Item 15. Exhibits, Financial Statement Schedules

(a)	Documents filed as part of this Report.

1.	Index to financial statements and supplementary data filed as part of this Report.

Item	Page
Financial Statements
Report of Independent Registered Public Accounting Firm	F- 1
Consolidated Balance Sheets	F- 2
Consolidated Statements of Operations	F- 3
Consolidated Statements of Comprehensive Income	F- 4
Consolidated Statements of Cash Flows	F- 5
Consolidated Statements of Stockholders' Equity	F- 6
Notes to Consolidated Financial Statements	F- 7
Supplementary Data: Quarterly Operating Results (unaudited)	F- 43

2.	Financial Statement Schedule.

Item	Page
Schedule II - Valuation Accounts and Reserves	F- 46

3.	Exhibits

An exhibit index has been filed as part of this Report beginning on page E-1 and is incorporated herein by reference.

(b)	Exhibits filed as part of this Report.

An exhibit index has been filed as part of this Report beginning on page E-1 and is incorporated herein by reference.

(c)	None.

Signatures

Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 22, 2017.

	QUEST DIAGNOSTICS INCORPORATED
	(Registrant)
	By:	/s/Stephen H. Rusckowski
		Stephen H. Rusckowski
		Chairman of the Board, President and Chief Executive Officer

Each individual whose signature appears below constitutes and appoints Michael E. Prevoznik and William J. O'Shaughnessy, Jr., and each of them singly, his or her true and lawful attorneys-in-fact and agents with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K filed with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all the said attorneys-in-fact and agents or any of them or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on February 22, 2017.

Signature		Capacity
/s/Stephen H. Rusckowski Stephen H. Rusckowski		Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)
/s/Mark J. Guinan Mark J. Guinan		Executive Vice President and Chief Financial Officer (Principal Financial Officer)
/s/Robert A. Klug Robert A. Klug		Vice President, Corporate Controller and Chief Accounting Officer (Principal Accounting Officer)
/s/Jenne K. Britell, Ph.D. Jenne K. Britell, Ph.D.		Director
/s/Vicky B. Gregg Vicky B. Gregg		Director
/s/Jeffrey M. Leiden, M.D., Ph. D. Jeffrey M. Leiden, M.D., Ph. D.		Director
/s/Timothy L. Main Timothy L. Main		Director
/s/Gary M. Pfeiffer Gary M. Pfeiffer		Director
/s/Timothy M. Ring Timothy M. Ring		Director
/s/Daniel C. Stanzione, Ph.D. Daniel C. Stanzione, Ph.D.		Director
/s/Gail R. Wilensky, Ph.D. Gail R. Wilensky, Ph.D.		Director
/s/John B. Ziegler John B. Ziegler		Director

SELECTED HISTORICAL FINANCIAL DATA OF OUR COMPANY

The following table summarizes selected historical financial data of our Company and our subsidiaries at the dates and for each of the periods presented. We derived the selected historical financial data for the years 2012 through 2016 from the audited consolidated financial statements of our Company. The selected historical financial data is only a summary and should be read together with the audited consolidated financial statements and related notes of our Company and management's discussion and analysis of financial condition and results of operations included elsewhere in this Annual Report on Form 10-K.

	Year Ended December 31,
	2016				2015				2014				2013				2012
	(dollars in millions, except per share data)
Operations Data:	(a) (b) (c)				(a) (d) (e)				(a) (f) (g)				(a) (h) (i)				(a) (j) (k)
Net revenues	$	7,515			$	7,493			$	7,435			$	7,146			$	7,383
Operating income	1,277				1,399				983				1,475				1,201
Income from continuing operations	696				753				587				848				666
Income (loss) from discontinued operations, net of taxes	—				—				5				35				(74		)
Net income	696				753				592				883				592
Less: Net income attributable to noncontrolling interests	51				44				36				34				36
Net income attributable to Quest Diagnostics	$	645			$	709			$	556			$	849			$	556
Amounts attributable to Quest Diagnostics' stockholders:
Income from continuing operations	$	645			$	709			$	551			$	814			$	630
Income (loss) from discontinued operations, net of taxes	—				—				5				35				(74		)
Net income	$	645			$	709			$	556			$	849			$	556

Earnings per share attributable to Quest Diagnostics' common stockholders - basic:
Income from continuing operations	$	4.58			$	4.92			$	3.80			$	5.35			$	3.96
Income (loss) from discontinued operations	—				—				0.03				0.23				(0.47		)
Net income	$	4.58			$	4.92			$	3.83			$	5.58			$	3.49
Earnings per share attributable to Quest Diagnostics' common stockholders - diluted:
Income from continuing operations	$	4.51			$	4.87			$	3.78			$	5.31			$	3.92
Income (loss) from discontinued operations	—				—				0.03				0.23				(0.46		)
Net income	$	4.51			$	4.87			$	3.81			$	5.54			$	3.46
Dividends per common share	$	1.65			$	1.52			$	1.32			$	1.20			$	0.81

	Year Ended December 31,
	2016				2015				2014				2013				2012
	(dollars in millions)
Balance Sheet Data (at end of year):	(a) (b) (c)				(a) (d) (e)				(a) (f) (g)				(a) (h) (i)				(a) (j) (k)
Cash and cash equivalents	$	359			$	133			$	192			$	187			$	296
Total assets	10,100				9,962				9,857				8,930				9,263
Long-term debt	3,728				3,492				3,224				3,102				3,333
Total debt	3,734				3,651				3,742				3,314				3,343
Redeemable noncontrolling interest	77				70				—				—				—
Other Data:
Net cash provided by operating activities	$	1,069			$	821			$	944			$	667			$	1,211
Net cash (used in) provided by investing activities	(152		)		(362		)		(1,025		)		328				(217		)
Net cash (used in) provided by financing activities	(691		)		(518		)		86				(1,121		)		(846		)
Capital expenditures	293				263				308				231				182
Purchases of treasury stock	590				224				132				1,037				200
Dividends paid	223				212				187				185				108

(a)

During the third quarter of 2006, we completed the wind down of NID, a test kit manufacturing subsidiary. As a result, the operations NID have been classified as discontinued operations for all periods presented. We will continue to report NID as a discontinued operation until uncertain tax benefits associated with NID are resolved. For further details regarding our discontinued operations, see Note 18 to the consolidated financial statements.

(b)

On February 29, 2016, we completed the acquisition of the outreach laboratory service business of Clinical Laboratory Partners, LLC ("CLP"), a wholly-owned subsidiary of Hartford HealthCare Corporation. Consolidated operating results for 2016 include the results of operations of CLP subsequent to the closing of the acquisition. On May 13, 2016, we completed the sale of our Focus Diagnostics products business to DiaSorin S.p.A ("Focus Sale"), which has not been classified as a discontinued operation. For further details regarding our acquisitions and dispositions, see Note 5 and Note 6, respectively, to the consolidated financial statements.

(c)	Operating income included:

•	a pre-tax gain of $118 million associated with the Focus Sale;

•	pre-tax charges of $78 million, primarily associated with systems conversions and integration costs incurred in connection with further restructuring and integrating our business; and

•	a net pre-tax gain of $7 million, primarily a result of a non-taxable gain on an escrow recovery associated with an acquisition, partially offset by costs associated with winding down subsidiaries, non-cash asset impairment charges and costs incurred related to certain legal matters.

In addition to the items included in operating income, income from continuing operations included:

•	income tax expense of $84 million associated with the Focus Sale, consisting of $91 million of current income tax expense and a deferred income tax benefit of $7 million;

•	$48 million of pre-tax charges on retirement of debt associated with the March 2016 cash tender offer and the related income tax benefit of $18 million;

•	non-cash asset impairment charges associated with certain investments of $7 million; and

•	$4 million of pre-tax restructuring and integration charges associated with our Q2 Solutions joint venture.

For further details regarding our retirement of debt, see Note 13 to the consolidated financial statements.

Net cash provided by operating activities included:

•	$47 million of pre-tax cash charges, or $30 million after the related cash tax benefit, on the retirement of debt associated with the March 2016 cash tender offer;

•	$54 million of proceeds received in 2016 from the termination of interest rate swap agreements; and

•	$91 million of income taxes paid in connection with the Focus Sale.

For further details regarding our financial instruments, including the termination of interest rate swap agreements, see Note 14 to the consolidated financial statements

Net cash used in investing activities included proceeds from the sale of businesses of $270 million, principally related to the Focus Sale.

(d)

On August 3, 2015, we completed the acquisition of MemorialCare Health System's laboratory outreach business ("MemorialCare"). On November 16, 2015, we completed the acquisition of the business assets of Superior Mobile Medics, Inc. ("Superior Mobile Medics"). Consolidated operating results for 2015 include the results of operations of MemorialCare and Superior Mobile Medics subsequent to the closing of the applicable acquisition. In July 2015, we contributed our clinical trials testing business to a newly formed global clinical trials central laboratory services joint venture with Quintiles IMS Holdings, Inc., Q2 Solutions ("Clinical Trials Contribution"). The disposition of our clinical trials testing business was not classified as a discontinued operation.

(e)	Operating income included:

•	pre-tax gain of $334 million associated with the Clinical Trials Contribution;

•	pre-tax charges of $105 million, primarily associated with workforce reductions and professional fees incurred in connection with further restructuring and integrating our business; and

•

net pre-tax charges of $33 million primarily associated with non-cash asset impairment charges and other costs associated with winding down our Celera products business and another subsidiary, costs incurred related to certain legal matters and a pre-tax gain of $13 million associated with a decrease in the fair value of the contingent consideration accrual associated with our Summit Health, Inc. acquisition.

In addition to the items included in operating income, income from continuing operations included:

•	$144 million of pre-tax charges on retirement of debt associated with the March 2015 cash tender offer and the April 2015 redemption and the related income tax benefit of $57 million;

•	deferred income tax expense of $145 million associated with the gain on the Clinical Trials Contribution;

•	$58 million deferred income tax benefit associated with winding down a subsidiary; and

•	$5 million of pre-tax restructuring and integration charges associated with our Q2 Solutions joint venture.

Net cash provided by operating activities included:

•	$146 million of pre-tax cash charges, or $89 million after the related cash tax benefit, on the retirement of debt associated with the March 2015 cash tender offer and April 2015 redemption;

•	payments associated with an additional payroll cycle in 2015; and

•	an income tax payment in the third quarter of 2015 associated with certain tax contingencies.

Net cash used in investing activities included a $33 million investment in Q2 Solutions.

Net cash used in financing activities included:

•	$51 million of deferred acquisition consideration payments, primarily to UMass Memorial Medical Center ("UMass"), related to the business acquisition in 2013; and

•	$63 million of proceeds from the sale of a noncontrolling interest in a subsidiary to UMass.

(f)

On March 7, 2014, we completed the acquisition of Solstas Lab Partners Group ("Solstas"). On April 18, 2014, we completed the acquisition of Summit Health, Inc. ("Summit Health"). On April 16, 2014, we completed the acquisition of the outreach laboratory service operations of Steward Healthcare, LLC ("Steward"). Consolidated operating results for 2014 include the results of operations of Solstas, Summit Health and Steward subsequent to the closing of the applicable acquisition.

(g)	Operating income included:

•	pre-tax charges of $121 million, primarily associated with workforce reductions and professional fees incurred in connection with further restructuring and integrating our business;

•	pre-tax charges of $24 million principally associated with costs related to certain legal matters; and

•	pre-tax gain of $9 million associated with a decrease in the fair value of the contingent consideration accrual associated with our Summit Health acquisition.

In addition to the items included in operating income, income from continuing operations included discrete income tax benefits of $44 million associated with the favorable resolution of certain tax contingencies.

(h)

On January 2, 2013, we completed the acquisition of the clinical outreach and anatomic pathology businesses of UMass. On May 15, 2013, we completed the acquisition of the toxicology and clinical laboratory business of Advanced Toxicology Network ("ATN") from Concentra, a subsidiary of Humana Inc. On June 22, 2013, we completed the acquisition of certain lab-related clinical outreach service operations of Dignity Health ("Dignity"), a hospital system in California. On October 7, 2013, we completed the acquisition of ConVerge Diagnostic Services, LLC ("ConVerge"), a leading full-service laboratory providing clinical, cytology and anatomic pathology testing services to patients, physicians and hospitals in New England. Consolidated operating results for 2013 include the results of operations of UMass, ATN, Dignity and ConVerge subsequent to the closing of the applicable acquisition. In September 2013, we completed the sale of our Enterix products business, which was not classified as a discontinued operation.

(i)	Operating income included:

•	pre-tax charges of $115 million, primarily associated with workforce reductions and professional fees incurred in connection with further restructuring and integrating our business;

•	pre-tax gain on sale of the ibrutinib royalty rights of $474 million; and

•	pre-tax loss of $40 million associated with the sale of the Enterix products business.

Income (loss) from discontinued operations, net of taxes included:

•	gain of $14 million (including foreign currency translation adjustments, partially offset by income tax expense and transaction costs) associated with the sale of our HemoCue products business; and

•	discrete tax benefits of $20 million associated with favorable resolution of certain tax contingencies related to our NID business.

Net cash provided by operating activities included:

•	income tax payments of $175 million associated with the sale of the ibrutinib royalty rights; and

•	$70 million of income tax payments which were deferred from the fourth quarter of 2012 under a program offered to companies whose principal place of business was in states most affected by Hurricane Sandy.

Net cash provided by investing activities included:

•	proceeds from the sale of the ibrutinib royalty rights of $474 million, net of transaction costs; and

•	proceeds from the sales of HemoCue and Enterix of $296 million.

(j)

On January 6, 2012, we completed the acquisition of S.E.D. Medical Laboratories ("S.E.D.") from Lovelace Health System. Consolidated operating results for 2012 include the results of operations of S.E.D. subsequent to the closing of the acquisition. During the fourth quarter of 2012, we sold our OralDNA salivary diagnostics business and committed to a plan to sell our HemoCue diagnostic products business. The sale of HemoCue was completed in April 2013. As a result, the operations for HemoCue and OralDNA have been classified as discontinued operations for all periods presented. As of December 31, 2012, the assets and liabilities of HemoCue were reported as held for sale.

(k)	Operating income included:

•	pre-tax charges of $106 million incurred in conjunction with further restructuring and integrating our business; and

•	pre-tax charges of $10 million, principally representing severance and other separation benefits as well as accelerated vesting of certain equity awards in connection with the succession of our prior CEO.

Income (loss) from discontinued operations, net of taxes included:

•	$86 million of charges for the asset impairment associated with HemoCue and the loss on sale associated with OralDNA;

•	$8 million of income tax expense related to the re-valuation of deferred tax assets associated with HemoCue and a $4 million income tax benefit related to the remeasurement of deferred taxes associated with HemoCue as a result of an enacted income tax rate change in Sweden.

Net cash provided by operating activities included:

•	receipts of $72 million from the termination of certain interest rate swap agreements; and

•	the deferral of approximately $70 million of income tax payments into the first quarter of 2013, which was offered to companies whose principal place of business was in states most affected by Hurricane Sandy.

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our Company

Diagnostic Information Services

Quest Diagnostics empowers people to take action to improve health outcomes. We use our extensive database of clinical lab results to derive diagnostic insights that reveal new avenues to identify and treat disease, inspire healthy behaviors and improve healthcare management. Our diagnostic information services business ("DIS") provides insights through clinical testing and related services to a broad range of customers, including patients, clinicians, hospitals, integrated delivery networks ("IDNs"), health plans, employers and accountable care organizations ("ACOs"). We offer the broadest access in the United States to diagnostic information services through our nationwide network of laboratories, patient service centers and phlebotomists in physician offices. We are the world's leading provider of diagnostic information services, which includes providing clinical testing services such as routine (including drugs-of-abuse) testing, gene-based and esoteric (including advanced diagnostics) testing, and anatomic pathology services, as well as related services and insights. We provide interpretive consultation with one of the largest medical and scientific staffs in the industry. Our DIS business makes up over 90% of our consolidated net revenues. During 2016, we processed approximately 160 million test requisitions through our extensive laboratory network.

The clinical testing that we perform is an essential element in the delivery of healthcare services. Clinicians use clinical testing for predisposition, screening, monitoring, diagnosis, prognosis and treatment choices of diseases and other medical conditions. The United States clinical testing industry consists of two segments. One segment, which we believe makes up approximately 37% of the total industry, includes hospital inpatient and outpatient testing. The second segment, which we believe makes up approximately 63% of the total industry, includes testing of persons who are not hospital patients, including testing done in commercial clinical laboratories, physician-office laboratories and other locations, as well as hospital outreach (non-hospital patients) testing. We believe that hospital-affiliated laboratories account for approximately 35% of the second segment, commercial clinical laboratories approximately 54% and physician-office laboratories and other locations account for the balance.

The clinical testing industry is subject to seasonal fluctuations in operating results and cash flows. Typically, testing volume declines during vacation and major holiday periods, reducing net revenues and operating cash flows below annual averages. Testing volume is also subject to declines due to severe weather or other events, which can deter patients from having testing performed and which can vary in duration and severity from year to year. Additionally, orders for clinical testing generated from physician offices, hospitals and employers can be affected by factors such as changes in the United States economy and regulatory environment, which affect the number of unemployed and uninsured, and design changes in healthcare plans, which affect the number of physician office and hospital visits.

Diagnostic Solutions

In our Diagnostic Solutions ("DS") businesses, which represents the balance of our consolidated net revenues, we offer a variety of solutions to insurers and healthcare providers. We are the leading provider of risk assessment services for the life insurance industry. In addition, we offer healthcare organizations, clinicians and patients robust information technology solutions. Prior to the sale of our Focus Diagnostics products business on May 13, 2016 ("Focus Sale") our diagnostics products business manufactured and marketed diagnostic products. Prior to the contribution of our clinical trials testing business to the Q2 Solutions joint venture on July 1, 2015 ("Clinical Trials Contribution"), our clinical trials testing business was a leading provider of central laboratory testing for clinical trials.

For further details regarding the Focus Sale, see "Two Point Strategy: Sale of Focus Diagnostics Products" below and Note 6 to the consolidated financial statements. For further details regarding the Clinical Trials Contribution, see Note 6 to the consolidated financial statements.

2016 Highlights

•	Our total net revenues of $7.52 billion were 0.3% above the prior year. The Clinical Trials Contribution, Focus Sale and winding down of our Celera products business ("Celera Products") negatively impacted total net revenues by 2.3% compared to the prior year.

•	DIS revenues of $7.1 billion were 2.5% above the prior year. DIS volume increased 2.0% compared to the prior year. DIS revenue per requisition increased 0.4% compared to the prior year.

•	DS revenues of $377 million were 28.5% below the prior year due to the Clinical Trials Contribution, Focus Sale and winding down of Celera Products.

•

Net income attributable to Quest Diagnostics' stockholders was $645 million, or $4.51 per diluted share, in 2016, compared to $709 million, or $4.87 per diluted share, in 2015. The decreases in net income attributable to Quest Diagnostics' stockholders and diluted earnings per share in 2016, compared to the prior year, were primarily a result of the gain on the Clinical Trials Contribution and a deferred income tax benefit associated with winding down a subsidiary in 2015, partially offset by the gain on the Focus Sale in 2016.

Two Point Strategy

In November 2012, we introduced a five-point business strategy to achieve our vision and our goals. At our Investor Day in November 2016, we updated our strategy to reflect our progress, narrowing our focus to two elements. Our two point strategy is described in detail in "Item 1. Business: Our Strategy and Strengths." We continued to execute on our strategy during 2016 as follows:

Acquisition of the Outreach Laboratory Service Business of Clinical Laboratory Partners

On February 29, 2016, we completed the acquisition of the outreach laboratory service business of Clinical Laboratory Partners, LLC ("CLP"), a wholly-owned subsidiary of Hartford HealthCare Corporation, in an all-cash transaction for $135 million. The acquired outreach laboratory service business of CLP is included in our DIS business. The acquisition was funded using a combination of cash on-hand and borrowings under our secured receivables credit facility.

For further details regarding our acquisitions, see Note 5 to the consolidated financial statements.

Sale of Focus Diagnostics Products

In March 2016, we signed a definitive agreement to sell the assets of our non-core Focus Diagnostics products business ("Focus Diagnostics") to DiaSorin S.p.A. On May 13, 2016, we completed the sale of Focus Diagnostics for $300 million in cash, or $293 million net of transaction costs and working capital adjustments, which includes $25 million of proceeds held in escrow. For the year ended December 31, 2016, we recorded a $118 million pre-tax gain on disposition of business. We also recorded income tax expense of $84 million, consisting of $91 million of current income tax expense (all of which was paid in 2016) and a deferred income tax benefit of $7 million.

As a result of this transaction, we completed our exit from the diagnostics products business as part of our efforts to refocus on diagnostic information services.

The proceeds from the Focus Sale were used to fund the repurchase of shares under the $250 million accelerated share repurchase agreement entered into in May 2016.

For further details regarding our dispositions, see Note 6 to the consolidated financial statements.

Retirement of Debt

In March 2016, we completed a cash tender offer ("2016 Tender Offer") to purchase up to $200 million aggregate principal amount of our 6.95% Senior Notes due July 2037 ("Senior Notes due 2037") and 5.75% Senior Notes due January 2040 ("Senior Notes due 2040"). We purchased $73 million of our Senior Notes due 2037 and $127 million of our Senior Notes due 2040 using a combination of cash on-hand and borrowing under our secured receivables credit facility. The retirement of debt is expected to reduce future interest expense. In connection with this transaction, we recorded a pre-tax loss on retirement of debt of $48 million, principally comprised of premiums paid, for the year ended December 31, 2016.

For further details regarding our debt and related transactions, see Note 13 to the consolidated financial statements.

Senior Notes Offering

In May 2016, the Company completed a $500 million senior notes offering (“2016 Senior Notes”), consisting of $500 million in aggregate principal of 3.45% senior notes due June 2026, issued at a discount of $1 million. The net proceeds from the 2016 Senior Notes were used to repay outstanding indebtedness under our senior unsecured revolving credit facility and our secured receivables credit facility and for general corporate purposes.

For further details regarding our 2016 Senior Notes and our debt, see Note 13 to the consolidated financial statements.

Accelerated Share Repurchase Agreement ("ASR")

In May 2016, we entered into an ASR with a financial institution to repurchase $250 million of our common stock as part of our share repurchase program. The ASR was completed in the third quarter of 2016. Under the ASR, we paid $250 million to the financial institution and received 3.1 million shares of our common stock, resulting in a final price per share of $81.04.

For further details regarding the ASR and repurchases of our common stock, see Note 15 to the consolidated financial statements and "Liquidity and Capital Resources: Share Repurchases" below.

Dividend Increase

On November 11, 2016, we announced that our Board of Directors authorized a 12.5% increase in our quarterly dividend from $0.40 per share to $0.45 per share, or $1.80 annually, commencing with the dividend payable in January 2017.

For further details regarding our dividend program, see Note 15 to the consolidated financial statements and "Liquidity and Capital Resources: Dividend Program" below.

Invigorate Program

The clinical testing industry is labor intensive. Employee compensation and benefits constitute approximately one-half of our total costs and expenses. In addition, performing clinical testing involves significant fixed costs for facilities and other infrastructure required to obtain, transport and test specimens. Therefore, relatively small changes in volume can have a significant impact on profitability in the short-term.

We are engaged in a multi-year program called Invigorate, which is designed to reduce our cost structure. We delivered more than $700 million in run-rate savings as we exited 2014. In November 2014, we announced our goal to deliver total run-rate savings from the Invigorate program of $1.3 billion as we exit 2017, compared to 2011. We ended 2016 with more than $1.1 billion in run-rate savings and believe we are on track to achieve our $1.3 billion run-rate savings goal as we exit 2017. In November 2016, we announced that we expect to drive operational excellence and achieve additional cost savings beyond 2017.

Invigorate has consisted of several flagship programs, with structured plans in each, to drive savings and improve performance across the customer value chain. These flagship programs include: organization excellence; information technology excellence; procurement excellence; field and customer service excellence; lab excellence; and revenue services excellence. In addition to these programs, we identified key themes to change how we operate in order to meet our goal of delivering the $1.3 billion of run-rate savings as we exit 2017. These additional key themes include: standardizing our processes, information technology systems, equipment and data; enhancing electronic enabling services; and enhancing reimbursement for work we perform. We believe that our efforts to standardize our information technology systems, equipment and data also foster our efforts to strengthen our foundation for growth and support the value creation initiatives of our clinical franchises by enhancing our operational flexibility, empowering and enhancing the customer experience, facilitating the delivery of actionable insights and bolstering our large data platform.

In January 2015, we adopted a course of action related to this multi-year program. We developed a high-level estimate of the total pre-tax charges expected to be incurred in 2015 through 2017 in connection with the course of action for the program: $300 million. During 2015 and 2016, we incurred $89 million and $63 million, respectively, of charges in connection with the courses of action. In February 2017, we developed high-level estimates of the pre-tax charges expected to be incurred in connection with the new course of action under the program for 2017 totaling $60 million to $80 million, consisting of up to $10 million of employee separation costs and $60 million to $70 million of systems conversion and integration costs. All of the total estimated

pre-tax charges expected to be incurred in 2017 will result in cash expenditures. The actual charges incurred in connection with the course of action in 2017 could be materially different from these estimates. As detailed plans to implement the course of action are approved and executed, it will result in charges to earnings.

From 2012 through 2014, the cumulative charges incurred in connection with the Invigorate program were $266 million, including $178 million of cumulative pre-tax employee separation costs and other restructuring related costs. From the beginning of 2015 through December 31, 2016, the cumulative charges incurred in connection with the Invigorate program were $152 million, including approximately $50 million of cumulative pre-tax employee separation costs and other restructuring related costs.

For further details regarding restructuring costs related to the Invigorate program, see Note 4 to the consolidated financial statements.

Outlook and Trends

The healthcare system in the United States is evolving; significant change is taking place in the system. We expect that the evolution of the healthcare industry will continue, and that industry change is likely to be extensive. There are a number of key trends that are having, and that we expect will continue to have, a significant impact on the diagnostic information services business in the United States and on our business. These trends present both opportunities and risks. However, because diagnostic information services is an essential healthcare service, we believe that the industry will continue to grow over the long term and that we are well positioned to benefit from the long-term growth expected in the industry.

We expect reimbursement pressure for our DIS business will continue to be moderate in 2017 and consistent with the last few years at approximately 1%. Healthcare market participants, including governments, are focusing on controlling costs, including potentially by changing reimbursement for healthcare services (including but not limited to a shift from fee for service to capitation), changing medical coverage policies (e.g., healthcare benefits design), pre-authorization of laboratory testing, requiring co-pays, introducing laboratory spend management utilities and payment and patient care innovations such as ACOs and patient-centered medical homes. As health plans and government programs require greater levels of patient cost-sharing, our patient collections could be negatively impacted and adversely impact our bad debt expense. As previously mentioned, there could be a shift to capitation arrangements where we agree to a predetermined monthly reimbursement rate for each member enrolled in a restricted plan, generally regardless of the number or cost of services provided by us. In both 2016 and 2015, we derived approximately 11% of our testing volume and 4% of our DIS revenues from capitated payment arrangements.

Historically, the Medicare Clinical Laboratory Fee Schedule and the Medicare Physician Fee Schedule established under Part B of the Medicare program have been subject to change, including each year. In addition, pursuant to the federal Protecting Access to Medicare Act of 2014 ("PAMA"), which is targeted for implementation in 2018, the Centers for Medicare and Medicaid Services will revise reimbursement schedules for clinical laboratory testing services provided under Medicare. While we cannot determine the impact of PAMA until we see the revised pricing schedules, we continue to believe that the impact will be manageable. In 2016, approximately 12% of our consolidated net revenues were reimbursed by Medicare under the Clinical Laboratory Fee Schedule and approximately 2% were reimbursed by Medicare under the Physician Fee Schedule.

The President of the United States has announced that he favors repealing the Affordable Care Act ("ACA") in 2017, and leaders of the Republication-controlled federal legislature also have expressed a desire to repeal the ACA. The scope and timing of any legislation to repeal, amend, replace, or reform the ACA is uncertain, but if such legislation were to become law, it could have a significant impact on the U.S. healthcare system. Uncertainty regarding the ACA prior to any such repeal, amendment, replacement or reform could create uncertainty generally in the healthcare market. In addition, Congress has expressed its interest in reforming federal income taxes applicable to U.S. corporations. Our activities are primarily in the United States, and, as a result, we had an effective tax rate in 2016 of nearly 40%. While we cannot determine the impact of tax reform until additional details become available, a change could have a material impact on our results of operations and cash flows.

Also, the trend of consolidating, converging and diversifying among our customers and payers has continued. Consolidation is increasing price transparency and bargaining power, and encouraging internalization of clinical testing.

For additional information on our key trends, see "Item 1. Business: The United States Clinical Testing Industry."

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions and select accounting policies that affect our reported financial results and the disclosure of contingent assets and liabilities.

While many operational aspects of our business are subject to complex federal, state and local regulations, the accounting for most of our business is generally straightforward, with net revenues primarily recognized upon completion of the testing process. Our revenues are primarily comprised of a high volume of relatively low-dollar transactions, and about one-half of our total costs and expenses consist of employee compensation and benefits. Due to the nature of our business, several of our accounting policies involve significant estimates and judgments:

•	revenues and accounts receivable associated with DIS;

•	reserves for general and professional liability claims;

•	reserves for other legal proceedings;

•	accounting for and recoverability of goodwill; and

•	accounting for stock-based compensation expense.

Revenues and accounts receivable associated with DIS

The process for estimating the ultimate collection of receivables associated with our DIS business involves significant assumptions and judgments. We primarily recognize revenue for services rendered upon completion of the testing process. Billings for services reimbursed by third-party payers, including Medicare and Medicaid, are generally recorded as revenues net of allowances for differences between amounts billed and the estimated receipts from such payers. Adjustments to the allowances, based on actual receipts from the third-party payers, are recorded upon settlement as an adjustment to net revenues.

We have a standardized approach to estimate and review the collectibility of our receivables based on a number of factors, including the period they have been outstanding, which results in increased allowances for doubtful accounts requirements as the aging of the related receivables increases. Historical collection and payer reimbursement experience is an integral part of the estimation process related to revenues and allowances for doubtful accounts. Changes to the allowances for doubtful accounts estimates are recorded as an adjustment to bad debt expense within selling, general and administrative expenses. Less than 5% of our net accounts receivable as of December 31, 2016 were outstanding more than 150 days.

We believe that the majority of our bad debt expense is primarily the result of the failure of patients to pay the portion of the receivable that is their responsibility; the remainder is primarily the result of missing or incorrect billing information on requisitions. In addition, we regularly assess the state of our billing operations in order to identify issues which may impact the collectibility of receivables or allowance estimates. We believe that the collectibility of our receivables is directly linked to the quality of our billing processes, most notably those related to obtaining the correct information in order to bill effectively for the services we provide. As such, we continue to implement “best practices” and increase the use of electronic ordering to reduce the number of requisitions that we receive from healthcare providers with missing or incorrect billing information. We believe that our collection and allowance estimation processes, along with our close monitoring of our billing operations, help to reduce the risk associated with material adjustments to reserve estimates.

The following table shows the approximate percentage of our total requisition volume and net revenues associated with our DIS business during 2016 applicable to each payer group:

	% of		% of
	DIS		DIS
	Volume		Revenues
Healthcare Insurers (including coinsurance and deductible responsibilities)	47		51
Government Payers	15		18
Client Payers	37		29
Patients	1		2

The following table shows net accounts receivable associated with our DIS business as of December 31, 2016 applicable to each payer group:

	% of
	Consolidated
	Net Accounts
	Receivable
Healthcare Insurers	17
Government Payers	15
Client Payers	45
Patients (including coinsurance and deductible responsibilities)	17
Total DIS	94

Healthcare insurers

Reimbursements from healthcare insurers are based on fee-for-service schedules and on capitated payment rates.

Substantially all of the accounts receivable due from healthcare insurers represent amounts billed under fee-for-service arrangements. Collection of such receivables is normally a function of providing complete and correct billing information to the healthcare insurers within the various filing deadlines and typically occurs within 30 to 60 days of billing. Provided we have billed healthcare insurers accurately with complete information prior to the established filing deadline, there has historically been little to no collection risk. If there has been a delay in billing, we determine if the amounts in question will likely go past the filing deadline, and if so, we will reserve accordingly for the billing.

Approximately 4% of our DIS net revenues for the year ended December 31, 2016 are reimbursed under capitated payment arrangements, in which case the healthcare insurers typically reimburse us in the same month services are performed, essentially giving rise to no outstanding accounts receivable at month-end. If any capitated payments are not received on a timely basis, we determine the cause and make a separate determination as to whether or not the collection of the amount from the healthcare insurer is at risk and, if so, would reserve accordingly.

Government payers

Payments for diagnostic information services made by the government are based on fee schedules set by governmental authorities. Collection of such receivables is normally a function of providing the complete and correct billing information within the various filing deadlines. Collection typically occurs within 30 days of billing. Our processes for billing, collecting and estimating uncollectible amounts for receivables due from government payers, as well as the risk of non-collection, are similar to those for healthcare insurers under fee-for-service arrangements.

Client payers

Client payers include physicians, hospitals, ACOs, IDNs, employers, other commercial laboratories and institutions for which services are performed on a wholesale basis, and are billed based on a negotiated fee schedule. Credit risk and ability to pay are more of a consideration for these payers than healthcare insurers and government payers. Collection typically occurs within 60 to 90 days of billing. In addition to our standard approach to establishing allowances for doubtful accounts, our approach to client payer receivables also focuses on specific account reviews, historical collection experience and other factors.

Patients

Patients are billed based on established patient fee schedules, subject to any limitations on fees negotiated with healthcare insurers or physicians on behalf of their patients. Collection of receivables due from patients is subject to credit risk and ability of the patients to pay. In addition to our standard approach to establishing allowances for doubtful accounts, our approach to patient receivables also considers historical collection experience and other factors. Patient receivables are generally fully reserved for when the related billing reaches 210 days outstanding. Balances are automatically written off when they are sent to collection agencies. Reserves are adjusted for estimated recoveries of amounts sent to collection agencies based on historical collection experience, which is regularly monitored.

Reserves for general and professional liability claims

As a general matter, providers of diagnostic information services may be subject to lawsuits alleging negligence or other similar legal claims. These suits could involve claims for substantial damages. Any professional liability litigation could also have an adverse impact on our client base and reputation. We maintain various liability insurance coverages for claims that could result from providing, or failing to provide, diagnostic information services, including inaccurate testing results, and other exposures. Our insurance coverage limits our maximum exposure on individual claims; however, we are essentially self-insured for a significant portion of these claims. While the basis for claims reserves is actuarially determined losses based upon our historical and projected loss experience, the process of analyzing, assessing and establishing reserve estimates relative to these types of claims involves a high degree of judgment. Although we believe that our present reserves and insurance coverage are sufficient to cover currently estimated exposures, it is possible that we may incur liabilities in excess of our recorded reserves or insurance coverage. Changes in the facts and circumstances associated with claims could have a material impact on our results of operations (principally costs of services), cash flows and financial condition in the period that reserve estimates are adjusted or paid. See Note 17 to the consolidated financial statements for a discussion of our reserves for general and professional liability claims.

Reserves for other legal proceedings

Our businesses are subject to or impacted by extensive and frequently changing laws and regulations, including inspections and audits by governmental agencies, in the United States (at both the federal and state levels) and the other jurisdictions in which we conduct business. Although we believe that we are in compliance, in all material respects, with applicable laws and regulations, there can be no assurance that a regulatory agency would not reach a different conclusion. Any noncompliance by us with applicable laws and regulations could have a material adverse effect on our results of operations. In addition, these laws and regulations may be interpreted or applied by a prosecutorial, regulatory or judicial authority in a manner that could require us to make changes in our operations, including our pricing and/or billing practices. We have, in the past, entered into several settlement agreements with various government and private payers relating to industry-wide billing and marketing practices that had been substantially discontinued. The federal or state governments may bring claims based on our current practices, which we believe are lawful. In addition, certain federal and state statutes, including the qui tam provisions of federal and state false claims acts, allow private individuals to bring lawsuits against healthcare companies on behalf of government or private payers alleging inappropriate billing practices. We are aware of certain pending lawsuits including class action lawsuits, and have received subpoenas related to billing practices. See Note 17 to the consolidated financial statements for a discussion of the various legal proceedings that involve the Company.

The process of analyzing, assessing and establishing reserve estimates relative to legal proceedings involves a high degree of judgment. Management has established reserves for legal proceedings in accordance with generally accepted accounting principles. Changes in facts and circumstances related to such proceedings could lead to significant adjustments to reserve estimates for such matters and could have a material impact on our results of operations, cash flows and financial condition in the period that reserve estimates are adjusted or paid.

Accounting for and recoverability of goodwill

We do not amortize goodwill, but evaluate the recoverability and measure the potential impairment of our goodwill annually, or more frequently, in the case of other events that indicate a potential impairment. We have identified the following reporting units for goodwill impairment testing:

•	DIS business;

•	Risk assessment services business;

•	Diagnostic products business (disposed of on May 13, 2016 as a result of the Focus Sale); and

•	Clinical trials testing business (disposed of on July 1, 2015 as a result of the Clinical Trials Contribution).

Certain reporting units have components that have been aggregated into a single reporting unit because they have similar economic characteristics, including similarities in financial performance, nature of products or services, nature of production processes and types of customers.

The annual impairment test includes an option to perform a qualitative assessment of whether it is more-likely-than-not that a reporting unit's fair value is less than its carrying value prior to, or as an alternative to, performing the two-step quantitative goodwill impairment test. In evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying value, we assess relevant events and circumstances such as: (a) macroeconomic conditions; (b) industry and market considerations; (c) cost factors; (d) overall financial performance; (e) other relevant entity-specific events; (f)

events affecting a reporting unit; (g) a sustained decrease in share price; and (h) other relevant events and circumstances that affect the fair value or carrying value of a reporting unit. If, after assessing the totality of events or circumstances, we determine that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value, then we are required to perform the first step of the two-step goodwill impairment test. Otherwise, no further analysis is required.

The quantitative impairment test is a two-step process that begins with the estimation of the fair value of the reporting unit. The first step in the two-step process screens for potential impairment and the second step measures the amount of the impairment, if any. As part of the first step to assess potential impairment, we compare our estimate of fair value for the reporting unit to the carrying value of the reporting unit. If the carrying value is greater than our estimate of fair value, we would then proceed to the second step to measure the impairment, if any. The second step compares the implied fair value of goodwill with its carrying value. The implied fair value is determined by allocating the fair value of the reporting unit to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. If the carrying value of the reporting unit's goodwill is greater than its implied fair value, an impairment loss will be recognized in the amount of the excess.

We calculate the fair value of each reporting unit using either a discounted cash flows analysis that converts future cash flow amounts into a single discounted present value amount or a market approach. We assess the valuation methodology based upon the relevance and availability of the data at the time we perform the valuation. The discounted cash flows analysis includes several unobservable inputs related to our own assumptions. The assumptions and estimates used in the discounted cash flows model are based upon the best available information in the circumstances and include a forecast of expected future cash flows, long-term growth rates, discount rates that are commensurate with economic risks, assumed income tax rates and estimates of capital expenditures and working capital. The fair values of the reporting units could be different if, for example, forecasted revenue growth rates, economic conditions, government regulations or actions by payers to control utilization of or reimbursement for healthcare services, turn out to be different than our assumptions or estimates. Changes in the assumed discount rates due to changes in interest rates could also affect the estimated fair values of the reporting units. We use a discount rate that considers a weighted average cost of capital plus an appropriate risk premium based upon the reporting unit being valued. Our analysis also considers publicly available information regarding the market capitalization of our Company, as well as (i) the financial projections and future prospects of our business, including its growth opportunities and likely operational improvements, and (ii) comparable sales prices, if available. We believe our estimation methods are reasonable and reflect common valuation practices.

On a quarterly basis, we perform a review of our business to determine if events or changes in circumstances have occurred which could have a material adverse effect on the fair value of the Company and its goodwill. If such events or changes in circumstances were deemed to have occurred, we would perform an impairment test of goodwill and record any noted impairment loss. We perform our annual impairment test during the fourth quarter of the fiscal year ended December 31st.

For years ended December 31, 2016 and 2015, we performed the qualitative assessment for our DIS and risk assessment services reporting units. Based on the totality of information available for the DIS and risk assessment services reporting units, we concluded that it was more-likely-than-not that the estimated fair values were greater than the carrying values of the reporting units, and as such, no further analysis was required. For the year ended December 31, 2015, we performed step one of the goodwill impairment test for our diagnostic products reporting unit and concluded that goodwill of the reporting unit was not impaired. Our most recent assessment indicates that no reporting units are currently at risk of impairment.

Accounting for stock-based compensation expense

We record stock-based compensation as a charge to earnings, net of the estimated impact of forfeited awards. As such, we recognize stock-based compensation cost only for those stock-based awards that are estimated to ultimately vest over their requisite service period, based on the vesting provisions of the individual grants. The process of estimating the fair value of stock-based compensation awards and recognizing stock-based compensation cost over their requisite service periods involves significant assumptions and judgments.

Beginning in 2015, we changed the method for estimating the fair value of our stock option awards from a lattice-based option-valuation method to a Black-Scholes option-valuation model, which has been applied prospectively to stock option awards. The change did not have a significant effect on our stock-based compensation expense reported in our consolidated statements of operations because we grant stock option awards based on a prescribed dollar value.

Estimating the fair value of stock option awards on the date of grant using the Black-Scholes option-valuation model and lattice-based option-valuation model requires management to make certain assumptions regarding: (i) the expected volatility in the market price of our common stock; (ii) dividend yield; (iii) risk-free interest rates; and (iv) the period of time employees are expected to hold the award prior to exercise (referred to as the expected holding period). Under the Black-Scholes option-valuation model, the expected volatility is based on historical volatilities of our common stock. The dividend yield is based on the approved annual dividend rate in effect and current market price of the underlying common stock at the time of grant. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for bonds with maturities consistent with the expected holding period of the related award. The expected holding period of the awards granted is estimated using the historical exercise behavior of employees.

We estimate the expected impact of forfeited awards and recognize stock-based compensation cost only for those awards expected to vest. We use historical experience to estimate projected forfeitures. If actual forfeiture rates are materially different from our estimates, stock-based compensation expense could be significantly different from what we have recorded in the current period. We periodically review actual forfeiture experience and adjust our estimates as necessary. The cumulative effect on current and prior periods of a change in the estimated forfeiture rate is recognized as compensation cost in earnings in the period of the change.

The terms of our performance share unit awards allow the recipients to earn a variable number of shares based on the achievement of the performance goals specified in the awards. Stock-based compensation expense associated with performance share units is recognized based on management's best estimates of the achievement of the performance goals specified in such awards and the resulting number of shares that will be earned. If the actual number of performance share units earned is different from our estimates, stock-based compensation could be significantly different from what we have recorded in the current period. The cumulative effect on current and prior periods of a change in the estimated number of performance share units expected to be earned is recognized as compensation cost in earnings in the period of the change. While the assumptions used to calculate and account for stock-based compensation awards represent management's best estimates, these estimates involve inherent uncertainties and the application of management's judgment. As a result, if changes are made to our assumptions and estimates, our stock-based compensation expense could vary significantly from period to period. In addition, the number of awards made under our equity compensation plans, changes in the design of those plans, the price of our shares and the performance of our Company can all cause stock-based compensation expense to vary from period to period.

Results of Operations

Basis of Presentation

Our DIS business currently represents our one reportable business segment. The DIS business for each of the three years ended December 31, 2016 accounted for more than 90% of our consolidated net revenues from continuing operations. Our other operating segments consist of our DS businesses. For further details regarding our business segment information, see Note 19 to the consolidated financial statements.

The results of operations for NID have been classified as discontinued operations in the accompanying consolidated statements of operations and related disclosures for all periods presented. We began reporting NID, a test kit manufacturing subsidiary which was wound down in 2006, as a discontinued operation in 2006 and will continue to report NID as a discontinued operation until uncertain tax benefits associated with NID are resolved. For further details regarding our discontinued operations, see Note 18 to the consolidated financial statements.

Results of Operations

The following table sets forth certain results of operations data for the periods presented:

													$ Increase (Decrease)								% Increase (Decrease)
	2016				2015				2014				2016 vs. 2015				2015 vs. 2014				2016 vs. 2015			2015 vs. 2014
	(dollars in millions, except per share data)
Net revenues:
DIS business	$	7,138			$	6,965			$	6,873			$	173			$	92			2.5	%		1.3	%
DS businesses	377				528				562				(151		)		(34		)		(28.5	)		(6.1	)
Total net revenues	$	7,515			$	7,493			$	7,435			$	22			$	58			0.3	%		0.8	%
Operating costs, expenses and other income:
Cost of services	$	4,616			$	4,657			$	4,637			$	(41	)		$	20			(0.9	)%		0.4	%
Selling, general and administrative	1,681				1,679				1,728				2				(49		)		0.1			(2.8	)
Amortization of intangible assets	72				81				94				(9		)		(13		)		(10.7	)		(14.1	)
Gain on disposition of business	(118		)		(334		)		—				216				(334		)		NM			NM
Other operating (income) expense, net	(13		)		11				(7		)		(24		)		18				NM			NM
Total operating costs and expenses, net	$	6,238			$	6,094			$	6,452			$	144			$	(358	)		2.4	%		(5.5	)%
Operating income	$	1,277			$	1,399			$	983			$	(122	)		$	416			(8.7	)%		42.3	%

Other income (expense):
Interest expense, net	$	(143	)		$	(153	)		$	(164	)		$	(10	)		$	(11	)		(6.3	)%		(6.7	)%
Other (expense) income, net	(48		)		(143		)		4				(95		)		147				NM			NM
Total non-operating expenses, net	$	(191	)		$	(296	)		$	(160	)		$	(105	)		$	136			(35.1	)%		85.8	%
Income tax expense	$	(429	)		$	(373	)		$	(262	)		$	56			$	111			15.3	%		41.9	%
Effective income tax rate	39.5		%		33.8		%		31.8		%		570 bps				200 bps				NM			NM
Equity in earnings of equity method investees, net of taxes	$	39			$	23			$	26			$	16			$	(3	)		73.3	%		(10.8	)%
Income from discontinued operations, net of taxes	$	—			$	—			$	5			$	—			$	(5	)		NM			NM
Income from continuing operations attributable to Quest Diagnostics' stockholders	$	645			$	709			$	551			$	(64	)		$	158			(9.1	)%		28.7	%
Diluted earnings per common share from continuing operations attributable to Quest Diagnostics’ common stockholders	$	4.51			$	4.87			$	3.78			$	(0.36	)		$	1.09			(7.4	)%		28.8	%

NM - Not Meaningful

bps - Basis Points

The following table sets forth certain results of continuing operations data as a percentage of net revenues for the periods presented:

	2016			2015			2014
Net revenues:
DIS business	95.0	%		93.0	%		92.4	%
DS businesses	5.0			7.0			7.6
Total net revenues	100.0	%		100.0	%		100.0	%
Operating costs, expenses and other income:
Cost of services	61.4	%		62.1	%		62.4	%
Selling, general and administrative	22.4			22.4			23.2
Amortization of intangible assets	1.0			1.1			1.3
Gain on disposition of business	(1.5	)		(4.4	)		—
Other operating (income) expense, net	(0.3	)		0.1			(0.1	)
Total operating costs and expenses, net	83.0	%		81.3	%		86.8	%
Operating income	17.0	%		18.7	%		13.2	%
Bad debt	4.1	%		4.0	%		4.0	%

Operating Results

Results for the year ended December 31, 2016 were affected by certain items that on a combined basis reduced earnings per diluted share by a net $0.26 as follows:

•	pre-tax gain of $118 million, or $0.24 per diluted share, related to the Focus Sale recorded in gain on disposition of business;

•

pre-tax charges of $82 million ($40 million in cost of services, $37 million in selling, general and administrative expenses, $1 million in other operating (income) expense, net and $4 million in equity in earnings of equity method investees, net of taxes), or $0.35 per diluted share, primarily associated with systems conversions and integration costs in connection with further restructuring and integrating our business;

•	pre-tax charges of $48 million, or $0.21 per diluted share, related to the 2016 Tender Offer recorded in other (expense) income, net; and

•

pre-tax costs of $6 million in selling, general and administrative expenses, a net pre-tax gain of $13 million in other operating (income) expense, net and pre-tax costs of $7 million in other (expense) income, net that on a combined basis benefited diluted earnings per share by $0.06, primarily a result of a non-taxable gain on an escrow recovery associated with an acquisition, partially offset by costs associated with winding down subsidiaries, non-cash asset impairment charges and costs incurred related to certain legal matters.

Results for the year ended December 31, 2015 were affected by certain items that on a combined basis benefited earnings per diluted share by a net $0.48 as follows:

•	pre-tax gain of $334 million, or $1.30 per diluted share, related to the Clinical Trials Contribution recorded in gain on disposition of business;

•

pre-tax charges of $150 million ($6 million in interest expense, net and $144 million in other (expense) income, net), or $0.62 per diluted share, related to the loss on retirement of debt and related refinancing charges in connection with the: March 2015 cash tender offer ("2015 Tender Offer"), in which we purchased $250 million aggregate principal amount of our Senior Notes due 2037 and Senior Notes due 2040; and the April 2015 redemption ("2015 Redemption"), in which we redeemed all of our $500 million Senior Notes due November 2015, $150 million, or 50%, of our Senior Notes due April 2016 and all of our $375 million Senior Notes due July 2017;

•

pre-tax charges of $110 million, or $0.46 per diluted share, related to restructuring costs primarily associated with workforce reductions, integration costs associated with acquisitions and professional fees associated with the further restructuring and integrating our business ($63 million in cost of services, $42 million in selling, general and administrative expenses and $5 million in equity in earnings of equity method investees, net of taxes);

•	a deferred income tax benefit of $58 million, or $0.40 per diluted share, associated with winding down a subsidiary; and

•

net pre-tax costs of $31 million ($2 million in cost of services, $21 million in selling, general and administrative expenses, $10 million in other operating (income) expense, net and $(2) million on other (expense) income, net), or $0.14 per diluted share, primarily associated with non-cash asset impairment charges and other costs associated with Celera Products and winding down of another subsidiary as well as costs incurred related to certain legal matters, partially offset by a pre-tax gain of $13 million associated with a decrease in the fair value of the contingent consideration accrual associated with our Summit Health, Inc. acquisition.

Results for the year ended December 31, 2014 were affected by certain items that on a combined basis reduced earnings per diluted share by a net $0.32 as follows:

•

pre-tax charges of $121 million ($50 million in cost of services, $69 million in selling, general and administrative expenses and $2 million in other operating (income) expense, net), or $0.53 per diluted share, related to restructuring costs primarily associated with workforce reductions, integration costs associated with acquisitions and professional fees associated with the further restructuring and integrating our business;

•	a discrete tax benefit of $44 million, or $0.30 per diluted share, associated with the favorable resolution of certain tax contingencies; and

•

net pre-tax costs of $15 million ($24 million in selling, general and administrative expenses and $(9) million in other operating (income) expense, net), or $0.09 per diluted share, primarily associated with costs related to certain legal matters, partially offset by a pre-tax gain of $9 million associated with a decrease in the fair value of the contingent consideration accrual associated with our Summit Health, Inc. acquisition.

Net Revenues

Net revenues for the year ended December 31, 2016 were 0.3% above the prior year level. The Clinical Trials Contribution, Focus Sale and winding down of Celera Products negatively impacted net revenues by 2.3%.

DIS revenues increased by 2.5% for the year ended December 31, 2016 compared to the prior year. Organic growth, or growth excluding the impact of acquisitions, and acquisitions contributed 1.7% and 0.8%, respectively, to DIS revenue growth. Our performance reflects continued focus on gene-based and esoteric (including advanced diagnostics) testing and expanding hospital health system relationships. DIS volume, measured by the number of requisitions, increased 2.0% for the year ended December 31, 2016. Organic growth and acquisitions contributed 1.2% and 0.8%, respectively, to DIS volume growth. Revenue per requisition for the year ended December 31, 2016 increased 0.4% compared to the prior year. Revenue per requisition benefited from favorable test mix, which was partially offset by pricing pressure of approximately 0.7% and lower revenue per requisition associated with our professional lab services engagements.

For the year ended December 31, 2016, combined revenues in our DS businesses decreased by 28.5% compared to the prior year due to the Clinical Trials Contribution, Focus Sale and winding down of Celera Products.

Net revenues for the year ended December 31, 2015 were 0.8% above the prior year level. The Clinical Trials Contribution negatively impacted net revenues by 1.2%.

DIS revenues increased by 1.3% for the year ended December 31, 2015 compared to the prior year. Acquisitions contributed nearly 1.3% to DIS revenue growth. DIS volume, measured by the number of requisitions, increased 1.2% for the year ended December 31, 2015 compared to the prior year. Acquisitions contributed approximately 1.5% to DIS volume in the period. Revenue per requisition for the year ended December 31, 2015 increased 0.1% compared to the prior year, reflecting growth in gene-based and esoteric (including advanced diagnostics) testing as well as strong growth in wellness, substantially offset by moderate reimbursement pressure.

For the year ended December 31, 2015, combined revenues in our DS businesses decreased by 6.1% compared to the prior year. The Clinical Trials Contribution negatively impacted DS revenues by approximately 17%.

Cost of Services

Cost of services consists principally of costs for obtaining, transporting and testing specimens as well as facility costs used for the delivery of our services.

Cost of services decreased $41 million for the year ended December 31, 2016 compared to the prior year. The decrease was primarily driven by lower costs as a result of the Clinical Trials Contribution, Focus Sale and winding down of Celera Products, net cost reductions under the Invigorate program, lower restructuring and integration charges and lower depreciation expense, partially offset by higher compensation and benefits and higher costs related to our acquisitions. For further details regarding the impact of the change in estimated useful lives of our property, plant and equipment on

depreciation expense, see Note 2 to the consolidated financial statements.

Cost of services increased $20 million for the year ended December 31, 2015 compared to the prior year. This increase was primarily driven by the additional costs associated with our acquisitions and, to a lesser extent, higher compensation and benefits and higher restructuring and integration charges, which were partially offset by the impact of the Clinical Trials Contribution on costs and net cost reductions under the Invigorate program.

Selling, General and Administrative Expenses ("SG&A")

SG&A consist principally of the costs associated with our sales and marketing efforts, billing operations, bad debt expense and general management and administrative support as well as administrative facility costs.

SG&A increased $2 million for the year ended December 31, 2016 compared to the prior year. The increase in SG&A was primarily driven by higher compensation and benefits and higher bad debt expense, substantially offset by lower costs as a result of the Clinical Trials Contribution, Focus Sale and winding down of Celera Products, net cost reductions under the Invigorate program and lower depreciation expense.

The increase in bad debt expense as a percentage of net revenues for the year ended December 31, 2016,

compared to the prior year, was primarily a result of our recent dispositions which had lower bad debt rates than our DIS

business.

SG&A decreased $49 million for the year ended December 31, 2015 compared to the prior year. The decrease in SG&A was primarily driven by lower compensation and benefits as a result of cost reductions under the Invigorate program, lower restructuring and integration charges and the impact of the Clinical Trials Contribution on costs, partially offset by additional costs associated with our acquisitions.

Amortization of Intangible Assets

The $9 million decrease in amortization of intangible assets for the year ended December 31, 2016 compared to the prior year was primarily a result of intangible assets that became fully amortized, were disposed of as a result of the Focus Sale and the winding down of Celera Products, or were impaired.

The $13 million decrease in amortization of intangible assets for the year ended December 31, 2015 compared to the prior year was primarily a result of intangible assets that became fully amortized in 2014 and early 2015.

Gain on Disposition of Business

For the year ended December 31, 2016, gain on disposition of business was a result of the Focus Sale. Gain on disposition of business for the year ended December 31, 2015 was the non-cash gain resulting from the Clinical Trials Contribution.

Other Operating (Income) Expense, net

Other operating (income) expense, net includes miscellaneous income and expense items and other charges related to operating activities.

For the year ended December 31, 2016, other operating (income) expense, net principally consisted of a non-taxable gain on an escrow recovery associated with an acquisition, partially offset by $7 million of non-cash asset impairment charges.

For the year ended December 31, 2015, other operating (income) expense, net included $24 million of non-cash asset impairment charges primarily associated with Celera Products and another subsidiary, partially offset by a gain of $13 million associated with a decrease in the fair value of the contingent consideration accrual associated with our Summit Health, Inc. acquisition.

For the year ended December 31, 2014, other operating (income) expense, net included a gain of $9 million associated with a decrease in the fair value of the contingent consideration accrual associated with our Summit Health, Inc. acquisition.

Interest Expense, net

Interest expense, net for the year ended December 31, 2016 decreased by $10 million compared to the prior year. The decrease in interest expense, net was primarily a result of lower interest rates as a result of the debt refinancing in 2015 and to a lesser extent the 2016 refinancing.

Interest expense, net for the year ended December 31, 2015 decreased by $11 million compared to the prior year. The decrease in interest expense, net was primarily a result of lower outstanding debt balances compared to the prior year and lower interest rates associated with the senior notes offering in 2015.

Other (Expense) Income, net

Other income (expense), net represents miscellaneous income and expense items related to non-operating activities, such as gains and losses associated with investments, other non-operating assets and early retirement of debt.

For the year ended December 31, 2016, other (expense) income, net included the loss on retirement of debt of $48 million associated with the 2016 Tender Offer and non-cash asset impairment charges associated with certain investments of $7 million.

For the year neded December 31, 2015, other (expense) income, net included the loss on retirement of debt of $144 million associated with the 2015 Tender Offer and 2015 Redemption.

Income Tax Expense

For the year ended December 31, 2016, income tax expense included $84 million of income taxes associated with the Focus Sale, consisting of $91 million of current income tax expense and a deferred income tax benefit of $7 million. The income tax expense resulted in an effective tax rate of 71.4% on the transaction, which was significantly in excess of the statutory tax rate primarily due to a lower tax basis in the assets sold, specifically the goodwill associated with the disposition. In addition, income tax expense included an income tax benefit of $18 million associated with the 2016 Tender Offer.

For the year ended December 31, 2015, income tax expense included deferred income tax expense of $145 million associated with the gain on the Clinical Trials Contribution, partially offset by a $58 million deferred income tax benefit associated with winding down a subsidiary and a $57 million income tax benefit associated with the 2015 Tender Offer and 2015 Redemption.

For the year ended December 31, 2014, income tax expense included a $44 million income tax benefit related to the favorable resolution of a tax contingency.

Our effective income tax rate for the year ended December 31, 2016 was negatively impacted by the higher tax rate, 71.4%, associated with the Focus Sale, and partially offset by a non-taxable gain on an escrow recovery associated with an acquisition and $9 million of excess tax benefits associated with stock-based compensation arrangements.

Our effective income tax rate for the year ended December 31, 2015 was positively impacted by the $58 million deferred income tax benefit associated with winding down a subsidiary, partially offset by the higher tax rate, 43.3%, associated with the gain on the Clinical Trials Contribution.

Our effective income tax rate for the year ended December 31, 2014 was positively impacted by a $44 million benefit related to the favorable resolution of a tax contingency.

Equity in Earnings of Equity Method Investees, Net of Taxes

The $16 million increase in equity in earnings of equity method investees, net of taxes for the year ended December 31, 2016 was primarily a result of increased earnings associated with our Q2 Solutions joint venture.

Quantitative and Qualitative Disclosures About Market Risk

We address our exposure to market risks, principally the market risk of changes in interest rates, through a controlled program of risk management that includes the use of derivative financial instruments. We do not hold or issue derivative financial instruments for speculative purposes. We seek to mitigate the variability in cash outflows that result from changes in interest rates by maintaining a balanced mix of fixed-rate and variable-rate debt obligations. In order to achieve this objective, we have entered into interest rate swaps. Interest rate swaps involve the periodic exchange of payments without the exchange of underlying principal or notional amounts. Net settlements are recognized as an adjustment to interest expense. We believe that our exposures to foreign exchange impacts and changes in commodity prices are not material to our consolidated financial condition or results of operations. For further details regarding our significant accounting policies on interest rate risk and foreign currency, see Note 2 to the consolidated financial statements.

As of December 31, 2016 and 2015, the fair value of our debt was estimated at approximately $3.9 billion and $3.7 billion, respectively, using quoted active market prices and yields for the same or similar types of borrowings, taking into account the underlying terms of the debt instruments. As of December 31, 2016 and 2015, the estimated fair value exceeded the carrying value of the debt by $165 million and $82 million, respectively. A hypothetical 10% increase in interest rates (representing 39 basis points at both December 31, 2016 and 2015) would potentially reduce the estimated fair value of our debt by approximately $102 million and $112 million as of December 31, 2016 and 2015, respectively.

Borrowings under our secured receivables credit facility and our senior unsecured revolving credit facility are subject to variable interest rates. Interest on our secured receivables credit facility is based on rates that are intended to approximate commercial paper rates for highly rated issuers plus a spread. Interest on our senior unsecured revolving credit facility is subject to a pricing schedule that can fluctuate based on changes in our credit ratings. As such, our borrowing cost under this credit arrangement will be subject to both fluctuations in interest rates and changes in our credit ratings. As of December 31, 2016, the borrowing rates under these debt instruments were: for our secured receivables credit facility, commercial paper rates for highly rated issuers plus 0.66%; and for our senior unsecured revolving credit facility, LIBOR plus 1.125%. As of December 31, 2016, the weighted average LIBOR was 0.8%. As of December 31, 2016, there were no borrowings outstanding under our $600 million secured receivables credit facility or under our $750 million senior unsecured revolving credit facility.

As of December 31, 2015, the Company had entered into various fixed-to-variable interest rate swap agreements with an aggregate notional amount of $1.2 billion and variable interest rates ranging from one-month LIBOR plus 1.4% to one-month LIBOR plus 3.6%. In July 2016, the Company terminated those interest rate swaps agreements. As a result of the termination, the Company received proceeds of $60 million, which included $6 million of accrued interest. The remaining basis adjustment on the respective debt obligation of $54 million will be amortized as a reduction of interest expense over the remaining terms of the hedged debt instrument. Immediately after the termination of these interest rate swaps, the Company entered into new fixed-to-variable interest rate swap agreements. The new interest rate swaps have an aggregate notional amount of $1.2 billion and variable interest rates ranging from one-month LIBOR plus 2.2% to one-month LIBOR plus 3.0%. These derivative financial instruments are accounted for as fair value hedges of a portion of the Senior Notes due 2024, the Senior Notes due 2025 and a portion of the Senior Notes due 2026.

The notional amount of fixed-to-variable interest rate swaps as of both December 31, 2016 and 2015 was $1.2 billion. The aggregate fair value of the fixed-to-variable interest rate swaps was $88 million, in a liability position, as of December 31, 2016. The aggregate fair value of the fixed-to-variable interest rate swaps that were in an asset position was $23 million as of December 31, 2015. The aggregate fair value of the fixed-to-variable interest rate swaps that were in a liability position was $6 million as of December 31, 2015.

Based on our net exposure to interest rate changes, a hypothetical 10% change to the variable interest rate component of our variable rate indebtedness (representing 7 basis points) would not impact annual interest expense materially, assuming no changes to the debt outstanding as of December 31, 2016. A hypothetical 10% change in the forward one-month LIBOR curve (representing a 22 basis point change in the weighted average yield) would potentially change the fair value of our derivative liabilities by $19 million.

For further details regarding our outstanding debt and our financial instruments and hedging activities, see Notes 13 and 14, respectively, to the consolidated financial statements.

Risk Associated with Investment Portfolio

Our investment portfolio includes equity investments comprised primarily of strategic equity holdings in privately and publicly held companies. These securities are exposed to price fluctuations and are generally concentrated in the life sciences industry. We regularly evaluate the fair value measurements of our equity investments to determine if losses in value are other than temporary and if an impairment loss has been incurred. The carrying value of our equity investments (excluding investments accounted for under the equity method) was $9 million as of December 31, 2016.

We do not hedge our equity price risk. The impact of an adverse movement in equity prices on our holdings in privately held companies cannot be easily quantified, as our ability to realize returns on investments depends on, among other things, the enterprises’ ability to raise additional capital or derive cash inflows from continuing operations or through liquidity events such as initial public offerings, mergers or private sales.

Liquidity and Capital Resources

	2016				2015				2014
	(dollars in millions)
Net cash provided by operating activities	$	1,069			$	821			$	944
Net cash used in investing activities	(152		)		(362		)		(1,025		)
Net cash (used in) provided by financing activities	(691		)		(518		)		86
Net change in cash and cash equivalents	$	226			$	(59	)		$	5

Cash and Cash Equivalents

Cash and cash equivalents consist of cash and highly liquid short-term investments. Cash and cash equivalents as of December 31, 2016, 2015 and 2014 totaled $359 million, $133 million and $192 million, respectively.

As of December 31, 2016, approximately 15% of our $359 million of consolidated cash and cash equivalents were held outside of the United States. These funds are considered indefinitely reinvested to be used to expand operations either organically or through acquisitions outside the United States. Further, our current plans do not demonstrate a need to repatriate foreign funds in order to fund operations in the United States. If the foreign cash and cash items are needed for operations in the United States, or we otherwise elect to repatriate the funds, we may be required to accrue and pay United States taxes on a significant portion of these amounts.

Cash Flows from Operating Activities

Net cash provided by operating activities for the year ended December 31, 2016 was $1.1 billion, compared to $821 million for the year ended December 31, 2015. This $248 million increase in cash provided by operating activities was primarily a result of:

•	$99 million decrease in payments related to the retirement of debt, principally comprised of premiums paid, associated with the 2016 Tender Offer as compared to the 2015 Tender Offer and 2015 Redemption;

•	an additional payroll cycle in 2015;

•	$54 million of proceeds received in 2016 from the termination of interest rate swap agreements;

•	$25 million decrease in restructuring payments;

•	$24 million decrease in interest paid; and

•	improved operating performance.

These increases in net cash provided by operating activities were partially offset by a $42 million increase in income taxes paid, which was driven by $91 million of income taxes paid in connection with the Focus Sale.

Net cash provided by operating activities for the year ended December 31, 2015 was $821 million, compared to $944 million for the year ended December 31, 2014. This $123 million decrease in cash provided by operating activities was primarily of:

•	$146 million of payments related to the retirement of debt, principally comprised of premiums paid, associated with the 2015 Tender Offer and 2015 Redemption;

•	an additional payroll cycle in 2015;

•	an income tax payment in the third quarter of 2015 associated with certain tax contingencies; and

•	higher performance-based compensation payments.

These decreases were partially offset by improved operating performance and improved working capital through management of days sales outstanding and days payable outstanding.

Days sales outstanding, a measure of billing and collection efficiency, was 47 days, 47 days and 48 days as of December 31, 2016, 2015 and 2014, respectively.

Cash Flows from Investing Activities

Net cash used in investing activities for the year ended December 31, 2016 was $152 million, compared to $362 million for the year ended December 31, 2015. This $210 million decrease in cash used in investing activities was a result of:

•	$270 million increase in proceeds from the disposition of business, principally related to the Focus Sale in 2016; and

•	$33 million decrease in investment in equity method investee, related to cash included in our Clinical Trials Contribution in 2015.

These decreases in net cash used in investing activities were partially offset by:

•	$72 million increase in cash paid for business acquisitions in 2016, principally a result of the CLP acquisition in 2016; and

•	$30 million increase in capital expenditures.

Net cash used in investing activities for the year ended December 31, 2015 was $362 million, compared to $1.0 billion for the year ended December 31, 2014 This $663 million decrease in cash used in investing activities was a result of:

•	a $661 million decrease in business acquisitions in 2015, primarily as a result of the Solstas Lab Partners Group and Summit Health, Inc. acquisitions in 2014; and

•	a $45 million decrease in capital expenditures.

These decreases in net cash used in investing activities were partially offset by $33 million of cash included in our Clinical Trials Contribution in 2015.

Cash Flows from Financing Activities

Net cash used in financing activities for the year ended December 31, 2016 was $691 million, compared to $518 million for the year ended December 31, 2015. This $173 million increase in cash used in financing activities was primarily a result of:

•	$366 million increase in repurchases of our common stock (discussed in "Share Repurchases" below); and

•	$63 million decrease in proceeds from the sale of noncontrolling interest in a subsidiary, as a result of the sale of noncontrolling interest in a subsidiary to UMass Memorial Medical Center ("UMass") in 2015.

These increases in net cash used in financing activities were partially offset by:

•	$145 million in net borrowings (proceeds from borrowings less repayments of debt) in 2016, compared to $84 million in net repayments in 2015; and

•	$51 million decrease in payment of deferred acquisition consideration principally a result of a payment to UMass in 2015 related to the business acquisition in 2013.

Net cash (used in) provided by financing activities for the year ended December 31, 2015 was $(518) million, compared to $86 million for the year ended December 31, 2014. This $604 million increase in cash used in financing activities was primarily a result of:

•	$84 million in net repayments (proceeds from borrowings less repayments of debt) in 2015, compared to $371 million in net borrowings in 2014;

•	$92 million increase in repurchases of our common stock (discussed in "Share Repurchases" below);

•	$25 million increase in dividends paid as a result of higher dividend rates in 2015 (discussed in "Dividend Program" below);

•	$18 million decrease in proceeds from the exercise of stock options; and

•	$51 million of deferred acquisition consideration payments, primarily to UMass related to the business acquisition in 2013.

These increases in net cash used in financing activities were partially offset by $63 million of proceeds from the sale of a noncontrolling interest in a subsidiary to UMass.

In 2016, we completed the issuance of the 2016 Senior Notes and the 2016 Tender Offer and repaid the remaining $150 million outstanding under the Senior Notes due April 2016. In addition, both cumulative borrowings and repayments under our secured receivables credit facility totaled $1.2 billion in 2016. Both cumulative borrowings and repayments under our senior unsecured revolving credit facility totaled $155 million in 2016.

In 2015, we completed a $1.2 billion senior notes offering, the 2015 Tender Offer and 2015 Redemption. In addition, both cumulative borrowings and repayments under our secured receivables credit facility totaled $1.3 billion in 2015.

In 2014, we completed a $600 million senior notes offering and repaid the $200 million floating rate senior notes due March 2014. In addition, both cumulative borrowings and repayments under our secured receivables credit facility totaled $1.2 billion in 2014. Both cumulative borrowings and repayments under our senior unsecured revolving credit facility totaled $200 million in 2014.

For details regarding our 2016 Senior Notes, see "Two Point Strategy: Senior Notes Offering" above. For details regarding our debt and related transactions, see Note 13 to the consolidated financial statements.

Dividend Program

During each of the first three quarters of 2016, our Board of Directors declared a quarterly cash dividend of $0.40 per common share. On November 11, 2016, our Board of Directors authorized a 12.5% increase in our quarterly dividend from $0.40 per share to $0.45 per share, or $1.80 annually, commencing with the dividend payable in January 2017. During each of the quarters of 2015, our Board of Directors declared a quarterly cash dividend of $0.38 per common share. During each of the quarters in 2014, our Board of Directors declared a quarterly cash dividend of $0.33 per common share. We expect to fund future dividend payments with cash flows from operations.

Share Repurchases

In December 2016, our Board of Directors authorized us to repurchase an additional $1 billion of our common stock.

In December 2015, our Board of Directors authorized us to repurchase an additional $500 million of our common stock. As of December 31, 2016, $1.4 billion remained available under the share repurchase authorization.

For the year ended December 31, 2016, we repurchased 7.4 million shares of our common stock for $590 million, which includes 3.1 million shares repurchased under the May 2016 ASR for $250 million (see "Two Point Strategy: Accelerated Share Repurchase Agreement" for further details).

For the year ended December 31, 2015, we repurchased 3.2 million shares of our common stock for $224 million.

For the year ended December 31, 2014, we repurchased 2.2 million shares of our common stock for $132 million.

For further details regarding our share repurchases, see Note 15 to the consolidated financial statements.

Contractual Obligations and Commitments

The following table summarizes certain of our contractual obligations as of December 31, 2016 (dollars in millions):

		Payments due by period
Contractual Obligations		Total				Less than 1 year				1-3 years				3-5 years				After 5 years
Outstanding debt		$	3,775			$	—			$	300			$	1,350			$	2,125
Capital lease obligations		13				6				6				1				—
Interest payments on outstanding debt		1,619				150				296				223				950
Operating leases		661				179				221				108				153
Purchase obligations		2,139				302				490				415				932
Merger consideration obligation		4				3				1				—				—
Total contractual obligations		$	8,211			$	640			$	1,314			$	2,097			$	4,160

Interest payments on our long-term debt have been calculated after giving effect to our interest rate swap agreements, using the interest rates as of December 31, 2016 applied to the December 31, 2016 balances, which are assumed to remain outstanding through their maturity dates.

A full description of the terms of our indebtedness and related debt service requirements and our future payments under certain of our contractual obligations is contained in Note 13 to the consolidated financial statements. A full discussion and analysis regarding our minimum rental commitments under noncancelable operating leases is contained in Note 17 to the consolidated financial statements. Purchase obligations include: our noncancelable commitments to purchase product or services as described in Note 17 to the consolidated financial statements; and purchase obligations under our agreement to outsource our billing and related operations, which is further described in Note 17 to consolidated financial statements. A full discussion regarding our acquisition of Steward Health Care Systems, LLC's laboratory outreach business and the related merger consider obligation is contained in Note 5 to the consolidated financial statements. A full discussion regarding the fair value of the contingent consideration associated with our acquisitions is discussed in Note 7 to the consolidated financial statements.

As of December 31, 2016, our total liabilities associated with unrecognized tax benefits were approximately $98 million, which were excluded from the table above. We believe it is reasonably possible that these liabilities may decrease by less than $7 million within the next twelve months, primarily as a result of payments, settlements and/or the conclusion of tax examinations on certain tax positions. For the remainder, we cannot make reasonably reliable estimates of the timing of the future payments of these liabilities. Additionally, it is reasonably possible that within the next 12 months, as result of ongoing negotiations with tax authorities and the expiration of statutes of limitations, our total liabilities associated with unrecognized tax benefits will further decrease and beneficially impact the effective tax rate for continuing operations. However, due to the inherent uncertainty of the negotiations and the resulting outcomes, we are not able to estimate the effective tax rate impact at this time. For further details regarding the contingent tax liability reserves, see Note 8 to the consolidated financial statements.

In connection with the sale of an 18.9% noncontrolling interest in a subsidiary to UMass, we granted UMass the right to require us to purchase all of its interest in the subsidiary at fair value commencing July 1, 2020. As of December 31, 2016, the fair value of the redeemable noncontrolling interest on the consolidated balance sheet was $77 million, which was excluded from the table above. Since the redemption of the noncontrolling interest is outside of our control, we cannot make a reasonably reliable estimate of the timing of the future payment, if any, of the redeemable noncontrolling interest. For further details regarding the redeemable noncontrolling interest, see Note 15 to the consolidated financial statements.

Our credit agreements contain various covenants and conditions, including the maintenance of certain financial ratios, that could impact our ability to, among other things, incur additional indebtedness. As of December 31, 2016, we were in compliance with the various financial covenants included in our credit agreements and we do not expect these covenants to adversely impact our ability to execute our growth strategy or conduct normal business operations.

Equity Method Investees

Our equity method investees primarily consist of our clinical trials central laboratory services joint venture and our diagnostic information services joint ventures, which are accounted for under the equity method of accounting. We believe that our transactions with our equity method investees are conducted at arm’s length, reflecting current market conditions and pricing. Our investment in equity method investees equals less than 5% of our consolidated total assets. Our proportionate share of income before income taxes associated with our equity method investees equals less than 5% of our consolidated income before income taxes and equity in earnings of equity method investees. We have no material unconditional obligations or guarantees to, or in support of, our equity method investees and their operations.

Requirements and Capital Resources

We estimate that we will invest approximately $250 million to $300 million during 2017 for capital expenditures, to support and grow our existing operations, principally related to investments in information technology, laboratory equipment and facilities, including specific initiatives associated with our Invigorate and other programs, and to enable the relocation of our headquarters to a lower cost location.

As of December 31, 2016, $1.3 billion of borrowing capacity was available under existing credit facilities consisting of $532 million available under our secured receivables credit facility and $750 million available under our senior unsecured revolving credit facility. For further details regarding the credit facilities, see Note 13 to the consolidated financial statements.

We believe the borrowing capacity under the credit facilities described above continues to be available to us. Should one or several banks no longer participate in either of our credit facilities, we would not expect it to impact our ability to fund operations. We expect that we will be able to replace our existing credit facilities with alternative arrangements prior to their expiration.

We believe that our cash and cash equivalents and cash from operations, together with our borrowing capacity under our credit facilities, will provide sufficient financial flexibility to fund seasonal and other working capital requirements, capital expenditures, debt service requirements and other obligations, cash dividends on common shares, share repurchases and additional growth opportunities for the foreseeable future. We believe that our credit profile should provide us with access to additional financing to refinance upcoming debt maturities and, if necessary, to fund growth opportunities that cannot be funded from existing sources.

Inflation

We believe that inflation generally does not have a material adverse effect on our results of operations or financial condition.

Impact of New Accounting Standards

The impacts of recent accounting pronouncements not yet effective on our consolidated financial statements are discussed in Note 2 to the consolidated financial statements.

REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of the Company, including its Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2016 based on criteria for effective internal control over financial reporting described in “Internal Control - Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has determined that the Company's internal control over financial reporting as of December 31, 2016 is effective.

The Company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorization of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited the financial statements included in this annual report, audited the Company's internal control over financial reporting as of December 31, 2016 and issued their audit report on the Company's internal control over financial reporting included herein.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

of Quest Diagnostics Incorporated

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive income, cash flows, and stockholders’ equity present fairly, in all material respects, the financial position of Quest Diagnostics Incorporated and its subsidiaries at December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and the financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the Report of Management on Internal Control over Financial Reporting under Item 9a. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/	PricewaterhouseCoopers LLP
	Florham Park, New Jersey
	February 22, 2017

F- 1

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2016 AND 2015

(in millions, except per share data)

	2016				2015
Assets
Current assets:
Cash and cash equivalents	$	359			$	133
Accounts receivable, net of allowance for doubtful accounts of $265 and $254 as of December 31, 2016 and 2015, respectively	926				901
Inventories	82				84
Prepaid expenses and other current assets	155				207
Assets held for sale	9				176
Total current assets	1,531				1,501
Property, plant and equipment, net	1,029				925
Goodwill	6,000				5,905
Intangible assets, net	949				984
Investments in equity method investees	443				473
Other assets	148				174
Total assets	$	10,100			$	9,962
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses	$	975			$	1,014
Current portion of long-term debt	6				159
Total current liabilities	981				1,173
Long-term debt	3,728				3,492
Other liabilities	654				514
Commitments and contingencies
Redeemable noncontrolling interest	77				70
Stockholders’ equity:
Quest Diagnostics stockholders’ equity:
Common stock, par value $0.01 per share; 600 shares authorized as of both December 31, 2016 and 2015; 216 shares issued as of both December 31, 2016 and 2015	2				2
Additional paid-in capital	2,545				2,481
Retained earnings	6,613				6,199
Accumulated other comprehensive loss	(72		)		(38		)
Treasury stock, at cost; 79 shares and 73 shares as of December 31, 2016 and 2015, respectively	(4,460		)		(3,960		)
Total Quest Diagnostics stockholders’ equity	4,628				4,684
Noncontrolling interests	32				29
Total stockholders’ equity	4,660				4,713
Total liabilities and stockholders’ equity	$	10,100			$	9,962

The accompanying notes are an integral part of these statements.

F- 2

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014

(in millions, except per share data)

	2016				2015				2014
Net revenues	$	7,515			$	7,493			$	7,435
Operating costs, expenses and other income:
Cost of services	4,616				4,657				4,637
Selling, general and administrative	1,681				1,679				1,728
Amortization of intangible assets	72				81				94
Gain on disposition of business	(118		)		(334		)		—
Other operating (income) expense, net	(13		)		11				(7		)
Total operating costs, expenses, net	6,238				6,094				6,452
Operating income	1,277				1,399				983
Other income (expense):
Interest expense, net	(143		)		(153		)		(164		)
Other (expense) income, net	(48		)		(143		)		4
Total non-operating expenses, net	(191		)		(296		)		(160		)
Income from continuing operations before income taxes and equity in earnings of equity method investees	1,086				1,103				823
Income tax expense	(429		)		(373		)		(262		)
Equity in earnings of equity method investees, net of taxes	39				23				26
Income from continuing operations	696				753				587
Income from discontinued operations, net of taxes	—				—				5
Net income	696				753				592
Less: Net income attributable to noncontrolling interests	51				44				36
Net income attributable to Quest Diagnostics	$	645			$	709			$	556
Amounts attributable to Quest Diagnostics’ stockholders:
Income from continuing operations	$	645			$	709			$	551
Income from discontinued operations, net of taxes	—				—				5
Net income	$	645			$	709			$	556
Earnings per share attributable to Quest Diagnostics’ common stockholders - basic:
Income from continuing operations	$	4.58			$	4.92			$	3.80
Income from discontinued operations	—				—				0.03
Net income	$	4.58			$	4.92			$	3.83
Earnings per share attributable to Quest Diagnostics’ common stockholders - diluted:
Income from continuing operations	$	4.51			$	4.87			$	3.78
Income from discontinued operations	—				—				0.03
Net income	$	4.51			$	4.87			$	3.81
Dividends per common share	$	1.65			$	1.52			$	1.32

The accompanying notes are an integral part of these statements.

F- 3

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014

(in millions)

	2016				2015				2014
Net income	$	696			$	753			$	592
Other comprehensive (loss) income:
Currency translation	(34		)		(15		)		(7		)
Market valuation, net of tax	(2		)		—				(1		)
Net deferred loss on cash flow hedges, net of tax	2				3				(10		)
Other	—				1				(1		)
Other comprehensive loss	(34		)		(11		)		(19		)
Comprehensive income	662				742				573
Less: Comprehensive income attributable to noncontrolling interests	51				44				36
Comprehensive income attributable to Quest Diagnostics	$	611			$	698			$	537

The accompanying notes are an integral part of these statements.

F- 4

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014

(in millions)

	2016				2015				2014
Cash flows from operating activities:
Net income	$	696			$	753			$	592
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	249				304				314
Provision for doubtful accounts	308				297				296
Deferred income tax provision	37				112				23
Stock-based compensation expense	69				52				51
Gain on disposition of business	(118		)		(334		)		—
Other, net	(6		)		6				(12		)
Changes in operating assets and liabilities:
Accounts receivable	(343		)		(262		)		(312		)
Accounts payable and accrued expenses	56				(24		)		74
Income taxes payable	42				(41		)		(84		)
Termination of interest rate swap agreements	54				—				—
Other assets and liabilities, net	25				(42		)		2
Net cash provided by operating activities	1,069				821				944
Cash flows from investing activities:
Business acquisitions, net of cash acquired	(139		)		(67		)		(728		)
Proceeds from sale of businesses	270				—				—
Capital expenditures	(293		)		(263		)		(308		)
Investment in equity method investee	—				(33		)		—
Decrease in investments and other assets	10				1				11
Net cash used in investing activities	(152		)		(362		)		(1,025		)
Cash flows from financing activities:
Proceeds from borrowings	1,869				2,453				2,018
Repayments of debt	(1,724		)		(2,537		)		(1,647		)
Purchases of treasury stock	(590		)		(224		)		(132		)
Exercise of stock options	73				60				78
Employee payroll tax withholdings on stock issued under stock-based compensation plans	(10		)		(7		)		(6		)
Dividends paid	(223		)		(212		)		(187		)
Distributions to noncontrolling interests	(41		)		(42		)		(31		)
Sale of noncontrolling interest in subsidiary	—				63				—
Payment of deferred business acquisition consideration	—				(51		)		—
Other financing activities, net	(45		)		(21		)		(7		)
Net cash (used in) provided by financing activities	(691		)		(518		)		86
Net change in cash and cash equivalents	226				(59		)		5
Cash and cash equivalents, beginning of year	133				192				187
Cash and cash equivalents, end of year	$	359			$	133			$	192

The accompanying notes are an integral part of these statements.

F- 5

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014

(in millions)

			Quest Diagnostics Stockholders’ Equity
	Shares of Common Stock Out- standing		Common Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Treasury Stock, at Cost			Non- controlling Interests			Total Stock-holders’ Equity					Redeemable Non-controlling Interest
Balance, December 31, 2013	144		$	2		$	2,379		$	5,358		$	(8	)	$	(3,783	)	$	25		$	3,973				$	—
Net income									556									36			592
Other comprehensive loss, net of tax												(19		)							(19		)
Dividends declared									(191		)										(191		)
Distributions to noncontrolling interests																		(31		)	(31		)
Issuance of common stock under benefit plans	1					2									17						19
Stock-based compensation expense						48									3						51
Exercise of stock options	1					(2		)							80						78
Shares to cover employee payroll tax withholdings on stock issued under stock-based compensation plans						(6		)													(6		)
Tax benefits associated with stock-based compensation plans						(3		)													(3		)
Purchases of treasury stock	(2	)													(132		)				(132		)
Other																		(1		)	(1		)
Balance, December 31, 2014	144		$	2		$	2,418		$	5,723		$	(27	)	$	(3,815	)	$	29		$	4,330				$	—
Net income									709									42			751					2
Other comprehensive loss, net of tax												(11		)							(11		)
Dividends declared									(219		)										(219		)
Distributions to noncontrolling interests																		(42		)	(42		)
Issuance of common stock under benefit plans	1					6									15						21
Stock-based compensation expense						48									4						52
Exercise of stock options	1														60						60
Shares to cover employee payroll tax withholdings on stock issued under stock-based compensation plans						(7		)													(7		)
Tax benefits associated with stock-based compensation plans						5															5
Purchases of treasury stock	(3	)													(224		)				(224		)
Sale of redeemable noncontrolling interest						11															11					54
Adjustment to fair value									(14		)										(14		)			14
Balance, December 31, 2015	143		$	2		$	2,481		$	6,199		$	(38	)	$	(3,960	)	$	29		$	4,713				$	70
Net income									645									44			689					7
Other comprehensive loss, net of tax												(34		)							(34		)
Dividends declared									(231		)										(231		)
Distributions to noncontrolling interests																		(41		)	(41		)
Issuance of common stock under benefit plans						7									15						22
Stock-based compensation expense						65									4						69
Exercise of stock options	1					2									71						73
Shares to cover employee payroll tax withholdings on stock issued under stock-based compensation plans						(10		)													(10		)
Purchases of treasury stock	(7	)													(590		)				(590		)
Balance, December 31, 2016	137		$	2		$	2,545		$	6,613		$	(72	)	$	(4,460	)	$	32		$	4,660				$	77

The accompanying notes are an integral part of these statements.

F- 6

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in millions unless otherwise indicated)

1. DESCRIPTION OF BUSINESS

Background

Quest Diagnostics Incorporated and its subsidiaries ("Quest Diagnostics" or the "Company") empower people to take action to improve health outcomes. The Company uses its extensive database of clinical lab results to derive diagnostic insights that reveal new avenues to identify and treat disease, inspire healthy behaviors and improve healthcare management. The Company's diagnostic information services business ("DIS") provides insights through clinical testing and related services to a broad range of customers, including patients, clinicians, hospitals, integrated delivery networks ("IDNs"), health plans, employers and accountable care organizations ("ACOs"). The Company offers the broadest access in the United States to diagnostic information services through its nationwide network of laboratories, patient service centers and phlebotomists in physician offices. The Company is the world's leading provider of diagnostic information services, which includes providing clinical testing services such as routine (including drugs-of-abuse) testing, gene-based and esoteric (including advanced diagnostics) testing, and anatomic pathology services, as well as related services and insights. The Company provides interpretive consultation with one of the largest medical and scientific staffs in the industry and hundreds of M.D.s and Ph.D.s, many of whom are recognized leaders in their fields. The Company's Diagnostic Solutions ("DS") businesses offer a variety of solutions for life insurers, healthcare providers and others. The Company is the leading provider of risk assessment services for the life insurance industry. In addition, the Company offers healthcare organizations, clinicians and patients robust information technology solutions. Prior to the sale of the Focus Diagnostics products business on May 13, 2016 (see Note 6), the Company's diagnostics products business manufactured and marketed diagnostic products. Prior to the contribution of its clinical trials testing business to the Q2 Solutions joint venture on July 1, 2015 (see Note 6), the Company's clinical trials testing business was a leading provider of central laboratory testing for clinical trials.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of all entities controlled by the Company through its direct or indirect ownership of a majority voting interest and the accounts of any variable interest entities ("VIEs") where the Company is subject to a majority of the risk of loss from the variable interest entity's activities, or entitled to receive a majority of the entity's residual returns, or both. The Company assesses the requirements related to the consolidation of VIEs, including a qualitative assessment of power and economics that considers which entity has the power to direct the activities that “most significantly impact” the VIEs economic performance and has the obligation to absorb losses of, or the right to receive benefits that could be potentially significant to, the VIE. The Company did not have any VIEs as of both December 31, 2016 and 2015. All significant intercompany accounts and transactions are eliminated in consolidation.

Equity Method Investments

Investments in entities which the Company does not control, but in which it has a substantial ownership interest (generally between 20% and 49%) and can exercise significant influence, are accounted for using the equity method of accounting. These investments are classified as investments in equity method investees in the consolidated balance sheets. The Company records its pro rata share of the earnings, adjusted for accretion of basis difference, of these investments in equity in earnings of equity method investees, net of taxes in the consolidated statements of operations. The Company reviews its investments in equity method investees for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable.

Basis of Presentation

During the third quarter of 2006, the Company completed the wind-down of NID, a test kit manufacturing subsidiary. The accompanying consolidated statements of operations and related disclosures report the results of NID as discontinued operations for all periods presented. See Note 18 for a further discussion of discontinued operations.

F- 7

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

Reclassifications

As a result of the early adoption of the accounting standard update ("ASU") associated with simplifying several aspects of stock-based compensation, certain reclassifications have been made to the prior period financial statements to conform with the current period presentation. For further details regarding the impact of the ASU, see New Accounting Standards.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition

The Company primarily recognizes revenue for services rendered upon completion of the testing process. Billings for services reimbursed by third-party payers, including Medicare and Medicaid, are recorded as revenues net of allowances for differences between amounts billed and the estimated receipts from such payers. Adjustments to the allowances, based on actual receipts from the third-party payers, are recorded upon settlement. Billings to the Medicare and Medicaid programs were approximately 17% of the Company's consolidated net revenues for each of the years ended December 31, 2016, 2015 and 2014. Under capitated arrangements with healthcare insurers, the Company recognizes revenue based on a predetermined monthly reimbursement rate for each member of an insurer's health plan regardless of the number or cost of services provided by the Company.

Revenues from the Company's risk assessment services, healthcare information technology, clinical trials testing (see Note 6 regarding the contribution of the clinical trials testing business to a newly formed joint venture effective July 1, 2015), and diagnostics products businesses (see Note 6 regarding the sale of the Focus Diagnostics products business on May 13, 2016) are recognized when persuasive evidence of a final agreement exists; delivery has occurred or services have been rendered; the price of the product or service is fixed or determinable; and collectibility from the customer is reasonably assured.

Taxes on Income

The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Current and deferred income taxes are measured based on the tax laws that are enacted as of the balance sheet date of the relevant reporting period. Deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax bases using tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted. Tax benefits from uncertain tax positions are recognized only if the tax position is more likely than not to be sustained upon examination by taxing authorities based on the technical merits of the position.

Earnings Per Share

The Company's unvested restricted stock units that contain non-forfeitable rights to dividends are participating securities and, therefore, are included in the earnings allocation in computing earnings per share using the two-class method. Basic earnings per common share is calculated by dividing net income, adjusted for earnings allocated to participating securities, by the weighted average number of common shares outstanding. Diluted earnings per common share is calculated by dividing net income, adjusted for earnings allocated to participating securities, by the weighted average number of common shares outstanding after giving effect to all potentially dilutive common shares outstanding during the period. Potentially dilutive common shares include the dilutive effect of outstanding stock options and performance share units granted under the Company's Amended and Restated Employee Long-Term Incentive Plan (“ELTIP”) and its Amended and Restated Non-Employee Director Long-Term Incentive Plan (“DLTIP”). Earnings allocable to participating securities include the portion of dividends declared as well as the portion of undistributed earnings during the period allocable to participating securities.

F- 8

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

Stock-Based Compensation

The Company records stock-based compensation as a charge to earnings net of the estimated impact of forfeited awards. As such, the Company recognizes stock-based compensation cost only for those stock-based awards that are estimated to ultimately vest over their requisite service period, based on the vesting provisions of the individual grants. The cumulative effect on current and prior periods of a change in the estimated forfeiture rate is recognized as compensation cost in earnings in the period of the change. The terms of the Company's performance share unit awards allow the recipients of such awards to earn a variable number of shares based on the achievement of the performance goals specified in the awards. Stock-based compensation expense associated with performance share units is recognized based on management's best estimates of the achievement of the performance goals specified in such awards and the resulting number of shares that will be earned. The cumulative effect on current and prior periods of a change in the estimated number of performance share units expected to be earned is recognized as compensation cost in earnings in the period of the change. The Company recognizes stock-based compensation expense related to the Company's Amended Employee Stock Purchase Plan (“ESPP”) based on the 15% discount at purchase. For further details regarding stock-based compensation, see Note 16.

Fair Value Measurements

The Company determines fair value measurements used in its consolidated financial statements based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants exclusive of any transaction costs, as determined by either the principal market or the most advantageous market.

Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy. The basis for fair value measurements for each level within the hierarchy is described below with Level 1 having the highest priority and Level 3 having the lowest.

Level 1: Quoted prices in active markets for identical assets or liabilities.

Level 2: Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.

Level 3: Valuations derived from valuation techniques in which one or more significant inputs are unobservable.

Foreign Currency

The Company predominately uses the U.S. dollar as its functional currency. The functional currency of the Company's foreign operating subsidiaries generally is the applicable local currency. Assets and liabilities denominated in non-U.S. dollars are translated into U.S. dollars at exchange rates as of the end of the reporting period. Income and expense items are translated at the average monthly exchange rates during the year. Resulting translation adjustments are recorded as a component of accumulated other comprehensive loss within stockholders' equity. Gains and losses from foreign currency transactions, which are denominated in a currency other than the functional currency, are included within other operating (income) expense, net in the consolidated statements of operations. Transaction gains and losses have historically not been material. The Company may be exposed to market risk for changes in foreign exchange rates primarily under certain intercompany receivables and payables. From time to time, the Company uses foreign exchange forward contracts to mitigate the exposure of the eventual net cash inflows or outflows resulting from these intercompany transactions. The Company's foreign exchange exposure is not material to the Company's consolidated financial condition. The Company does not hedge its net investment in non-U.S. subsidiaries because it views those investments as long-term in nature.

Cash and Cash Equivalents

Cash and cash equivalents include all highly-liquid investments with original maturities, at the time acquired by the Company, of three months or less.

F- 9

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk are principally cash, cash equivalents, short-term investments, accounts receivable and derivative financial instruments. The Company's policy is to place its cash, cash equivalents and short-term investments in highly-rated financial instruments and institutions. Concentration of credit risk with respect to accounts receivable is mitigated by the diversity of the Company's payers and their dispersion across many different geographic regions, and is limited to certain payers who are large buyers of the Company's services. To reduce risk, the Company routinely assesses the financial strength of these payers and, consequently, believes that its accounts receivable credit risk exposure, with respect to these payers, is limited. While the Company has receivables due from federal and state governmental agencies, the Company does not believe that such receivables represent a credit risk since the related healthcare programs are funded by federal and state governments, and payment is primarily dependent on submitting appropriate documentation. As of December 31, 2016 and 2015, receivables due from government payers under the Medicare and Medicaid programs represent approximately 15% and 16%, respectively, of the Company's consolidated net accounts receivable. The portion of the Company's accounts receivable due from patients comprises the largest portion of credit risk. As of both December 31, 2016 and 2015, receivables due from patients represent approximately 17% of the Company's consolidated net accounts receivable. The Company applies assumptions and judgments including historical collection experience for assessing collectibility and determining allowances for doubtful accounts for accounts receivable from patients.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are reported at realizable value, net of allowances for doubtful accounts, which is estimated and recorded in the period the related revenue is recorded. The Company has a standardized approach to estimate and review the collectibility of its receivables based on a number of factors, including the period they have been outstanding. Historical collection and payer reimbursement experience is an integral part of the estimation process related to allowances for doubtful accounts. In addition, the Company regularly assesses the state of its billing operations in order to identify issues which may impact the collectibility of these receivables or reserve estimates. Changes to the allowances for doubtful accounts estimates are recorded as an adjustment to bad debt expense within selling, general and administrative expenses in the consolidated statements of operations. Receivables deemed to be uncollectible are charged against the allowance for doubtful accounts at the time such receivables are written-off. Recoveries of receivables previously written-off are recorded as credits to the allowance for doubtful accounts.

Inventories

Inventories, which consist principally of testing supplies and reagents, are valued at the lower of cost (first in, first out method) or market.

Property, Plant and Equipment

Property, plant and equipment is recorded at cost. Major renewals and improvements are capitalized, while maintenance and repairs are expensed as incurred. Costs incurred for computer software developed or obtained for internal use are capitalized for application development activities and expensed as incurred for preliminary project activities and post-implementation activities. Capitalized costs include external direct costs of materials and services consumed in developing or obtaining internal-use software, payroll and payroll-related costs for employees who are directly associated with the internal-use software project, and interest costs incurred, when material, while developing internal-use software. Capitalization of such costs ceases when the project is substantially complete and ready for its intended purpose. Costs for maintenance and training are expensed as incurred. The Company capitalizes interest on borrowings during the active construction period of major capital projects. Capitalized interest is added to the cost of the underlying assets and is amortized over the expected useful lives of the assets. Depreciation and amortization are provided on the straight-line method over expected useful asset lives as of December 31, 2016 as follows:

•	buildings and improvements, ranging up to thirty-one and a half years;

•	laboratory equipment and furniture and fixtures, ranging from five to twelve years;

•	leasehold improvements, the lesser of the useful life of the improvement or the remaining life of the building or lease, as applicable; and

•	computer software developed or obtained for internal use, five years.

F- 10

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

In connection with the Company’s annual review of the estimated useful lives of its property, plant and equipment completed during the first quarter of 2016, the Company revised the estimated useful lives of certain classes of its property, plant and equipment. In order to better reflect the Company's current expectations regarding the use of its assets, the recent operational improvements from its Invigorate program and considering historical and other data, the Company revised the estimated useful lives of its laboratory equipment from a range of five to seven years to a range of seven to ten years, furniture and fixtures from a range of three to seven years to a range of five to twelve years and computer software obtained for internal use from three years to five years. The change in estimated useful lives was accounted for prospectively as a change in accounting estimate effective in the first quarter of 2016. The impact of this change for the year ended December 31, 2016, was a decrease in depreciation expense and an increase in operating income of $37 million and an increase in net income of $23 million, or $0.16 per share on a basic and diluted basis.

Goodwill

Goodwill represents the excess of the fair value of the acquiree (including the fair value of non-controlling interests) over the recognized bases of the net identifiable assets acquired and includes the future economic benefits from other assets that could not be individually identified and separately recognized. Goodwill is not amortized, but instead is periodically reviewed for impairment and an impairment charge is recorded in the periods in which the recorded carrying value of goodwill is more than its implied fair value. The goodwill test is performed at least annually, or more frequently, in the case of other events that indicate a potential impairment.

The annual impairment test includes an option to perform a qualitative assessment of whether it is more-likely-than-not that a reporting unit's fair value is less than its carrying value prior to, or as an alternative to, performing the two-step quantitative goodwill impairment test. If, after assessing the totality of events or circumstances, the Company determines that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value, then it is required to perform the first step of the two-step goodwill impairment test. Otherwise, no further analysis is required.

The quantitative impairment test is a two-step process that begins with the estimation of the fair value of the reporting unit. The first step screens for potential impairment and the second step measures the amount of the impairment, if any. The fair value of the reporting unit is based upon either a discounted cash flows analysis that converts future cash flow amounts into a single discounted present value amount or a market approach. The Company assesses the valuation methodology based upon the relevance and availability of the data at the time it performs the valuation. As part of the first step to assess potential impairment, management compares the estimate of fair value for the reporting unit to the carrying value of the reporting unit. If the carrying value is greater than the estimate of fair value, the Company would then proceed to the second step to measure the impairment, if any. The second step compares the implied fair value of goodwill with its carrying value. The implied fair value is determined by allocating the fair value of the reporting unit to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. If the carrying amount of the reporting unit's goodwill is greater than its implied fair value, an impairment loss will be recognized in the amount of the excess.

On a quarterly basis, management performs a review of the Company's business to determine if events or changes in circumstances have occurred which could have a material adverse effect on the fair value of the Company and its goodwill. If such events or changes in circumstances were deemed to have occurred, the Company would perform an impairment test of goodwill as of the end of the quarter and record any noted impairment loss. The Company performs its annual impairment test during the fourth quarter of the fiscal year ended December 31st.

For the years ended December 31, 2016 and 2015, the Company performed the qualitative assessment for its DIS and risk assessment services reporting units. Based on the totality of information available for the DIS and risk assessment services reporting units, the Company concluded that it was more-likely-than-not that the estimated fair values were greater than the carrying values of the reporting units, and as such, no further analysis was required. For the year ended December 31, 2015, the Company performed step one of the goodwill impairment test for its diagnostic products reporting unit, which was disposed of in 2016 as a result of the sale of the Focus Diagnostics products business (see Note 6), and concluded that goodwill of the reporting unit was not impaired.

F- 11

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

Intangible Assets

Intangible assets are recognized at fair value, as an asset apart from goodwill if the asset arises from contractual or other legal rights, or if it is separable. Intangible assets, principally representing the cost of customer-related intangibles, non-competition agreements and technology acquired, are capitalized and amortized on the straight-line method over their expected useful life, which generally ranges from five to twenty years. Intangible assets with indefinite useful lives, consisting principally of acquired tradenames, are not amortized, but instead are periodically reviewed for impairment.

The Company reviews indefinite-lived intangible assets periodically for impairment and an impairment charge is recorded in the periods in which the recorded carrying value of indefinite-lived intangibles is more than its estimated fair value. The indefinite-lived intangible asset impairment test is performed at least annually, or more frequently in the case of other events that indicate a potential impairment.

Based upon the Company’s most recent annual impairment tests completed during the fourth quarter of the years ended December 31, 2016 and 2015, the Company concluded that indefinite-lived intangible assets were not impaired.

The Company reviews the recoverability of its long-lived assets (including amortizable intangible assets), other than goodwill and indefinite-lived intangible assets, when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. Evaluation of possible impairment is based on the Company's ability to recover the asset from the expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations. If the expected undiscounted pre-tax cash flows are less than the carrying amount of such asset, an impairment loss is recognized for the difference between the estimated fair value and carrying amount of the asset.

Investments

The Company's investments, which are included in other assets in the consolidated balance sheets, are comprised of trading securities, available-for-sale securities and other investments. The classification of an investment depends on our intent and ability to hold the investment.

•

Trading securities represent participant-directed investments of deferred employee compensation and related Company matching contributions held in trusts pursuant to the Company's supplemental deferred compensation plans (see Note 16). Trading securities are carried at fair value with both realized and unrealized gains and losses recorded currently in earnings as a component of non-operating expenses within other (expense) income, net in the consolidated statements of operations. For the years ended December 31, 2016, 2015 and 2014, gains from trading equity securities totaled $3 million, $0 million, and $3 million, respectively.

•

Available-for-sale equity securities consists of an investment in registered shares of a public corporation. Available-for-sale equity securities are carried at fair value with unrealized gains and losses, net of tax, recorded as a component of accumulated other comprehensive loss within stockholders' equity and realized gains and losses recorded in other (expense) income, net in the consolidated statements of operations. As of December 31, 2016, the Company had gross unrealized losses from available-for-sale equity securities of $5 million.

•	Other investments do not have readily determinable fair values and consist of investments in preferred and common shares of privately held companies and are accounted for under the cost method.

Gains and losses on securities sold are based on the average cost method. The Company periodically reviews its investments to determine whether a decline in fair value below the cost basis is other-than-temporary. The primary factors considered in the determination are: the length of time that the fair value of the investment is below carrying value; the financial condition, operating performance and near-term prospects of the investee; and the Company's intent and ability to hold the investment for a period of time sufficient to allow for a recovery in fair value. If the decline in fair value is deemed to be other-than-temporary, the cost basis of the security is written down to fair value.

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

Investments as of December 31, 2016 and 2015 consisted of the following:

	2016				2015
Available-for-sale equity securities	$	3			$	6
Trading equity securities	51				49
Other investments	6				8
Total	$	60			$	63

Derivative Financial Instruments

The Company uses derivative financial instruments to manage its exposure to market risks for changes in interest rates and, from time to time, foreign currencies. This strategy includes the use of interest rate swap agreements, forward starting interest rate swap agreements, interest rate lock agreements and foreign currency forward contracts to manage its exposure to movements in interest and currency rates. The Company has established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. These policies prohibit holding or issuing derivative financial instruments for speculative purposes. The Company does not enter into derivative financial instruments that contain credit-risk-related contingent features or requirements to post collateral.

Interest Rate Risk

The Company is exposed to interest rate risk on its cash and cash equivalents and its debt obligations. Interest income earned on cash and cash equivalents may fluctuate as interest rates change; however, due to their relatively short maturities, the Company does not hedge these assets or their investment cash flows and the impact of interest rate risk is not material. The Company's debt obligations consist of fixed-rate and variable-rate debt instruments. The Company's primary objective is to achieve the lowest overall cost of funding while managing the variability in cash outflows within an acceptable range. In order to achieve this objective, the Company has entered into interest rate swaps. Interest rate swaps involve the periodic exchange of payments without the exchange of underlying principal or notional amounts. Net settlements between the counterparties are recognized as an adjustment to interest expense.

The Company accounts for these derivatives as either an asset or liability measured at its fair value. The fair value is based upon model-derived valuations in which all significant inputs are observable in active markets and includes an adjustment for the credit risk of the obligor's non-performance. For a derivative instrument that has been formally designated as a fair value hedge, fair value gains or losses on the derivative instrument are reported in earnings, together with offsetting fair value gains or losses on the hedged item that are attributable to the risk being hedged. For derivatives that have been formally designated as a cash flow hedge, the effective portion of changes in the fair value of the derivatives is recorded in accumulated other comprehensive loss and the ineffective portion is recorded in earnings. Upon maturity or early termination of an effective interest rate swap designated as a cash flow hedge, unrealized gains or losses are deferred in stockholders' equity, as a component of accumulated other comprehensive loss, and are amortized as an adjustment to interest expense over the period during which the hedged forecasted transaction affects earnings, which is when the Company recognizes interest expense on the hedged cash flows. At inception and quarterly thereafter, the Company formally assesses whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in the fair value or cash flows of the hedged item. All components of each derivative financial instrument's gain or loss are included in the assessment of hedge effectiveness. If it is determined that a derivative ceases to be a highly effective hedge, the Company discontinues hedge accounting and any deferred gains or losses related to a discontinued cash flow hedge shall continue to be reported in accumulated other comprehensive loss, unless it is probable that the forecasted transaction will not occur. If it is probable that the forecasted transaction will not occur by the originally specified time period, the Company discontinues hedge accounting, and any deferred gains or losses reported in accumulated other comprehensive loss are classified into earnings immediately.

Comprehensive Income (Loss)

Comprehensive income (loss) encompasses all changes in stockholders' equity (except those arising from transactions with stockholders) and includes net income, net unrealized gains or losses on available-for-sale securities, foreign currency translation adjustments and deferred gains and losses related to certain derivative financial instruments (see Note 15).

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

New Accounting Standards

In May 2014, the Financial Accounting Standards Board ("FASB") issued an ASU on revenue recognition. This ASU outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers. This standard supersedes existing revenue recognition requirements and eliminates most industry-specific guidance from GAAP. The core principle of the revenue recognition standard is to require an entity to recognize as revenue the amount that reflects the consideration to which it expects to be entitled in exchange for goods or services as it transfers control to its customers. The standard requires additional disclosures including those that are qualitative and quantitative disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB deferred the effective date of this ASU to the first quarter of 2018, with early adoption permitted beginning in the first quarter of 2017. The ASU can be applied using a full retrospective method or a modified retrospective method of adoption. The Company expects to adopt the ASU in the first quarter of 2018 using the full retrospective method and continues to assess the impact of this ASU on its results of operations, financial position and cash flows. Based on its preliminary assessment, the Company expects the majority of the amounts that have historically been classified as bad debt expense, primarily related to patient responsibility, will be reflected as a reduction of the transaction price and therefore as a reduction in revenue. The adoption of this ASU is not expected to have a material impact on the Company's financial position or cash flows.

In January 2016, the FASB issued an ASU on the recognition and measurement of financial assets and financial liabilities. This ASU requires that all equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) be measured at fair value with changes in fair value recognized in net income. However, companies may elect to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. In addition, the ASU eliminates the requirement to disclose the method and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet. The ASU is effective for the Company in the first quarter of 2018. The Company does not expect the adoption of this ASU to have a material impact on its results of operations, financial position and cash flows.

In February 2016, the FASB issued an ASU that amends accounting for leases. Under the new guidance, a lessee will recognize assets and liabilities for most leases on its balance sheet but will recognize expense on its statement of operations similar to current lease accounting. The ASU is effective for the Company in the first quarter of 2019 with early adoption permitted. The new guidance must be adopted using a modified retrospective transition approach, and provides for certain practical expedients. The adoption of this ASU will result in a significant increase to the Company’s balance sheet for lease liabilities and right-of-use assets, which has not yet been quantified. The Company is currently evaluating this and the other effects of adoption of this ASU on its consolidated financial statements.

In March 2016, the FASB issued an ASU that simplifies the transition to the equity method of accounting by requiring adoption as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence, no retroactive adjustment of the investment is required. The ASU is effective for the Company in the first quarter of 2017 with early adoption permitted. The Company does not expect the adoption of this ASU to have a material impact on its results of operations, financial position and cash flows.

In March 2016, the FASB issued an ASU that simplifies several aspects of the accounting for stock-based compensation award transactions, including the income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows and accounting for forfeitures. In the second quarter of 2016, the Company elected to early adopt this standard, effective January 1, 2016. As a result:

•

Excess income tax benefits and deficiencies from stock-based compensation arrangements are recognized as a discrete item within income tax expense, rather than additional paid-in capital. The adoption of this provision, which was done on a prospective basis, resulted in the classification of $9 million of tax benefits in income tax expense for the year ended December 31, 2016. In addition, excess income tax benefits and deficiencies are no longer considered when applying the treasury stock method for computing the effect of dilutive securities, which resulted in an increase in the effect of the dilutive securities for the year ended December 31, 2016.

•	Excess income tax benefits from stock-based compensation arrangements are classified as an operating activity and cash paid for employee payroll tax withholdings by directly withholding shares are classified as a financing activity in

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

the consolidated statements of cash flows. The adoption of these provisions, which was done on a retrospective basis, resulted in the reclassification of:

◦	$5 million and $0 million of excess tax benefits related to the settlement of stock-based compensation awards from financing to operating activities for the year ended December 31, 2015 and 2014, respectively; and

◦	$7 million and $6 million of taxes paid related to employee payroll tax withholdings on stock issued under stock-based compensation plans from operating to financing activities for the years ended December 31, 2015 and 2014, respectively.

In addition, the ASU permits the Company to make a policy election to either estimate the forfeitures expected to occur in order to determine the amount of compensation cost to be recognized in each period or to account for forfeitures in the period they occur. The Company elected to continue to estimate the forfeitures expected to occur in order to determine the amount of compensation cost to be recognized in each period.

In June 2016, the FASB issued an ASU that changes the impairment model for most financial instruments, including trade receivables from an incurred loss method to a new forward-looking approach, based on expected losses. The estimate of expected credit losses will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. This ASU is effective for the Company in the first quarter of 2020 and must be adopted using a modified retrospective transition approach. The Company is currently assessing the impact of the adoption of this ASU on the Company’s results of operations, financial position and cash flows.

In August 2016, the FASB issued an ASU that clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The ASU is effective for the Company in the first quarter of 2018 with early adoption permitted and must be applied retrospectively to all periods presented. Upon adoption cash payments for debt retirement costs would be reclassified from operating cash outflows to financing cash outflows in the statement of cash flows.

In November 2016, the FASB issued an ASU that clarifies the presentation and classification of restricted cash in the statement of cash flows. The ASU requires that amounts generally described as restricted cash and restricted cash equivalents be presented with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The ASU is effective for the Company in the first quarter of 2018 with early adoption permitted and must be applied retrospectively to all periods presented. The Company does not expect the adoption of this ASU to have a material impact on its cash flows.

In January 2017, the FASB issued an ASU that provides guidance on evaluating when a set of transferred assets and activities (set) is a business. If an entity determines that substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, then the set is not a business. If this threshold is not met, then the entity needs to evaluate whether the set meets the requirement that a business include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. The ASU is effective for the Company in the first quarter of 2018 with early adoption permitted. The Company is currently assessing the impact of the adoption of this ASU on the Company’s results of operations, financial position and cash flows.

In January 2017, the FASB issued an ASU that simplifies the quantitative test for goodwill impairment. The guidance eliminates step two in the current two-step process so that any goodwill impairment is measured as the amount by which the reporting unit’s carrying amount exceeds its fair value. The ASU is effective for the Company in the first quarter of 2020 with early adoption permitted. The Company does not expect the adoption of this ASU to have a material impact on its results of operations, financial position and cash flows.

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

3. EARNINGS PER SHARE

The computation of basic and diluted earnings per common share is as follows (in millions, except per share data):

	2016				2015				2014
Amounts attributable to Quest Diagnostics’ stockholders:
Income from continuing operations	$	645			$	709			$	551
Income from discontinued operations, net of taxes	—				—				5
Net income attributable to Quest Diagnostics’ common stockholders	$	645			$	709			$	556
Income from continuing operations	$	645			$	709			$	551
Less: Earnings allocated to participating securities	3				3				2
Earnings available to Quest Diagnostics’ common stockholders – basic and diluted	$	642			$	706			$	549
Weighted average common shares outstanding – basic	140				144				145
Effect of dilutive securities:
Stock options and performance share units	2				1				—
Weighted average common shares outstanding – diluted	142				145				145
Earnings per share attributable to Quest Diagnostics’ common stockholders – basic:
Income from continuing operations	$	4.58			$	4.92			$	3.80
Income from discontinued operations	—				—				0.03
Net income	$	4.58			$	4.92			$	3.83
Earnings per share attributable to Quest Diagnostics’ common stockholders – diluted:
Income from continuing operations	$	4.51			$	4.87			$	3.78
Income from discontinued operations	—				—				0.03
Net income	$	4.51			$	4.87			$	3.81

The following securities were not included in the calculation of diluted earnings per share due to their antidilutive effect:

	2016			2015			2014
Stock options and performance share units	1			2			2

4. RESTRUCTURING ACTIVITIES

Invigorate Program

During 2012, the Company committed to a course of action related to a multi-year program called Invigorate which is designed to reduce its cost structure. Invigorate has consisted of several flagship programs, with structured plans in each, to drive savings and improve performance across the customer value chain. These flagship programs include: organization excellence; information technology excellence; procurement excellence; service excellence; lab excellence; and billing excellence. From 2012 through 2014, the Invigorate program was intended to partially offset reimbursement pressures and labor and benefit cost increases; free up additional resources to invest in science, innovation and other growth initiatives; and enable us to improve service quality and operating profitability.

F- 16

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

In January 2015, the Company adopted a program to further reduce its cost structure through 2017. This multi-year program continues to focus on the flagship program themes and additional key themes such as: standardizing processes, information technology systems, equipment and data; enhancing electronic enabling services; and enhancing reimbursement for work performed.

The following table provides a summary of the Company's pre-tax restructuring charges associated with its Invigorate program and other restructuring activities:

	2016				2015				2014
Employee separation costs	$	9			$	38			$	31
Facility-related costs	2				1				12
Asset impairment charges	—				—				1
Total restructuring charges	$	11			$	39			$	44

Total restructuring charges incurred for the years ended December 31, 2016, 2015 and 2014 were primarily associated with various workforce reduction initiatives as the Company continued to simplify and restructure its organization.

Of the total restructuring charges incurred during the year ended December 31, 2016, $6 million and $5 million were recorded in cost of services and selling, general and administrative expenses, respectively. Of the total restructuring charges incurred during the year ended December 31, 2015, $32 million and $7 million were recorded in cost of services and selling, general and administrative expenses, respectively. Of the total restructuring charges incurred during the year ended December 31, 2014, $21 million and $23 million were recorded in cost of services and selling, general and administrative expenses, respectively.

Charges for all periods presented were primarily recorded in the Company's DIS business.

The following table summarizes the activity of the restructuring liability as of December 31, 2016 and 2015, which is included in accrued expenses in Note 12:

	Employee Separation Costs				Facility-Related Costs				Total
Balance, December 31, 2014	$	18			$	11			$	29
Income statement expense	38				1				39
Cash payments	(40		)		(6		)		(46		)
Other / adjustments	—				(3		)		(3		)
Balance, December 31, 2015	16				3				19
Income statement expense	9				2				11
Cash payments	(19		)		(2		)		(21		)
Balance, December 31, 2016	$	6			$	3			$	9

5. BUSINESS ACQUISITIONS

2016 Acquisitions

During 2016, the Company completed acquisitions for an aggregate purchase price of $139 million, including the acquisition of the outreach laboratory service business of Clinical Laboratory Partners, LLC discussed below. The 2016 acquisitions resulted in goodwill of $95 million, all of which is deductible for tax purposes. These acquisitions also resulted in $44 million of intangible assets, principally comprised of customer-related intangibles.

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

Acquisition of the Outreach Laboratory Service Business of Clinical Laboratory Partners, LLC

On February 29, 2016, the Company completed the acquisition of the outreach laboratory service business of Clinical Laboratory Partners, LLC ("CLP"), a wholly-owned subsidiary of Hartford HealthCare Corporation, in an all-cash transaction for $135 million. CLP provides clinical testing services to physicians, hospitals, clinics and long-term care facilities in Connecticut. The assets acquired principally consist of $91 million of tax deductible goodwill and $43 million of customer-related intangible assets, which are being amortized over a useful life of 15 years.

2015 Acquisitions

During 2015, the Company completed acquisitions for an aggregate purchase price of $63 million, including the acquisition of MemorialCare Health System's laboratory outreach business and Superior Mobile Medics, Inc. acquisitions discussed below. The acquisitions in 2015 resulted in goodwill of $33 million, of which $32 million is deductible for tax purposes. These acquisitions also resulted in $26 million of intangible assets, principally comprised of customer-related intangibles.

Acquisition of MemorialCare Health System's Laboratory Outreach Business

On August 3, 2015, the Company completed the acquisition of MemorialCare Health System's laboratory outreach business ("MemorialCare") in an all-cash transaction valued at $35 million. The assets acquired primarily represent tax deductible goodwill and intangible assets, principally comprised of customer-related intangibles.

Acquisition of the Business Assets of Superior Mobile Medics, Inc.

On November 16, 2015, the Company completed the acquisition of the business assets of Superior Mobile Medics, Inc. ("Superior Mobile Medics"), a national provider of paramedical and health data collection services to the life insurance and employer health and wellness industries, in an all-cash transaction valued at $27 million. The assets acquired primarily represent accounts receivable, tax deductible goodwill and intangible assets, principally comprised of customer-related intangibles.

2014 Acquisitions

During 2014, the Company completed acquisitions for an aggregate purchase price of $768 million, including the acquisitions of Solstas Lab Partners Group, Summit Health, Inc. and Steward Health Care Systems, LLC's laboratory outreach business discussed below. The acquisitions in 2014 resulted in goodwill of $383 million, of which $90 million is deductible for tax purposes. These acquisitions also resulted in $270 million of intangible assets, principally comprised of customer-related intangibles and tradenames.

The following tables summarize the total consideration and the amounts of assets acquired and liabilities assumed for Solstas Lab Partners Group and Summit Health, Inc. acquisitions, which are further discussed below:

	Solstas						Summit Health
Cash	$	572					$	125
Estimated fair value of contingent consideration	—						22
Transaction related costs due to sellers	—						5
Total consideration	$	572					$	152

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

	Solstas						Summit Health
	Fair Value				Weighted Average Useful Life (in years)		Fair Value				Weighted Average Useful Life (in years)
Allocation of purchase price:
Cash and cash equivalents	$	9					$	1
Accounts receivable, net	48						9
Other current assets	12						16
Property, plant and equipment, net	49						6
Goodwill	271						92
Intangible assets:
Customer relationships	203				20		33				15
Tradename	7				2		2				1
Software	—						3				4
Total intangible assets	210						38
Non-current deferred income taxes	48						—
Total assets acquired	647						162
Current liabilities	64						10
Non-current deferred income taxes	3						—
Other non-current liabilities	8						—
Total liabilities assumed	75						10
Net assets acquired	$	572					$	152

Acquisition of Solstas Lab Partners Group

On March 7, 2014, the Company completed its acquisition of Solstas Lab Partners Group and its subsidiaries ("Solstas") in an all-cash transaction valued at $572 million, or $563 million net of cash acquired. The Company financed the acquisition with borrowings under its secured receivables credit facility and senior unsecured revolving credit facility. The final consideration paid was subject to post closing adjustments related to working capital and other items. Through the acquisition, the Company acquired all of Solstas' operations. Solstas is a full-service commercial laboratory based in Greensboro, North Carolina and operates in nine states throughout the southeastern United States, including the Carolinas, Virginia, Tennessee, Georgia and Alabama.

For the year ended December 31, 2014, Solstas contributed $300 million to the Company's consolidated net revenues and $294 million to operating expenses which included approximately $17 million of restructuring, integration and transaction related costs. Of the $17 million of restructuring, integration and transaction related costs recorded for the year ended December 31, 2014, $4 million and $13 million were in cost of services and selling, general and administrative expenses, respectively.

Acquisition of Summit Health, Inc.

On April 18, 2014, the Company completed its acquisition of Summit Health, Inc. ("Summit Health") for $152 million, which consisted of cash consideration of $125 million (which included $10 million of working capital adjustments), or $124 million net of cash acquired, estimated contingent consideration of $22 million and $5 million associated with certain transaction related costs due to the sellers of Summit Health. The contingent consideration arrangement was dependent on the achievement of certain revenue targets in 2015, with a maximum payment of $25 million in 2016. Based on actual 2015 revenue results for Summit Health compared to the earn-out target included in the contingent consideration arrangement, no payment was required, and therefore, the contingent consideration accrual was $0 as of December 31, 2015. Through the acquisition, the Company acquired all of Summit Health's operations. Summit is a provider of on-site prevention and wellness programs. For further details regarding the fair value of the estimated contingent consideration associated with the Summit Health acquisition, see Note 7.

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

Acquisition of Steward Health Care Systems, LLC's Laboratory Outreach Business

On April 16, 2014, the Company completed the acquisition of the laboratory outreach service operations of Steward Health Care Systems, LLC ("Steward") for $34 million, which consisted of cash consideration of $30 million and contingent consideration of $4 million. The assets acquired primarily represent tax deductible goodwill and intangible assets, principally comprised of customer-related intangibles. The contingent consideration arrangement secures the seller's compliance with a non-compete agreement under which the Company will pay up to $5 million, ratably through 2018, provided the non-compete agreement is not violated. For further details regarding the fair value of the estimated contingent consideration associated with the Steward acquisition, see Note 7.

General Information

The acquisitions described above were accounted for under the acquisition method of accounting. As such, the assets acquired and liabilities assumed are recorded based on their estimated fair values as of the closing date. The consolidated financial statements include the results of operations of the acquisitions subsequent to the closing of each acquisition. All of the goodwill acquired in connection with the CLP, MemorialCare, Solstas, Summit Health and Steward acquisitions has been allocated to the Company's DIS business. The goodwill associated with the Superior Mobile Medics acquisition has been allocated to the Company's risk assessment services business. The goodwill recorded as part of the acquisitions includes the expected synergies resulting from combining the operations of the acquired business with those of the Company and the value associated with an assembled workforce that has a historical track record of identifying opportunities.

Pro Forma Combined Financial Information

The following unaudited pro forma combined financial information reflects the consolidated statement of operations of the Company as if the acquisitions of Solstas and Summit Health had occurred as of January 1, 2013. The unaudited pro forma information includes adjustments primarily related to the amortization of intangible assets acquired, interest expense associated with debt extinguished prior to the acquisitions, and transaction costs related to the Solstas and Summit Health acquisitions. The unaudited pro forma combined financial information does not include the estimated annual synergies expected to be realized upon completion of the integration of Solstas and Summit Health and is not indicative of the results of operations as they would have been had the transaction been effected on the assumed date. Pre-acquisition financial information for all other acquisitions has not been included in the table below as these acquisitions were not material to the Company’s consolidated financial statements.

	2014
	(unaudited)
Pro forma net revenues	$	7,520
Pro forma income from continuing operations	$	585
Earnings per share attributable to Quest Diagnostics’ common stockholders - basic:
Pro forma income from continuing operations	$	3.79
Earnings per share attributable to Quest Diagnostics’ common stockholders - diluted:
Pro forma income from continuing operations	$	3.77

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

6. DISPOSITIONS AND HELD FOR SALE

Sale of Focus Diagnostics Products

On March 29, 2016, the Company entered into a definitive agreement to sell the assets of its non-core Focus Diagnostics products business ("Focus Diagnostics") to DiaSorin S.p.A. ("DiaSorin"). On May 13, 2016, the Company completed the sale of Focus Diagnostics for $300 million in cash, or $293 million net of transaction costs and working capital adjustments, which includes $25 million of proceeds held in escrow. For the year ended December 31, 2016, the Company recorded a $118 million pre-tax gain on disposition of business. The Company also recorded income tax expense of $84 million, consisting of $91 million of current income tax expense (all of which was paid in 2016) and a deferred income tax benefit of $7 million. The income tax expense resulted in an effective tax rate of 71.4%, which was significantly in excess of the statutory tax rate primarily due to a lower tax basis in the assets sold, specifically the goodwill associated with the disposition.

The assets disposed of consisted of $113 million of goodwill, $30 million of intangible assets, with the remaining $38 million consisting of accounts receivable, inventories and property, plant and equipment. In addition, the disposition included liabilities of $6 million. As of December 31, 2015, the assets to be disposed of as part of the transaction primarily consisted of $113 million of goodwill, with the remainder consisting of property, plant and equipment, inventories and intangible assets, which were classified and included in current assets held for sale.

In connection with the sale, the Company entered into a five year supply agreement with DiaSorin. The supply agreement, which does not include a minimum purchase commitment, enables the Company to purchase certain products and supplies used in its DIS business. Purchases by the Company under this supply agreement subsequent to the sale of Focus Diagnostics were not material.

Focus Diagnostics, prior to May 13, 2016, was included in all other operating segments and has not been classified as a discontinued operation. For further details regarding business segment information, see Note 19.

Contribution of Clinical Trials Business

On March 30, 2015, the Company entered into a definitive agreement with Quintiles Transnational Holdings, Inc. (now know as Quintiles IMS Holdings, Inc.) to form a global clinical trials central laboratory services joint venture, Q2 Solutions. The transaction closed on July 1, 2015. In connection with the transaction, the Company contributed certain assets of its clinical trials testing business ("Clinical Trials") and $33 million of cash to the newly formed joint venture in exchange for a non-controlling, 40% ownership interest. The assets of Clinical Trials contributed to the joint venture, principally consisting of property, plant and equipment and goodwill, were classified as assets held for sale in the first quarter of 2015 and were contributed to Q2 Solutions upon closing of the transaction. Subsequent to closing, the Company's ownership interest in the joint venture is being accounted for under the equity method of accounting. As of December 31, 2016 and 2015, the investment in Q2 Solutions had a carrying value of $389 million and $416 million, respectively.

During the third quarter of 2015, the Company recognized a pre-tax gain of $334 million based on the difference between the fair value of the Company's equity interest in the newly formed joint venture over the carrying value of the assets contributed. The fair value of the Company's equity interest was determined using discounted cash flows. The most significant assumptions used in the valuation include a discount rate (12%), a long-term growth rate (2.5%) and EBITDA margins. In connection with the gain, the Company recorded a deferred income tax liability of $145 million. Upon formation, the Company's investment in Q2 Solutions exceeded its equity in the underlying net assets by approximately $219 million. This basis difference is attributable to finite-lived assets, indefinite-lived intangible assets and goodwill of the joint venture. The basis difference associated with the finite-lived assets of $75 million is being amortized over a weighted average useful life of 8 years as a reduction to the carrying value of the investment in equity method investees and corresponding reduction in equity in earnings of equity method investees, net of taxes.

Q2 Solutions is considered a related party to the Company due to the Company's non-controlling ownership interest in Q2 Solutions and the Company's continuing involvement in providing diagnostic information services on an ongoing basis. In addition, the Company provides transition services to Q2 Solutions for a limited period of time. For further details regarding related parties, see Note 20.

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

Clinical Trials, prior to July 1, 2015, was included in all other operating segments and has not been classified as discontinued operations. For further details regarding business segment information, see Note 19.

7. FAIR VALUE MEASUREMENTS

The following table provides a summary of the recognized assets and liabilities that are measured at fair value on a recurring basis:

					Basis of Fair Value Measurements
	Total				Level 1				Level 2				Level 3
December 31, 2016
Assets:
Trading securities	$	51			$	51			$	—			$	—
Cash surrender value of life insurance policies	32				—				32				—
Available-for-sale equity securities	3				3				—				—
Total	$	86			$	54			$	32			$	—
Liabilities:
Deferred compensation liabilities	$	91			$	—			$	91			$	—
Interest rate swaps	88				—				88				—
Contingent consideration	3				—				—				3
Total	$	182			$	—			$	179			$	3
December 31, 2015
Assets:
Trading securities	$	49			$	49			$	—			$	—
Cash surrender value of life insurance policies	29				—				29				—
Interest rate swaps	23				—				23				—
Available-for-sale equity securities	6				6				—				—
Total	$	107			$	55			$	52			$	—
Liabilities:
Deferred compensation liabilities	$	85			$	—			$	85			$	—
Interest rate swaps	6				—				6				—
Contingent consideration	3				—				—				3
Total	$	94			$	—			$	91			$	3

The Company offers certain employees the opportunity to participate in non-qualified supplemental deferred compensation plans. A participant's deferrals, together with Company matching credits, are invested in a variety of participant-directed stock and bond mutual funds that are classified as trading securities. The trading securities are classified within Level 1 because the changes in the fair value of these securities are measured using quoted prices in active markets based on the market price per unit multiplied by the number of units held exclusive of any transaction costs. A corresponding adjustment for changes in fair value of the trading securities is also reflected in the changes in fair value of the deferred compensation obligation. The deferred compensation liabilities are classified within Level 2 because their inputs are derived principally from observable market data by correlation to the trading securities.

The Company offers certain employees the opportunity to participate in a non-qualified deferred compensation program. A participant's deferrals, together with Company matching credits, are “invested” at the direction of the employee in a hypothetical portfolio of investments which are tracked by an administrator. The Company purchases life insurance policies, with the Company named as beneficiary of the policies, for the purpose of funding the program's liability. Changes in the cash surrender value of the life insurance policies are based upon earnings and changes in the value of the underlying investments. Changes in the fair value of the deferred compensation obligation are derived using quoted prices in active markets based on

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

the market price per unit multiplied by the number of units. The cash surrender value and the deferred compensation obligations are classified within Level 2 because their inputs are derived principally from observable market data by correlation to the hypothetical investments.

The fair value measurements of the Company's interest rate swaps classified within Level 2 of the fair value hierarchy are model-derived valuations as of a given date in which all significant inputs are observable in active markets including certain financial information and certain assumptions regarding past, present and future market conditions.

Investment in available-for-sale equity securities represents an investment in registered shares of a publicly-held company. The Company's investment in available-for-sale equity securities is classified within Level 1 of the fair value hierarchy because the fair value is obtained from quoted prices in an active market.

In April 2014, the Company completed the acquisitions of Summit Health and Steward (see Note 5). In connection with these acquisitions the Company initially recorded an aggregate contingent consideration liability of $26 million. The contingent consideration liability was classified within Level 3 measured at fair value using a probability weighted and discounted cash flow method. These measurements are based on externally obtained inputs and management's probability assessments of the occurrence of triggering events, appropriately discounted considering the uncertainties associated with the obligations, as well as the likelihood of achieving financial targets. The initial probability estimate of the occurrence of such triggering events associated with the amounts the Company could be obligated to pay in future periods for both Summit Health and Steward was between 5% and 95%. The probability-weighted cash flows were then discounted using a discount rate of 1.5% to 2.8%. The estimated fair value of the contingent consideration associated with Summit Health was reduced to $13 million in the fourth quarter of 2014 and $0 in the second quarter of 2015. These reductions were a result of updated revenue forecasts and actual results for 2015 compared to the earn-out target included in the contingent consideration arrangement. As a result, other operating (income) expense, net for the years ended December 31, 2015 and 2014 included gains of $13 million and $9 million, respectively. The remaining contingent consideration associated with Steward is projected to be paid out in three equal annual installments, with a maximum payout of $4 million.

The following table provides a reconciliation of the beginning and ending balances of liabilities using significant unobservable inputs (Level 3):

	Contingent Consideration
Balance, December 31, 2014	$	17
Settlements	(1		)
Total (gains) losses - realized/unrealized:
Included in earnings	(13		)
Balance, December 31, 2015	3
Balance, December 31, 2016	$	3

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value based on the short maturities of these instruments. As of December 31, 2016 and 2015, the fair value of the Company's debt was estimated at $3.9 billion and $3.7 billion, respectively. Principally all of the Company's debt is classified within Level 1 of the fair value hierarchy because the fair value of the debt is estimated based on rates currently offered to the Company with identical terms and maturities, using quoted active market prices and yields, taking into account the underlying terms of the debt instruments.

8. TAXES ON INCOME

The Company's pre-tax income from continuing operations before equity in earnings of equity method investees consisted of approximately $1.1 billion, $1.1 billion and $810 million from U.S. operations and $4 million, $11 million and $13 million from foreign operations for the years ended December 31, 2016, 2015 and 2014, respectively.

During the year ended December 31, 2016, the Company recorded $84 million of income tax expense, consisting of $91 million of current income tax expense and a deferred income tax benefit of $7 million, associated with the sale of Focus

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

Diagnostics (see Note 6). In addition, the Company recognized a non-taxable gain on an escrow recovery associated with an acquisition.

During the year ended December 31, 2015, the Company recognized $145 million deferred income tax expense associated with the financial reporting and tax basis difference resulting from the contribution of the Clinical Trials business to the Q2 Solutions joint venture and a $58 million deferred income tax benefit resulting from the future tax effects of winding down a subsidiary.

The components of income tax expense from continuing operations for 2016, 2015 and 2014 were as follows:

	2016				2015				2014
Current:
Federal	$	346			$	231			$	204
State and local	45				27				34
Foreign	1				3				3
Deferred:
Federal	33				104				28
State and local	4				7				(6		)
Foreign	—				1				(1		)
Total	$	429			$	373			$	262

A reconciliation of the federal statutory rate to the Company's effective tax rate for 2016, 2015 and 2014 was as follows:

	2016			2015			2014
Tax provision at statutory rate	35.0	%		35.0	%		35.0	%
State and local income taxes, net of federal benefit	3.3			2.6			3.2
Gains and losses on book and tax basis difference	3.3			(2.7	)		—
Adjustments to unrecognized tax positions	0.5			(0.4	)		(5.1	)
Impact of noncontrolling interests	(1.8	)		(1.6	)		(1.7	)
Impact of equity earnings	1.0			0.7			1.1
Other, net	(1.8	)		0.2			(0.7	)
Effective tax rate	39.5	%		33.8	%		31.8	%

In 2016, the sale of Focus Diagnostics and the non-taxable gain on an escrow recovery associated with an acquisition resulted in the gains and losses on book and tax basis difference as discussed above.

In 2015, the contribution of the Clinical Trials business to the Q2 Solutions joint venture and winding down a subsidiary resulted in the gains and losses on book and tax basis difference as discussed above.

In 2014, the adjustments to unrecognized tax positions mainly resulted from the favorable resolution of certain tax contingencies.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets (liabilities) as of December 31, 2016 and 2015 were as follows:

	2016				2015
Non-current deferred tax assets (liabilities):
Accounts receivable reserves	$	94			$	95
Liabilities not currently deductible	189				202
Stock-based compensation	58				49
Capitalized R&D expense	—				1
Basis differences in investments, joint ventures and subsidiaries	(87		)		(90		)
Net operating loss carryforwards, net of valuation allowance	120				140
Depreciation and amortization	(533		)		(517		)
Total non-current deferred tax liabilities, net	$	(159	)		$	(120	)

As of December 31, 2016 and 2015, non-current deferred tax assets of $32 million and $37 million, respectively, are recorded in other long-term assets. As of December 31, 2016 and 2015, non-current deferred tax liabilities of $191 million and $157 million, respectively, are included in other long-term liabilities.

As of December 31, 2016, the Company had estimated net operating loss carryforwards for federal and state income tax purposes of $215 million and $1.4 billion, respectively, which expire at various dates through 2036. Estimated net operating loss carryforwards for foreign income tax purposes are $57 million as of December 31, 2016, some of which can be carried forward indefinitely while others expire at various dates through 2026. As of December 31, 2016, 2015 and 2014, deferred tax assets associated with net operating loss carryforwards of $204 million, $222 million and $242 million, respectively, have each been reduced by valuation allowances of $56 million, $54 million and $60 million, respectively.

The Company has not provided U.S. federal income and foreign tax withholdings on undistributed earnings from certain non-U.S. subsidiaries for which the Company intends to reinvest such earnings indefinitely outside the U.S. Determination of the amount of unrecognized deferred tax liability related to these earnings is not practicable.

Income taxes payable, including those classified in other long-term liabilities as of December 31, 2016 and 2015, were $62 million and $50 million, respectively. Prepaid income taxes were $14 million and $41 million as of December 31, 2016 and 2015, respectively, and were included in prepaid expenses and other current assets.

The total amount of unrecognized tax benefits as of and for the years ended December 31, 2016, 2015 and 2014 consisted of the following:

	2016				2015				2014
Balance, beginning of year	$	91			$	122			$	168
Additions:
For tax positions of current year	3				5				17
For tax positions of prior years	12				5				1
Reductions:
Changes in judgment	(1		)		(11		)		(56		)
Expirations of statutes of limitations	(7		)		(3		)		(6		)
Settlements	—				(27		)		(2		)
Balance, end of year	$	98			$	91			$	122

The contingent liabilities for tax positions primarily relate to uncertainties associated with the realization of tax benefits derived from the allocation of income and expense among state jurisdictions, the characterization and timing of certain tax deductions associated with business combinations, income and expenses associated with certain intercompany licensing arrangements, certain tax credits and the deductibility of certain settlement payments.

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

The total amount of unrecognized tax benefits as of December 31, 2016, that, if recognized, would affect the effective income tax rate from continuing operations is $44 million. Based upon the expiration of statutes of limitations, settlements and/or the conclusion of tax examinations, the Company believes it is reasonably possible that the total amount of unrecognized tax benefits may decrease by up to $11 million within the next twelve months.

Accruals for interest expense on contingent tax liabilities are classified in income tax expense in the consolidated statements of operations. Accruals for penalties have historically been immaterial. Interest expense (income) included in income tax expense in each of the years ended December 31, 2016, 2015 and 2014 was approximately $2 million, $0 million and $(1) million respectively. As of December 31, 2016 and 2015, the Company has approximately $12 million and $9 million, respectively, accrued, net of the benefit of a federal and state deduction, for the payment of interest on uncertain tax positions.

The recognition and measurement of certain tax benefits includes estimates and judgment by management and inherently involves subjectivity. Changes in estimates may create volatility in the Company's effective tax rate in future periods and may be due to settlements with various tax authorities (either favorable or unfavorable), the expiration of the statute of limitations on some tax positions and obtaining new information about particular tax positions that may cause management to change its estimates.

In the regular course of business, various federal, state, local and foreign tax authorities conduct examinations of the Company's income tax filings and the Company generally remains subject to examination until the statute of limitations expires for the respective jurisdiction. The Internal Revenue Service (“IRS”) has either completed its examinations of the Company's consolidated federal income tax returns or the statute of limitations has expired up through and including the 2012 tax year; however, the Company is pursuing all alternatives for settlement, including litigation, for certain tax adjustments related to its 2009 tax year. At this time, the Company does not believe that there will be any material additional payments beyond its recorded contingent liability reserves that may be required as a result of these tax audits. As of December 31, 2016, a summary of the tax years that remain subject to examination, are under appeal, or are otherwise unresolved for the Company's major jurisdictions are:

United States - federal 2009, 2013 - 2016

United States - various states 2006 - 2016

9. SUPPLEMENTAL CASH FLOW & OTHER DATA

Supplemental cash flow and other data for the years ended December 31, 2016, 2015 and 2014 were as follows:

	2016				2015				2014
Depreciation expense	$	177			$	223			$	220
Amortization expense	72				81				94
Depreciation and amortization expense	$	249			$	304			$	314
Interest expense	$	(144	)		$	(154	)		$	(167	)
Interest income	1				1				3
Interest expense, net	$	(143	)		$	(153	)		$	(164	)
Interest paid	$	148			$	172			$	170
Income taxes paid	$	361			$	319			$	327
Assets acquired under capital leases	$	—			$	3			$	12
Accounts payable associated with capital expenditures	$	9			$	15			$	26
Dividend payable	$	62			$	55			$	48
Businesses acquired:
Fair value of assets acquired	$	139			$	63			$	853
Fair value of liabilities assumed	—				—				85
Fair value of net assets acquired	139				63				768
Merger consideration paid (payable), net	—				4				(30		)
Cash paid for business acquisitions	139				67				738
Less: Cash acquired	—				—				10
Business acquisitions, net of cash acquired	$	139			$	67			$	728

10. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment as of December 31, 2016 and 2015 consisted of the following:

	2016				2015
Land	$	28			$	28
Buildings and improvements	379				370
Laboratory equipment and furniture and fixtures	1,462				1,407
Leasehold improvements	533				535
Computer software developed or obtained for internal use	834				756
Construction-in-progress	193				136
	3,429				3,232
Less: Accumulated depreciation and amortization	(2,400		)		(2,307		)
Total	$	1,029			$	925

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

11. GOODWILL AND INTANGIBLE ASSETS

The changes in goodwill for the years ended December 31, 2016 and 2015 were as follows:

	2016				2015
Balance, beginning of year	$	5,905			$	6,032
Goodwill acquired during the year	95				33
Reclassification to assets held for sale	—				(160		)
Balance, end of year	$	6,000			$	5,905

Principally all of the Company’s goodwill as of December 31, 2016 and 2015 was associated with its DIS business.

For the year ended December 31, 2016, goodwill acquired during the period was principally associated with the CLP acquisition (see Note 5).

For the year ended December 31, 2015, goodwill acquired during the period was principally associated with the MemorialCare and Superior Mobile Medics acquisitions (see Note 5). The reclassification to assets held for sale was principally associated with Clinical Trials and Focus Diagnostics (see Note 6).

Intangible assets as of December 31, 2016 and 2015 consisted of the following:

	Weighted Average Amort-ization Period (Years)		December 31, 2016												December 31, 2015
		Cost				Accumulated Amortization				Net				Cost				Accumulated Amortization				Net
Amortizing intangible assets:
Customer-related intangibles	18		$	971			$	(346	)		$	625			$	936			$	(296	)		$	640
Non-compete agreements	6		6				(4		)		2				6				(3		)		3
Technology	18		93				(40		)		53				93				(35		)		58
Other	9		103				(70		)		33				106				(59		)		47
Total	18		1,173				(460		)		713				1,141				(393		)		748
Intangible assets not subject to amortization:
Tradenames			235				—				235				235				—				235
Other			1				—				1				1				—				1
Total intangible assets			$	1,409			$	(460	)		$	949			$	1,377			$	(393	)		$	984

For the year ended December 31, 2016, the Company recognized impairment charges associated with intangible assets of $7 million associated with certain customer related and other intangibles, which have been included in other operating (income) expense, net.

For the year ended December 31, 2015, the Company recognized impairment charges associated with intangible assets of $16 million associated with Celera products and winding down a subsidiary, which have been included in other operating (income) expense, net.

Amortization expense related to intangible assets was $72 million, $81 million and $94 million for the years ended December 31, 2016, 2015 and 2014, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

The estimated amortization expense related to amortizable intangible assets for each of the five succeeding fiscal years and thereafter as of December 31, 2016 is as follows:

Year Ending December 31,
2017	$	69
2018	65
2019	64
2020	64
2021	57
Thereafter	394
Total	$	713

12. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses as of December 31, 2016 and 2015 consisted of the following:

	2016				2015
Trade accounts payable	$	261			$	279
Accrued wages and benefits (including incentive compensation)	316				305
Income taxes payable	3				4
Accrued interest	46				52
Accrued insurance	31				60
Merger consideration payable	2				2
Dividend payable	62				55
Accrued expenses	254				257
Total	$	975			$	1,014

13. DEBT

Long-term debt as of December 31, 2016 and 2015 consisted of the following:

	2016				2015
3.20% Senior Notes due April 2016	—				150
2.70% Senior Notes due April 2019	300				300
4.75% Senior Notes due January 2020	521				522
2.50% Senior Notes due March 2020	299				299
4.70% Senior Notes due April 2021	563				554
4.25% Senior Notes due April 2024	307				313
3.50% Senior Notes due March 2025	568				601
3.45% Senior Notes due June 2026	469				—
6.95% Senior Notes due July 2037	174				247
5.75% Senior Notes due January 2040	244				368
4.70% Senior Notes due March 2045	300				300
Other	13				22
Debt issuance costs	(24		)		(25		)
Total long-term debt	3,734				3,651
Less: Current portion of long-term debt	6				159
Total long-term debt, net of current portion	$	3,728			$	3,492

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

Secured Receivables Credit Facility

In October 2015, the Company amended and restated the agreement for the $525 million secured receivables credit facility (the “Secured Receivables Credit Facility”) entered into in December 2014, increasing the borrowing capacity under the facility to $600 million. The amended and restated Secured Receivables Credit Facility matures in October 2017. Under the Secured Receivables Credit Facility, the Company can issue letters of credit totaling $100 million (see Note 17). Issued letters of credit reduce the available borrowing capacity under the facility. Borrowings under the Secured Receivables Credit Facility are collateralized by certain domestic receivables. As of December 31, 2016 and 2015, interest on the borrowings under the Secured Receivables Credit Facility is based on commercial paper rates for highly-rated issuers plus 0.66%. As of both December 31, 2016 and 2015, there were no outstanding borrowings under the Secured Receivables Credit Facility.

Senior Unsecured Revolving Credit Facility

In April 2014, the Company amended and restated the agreement for the $750 million senior unsecured revolving credit facility (the “Credit Facility” or "Senior Unsecured Revolving Credit Facility") entered into in September 2011. The amended and restated Credit Facility matures in April 2019. Under the Credit Facility, the Company can issue letters of credit totaling $150 million (see Note 17). Issued letters of credit reduce the available borrowing capacity under the facility. Interest on the Credit Facility is based on certain published rates plus an applicable margin that will vary over a range from 75 basis points to 163 basis points based on changes in the Company's public debt ratings. At the option of the Company, it may elect to lock into LIBOR-based interest rates for periods up to six months. Interest on any outstanding amounts not covered under LIBOR-based interest rate contracts is based on an alternate base rate, which is calculated by reference to the prime rate, the federal funds rate or an adjusted LIBOR rate. As of both December 31, 2016 and 2015, the Company's borrowing rate for LIBOR-based loans under the Credit Facility was LIBOR plus 1.125%. The Credit Facility contains various covenants, including the maintenance of certain financial ratios, which could impact the Company's ability to, among other things, incur additional indebtedness. As of both December 31, 2016 and 2015, there were no outstanding borrowings under the Credit Facility.

Senior Notes Offerings

In May 2016, the Company completed a $500 million senior notes offering (the "2016 Senior Notes"). The offering consisted of $500 million in aggregate principal of 3.45% senior notes due June 2026, issued at a discount of $1 million. The Company incurred $4 million of costs associated with the 2016 Senior Notes, which is included as a reduction to the carrying amount of long-term debt and is being amortized over the term of the related debt. The net proceeds from the 2016 Senior Notes were used to repay outstanding indebtedness under the senior unsecured revolving credit facility and the secured receivables credit facility and for general corporate purposes.

In March 2015, the Company completed a $1.2 billion senior notes offering (the “2015 Senior Notes”) that was sold in three tranches: (a) $300 million aggregate principal amount of 2.50% senior notes due March 2020, issued at a discount of $1 million; (b) $600 million aggregate principal amount of 3.50% senior notes due March 2025; and (c) $300 million aggregate principal amount of 4.70% senior notes due March 2045. The Company incurred $11 million of costs associated with the 2015 Senior Notes, which is included as a reduction to the carrying amount of long-term debt and is being amortized over the term of the related debt.

All of the senior notes are unsecured obligations of the Company and rank equally with the Company's other senior unsecured obligations. None of the Company's senior notes have a sinking fund requirement.

Retirement of Debt

In March 2016, the Company completed a cash tender offer to purchase up to $200 million aggregate principal amount of its 6.95% Senior Notes due July 2037 ("Senior Notes due 2037") and 5.75% Senior Notes due January 2040 ("Senior Notes due 2040"). The Company purchased $73 million of its Senior Notes due 2037 and $127 million of its Senior Notes due 2040.

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

In March 2015, the Company completed a cash tender offer to purchase up to $250 million aggregate principal amount of its Senior Notes due 2037 and Senior Notes due 2040 using a portion of the proceeds from the 2015 Senior Notes. The Company purchased $176 million of its Senior Notes due 2037 and $74 million of its Senior Notes due 2040. In April 2015, the Company redeemed all of its 5.45% Senior Notes due November 2015, $150 million of its 3.20% Senior Notes due April 2016 and all of its 6.40% Senior Notes due July 2017 with the remaining proceeds from the 2015 Senior Notes.

For the years ended December 31, 2016 and 2015, the Company recorded losses on retirement of debt, principally comprised of premiums paid, of $48 million and $144 million, respectively, in other (expense) income, net.

Maturities of Long-Term Debt

As of December 31, 2016, long-term debt matures as follows:

Year Ending December 31,
2017	$	6
2018	4
2019	302
2020	801
2021	550
Thereafter	2,125
Total maturities of long-term debt	3,788
Unamortized discount	(13		)
Debt issuance costs	(24		)
Fair value basis adjustments attributable to hedged debt	(17		)
Total long-term debt	3,734
Less: Current portion of long-term debt	6
Total long-term debt, net of current portion	$	3,728

14. FINANCIAL INSTRUMENTS

Interest Rate Derivatives – Cash Flow Hedges

From time to time, the Company has entered into various interest rate lock agreements and forward starting interest rate swap agreements to hedge part of the Company's interest rate exposure associated with the variability in future cash flows attributable to changes in interest rates.

In May 2016, the Company entered into interest rate lock agreements with several financial institutions for a total notional amount of $250 million which were accounted for as cash flow hedges. These agreements were entered into to hedge a portion of the Company’s interest rate exposure associated with variability in future cash flows attributable to changes in the ten-year treasury rates related to the planned issuance of the 2016 Senior Notes. In connection with the issuance of the 2016 Senior Notes, these agreements were settled, and the Company paid $1 million. These losses are deferred in stockholders’ equity, net of income taxes, as a component of accumulated other comprehensive loss, and amortized as an adjustment to interest expense, net over the term of the respective senior notes.

In March 2015, the Company entered into interest rate lock agreements with several financial institutions for a total notional amount of $350 million which were accounted for as cash flow hedges. These agreements were entered into to hedge a portion of the Company’s interest rate exposure associated with variability in future cash flows attributable to changes in the five-year, ten-year and thirty-year treasury rates related to the planned issuance of the 2015 Senior Notes. In connection with the issuance of the 2015 Senior Notes, these agreements were settled and the Company received $3 million. These gains are deferred in stockholders’ equity, net of income taxes, as a component of accumulated other comprehensive loss, and amortized as an adjustment to interest expense, net over the term of the respective senior notes.

During the fourth quarter of 2013 and first quarter of 2014, the Company entered into various forward starting interest rate swap agreements for an aggregate notional amount of $150 million which were accounted for as cash flow hedges. In

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

connection with the issuance of the 2015 Senior Notes, all of these agreements were settled and the Company paid $17 million. These losses are deferred in stockholders’ equity, net of income taxes, as a component of accumulated other comprehensive loss, and amortized as an adjustment to interest expense, net over the term of the Senior Notes due 2025.

The total net loss, net of taxes, recognized in accumulated other comprehensive loss, related to the Company's cash flow hedges as of December 31, 2016 and 2015 was $10 million and $12 million, respectively. The loss recognized on the Company's cash flow hedges for the years ended December 31, 2016, 2015 and 2014, as a result of ineffectiveness, was not material. The net amount of deferred losses on cash flow hedges that is expected to be reclassified from accumulated other comprehensive loss into earnings within the next twelve months is $3 million.

Interest Rate Derivatives – Fair Value Hedges

The Company maintains various fixed-to-variable interest rate swaps to convert a portion of the Company's long-term debt into variable interest rate debt. A summary of the notional amounts of interest rate derivatives – fair value hedges as of December 31, 2016 and 2015 is as follows:

		Notional Amount
Debt Instrument		2016				2015
4.75% Senior Notes due January 2020		$	—			$	350
4.70% Senior Notes due April 2021		—				400
4.25% Senior Notes due April 2024		250				250
3.50% Senior Notes due March 2025		600				200
3.45% Senior Notes due June 2026		350				—
		$	1,200			$	1,200

As of December 31, 2016, the Company had entered into various fixed to variable interest rate swap agreements with an aggregate notional amount of $1.2 billion and variable interest rate ranging from one-month LIBOR plus 2.2% to one-month LIBOR plus 3.0%.

As of December 31, 2015, the Company had entered into various fixed-to-variable interest rate swap agreements with an aggregate notional amount of $1.2 billion and variable interest rates ranging from one-month LIBOR plus 1.4% to one-month LIBOR plus 3.6%. In July 2016, the Company terminated those interest rate swaps agreements. As a result of the termination, the Company received proceeds of $60 million, which included $6 million of accrued interest. The remaining basis adjustment on the respective debt obligation of $54 million will be amortized as a reduction of interest expense over the remaining terms of the hedged debt instrument. Immediately after the termination of these interest rate swaps, the Company entered into new fixed-to-variable interest rate swap agreements, which are reflected in the table above.

In prior years, the Company entered into various fixed-to-variable interest rate swap agreements that were accounted for as fair value hedges of a portion of the Senior Notes due 2016 and a portion of the Senior Notes due 2020. In July 2012, the Company monetized the value of these interest rate swap assets by terminating the hedging instruments. The asset value, including accrued interest through the date of termination, was $72 million and the amount to be amortized as a reduction of interest expense over the remaining terms of the hedged debt instruments was $65 million.

As of December 31, 2016, the remaining unamortized basis adjustment associated with the terminated interest rate swap agreements totaled $71 million.

Since inception, the fair value hedges have been effective or highly effective; therefore, there is no impact on earnings for the years ended December 31, 2016, 2015 and 2014 as a result of hedge ineffectiveness.

Interest Rate Derivatives - Economic Hedges

In March 2016, in connection with the retirement of debt (see Note 13), the Company entered into reverse interest rate lock agreements with several financial institutions which were not designated for hedge accounting. The Company entered into these agreements to hedge the variability in cash flows associated with $75 million of the $200 million principal amount of debt

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

that was retired in the first quarter of 2016. These agreements were settled during the first quarter of 2016 resulting in a gain of $1 million which was recognized in other (expense) income, net.

In March 2015, in connection with the retirement of debt (see Note 13), the Company entered into reverse interest rate lock agreements with several financial institutions which were not designated for hedge accounting. The Company entered into these agreements to hedge the variability in cash flows associated with $280 million of the $1.3 billion principal amount of debt that was retired in the first and second quarters of 2015. These agreements were settled during the first and second quarters of 2015 which resulted in a gain of $3 million which was recognized in other (expense) income, net.

A summary of the fair values of derivative instruments in the consolidated balance sheets is stated in the table below:

	December 31, 2016						December 31, 2015
	Balance Sheet Classification		Fair Value				Balance Sheet Classification		Fair Value
Derivatives Designated as Hedging Instruments
Asset Derivatives:
Interest rate swaps			$	—			Other assets		$	23
Liability Derivatives:
Interest rate swaps	Other liabilities		88				Other liabilities		6
Total Net Derivatives (Liabilities) Assets			$	(88	)				$	17

15. STOCKHOLDERS’ EQUITY AND REDEEMABLE NONCONTROLLING INTEREST

Stockholders' Equity

Series Preferred Stock

Quest Diagnostics is authorized to issue up to 10 million shares of Series Preferred Stock, par value $1.00 per share. The Company's Board of Directors has the authority to issue such shares without stockholder approval and to determine the designations, preferences, rights and restrictions of such shares. No shares are currently outstanding.

Common Stock

On May 4, 2006, the Company's Restated Certificate of Incorporation was amended to increase the number of authorized shares of common stock, par value $0.01 per share, from 300 million shares to 600 million shares.

Changes in Accumulated Other Comprehensive Income (Loss) by Component

The market value adjustments represent unrealized holding gains (losses) on available-for-sale securities, net of taxes. The net deferred loss on cash flow hedges represents deferred losses, net of taxes on the Company’s interest rate related derivative financial instruments designated as cash flow hedges, net of amounts reclassified to interest expense (see Note 14). For the years ended December 31, 2016, 2015 and 2014, the tax effects related to the market valuation adjustments, deferred losses and other were not material. Foreign currency translation adjustments are not adjusted for income taxes since they relate to indefinite investments in non-U.S. subsidiaries.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

The changes in accumulated other comprehensive income (loss) by component for 2016, 2015 and 2014 were as follows:

	Foreign Currency Translation Adjustment				Market Value Adjustment				Net Deferred Loss on Cash Flow Hedges				Other				Accumulated Other Comprehensive Income (Loss)
Balance, December 31, 2013	$	(2	)		$	—			$	(5	)		$	(1	)		$	(8	)
Other comprehensive income (loss) before reclassifications	(7		)		(1		)		(11		)		(1		)		(20		)
Amounts reclassified from accumulated other comprehensive income (loss)	—				—				1				—				1
Net current period other comprehensive income (loss)	(7		)		(1		)		(10		)		(1		)		(19		)
Balance, December 31, 2014	(9		)		(1		)		(15		)		(2		)		(27		)
Other comprehensive income (loss) before reclassifications	(15		)		—				—				1				(14		)
Amounts reclassified from accumulated other comprehensive income (loss)	—				—				3				—				3
Net current period other comprehensive income (loss)	(15		)		—				3				1				(11		)
Balance, December 31, 2015	(24		)		(1		)		(12		)		(1		)		(38		)
Other comprehensive income (loss) before reclassifications	(34		)		(2		)		—				—				(36		)
Amounts reclassified from accumulated other comprehensive income (loss)	—				—				2				—				2
Net current period other comprehensive income (loss)	(34		)		(2		)		2				—				(34		)
Balance, December 31, 2016	$	(58	)		$	(3	)		$	(10	)		$	(1	)		$	(72	)

For the years ended December 31, 2016, 2015 and 2014, the gross deferred losses on cash flow hedges were reclassified from accumulated other comprehensive loss to interest expense, net.

Dividend Program

During each of the first three quarters of 2016, the Company's Board of Directors declared a quarterly cash dividend of $0.40 per common share. On November 11, 2016, the Company's Board of Directors authorized a quarterly cash dividend of $0.45 per common share. During each of the quarters of 2015, the Company's Board of Directors declared a quarterly cash dividend of $0.38 per common share. During each of the quarters in 2014, the Company's Board of Directors declared a quarterly cash dividend of $0.33 per common share.

Share Repurchase Program

In December 2016 and 2015, the Company’s Board of Directors authorized the Company to repurchase an additional $1 billion and $500 million, respectively, of the Company's common stock.

As of December 31, 2016, $1.4 billion remained available under the Company’s share repurchase authorization. The share repurchase authorization has no set expiration or termination date.

Share Repurchases

For the year ended December 31, 2016, the Company repurchased 7.4 million shares of its common stock for $590 million, which includes 3.1 million shares repurchased under an accelerated share repurchase agreement ("ASR") as follows:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

In May 2016, the Company entered into an ASR with a financial institution to repurchase $250 million of the Company's common stock as part of the Company's share repurchase program. The ASR was structured as a combination of two transactions: (1) a treasury stock repurchase; and (2) a forward contract, which permitted the Company to purchase shares immediately with the final purchase price of those shares determined by the volume weighted average price of the Company's common stock during the repurchase period, less a fixed discount. Under the ASR, the Company paid $250 million to the financial institution and received 3.1 million shares of common stock, resulting in a final price per share of $81.04. The Company initially received 2.8 million shares of its common stock during the second quarter of 2016 and received an additional 0.3 million shares upon completion of the ASR during the third quarter of 2016.

For the year ended December 31, 2015, the Company repurchased 3.2 million shares of its common stock for $224 million.

For the year ended December 31, 2014, the Company repurchased 2.2 million shares of its common stock for $132 million.

Shares Reissued from Treasury Stock

For the years ended December 31, 2016, 2015 and 2014 the Company reissued 2 million shares, 1 million shares and 2 million shares, respectively, for employee benefit plans.

Redeemable Noncontrolling Interest

On July 1, 2015, UMass Memorial Medical Center ("UMass") acquired an 18.9% noncontrolling interest in a subsidiary of the Company that performs diagnostic information services in a defined territory within the state of Massachusetts. In connection with the transaction, the Company received consideration of $68 million. Under the terms of the transaction, UMass has the right to require the Company to purchase all of its interest in the subsidiary at fair value commencing July 1, 2020. Since the redemption of the noncontrolling interest is outside of the Company's control, it has been presented outside of stockholders' equity at the greater of its carrying amount or its fair value. The Company will record changes in the fair value of the noncontrolling interest immediately as they occur. As of December 31, 2016 and 2015, the redeemable noncontrolling interest was $77 million and $70 million, respectively, and was presented at its fair value.

16. STOCK OWNERSHIP AND COMPENSATION PLANS

Employee and Non-employee Directors Stock Ownership Programs

In 2005, the Company established the ELTIP to replace the Company's prior plan. The ELTIP provides for three types of awards: (a) stock options, (b) stock appreciation rights and (c) stock awards. The ELTIP provides for the grant to eligible employees of either non-qualified or incentive stock options, or both, to purchase shares of Company common stock at an exercise price no less than the fair market value of the Company's common stock on the date of grant. Grants of stock appreciation rights allow eligible employees to receive a payment based on the appreciation of Company common stock in cash, shares of Company common stock or a combination thereof. The stock appreciation rights are granted at an exercise price no less than the fair market value of the Company's common stock on the date of grant. Stock options and stock appreciation rights granted under the ELTIP expire on the date designated by the Board of Directors but in no event more than ten years from date of grant. No stock appreciation rights have been granted under the ELTIP. The stock options and shares are subject to forfeiture if employment terminates prior to the end of the vesting period prescribed by the Board of Directors. For all award types, the vesting period is generally over three years from the date of grant. For performance share unit awards, the actual amount of shares earned is based on the achievement of the performance goals specified in the awards. The maximum number of shares of Company common stock that may be optioned or granted under the ELTIP is approximately 71 million shares.

In 2005, the Company established the DLTIP to replace the Company's prior plan. The DLTIP provides for the grant to non-employee directors of non-qualified stock options to purchase shares of Company common stock at an exercise price no less than the fair market value of the Company's common stock on the date of grant. The DLTIP also permits awards of restricted stock and restricted stock units to non-employee directors. Stock options granted under the DLTIP expire on the date designated by the Board of Directors but in no event more than ten years from date of grant, and generally become exercisable

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

in three equal annual installments beginning on the first anniversary date of the grant of the option regardless of whether the optionee remains a director of the Company. The maximum number of shares that may be issued under the DLTIP is 2.4 million shares. For the years ended December 31, 2016, 2015 and 2014, grants under the DLTIP totaled 21 thousand shares, 31 thousand shares and 32 thousand shares, respectively.

The Company's practice has been to issue shares related to its stock-based compensation program from shares of its common stock held in treasury or by issuing new shares of its common stock. See Note 15 for further information regarding the Company's share repurchase program.

Beginning in 2015, the Company changed its method for estimating the fair value of its stock option awards from a lattice-based option-valuation method to a Black-Scholes option-valuation model which has been applied prospectively to stock option awards. The change did not have a significant effect on the stock-based compensation expense reported in the consolidated statements of operations for the years ended December 31, 2016 and 2015, because stock option awards are granted based on a prescribed dollar value.

The expected volatility under the Black-Scholes option-valuation model was based on historical volatilities of the Company's common stock. The dividend yield was based on the approved annual dividend rate in effect and current market price of the underlying common stock at the time of grant. The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the time of grant for bonds with maturities consistent with the expected holding period of the related award. The expected holding period was estimated using the historical exercise behavior of employees.

The weighted average assumptions used in valuing stock options granted in the periods presented were:

	2016		2015		2014
Fair value at grant date	$10.35		$11.57		$10.99
Expected volatility	21.6%		21.0%		25.1%
Dividend yield	2.4%		2.1%		2.1%
Risk-free interest rate	1.4%		1.7%		1.6% - 2.0%
Expected holding period, in years	5.3		5.3		5.5 - 6.6

The fair value of restricted stock awards, restricted stock units and performance share units is the average market price of the Company's common stock at the date of grant.

The following summarizes the activity relative to stock option awards for 2016:

	Shares			Weighted Average Exercise Price				Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Options outstanding, beginning of year	7.7			$	59.65
Options granted	2.8			66.87
Options exercised	(1.3	)		56.17
Options forfeited and canceled	(0.1	)		66.53
Options outstanding, end of year	9.1			$	62.27			7.2		$	269
Exercisable, end of year	4.2			$	57.84			5.7		$	144
Vested and expected to vest, end of year	8.8			$	62.10			7.2		$	262

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company's closing common stock price on the last trading day of 2016 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2016. This amount changes based on the fair market value of the Company's common stock. Total intrinsic value of options exercised in 2016, 2015 and 2014 was $30 million, $21 million and $13 million, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

As of December 31, 2016, there was $16 million of unrecognized stock-based compensation cost related to nonvested stock options which is expected to be recognized over a weighted average period of 1.9 years.

The following summarizes the activity relative to stock awards, including restricted stock awards, restricted stock units and performance share units, for 2016, 2015 and 2014:

	2016							2015							2014
	Shares			Weighted Average Grant Date Fair Value				Shares			Weighted Average Grant Date Fair Value				Shares			Weighted Average Grant Date Fair Value
Shares outstanding, beginning of year	1.7			$	59.92			1.9			$	55.50			1.9			$	57.08
Shares granted	0.6			67.26				0.6			71.17				0.7			52.72
Shares vested	(0.4	)		58.98				(0.3	)		55.74				(0.3	)		57.14
Shares forfeited and canceled	(0.4	)		57.31				(0.5	)		58.18				(0.4	)		56.44
Shares outstanding, end of year	1.5			$	63.88			1.7			$	59.92			1.9			$	55.50

As of December 31, 2016, there was $33 million of unrecognized stock-based compensation cost related to nonvested stock awards, which is expected to be recognized over a weighted average period of 1.9 years. Total fair value of shares vested was $28 million, $20 million and $17 million for the years ended December 31, 2016, 2015 and 2014, respectively. The amount of unrecognized stock-based compensation cost is subject to change based on changes, if any, to management's best estimates of the achievement of the performance goals specified in such awards and the resulting number of shares that will be earned at the end of the performance periods.

For the years ended December 31, 2016, 2015 and 2014, stock-based compensation expense totaled $69 million, $52 million and $51 million, respectively. Income tax benefits related to stock-based compensation expense totaled $32 million, $20 million and $20 million for the years ended December 31, 2016, 2015 and 2014, respectively.

Employee Stock Purchase Plan

Under the Company's Employee Stock Purchase Plan (“ESPP”), substantially all employees can elect to have up to 10% of their annual wages withheld to purchase Quest Diagnostics common stock. The purchase price of the stock is 85% of the market price of the Company's common stock on the last business day of each calendar month. Under the ESPP, the maximum number of shares of Quest Diagnostics common stock which may be purchased by eligible employees is 9 million. Approximately 332 thousand, 349 thousand and 392 thousand shares of common stock were purchased by eligible employees in 2016, 2015 and 2014, respectively.

Defined Contribution Plans

The Company maintains qualified defined contribution plans covering substantially all of its employees. The maximum Company matching contribution is 5% of eligible employee compensation. The Company's expense for contributions to its defined contribution plans aggregated $76 million, $77 million and $73 million for 2016, 2015 and 2014, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

Supplemental Deferred Compensation Plans

The Company has a supplemental deferred compensation plan that is an unfunded, non-qualified plan that provides for certain management and highly compensated employees to defer up to 50% of their salary in excess of their defined contribution plan limits and for certain eligible employees, up to 95% of their variable incentive compensation. The maximum Company matching contribution is 5% of eligible employee compensation. The compensation deferred under this plan, together with Company matching amounts, are credited with earnings or losses measured by the mirrored rate of return on investments elected by plan participants. Each plan participant is fully vested in all deferred compensation, Company match and earnings credited to their account. The amounts accrued under the Company's deferred compensation plans were $51 million and $49 million as of December 31, 2016 and 2015, respectively. Although the Company is currently contributing all participant deferrals and matching amounts to trusts, the funds in these trusts, totaling $51 million and $49 million as of December 31, 2016 and 2015, respectively, are general assets of the Company and are subject to any claims of the Company's creditors.

The Company also offers certain employees the opportunity to participate in a non-qualified deferred compensation program. Eligible participants are allowed to defer up to $20 thousand of eligible compensation per year. The Company matches employee contributions equal to 25%, up to a maximum of $5 thousand per plan year. A participant's deferrals, together with Company matching credits, are “invested” at the direction of the employee in a hypothetical portfolio of investments which are tracked by an administrator. Each participant is fully vested in their deferred compensation and vests in Company matching contributions over a four-year period at 25% per year. The amounts accrued under this plan were $39 million and $36 million as of December 31, 2016 and 2015, respectively. The Company purchases life insurance policies, with the Company named as beneficiary of the policies, for the purpose of funding the program's liability. The cash surrender value of such life insurance policies was $32 million and $29 million as of December 31, 2016 and 2015, respectively.

For the years ended December 31, 2016, 2015 and 2014, the Company's expense for matching contributions to these plans were not material.

17. COMMITMENTS AND CONTINGENCIES

Letters of Credit and Contractual Obligations

The Company can issue letters of credit under its Secured Receivables Credit Facility and Senior Unsecured Revolving Credit Facility (see Note 13). In support of its risk management program, to ensure the Company’s performance or payment to third parties, $68 million in letters of credit under the Secured Receivables Credit Facility were outstanding as of December 31, 2016. The letters of credit primarily represent collateral for current and future automobile liability and workers’ compensation loss payments.

Minimum rental commitments under noncancelable operating leases, primarily real estate, in effect as of December 31, 2016 are as follows:

Year Ending December 31,
2017	$	179
2018	129
2019	92
2020	64
2021	44
Thereafter	153
Minimum lease payments	$	661

Operating lease rental expense for 2016, 2015 and 2014 totaled $216 million, $224 million and $242 million, respectively. Rent expense associated with operating leases that include scheduled rent increases and tenant incentives, such as rent holidays and improvement allowances, is recorded on a straight-line basis over the term of the lease.

The Company has certain noncancelable commitments, primarily under take-or-pay arrangements, to purchase products or services from various suppliers, mainly for consulting and other service agreements, and standing orders to

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

purchase reagents and other laboratory supplies. As of December 31, 2016, the approximate total future purchase commitments are $111 million, of which $66 million are expected to be incurred in 2017, $21 million are expected to be incurred in 2018 through 2019 and the balance thereafter.

Billing and Collection Agreement

In September 2016, the Company entered into a ten year agreement with a third party to outsource its billing and related operations for the majority of the Company’s revenues. Services under the agreement commenced during the fourth quarter of 2016. The agreement includes an annual fee, which is subject to adjustment based on certain changes in the Company's requisition volume and the achievement of various performance metrics.

Contingent Lease Obligations

The Company remains subject to contingent obligations under certain real estate leases, including real estate leases that were entered into by certain predecessor companies of a subsidiary prior to the Company's acquisition of the subsidiary. While over the course of many years, the title to certain properties and interest in the subject leases have been transferred to third parties and the subject leases have been amended several times by such third parties, the lessors have not formally released the subsidiary predecessor companies from their original obligations under the leases and therefore remain contingently liable in the event of default. The remaining terms of the lease obligations and the Company's corresponding indemnifications range up to 31 years. The lease payments under certain leases are subject to market value adjustments and contingent rental payments and therefore, the total contingent obligations under the leases cannot be precisely determined but are likely to total several hundred million dollars. A claim against the Company would be made only upon the current lessee's default and, in certain cases, after a series of claims and corresponding defaults by third parties that precede the Company in the order of liability. The Company also has certain indemnification rights from other parties to recover losses in the event of default on the lease obligations. The Company believes that the likelihood of its performance under these contingent obligations is remote and no liability has been recorded for any potential payments under the contingent lease obligations.

Agreement in Principle

In April 2015, a qui tam civil lawsuit entitled United States ex rel. Mayes v. Berkeley HeartLab, Inc., et al., filed in the U.S. District Court for the District of South Carolina, was unsealed. The complaint alleges that certain alleged business practices of the defendants violate the False Claims Act, and seeks monetary relief. The United States has intervened as a plaintiff as to Berkeley HeartLab, Inc., a subsidiary of the Company and filed a complaint in intervention; the United States did not intervene as a plaintiff as to Quest Diagnostics Incorporated. The parties have reached an agreement in principle to resolve these matters, subject to further negotiation of terms and conditions and governmental sign-offs. In order to most efficiently and effectively finalize the settlement agreement, the parties have agreed to stay the filing of certain pleadings and their respective discovery requests associated with these matters.

Legal Matters

The Company is involved in various legal proceedings. Some of the proceedings against the Company involve claims that could be substantial in amount.

In addition to the matters described below, in the normal course of business, the Company has been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with the Company's activities as a provider of diagnostic testing, information and services. These legal actions may include lawsuits alleging negligence or other similar legal claims. These actions could involve claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages, and could have an adverse impact on the Company's client base and reputation.

The Company is also involved, from time to time, in other reviews, investigations and proceedings by governmental agencies regarding the Company's business, including, among other matters, operational matters, which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief. The number of these reviews, investigations and proceedings has increased in recent years with regard to many firms in the healthcare services industry, including the Company.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

In June 2010, the Company received a subpoena from the Florida Attorney General's Office seeking documents relating to the Company's pricing and billing practices as they relate to Florida’s Medicaid program. The Company cooperated with the requests. In November 2013, the State of Florida intervened as a plaintiff in a civil lawsuit, Florida ex rel. Hunter Laboratories LLC v. Quest Diagnostics Incorporated, et al., filed in Florida Circuit Court. The suit, originally filed by a competitor laboratory, alleges that the Company overcharged Florida’s Medicaid program. The Company's motion to dismiss the state's amended complaint was denied. The Company filed a motion for summary judgment on the primary claim in the case; the motion was granted. The court found that the Company had properly billed the Medicaid program the Company’s “usual and customary charge.”

The federal or state governments may bring claims based on the Company's current practices, which it believes are lawful. In addition, certain federal and state statutes, including the qui tam provisions of the federal False Claims Act, allow private individuals to bring lawsuits against healthcare companies on behalf of government or private payers. The Company is aware of lawsuits, and from time to time has received subpoenas, related to billing practices based on the qui tam provisions of the Civil False Claims Act or other federal and state statutes, regulations or other laws. The Company understands that there may be other pending qui tam claims brought by former employees or other "whistle blowers" as to which the Company cannot determine the extent of any potential liability.

Management cannot predict the outcome of such matters. Although management does not anticipate that the ultimate outcome of such matters will have a material adverse effect on the Company's financial condition, given the high degree of judgment involved in establishing loss estimates related to these types of matters, the outcome of such matters may be material to the Company's results of operations or cash flows in the period in which the impact of such matters is determined or paid.

These matters are in different stages. Some of these matters are in their early stages. Matters may involve responding to and cooperating with various government investigations and related subpoenas. As of December 31, 2016, the Company does not believe that any material losses related to the legal matters described above are probable. While the Company believes that a reasonable possibility exists that losses may have been incurred related to the legal matters described above for which an accrual has not been recorded, based on the nature and status of these matters, potential losses, if any, cannot be estimated.

Reserves for Legal Matters

Reserves for legal matters, other than those described above, totaled $5 million and $9 million as of December 31, 2016 and 2015, respectively.

Reserves for General and Professional Liability Claims

As a general matter, providers of clinical testing services may be subject to lawsuits alleging negligence or other similar legal claims. These suits could involve claims for substantial damages. Any professional liability litigation could also have an adverse impact on the Company's client base and reputation. The Company maintains various liability insurance coverages for, among other things, claims that could result from providing, or failing to provide, clinical testing services, including inaccurate testing results, and other exposures. The Company's insurance coverage limits its maximum exposure on individual claims; however, the Company is essentially self-insured for a significant portion of these claims. Reserves for such matters, including those associated with both asserted and incurred but not reported claims, are established by considering actuarially determined losses based upon the Company's historical and projected loss experience. Such reserves totaled $117 million and $124 million as of December 31, 2016 and 2015, respectively. Management believes that established reserves and present insurance coverage are sufficient to cover currently estimated exposures. Management cannot predict the outcome of any claims made against the Company. Although management does not anticipate that the ultimate outcome of any such proceedings or claims will have a material adverse effect on the Company's financial condition, given the high degree of judgment involved in establishing accruals for loss estimates related to these types of matters, the outcome may be material to the Company's results of operations or cash flows in the period in which the impact of such claims is determined or paid.

18. DISCONTINUED OPERATIONS

During the third quarter of 2006, the Company completed its wind down of NID and classified the operations of NID as discontinued operations. The Company will continue to report NID as a discontinued operation until uncertain tax benefits associated with NID are resolved.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

The results of operations for NID have been classified as discontinued operations for all periods presented.

Summarized financial information for the discontinued operations is set forth below:

	2016				2015				2014
Net revenues	$	—			$	—			$	—
Income from discontinued operations before taxes	—				—				1
Income tax benefit	—				—				(4		)
Income from discontinued operations, net of taxes	$	—			$	—			$	5

The remaining balance sheet information related to NID was not material as of December 31, 2016 and 2015.

19. BUSINESS SEGMENT INFORMATION

The Company's DIS business provides insights through clinical testing and related services to a broad range of customers, including patients, clinicians, hospitals, IDNs, health plans, employers and ACOs. The Company is the world's leading provider of diagnostic information services, which includes providing clinical testing services such as routine (including drugs-of-abuse) testing, gene-based and esoteric (including advanced diagnostics) testing, and anatomic pathology services, as well as related services and insights. The DIS business accounted for greater than 90% of net revenues from continuing operations in 2016, 2015 and 2014.

All other operating segments include the Company's DS businesses, which consists of its risk assessment services, healthcare information technology, diagnostic products (prior to May 13, 2016), and clinical trials testing (prior to July 1, 2015) businesses. The Company's DS businesses offer a variety of solutions for life insurers, healthcare providers and others.

In addition to the sale of Focus Diagnostics (see Note 6) in 2016, the Company wound down its Celera products business, which did not have a material impact on the Company's consolidated financial statements. As a result of these transactions, the Company has disposed of its diagnostics products business.

During 2016, 2015 and 2014, the Company acquired certain operations of CLP, certain operations of MemorialCare, Superior Mobile Medics, Solstas, Summit Health and certain operations of Steward (see Note 5). CLP, MemorialCare, Solstas, Summit Health and Steward are included in the Company's DIS business. Superior Mobile Medics is included in all other operating segments.

On April 19, 2006, the Company decided to discontinue NID’s operations. The results of operations for NID have been classified as discontinued operations for all periods presented (see Note 18).

As of December 31, 2016, substantially all of the Company’s services were provided within the United States, and substantially all of the Company’s assets were located within the United States.

The following table is a summary of segment information for the years ended December 31, 2016, 2015 and 2014. Segment asset information is not presented since it is not used by the chief operating decision maker at the operating segment level. Operating earnings (loss) of each segment represents net revenues less directly identifiable expenses to arrive at operating income (loss) for the segment. General corporate activities included in the table below are comprised of general management and administrative corporate expenses, amortization and impairment of intangibles assets, other operating income and expenses net of certain general corporate activity costs that are allocated to the DIS and DS businesses, and the gains on disposition of businesses associated with the dispositions of Focus Diagnostics and Clinical Trials (see Note 6) . The accounting policies of the segments are the same as those of the Company as set forth in Note 2.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

	2016				2015				2014
Net revenues:
DIS business	$	7,138			$	6,965			$	6,873
All other operating segments	377				528				562
Total net revenues	$	7,515			$	7,493			$	7,435
Operating earnings (loss):
DIS business	$	1,244			$	1,118			$	1,068
All other operating segments	64				110				94
General corporate activities	(31		)		171				(179		)
Total operating income	1,277				1,399				983
Non-operating expenses, net	(191		)		(296		)		(160		)
Income from continuing operations before income taxes and equity in earnings of equity method investees	1,086				1,103				823
Income tax expense	(429		)		(373		)		(262		)
Equity in earnings of equity method investees, net of taxes	39				23				26
Income from continuing operations	696				753				587
Income from discontinued operations, net of taxes	—				—				5
Net income	696				753				592
Less: Net income attributable to noncontrolling interests	51				44				36
Net income attributable to Quest Diagnostics	$	645			$	709			$	556

Depreciation and amortization expense for the years ended December 31, 2016, 2015 and 2014 were as follows:

	2016				2015				2014
DIS business	$	170			$	212			$	206
All other operating segments	6				10				13
General corporate	73				82				95
Total depreciation and amortization	$	249			$	304			$	314

Capital expenditures for the years ended December 31, 2016, 2015 and 2014 were as follows:

	2016				2015				2014
DIS business	$	264			$	243			$	283
All other operating segments	21				16				17
General corporate	8				4				8
Total capital expenditures	$	293			$	263			$	308

F- 41

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

Net revenues by major service for the years ended December 31, 2016, 2015 and 2014 were as follows:

	2016				2015				2014
Routine clinical testing services	$	4,179			$	4,078			$	4,066
Gene-based and esoteric (including advanced diagnostics) testing services	2,335				2,256				2,158
Anatomic pathology testing services	624				631				649
All other	377				528				562
Total net revenues	$	7,515			$	7,493			$	7,435

20. RELATED PARTIES

The Company's equity method investees primarily consist of its clinical trials central laboratory services joint venture and its diagnostic information services joint ventures, which are accounted for under the equity method of accounting. During the years ended December 31, 2016 and 2015, the Company recognized net revenues of $33 million and $30 million, respectively, associated with diagnostic information services provided to its equity method investees. As of December 31, 2016 and 2015, there was $10 million and $5 million, respectively, of accounts receivable from equity method investees related to such services.

During the years ended December 31, 2016 and 2015, the Company recognized income of $19 million and $31 million, respectively, associated with the performance of certain corporate services, including transition services, for its equity method investees, classified within selling, general and administrative expenses. As of December 31, 2016 and 2015, there was $5 million and $32 million, respectively, of other receivables from equity method investees included in prepaid expenses and other current assets related to these service agreements and other transition related items. In addition, accounts payable and accrued expenses as of both December 31, 2016 and 2015 included $9 million due to equity method investees.

21. SUBSEQUENT EVENTS

In February 2017, the Company entered into a definitive agreement to acquire the outreach laboratory services operations of PeaceHealth Laboratories ("PeaceHealth"). PeaceHealth delivers laboratory services in Oregon, Washington and Alaska. Closing of the transaction, which is expected in the second quarter of 2017, is subject to customary regulatory review and customary closing conditions.

In February 2017, the Company developed high-level estimates of the pre-tax charges expected to be incurred in connection with the course of action for 2017 under the Invigorate program. For further details regarding the Invigorate program, see Note 4.

F- 42

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

Quarterly Operating Results (unaudited)

(in millions, except per share data)

2016 (a)	First Quarter				Second Quarter				Third Quarter				Fourth Quarter				Total Year
	(b)				(c)				(d)				(e)
Net revenues	$	1,863			$	1,906			$	1,885			$	1,861			$	7,515
Gross profit	719				751				728				701				2,899
Income from continuing operations	115				209				205				167				696
Income from discontinued operations, net of taxes	—				—				—				—				—
Net income	115				209				205				167				696
Less: Net income attributable to noncontrolling interests	12				14				13				12				51
Net income attributable to Quest Diagnostics	$	103			$	195			$	192			$	155			$	645
Amounts attributable to Quest Diagnostics' stockholders:
Income from continuing operations	$	103			$	195			$	192			$	155			$	645
Income from discontinued operations, net of taxes	—				—				—				—				—
Net income	$	103			$	195			$	192			$	155			$	645
Earnings per share attributable to Quest Diagnostics' stockholders - basic:
Income from continuing operations	$	0.72			$	1.38			$	1.37			$	1.11			$	4.58
Income from discontinued operations	—				—				—				—				—
Net income	$	0.72			$	1.38			$	1.37			$	1.11			$	4.58
Earnings per share attributable to Quest Diagnostics' stockholders - diluted:
Income from continuing operations	$	0.71			$	1.37			$	1.34			$	1.09			$	4.51
Income from discontinued operations	—				—				—				—				—
Net income	$	0.71			$	1.37			$	1.34			$	1.09			$	4.51

F- 43

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

Quarterly Operating Results (unaudited)

(in millions, except per share data)

2015 (a)	First Quarter				Second Quarter				Third Quarter				Fourth Quarter				Total Year
	(f)				(g)				(h)				(i)
Net revenues	$	1,839			$	1,925			$	1,880			$	1,849			$	7,493
Gross profit	676				743				718				699				2,836
Income from continuing operations	70				129				354				200				753
Income from discontinued operations, net of taxes	—				—				—				—				—
Net income	70				129				354				200				753
Less: Net income attributable to noncontrolling interests	9				11				12				12				44
Net income attributable to Quest Diagnostics	$	61			$	118			$	342			$	188			$	709
Amounts attributable to Quest Diagnostics' stockholders:
Income from continuing operations	$	61			$	118			$	342			$	188			$	709
Income from discontinued operations, net of taxes	—				—				—				—				—
Net income	$	61			$	118			$	342			$	188			$	709
Earnings per share attributable to Quest Diagnostics' stockholders - basic:
Income from continuing operations	$	0.42			$	0.82			$	2.37			$	1.31			$	4.92
Income from discontinued operations	—				—				—				—				—
Net income	$	0.42			$	0.82			$	2.37			$	1.31			$	4.92
Earnings per share attributable to Quest Diagnostics' stockholders - diluted:
Income from continuing operations	$	0.42			$	0.81			$	2.35			$	1.29			$	4.87
Income from discontinued operations	—				—				—				—				—
Net income	$	0.42			$	0.81			$	2.35			$	1.29			$	4.87

(a)

During the third quarter of 2006, the Company completed its wind down of NID and classified the operations of NID as discontinued operations. Results of operations have been prepared to report the results of NID as discontinued operations for all periods presented (see Note 18). In May 2016, the Company completed the sale of Focus Diagnostics (see Note 6). In July 2015, the Company contributed its clinical trials testing business to a newly formed global clinical trials central laboratory services joint venture, Q2 Solutions (see Note 6). Subsequent to the contribution, the Company's ownership interest in the joint venture is being accounted for under the equity method of accounting.

(b)

Included pre-tax charges of $21 million, primarily associated with systems conversions and integration costs incurred in connection with further restructuring and integrating the Company ($7 million in cost of services, $12 million in selling, general and administrative expenses and $2 million in equity in earnings of equity method investees, net of taxes); pre-tax charges of $1 million in other operating (income) expense, net, representing non-cash asset impairment charges; pre-tax charges in selling, general and administrative expenses of $2 million, primarily representing costs incurred related to certain legal matters; pre-tax charges of $48 million on retirement of debt associated with the March 2016 cash tender offer in other (expense) income, net (see Note 13); and pre-tax charges of $1 million representing non-cash asset impairment charges associated with an investment.

(c)

Included a pre-tax gain of $118 million associated with the sales of the Focus Diagnostics; pre-tax charges of $19 million, primarily associated with systems conversions and integration costs incurred in connection with further restructuring and integrating the Company ($10 million in cost of services, $8 million in selling, general and administrative expenses and $1 million in equity in earnings of equity method investees, net of taxes); pre-tax charges in selling, general and administrative expenses of $1 million, primarily representing costs incurred related to certain legal matters; and pre-tax charges of $6 million representing non-cash asset impairment charges associated with certain investments in other (expense) income, net.

F- 44

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

Quarterly Operating Results (unaudited)

(in millions, except per share data)

(d)

Included pre-tax charges of $18 million, primarily associated with systems conversions and integration costs incurred in connection with further restructuring and integrating the Company ($8 million in cost of services and $10 million in selling, general and administrative expenses); and pre-tax gain of $21 million, principally a result of a gain on escrow recovery associated with an acquisition in other operating (income) expense, net.

(e)

Included pre-tax charges of $24 million, primarily associated with systems conversions and integration costs incurred in connection with further restructuring and integrating the Company ($15 million in cost of services, $7 million in selling, general and administrative expenses, $1 million in other operating (income) expense, net and $1 million in equity in earnings of equity method investees, net of taxes); and pre-tax charges of $6 million in other operating (income) expense, net, representing non-cash asset impairment charges.

(f)

Included pre-tax charges of $31 million, primarily associated with workforce reductions and professional fees incurred in connection with further restructuring and integrating the Company ($20 million in cost of services and $11 million in selling, general and administrative expenses); pre-tax charges of $8 million in other operating (income) expense, net, representing non-cash asset impairment charges associated with our Celera products business; pre-tax charges in selling, general and administrative expenses of $2 million, principally representing costs incurred related to certain legal matters; and pre-tax charges of $79 million on retirement of debt associated with the March 2015 cash tender offer in other (expense) income, net (see Note 13).

(g)

Included pre-tax charges of $23 million, primarily associated with workforce reductions and professional fees incurred in connection with further restructuring and integrating the Company ($11 million in cost of services and $12 million in selling, general and administrative expenses); a pre-tax gain included in other operating (income) expense, net of $13 million associated with a decrease in the fair value of the contingent consideration accrual associated with our Summit Health acquisition (see Note 5 and Note 7); pre-tax charges in selling, general and administrative expenses of $5 million, principally representing costs incurred related to certain legal matters; pre-tax charges of $5 million in other operating (income) expense, net, representing non-cash asset impairment charges; and pre-tax charges of $65 million on retirement of debt associated with the April 2015 redemption in other (expense) income, net (see Note 13).

(h)

Included a pre-tax gain of $334 million associated with the contribution of the Company's clinical trials testing business to Q2 Solutions (see Note 6); and pre-tax charges of $34 million, primarily associated with workforce reductions and professional fees incurred in connection with further restructuring and integrating the Company ($20 million in cost of services, $9 million in selling, general and administrative expenses and $5 million equity in earnings of equity method investees, net of taxes).

(i)

Included pre-tax charges of $22 million, primarily associated with workforce reductions and professional fees incurred in connection with further restructuring and integrating the Company ($12 million in cost of services and $10 million in selling, general and administrative expenses); pre-tax charges of $11 million in other operating (income) expense, net, representing non-cash asset impairment charges associated with winding down a subsidiary; and pre-tax charges in selling, general and administrative expenses of $10 million, principally representing costs incurred related to certain legal matters. Income from continuing operations includes a deferred income tax benefit of $58 million associated with winding down a subsidiary.

F- 45

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

SCHEDULE II - VALUATION ACCOUNTS AND RESERVES

(in millions)

	Balance at Beginning of Year				Provision for Doubtful Accounts				Net Deductions and Other				Balance at End of Year
Year Ended December 31, 2016
Doubtful accounts and allowances	$	254			$	308			$	297		(a)	$	265
Year Ended December 31, 2015
Doubtful accounts and allowances	$	250			$	297			$	293		(a)	$	254
Year Ended December 31, 2014
Doubtful accounts and allowances	$	236			$	296			$	282		(a)	$	250

(a)	Primarily represents the write-off of accounts receivable, net of recoveries.

F- 46

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

EXHIBITS TO FORM 10-K

For the fiscal year ended December 31, 2016

Commission File No. 001-12215

QUEST DIAGNOSTICS INCORPORATED

Exhibit Number	Description
3.1	Restated Certificate of Incorporation (filed as an Exhibit to the Company's current report on Form 8-K (Date of Report: May 20, 2014) and incorporated herein by reference) (Commission File Number 001-12215)
3.2	Amended and Restated By-Laws of the Company (filed as an Exhibit to the Company's current report on Form 8-K (Date of Report: February 25, 2016) and incorporated herein by reference) (Commission File Number 001-12215)
4.1	Form of 6.95% Senior Note due 2037 (filed as an Exhibit to the Company's current report on Form 8-K (Date of Report: June 19, 2007) and incorporated herein by reference) (Commission file Number 001-12215)
4.2	Form of 4.750% Senior Note due 2020 (filed as an Exhibit to the Company's current report on Form 8-K (Date of Report: November 17, 2009) and incorporated herein by reference) (Commission file Number 001-12215)
4.3	Form of 5.750% Senior Note due 2040 (filed as an Exhibit to the Company's current report on Form 8-K (Date of Report: November 17, 2009) and incorporated herein by reference) (Commission file Number 001-12215)
4.4	Form of 4.700% Senior Note due 2021 (filed as an Exhibit to the Company's current report on Form 8-K (Date of Report: March 21, 2011) and incorporated herein by reference) (Commission File Number 001-12215)
4.5	Form of 2.700% Senior Note due 2019 (filed as an Exhibit to the Company's current report on Form 8-K (Date of Report: March 12, 2014) and incorporated herein by reference) (Commission File Number 001-12215)
4.6	Form of 4.250% Senior Note due 2024 (filed as an Exhibit to the Company's current report on Form 8-K (Date of Report: March 12, 2014) and incorporated herein by reference) (Commission File Number 001-12215)
4.7	Form of 2.500% Senior Note due 2020 (filed as an Exhibit to the Company's current report on Form 8-K (Date of Report: March 10, 2015) and incorporated herein by reference) (Commission File Number 001-12215)
4.8	Form of 3.500% Senior Note due 2025 (filed as an Exhibit to the Company's current report on Form 8-K (Date of Report: March 10, 2015) and incorporated herein by reference) (Commission File Number 001-12215)
4.9	Form of 4.700% Senior Note due 2045 (filed as an Exhibit to the Company's current report on Form 8-K (Date of Report: March 10, 2015) and incorporated herein by reference) (Commission File Number 001-12215)
4.10	Form of 3.450% Senior Note due 2026 (filed as an Exhibit to the Company’s current report on Form 8-K (Date of Report: May 23, 2016) and incorporated herein by reference) (Commission File Number 001-12215)
4.11	Indenture dated as of June 27, 2001, among the Company, the Subsidiary Guarantors, and the Trustee (filed as an Exhibit to the Company's current report on Form 8-K (Date of Report: June 27, 2001) and incorporated herein by reference) (Commission File Number 001-12215)

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4.12	First Supplemental Indenture, dated as of June 27, 2001, among the Company, the Subsidiary Guarantors, and The Bank of New York (filed as an Exhibit to the Company's current report on Form 8-K (Date of Report: June 27, 2001) and incorporated herein by reference) (Commission File Number 001-12215)
4.13	Second Supplemental Indenture, dated as of November 26, 2001, among the Company, the Subsidiary Guarantors, and The Bank of New York (filed as an Exhibit to the Company's current report on Form 8-K (Date of Report: November 26, 2001) and incorporated herein by reference) (Commission File Number 001-12215)
4.14	Third Supplemental Indenture, dated as of April 4, 2002, among the Company, the Additional Subsidiary Guarantors, and The Bank of New York (filed as an Exhibit to the Company's current report on Form 8-K (Date of Report: April 1, 2002) and incorporated herein by reference) (Commission File Number 001-12215)
4.15	Fourth Supplemental Indenture dated as of March 19, 2003, among Unilab Corporation (f/k/a Quest Diagnostics Newco Incorporated), the Company, The Bank of New York, and the Subsidiary Guarantors (filed as an Exhibit to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2003 and incorporated herein by reference) (Commission File Number 001-12215)
4.16	Fifth Supplemental Indenture dated as of April 16, 2004, among Unilab Acquisition Corporation (d/b/a FNA Clinics of America), the Company, The Bank of New York, and the Subsidiary Guarantors (filed as an Exhibit to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2004 and incorporated herein by reference) (Commission File Number 001-12215)
4.17	Sixth Supplemental Indenture dated as of October 31, 2005, among the Company, The Bank of New York, and the Subsidiary Guarantors (filed as an Exhibit to the Company's current report on Form 8-K (Date of Report: October 31, 2005) and incorporated herein by reference) (Commission File Number 001-12215)
4.18	Seventh Supplemental Indenture dated as of November 21, 2005, among the Company, The Bank of New York, and the Subsidiary Guarantors (filed as an Exhibit to the Company's current report on Form 8-K (Date of Report: November 21, 2005) and incorporated herein by reference) (Commission File Number 001-12215)
4.19	Eighth Supplemental Indenture dated as of July 31, 2006, among the Company, The Bank of New York, and the Subsidiary Guarantors (filed as an Exhibit to the Company's current report on Form 8-K (Date of Report: July 31, 2006) and incorporated herein by reference) (Commission File Number 001-12215)
4.20	Ninth Supplemental Indenture dated as of September 30, 2006, among the Company, The Bank of New York, and the Subsidiary Guarantors (filed as an Exhibit to the Company's current report on Form 8-K (Date of Report: September 30, 2006) and incorporated herein by reference) (Commission File Number 001-12215)
4.21	Tenth Supplemental Indenture dated as of June 22, 2007, among the Company, The Bank of New York, and the Subsidiary Guarantors (filed as an Exhibit to the Company's current report on Form 8-K (Date of Report: June 19, 2007) and incorporated herein by reference) (Commission File Number 001-12215)
4.22	Eleventh Supplemental Indenture dated as of June 22, 2007, among the Company, The Bank of New York, and the Additional Subsidiary Guarantors (filed as an Exhibit to the Company's current report on Form 8-K (Date of Report: June 19, 2007) and incorporated herein by reference) (Commission File Number 001-12215)
4.23	Twelfth Supplemental Indenture dated as of June 25, 2007, among the Company, The Bank of New York, and the Additional Subsidiary Guarantors (filed as an Exhibit to the Company's current report on Form 8-K (Date of Report: June 19, 2007) and incorporated herein by reference) (Commission File Number 001-12215)
4.24	Thirteenth Supplemental Indenture dated as of November 17, 2009, among the Company, The Bank of New York, and the Subsidiary Guarantors (filed as an Exhibit to the Company's current report on Form 8-K (Date of Report: November 17, 2009) and incorporated herein by reference) (Commission File Number 001-12215)
4.25	Fourteenth Supplemental Indenture dated as of March 24, 2011, among the Company, The Bank of New York, and the Subsidiary Guarantors (filed as an Exhibit to the Company's current report on Form 8-K (Date of Report: March 21, 2011) and incorporated herein by reference) (Commission File Number 001-12215)

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4.26	Fifteenth Supplemental Indenture dated as of November 30, 2011, among the Company, The Bank of New York Mellon Trust Company, N.A., as successor trustee to The Bank of New York, and the Subsidiary Guarantors (filed as an Exhibit to the Company's 2011 annual report on Form 10-K and incorporated herein by reference) (Commission File Number 001-12215)
4.27	Sixteenth Supplemental Indenture dated as of March 12, 2014, among the Company, The Bank of New York Mellon Trust Company, N.A., (filed as an Exhibit to the Company's current report on Form 8-K and incorporated herein by reference) (Commission File Number 001-12215)
4.28	Seventeenth Supplemental Indenture dated as of March 10, 2015, among the Company and The Bank of New York Mellon (filed as an Exhibit to the Company’s current report on Form 8-K (Date of Report: March 5, 2015) and incorporated herein by reference) (Commission File Number 001-12215)
4.29	Eighteenth Supplemental Indenture dated as of May 26, 2016, among the Company and The Bank of New York Mellon (filed as an Exhibit to the Company’s current report on Form 8-K (Date of Report: May 23, 2016) and incorporated herein by reference) (Commission File Number 001-12215)
10.1‡	Amended and Restated Employee Stock Purchase Plan (filed as an Exhibit to the Company's quarterly report on form 10-Q for the quarter ended June 30, 2016 and incorporated herein by reference) (Commission file number 001-12215)
10.2‡	Amended and Restated Quest Diagnostics Incorporated Employee Long-Term Incentive Plan as amended May 15, 2015 (filed as an exhibit to the Company's 2015 quarterly report on Form 10-Q for the quarter ended June 30, 2015 and incorporated herein by reference) (Commission file number 001-12215)
10.3‡	Form of Equity Award Agreement dated as of February 23, 2015 (filed as an exhibit to the Company’s 2015 annual report on Form 10-K and incorporated herein by reference) (Commission file number 001-12215)
10.4‡	Quest Diagnostics Supplemental Deferred Compensation Plan (Post 2004) amended December 22, 2008 (filed as an Exhibit to the Company's 2008 annual report on Form 10-K and incorporated herein by reference) (Commission File Number 001-12215)
10.5‡	Amendment No. 1 dated November 27, 2012 to Quest Diagnostics Supplemental Deferred Compensation Plan (Post 2004) amended December 22, 2008 (filed as an Exhibit to the Company's 2012 annual report on Form 10-K and incorporated herein by reference) (Commission File Number 001-12215)
10.6‡	Quest Diagnostics Supplemental Deferred Compensation Plan (Pre-2005) amended and restated November 27, 2012 (filed as an Exhibit to the Company's 2012 annual report on Form 10-K and incorporated herein by reference) (Commission File Number 001-12215)
10.7‡	Quest Diagnostics Incorporated Senior Management Incentive Plan (filed as Appendix A to the Company's Definitive Proxy Statement dated March 28, 2003 and incorporated herein by reference) (Commission File Number 001-12215)
10.8‡*	Amended and Restated Quest Diagnostics Incorporated Executive Officer Severance Plan as amended February 20, 2017
10.9‡	AmeriPath Group Holdings, Inc. 2006 Stock Option and Restricted Stock Purchase Plan (filed as an Exhibit to the Company's registration statement on Form S-8 (Registration No. 333-143889 filed with the Commission on June 19, 2007 and incorporated herein by reference) (Commission File Number 333-143889)
10.10‡	Amendment dated as of August 17, 2007 to the AmeriPath Group Holdings, Inc. 2006 Stock Option and Restricted Stock Purchase Plan (filed as an Exhibit to the Company's 2007 annual report on Form 10-K and incorporated herein by reference) (Commission File Number 001-12215)

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10.11‡	The Profit Sharing Plan of Quest Diagnostics Incorporated (Amendment and Restatement, effective as of January 1, 2016) (filed as an exhibit to the Company’s 2015 annual report on Form 10-K and incorporated herein by reference) (Commission file number 001-12215)
10.12‡	Quest Diagnostics Incorporated Amended and Restated Deferred Compensation Plan For Directors as amended effective January 1, 2016 (filed as an exhibit to the Company’s 2015 annual report on Form 10-K and incorporated herein by reference) (Commission file number 001-12215)
10.13‡	Amended and Restated Quest Diagnostics Incorporated Long-Term Incentive Plan for Non-Employee Directors as amended December 3, 2015 (filed as an exhibit to the Company’s 2015 annual report on Form 10-K and incorporated herein by reference) (Commission file number 001-12215)
10.14‡	Form of Non-Employee Director Equity Award Agreement (filed as an Exhibit to the Company's 2011 annual report on Form 10-K and incorporated herein by reference) (Commission File Number 001-12215)
10.15‡	Form of Non-Employee Director Equity Award Agreement dated May 15, 2015 (filed as an exhibit to the Company’s 2015 annual report on Form 10-K and incorporated herein by reference) (Commission file number 001-12215)
10.16‡	Form of Non-Employee Director Elective Option Award Agreement (filed as an Exhibit to the Company's 2011 annual report on Form 10-K and incorporated herein by reference) (Commission File Number 001-12215)
10.17‡	Employment Agreement between Stephen H. Rusckowski and Quest Diagnostics Incorporated, dated April 3, 2012 (filed as an Exhibit to the Company's current report on Form 8-K (Date of Report: April 9, 2012) and incorporated herein by reference) (Commission File Number 001-12215)
10.18‡	Amendment to Employment Agreement between Stephen H. Rusckowski and Quest Diagnostics Incorporated, dated June 11, 2015 (filed as an Exhibit to the Company’s current report on Form 8-K (Date of Report: June 11, 2015) and incorporated herein by reference) (Commission File Number 001-12215)
10.19‡	Aircraft Timesharing Agreement dated as of December 17, 2013 between Quest Diagnostics Incorporated and Stephen H. Rusckowski (filed as an Exhibit to the Company’s 2013 annual report on Form 10-K and incorporated herein by reference) (Commission File Number 001-12215)
11.1	Statement re: Computation of Earnings Per Common Share (the calculation of per share earnings is in Part II, Item 8, Note 3 to the consolidated financial statements (Earnings Per Share) and is omitted in accordance with Item 601(b)(11) of Regulation S-K)
21.1*	Subsidiaries of Quest Diagnostics Incorporated
23.1*	Consent of PricewaterhouseCoopers LLP
24.1*	Power of Attorney (included on signature page)
31.1*	Rule 13a-14(a) Certification of Chief Executive Officer
31.2*	Rule 13a-14(a) Certification of Chief Financial Officer
32.1**	Section 1350 Certification of Chief Executive Officer
32.2**	Section 1350 Certification of Chief Financial Officer
101.INS*	dgx-20161231.xml

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101.SCH*	dgx-20161231.xsd
101.CAL*	dgx-20161231_cal.xml
101.DEF*	dgx-20161231_def.xml
101.LAB*	dgx-20161231_lab.xml
101.PRE*	dgx-20161231_pre.xml
*	Filed herewith.
**	Furnished herewith.
‡	Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 15(b) of Form 10-K.

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