Item 16. Form 10-K Summary

None.

Signatures

Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 23, 2018.

	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 23, 2018.

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

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 2013 through 2017 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,
	2017				2016				2015				2014				2013
	(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	$	7,709			$	7,515			$	7,493			$	7,435			$	7,146
Operating income	1,165				1,277				1,399				983				1,475
Income from continuing operations	824				696				753				587				848
Income from discontinued operations, net of taxes	—				—				—				5				35
Net income	824				696				753				592				883
Less: Net income attributable to noncontrolling interests	52				51				44				36				34
Net income attributable to Quest Diagnostics	$	772			$	645			$	709			$	556			$	849
Amounts attributable to Quest Diagnostics' stockholders:
Income from continuing operations	$	772			$	645			$	709			$	551			$	814
Income from discontinued operations, net of taxes	—				—				—				5				35
Net income	$	772			$	645			$	709			$	556			$	849

Earnings per share attributable to Quest Diagnostics' common stockholders - basic:
Income from continuing operations	$	5.63			$	4.58			$	4.92			$	3.80			$	5.35
Income from discontinued operations	—				—				—				0.03				0.23
Net income	$	5.63			$	4.58			$	4.92			$	3.83			$	5.58
Earnings per share attributable to Quest Diagnostics' common stockholders - diluted:
Income from continuing operations	$	5.50			$	4.51			$	4.87			$	3.78			$	5.31
Income from discontinued operations	—				—				—				0.03				0.23
Net income	$	5.50			$	4.51			$	4.87			$	3.81			$	5.54
Dividends per common share	$	1.80			$	1.65			$	1.52			$	1.32			$	1.20

	Year Ended December 31,
	2017				2016				2015				2014				2013
	(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	$	137			$	359			$	133			$	192			$	187
Total assets	10,503				10,100				9,962				9,857				8,930
Long-term debt	3,748				3,728				3,492				3,224				3,102
Total debt	3,784				3,734				3,651				3,742				3,314
Redeemable noncontrolling interest	80				77				70				—				—
Other Data:
Net cash provided by operating activities	$	1,175			$	1,069			$	821			$	944			$	667
Net cash (used in) provided by investing activities	(805		)		(152		)		(362		)		(1,025		)		328
Net cash (used in) provided by financing activities	(592		)		(691		)		(518		)		86				(1,121		)
Capital expenditures	252				293				263				308				231
Purchases of treasury stock	465				590				224				132				1,037
Dividends paid	247				223				212				187				185

(a)	During the third quarter of 2006, we completed the wind down of NID, a test kit manufacturing subsidiary. As a result, the NID operations 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.

(b)

On May 1, 2017, we completed the acquisition of the outreach laboratory service business of PeaceHealth Laboratories ("PHL"). On July 14, 2017, we completed the acquisition of Med Fusion, LLC and Clearpoint Diagnostic Laboratories, LLC ("Med Fusion"). On September 28, 2017, we completed the acquisition of the outreach laboratory service businesses of two hospitals of Hartford HealthCare Corporation ("HHC"), The William W. Backus Hospital and The Hospital of Central Connecticut. On December 1, 2017, we completed the acquisition of Cleveland HeartLab, Inc. ("CHL"). On December 7, 2017, we completed the acquisition of certain assets of the clinical and anatomic pathology laboratory business of Shiel Holdings, LLC ("Shiel"). Consolidated operating results for 2017 include the results of operations of PHL, Med Fusion, HHC, CHL and Shiel subsequent to the closing of the applicable acquisition. For further details regarding our acquisitions, see Note 5 to the consolidated financial statements.

(c)	Operating income included:

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

•	pre-tax charges of $12 million, primarily a result of non-cash asset impairment charges and incremental costs incurred as a result of hurricanes and costs incurred related to certain legal matters.

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

•	a net pre-tax gain of $2 million, primarily a result of a gain on the sale of an interest in an equity method investment partially offset by non-cash asset impairment charges associated with an investment;

•	$1 million of pre-tax restructuring and integration charges associated with our Q2 Solutions joint venture;

•

a provisional estimated income tax benefit of $106 million associated with the Tax Cuts and Jobs Act, including a deferred income tax benefit of $115 million primarily due to the remeasurement of our net deferred tax liabilities and reserves at the new combined federal and state tax rate, partially offset by $9 million of current tax expense primarily due to the mandatory repatriation toll charge on undistributed foreign earnings and profits;

•	excess tax benefits associated with stock-based compensation arrangements of $37 million; and

•	income tax expense of $3 million primarily a result of recording a valuation allowance against certain net operating loss carryforwards in a geography impacted by hurricanes.

Net cash provided by operating activities benefited from a decrease in tax payments associated with the realization of a $62 million deferred tax benefit.

Net cash used in investing activities included a $25 million release of escrow proceeds received in 2017 associated with the sale of our Focus Diagnostics products business ("Focus Sale").

(d)

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 HHC. 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 Focus Sale: our Focus Diagnostics products business has not been classified as a discontinued operation. For further details regarding dispositions, see Note 6 to the consolidated financial statements.

(e)	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 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 the 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 of $7 million associated with certain investments;

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

•	excess tax benefits associated with stock-based compensation arrangements of $9 million.

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 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.

(f)

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 IQVIA Holdings Inc., Q2 Solutions ("Clinical Trials Contribution"). Our clinical trials testing business was not classified as a discontinued operation.

(g)	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. ("Summit Health") 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.

(h)

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. 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.

(i)	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.

(j)

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.

(k)	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.

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

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

Our Company

Diagnostic Information Services

Quest Diagnostics empowers people to take action to improve health outcomes. We use our extensive database of clinical lab results to derive diagnostic insights that reveal new avenues to identify and treat disease, inspire healthy behaviors and improve healthcare management. Our diagnostic information services business ("DIS") provides information and insights based on the industry-leading menu of routine, non-routine and advanced clinical testing and anatomic pathology testing, and other diagnostic information services. We provide services to a broad range of customers, including patients, clinicians, hospitals, independent delivery networks ("IDNs"), health plans, employers 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 and our connectivity resources, including call centers and mobile paramedics, nurses and other health and wellness professionals. We are the world's leading provider of diagnostic information services. We provide interpretive consultation with one of the largest medical and scientific staffs in the industry. Our DIS business makes up over 90% of our consolidated net revenues. During 2017, we processed approximately 164 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 for life insurers and healthcare organizations and clinicians. We are the leading provider of risk assessment services for the life insurance industry. In addition, we offer healthcare organizations and clinicians robust information technology solutions. 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 and the Clinical Trials Contribution, see Note 6 to the consolidated financial statements.

2017 Highlights

•	Our total net revenues of $7.71 billion were 2.6% above the prior year. The Focus Sale negatively impacted revenue growth by 0.3% and we estimate that hurricanes negatively impacted revenue growth by approximately 0.4%.

•	In our DIS business:

◦	Revenues of $7.4 billion increased by 3.3% compared to the prior year.

◦	Volume, measured by the number of requisitions, increased 2.3% compared to the prior year.

◦	Revenue per requisition increased 1.0% compared to the prior year.

•	DS revenues of $339 million were 10.0% below the prior year primarily due to the Focus Sale.

•

Net income attributable to Quest Diagnostics' stockholders was $772 million, or $5.50 per diluted share, in 2017, compared to $645 million, or $4.51 per diluted share, in 2016. The increase of 22.0% in diluted earnings per share was primarily due to a tax benefit recorded as a result of the Tax Cuts and Jobs Act ("TCJA"). We estimate that hurricanes negatively impacted diluted earnings per share by approximately $0.14.

•	Net cash provided by operating activities was $1.2 billion in 2017, compared to $1.1 billion in the prior year.

Two Point Strategy

Our two point strategy is described in detail in "Item 1. Business: Our Strategy and Strengths." We continued to execute on our strategy during 2017 as follows:

Acquisition of the Outreach Laboratory Service Business of PeaceHealth Laboratories

On May 1, 2017, we completed the acquisition of the outreach laboratory services operations of PeaceHealth Laboratories ("PHL"), in an all-cash transaction for $101 million. The acquired outreach laboratory service business of PHL is included in our DIS business. Under a professional laboratory services agreement, Quest will also manage 11 laboratories, which PHL will continue to own.

Acquisition of Med Fusion and Clearpoint

On July 14, 2017, we completed the acquisition of Med Fusion, LLC and Clearpoint Diagnostic Laboratories, LLC ("Med Fusion") in an all-cash transaction for $150 million. Med Fusion provides precision medicine diagnostics to aid cancer treatment nationwide and the acquired businesses form the Company's center of excellence in precision diagnostics for oncology. The acquired laboratory service businesses are included in our DIS business.

Acquisition of the Outreach Laboratory Service Business of The William W. Backus Hospital and The Hospital of Central Connecticut

On September 28, 2017, we completed the acquisition of the outreach laboratory service businesses of two hospitals of Hartford HealthCare Corporation, The William W. Backus Hospital and The Hospital of Central Connecticut in an all-cash transaction for $30 million. The acquired outreach laboratory service businesses are included in our DIS business.

Acquisition of Cleveland HeartLab, Inc.

On December 1, 2017, we completed the acquisition of Cleveland HeartLab, Inc. ("CHL") in an all-cash transaction for $94 million, net of $12 million cash acquired. CHL is a specialty clinical laboratory and disease management company, which forms the basis for our advanced diagnostics center of excellence in cardiovascular testing. The acquired business is included in our DIS business.

Acquisition of the Clinical and Anatomic Pathology Laboratory Business of Shiel Holdings, LLC

On December 7, 2017, we completed the acquisition of certain assets of the clinical and anatomic pathology laboratory business of Shiel Holdings, LLC ("Shiel") in an all-cash transaction for $176 million, which consisted of cash consideration of $170 million and contingent consideration estimated at $6 million. The contingent consideration arrangement is dependent upon the achievement of certain testing volume benchmarks. Shiel serves the New York-New Jersey metropolitan area. The acquired business is included in our DIS business.

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

Collaboration with Wal-Mart

In June 2017, we announced our collaboration with Wal-Mart Stores, Inc. ("Wal-Mart") to help improve access to care and, over time, help lower healthcare costs through providing basic healthcare services. The collaboration has launched with a select number of co-branded sites opening within Wal-Mart stores that are initially providing laboratory testing services. Over time, service offerings are expected to expand to include other basic healthcare services.

Invigorate Program

We are engaged in a multi-year program called Invigorate, which is designed to reduce our cost structure and improve our performance. We delivered more than $700 million in run-rate savings (compared to 2011) as we exited 2014, and delivered more than $1.3 billion in run rate savings (compared to 2011) as we exited 2017, exceeding our goal that we announced in November 2014.

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 exited 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. In February 2017, we developed high-level estimates of the pre-tax charges expected to be incurred in 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.

During 2017 we incurred $90 million of pre-tax charges including $23 million of employee separation costs and other restructuring related costs with the remainder primarily consisting of systems conversion and integration costs. From 2015 through December 31, 2017, the cumulative pre-tax charges incurred in connection with the Invigorate program were $242 million, including $73 million of cumulative employee separation costs and other restructuring related costs.

For further details of the Invigorate program and associated costs, 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.

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), preauthorization 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 results of operations. As previously mentioned, there could be a shift to capitation arrangements where we agree to a predetermined monthly reimbursement rate for each member enrolled in a restricted plan, generally regardless of the number or cost of services provided by us. In both 2017 and 2016, 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 ("CLFS") and the Medicare Physician Fee Schedule established under Part B of the Medicare program have been subject to change, including each year. On November 17, 2017,

the Centers for Medicare and Medicaid Services ("CMS") finalized the 2018 Medicare reimbursement rates for clinical laboratory tests under the CLFS pursuant to Protecting Access to Medicare Act ("PAMA"). The Company expects the impact on our CLFS based revenues (in 2017 CLFS revenues comprised 12% of our consolidated net revenues) as a result of PAMA to be a reduction of approximately 4% in 2018, and approximately 10% in both 2019 and 2020. PAMA calls for further revision of the Medicare Clinical Laboratory Fee Schedule for years after 2020, based on future surveys of market rates; further reduction in reimbursement may result from such revisions. Excluding the impact of PAMA we expect reimbursement pressure for our DIS business in 2018 to remain less than 1%, with PAMA adding an additional 0.5%.

On December 22, 2017, the President signed the TCJA into law. Pursuant to the law, among other changes to U.S. corporate income tax laws, the federal corporate statutory income tax rate is reduced from 35% to 21% effective for 2018; and a mandatory deemed repatriation of post-1986 undistributed foreign earnings and profits will result in a repatriation toll charge. Our activities are primarily in the United States, and, as a result, we expect the impact of the reduction of the federal corporate statutory tax rate to have a positive impact on our results of operations and cash flows. The estimated provisional repatriation toll charge of $9 million was not significant due to our limited international operations.

In addition, 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. We also believe that PAMA may be a further catalyst for consolidation as diagnostic information services providers realize lower Medicare reimbursement rates and large diagnostic information services providers may be able to increase their share of the overall diagnostic information services industry due to their large networks and lower cost structures.

For 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, 2017 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 endeavor to increase the use of electronic ordering to reduce the number of requisitions that we receive from healthcare providers with missing or incorrect billing information. We believe that our collection and 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 2017 applicable to each payer group:

	% of		% of
	DIS		DIS
	Volume		Revenues
Healthcare Insurers (including coinsurance and deductible responsibilities)	47		51
Government Payers	15		17
Client Payers	37		29
Patients	1		3

The following table shows net accounts receivable as of December 31, 2017 applicable to each payer group:

	% of
	Consolidated
	Net Accounts
	Receivable
Healthcare Insurers	19
Government Payers	14
Client Payers	42
Patients (including coinsurance and deductible responsibilities)	20
Total DIS	95

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, 2017 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 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 in 2017:

•	DIS business;

•	Risk assessment services business which is part of our DS businesses

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

Goodwill is evaluated for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The annual impairment test includes an option to perform a qualitative assessment of whether it is more-likely-than-not that a reporting unit's fair value is less than its carrying value; the qualitative analysis may be performed prior to, or as an alternative to, performing a quantitative goodwill impairment test. In evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying value, we assess relevant events and circumstances, such as: (a) macroeconomic conditions; (b) industry and market considerations; (c) cost factors; (d) overall financial performance; (e) other relevant entity-specific events; (f) events affecting a reporting unit; and (g) a sustained decrease in share price. If, after assessing the totality of events or circumstances, we determine that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value, then we are required to perform the quantitative goodwill impairment test. Otherwise, no further analysis is required. Additionally, the Company's policy is to update the fair value calculation of its reporting units and perform the quantitative goodwill impairment test on a periodic basis.

The quantitative impairment test involves the comparison of the fair value of the reporting unit to its carrying value. If the carrying value is greater than our estimate of fair value, an impairment loss will be recognized in the amount of the excess. We calculate the fair value of each reporting unit using either 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. For the year ended December 31, 2017, in accordance with our policy to perform the quantitative test on a periodic basis, we updated the fair value calculation of our reporting units, performed the quantitative impairment test and concluded that goodwill was not impaired.

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.

The fair value of each stock option award granted was estimated on the date of grant using a Black-Scholes option-valuation model. Estimating the fair value of stock option awards on the date of grant using the Black-Scholes 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, 2017 accounted for more than 90% of our consolidated net revenues. Our other operating segments consist of our DS businesses. For further details regarding our business segment information, 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)
	2017				2016				2015				2017 vs. 2016				2016 vs. 2015				2017 vs. 2016			2016 vs. 2015
	(dollars in millions, except per share data)
Net revenues:
DIS business	$	7,370			$	7,138			$	6,965			$	232			$	173			3.3	%		2.5	%
DS businesses	339				377				528				(38		)		(151		)		(10.0	)		(28.5	)
Total net revenues	$	7,709			$	7,515			$	7,493			$	194			$	22			2.6	%		0.3	%
Operating costs and expenses and other operating income:
Cost of services	$	4,719			$	4,616			$	4,657			$	103			$	(41	)		2.2	%		(0.9	)%
Selling, general and administrative	1,750				1,681				1,679				69				2				4.1			0.1
Amortization of intangible assets	74				72				81				2				(9		)		2.5			(10.7	)
Gain on disposition of business	—				(118		)		(334		)		118				216				NM			NM
Other operating expense (income), net	1				(13		)		11				14				(24		)		NM			NM
Total operating costs and expenses, net	$	6,544			$	6,238			$	6,094			$	306			$	144			4.9	%		2.4	%
Operating income	$	1,165			$	1,277			$	1,399			$	(112	)		$	(122	)		(8.8	)%		(8.7	)%

Other income (expense):
Interest expense, net	$	(151	)		$	(143	)		$	(153	)		$	8			$	(10	)		5.3	%		(6.3	)%
Other income (expense), net	16				(48		)		(143		)		(64		)		(95		)		NM			NM
Total non-operating expenses, net	$	(135	)		$	(191	)		$	(296	)		$	(56	)		$	(105	)		(29.1	)%		(35.1	)%
Income tax expense	$	(241	)		$	(429	)		$	(373	)		$	(188	)		$	56			(43.9	)%		15.3	%
Effective income tax rate	23.4		%		39.5		%		33.8		%		-1610 bps				570 bps				NM			NM
Equity in earnings of equity method investees, net of taxes	$	35			$	39			$	23			$	(4	)		$	16			(9.6	)%		73.3	%
Net income attributable to Quest Diagnostics' stockholders	$	772			$	645			$	709			$	127			$	(64	)		19.8	%		(9.1	)%
Diluted earnings per common share attributable to Quest Diagnostics’ common stockholders	$	5.50			$	4.51			$	4.87			$	0.99			$	(0.36	)		22.0	%		(7.4	)%

NM - Not Meaningful

bps - Basis Points

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

	2017			2016			2015
Net revenues:
DIS business	95.6	%		95.0	%		93.0	%
DS businesses	4.4			5.0			7.0
Total net revenues	100.0	%		100.0	%		100.0	%
Operating costs and expenses and other operating income:
Cost of services	61.2	%		61.4	%		62.1	%
Selling, general and administrative	22.7			22.4			22.4
Amortization of intangible assets	1.0			1.0			1.1
Gain on disposition of business	—			(1.5	)		(4.4	)
Other operating expense (income), net	—			(0.3	)		0.1
Total operating costs and expenses, net	84.9	%		83.0	%		81.3	%
Operating income	15.1	%		17.0	%		18.7	%
Bad debt	4.1	%		4.1	%		4.0	%

Operating Results

Results for the year ended December 31, 2017 were affected by certain items that on a net basis benefited earnings per share by a net $0.50 as follows:

•	excess tax benefits associated with stock-based compensation arrangements of $37 million, or $0.27 per diluted share, recorded in income tax expense;

•

a provisional estimated income tax benefit of $106 million, or $0.77 per diluted share, associated with the TCJA, including a deferred income tax benefit of $115 million primarily due to the remeasurement of our net deferred tax liabilities and reserves at the new combined federal and state tax rate, partially offset by $9 million of current tax expense primarily due to the mandatory repatriation toll charge on undistributed foreign earnings and profits;

•

pre-tax charges of $106 million ($45 million in cost of services, $60 million in selling, general and administrative expenses and $1 million in equity in earnings of equity method investees, net of taxes), or $0.47 per diluted share, primarily associated with systems conversions, integration and workforce reductions incurred in connection with further restructuring and integrating our business; and

•

net pre-tax charges of $10 million ($5 million in cost of services, $7 million in selling, general and administrative expenses and $2 million in other income (expense), net), or $0.07 per diluted share primarily associated with non-cash asset impairment charges associated with an investment, non-cash asset impairment charges and incremental costs incurred as a result of hurricanes, and costs incurred related to certain legal matters, partially offset by gain on the sale of an interest in an equity method investment.

Results for the year ended December 31, 2016 were affected by certain items that on a net basis reduced earnings per diluted share by a net $0.20 as follows:

•	excess tax benefits associated with stock-based compensation arrangements of $9 million, or $0.06 per diluted share, recorded in income tax expense;

•	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 expense (income), 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 loss on retirement of debt associated with the March 2016 cash tender offer ("2016 Tender Offer"), in which we purchased $73 million of our Senior Notes due 2037 and $127 million of our Senior Notes due 2040, recorded in other income (expense), 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 expense (income), net and pre-tax costs of $7 million in other income (expense), 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 net 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 income (expense), 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 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 expense (income), net and $(2) million in other income (expense), 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.

Net Revenues

Net revenues for the year ended December 31, 2017 increased by 2.6% compared to the prior year. The Focus Sale negatively impacted revenue growth by 0.3% and we estimate that hurricanes negatively impacted revenue growth by approximately 0.4%.

DIS revenues for the year ended December 31, 2017 increased by 3.3% compared to the prior year, which reflects continuing expansion of hospital health system relationships and growth in non-routine (including advanced diagnostics) testing. Organic growth (growth excluding the impact of acquisitions) and acquisitions contributed approximately 2.1% and 1.2%, respectively, to DIS revenue growth. DIS volume, measured by the number of requisitions, increased 2.3%, with organic growth and acquisitions contributing approximately 1.4% and 0.9%, respectively, to DIS volume growth. Revenue per requisition increased by 1.0% compared to the prior year. Revenue per requisition benefited from favorable test mix, driven in part by acquisitions, partially offset by moderate pricing pressure of less than 1% and lower revenue per requisition associated with our growth in professional lab services engagements.

Combined revenues in our DS businesses for the year ended December 31, 2017 decreased by 10.0% compared to the prior year primarily due to the Focus Sale.

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 and acquisitions contributed 1.7% and 0.8%, respectively, to DIS revenue growth. Our performance reflected 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.

Cost of Services

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

Cost of services increased $103 million for the year ended December 31, 2017 compared to the prior year. The increases were primarily driven by additional operating costs associated with our acquisitions, higher compensation and benefits expense, and higher supplies expense related to increased testing volume.

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 expense 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.

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 $69 million for the year ended December 31, 2017 compared to the prior year. The increase in SG&A was primarily driven by higher systems conversion, integration and workforce reduction costs associated with our Invigorate program, additional operating costs associated with our acquisitions and higher performance-based compensation costs. Bad debt expense as a percentage of net revenues for the year ended December 31, 2017 was consistent with the prior year.

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.

Amortization of Intangible Assets

The $2 million increase in amortization of intangible assets for the year ended December 31, 2017 compared to the prior year was associated with our acquisitions.

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.

Gain on Disposition of Business

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

Other Operating Expense (Income), net

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

For the year ended December 31, 2016, other operating expense (income), 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 expense (income), 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.

Interest Expense, net

Interest expense, net for the year ended December 31, 2017 increased by $8 million compared to the prior year. The increase in interest expense, net was primarily driven by higher interest rates associated with our variable rate indebtedness combined with higher average outstanding indebtedness.

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.

Other Income (Expense), 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, 2017, other income (expense), net included $13 million of gains associated with investments in our deferred compensation plans and a $7 million gain on the sale of an interest in an equity method investment, which are partially offset by non-cash asset impairment charges associated with certain investments of $6 million.

For the year ended December 31, 2016, other income (expense), 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 ended December 31, 2015, other income (expense), 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, 2017, we recorded a provisional estimated income tax benefit of $106 million, associated with the TCJA, including a deferred income tax benefit of $115 million primarily due to the remeasurement of our net deferred tax liabilities and reserves at the new combined federal and state tax rate, partially offset by $9 million of current tax expense primarily due to the mandatory repatriation toll charge on undistributed foreign earnings and profits. In addition, income tax expense included $37 million of excess tax benefits associated with stock-based compensation arrangements.

For the year ended December 31, 2016, income tax expense included $84 million of income taxes associated with the Focus Sale, partially offset by $9 million of excess tax benefits associated with stock-based compensation arrangements and an income tax benefit of $18 million associated with the 2016 Tender Offer. The income tax expense associated with the Focus Sale 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.

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.

Our effective income tax rate for the year ended December 31, 2017 was positively impacted by a provisional estimated $106 million benefit associated with the TCJA and $37 million of excess tax benefits associated with stock-based compensation arrangements.

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, 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.

Equity in Earnings of Equity Method Investees, Net of Taxes

For the year ended December 31, 2017 there was a $4 million decrease in 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 compared to the prior year 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 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, 2017 and 2016, the fair value of our debt was estimated at approximately $4.0 billion and $3.9 billion, respectively, using quoted prices in active markets and yields for the same or similar types of borrowings, taking into account the underlying terms of the debt instruments. As of December 31, 2017 and 2016, the estimated fair value exceeded the carrying value of the debt by $247 million and $165 million, respectively. A hypothetical 10% increase in market interest rates (representing 31 and 33 basis points on average at December 31, 2017 and 2016, respectively) would potentially reduce the estimated fair value of our debt by approximately $90 million and $102 million as of December 31, 2017 and 2016, respectively.

Borrowings under our secured receivables credit facility and our senior unsecured revolving credit facility are subject to variable interest rates. Interest on our secured receivables credit facility is based on either a rate that is intended to approximate commercial paper rates for highly rated issuers or LIBOR, 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, 2017, the borrowing rate under our $750 million senior unsecured revolving credit facility was LIBOR plus 1.125%, however there were no borrowings outstanding. As of December 31, 2017, there were $30 million of outstanding borrowings under our $600 million secured receivables credit facility with a borrowing rate of 2.27%.

The notional amount of fixed-to-variable interest rate swaps as of both December 31, 2017 and 2016 was $1.2 billion. The aggregate fair value of the fixed-to-variable interest rate swaps was $89 million and $88 million, in a liability position, as of December 31, 2017 and 2016, respectively.

Based on our net exposure to interest rate changes, a hypothetical 10% change to the variable rate component of our variable rate indebtedness (representing 14 basis points) would not impact annual interest expense materially, assuming no changes to the debt outstanding as of December 31, 2017. A hypothetical 10% change in the forward one-month LIBOR curve (representing a 23 basis point change in the weighted average yield) would potentially change the fair value of our derivative liabilities by $18 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 $11 million as of December 31, 2017.

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

	2017				2016				2015
	(dollars in millions)
Net cash provided by operating activities	$	1,175			$	1,069			$	821
Net cash used in investing activities	(805		)		(152		)		(362		)
Net cash used in financing activities	(592		)		(691		)		(518		)
Net change in cash and cash equivalents	$	(222	)		$	226			$	(59	)

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, 2017, 2016 and 2015 totaled $137 million, $359 million and $133 million, respectively.

As of December 31, 2017, approximately 37% of our $137 million of consolidated cash and cash equivalents were held outside of the United States. Our current liquidity position does not require repatriation of these funds in order to fund operations in the United States. However, as a result of changes introduced by the TCJA, we may repatriate back to the United States the portion of these foreign funds not expected to be used to maintain or expand operations, including through acquisitions, outside of the United States.

Cash Flows from Operating Activities

Net cash provided by operating activities for the year ended December 31, 2017 was $1.2 billion, compared to $1.1 billion for the year ended December 31, 2016. This $106 million increase in cash provided by operating activities was primarily a result of:

•	a decrease in 2017 tax payments associated with the realization of a $62 million deferred tax benefit in 2017 and a $91 million tax payment in 2016 related to the Focus Sale;

•	$47 million of payments made in 2016 related to the retirement of debt; and

•	improved operating performance in 2017; partially offset by

•	$54 million of proceeds received in the third quarter of 2016 from the termination of interest swap agreements.

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.

Days sales outstanding, a measure of billing and collection efficiency, was 45 days, 47 days and 47 days as of December 31, 2017, 2016 and 2015, respectively.

Cash Flows from Investing Activities

Net cash used in investing activities for the year ended December 31, 2017 was $805 million, compared to $152 million for the year ended December 31, 2016. This $653 million increase in cash used in investing activities was a result of:

•	$442 million increase in cash paid for business acquisitions; and

•	$269 million decrease in proceeds from the disposition of businesses, primarily a result of the Focus Sale in 2016; partially offset by

•	$41 million decrease in capital expenditures; and

•	$25 million release of escrow proceeds received in 2017 associated with the Focus Sale.

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; 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.

Cash Flows from Financing Activities

Net cash used in financing activities for the year ended December 31, 2017 was $592 million, compared to $691 million for the year ended December 31, 2016. This $99 million decrease in cash used in financing activities was primarily a result of:

•	$125 million decrease in repurchases of our common stock (see "Share Repurchases" for further details) in 2017;

•	$80 million increase in bank overdrafts, which are generally settled in cash the following business day; and

•	$57 million increase in proceeds from the exercise of stock options, which was a result of an increase in the volume of stock options exercised over the past year; partially offset by

•	$23 million in net borrowings (proceeds from borrowings less repayments of debt) in 2017, compared to $145 million in net borrowings in 2016; and

•	$24 million increase in dividends paid.

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; 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.

In 2017, there were $205 million in cumulative borrowings primarily associated with the funding of the CHL and Shiel acquisitions in December 2017 and $175 million in repayments under our secured receivables credit facility. In 2017, there were no borrowings under our senior unsecured revolving credit facility.

In 2016, we completed the issuance of the $500 million principal amount of 3.45% senior notes due June 2026, 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.

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

Dividend Program

During each of the four quarters of 2017 and the fourth quarter of 2016, our Board of Directors declared a quarterly cash dividend of $0.45 per common share. During each of the first three quarters of 2016, our Board of Directors declared a quarterly cash dividend of $0.40 per common share. During each of the quarters of 2015, our Board of Directors declared a quarterly cash dividend of $0.38 per common share. We expect to fund future dividend payments with cash flows from operations.

On January 30, 2018, our Board of Directors authorized an 11% increase in our quarterly dividend from $0.45 to $0.50 per share, or $2.00 per share annually, commencing with the dividend payable on April 18, 2018.

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, 2017, $0.9 billion remained available under the share repurchase authorization.

For the year ended December 31, 2017, we repurchased 4.6 million shares of our common stock for $465 million.

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 an accelerated share repurchase program.

For the year ended December 31, 2015, we repurchased 3.2 million shares of our common stock for $224 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, 2017 (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		$	3,806			$	30			$	1,100			$	550			$	2,126
Capital lease obligations		42				6				7				2				27
Interest payments on outstanding debt		1,560				162				294				204				900
Operating leases		659				177				238				117				127
Purchase obligations		1,925				286				485				418				736
Merger consideration obligation		7				7				—				—				—
Total contractual obligations		$	7,999			$	668			$	2,124			$	1,291			$	3,916

Interest payments on our outstanding debt have been calculated after giving effect to our interest rate swap agreements, using the interest rates as of December 31, 2017 applied to the December 31, 2017 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. A full discussion regarding our acquisition of Shiel and the related merger consideration 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, 2017, our total liabilities associated with unrecognized tax benefits were approximately $115 million, which were excluded from the table above. We expect that these liabilities may decrease by less than $35 million within the next twelve months, primarily as a result of payments, settlements, expiration of statutes of limitations 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 a 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, 2017, the fair value of the redeemable noncontrolling interest on the consolidated balance sheet was $80 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, 2017, 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. 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. For further details regarding related party transactions with our equity method investees, see Note 19 to the consolidated financial statements.

Requirements and Capital Resources

We estimate that we will invest approximately $350 million to $400 million during 2018 for capital expenditures, to support and grow our existing operations, principally related to investments in information technology, laboratory equipment and facilities, including the planned start of our multi-year new laboratory construction in New Jersey, additional investments in our advanced and consumer growth strategies, as well as final buildout costs associated with the relocation of our headquarters to a lower cost location.

We expect the reduction of the federal corporate statutory tax rate under TCJA to result in tax savings and have a positive impact on our cash from operations, a portion of which we plan to reinvest back into the business and our people during 2018. The tax savings will also offset Medicare payment reductions as a result of PAMA during 2018.

As of December 31, 2017, $1.2 billion of borrowing capacity was available under our existing credit facilities consisting of $499 million available under our secured receivables credit facility and $750 million available under our senior unsecured revolving credit facility. The secured receivables credit facility includes a $250 million loan commitment which matures October 2018, and a $250 million loan commitment and a $100 million letter of credit facility which mature October 2019. The senior unsecured revolving credit facility matures in April 2019. 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, 2017 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, 2017 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, 2017 and issued their audit report on the Company's internal control over financial reporting included herein.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Quest Diagnostics Incorporated

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Quest Diagnostics Incorporated and its subsidiaries as of December 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, including the related notes and financial statement schedule of valuation accounts and reserves for each of the three years in the period ended December 31, 2017 listed under Item 15(a)2 (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Basis for Opinions

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Report of Management on Internal Control over Financial Reporting under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

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

F- 1

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 23, 2018

We have served as the Company’s auditor since 1995.

F- 2

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2017 AND 2016

(in millions, except per share data)

	2017				2016
Assets
Current assets:
Cash and cash equivalents	$	137			$	359
Accounts receivable, net of allowance for doubtful accounts of $269 and $265 as of December 31, 2017 and 2016, respectively	924				926
Inventories	95				82
Prepaid expenses and other current assets	150				155
Assets held for sale	—				9
Total current assets	1,306				1,531
Property, plant and equipment, net	1,145				1,029
Goodwill	6,335				6,000
Intangible assets, net	1,119				949
Investments in equity method investees	462				443
Other assets	136				148
Total assets	$	10,503			$	10,100
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses	$	1,021			$	975
Current portion of long-term debt	36				6
Total current liabilities	1,057				981
Long-term debt	3,748				3,728
Other liabilities	663				654
Commitments and contingencies
Redeemable noncontrolling interest	80				77
Stockholders’ equity:
Quest Diagnostics stockholders’ equity:
Common stock, par value $0.01 per share; 600 shares authorized as of both December 31, 2017 and 2016; 216 shares issued as of both December 31, 2017 and 2016	2				2
Additional paid-in capital	2,612				2,545
Retained earnings	7,138				6,613
Accumulated other comprehensive loss	(48		)		(72		)
Treasury stock, at cost; 81 shares and 79 shares as of December 31, 2017 and 2016, respectively	(4,783		)		(4,460		)
Total Quest Diagnostics stockholders’ equity	4,921				4,628
Noncontrolling interests	34				32
Total stockholders’ equity	4,955				4,660
Total liabilities and stockholders’ equity	$	10,503			$	10,100

The accompanying notes are an integral part of these statements.

F- 3

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015

(in millions, except per share data)

	2017				2016				2015
Net revenues	$	7,709			$	7,515			$	7,493
Operating costs and expenses and other operating income:
Cost of services	4,719				4,616				4,657
Selling, general and administrative	1,750				1,681				1,679
Amortization of intangible assets	74				72				81
Gain on disposition of business	—				(118		)		(334		)
Other operating expense (income), net	1				(13		)		11
Total operating costs and expenses, net	6,544				6,238				6,094
Operating income	1,165				1,277				1,399
Other income (expense):
Interest expense, net	(151		)		(143		)		(153		)
Other income (expense), net	16				(48		)		(143		)
Total non-operating expenses, net	(135		)		(191		)		(296		)
Income before income taxes and equity in earnings of equity method investees	1,030				1,086				1,103
Income tax expense	(241		)		(429		)		(373		)
Equity in earnings of equity method investees, net of taxes	35				39				23
Net income	824				696				753
Less: Net income attributable to noncontrolling interests	52				51				44
Net income attributable to Quest Diagnostics	$	772			$	645			$	709
Earnings per share attributable to Quest Diagnostics’ common stockholders:
Basic	$	5.63			$	4.58			$	4.92
Diluted	$	5.50			$	4.51			$	4.87
Dividends per common share	$	1.80			$	1.65			$	1.52

The accompanying notes are an integral part of these statements.

F- 4

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015

(in millions)

	2017				2016				2015
Net income	$	824			$	696			$	753
Other comprehensive income (loss):
Currency translation	20				(34		)		(15		)
Investment adjustments, net of taxes	3				(2		)		—
Net deferred loss on cash flow hedges, net of tax	1				2				3
Other	—				—				1
Other comprehensive income (loss)	24				(34		)		(11		)
Comprehensive income	848				662				742
Less: Comprehensive income attributable to noncontrolling interests	52				51				44
Comprehensive income attributable to Quest Diagnostics	$	796			$	611			$	698

The accompanying notes are an integral part of these statements.

F- 5

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015

(in millions)

	2017				2016				2015
Cash flows from operating activities:
Net income	$	824			$	696			$	753
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	270				249				304
Provision for doubtful accounts	315				308				297
Deferred income tax provision	9				37				112
Stock-based compensation expense	79				69				52
Gain on disposition of business	—				(118		)		(334		)
Other, net	(6		)		(6		)		6
Changes in operating assets and liabilities:
Accounts receivable	(298		)		(343		)		(262		)
Accounts payable and accrued expenses	(8		)		56				(24		)
Income taxes payable	16				42				(41		)
Termination of interest rate swap agreements	—				54				—
Other assets and liabilities, net	(26		)		25				(42		)
Net cash provided by operating activities	1,175				1,069				821
Cash flows from investing activities:
Business acquisitions, net of cash acquired	(581		)		(139		)		(67		)
Proceeds from disposition of business	1				270				—
Escrow proceeds associated with disposition of business	25				—				—
Capital expenditures	(252		)		(293		)		(263		)
Investment in equity method investee	—				—				(33		)
Decrease in investments and other assets	2				10				1
Net cash used in investing activities	(805		)		(152		)		(362		)
Cash flows from financing activities:
Proceeds from borrowings	205				1,869				2,453
Repayments of debt	(182		)		(1,724		)		(2,537		)
Purchases of treasury stock	(465		)		(590		)		(224		)
Exercise of stock options	130				73				60
Employee payroll tax withholdings on stock issued under stock-based compensation plans	(23		)		(10		)		(7		)
Dividends paid	(247		)		(223		)		(212		)
Distributions to noncontrolling interests	(51		)		(41		)		(42		)
Sale of noncontrolling interest in subsidiary	4				—				63
Payment of deferred business acquisition consideration	(3		)		—				(51		)
Other financing activities, net	40				(45		)		(21		)
Net cash used in financing activities	(592		)		(691		)		(518		)
Net change in cash and cash equivalents	(222		)		226				(59		)
Cash and cash equivalents, beginning of year	359				133				192
Cash and cash equivalents, end of year	$	137			$	359			$	133

The accompanying notes are an integral part of these statements.

F- 6

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015

(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, 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
Net income									772									45			817					7
Other comprehensive income, net of tax												24									24
Dividends declared									(247		)										(247		)
Distributions to noncontrolling interests																		(47		)	(47		)			(4		)
Issuance of common stock under benefit plans						11									12						23
Stock-based compensation expense						75									4						79
Exercise of stock options	3					4									126						130
Shares to cover employee payroll tax withholdings on stock issued under stock-based compensation plans						(23		)													(23		)
Purchases of treasury stock	(5	)													(465		)				(465		)
Sale of noncontrolling interest																		4			4
Balance, December 31, 2017	135		$	2		$	2,612		$	7,138		$	(48	)	$	(4,783	)	$	34		$	4,955				$	80

The accompanying notes are an integral part of these statements.

F- 7

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in millions unless otherwise indicated)

1. DESCRIPTION OF BUSINESS

Background

Quest Diagnostics Incorporated and its subsidiaries ("Quest Diagnostics" or the "Company") empower people to take action to improve health outcomes. The Company uses its extensive database of clinical lab results to derive diagnostic insights that reveal new avenues to identify and treat disease, inspire healthy behaviors and improve healthcare management. The Company's diagnostic information services business ("DIS") provides information and insights based on the industry-leading menu of routine, non-routine and advanced clinical testing and anatomic pathology testing, and other diagnostic information services. The Company provides services to a broad range of customers, including patients, clinicians, hospitals, independent delivery networks ("IDNs"), health plans, employers 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 and the Company's connectivity resources, including call centers and mobile paramedics, nurses and other health and wellness professionals. The Company is the world's leading provider of diagnostic information services. The Company provides interpretive consultation with one of the largest medical and scientific staffs in the industry 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 and healthcare organizations and clinicians. The Company is the leading provider of risk assessment services for the life insurance industry. In addition, the Company offers healthcare organizations and clinicians 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, 2017 and 2016. All significant intercompany accounts and transactions are eliminated in consolidation.

Income attributable to the minority interest in the Company's majority owned and controlled consolidated subsidiaries is recorded as net income attributable to noncontrolling interests in the consolidated statements of operations and the noncontrolling interest is reflected as a separate component of consolidated stockholders' equity.

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.

F- 8

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

Use of Estimates

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

Revenue Recognition

The Company 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 16%, 17% and 17% of the Company's consolidated net revenues for the years ended December 31, 2017, 2016 and 2015, respectively. 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- 9

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 and Restated 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 expense (income), 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- 10

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, 2017 and 2016, receivables due from government payers under the Medicare and Medicaid programs represent approximately 14% and 15%, 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 December 31, 2017 and 2016, receivables due from patients represent approximately 20% and 17%, respectively, 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. Refer to New Accounting Standards To Be Adopted within this Note 2 for impact of accounting standards update ("ASU") on revenue recognition.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are reported at realizable value, net of allowances for doubtful accounts, which are 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) and net realizable value.

Property, Plant and Equipment

Property, plant and equipment is recorded at cost. Major renewals and improvements are capitalized, while maintenance and repairs are expensed as incurred. Costs incurred for computer software developed or obtained for internal use are capitalized for application development activities and expensed as incurred for preliminary project activities and post-implementation activities. Capitalized costs include external direct costs of materials and services consumed in developing or obtaining internal-use software, payroll and payroll-related costs for employees who are directly associated with the internal-use software project, and interest costs incurred, when material, while developing internal-use software. Capitalization of such costs ceases when the project is substantially complete and ready for its intended purpose. Costs for maintenance and training are expensed as incurred. The Company capitalizes interest on borrowings during the active construction period of major capital projects. Capitalized interest is added to the cost of the underlying assets and is amortized over the expected useful lives of the assets. Depreciation and amortization are provided on the straight-line method over expected useful asset lives as of December 31, 2017 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

F- 11

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

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

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 fair value.

The goodwill test is performed at least annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The annual impairment test includes an option to perform a qualitative assessment of whether it is more-likely-than-not that a reporting unit's fair value is less than its carrying value; the qualitative test may be performed prior to, or as an alternative to, performing a quantitative goodwill impairment test. If, after assessing the totality of events or circumstances, the Company determines that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value, then the Company is required to perform the quantitative goodwill impairment test. Otherwise, no further analysis is required. Additionally, the Company's policy is to update the fair value calculation of its reporting units and perform the quantitative goodwill impairment test on a periodic basis.

The quantitative impairment test involves the comparison of the fair value of the reporting unit to its carrying value. The Company calculates the fair value of each reporting unit using either 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 that the valuation is performed. The Company compares the estimate of fair value for the reporting unit to the carrying value of the reporting unit. If the carrying value is greater than the estimate of fair value, an impairment loss will be recognized in the amount of the excess.

On a quarterly basis, the Company performs a review of its business to determine if events or changes in circumstances have occurred which could have a material adverse effect on the fair value of the Company and its goodwill. If such events or changes in circumstances were deemed to have occurred, the Company would perform an impairment test of goodwill as of the end of the quarter and record any noted impairment loss.

The Company performs its annual impairment test during the fourth quarter of the fiscal year. For the year ended December 31, 2017, in accordance with its policy to perform the quantitative test on a periodic basis, the Company updated the fair value calculation of its reporting units, performed the quantitative impairment test and concluded that goodwill was not impaired. For the year ended December 31, 2016, the Company performed the qualitative impairment test. 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.

F- 12

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, 2017 and 2016, 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 the Company's 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 income (expense), net in the consolidated statements of operations. For the years ended December 31, 2017, 2016 and 2015, gains from trading equity securities totaled $8 million, $3 million, and $0 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 income (expense), net in the consolidated statements of operations. As of December 31, 2017, the Company had gross unrealized gains from available-for-sale equity securities of $0 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. For the year ended December 31, 2017, the Company recorded an other-than-temporary impairment of $6 million in other income (expense), net related to its available-for-sale equity investment.

F- 13

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

Investments as of December 31, 2017 and 2016 consisted of the following:

	2017				2016
Available-for-sale equity securities	$	2			$	3
Trading equity securities	58				51
Other investments	9				6
Total	$	69			$	60

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, treasury 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, net.

The Company accounts for these derivatives as either an asset or liability measured at its fair value. The fair value is based upon model-derived valuations in which all significant inputs are observable in active markets 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 along with offsetting fair value gains or losses on the hedged item that are attributable to the risk being hedged are reported in other income (expense), net in the consolidated statements of operations. For derivatives that have been formally designated as a cash flow hedge, the change in the fair value of the derivatives is recorded in accumulated other comprehensive loss. Upon maturity or early termination of an effective interest rate swap designated as a cash flow hedge, unrealized gains or losses are deferred in stockholders' equity, as a component of accumulated other comprehensive loss, and are amortized as an adjustment to interest expense over the period during which the hedged forecasted transaction affects earnings, which is when the Company recognizes interest expense on the hedged cash flows. At inception and quarterly thereafter, the Company formally assesses whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in the fair value or cash flows of the hedged item. After the initial quantitative assessment, this analysis is performed on a qualitative basis and, if it is determined that the hedging relationship was and continues to be highly effective, no further analysis is required. All components of each derivative financial instrument's gain or loss are included in the assessment of hedge effectiveness. If it is determined that a derivative ceases to be a highly effective hedge, the Company discontinues hedge accounting and any deferred gains or losses related to a discontinued cash flow hedge shall continue to be reported in accumulated other comprehensive loss, unless it is probable that the forecasted transaction will not occur. If it is probable that the forecasted transaction will not occur by the originally specified time period, the Company discontinues hedge accounting, and any deferred gains or losses reported in accumulated other comprehensive loss are classified into earnings immediately.

Comprehensive Income (Loss)

Comprehensive income (loss) encompasses all changes in stockholders' equity (except those arising from transactions with stockholders) and includes:

•	Foreign currency translation adjustments;

F- 14

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

•	Investment adjustments, which represent unrealized holding gains (losses), net of tax on available for sale securities, net of other-than-temporary impairment amounts reclassified to other income (expense), net; and

•	Net deferred loss on cash flow hedges, which represents deferred losses, net of tax on interest rate related derivative financial instruments designated as cash flow hedges, net of amounts reclassified to interest expense (see Note 15).

New Accounting Standards

Adoption of New Accounting Standards

On January 1, 2017, the Company adopted a new accounting standard issued by the Financial Accounting Standards Board ("FASB") 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 adoption of this standard did not have a material impact on the Company's results of operations, financial position or cash flows.

In the fourth quarter of 2017, the Company adopted a new accounting standard 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 adoption of this standard, which was done on a prospective basis, did not have a material impact on the Company's results of operations, financial position or cash flows.

In the third quarter of 2017, the Company elected to early adopt a new accounting standard, effective January 1, 2017, that amends and simplifies existing hedge accounting guidance and allows for more hedging strategies to be eligible for hedge accounting. In addition, the new standard amends disclosure requirements and how hedge effectiveness is assessed. The adoption of this standard did not have a material impact on the Company's results of operations, financial position or cash flows. For further details regarding the Company's derivative financial instruments, see Note 14.

New Accounting Standards To Be Adopted

In May 2014, the 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. 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 will adopt the ASU in the first quarter of 2018 using the full retrospective method. The Company continues to assess the impact of this ASU on its results of operations, financial position, cash flows and disclosures. Based on the Company's assessment of this ASU, the majority of the amounts that were historically classified as bad debt expense, primarily related to patient responsibility, will be considered an implicit price concession in determining net revenues. Accordingly, the Company will report uncollectible balances associated with patient responsibility as a reduction of the transaction price and therefore as a reduction in net revenues when historically these amounts were classified as bad debt expense within selling, general and administrative expenses. As a result of this change, the Company preliminarily estimates the following impact to its consolidated statements of operations for the years ended December 31, 2017 and 2016:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

	Year Ended December 31, 2017												Year Ended December 31, 2016
	As Reported				Adjustment for ASU on Revenue Recognition				As Adjusted				As Reported				Adjustment for ASU on Revenue Recognition				As Adjusted
Net revenues	$	7,709			$	(307	)		$	7,402			$	7,515			$	(301	)		$	7,214
Selling, general and administrative expenses	$	1,750			$	(307	)		$	1,443			$	1,681			$	(301	)		$	1,380
Net income attributable to Quest Diagnostics	$	772			$	—			$	772			$	645			$	—			$	645

In addition, the adoption of this ASU will result in increased disclosure, including qualitative and quantitative disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. However, 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 or 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 consolidated 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. 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 assessing the impact of the adoption of this ASU on the Company’s results of operations, financial position and cash flows. Significant implementation matters being addressed by the Company include implementing an integrated third-party lease accounting application, assessing the impact to its internal controls over financial reporting and documenting the new lease accounting process.

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 and must be applied retrospectively to all periods presented. Upon adoption cash payments for debt retirement costs (which were $47 million in 2016) would be reclassified from operating cash outflows to financing cash outflows in the consolidated statements of cash flows. The future impact of the adoption of this ASU on the Company's cash flows will be dependent upon the nature of any future debt refinancing transactions.

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 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

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 asset is not a business. If this threshold is not met, then the entity needs to evaluate whether the asset includes, 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 and must be applied prospectively. The future impact of the adoption of this ASU on the Company’s results of operations, financial position and cash flows will be dependent upon the nature of any future acquisitions or dispositions made by the Company.

3. EARNINGS PER SHARE

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

	2017				2016				2015
Amounts attributable to Quest Diagnostics’ common stockholders:
Net income attributable to Quest Diagnostics	$	772			$	645			$	709
Less: Earnings allocated to participating securities	3				3				3
Earnings available to Quest Diagnostics’ common stockholders – basic and diluted	$	769			$	642			$	706
Weighted average common shares outstanding – basic	137				140				144
Effect of dilutive securities:
Stock options and performance share units	3				2				1
Weighted average common shares outstanding – diluted	140				142				145
Earnings per share attributable to Quest Diagnostics’ common stockholders:
Basic	$	5.63			$	4.58			$	4.92
Diluted	$	5.50			$	4.51			$	4.87

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

	2017			2016			2015
Stock options	2			1			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 and improve performance. 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.

In January 2015, the Company adopted a program to further reduce its cost structure through 2017. This multi-year program continued 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

Restructuring Charges

The following table provides a summary of the Company's pre-tax restructuring charges for the years ended December 31, 2017, 2016 and 2015:

	2017				2016				2015
Employee separation costs	$	29			$	9			$	38
Facility-related costs	1				2				1
Asset impairment charges	3				—				—
Total restructuring charges	$	33			$	11			$	39

The restructuring charges incurred for the years ended December 31, 2017, December 31, 2016 and December 31, 2015 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, 2017, $11 million and $22 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, 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.

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, 2017 and 2016, which is included in accrued expenses in Note 12:

	Employee Separation Costs				Facility-Related Costs				Total
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
Income statement expense	29				1				30
Cash payments	(14		)		(3		)		(17		)
Balance, December 31, 2017	$	21			$	1			$	22

5. BUSINESS ACQUISITIONS

2017 Acquisitions

During 2017, the Company completed acquisitions for an aggregate purchase price of $587 million, net of cash acquired, including the acquisitions discussed below. The 2017 acquisitions resulted in goodwill of $335 million, of which $273 million is deductible for tax purposes. These acquisitions also resulted in $242 million of intangible assets, principally comprised of customer-related intangibles. Net revenues attributable to the 2017 acquisitions were $75 million for the year ended December 31, 2017.

Acquisition of the Outreach Laboratory Service Business of PeaceHealth Laboratories

On May 1, 2017, the Company completed the acquisition of the outreach laboratory service business of PeaceHealth Laboratories ("PHL"), in an all cash transaction for $101 million. PHL is a healthcare system in Oregon, Washington and

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

Alaska. The assets acquired principally consist of $71 million of tax deductible goodwill and $30 million of customer-related intangible assets. The intangible assets are being amortized over a useful life of 15 years.

Acquisition of Med Fusion, LLC and Clearpoint Diagnostic Laboratories, LLC

On July 14, 2017, the Company completed the acquisitions of Med Fusion, LLC and Clearpoint Diagnostic Laboratories, LLC ("Med Fusion"), in an all-cash transaction for $150 million. The final consideration paid is subject to post closing adjustments related to working capital. Through the acquisition, the Company acquired all of Med Fusion's operations. Med Fusion provides precision medicine diagnostics to aid cancer treatment nationwide and the acquired businesses form the Company's center of excellence in precision diagnostics for oncology. The assets acquired principally consist of $84 million of customer-related intangible assets, $62 million of goodwill (of which $60 million is tax deductible) and $31 million of property, plant and equipment. The liabilities assumed principally consist of a $28 million capital lease obligation. The intangible assets are being amortized over a useful life of 15 years.

Acquisition of the Outreach Laboratory Service Business of The William W. Backus Hospital and The Hospital of Central Connecticut

On September 28, 2017, the Company completed the acquisition of the outreach laboratory service businesses of two hospitals of Hartford HealthCare Corporation ("HHC"), The William W. Backus Hospital and The Hospital of Central Connecticut, in an all-cash transaction for $30 million. The assets acquired principally consist of tax deductible goodwill and customer-related intangible assets.

Acquisition of Cleveland HeartLab, Inc.

On December 1, 2017, the Company completed the acquisition of Cleveland HeartLab, Inc. ("CHL") in an all-cash transaction for $94 million, net of $12 million cash acquired. The final consideration is subject to post closing adjustments related to working capital. CHL is a specialty clinical laboratory and disease management company, which forms the basis for the Company’s advanced diagnostics center of excellence in cardiovascular testing. Through the acquisition, the Company acquired all of CHL's operations. Based on the preliminary purchase price allocation, the assets acquired and liabilities assumed consist of $55 million of goodwill (of which $1 million is tax deductible), $32 million of intangible assets, $11 million of deferred tax assets associated with acquired net operating losses, $11 million of deferred tax liabilities primarily associated with acquired intangible assets, $4 million of working capital and $3 million of property, plant and equipment. The intangible assets consist primarily of customer related assets which are being amortized over a useful life of 15 years.

Acquisition of the Clinical and Anatomic Pathology Laboratory Business of Shiel Holdings, LLC

On December 7, 2017, the Company completed the acquisition of certain assets of the clinical and anatomic pathology laboratory business of Shiel Holdings, LLC ("Shiel") in an all-cash transaction for $176 million, which consisted of cash consideration of $170 million and contingent consideration estimated at $6 million. The contingent consideration arrangement is dependent upon the achievement of certain testing volume benchmarks. Shiel serves the New York-New Jersey metropolitan area. Based on the preliminary purchase price allocation, the assets acquired principally consist of $106 million of goodwill (of which $100 million is tax deductible) and $70 million of customer-related intangible assets. The intangible assets are being amortized over a useful life of 15 years. For further details regarding the fair value of the contingent consideration, see Note 7.

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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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 HHC, 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 acquisitions of MemorialCare Health System's laboratory outreach business and Superior Mobile Medics, Inc. 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.

General Information

The acquisitions described above were accounted for under the acquisition method of accounting. As such, the assets acquired and liabilities assumed are recorded based on their estimated fair values as of the closing date. Supplemental pro forma combined financial information has not been presented as the impact of the acquisitions is not material to the Company's consolidated financial statements. The goodwill recorded primarily includes the expected synergies resulting from combining the operations of the acquired entities with those of the Company and the value associated with an assembled workforce and other intangible assets that do not qualify for separate recognition. All of the goodwill acquired in connection with these acquisitions, except for that associated with Superior Mobile Medics, has been allocated to the Company's DIS business. Goodwill acquired in connection with Superior Mobile Medics has been allocated to the Company's risk assessment business. For further details regarding business segment information, see Note 18.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

6. DISPOSITIONS

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 included $25 million of proceeds which were initially held in escrow and received in 2017. 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.

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.

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 18.

Contribution of Clinical Trials Business

On March 30, 2015, the Company entered into a definitive agreement with Quintiles Transnational Holdings, Inc. (now known as IQVIA 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, 2017 and 2016, the investment in Q2 Solutions had a carrying value of $406 million and $389 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 19.

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 18.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

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, 2017
Assets:
Trading securities	$	58			$	58			$	—			$	—
Cash surrender value of life insurance policies	37				—				37				—
Available-for-sale equity securities	2				2				—				—
Total	$	97			$	60			$	37			$	—
Liabilities:
Deferred compensation liabilities	$	103			$	—			$	103			$	—
Interest rate swaps	89				—				89				—
Contingent consideration	7				—				—				7
Total	$	199			$	—			$	192			$	7
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

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 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. This plan was amended effective January 1, 2018 so that future deferrals under the plan may only be made by participants who made deferrals under the plan in 2017.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

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, Inc. ("Summit Health"), a provider of on-site prevention and wellness programs, and Steward Health Care Systems, LLC's ("Steward") laboratory outreach business. 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 of the fair value hierarchy 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%. Based on actual 2015 results for Summit Health compared to the earn-out target included in the contingent consideration arrangement, no payment was required. Therefore, the fair value of the contingent consideration accrual associated with Summit Health was reduced to $0 in the second quarter of 2015, which resulted in a $13 million gain included in other operating expense (income), net for the year ended December 31, 2015. The remaining contingent consideration associated with Steward of $1 million is expected to be paid in 2018.

In December 2017, the Company completed the acquisition of Shiel which provides for up to $15 million of contingent consideration to be paid based on the achievement of certain testing volume benchmarks. In connection with the acquisition, the Company initially recorded a contingent consideration liability of $6 million which was classified within Level 3 of the fair value hierarchy. The contingent consideration was measured at fair value using an option-pricing model. Significant inputs included management's estimate of volume and other market inputs including comparable company revenue volatility of 6.9% and a discount rate of 4.5%. Any contingent consideration associated with Shiel is expected to be paid in 2018. For further details regarding the Shiel acquisition, see Note 5.

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

	Contingent Consideration
Balance, December 31, 2015	$	3
Purchases, additions and issuances	—
Balance, December 31, 2016	3
Purchases, additions and issuances	6
Settlements	(2		)
Balance, December 31, 2017	$	7

The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable and accrued expenses approximate fair value based on the short maturities of these instruments. As of December 31, 2017 and 2016, the fair value of the Company's debt was estimated at $4.0 billion and $3.9 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

8. TAXES ON INCOME

The Company's pre-tax income before equity in earnings of equity method investees consisted of approximately $1.0 billion, $1.1 billion and $1.1 billion from U.S. operations and a pre-tax (loss) income of $(7) million, $4 million and $11 million from foreign operations for the years ended December 31, 2017, 2016 and 2015, respectively.

The Company recognized the income tax effects of the Tax Cuts and Jobs Act ("TCJA") in its 2017 consolidated financial statements in accordance with Staff Accounting Bulletin No. 118, which provides Securities and Exchange Commission staff guidance for the application of ASC Topic 740, Income Taxes, in the reporting period in which the TCJA was signed into law. As such, the Company’s financial results reflect the provisional estimate of the income tax effects of the TCJA. The estimate of the impact of TCJA is based on certain assumptions and the Company's current interpretation, and may change, as the Company receives additional clarification and implementation guidance and as the interpretation of the TCJA evolves over time.

During the year ended December 31, 2017, the Company recorded a provisional estimated income tax benefit of $106 million associated with the TCJA, including a deferred income tax benefit of $115 million primarily due to the remeasurement of net deferred tax liabilities and reserves at the new combined federal and state tax rate, partially offset by $9 million of current tax expense primarily due to the mandatory repatriation toll charge on undistributed foreign earnings and profits. The Company did not identify items for which the income tax effects of the TCJA have not been completed and a reasonable estimate could not be determined as of December 31, 2017.

As a result of the TCJA, the Company changed its assertion that it intends to indefinitely reinvest undistributed earnings from certain non-U.S. subsidiaries outside the U.S. The Company is indefinitely reinvested in the remaining basis difference and it is not practicable to determine the associated amount of unrecognized deferred tax liability.

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 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 of 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 $58 million of deferred income tax benefit resulting from the future tax effects of winding down a subsidiary.

The components of income tax expense (benefit) for 2017, 2016 and 2015 were as follows:

	2017				2016				2015
Current:
Federal	$	226			$	346			$	231
State and local	5				45				27
Foreign	1				1				3
Deferred:
Federal	(20		)		33				104
State and local	27				4				7
Foreign	2				—				1
Total	$	241			$	429			$	373

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

A reconciliation of the federal statutory rate to the Company's effective tax rate for 2017, 2016 and 2015 was as follows:

	2017			2016			2015
Tax provision at statutory rate	35.0	%		35.0	%		35.0	%
State and local income taxes, net of federal benefit	3.8			3.3			2.6
Gains and losses on book and tax basis difference	(0.1	)		3.3			(2.7	)
Impact of noncontrolling interests	(1.9	)		(1.8	)		(1.6	)
Impact of equity earnings	1.1			1.0			0.7
Excess tax benefits on stock-based compensation arrangements	(3.6	)		(0.8	)		—
Return to provision true-ups	(2.0	)		(0.8	)		(0.2	)
Impact of TCJA enactment	(10.4	)		—			—
Other, net	1.5			0.3			—
Effective tax rate	23.4	%		39.5	%		33.8	%

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.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets (liabilities) as of December 31, 2017 and 2016 were as follows:

	2017				2016
Non-current deferred tax assets (liabilities):
Accounts receivable reserves	$	63			$	94
Liabilities not currently deductible	129				189
Stock-based compensation	41				58
Basis differences in investments, joint ventures and subsidiaries	(79		)		(87		)
Net operating loss carryforwards, net of valuation allowance	83				120
Depreciation and amortization	(403		)		(533		)
Total non-current deferred tax liabilities, net	$	(166	)		$	(159	)

As of December 31, 2017 and 2016, non-current deferred tax assets of $4 million and $32 million, respectively, are recorded in other assets. As of December 31, 2017 and 2016, non-current deferred tax liabilities of $170 million and $191 million, respectively, are included in other liabilities.

As of December 31, 2017, the Company had estimated net operating loss carryforwards for federal and state income tax purposes of $184 million and $1.3 billion, respectively, which expire at various dates through 2037. Estimated net operating loss carryforwards for foreign income tax purposes are $68 million as of December 31, 2017, some of which can be carried forward indefinitely while others expire at various dates through 2027. As of December 31, 2017, 2016 and 2015, deferred tax assets associated with net operating loss carryforwards of $155 million, $204 million and $222 million, respectively, have each been reduced by valuation allowances of $57 million, $56 million and $54 million, respectively.

Income taxes payable, including those classified as long-term in other liabilities as of December 31, 2017 and 2016, were $82 million and $62 million, respectively. Prepaid income taxes were $37 million and $14 million as of December 31, 2017 and 2016, respectively, and were recorded in prepaid expenses and other current assets.

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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 and for the years ended December 31, 2017, 2016 and 2015 consisted of the following:

	2017				2016				2015
Balance, beginning of year	$	98			$	91			$	122
Additions:
For tax positions of current year	5				3				5
For tax positions of prior years	23				12				5
Reductions:
Changes in judgment	(2		)		(1		)		(11		)
Expirations of statutes of limitations	(6		)		(7		)		(3		)
Settlements	(3		)		—				(27		)
Balance, end of year	$	115			$	98			$	91

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.

The total amount of unrecognized tax benefits as of December 31, 2017, that, if recognized, would affect the effective income tax rate is $64 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 $35 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 included in income tax expense in each of the years ended December 31, 2017, 2016 and 2015 was approximately $1 million, $2 million and $0 million, respectively. As of December 31, 2017 and 2016, the Company has approximately $13 million and $12 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 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 pending Joint Committee of Congress approval of refund for settlement of certain tax adjustments related to the 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, 2017, a summary of the tax years that remain subject to examination, awaiting approval, are under appeal, or are otherwise unresolved for the Company's major jurisdictions are:

United States - federal 2009, 2013 - 2017

United States - various states 2006 - 2017

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

9. SUPPLEMENTAL CASH FLOW & OTHER DATA

Supplemental cash flow and other data for the years ended December 31, 2017, 2016 and 2015 was as follows:

	2017				2016				2015
Depreciation expense	$	196			$	177			$	223
Amortization expense	74				72				81
Depreciation and amortization expense	$	270			$	249			$	304
Interest expense	$	(153	)		$	(144	)		$	(154	)
Interest income	2				1				1
Interest expense, net	$	(151	)		$	(143	)		$	(153	)
Interest paid	$	159			$	148			$	172
Income taxes paid	$	243			$	361			$	319
Assets acquired under capital leases	$	7			$	—			$	3
Accounts payable associated with capital expenditures	$	26			$	9			$	15
Dividends payable	$	61			$	62			$	55
Businesses acquired:
Fair value of assets acquired	$	657			$	139			$	63
Fair value of liabilities assumed	58				—				—
Fair value of net assets acquired	599				139				63
Merger consideration paid (payable), net	(6		)		—				4
Cash paid for business acquisitions	593				139				67
Less: Cash acquired	12				—				—
Business acquisitions, net of cash acquired	$	581			$	139			$	67

The escrow proceeds associated with disposition of business received in 2017 related to the sale of Focus Diagnostics. For further details regarding the sale of Focus Diagnostics, see Note 6.

10. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment as of December 31, 2017 and 2016 consisted of the following:

	2017				2016
Land	$	29			$	28
Buildings and improvements	430				379
Laboratory equipment and furniture and fixtures	1,594				1,462
Leasehold improvements	544				533
Computer software developed or obtained for internal use	934				834
Construction-in-progress	140				193
	3,671				3,429
Less: Accumulated depreciation and amortization	(2,526		)		(2,400		)
Total	$	1,145			$	1,029

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

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, 2017 and 2016 were as follows:

	2017				2016
Balance, beginning of year	$	6,000			$	5,905
Goodwill acquired during the year	335				95
Balance, end of year	$	6,335			$	6,000

Principally all of the Company’s goodwill as of December 31, 2017 and 2016 was associated with its DIS business.

For the year ended December 31, 2017, goodwill acquired during the period was principally associated with the Shiel, PHL, Med Fusion, CHL, and HHC acquisitions (see Note 5).

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

Intangible assets as of December 31, 2017 and 2016 consisted of the following:

	Weighted Average Amortization Period (in years)		December 31, 2017												December 31, 2016
		Cost				Accumulated Amortization				Net				Cost				Accumulated Amortization				Net
Amortizing intangible assets:
Customer-related	18		$	1,210			$	(404	)		$	806			$	971			$	(346	)		$	625
Non-compete agreements	7		7				(5		)		2				6				(4		)		2
Technology	17		95				(45		)		50				93				(40		)		53
Other	10		105				(80		)		25				103				(70		)		33
Total	17		1,417				(534		)		883				1,173				(460		)		713
Intangible assets not subject to amortization:
Trade names			235				—				235				235				—				235
Other			1				—				1				1				—				1
Total intangible assets			$	1,653			$	(534	)		$	1,119			$	1,409			$	(460	)		$	949

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 expense (income), net.

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

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, 2017 is as follows:

Year Ending December 31,
2018	$	82
2019	81
2020	81
2021	74
2022	72
Thereafter	493
Total	$	883

12. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses as of December 31, 2017 and 2016 consisted of the following:

	2017				2016
Accrued wages and benefits (including incentive compensation)	$	325			$	316
Accrued expenses	246				254
Trade accounts payable	224				231
Overdrafts	71				30
Dividend payable	61				62
Accrued interest	46				46
Accrued insurance	32				31
Income taxes payable	9				3
Merger consideration payable	7				2
Total	$	1,021			$	975

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

13. DEBT

Long-term debt as of December 31, 2017 and 2016 consisted of the following:

	2017				2016
Secured Receivables Credit Facility (2.27% at December 31, 2017)	$	30			$	—
2.70% Senior Notes due April 2019	300				300
4.75% Senior Notes due January 2020	514				521
2.50% Senior Notes due March 2020	300				299
4.70% Senior Notes due April 2021	559				563
4.25% Senior Notes due April 2024	303				307
3.50% Senior Notes due March 2025	566				568
3.45% Senior Notes due June 2026	470				469
6.95% Senior Notes due July 2037	174				174
5.75% Senior Notes due January 2040	244				244
4.70% Senior Notes due March 2045	300				300
Other	44				13
Debt issuance costs	(20		)		(24		)
Total long-term debt	3,784				3,734
Less: Current portion of long-term debt	36				6
Total long-term debt, net of current portion	$	3,748			$	3,728

Secured Receivables Credit Facility

On October 27, 2017, the Company amended and restated the agreement for the $600 million secured receivables credit facility (the “Secured Receivables Credit Facility”) previously amended in October 2015, maintaining the borrowing capacity under the facility at $600 million. Under the Secured Receivables Credit Facility, the Company can borrow against a $250 million loan commitment maturing October 2018, and a $250 million loan commitment maturing October 2019, and can issue up to $100 million of letters of credit (see Note 17) through October 2019. Borrowings under the Secured Receivables Credit Facility are collateralized by certain domestic receivables. As of December 31, 2017, interest on the borrowings under the Secured Receivables Credit Facility is based on either commercial paper rates for highly-rated issuers or LIBOR plus a spread of 0.70% to 0.725%. The Secured Receivables Credit Facility contains various covenants which could impact the Company's ability to, among other things, incur additional indebtedness. As of December 31, 2017, there was $30 million of outstanding borrowings under the Secured Receivables Credit Facility. As of December 31, 2016, 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, 2017 and 2016, 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, 2017 and 2016, there were no outstanding borrowings under the Credit Facility.

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

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.

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 income (expense), net.

Maturities of Long-Term Debt

As of December 31, 2017, long-term debt matures as follows:

Year Ending December 31,
2018	$	36
2019	304
2020	803
2021	552
2022	—
Thereafter	2,153
Total maturities of long-term debt	3,848
Unamortized discount	(11		)
Debt issuance costs	(20		)
Fair value basis adjustments attributable to hedged debt	(33		)
Total long-term debt	3,784
Less: Current portion of long-term debt	36
Total long-term debt, net of current portion	$	3,748

F- 31

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

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 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 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 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 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, 2017 and 2016 was $9 million and $10 million, respectively. The net amount of deferred losses on cash flow hedges that is expected to be reclassified from accumulated other comprehensive loss into interest expense, net 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 these interest rate swaps as of December 31, 2017 and 2016 was as follows:

		Notional Amount
Debt Instrument		2017				2016
4.25% Senior Notes due April 2024		250				250
3.50% Senior Notes due March 2025		600				600
3.45% Senior Notes due June 2026		350				350
		$	1,200			$	1,200

The fixed-to-variable interest rate swap agreements in the table above have variable interest rates 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. 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

F- 32

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

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, 2017, the following amounts were recorded on the consolidated balance sheet related to cumulative basis adjustments for fair value hedges:

Balance Sheet Classification			Carrying Amount of Hedged Long-Term Debt				Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Long-Term Debt
	December 31, 2017				December 31, 2017
Long-term debt			$	1,132			$	(33	)	(a)

(a) The balance includes $56 million of remaining unamortized hedging adjustment on a discontinued relationship.

The following table presents the effect of fair value hedge accounting on the consolidated statement of operations for the year ended December 31, 2017:

			Other income (expense), net
Total for line item in which the effects of fair value hedges are recorded			$	16
Gain (loss) on fair value hedging relationships:
Hedged items (Long-term debt)			$	1
Derivatives designated as hedging instruments			$	(1	)

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 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 income (expense), 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 income (expense), net.

F- 33

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

A summary of the fair values of derivative instruments in the consolidated balance sheets was as follows:

	December 31, 2017						December 31, 2016
	Balance Sheet Classification		Fair Value				Balance Sheet Classification		Fair Value
Derivatives Designated as Hedging Instruments
Interest rate swaps	Other liabilities		$	89			Other liabilities		$	88

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

Comprehensive income (loss) includes:

•	Foreign currency translation adjustments;

•	Investment adjustments, which represent unrealized holding gains (losses), net of tax on available for sale securities, net of other-than-temporary impairment amounts reclassified to other income (expense), net;

•	Net deferred loss on cash flow hedges, which represents deferred losses, net of tax on interest rate related derivative financial instruments designated as cash flow hedges, net of amounts reclassified to interest expense (see Note 14).

For the years ended December 31, 2017, 2016 and 2015, the tax effects related to the investment adjustments, deferred losses on cash flow hedges and other were not material. Foreign currency translation adjustments related to indefinite investments in non-U.S. subsidiaries are not adjusted for income taxes.

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

The changes in accumulated other comprehensive income (loss) by component for 2017, 2016 and 2015 were as follows:

	Foreign Currency Translation Adjustment				Investment Adjustments				Net Deferred Loss on Cash Flow Hedges				Other				Accumulated Other Comprehensive Income (Loss)
Balance, December 31, 2014	$	(9	)		$	(1	)		$	(15	)		$	(2	)		$	(27	)
Other comprehensive (loss) income before reclassifications	(15		)		—				—				1				(14		)
Amounts reclassified from accumulated other comprehensive loss	—				—				3				—				3
Net current period other comprehensive (loss) income	(15		)		—				3				1				(11		)
Balance, December 31, 2015	(24		)		(1		)		(12		)		(1		)		(38		)
Other comprehensive loss before reclassifications	(34		)		(2		)		—				—				(36		)
Amounts reclassified from accumulated other comprehensive loss	—				—				2				—				2
Net current period other comprehensive (loss) income	(34		)		(2		)		2				—				(34		)
Balance, December 31, 2016	(58		)		(3		)		(10		)		(1		)		(72		)
Other comprehensive income before reclassifications	20				—				—				—				20
Amounts reclassified from accumulated other comprehensive loss	—				3				1				—				4
Net current period other comprehensive income	20				3				1				—				24
Balance, December 31, 2017	$	(38	)		$	—			$	(9	)		$	(1	)		$	(48	)

For the years ended December 31, 2017, 2016 and 2015, the gross deferred losses on cash flow hedges were reclassified from accumulated other comprehensive loss to interest expense, net.

For the year ended December 31, 2017, the other-than-temporary impairment amount included in investment adjustments were reclassified from accumulated other comprehensive loss to other income (expense), net.

Dividend Program

During each of the four quarters of 2017 and during the fourth quarter of 2016, the Company's Board of Directors declared a quarterly cash dividend of $0.45 per common share. 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. During each of the quarters of 2015, the Company's Board of Directors declared a quarterly cash dividend of $0.38 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, 2017, $917 million remained available under the Company’s share repurchase authorization. The share repurchase authorization has no set expiration or termination date.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

Share Repurchases

For the year ended December 31, 2017, the Company repurchased 4.6 million shares of its common stock for $465 million.

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

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.

Shares Reissued from Treasury Stock

For the years ended December 31, 2017, 2016 and 2015 the Company reissued 2 million shares, 2 million shares and 1 million shares, respectively, from treasury stock for shares issued under the ESPP and stock option 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 records changes in the fair value of the noncontrolling interest immediately as they occur. As of December 31, 2017 and 2016, the redeemable noncontrolling interest was $80 million and $77 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

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 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, 2017, 2016 and 2015, grants under the DLTIP totaled 13 thousand shares, 21 thousand shares and 31 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.

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

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

	2017		2016		2015
Fair value at grant date	$15.98		$10.35		$11.57
Expected volatility	19.8%		21.6%		21%
Dividend yield	1.9%		2.4%		2.1%
Risk-free interest rate	2.1%		1.4%		1.7%
Expected holding period, in years	5.2		5.3		5.3

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 2017:

	Shares			Weighted Average Exercise Price				Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Options outstanding, beginning of year	9.1			$	62.27
Options granted	1.8			96.02
Options exercised	(2.2	)		58.91
Options forfeited and canceled	(0.2	)		79.74
Options outstanding, end of year	8.5			$	70.11			7.1		$	243
Exercisable, end of year	4.4			$	60.81			5.9		$	166
Vested and expected to vest, end of year	8.3			$	69.73			7.1		$	240

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 2017 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, 2017. This amount changes based on the fair market value of the Company's common stock. Total intrinsic value of options exercised in 2017, 2016 and 2015 was $94 million, $30 million and $21 million, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

As of December 31, 2017, 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 2017, 2016 and 2015:

	2017							2016							2015
	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	1.5			$	63.88			1.7			$	59.92			1.9			$	55.50
Shares granted	0.4			96.27				0.6			67.26				0.6			71.17
Shares vested	(0.6	)		57.59				(0.4	)		58.98				(0.3	)		55.74
Shares forfeited and canceled	—			—				(0.4	)		57.31				(0.5	)		58.18
Shares outstanding, end of year	1.3			$	77.90			1.5			$	63.88			1.7			$	59.92

As of December 31, 2017, there was $39 million of unrecognized stock-based compensation cost related to nonvested stock awards, which is expected to be recognized over a weighted average period of 1.8 years. Total fair value of shares vested was $58 million, $28 million and $20 million for the years ended December 31, 2017, 2016 and 2015, 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, 2017, 2016 and 2015, stock-based compensation expense totaled $79 million, $69 million and $52 million, respectively. Income tax benefits recognized in the consolidated statements of operations related to stock-based compensation expense totaled $67 million, $32 million and $20 million for the years ended December 31, 2017, 2016 and 2015, respectively, which includes excess tax benefits associated with stock-based compensation arrangements of $37 million and $9 million for the years ended December 31, 2017 and 2016, respectively.

Employee Stock Purchase Plan

Under the Company's ESPP, substantially all employees can elect to have up to 10% of their annual wages withheld to purchase Quest Diagnostics common stock. The purchase price of the stock is 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 278 thousand, 332 thousand and 349 thousand shares of common stock were purchased by eligible employees in 2017, 2016 and 2015, 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, $76 million and $77 million for 2017, 2016 and 2015, respectively.

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

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 $58 million and $51 million as of December 31, 2017 and 2016, respectively. Although the Company is currently contributing all participant deferrals and matching amounts to trusts, the funds in these trusts, totaling $58 million and $51 million as of December 31, 2017 and 2016, 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. This plan was amended effective January 1, 2018 so that future deferrals under the plan may only be made by participants who made deferrals under the plan in 2017. The amounts accrued under this plan were $45 million and $39 million as of December 31, 2017 and 2016, 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 $37 million and $32 million as of December 31, 2017 and 2016, respectively.

For the years ended December 31, 2017, 2016 and 2015, 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, $71 million in letters of credit under the Secured Receivables Credit Facility were outstanding as of December 31, 2017. 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, 2017 are as follows:

Year Ending December 31,
2018	$	177
2019	139
2020	99
2021	69
2022	48
Thereafter	127
Minimum lease payments	$	659

Operating lease rental expense for 2017, 2016 and 2015 totaled $219 million, $216 million and $224 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

The Company has certain noncancelable commitments, primarily under take-or-pay arrangements, to purchase products or services from various suppliers, mainly for consulting and other service agreements, and standing orders to purchase reagents and other laboratory supplies. As of December 31, 2017, the approximate total future purchase commitments are $99 million, of which $53 million are expected to be incurred in 2018, $21 million are expected to be incurred in 2019 through 2020 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 30 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.

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 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.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

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, 2017, the Company does not believe that any material losses related to the legal matters described above are probable.

Reserves for Legal Matters

Reserves for legal matters totaled $2 million and $5 million as of December 31, 2017 and 2016, respectively.

Reserves for General and Professional Liability Claims

As a general matter, providers of clinical testing services may be subject to lawsuits alleging negligence or other similar legal claims. These suits could involve claims for substantial damages. Any professional liability litigation could also have an adverse impact on the Company's client base and reputation. The Company maintains various liability insurance coverages for, among other things, claims that could result from providing, or failing to provide, clinical testing services, including inaccurate testing results, and other exposures. The Company's insurance coverage limits its maximum exposure on individual claims; however, the Company is essentially self-insured for a significant portion of these claims. Reserves for such matters, including those associated with both asserted and incurred but not reported claims, are established on an undiscounted basis by considering actuarially determined losses based upon the Company's historical and projected loss experience. Such reserves totaled $118 million and $117 million as of December 31, 2017 and 2016, 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. BUSINESS SEGMENT INFORMATION

The Company's DIS business is the only reportable segment based on the manner in which the Chief Executive Officer, who is the Company's chief operating decision maker ("CODM"), assesses performance and allocates resources across the organization. The DIS business provides diagnostic information services to a broad range of customers, including patients, clinicians, hospitals, IDNs, health plans, employers and ACOs. The Company is the world's leading provider of diagnostic information services, which includes providing information and insights based on the industry-leading menu of routine, non-routine and advanced clinical testing and anatomic pathology testing, and other diagnostic information services. The DIS business accounted for greater than 90% of net revenues in 2017, 2016 and 2015.

All other operating segments include the Company's DS businesses, which consists of its risk assessment services, healthcare information technology, diagnostic products (prior to disposition on May 13, 2016), and clinical trials testing (prior to the formation of the Q2 Solutions joint venture on July 1, 2015) businesses. The Company's DS businesses offer a variety of solutions for life insurers and healthcare organizations and clinicians.

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.

As of December 31, 2017, 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, 2017, 2016 and 2015. Segment asset information is not presented since it is not used by the CODM at the operating segment level. Operating earnings (loss) of each segment represents net revenues less directly identifiable expenses to arrive at operating income (loss) for the segment. General corporate activities included in the table below are comprised of general management and administrative corporate expenses, amortization and impairment of intangibles assets, other operating income and expenses net

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

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.

	2017				2016				2015
Net revenues:
DIS business	$	7,370			$	7,138			$	6,965
All other operating segments	339				377				528
Total net revenues	$	7,709			$	7,515			$	7,493
Operating earnings (loss):
DIS business	$	1,313			$	1,244			$	1,118
All other operating segments	52				64				110
General corporate activities	(200		)		(31		)		171
Total operating income	1,165				1,277				1,399
Non-operating expenses, net	(135		)		(191		)		(296		)
Income before income taxes and equity in earnings of equity method investees	1,030				1,086				1,103
Income tax expense	(241		)		(429		)		(373		)
Equity in earnings of equity method investees, net of taxes	35				39				23
Net income	824				696				753
Less: Net income attributable to noncontrolling interests	52				51				44
Net income attributable to Quest Diagnostics	$	772			$	645			$	709

Depreciation and amortization expense for the years ended December 31, 2017, 2016 and 2015 were as follows:

	2017				2016				2015
DIS business	$	189			$	170			$	212
All other operating segments	6				6				10
General corporate	75				73				82
Total depreciation and amortization	$	270			$	249			$	304

Capital expenditures for the years ended December 31, 2017, 2016 and 2015 were as follows:

	2017				2016				2015
DIS business	$	219			$	264			$	243
All other operating segments	15				21				16
General corporate	18				8				4
Total capital expenditures	$	252			$	293			$	263

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

Net revenues by major service for the years ended December 31, 2017, 2016 and 2015 were as follows:

	2017				2016				2015
Routine clinical testing services	$	4,309			$	4,179			$	4,078
Gene-based and esoteric (including advanced diagnostics) testing services	2,449				2,335				2,256
Anatomic pathology testing services	612				624				631
All other	339				377				528
Total net revenues	$	7,709			$	7,515			$	7,493

19. 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, 2017, 2016 and 2015, the Company recognized net revenues of $37 million, $33 million and $30 million, respectively, associated with diagnostic information services provided to its equity method investees. As of December 31, 2017 and 2016, there was $3 million and $10 million, respectively, of accounts receivable from equity method investees related to such services.

During the years ended December 31, 2017, 2016 and 2015, the Company recognized income of $16 million, $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, 2017 and 2016, there was $7 million and $5 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 December 31, 2017 and 2016 included $1 million and $9 million, respectively, due to equity method investees.

20. SUBSEQUENT EVENTS

On January 30, 2018, the Company's Board of Directors authorized an increase in its quarterly dividend from $0.45 per share to $0.50 per share, commencing with the dividend payable on April 18, 2018.

On February 1, 2018, the Company completed its acquisition of Mobile Medical Examination Service ("MedXM"), in an all cash transaction for $130 million and up to $30 million of contingent consideration if certain revenue targets are achieved. MedXM is a leading national provider of home-based health risk assessments and related services. Through the acquisition, the Company acquired all of MedXM's operations.

The preliminary purchase price allocation for the MedXM acquisition, which will be accounted for as a business combination, is not provided as the appraisal necessary to assess the fair values of assets acquired and liabilities assumed is not yet complete, but a significant portion of the purchase price is expected to be allocated to intangible assets and goodwill.

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

Quarterly Operating Results (unaudited)

(in millions, except per share data)

2017 (a)	First Quarter				Second Quarter				Third Quarter				Fourth Quarter				Total Year
	(b)				(c)				(d)				(e)
Net revenues	$	1,899			$	1,943			$	1,931			$	1,936			$	7,709
Gross profit	734				773				741				742				2,990
Net income	175				207				175				267				824
Less: Net income attributable to noncontrolling interests	11				14				14				13				52
Net income attributable to Quest Diagnostics	$	164			$	193			$	161			$	254			$	772
Earnings per share attributable to Quest Diagnostics' stockholders:
Basic	$	1.19			$	1.40			$	1.18			$	1.86			$	5.63
Diluted	$	1.16			$	1.37			$	1.15			$	1.82			$	5.50

2016 (a)	First Quarter				Second Quarter				Third Quarter				Fourth Quarter				Total Year
	(f)				(g)				(h)				(i)
Net revenues	$	1,863			$	1,906			$	1,885			$	1,861			$	7,515
Gross profit	719				751				728				701				2,899
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
Earnings per share attributable to Quest Diagnostics' stockholders:
Basic	$	0.72			$	1.38			$	1.37			$	1.11			$	4.58
Diluted	$	0.71			$	1.37			$	1.34			$	1.09			$	4.51

(a)	In May 2016, the Company completed the sale of Focus Diagnostics (see Note 6).

(b)

Included pre-tax charges of $18 million, primarily associated with systems conversions and integration incurred in connection with further restructuring and integrating the Company ($10 million in cost of services and $8 million in selling, general and administrative expenses); and excess tax benefits associated with stock-based compensation arrangements of $16 million recorded in income tax expense.

(c)

Included pre-tax charges of $23 million, primarily associated with systems conversions and integration incurred in connection with further restructuring and integrating the Company ($9 million in cost of services, $13 million in selling, general and administrative expenses, and $1 million in equity in earnings of equity method investees, net of taxes); pre-tax gain of $7 million related to the sale of an interest in an equity method investment (recorded in other income (expense), net); $2 million in costs incurred related to certain legal matters (recorded in selling, general and administrative expenses); and excess tax benefits associated with stock-based compensation arrangements of $13 million recorded in income tax expense.

(d)

Included pre-tax charges of $23 million, primarily associated with systems conversions and integration incurred in connection with further restructuring and integrating the Company ($12 million in cost of services and $11 million in selling, general and administrative expenses); pre-tax charges of $9 million primarily associated with non-cash asset impairment charges and incremental costs incurred as a result of hurricanes ($3 million in cost of services, $1 million in selling, general and administrative expenses, and $5 million in other income (expense), net); and excess tax benefits associated with stock-based compensation arrangements of $7 million recorded in income tax expense.

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

Quarterly Operating Results (unaudited)

(in millions, except per share data)

(e)

Included pre-tax charges of $42 million, primarily associated with systems conversions, integration and workforce reductions incurred in connection with further restructuring and integrating the Company ($14 million in cost of services and $28 million in selling, general and administrative expenses); pre-tax charges of $6 million, primarily related to non-cash asset impairment charges and incremental costs incurred as a result of the hurricanes ($2 million in cost of services and $4 million in selling, general and administrative expenses); a provisional estimated income tax benefit of $106 million associated with the TCJA, including a deferred income tax benefit of $115 million primarily due to the remeasurement of net deferred tax liabilities and reserves at the new combined federal and state tax rate, partially offset by $9 million of current tax expense primarily due to the mandatory repatriation toll charge on undistributed foreign earnings and profits; and excess tax benefits associated with stock-based compensation arrangements of $1 million recorded in income tax expense.

(f)

Included pre-tax charges of $21 million, primarily associated with systems conversions and integration 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, representing non-cash asset impairment charges recorded in other operating expense (income), net; pre-tax charges of $2 million, primarily representing costs incurred related to certain legal matters recorded in selling, general and administrative expenses; pre-tax charges of $48 million on retirement of debt associated with the March 2016 cash tender offer recorded in other income (expense), net (see Note 13); pre-tax charges of $1 million representing non-cash asset impairment charges associated with an investment recorded in other income (expense), net; and excess tax benefits associated with stock-based compensation arrangements of $2 million recorded in income tax expense.

(g)

Included a pre-tax gain of $118 million associated with the sale of Focus Diagnostics; pre-tax charges of $19 million, primarily associated with systems conversions and integration 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 of $1 million, primarily representing costs incurred related to certain legal matters recorded in selling, general and administrative expenses; pre-tax charges of $6 million representing non-cash asset impairment charges associated with certain investments recorded in other income (expense), net; and excess tax benefits associated with stock-based compensation arrangements of $2 million recorded in income tax expense.

(h)

Included pre-tax charges of $18 million, primarily associated with systems conversions and integration 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); pre-tax gain of $21 million, principally a result of a gain on escrow recovery associated with an acquisition recorded in other operating expense (income), net; and excess tax benefits associated with stock-based compensation arrangements of $3 million recorded in income tax expense.

(i)

Included pre-tax charges of $24 million, primarily associated with systems conversions and integration 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 expense (income), net and $1 million in equity in earnings of equity method investees, net of taxes); pre-tax charges of $6 million representing non-cash asset impairment charges recorded in other operating expense (income), net; and excess tax benefits associated with stock-based compensation arrangements of $2 million recorded in income tax expense.

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, 2017
Doubtful accounts and allowances	$	265			$	315			$	311		(a)	$	269
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

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

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

EXHIBITS TO FORM 10-K

For the fiscal year ended December 31, 2017

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)

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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)
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 and restated as of November 27, 2017
10.5‡	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)
10.6‡	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)
10.7‡	Amended and Restated Quest Diagnostics Incorporated Executive Officer Severance Plan as amended February 20, 2017 (filed as an exhibit to the Company's 2016 annual report on Form 10-K and incorporated herein by reference) (Commission File Number 001-12215)
10.8‡	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)
10.9‡*	Amendment No. 1 to The Profit Sharing Plan of Quest Diagnostics Incorporated, effective as of January 1, 2018

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10.10‡	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)
10.11‡	Amended and Restated Quest Diagnostics Incorporated Long-Term Incentive Plan for Non-Employee Directors (filed as Annex B to the Company’s Definitive Proxy Statement dated April 5, 2017 and incorporated herein by reference) (Commission file number 001-12215)
10.12‡	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)
10.13‡	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)
10.14‡	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)
10.15‡	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)
10.16‡	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)
10.17‡	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
101.SCH*	dgx-20161231.xsd

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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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