters of the calendar year. Historically, sales of our influenza products have varied from year to year based, in large part, on the severity, length and timing of the onset of the cold and flu season.
Off-Balance Sheet Arrangements
At September 30, 2018 and December 31, 2017, we did not have any relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As

25


such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
Recent Accounting Pronouncements
Information about recently adopted and proposed accounting pronouncements is included in Note 1 of the Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report under the heading “Recent Accounting Pronouncements” and is incorporated herein by reference.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, management evaluates its estimates, including those related to customer programs and incentives, stock-based compensation, goodwill and intangible assets, business combinations, income taxes, and convertible debt. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
A comprehensive discussion of our critical accounting policies and management estimates is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2017. Other than the adoption of ASU 2014-09, Revenue from Contracts with Customers (Topic 606) as described in Note 1 to the Consolidated Financial Statements in this Quarterly Report, there were no material changes to our critical accounting policies and estimates during the nine months ended September 30, 2018.
ITEM 3.    Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We are not subject to interest rate risk on our Convertible Senior Notes as the notes have a fixed interest rate of 3.25%. For fixed rate debt, changes in interest rates will generally affect the fair value of the debt instrument, but not our earnings or cash flows. Under our current policies, we do not use interest rate derivative instruments to manage our exposure to changes in interest rates.
Our Senior Credit Facility debt is subject to interest rate risk as a portion of the interest rate fluctuates based on the LIBOR. We had $83.2 million outstanding under our Senior Credit Facility at September 30, 2018. The weighted average interest rate on these borrowings is 4.31% as of September 30, 2018. A hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would increase our annual interest expense by approximately $0.8 million. Based on our market risk sensitive instruments outstanding at September 30, 2018, we have determined that there was no material market risk exposure from such instruments to our consolidated financial position, results of operations or cash flows as of such date.
Our current investment policy with respect to our cash and cash equivalents focuses on maintaining acceptable levels of interest rate risk and liquidity. Although we periodically evaluate our placement of investments, as of September 30, 2018, we did not have any cash and cash equivalents placed in funds held in government money market accounts and commercial paper.
Foreign Currency Exchange Risk
Sales to customers outside the U.S. represented $124.3 million (32%) of total revenue for the nine months ended September 30, 2018, and accounts receivable due from foreign customers was $10.1 million as of September 30, 2018. We recognized $0.5 million in foreign exchange loss for the nine months ended September 30, 2018 and an immaterial foreign exchange loss for the nine months ended September 30, 2017. The majority of our international sales are negotiated for and paid in foreign currency, which involves currency risks. Change in the values of the Euro and the Chinese Renminbi could result in currency gains and losses and could have an impact on our business, financial condition and results of operations. We do not currently hedge against exchange rate fluctuations, which means that we are fully exposed to exchange rate changes. In addition, we have certain agreements whereby we share the foreign currency exchange fluctuation risk. We may, in the future, enter into similar such arrangements.

26


ITEM 4.    Controls and Procedures
Evaluation of disclosure controls and procedures: We have performed an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of September 30, 2018 at a reasonable assurance level to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Changes in internal control over financial reporting: There was no change in our internal control over financial reporting during the quarter ended September 30, 2018 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1.    Legal Proceedings
The information set forth in the section entitled “Litigation and Other Legal Proceedings” under Note 9 of the Notes to the Consolidated Financial Statements, included in Part I, Item I of this Quarterly Report, is incorporated herein by reference.
ITEM 1A.    Risk Factors
There has been no material change in our risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017. For a detailed description of our risk factors, refer to Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2017. 
ITEM 2.    Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The table below sets forth information regarding repurchases of our common stock by us during the three months ended September 30, 2018.
Period
 
Total number
of shares
purchased (1)
 
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 (2)
July 2, 2018 - July 29, 2018
 

 
$

 

 
$

July 30, 2018 - August 26, 2018
 
316

 
70.76

 

 

August 27, 2018 - September 30, 2018
 
2,202

 
73.18

 

 

Total
 
2,518

 
$
72.87

 

 
$

(1) We withheld 2,518 shares of common stock from employees in connection with payment of minimum tax withholding obligations relating to the lapse of restrictions on certain RSUs during the three months ended September 30, 2018.
(2) Our prior share repurchase program expired on January 25, 2018 and was not renewed.
ITEM 3.    Defaults Upon Senior Securities
None.
ITEM 4.    Mine Safety Disclosures
Not applicable.

27


ITEM 5.    Other Information
None.
ITEM 6.    Exhibits
 
 
 
3.1
 
3.2
 
3.3
 
4.1
 
10.1*
 
31.1*
 
31.2*
 
32.1**
 
101.INS*
 
XBRL Instance Document
101.SCH*
 
XBRL Taxonomy Extension Schema Document
101.CAL*
 
XBRL Taxonomy Calculation Linkbase Document
101.DEF*
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
 
XBRL Taxonomy Label Linkbase Document
101.PRE*
 
XBRL Taxonomy Presentation Linkbase Document
___________________________
* Filed herewith.
** Furnished herewith.



28


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
Date: November 7, 2018
QUIDEL CORPORATION
 
 
 
/s/ DOUGLAS C. BRYANT
 
Douglas C. Bryant
 
President and Chief Executive Officer
(Principal Executive Officer)
 
 
 
/s/ RANDALL J. STEWARD
 
Randall J. Steward
 
Chief Financial Officer
(Principal Financial Officer)

29


Exhibit Index
 
Exhibit
Number
 
 
3.1
 
3.2
 
3.3
 
4.1
 
10.1*
 

31.1*
 
31.2*
 
32.1**
 
101.INS*
 
XBRL Instance Document
101.SCH*
 
XBRL Taxonomy Extension Schema Document
101.CAL*
 
XBRL Taxonomy Calculation Linkbase Document
101.DEF*
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
 
XBRL Taxonomy Label Linkbase Document
101.PRE*
 
XBRL Taxonomy Presentation Linkbase Document
___________________________
* Filed herewith.
** Furnished herewith.






30
EX-10.1 2 exhibit101creditagreement.htm EXHIBIT 10.1 Exhibit


Exhibit 10.1

Publish CUSIP Number: 74839TAF5
 
AMENDED AND RESTATED CREDIT AGREEMENT
Dated as of August 31, 2018
among
qdelexhibit101logoa01.jpg



QUIDEL CORPORATION
as the Borrower,
 
BANK OF AMERICA, N.A.,
as Administrative Agent, Swing Line Lender and
L/C Issuer,
and
The Other Lenders Party Hereto
JPMORGAN CHASE BANK, N.A.,
as Syndication Agent
BANK OF AMERICA MERRILL LYNCH
and
JPMORGAN CHASE BANK, N.A.,
as Joint Lead Arrangers and Joint Lead Bookrunners


103167989_7

 

 
 
TABLE OF CONTENTS
 
ARTICLE I
 
DEFINITIONS AND ACCOUNTING TERMS
1

1.01
 
Defined Terms
1

1.02
 
Other Interpretive Provisions
30

1.03
 
Accounting Terms
30

1.04
 
Rounding
31

1.05
 
Times of Day; Rates
31

1.06
 
Letter of Credit Amounts
31

1.07
 
Currency Equivalents Generally
31

ARTICLE II
 
THE COMMITMENTS AND CREDIT EXTENSIONS
32

2.01
 
The Loans
32

2.02
 
Borrowings, Conversions and Continuations of Loans
32

2.03
 
Letters of Credit
33

2.04
 
Swing Line Loans
41

2.05
 
Prepayments
43

2.06
 
Termination or Reduction of Commitments
44

2.07
 
Repayment of Loans
44

2.08
 
Interest
45

2.09
 
Fees
45

2.10
 
Computation of Interest and Fees; Retroactive Adjustments of Applicable Rate
46

2.11
 
Evidence of Debt
46

2.12
 
Payments Generally; Administrative Agent’s Clawback
47

2.13
 
Sharing of Payments by Lenders
48

2.14
 
Increase in Commitments
49

2.15
 
Cash Collateral
51

2.16
 
Defaulting Lenders
52

ARTICLE III
 
TAXES, YIELD PROTECTION AND ILLEGALITY
55

3.01
 
Taxes
55

3.02
 
Illegality
59

3.03
 
Inability to Determine Rates
59

3.04
 
Increased Costs; Reserves on Eurodollar Rate Loans
61

3.05
 
Compensation for Losses
63

3.06
 
Mitigation Obligations; Replacement of Lenders
63

3.07
 
Survival
64

ARTICLE IV
 
CONDITIONS PRECEDENT TO CREDIT EXTENSIONS
64

4.01
 
Conditions of Initial Credit Extension
64

4.02
 
Conditions to All Credit Extensions
66

ARTICLE V
 
REPRESENTATIONS AND WARRANTIES
67

5.01
 
Existence, Qualification and Power
67

5.02
 
Authorization; No Contravention
67

5.03
 
Governmental Authorization; Other Consents
67

5.04
 
Binding Effect
68

5.05
 
Financial Statements; No Material Adverse Effect
68


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5.06
 
Litigation
68

5.07
 
No Default
68

5.08
 
Ownership of Property; Liens; Investments
69

5.09
 
Environmental Compliance
69

5.10
 
Insurance
69

5.11
 
Taxes
69

5.12
 
ERISA Compliance
69

5.13
 
Subsidiaries; Equity Interests; Loan Parties
70

5.14
 
Margin Regulations; Investment Company Act
70

5.15
 
Disclosure
70

5.16
 
Compliance with Laws
71

5.17
 
Intellectual Property; Licenses, Etc
71

5.18
 
Rights in Collateral; Priority of Liens
71

5.19
 
Solvency
72

5.20
 
No Medicare/Medicaid Receivables
72

5.21
 
OFAC
72

5.22
 
Anti-Corruption Laws
72

5.23
 
Not an EEA Financial Institution
72

5.24
 
Casualty, Etc
72

5.25
 
Labor Matters
72

5.26
 
Beneficial Ownership
73

ARTICLE VI
 
AFFIRMATIVE COVENANTS
73

6.01
 
Financial Statements
73

6.02
 
Certificates; Other Information
73

6.03
 
Notices
76

6.04
 
Payment of Obligations
76

6.05
 
Preservation of Existence, Etc
76

6.06
 
Maintenance of Properties
77

6.07
 
Maintenance of Insurance
77

6.08
 
Compliance with Laws and Contractual Obligations
77

6.09
 
Books and Records
77

6.10
 
Inspection Rights
77

6.11
 
Use of Proceeds
78

6.12
 
Covenant to Guarantee Obligations and Give Security
78

6.13
 
Collateral Records
79

6.14
 
Cash Management System
79

6.15
 
Compliance with Environmental Laws
80

6.16
 
Further Assurances
80

6.17
 
Medicare/Medicaid Receivables
80

6.18
 
Compliance with Terms of Leaseholds
80

6.19
 
Designation as Senior Debt
80

6.20
 
Anti-Corruption Laws
81

6.21
 
Post-Closing Requirements
81


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ARTICLE VII
 
NEGATIVE COVENANTS
81

7.01
 
Liens
81

7.02
 
Indebtedness
83

7.03
 
Investments
84

7.04
 
Fundamental Changes
86

7.05
 
Dispositions
86

7.06
 
Restricted Payments
87

7.07
 
Change in Nature of Business
88

7.08
 
Transactions with Affiliates
88

7.09
 
Burdensome Agreements
88

7.10
 
Use of Proceeds
89

7.11
 
Financial Covenants
89

7.12
 
Sanctions
90

7.13
 
Amendments of Organization Documents
90

7.14
 
Accounting Changes
90

7.15
 
Prepayments, Etc. of Indebtedness
90

7.16
 
Amendment, Etc. of Indebtedness
90

7.17
 
Sale and Leaseback Transactions
90

 
 
Anti-Corruption Laws
90

ARTICLE VIII
 
90
 
EVENTS OF DEFAULT AND REMEDIES
90

8.01
 
Events of Default
90

8.02
 
Remedies upon Event of Default
93

8.03
 
Application of Funds
93

ARTICLE IX
 
ADMINISTRATIVE AGENT
94

9.01
 
Appointment and Authority
94

9.02
 
Rights as a Lender
95

9.03
 
Exculpatory Provisions
95

9.04
 
Reliance by Administrative Agent
96

9.05
 
Delegation of Duties
96

9.06
 
Resignation of Administrative Agent
96

9.07
 
Non-Reliance on Administrative Agent and Other Lenders
98

9.08
 
No Other Duties, Etc
98

9.09
 
Administrative Agent May File Proofs of Claim; Credit Bidding
98

9.10
 
Collateral and Guaranty Matters
99

9.11
 
Secured Cash Management Agreements and Secured Hedge Agreements
100

ARTICLE X
 
MISCELLANEOUS
100

10.01
 
Amendments, Etc
100

10.02
 
Notices; Effectiveness; Electronic Communications
102

10.03
 
No Waiver; Cumulative Remedies; Enforcement
104


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10.04
 
Expenses; Indemnity; Damage Waiver
104

10.05
 
Payments Set Aside
106

10.06
 
Successors and Assigns
106

10.07
 
Treatment of Certain Information; Confidentiality
110

10.08
 
Right of Setoff
111

10.09
 
Interest Rate Limitation
112

10.10
 
Counterparts; Integration; Effectiveness
112

10.11
 
Survival of Representations and Warranties
112

10.12
 
Severability
113

10.13
 
Replacement of Lenders
113

10.14
 
Governing Law; Jurisdiction; Etc
113

10.15
 
WAIVER OF JURY TRIAL
114

10.16
 
No Advisory or Fiduciary Responsibility
115

10.17
 
Electronic Execution of Assignments and Certain Other Documents
115

10.18
 
USA PATRIOT Act
115

10.19
 
Acknowledgement and Consent to Bail-In of EEA Financial Institutions
116

10.20
 
Lender Representations
116

10.21
 
Keepwell
118

10.22
 
California Judicial Reference
118

10.23
 
Amendment and Restatement
118


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SCHEDULES
1.01(a)(ii)    Material Leased Real Property
2.01        Commitments and Applicable Percentages
5.06        Litigation Matters
5.09        Environmental Matters
5.13        Subsidiaries and Other Equity Investments; Loan Parties
5.17(a)        IP Rights
5.17(b)        Material Intellectual Property Licenses
6.12(d)        Material Deposit Accounts and Material Securities Accounts
6.21        Post-Closing Requirements
7.01        Existing Liens
7.02        Existing Indebtedness
10.02        Administrative Agent’s Office, Certain Addresses for Notices

EXHIBITS
Form of
A        Committed Loan Notice
B        Swing Line Loan Notice
C        Note
D        Compliance Certificate
E        Assignment and Assumption
F        Guaranty
G        Security Agreement
H        United States Tax Compliance Certificates
I        Solvency Certificate
J        Opinion



v

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AMENDED AND RESTATED CREDIT AGREEMENT
This AMENDED AND RESTATED CREDIT AGREEMENT (“Agreement”) is entered into as of August 31, 2018, among QUIDEL CORPORATION, a Delaware corporation (the “Borrower”), each lender from time to time party hereto (collectively, the “Lenders” and individually, a “Lender”), and BANK OF AMERICA, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer.
PRELIMINARY STATEMENTS:
The Borrower, the Administrative Agent and the lenders party thereto (the “Existing Lenders”) have entered into that certain Credit Agreement dated as of October 6, 2017 (as amended, restated, supplemented or otherwise modified from time to time prior to the date hereof, the “Existing Credit Agreement”).
The Borrower, the Administrative Agent and the Lenders desire to amend and restate the terms of the Existing Credit Agreement on the terms and subject to the conditions set forth herein.
In consideration of the mutual covenants and agreements herein contained, the parties hereto covenant and agree as follows:
ARTICLE I    
DEFINITIONS AND ACCOUNTING TERMS
1.01    Defined Terms. As used in this Agreement, the following terms shall have the meanings set forth below:
Acquisition” means, with respect to any Person, any acquisition, whether by purchase, merger, amalgamation or otherwise, by such Person of (a) Equity Interests of any other Person if, after giving effect to the acquisition of such Equity Interests, such other Person would be a Subsidiary of such Person, (b) all or substantially all of the assets of any other Person or (c) assets constituting one or more business units of any other Person.
Act” means USA PATRIOT Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)).
Administrative Agent” means Bank of America in its capacity as administrative agent under any of the Loan Documents, or any successor administrative agent.
Administrative Agent’s Office” means the Administrative Agent’s address and, as appropriate, account as set forth on Schedule 10.02, or such other address or account as the Administrative Agent may from time to time notify to the Borrower and the Lenders.
Administrative Questionnaire” means an Administrative Questionnaire in substantially the form approved by the Administrative Agent.
Affiliate” means, with respect to any Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified.
Aggregate Commitments” means the Commitments of all the Lenders.
Agreement” means this Credit Agreement.

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Alpha” means Angel Sub, Inc., a Delaware corporation and a wholly owned Subsidiary of Abbott Laboratories, an Illinois corporation.
Applicable Percentage” means, with respect to any Lender at any time, the percentage (carried out to the ninth decimal place) of the Aggregate Commitments represented by such Lender’s Commitment at such time, subject to adjustment as provided in Section 2.16. If the Commitment of each Lender to make Loans and the obligation of the L/C Issuer to make L/C Credit Extensions have been terminated pursuant to Section 8.02, or if the Aggregate Commitments have expired, then the Applicable Percentage of each Lender shall be determined based on the Applicable Percentage of such Lender most recently in effect, giving effect to any subsequent assignments. The initial Applicable Percentage of each Lender is set forth opposite the name of such Lender on Schedule 2.01 or in the Assignment and Assumption pursuant to which such Lender becomes a party hereto, as applicable.
Applicable Rate” means, from time to time, the following percentages per annum, based upon the Consolidated Leverage Ratio as set forth below:
Applicable Rate
Pricing
Level
Consolidated Leverage Ratio
Eurodollar Rate / Letters of Credit
Base Rate
Commitment Fee
1
< 1.0 to 1.0
1.75%
0.75%
0.15%
2
> 1.0 to 1.0 but < 2.0 to 1.0
2.00%
1.00%
0.20%
3
> 2.0 to 1.0 but < 3.0 to 1.0
2.25%
1.25%
0.25%
4
> 3.0 to 1.0
2.50%
1.50%
0.30%

Initially, from the Closing Date to the first Business Day immediately following the date on which the Administrative Agent receives a Compliance Certificate pursuant to Section 6.02(b) for the fiscal quarter ending September 30, 2018, the Applicable Rate shall be determined based upon Pricing Level 2 pursuant to the certification required under Section 4.01(a)(viii)(D). Thereafter, any increase or decrease in the Applicable Rate resulting from a change in the Consolidated Leverage Ratio shall become effective as of the first Business Day immediately following the date a Compliance Certificate is delivered pursuant to Section 6.02(b); provided, however, that if a Compliance Certificate is not delivered when due in accordance with such Section, then, upon the request of the Required Lenders, Pricing Level 4 shall apply as of the first Business Day after the date on which such Compliance Certificate was required to have been delivered and in each case shall remain in effect until the date on which such Compliance Certificate is delivered.
Notwithstanding anything to the contrary contained in this definition, the determination of the Applicable Rate for any period shall be subject to the provisions of Section 2.10(b).
Approved Fund” means any Fund that is administered or managed by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity or an Affiliate of an entity that administers or manages a Lender.
Arrangers” means, collectively (a) Merrill Lynch, Pierce, Fenner & Smith Incorporated (or any other registered broker-dealer wholly owned by Bank of America Corporation to which all or substantially all of Bank of America Corporation’s or any of its subsidiaries’ investment banking, commercial lending services or related businesses may be transferred following the date of this Agreement), and (b) JPMorgan Chase Bank, N.A., each in its capacity as joint lead arranger and joint bookrunner.

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Assignment and Assumption” means an assignment and assumption entered into by a Lender and an Eligible Assignee (with the consent of any party whose consent is required by Section 10.06(b)), and accepted by the Administrative Agent, in substantially the form of Exhibit E or any other form (including electronic documentation generated by use of an electronic platform) approved by the Administrative Agent.
Attributable Indebtedness” means, on any date, (a) in respect of any Capitalized Lease of any Person, the capitalized amount thereof that would appear on a balance sheet of such Person prepared as of such date in accordance with GAAP and (b) in respect of any Synthetic Lease Obligation, the capitalized amount of the remaining lease or similar payments under the relevant lease or other applicable agreement or instrument that would appear on a balance sheet of such Person prepared as of such date in accordance with GAAP if such lease or other agreement or instrument were accounted for as a Capitalized Lease.
Audited Financial Statements” means the audited consolidated balance sheet of the Borrower and its Subsidiaries for the fiscal year ended December 31, 2017, and the related consolidated statements of income or operations, shareholders’ equity and cash flows for such fiscal year of the Borrower and its Subsidiaries, including the notes thereto.
Availability Period” means the period from and including the Closing Date to the earliest of (a) the Maturity Date, (b) the date of termination of the Commitments pursuant to Section 2.06, and (c) the date of termination of the commitment of each Lender to make Revolving Credit Loans and of the obligation of the L/C Issuer to make L/C Credit Extensions pursuant to Section 8.02.
Bail-In Action” means the exercise of any Write-Down and Conversion Powers by the applicable EEA Resolution Authority in respect of any liability of an EEA Financial Institution.
Bail-In Legislation” means, 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 for such EEA Member Country from time to time which is described in the EU Bail-In Legislation Schedule.
Bank of America” means Bank of America, N.A. and its successors.
Base Rate” means for any day a fluctuating rate per annum equal to the highest of (a) the Federal Funds Rate plus 1/2 of 1%, (b) the rate of interest in effect for such day as publicly announced from time to time by Bank of America as its “prime rate”, (c) the Eurodollar Rate plus 1.00%, and (d) 1.00%. The “prime rate” is a rate set by Bank of America based upon various factors including Bank of America’s costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate. Any change in such prime rate announced by Bank of America shall take effect at the opening of business on the day specified in the public announcement of such change.
Base Rate Loan” means a Revolving Credit Loan that bears interest based on the Base Rate.
Beach Acquisition” means the acquisition by the Borrower or any Subsidiary thereof of certain assets of the Target (such assets, the “Beach Assets”) pursuant to the Beach Acquisition Agreement.
Beach Acquisition Agreement” means the Amended and Restated Purchase Agreement (including all schedules and exhibits thereto), dated as of September 15, 2017, by and among the Target, as seller, Quidel Cardiovascular Inc. (fka QTB Acquisition Corp.), a Delaware corporation, as purchaser, for the purposes of

3

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Section 11.15 thereof, the Borrower, as purchaser parent, and, for the limited purposes therein set forth, Abbott Laboratories, an Illinois corporation, with respect to the Beach Assets.
Beach Assets” has the meaning set forth in the definition of “Beach Acquisition”.
Beach Instalment Payments” means collectively the EEA Instalment Payments (as defined in Section 1(a) of Schedule 2.05 to the Beach Acquisition Agreement) and the ROW Instalment Payments (as defined in the Section 1(b) of Schedule 2.05 to the Beach Acquisition Agreement).
Beneficial Ownership Certification” means a certification regarding beneficial ownership 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 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” has the meaning specified in the introductory paragraph hereto.
Borrower Materials” has the meaning specified in Section 6.02.
Borrowing” means a Revolving Credit Borrowing or a Swing Line Borrowing, as the context may require.
Business Day” means any day other than a Saturday, Sunday or other day on which commercial banks are authorized to close under the Laws of, or are in fact closed in, the state where the Administrative Agent’s Office is located and, if such day relates to any Eurodollar Rate Loan, means any such day that is also a London Banking Day.
Capital Expenditures” means, with respect to any Person for any period, any expenditure in respect of the purchase or other acquisition of any fixed or capital asset (excluding normal replacements and maintenance which are properly charged to current operations).
Capitalized Leases” means all leases that have been or should be, in accordance with GAAP, recorded as capitalized leases.
Cash Collateralize” means to pledge and deposit with or deliver to the Administrative Agent, for the benefit of one or more of the L/C Issuer or the Lenders, as collateral for L/C Obligations or obligations of the Lenders to fund participations in respect of L/C Obligations, cash or deposit account balances or, if the Administrative Agent and the L/C Issuer shall agree in their sole discretion, other credit support, in each case pursuant to customary documentation in form and substance reasonably satisfactory to the Administrative Agent and the L/C Issuer. “Cash Collateral” shall have a meaning correlative to the foregoing and shall include the proceeds of such cash collateral and other credit support.
Cash Equivalents” means any of the following types of Investments, to the extent owned by the Borrower or any of its Subsidiaries free and clear of all Liens (other than Liens created under the Collateral Documents and other Liens permitted hereunder):

4

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(a)    readily marketable obligations issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof having maturities of not more than one year from the date of acquisition thereof; provided that the full faith and credit of the United States of America is pledged in support thereof;
(b)    time deposits with, or insured certificates of deposit or bankers’ acceptances of, any commercial bank that (i) (A) is a Lender or (B) is organized under the laws of the United States of America, any state thereof or the District of Columbia or is the principal banking subsidiary of a bank holding company organized under the laws of the United States of America, any state thereof or the District of Columbia, and is a member of the Federal Reserve System, (ii) issues (or the parent of which issues) commercial paper rated as described in clause (c) of this definition and (iii) has combined capital and surplus of at least $1,000,000,000, in each case with maturities of not more than one year from the date of acquisition thereof;
(c)    commercial paper issued by any Person organized under the laws of any state of the United States of America and rated at least “Prime-1” (or the then equivalent grade) by Moody’s or at least “A-1” (or the then equivalent grade) by S&P, in each case with maturities of not more than 365 days from the date of acquisition thereof; and
(d)    Investments, classified in accordance with GAAP as current assets of the Borrower or any of its Subsidiaries, in money market investment programs registered under the Investment Company Act of 1940, which are administered by financial institutions that have the highest rating obtainable from either Moody’s or S&P, and the portfolios of which are limited solely to Investments of the character, quality and maturity described in clauses (a), (b) and (c) of this definition.
Cash Management Agreement” means any agreement to provide cash management services, including treasury, depository, overdraft, credit or debit card, electronic funds transfer and other cash management arrangements.
Cash Management Bank” means any Person that either (a) at the time it enters into a Cash Management Agreement, is a Lender or an Affiliate of a Lender or (b) is a party to a Cash Management Agreement at the time it (or its applicable Affiliate) becomes a Lender (either on the Closing Date or thereafter as an Eligible Assignee), in each case in its capacity as a party to such Cash Management Agreement.
Change in Law” means the occurrence, after the date of this Agreement, of any of the following: (a) the adoption or taking effect of any law, rule, regulation or treaty, (b) any change in any law, rule, regulation or treaty 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) by any Governmental Authority; provided that notwithstanding anything herein to the contrary, (x) the Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, rules, guidelines or directives thereunder or issued in connection therewith and (y) 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 or issued.
Change of Control” means, with respect to any Person, an event or series of events by which any “person” or “group” (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, but excluding any employee benefit plan of such person or its subsidiaries, and any person or entity acting in its capacity as trustee, agent or other fiduciary or administrator of any such plan) becomes the

5

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“beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, except that a person or group shall be deemed to have “beneficial ownership” of all securities that such person or group has the right to acquire (such right, an “option right”), whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of 35% or more of the equity securities of such Person entitled to vote for members of the board of directors or equivalent governing body of such Person on a fully-diluted basis (and taking into account all such securities that such person or group has the right to acquire pursuant to any option right).
Closing Date” means the first date all the conditions precedent in Section 4.01 are satisfied or waived in accordance with Section 10.01.
Code” means the Internal Revenue Code of 1986, as amended.
Collateral” means all of the “Collateral” or other similar term referred to in the Collateral Documents and all of the other property that is or is intended under the terms of the Collateral Documents to be subject to Liens in favor of the Administrative Agent for the benefit of the Secured Parties.
Collateral Documents” means, collectively, the Security Agreement, the Intellectual Property Security Agreements, each of the collateral assignments, Security Agreement Supplements, security agreements, pledge agreements or other similar agreements delivered to the Administrative Agent pursuant to Section 6.12, and each of the other agreements, instruments or documents that creates or purports to create a Lien in favor of the Administrative Agent for the benefit of the Secured Parties.
Commitment” means, as to each Lender, its obligation to (a) make Revolving Credit Loans to the Borrower pursuant to Section 2.01, (b) purchase participations in L/C Obligations, and (c) purchase participations in Swing Line Loans, in an aggregate principal amount at any one time outstanding not to exceed the amount set forth opposite such Lender’s name on Schedule 2.01 under the caption “Commitment” or opposite such caption in the Assignment and Assumption pursuant to which such Lender becomes a party hereto, as applicable, as such amount may be adjusted from time to time in accordance with this Agreement.
Committed Loan Notice” means a notice of (a) a Revolving Credit Borrowing, (b) a conversion of Loans from one Type to the other, or (c) a continuation of Eurodollar Rate Loans, pursuant to Section 2.02(a), which shall be substantially in the form of Exhibit A or such other form as may be approved by the Administrative Agent (including any form on an electronic platform or electronic transmission system as shall be approved by the Administrative Agent), appropriately completed and signed by a Responsible Officer of the Borrower.
Commodity Exchange Act” means the Commodity Exchange Act (7 U.S.C. § 1 et seq.), as amended from time to time, and any successor statute.
Compliance Certificate” means a certificate substantially in the form of Exhibit D.
Connection Income Taxes” means Other Connection Taxes that are imposed on or measured by net income (however denominated) or that are franchise Taxes or branch profits Taxes.
Consolidated EBITDA” means for any Measurement Period, an amount determined for the Borrower and its Subsidiaries on a consolidated basis (in each case, without duplication) equal to: (a) Consolidated Net Income, (b) plus income taxes, (c) plus interest expense and debt issuance costs and commissions, discounts and other fees and charges associated with initial incurrence of any Indebtedness, (d) plus non-cash stock compensation expenses, (e) plus depreciation, (f) plus amortization (including

6

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amortization of inventory write-ups and deferred revenue adjustments), (g) plus transaction expenses or other initial non cash or fair value adjustments related to any merger, Acquisition or joint venture, and non-recurring and non-cash charges associated with any impairment analysis required under Financial Accounting Standards No. 142 and 144, (h) plus pro forma “run rate” cost savings, operating expense reductions and synergies related to Acquisitions (including the Existing Closing Date Acquisitions), Dispositions, restructurings, cost savings initiatives and other initiatives that are reasonably identifiable, factually supportable and projected by the Borrower in good faith to result from actions that have been taken or with respect to which substantial steps have been taken or are expected to be taken (in the good faith determination of the Borrower) within eighteen months after any Acquisition, Disposition, restructuring, cost savings initiative or other initiative and (i) minus the Beach Instalment Payments actually paid by the Borrower or any Subsidiary in connection with the Beach Acquisition; provided that (i) the amount added-back to Consolidated EBITDA pursuant to clause (h) shall not, in the aggregate, exceed $10,000,000 for such period, (ii) Consolidated EBITDA shall be determined after giving effect on a pro forma basis to any Permitted Acquisitions that have been consummated to the extent the Administrative Agent has approved the financial statements of the applicable acquired Persons or assets or such financial statements are audited by a national accounting firm reasonably acceptable to the Administrative Agent (and in either case giving effect to pro forma adjustments as determined by a Responsible Officer of the Borrower in good faith and approved by the Administrative Agent, such approval not to be unreasonably withheld) and (iii) prior to the making of the initial Beach Instalment Payment, such Beach Instalment Payment shall be deemed to have been made and Consolidated EBITDA shall be reduced by the amount of such payment in the period prior to the period in which such initial Beach Instalment Payment is made.
Consolidated EBITDAR” means, at any date of determination, an amount equal to the sum of (a) Consolidated EBITDA for the most recently completed Measurement Period plus (b) Consolidated Rental Payments during such Measurement Period.
Consolidated Fixed Charge Coverage Ratio” means, at any date of determination, the ratio of (a) (i) Consolidated EBITDAR less (ii) the aggregate amount of all unfinanced Capital Expenditures less (iii) the aggregate amount of Federal, state, local and foreign income taxes paid in cash to (b) the sum of (i) Consolidated Interest Charges, (ii) the aggregate principal amount of all regularly scheduled principal payments or redemptions or similar acquisitions for value of outstanding debt for borrowed money (without adjustment for optional or mandatory prepayments), but excluding any such payments to the extent refinanced through the incurrence of additional Indebtedness otherwise expressly permitted under Section 7.02, (iii) Consolidated Rental Payments during such Measurement Period and (iv) the aggregate amount of all Restricted Payments, in each case, of or by the Borrower and its Subsidiaries for the most recently completed Measurement Period.
Consolidated Funded Indebtedness means, as of any date of determination, for the Borrower and its Subsidiaries on a consolidated basis, all outstanding Indebtedness for borrowed money and other interest-bearing Indebtedness, including current and long term Indebtedness. For the avoidance of doubt, the Beach Instalment Payments shall not be included as a component of Consolidated Funded Indebtedness.
Consolidated Interest Charges” means, for any Measurement Period, for the Borrower and its Subsidiaries on a consolidated basis, the sum of (a) all interest, premium, debt discount, fees, charges and related expenses of the Borrower and its Subsidiaries in connection with borrowed money (including capitalized interest) or in connection with the deferred purchase price of assets, in each case to the extent treated as interest in accordance with GAAP, and (b) the portion of rent expense of the Borrower and its Subsidiaries with respect to such period under capital leases that is treated as interest in accordance with GAAP.

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Consolidated Leverage Ratio” means, as of any date of determination, the ratio of (a) Consolidated Funded Indebtedness as of such date to (b) Consolidated EBITDA of the Borrower and its Subsidiaries on a consolidated basis for the most recently completed Measurement Period.
Consolidated Net Income” means, at any date of determination, the net income of the Borrower and its Subsidiaries on a consolidated basis for the most recently completed Measurement Period (excluding extraordinary gains and extraordinary losses).
Consolidated Rental Payments” means, for the relevant Measurement Period, the aggregate amount of rental payments made in cash with respect to Leases by the Borrower and its Subsidiaries on a consolidated basis during such Measurement Period.
Consolidated Senior Secured Leverage Ratio” means, as of any date of determination, the ratio of (a) Consolidated Funded Indebtedness that, as of such date, is secured equally and ratably with the Obligations by a Lien on any property of the Borrower and its Subsidiaries to (b) Consolidated EBITDA of the Borrower and its Subsidiaries on a consolidated basis for the most recently completed Measurement Period.
Consolidated Total Assets” means, as of any date of determination, for the Borrower and its Subsidiaries on a consolidated basis, the sum of the total assets held by the Borrower and its Subsidiaries on that date.
Contractual Obligation” means, as to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound.
Control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. “Controlling” and “Controlled” have meanings correlative thereto.
Control Agreement” means an agreement, satisfactory in form and substance to the Administrative Agent and executed by the financial institution or securities intermediary at which a Material Deposit Account or Material Securities Account, as the case may be, is maintained, pursuant to which such financial institution or securities intermediary confirms and acknowledges the Administrative Agent’s security interest in such account and agrees that the financial institution or securities intermediary, as the case may be, will comply with instructions originated by the Administrative Agent as to disposition of funds in such account, without further consent by the Borrower or the applicable Subsidiary, as the case may be.
Convertible Senior Notes” means the Borrower’s 3.25% Convertible Senior Notes due 2020.
Credit Extension” means each of the following: (a) a Borrowing and (b) an L/C Credit Extension.
Debtor Relief Laws” means the Bankruptcy Code of the United States, and all other liquidation, conservatorship, bankruptcy, assignment for the benefit of creditors, moratorium, rearrangement, receivership, insolvency, reorganization, or similar debtor relief Laws of the United States or other applicable jurisdictions from time to time in effect and affecting the rights of creditors generally.
Default” means any event or condition that constitutes an Event of Default or that, with the giving of any notice, the passage of time, or both, would be an Event of Default.

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Default Rate” means (a) when used with respect to Obligations, other than Letter of Credit Fees, Secured Hedge Agreements and Secured Cash Management Agreements, an interest rate equal to (i) the Base Rate plus (ii) the Applicable Rate, if any, applicable to Base Rate Loans plus (iii) 2% per annum; provided, however, that with respect to a Eurodollar Rate Loan, the Default Rate shall be an interest rate equal to the interest rate (including any Applicable Rate) otherwise applicable to such Loan plus 2% per annum and (b) when used with respect to Letter of Credit Fees, a rate equal to the Applicable Rate plus 2% per annum, in all cases to the fullest extent permitted by applicable Laws.
Defaulting Lender” means, subject to Section 2.16(b), any Lender that (a) has failed to (i) fund all or any portion of its Loans within two Business Days of the date such Loans were required to be funded hereunder unless such Lender notifies the Administrative Agent and the Borrower in writing that such failure is the result of such Lender’s determination that one or more conditions precedent to funding (each of which conditions precedent, together with any applicable default, shall be specifically identified in such writing) has not been satisfied, or (ii) pay to the Administrative Agent, the L/C Issuer, the Swing Line Lender or any other Lender any other amount required to be paid by it hereunder (including in respect of its participation in Letters of Credit or Swing Line Loans) within two Business Days of the date when due, (b) has notified the Borrower, the Administrative Agent, the L/C Issuer or the Swing Line Lender in writing that it does not intend to comply with its funding obligations hereunder, or has made a public statement to that effect (unless such writing or public statement relates to such Lender’s obligation to fund a Loan hereunder and states that such position is based on such Lender’s determination that a condition precedent to funding (which condition precedent, together with any applicable default, shall be specifically identified in such writing or public statement) cannot be satisfied), (c) has failed, within three Business Days after written request by the Administrative Agent or the Borrower, to confirm in writing to the Administrative Agent and the Borrower that it will comply with its prospective funding obligations hereunder (provided that such Lender shall cease to be a Defaulting Lender pursuant to this clause (c) upon receipt of such written confirmation by the Administrative Agent and the Borrower), or (d) has, or has a direct or indirect parent company that has, (i) become the subject of a proceeding under any Debtor Relief Law, (ii) had appointed for it a receiver, custodian, conservator, trustee, administrator, assignee for the benefit of creditors or similar Person charged with reorganization or liquidation of its business or assets, including the Federal Deposit Insurance Corporation or any other state or federal regulatory authority acting in such a capacity, or (iii) become the subject of a Bail-In Action; provided that a Lender shall not be a Defaulting Lender solely by virtue of the ownership or acquisition of any Equity Interest in that Lender or any direct or indirect parent company thereof by a Governmental Authority so long as such ownership interest does not result in or provide such Lender with immunity from the jurisdiction of courts within the United States or from the enforcement of judgments or writs of attachment on its assets or permit such Lender (or such Governmental Authority) to reject, repudiate, disavow or disaffirm any contracts or agreements made with such Lender. Any determination by the Administrative Agent that a Lender is a Defaulting Lender under any one or more of clauses (a) through (d) above, and of the effective date of such status, shall be conclusive and binding absent manifest error, and such Lender shall be deemed to be a Defaulting Lender (subject to Section 2.16(b)) as of the date established therefor by the Administrative Agent in a written notice of such determination, which shall be delivered by the Administrative Agent to the Borrower, the L/C Issuer, the Swing Line Lender and each other Lender promptly following such determination.
Deposit Account” means a demand, time, savings, passbook or similar account maintained with a Person engaged in the business of banking, including a savings bank, savings and loan association, credit union or trust company.
Designated Jurisdiction” means any country or territory to the extent that such country or territory itself is the subject of any Sanction.

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Disposition” or “Dispose” means the sale, transfer, license, lease or other disposition (including any sale and leaseback transaction) of any property by any Person (or the granting of any option or other right to do any of the foregoing), including any sale, assignment, transfer or other disposal, with or without recourse, of any notes or accounts receivable or any rights and claims associated therewith.
Dollar” and “$” mean lawful money of the United States.
Domestic Subsidiary” means any Subsidiary that is organized or existing under the laws of the United States, any state thereof or the District of Columbia.
EEA Financial Institution” means (a) any credit institution or investment firm established in any EEA Member Country which is subject to the supervision of an EEA Resolution Authority, (b) any entity established in an EEA Member Country which is a parent of an institution described in clause (a) of this definition, or (c) any financial institution established in an EEA Member Country which is a subsidiary of an institution described in clauses (a) or (b) of this definition and is subject to consolidated supervision with its parent.
EEA Member Country” means any of the member states 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.
Eligible Assignee” means any Person that meets the requirements to be an assignee under Section 10.06(b)(iii) and (v) (subject to such consents, if any, as may be required under Section 10.06(b)(iii)).
Environment” means ambient air, indoor air, surface water, groundwater, drinking water, soil, surface and subsurface strata, and natural resources such as wetland, flora and fauna.
Environmental Laws” means any and all Federal, state, local, and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or governmental restrictions relating to pollution and the protection of the environment or the release of any materials into the environment, including those related to hazardous substances or wastes, air emissions and discharges to waste or public systems.
Environmental Liability” means any liability, contingent or otherwise (including any liability for damages, costs of environmental remediation, fines, penalties or indemnities), of the Borrower, any other Loan Party or any of their respective Subsidiaries 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) 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.
Equity Interests” means, with respect to any Person, all of the shares of capital stock of (or other ownership or profit interests in) such Person, all of the warrants, options or other rights for the purchase or acquisition from such Person of shares of capital stock of (or other ownership or profit interests in) such Person, all of the securities convertible into or exchangeable for shares of capital stock of (or other ownership or profit interests in) such Person or warrants, rights or options for the purchase or acquisition from such Person of such shares (or such other interests), and all of the other ownership or profit interests in such Person

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(including partnership, member or trust interests therein), whether voting or nonvoting, and whether or not such shares, warrants, options, rights or other interests are outstanding on any date of determination.
ERISA” means the Employee Retirement Income Security Act of 1974.
ERISA Affiliate” means any trade or business (whether or not incorporated) under common control with the Borrower within the meaning of Section 414(b) or (c) of the Code (and Sections 414(m) and (o) of the Code for purposes of provisions relating to Section 412 of the Code).
ERISA Event” means (a) a Reportable Event with respect to a Pension Plan; (b) the withdrawal of the Borrower or any ERISA Affiliate from a Pension Plan subject to Section 4063 of ERISA during a plan year in which such entity was a “substantial employer” as defined in Section 4001(a)(2) of ERISA or a cessation of operations that is treated as such a withdrawal under Section 4062(e) of ERISA; (c) a complete or partial withdrawal by the Borrower or any ERISA Affiliate from a Multiemployer Plan or notification that a Multiemployer Plan is in reorganization; (d) the filing of a notice of intent to terminate, the treatment of a Pension Plan amendment as a termination under Section 4041 or 4041A of ERISA; (e) the institution by the PBGC of proceedings to terminate a Pension Plan; (f) any event or condition which constitutes grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan; (g) the determination that any Pension Plan is considered an at-risk plan or a plan in endangered or critical status within the meaning of Sections 430, 431 and 432 of the Code or Sections 303, 304 and 305 of ERISA; (h) the imposition of any liability under Title IV of ERISA, other than for PBGC premiums due but not delinquent under Section 4007 of ERISA, upon the Borrower or any ERISA Affiliate; or (i) a failure by the Borrower or any ERISA Affiliate to meet all applicable requirements under the Pension Funding Rules in respect of a Pension Plan, whether or not waived, or the failure by the Borrower or any ERISA Affiliate to make any required contribution to a Multiemployer 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.
Eurodollar Rate” means:
(a)    for any Interest Period with respect to a Eurodollar Rate Loan, the LIBOR Screen Rate at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period, for Dollar deposits (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period;
(b)    for any interest calculation with respect to a Base Rate Loan on any date, the rate per annum equal to LIBOR, at or about 11:00 a.m., London time, determined two Business Days prior to such date for U.S. Dollar deposits with a term of one month commencing that day; and
(c)    if the Eurodollar Rate shall be less than zero, such rate shall be deemed zero for purposes of this Agreement;
provided that to the extent a comparable or successor rate is approved by the Administrative Agent in connection herewith, the approved rate shall be applied in a manner consistent with market practice; provided, further that to the extent such market practice is not administratively feasible for the Administrative Agent, such approved rate shall be applied in a manner as otherwise reasonably determined by the Administrative Agent.

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Eurodollar Rate Loan” means a Revolving Credit Loan that bears interest at a rate based on clause (a) of the definition of the Eurodollar Rate.
Event of Default” has the meaning specified in Section 8.01.
Excluded Swap Obligation” means, with respect to any Guarantor, any Swap Obligation if, and to the extent that, all or a portion of the Guaranty of such Guarantor of, or the grant by such Guarantor of a security interest to secure, such Swap Obligation (or any Guaranty thereof) is or becomes illegal under the Commodity Exchange Act or any rule, regulation or order of the Commodity Futures Trading Commission (or the application or official interpretation of any thereof) by virtue of such Guarantor’s failure for any reason to constitute an “eligible contract participant” as defined in the Commodity Exchange Act (determined after giving effect to Section 10.21 and any other “keepwell, support or other agreement” for the benefit of such Guarantor and any and all guarantees of such Guarantor’s Swap Obligations by other Loan Parties) at the time the Guaranty of such Guarantor, or a grant by such Guarantor of a security interest, becomes effective with respect to such Swap Obligation. If a Swap Obligation arises under a master agreement governing more than one swap, such exclusion shall apply only to the portion of such Swap Obligation that is attributable to swaps for which such Guaranty or security interest is or becomes excluded in accordance with the first sentence of this definition.
Excluded Taxes” means any of the following Taxes imposed on or with respect to any Recipient or required to be withheld or deducted from payment to a Recipient: (a) Taxes imposed on or measured by net income (however denominated), franchise Taxes, and branch profits Taxes, in each case, (i) imposed as a result of such Recipient being organized under the laws of, or having its principal office or, in the case of any Lender, its Lending Office located in, the jurisdiction imposing such Tax (or any political subdivision thereof) or (ii) that are Other Connection Taxes; (b) in the case of a Lender, U.S. federal withholding Taxes imposed on amounts payable to or for the account of such Lender with respect to an applicable interest in a Loan or Commitment pursuant to a law in effect on the date on which (i) such Lender acquires such interest in the Loan or Commitment (other than pursuant to an assignment request by the Borrower under Section 10.13) or (ii) such Lender changes its Lending Office, except in each case to the extent that, pursuant to Sections 3.01(a)(ii) or (c) amounts with respect to such Taxes were payable either to such Lender’s assignor immediately before such Lender became a party hereto or to such Lender immediately before it changed its Lending Office; (c) Taxes attributable to such Recipient’s failure to comply with Section 3.01(e); and (d) any U.S. federal withholding Taxes imposed pursuant to FATCA.
Existing Closing Date Acquisitions” means, collectively, (a) the Tango Acquisition and (b) the Beach Acquisition.
Existing Closing Date Acquisition Agreements” means, collectively, (a) the Tango Acquisition Agreement and (b) the Beach Acquisition Agreement.
Existing Credit Agreement” has the meaning specified in the introductory paragraphs hereto.
Existing Lender” has the meaning specified in the introductory paragraphs hereto.
FASB ASC” means the Accounting Standards Codification of the Financial Accounting Standards Board.
FATCA” means Sections 1471 through 1474 of the Code, as of the date of this Agreement (or any amended or successor version that is substantially comparable and not materially more onerous to comply

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with) and any current or future regulations or official interpretations thereof and any agreements entered into pursuant to Section 1471(b)(1).
Federal Funds Rate” means, for any day, the rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day; provided that (a) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, (b) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate (rounded upward, if necessary, to a whole multiple of 1/100 of 1%) charged to Bank of America on such day on such transactions as determined by the Administrative Agent, and (c) if the Federal Funds Rate shall be less than zero, such rate shall be deemed zero for purposes of this Agreement.
Fee Letter” means the letter agreement, dated June 19, 2018, among the Borrower, the Administrative Agent and Merrill Lynch, Pierce, Fenner & Smith Incorporated.
Foreign Lender” means (a) if the Borrower is a U.S. Person, a Lender that is not a U.S. Person, and (b) if the Borrower is not a U.S. Person, a Lender that is resident or organized under the laws of a jurisdiction other than that in which the Borrower is resident for tax purposes. For purposes of this definition, the United States, each State thereof and the District of Columbia shall be deemed to constitute a single jurisdiction.
Foreign Subsidiary” means any Subsidiary that is not a Domestic Subsidiary.
FRB” means the Board of Governors of the Federal Reserve System of the United States.
Fronting Exposure” means, at any time there is a Defaulting Lender, (a) with respect to the L/C Issuer, such Defaulting Lender’s Applicable Percentage of the outstanding L/C Obligations other than L/C Obligations as to which such Defaulting Lender’s participation obligation has been reallocated to other Lenders or Cash Collateralized in accordance with the terms hereof, and (b) with respect to the Swing Line Lender, such Defaulting Lender’s Applicable Percentage of Swing Line Loans other than Swing Line Loans as to which such Defaulting Lender’s participation obligation has been reallocated to other Lenders in accordance with the terms hereof.
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 activities.
GAAP” means generally accepted accounting principles in the United States set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or such other principles as may be approved by a significant segment of the accounting profession in the United States, that are applicable to the circumstances as of the date of determination, consistently applied.
Governmental Authority” means the government of the United States or any other nation, or of 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 supra-national bodies such as the European Union or the European Central Bank).

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Guarantee” means, as to any Person, any (a) any obligation, contingent or otherwise, of such Person guaranteeing or having the economic effect of guaranteeing any Indebtedness payable by another Person (the “primary obligor”) in any manner, whether directly or indirectly, and including any obligation of such Person, direct or indirect, (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness, (ii) to purchase or lease property, securities or services for the purpose of assuring the obligee in respect of such Indebtedness or the payment of such Indebtedness, (iii) to maintain working capital, equity capital or any other financial statement condition or liquidity or level of income or cash flow of the primary obligor so as to enable the primary obligor to pay such Indebtedness, or (iv) entered into for the purpose of assuring in any other manner the obligee in respect of such Indebtedness or the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part), or (b) any Lien on any assets of such Person securing any Indebtedness or other obligation of any other Person, whether or not such Indebtedness or other obligation is assumed by such Person (or any right, contingent or otherwise, of any holder of such Indebtedness to obtain any such Lien). The amount of any Guarantee shall be deemed to be an amount equal to the stated or determinable amount of the related primary obligation, or portion thereof, in respect of which such Guarantee is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by the guaranteeing Person in good faith. The amount of any Guarantee pursuant to clause (b) above shall not exceed the value of the assets subject to such Lien. The term “Guarantee” as a verb has a corresponding meaning.
Guarantors” means, collectively, (a) all direct and indirect Mate