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 21, 2019.

	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 21, 2019.

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/Denise M. Morrison Denise M. Morrison		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/Helen I. Torley, M.B. Ch. B., M.R.C.P. Helen I. Torley, M.B. Ch. B., M.R.C.P.		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 2016 through 2018 from the audited consolidated financial statements of our Company. Refer to the Note (a) below regarding the impact of adoption of new accounting standards on our consolidated financial statements. 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,
	2018				2017				2016				2015				2014
	(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	$	7,531			$	7,402			$	7,214			$	7,493			$	7,435
Operating income	1,101				1,165				1,277				1,399				983
Income from continuing operations	788				824				696				753				587
Income from discontinued operations, net of taxes	—				—				—				—				5
Net income	788				824				696				753				592
Less: Net income attributable to noncontrolling interests	52				52				51				44				36
Net income attributable to Quest Diagnostics	$	736			$	772			$	645			$	709			$	556
Amounts attributable to Quest Diagnostics' stockholders:
Income from continuing operations	$	736			$	772			$	645			$	709			$	551
Income from discontinued operations, net of taxes	—				—				—				—				5
Net income	$	736			$	772			$	645			$	709			$	556

Earnings per share attributable to Quest Diagnostics' common stockholders - basic:
Income from continuing operations	$	5.39			$	5.63			$	4.58			$	4.92			$	3.80
Income from discontinued operations	—				—				—				—				0.03
Net income	$	5.39			$	5.63			$	4.58			$	4.92			$	3.83
Earnings per share attributable to Quest Diagnostics' common stockholders - diluted:
Income from continuing operations	$	5.29			$	5.50			$	4.51			$	4.87			$	3.78
Income from discontinued operations	—				—				—				—				0.03
Net income	$	5.29			$	5.50			$	4.51			$	4.87			$	3.81
Dividends per common share	$	2.03			$	1.80			$	1.65			$	1.52			$	1.32

	Year Ended December 31,
	2018				2017				2016				2015				2014
	(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	$	135			$	137			$	359			$	133			$	192
Total assets	11,003				10,503				10,100				9,962				9,857
Long-term debt	3,429				3,748				3,728				3,492				3,224
Total debt	3,893				3,784				3,734				3,651				3,742
Redeemable noncontrolling interest	77				80				77				70				—
Other Data:
Net cash provided by operating activities	$	1,200			$	1,175			$	1,116			$	967			$	944
Net cash used in investing activities	(801		)		(830		)		(127		)		(362		)		(1,025		)
Net cash (used in) provided by financing activities	(401		)		(592		)		(738		)		(664		)		86
Capital expenditures	383				252				293				263				308
Purchases of treasury stock	322				465				590				224				132
Dividends paid	266				247				223				212				187

(a)

Net revenues for the years ended December 31, 2017 and 2016 have been restated to reflect the impact of new revenue recognition rules that became effective January 1, 2018 and were adopted on a retrospective basis; Net revenues for the years ended December 31, 2015 and 2014 have not been restated. Cash flow data for the years ended December 31, 2017, 2016, 2015 and 2014 have been restated to reflect the impact of the adoption of two new accounting standards that clarify presentation and classification in the statement of cash flows on a retrospective basis. See Note 2 to the consolidated financial statements for further details on the adoption of new accounting standards. 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 February 1, 2018, we completed the acquisition of Mobile Medical Examination Services, LLC. ("MedXM"). On June 18, 2018, we completed the acquisition of the outreach laboratory service business of Cape Cod Healthcare, Inc. On September 19, 2018, we completed the acquisition of ReproSource, Inc. ("ReproSource"). On November 6, 2018, we completed the acquisition of the U.S. laboratory service business of Oxford Immunotec, Inc. ("Oxford"). Consolidated operating results for 2018 include the results of operations of MedXM, the outreach laboratory service business of Cape Cod Healthcare, Inc., ReproSource and Oxford subsequent to the closing of the applicable acquisition. For further details regarding our acquisitions, see Note 6 to the consolidated financial statements.

(c)	Operating income included (for 2018):

•	pre-tax charges of $122 million, primarily associated with workforce reductions, systems conversions and integration incurred in connection with further restructuring and integrating our business; and

•	pre-tax charges of $2 million, primarily associated with costs incurred related to certain legal matters and a loss on the sale of a foreign subsidiary partially offset by a gain associated with the decrease in the fair value of the contingent consideration accrual associated with our MedXM acquisition and an insurance claim for hurricane related losses.

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

•	excess tax benefits associated with stock-based compensation arrangements of $18 million; and

•

income tax benefit of $14 million primarily associated with a change in a tax return accounting method that enabled our Company to accelerate the deduction of certain expenses on its 2017 tax return at the federal corporate statutory tax rate in effect during 2017 partially offset by an income tax expense associated with finalizing the impact of the enactment of the Tax Cuts and Jobs Act ("TCJA").

Pursuant to the TCJA, among other changes to U.S. corporate income tax laws, the federal corporate statutory income tax rate was reduced from 35% to 21% effective for 2018.

(d)

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 6 to the consolidated financial statements.

(e)	Operating income included (for 2017):

•	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 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;

•	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.

(f)

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 sale of our Focus Diagnostics products business ("Focus Sale"). Our Focus Diagnostics products business has not been classified as a discontinued operation. For further details regarding dispositions, see Note 7 to the consolidated financial statements.

(g)	Operating income included (for 2016):

•	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.

Net cash provided by operating activities included:

•	a $17 million 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.

Net cash used in investing activities included proceeds from the sale of businesses of $295 million, principally related to the Focus Sale.

Net cash used in financing activities included $43 million of pre-tax cash charges on the retirement of debt associated with the March 2016 cash tender offer, principally comprised of premiums paid to retire the debt.

(h)

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.

(i)	Operating income included (for 2015):

•	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:

•	a $57 million income 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:

•	$139 million of pre-tax cash charges on retirement of debt associated with the March 2015 cash tender offer and the April 2015 redemption, principally consisting of premiums paid;

•	$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.

(j)

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.

(k)	Operating income included (for 2014):

•	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.

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 approximately 95% of our consolidated net revenues. During 2018, we processed approximately 168 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 36% of the total industry, includes hospital inpatient and outpatient testing. The second segment, which we believe makes up approximately 64% 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 36% 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 clinician 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 clinician 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.

For further details regarding the Focus Sale, see Note 7 to the audited consolidated financial statements.

2018 Highlights

•	Our total net revenues of $7.5 billion were 1.7% above the prior year.

•	In DIS:

◦	Revenues of $7.2 billion increased by 1.9% compared to the prior year, which reflects the impact of recent acquisitions, partially offset by a decrease in organic revenue (revenue growth excluding the impact of acquisitions).

◦	Volume, measured by the number of requisitions, increased 2.5% compared to the prior year.

◦	Revenue per requisition decreased by 1.2% compared to the prior year primarily due to pricing pressure including the impact of the Protecting Access to Medicare Act ("PAMA"), increased denials and higher patient concessions.

•	DS revenues of $327 million were 2.3% below the prior year primarily due to certain royalty revenues received in 2017 related to a royalty agreement, retained from the sale of our products business, that has since expired.

•	Net income attributable to Quest Diagnostics' stockholders was $736 million, or $5.29 per diluted share, in 2018, compared to $772 million, or $5.50 per diluted share, in 2017.

•	Net cash provided by operating activities was $1.2 billion in both 2018 and 2017.

We adopted the new accounting standard for revenue recognition effective January 1, 2018 using the full retrospective method which required the restatement of certain previously reported financial results, as well as our days sales outstanding calculation. For further details on the impact of the new accounting standard, refer to Note 2 to the audited consolidated financial statements.

Two Point Strategy

Our two point strategy is described in detail in "Item 1. Business: Our Strategy." We continued to execute our strategy during 2018 as follows:

Long-term Strategic Partnership with UnitedHealthcare

On May 24, 2018, we established a long-term strategic partnership with UnitedHealthcare focused on ways to create more personalized care recommendations and a simpler consumer experience for the people enrolled in UnitedHealthcare plans. Effective January 1, 2019, we became a contracted, participating provider of clinical laboratory testing services, on a nationwide basis, for all UnitedHealthcare plans, excluding existing lab capitation arrangements. Prior to January 1, 2019 we were in network for a limited number of UnitedHealthcare plans.

Preferred Provider for Horizon Blue Cross Blue Shield of New Jersey

On November 8, 2018, Horizon Blue Cross Blue Shield of New Jersey announced that it is expanding its laboratory network by adding Quest Diagnostics as an in-network preferred provider of diagnostic information services for its members (with the exception of its managed Medicaid and Dual Eligible Special Needs plan beneficiaries), effective January 1, 2019.

Acquisition of Mobile Medical Examination Services, LLC.

On February 1, 2018, we completed the acquisition of Mobile Medical Examination Services, LLC. ("MedXM"), in an all cash transaction for $142 million, net of $5 million cash acquired, which consisted of cash consideration of $130 million and contingent consideration initially estimated at $12 million. The contingent consideration arrangement is dependent upon the achievement of certain revenue targets. MedXM is a leading national provider of home-based health risk assessments and related services. The acquired business is included in our DIS business.

Acquisition of the Outreach Laboratory Service Business of Cape Cod Healthcare, Inc.

On June 18, 2018, we completed the acquisition of the outreach laboratory service business of Cape Cod Healthcare, Inc. in an all cash transaction for $35 million. The acquired business is included in our DIS business.

Acquisition of ReproSource, Inc.

On September 19, 2018, we completed the acquisition of ReproSource, Inc. ("ReproSource"), in an all cash transaction for $35 million, which consisted of cash consideration of $30 million and contingent consideration estimated at $5

million. The contingent consideration arrangement is dependent on the achievement of certain revenue targets. ReproSource is a national leader in specialty fertility diagnostic services. The acquired business is included in our DIS business.

Acquisition of the U.S. Laboratory Service Business of Oxford Immunotec, Inc.

On November 6, 2018, we completed the acquisition of the U.S. laboratory service business of Oxford Immunotec, Inc. ("Oxford"), in an all cash transaction for $170 million, net of $1 million cash acquired. The acquisition included laboratories in Tennessee and Massachusetts that provide tuberculosis and tick-borne disease testing services. As part of the transaction, Oxford will sell test kits and related accessories to us under a long-term supply agreement. The acquired business is included in our DIS business.

For details regarding our acquisitions, see Note 6 to the audited consolidated financial statements.

Invigorate Program

We are engaged in a multi-year program called Invigorate, which is designed to reduce our cost structure and improve our performance. We 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. We currently aim annually to save approximately 3% of our costs, and in 2018 we achieved that goal.

Invigorate has consisted of several flagship programs, with structured plans in each, to drive savings and improve performance across the customer value chain. These flagship programs include: organization excellence; information technology excellence; procurement excellence; field and customer service excellence; lab excellence; and revenue services excellence. In addition to these programs, we identified key themes to change how we operate including reducing denials and patient concessions; further digitizing our business; standardization and automation; and optimization initiatives in our lab network and patient service center network. We believe that our efforts to standardize our information technology systems, equipment and data also foster our efforts to strengthen our foundation for growth and support the value creation initiatives of our clinical franchises by enhancing our operational flexibility, empowering and enhancing the customer experience, facilitating the delivery of actionable insights and bolstering our large data platform.

For the year ended December 31, 2018, we incurred $109 million of pre-tax charges under our Invigorate program including $48 million of employee separation costs and other restructuring related costs with the remainder primarily consisting of systems conversion and integration costs, all of which result in cash expenditures. Additional restructuring charges may be incurred in future periods as we identify additional opportunities to achieve further cost savings.

For further details of the Invigorate program and associated costs, see Note 5 to the audited 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, discussed in "Item 1, Business: The United States Clinical Testing Industry", present both opportunities and risks. We believe that several of the trends, including consolidation, price transparency and increased consumer involvement, are favorable to our business.

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), denying coverage for services, 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. The ongoing trend of rising patient responsibility and increasing payer denials has resulted in an increase in patient revenues as a percentage of total revenue, which has resulted in an increase in our reserves for patient price concessions. As health plans and government programs require greater levels of patient cost-sharing, our patient price concessions may continue to be negatively impacted and adversely impact our results of operations. As previously mentioned, there could be a shift to capitation arrangements where we agree to a predetermined monthly reimbursement rate for each member enrolled in a restricted plan, generally regardless of the number or cost of services provided by us. In both 2018 and 2017, we derived approximately 3% of our consolidated net revenues and 11% of our testing volume, respectively, 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 PAMA. Under the revised Medicare Clinical Laboratory Fee Schedule (in 2018 CLFS revenues comprised 12% of our consolidated net revenues), reimbursement for clinical laboratory testing was reduced in 2018 and is scheduled to be reduced again by approximately 10% in each of 2019 and 2020. PAMA calls for further revision of the CLFS for years after 2020, based on future surveys of market rates; reimbursement rate reduction from 2021-23 is capped by PAMA at 15% annually. We expect reimbursement rate pressure for 2019, including as a result of PAMA, to exceed 2.5%.

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.

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 revenues and the ultimate collection of receivables associated with our DIS business involves significant assumptions and judgments. We recognize as revenue the amount of consideration to which we expect to be entitled upon completion of the testing process, when results are reported, or when services have been rendered. We estimate the amount of consideration we expect to be entitled to receive from customer groups, determined using the portfolio approach, in exchange for providing services. These estimates include the impact of contractual allowances, including payer denials, and price concessions, as discussed below. The portfolios determined using the portfolio approach consist of the following customers:

•	Healthcare Insurers

•	Government Payers

•	Client Payers

•	Patients

We have a standardized approach to estimate the amount of consideration that we expect to be entitled to, including the impact of contractual allowances, including payer denials, and price concessions. Historical collection and payer reimbursement experience is an integral part of the estimation process related to revenues and receivables. Adjustments to our estimated contractual allowances and implicit price concessions are recorded in the current period as changes in estimates. Further adjustments to the allowances, based on actual receipts, may be recorded upon settlement. Based on our standard process, during the fourth quarter of 2018, we increased our reserves for revenues and accounts receivable by approximately $35 million due to an increase in denials and a shift toward higher patient responsibility throughout the year.

We regularly assess the state of our billing operations in order to identify issues which may impact the collectibility of receivables or revenue 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 revenue estimation processes, along with our close monitoring of our billing operations, help to reduce the risk associated with material adjustments to reserve estimates. However, changes to our estimate of the impact of contractual allowances, including payer denials, and price concessions could have a material impact on our results of operations and financial condition in the period that the estimates are adjusted.

The following table shows the approximate percentage of our total requisition volume and net revenues associated with our DIS business during 2018 applicable to each customer group:

	% of		% of
	Total		Consolidated
	Volume		Net Revenues
Healthcare Insurers	46		35
Government Payers	13		16
Client Payers	37		32
Patients *	1		13
Total DIS	97		96

*Patient revenue includes co-pays and deductibles but volume associated with such revenue is reported under Healthcare Insurers.

The following table shows net accounts receivable as of December 31, 2018 applicable to each payer group:

	% of
	Consolidated
	Net Accounts
	Receivable
Healthcare Insurers	22
Government Payers	13
Client Payers	41
Patients (including coinsurance and deductible responsibilities)	20
Total DIS	96

Healthcare insurers

Reimbursements from healthcare insurers are based on fee-for-service schedules and on capitated payment rates. Under fee-for-service arrangements, healthcare insurers are billed at our Company's list price. Net revenues recognized consist of amounts billed net of contractual allowances for differences between amounts billed and the estimated consideration we expect to receive from such payers, which considers historical denial and collection experience and the terms of our contractual arrangements.

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

Under capitated arrangements with healthcare insurers, we recognize revenue based on a predetermined monthly reimbursement rate for each member of an insurer's health plan regardless of the number or cost of services provided by us. Approximately 3% of our consolidated net revenues for the year ended December 31, 2018 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 the end of a reporting period. If any capitated payments are not received on a timely basis, we determine the cause and make a separate determination as to whether or not the collection of the amount from the healthcare insurer is at risk and, if so, would reserve accordingly.

Government payers

Reimbursements from government payers are based on fee-for-service schedules set by governmental authorities, including traditional Medicare and Medicaid. Net revenues recognized consist of amounts billed net of contractual allowances for differences between amounts billed and the estimated consideration our Company expects to receive from such payers, which considers historical denial and collection experience.

Collection of our Company's net revenues from government payers is normally a function of providing the complete and correct billing information within the various filing deadlines. Collection generally occurs within 30 days of billing. Provided we have billed government payers accurately with complete information prior to the established filing deadline, there has historically been little to no credit risk. If there has been a delay in billing, we determine if the amounts in question will likely go past the filing deadline, and, if so, we will reserve for the billing accordingly.

Client payers

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

Patients

Uninsured patients are billed based on established patient fee schedules or fees negotiated with physicians on behalf of their patients. Insured patients (includes coinsurance and deductible responsibilities) are billed based on fees negotiated with healthcare insurers. Collection of billings from patients is subject to credit risk and ability of the patients to pay. Net revenues consist of amounts billed net of discounts provided to uninsured patients in accordance with our policies and implicit price concessions. Implicit price concessions represent differences between amounts billed and the estimated consideration we expect to receive from patients, which considers historical collection experience and other factors including current market conditions. Patient billings 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. Allowances are further adjusted for estimated recoveries of amounts sent to collection agencies based on historical collection experience, which is regularly monitored. Collection of consideration we expect to receive generally occurs within 30 to 60 days of billing.

Reserves for general and professional liability claims

As a general matter, providers of diagnostic information services may be subject to lawsuits alleging negligence or other similar claims. These suits could involve claims for substantial damages. Any professional liability litigation could also have an adverse impact on our client base and reputation. We maintain various liability insurance coverages for claims that could result from providing, or failing to provide, 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 18 to the audited consolidated financial statements for a discussion of our reserves for general and professional liability claims.

Reserves for other legal proceedings

Our businesses are subject to or impacted by extensive and frequently changing laws and regulations, including inspections and audits by governmental agencies, in the United States (at both the federal and state levels) and the other jurisdictions in which we conduct business. Although we believe that we are in compliance, in all material respects, with applicable laws and regulations, there can be no assurance that a regulatory agency would not reach a different conclusion. Any noncompliance by us with applicable laws and regulations could have a material adverse effect on our results of operations. In addition, these laws and regulations may be interpreted or applied by a prosecutorial, regulatory or judicial authority in a manner that could require us to make changes in our operations, including our pricing and/or billing practices. 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 18 to the audited consolidated financial statements for a discussion of the various legal proceedings that involve our 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 2018:

•	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, our policy is to update the fair value calculation of our reporting units and perform the quantitative goodwill impairment test on a periodic basis.

The quantitative impairment test involves the comparison of the fair value of the reporting unit to its carrying value. If the carrying value is greater than our estimate of fair value, an impairment loss will be recognized in the amount of the excess. We calculate the fair value of each reporting unit using either 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 our 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, 2018, we performed the qualitative assessment for our DIS and risk assessment services reporting units. Based on the totality of the information available for each reporting unit, we concluded that it was more likely than not that the estimated fair values were greater than the carrying values of the reporting units, and as such, no further analysis was required.

Accounting for stock-based compensation expense

We measure stock-based compensation for equity awards at fair value on the date of grant and 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 stock option 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, 2018 accounted for approximately 95% of our consolidated net revenues. Our other operating segments consist of our DS businesses. For further details regarding our business segment information, see Note 19 to the audited consolidated financial statements.

Results of Operations

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

													$ Increase (Decrease)								% Increase (Decrease)
	2018				2017				2016				2018 vs. 2017				2017 vs. 2016				2018 vs. 2017			2017 vs. 2016
	(dollars in millions, except per share data)
Net revenues:
DIS business	$	7,204			$	7,068			$	6,837			$	136			$	231			1.9	%		3.4	%
DS businesses	327				334				377				(7		)		(43		)		(2.3	)		(11.3	)
Total net revenues	$	7,531			$	7,402			$	7,214			$	129			$	188			1.7	%		2.6	%
Operating costs and expenses and other operating income:
Cost of services	$	4,926			$	4,719			$	4,616			$	207			$	103			4.4	%		2.2	%
Selling, general and administrative	1,424				1,443				1,380				(19		)		63				(1.3	)		4.6
Amortization of intangible assets	90				74				72				16				2				21.2			2.5
Loss (gain) on disposition of business	4				—				(118		)		4				118				NM			NM
Other operating (income) expense, net	(14		)		1				(13		)		(15		)		14				NM			NM
Total operating costs and expenses, net	$	6,430			$	6,237			$	5,937			$	193			$	300			3.1	%		5.1	%
Operating income	$	1,101			$	1,165			$	1,277			$	(64	)		$	(112	)		(5.5	)%		(8.8	)%

Other (expense) income:
Interest expense, net	$	(167	)		$	(151	)		$	(143	)		$	(16	)		$	(8	)		10.8	%		5.3	%
Other (expense) income, net	(8		)		16				(48		)		(24		)		64				NM			NM
Total non-operating expenses, net	$	(175	)		$	(135	)		$	(191	)		$	(40	)		$	56			28.9	%		(29.1	)%
Income tax expense	$	(182	)		$	(241	)		$	(429	)		$	59			$	188			(24.2	)%		(43.9	)%
Effective income tax rate	19.7		%		23.4		%		39.5		%		-370 bps				-1610 bps				NM			NM
Equity in earnings of equity method investees, net of taxes	$	44			$	35			$	39			$	9			$	(4	)		24.4	%		(9.6	)%
Net income attributable to Quest Diagnostics' stockholders	$	736			$	772			$	645			$	(36	)		$	127			(4.7	)%		19.8	%
Diluted earnings per common share attributable to Quest Diagnostics’ common stockholders	$	5.29			$	5.50			$	4.51			$	(0.21	)		$	0.99			(3.8	)%		22.0	%

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:

	2018			2017			2016
Net revenues:
DIS business	95.7	%		95.5	%		94.8	%
DS businesses	4.3			4.5			5.2
Total net revenues	100.0	%		100.0	%		100.0	%
Operating costs and expenses and other operating income:
Cost of services	65.4	%		63.8	%		64.0	%
Selling, general and administrative	18.9			19.5			19.1
Amortization of intangible assets	1.2			1.0			1.0
Loss (gain) on disposition of business	0.1			—			(1.5	)
Other operating (income) expense, net	(0.2	)		—			(0.3	)
Total operating costs and expenses, net	85.4	%		84.3	%		82.3	%
Operating income	14.6	%		15.7	%		17.7	%

Operating Results

Results for the year ended December 31, 2018 were affected by certain items that on a net basis reduced earnings per diluted share by $0.45 as follows:

•	pre-tax charges of $122 million ($56 million in cost of services, $65 million in selling, general and administrative expenses, and $1 million in other operating (income) expense, net), or $0.66 per diluted share, primarily associated with workforce reductions, systems conversions and integration incurred in connection with further restructuring and integrating our business;

•	excess tax benefits associated with stock-based compensation arrangements of $18 million, or $0.13 per diluted share, recorded in income tax expense;

•

an income tax benefit of $14 million, or $0.09 per diluted share, associated with a change in a tax return accounting method that enabled our Company to accelerate the deduction of certain expenses on its 2017 tax return at the federal corporate statutory tax rate in effect during 2017 partially offset by an income tax expense associated with finalizing the impact of the enactment of the Tax Cuts and Jobs Act ("TCJA");

•

net pre-tax charges of $2 million ($12 million in cost of services and $4 million in loss (gain) on disposition of business partially offset by $14 million gain in other operating (income) expense, net), or $0.01 per diluted share, primarily attributable to costs incurred related to certain legal matters and a loss on the sale of a foreign subsidiary which were partially offset by a gain associated with the decrease in the fair value of the contingent consideration accrual associated with our MedXM acquisition and an insurance claim for hurricane related losses.

Results for the year ended December 31, 2017 were affected by certain items that on a net basis benefited earnings per diluted share by $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 benefit in other (expense) income, 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 $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 loss (gain) on disposition of business;

•

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

•

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

Net Revenues

Net revenues for the year ended December 31, 2018 increased by 1.7% compared to the prior year.

DIS revenues for the year ended December 31, 2018 increased by 1.9% compared to the prior year reflecting the impact of recent acquisitions. Acquisitions contributed 3.2% to DIS revenue growth with organic revenue growth (growth excluding the impact of acquisitions) down 1.3%. DIS volume increased by 2.5%, with acquisitions and organic growth contributing approximately 2% and 0.5%, respectively, to DIS volume growth. Revenue per requisition decreased by 1.2% compared to the prior year primarily from pricing pressure, including pricing pressure due to PAMA and all other sources, of slightly less than 1.5%; increased denials; higher patient concessions and lower revenue per requisition associated with our growth in professional lab services engagements, partially offset by favorable test mix, driven in part by acquisitions.

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 0.4% and we estimate that hurricanes negatively impacted revenue growth by approximately 0.4%.

DIS revenues for the year ended December 31, 2017 increased by 3.4% compared to the prior year, which reflected 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 1.3%, 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 1.1% 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 11.3% compared to the prior year primarily due to the Focus Sale.

Cost of Services

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

Cost of services increased by $207 million for the year ended December 31, 2018 compared to the prior year. The increase was primarily driven by additional operating costs associated with our acquisitions, $20 million of incremental expense associated with reinvestments in the business with savings from tax reform, higher supplies expense, and higher depreciation expense associated with increased capital expenditures, partially offset by lower performance-based compensation.

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.

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

SG&A consists 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 decreased by $19 million for the year ended December 31, 2018, compared to the prior year primarily driven by lower compensation and benefits expense including performance-based compensation, partially offset by additional operating costs associated with our acquisitions and $19 million of incremental expense associated with reinvestments in the business with savings from tax reform.

SG&A increased $63 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.

Amortization of Intangible Assets

The $16 million increase in amortization of intangible assets for the year ended December 31, 2018 compared to the prior year was associated with our acquisitions.

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.

Loss (Gain) on Disposition of Business

For the year ended December 31, 2018, loss on disposition of business was due to the sale of a foreign subsidiary. For the year ended December 31, 2016, gain on disposition of business was a result of the Focus Sale.

Other Operating (Income) Expense, net

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

For the year ended December 31, 2018, other operating (income) expense, net included a gain of $12 million associated with a decrease in the fair value of the contingent consideration accrual associated with our MedXM acquisition.

For the year ended December 31, 2016, other operating (income) expense, net principally consisted of a $22 million non-taxable gain on an escrow recovery associated with an acquisition, partially offset by $7 million of non-cash asset impairment charges.

Operating Income

Operating income was $1,101 million or 14.6% of net revenue for the year ended December 31, 2018, $1,165 million or 15.7% of revenue for the year ended December 31, 2017, and $1,277 million or 17.7% of net revenue for the year ended December 31, 2016.

In addition to the impact of the above items, operating income as a percentage of net revenues for the year ended December 31, 2018 decreased compared to the prior year as certain acquisitions completed during 2017 and 2018 initially have lower operating income (including amortization of acquired intangibles) as compared to the overall business until such time as full cost synergies can be realized through integration of the acquired business.

Interest Expense, net

Interest expense, net for the year ended December 31, 2018 increased by $16 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, 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.

Other (Expense) Income, net

Other (expense) income, 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, 2018, other (expense) income, net included $6 million of losses associated with investments in our deferred compensation plans and the loss on the write-off of an equity investment.

For the year ended December 31, 2017, other (expense) income, 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 were partially offset by non-cash asset impairment charges associated with certain investments of $6 million.

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

Income Tax Expense

For the year ended December 31, 2018, income tax expense included a $15 million income tax benefit associated with a change in a tax return accounting method that enabled our Company to accelerate the deduction of certain expenses on its 2017 tax return at the federal corporate statutory rate in effect during 2017; a $7 million net income tax benefit associated with tax reserves primarily related to the expiration of the statute of limitations for certain income tax returns; and $18 million of excess tax benefits associated with stock-based compensation arrangements. In addition to these items, our effective income tax rate for the year ended December 31, 2018 benefited from the reduced corporate tax rate as a result of TCJA.

For the year ended December 31, 2017, income tax expense and our effective income tax rate benefited from the impact of the enactment of TCJA and excess tax benefits associated with stock-based compensation arrangements. 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. 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.

Equity in Earnings of Equity Method Investees, Net of Taxes

For the year ended December 31, 2018 there was a $9 million increase in equity in earnings of equity method investees, net of taxes, primarily associated with our investment in the Q2 Solutions joint venture.

For the year ended December 31, 2017 there was a $4 million decrease in equity in earnings of equity method investees, net of taxes.

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 audited consolidated financial statements.

As of both December 31, 2018 and 2017, the fair value of our debt was estimated at approximately $4.0 billion 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, 2018 and 2017, the estimated fair value exceeded the carrying value of the debt by $85 million and $247 million, respectively. A hypothetical 10% increase in market interest rates (representing 39 and 31 basis points on average at December 31, 2018 and 2017, respectively) would potentially reduce the estimated fair value of our debt by approximately $88 million and $90 million as of December 31, 2018 and 2017, 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, 2018, the borrowing rates under these debt instruments were: for our secured receivables credit facility, commercial paper rates for highly rated issuers, or LIBOR, plus a spread of 0.70% to 0.725%; and for our senior unsecured revolving credit facility, LIBOR plus 1.125%. As of December 31, 2018, there was $160 million in borrowings outstanding under our $600 million secured receivables credit facility and no borrowings outstanding under our $750 million senior unsecured revolving credit facility.

The notional amount of fixed-to-variable interest rate swaps as of both December 31, 2018 and 2017 was $1.2 billion. The aggregate fair value of the fixed-to-variable interest rate swaps was $93 million and $89 million, in a liability position, as of December 31, 2018 and 2017, 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 24 basis points) would potentially change annual interest expense by $3 million. A hypothetical 10% change in the forward one-month LIBOR curve (representing a 25 basis point change in the weighted average yield) would potentially change the fair value of our derivative liabilities by $17 million.

For further details regarding our outstanding debt and our financial instruments and hedging activities, see Notes 14 and 15, respectively, to the audited 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. Equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) with readily determinable fair values are measured at fair value with changes in fair value recognized in net income. Equity investments that do not have readily determinable fair values are measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes; we regularly evaluate these equity investments to determine if there are any indicators that the investment is impaired. The carrying value of our equity investments that do not have readily determinable fair values was $10 million as of December 31, 2018.

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

	2018				2017				2016
	(dollars in millions)
Net cash provided by operating activities	$	1,200			$	1,175			$	1,116
Net cash used in investing activities	(801		)		(830		)		(127		)
Net cash used in financing activities	(401		)		(592		)		(738		)
Net change in cash and cash equivalents and restricted cash	$	(2	)		$	(247	)		$	251

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, 2018, 2017 and 2016 totaled $135 million, $137 million and $359 million, respectively.

As of December 31, 2018, approximately 33% of our $135 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, 2018 was $1.2 billion, and increased $25 million compared to the prior year primarily as a result of:

•	a decrease in 2018 tax payments of $159 million primarily due to the impact of TCJA; partially offset by;

•	lower operating income in 2018 as compared to 2017; and

•	timing of movements in our working capital accounts.

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 $59 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; 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.

Days sales outstanding, a measure of billing and collection efficiency, was 54 days, 47 days and 48 days as of December 31, 2018, 2017 and 2016, respectively.

Cash Flows from Investing Activities

Net cash used in investing activities for the year ended December 31, 2018 was $801 million, compared to $830 million for the year ended December 31, 2017. This $29 million decrease in cash used in investing activities was a result of:

•	$160 million decrease in cash paid for business acquisitions; partially offset by;

•	$131 million increase in capital expenditures.

Net cash used in investing activities for the year ended December 31, 2017 was $830 million, compared to $127 million for the year ended December 31, 2016. This $703 million increase in cash used in investing activities was a result of:

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

•	$294 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

Cash Flows from Financing Activities

Net cash used in financing activities for the year ended December 31, 2018 was $401 million, compared to $592 million for the year ended December 31, 2017. This $191 million decrease in cash used in financing activities was primarily a result of:

•	$143 million decrease in cash paid for repurchases of our common stock (see "Share Repurchases" for further details) in 2018; and

•	$124 million in net borrowings (proceeds from borrowings less repayments of debt) in 2018, compared to $23 million in net borrowings in 2017; partially offset by;

•	$31 million decrease in proceeds from the exercise of stock options, which was a result of a decrease in the volume of stock options exercised over the past year.

Net cash used in financing activities for the year ended December 31, 2017 was $592 million, compared to $738 million for the year ended December 31, 2016. This $146 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;

•	$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 compared to the prior year; and

•	$43 million of payments related to the retirement of debt in 2016; partially offset by;

•	$23 million in net borrowings (proceeds from borrowings less repayments of debt) in 2017, compared to $141 million in net borrowings in 2016; and

•	$24 million increase in dividends paid.

In 2018, there were $2,090 million in cumulative borrowings under the secured receivables credit facility primarily associated with working capital requirements as well as the funding of our 2018 acquisitions and $1,960 million in repayments. In 2018, there were no borrowings or repayments under our senior unsecured revolving credit facility.

In 2017, there were $205 million in cumulative borrowings primarily associated with the funding of the Cleveland HeartLab, Inc. and Shiel Holdings, LLC ("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.

For details regarding our debt and related transactions, see Note 14 to the audited consolidated financial statements.

Dividend Program

During each of the first three quarters of 2018, our Board of Directors declared a quarterly cash dividend of $0.50 per common share. During the fourth quarter of 2018, our Board of Directors declared a quarterly cash dividend of $0.53 per common share. 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. We expect to fund future dividend payments with cash flows from operations.

Share Repurchases

In December 2016, our Board of Directors authorized us to repurchase an additional $1 billion of our common stock. As of December 31, 2018, $0.6 billion remained available under the share repurchase authorization.

For the year ended December 31, 2018, we repurchased 3.4 million shares of our common stock for $325 million, which included an accrual of $3 million recorded in accounts payable and accrued expenses in the consolidated balance sheet for share repurchases not settled.

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 included 3.1 million shares repurchased under an accelerated share repurchase program.

For further details regarding our share repurchases, see Note 16 to the audited consolidated financial statements.

Contractual Obligations and Commitments

The following table summarizes certain of our contractual obligations as of December 31, 2018 (dollars in millions):

		Payments due by period
Contractual Obligations		Total				Less than 1 year				1-3 years				4-5 years				After 5 years
Outstanding debt		$	3,936			$	460			$	1,350			$	—			$	2,126
Capital lease obligations		36				4				6				4				22
Interest payments on outstanding debt		1,476				169				269				214				824
Operating leases		691				181				249				139				122
Purchase obligations		1,831				300				546				440				545
Merger consideration obligation		14				9				5				—				—
Total contractual obligations		$	7,984			$	1,123			$	2,425			$	797			$	3,639

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, 2018 applied to the December 31, 2018 balances, which are assumed to remain outstanding through their maturity dates.

A 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 14 to the audited consolidated financial statements. A discussion and analysis regarding our minimum rental commitments under noncancelable operating leases is contained in Note 18 to the audited consolidated financial statements. Purchase obligations include our noncancelable commitments to purchase product or services as described in Note 18 to the audited consolidated financial statements. A discussion regarding our acquisitions of Shiel and ReproSource and the related merger consideration obligation is contained in Note 6 to the audited consolidated financial statements. A discussion regarding the fair value of the contingent consideration associated with our acquisitions is discussed in Note 8 to the audited consolidated financial statements.

As of December 31, 2018, our total liabilities associated with unrecognized tax benefits were approximately $107 million, which were excluded from the table above. We expect that these liabilities may decrease by less than $34 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 may further decrease and beneficially impact the effective tax rate. 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 9 to the audited 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, 2018, the fair value of the redeemable noncontrolling interest on the consolidated balance sheet was $77 million, which was excluded from the table above. Since the redemption of the noncontrolling interest is outside of our control, we cannot make a reasonably reliable estimate of the timing of the future payment, if any, of the redeemable noncontrolling interest. For further details regarding the redeemable noncontrolling interest, see Note 16 to the audited 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, 2018, 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 is approximately 6% 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 20 to the audited consolidated financial statements.

Requirements and Capital Resources

We estimate that we will invest approximately $350 million to $400 million during 2019 for capital expenditures, to support and grow our existing operations, principally related to investments in information technology, laboratory equipment and facilities, including our new multi-year laboratory construction in New Jersey, and additional investments in our advanced and consumer growth strategies.

As of December 31, 2018, $1.1 billion of borrowing capacity was available under our existing credit facilities consisting of $369 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 2019, and a $250 million loan commitment and a $100 million letter of credit facility which mature October 2020. The senior unsecured revolving credit facility matures in March 2023.

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 audited consolidated financial statements are discussed in Note 2 to the audited consolidated financial statements.

REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of the Company, including its Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2018 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, 2018 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, 2018 and issued their audit report on the Company's internal control over financial reporting included herein.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Quest Diagnostics Incorporated

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Quest Diagnostics Incorporated and its subsidiaries (the “Company”) as of December 31, 2018 and 2017, 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, 2018, 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, 2018 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, 2018, 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, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 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, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Change in Accounting Principle

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for revenues from contracts with customers in 2018.

Basis for Opinions

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

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

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

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to

F- 1

permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

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

/s/	PricewaterhouseCoopers LLP
	Florham Park, New Jersey
	February 21, 2019

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

F- 2

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2018 AND 2017

(in millions, except per share data)

	2018				2017
Assets
Current assets:
Cash and cash equivalents	$	135			$	137
Accounts receivable, net of allowance for doubtful accounts of $15 and $13 as of December 31, 2018 and 2017, respectively	1,012				924
Inventories	99				95
Prepaid expenses and other current assets	144				150
Total current assets	1,390				1,306
Property, plant and equipment, net	1,288				1,145
Goodwill	6,563				6,335
Intangible assets, net	1,207				1,119
Investments in equity method investees	436				462
Other assets	119				136
Total assets	$	11,003			$	10,503
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses	$	1,021			$	1,021
Current portion of long-term debt	464				36
Total current liabilities	1,485				1,057
Long-term debt	3,429				3,748
Other liabilities	745				663
Commitments and contingencies
Redeemable noncontrolling interest	77				80
Stockholders’ equity:
Quest Diagnostics stockholders’ equity:
Common stock, par value $0.01 per share; 600 shares authorized as of both December 31, 2018 and 2017; 217 and 216 shares issued as of December 31, 2018 and 2017, respectively	2				2
Additional paid-in capital	2,667				2,612
Retained earnings	7,602				7,138
Accumulated other comprehensive loss	(59		)		(48		)
Treasury stock, at cost; 82 shares and 81 shares as of December 31, 2018 and 2017, respectively	(4,996		)		(4,783		)
Total Quest Diagnostics stockholders’ equity	5,216				4,921
Noncontrolling interests	51				34
Total stockholders’ equity	5,267				4,955
Total liabilities and stockholders’ equity	$	11,003			$	10,503

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, 2018, 2017 AND 2016

(in millions, except per share data)

	2018				2017				2016
Net revenues	$	7,531			$	7,402			$	7,214
Operating costs and expenses and other operating income:
Cost of services	4,926				4,719				4,616
Selling, general and administrative	1,424				1,443				1,380
Amortization of intangible assets	90				74				72
Loss (gain) on disposition of business	4				—				(118		)
Other operating (income) expense, net	(14		)		1				(13		)
Total operating costs and expenses, net	6,430				6,237				5,937
Operating income	1,101				1,165				1,277
Other (expense) income:
Interest expense, net	(167		)		(151		)		(143		)
Other (expense) income, net	(8		)		16				(48		)
Total non-operating expenses, net	(175		)		(135		)		(191		)
Income before income taxes and equity in earnings of equity method investees	926				1,030				1,086
Income tax expense	(182		)		(241		)		(429		)
Equity in earnings of equity method investees, net of taxes	44				35				39
Net income	788				824				696
Less: Net income attributable to noncontrolling interests	52				52				51
Net income attributable to Quest Diagnostics	$	736			$	772			$	645
Earnings per share attributable to Quest Diagnostics’ common stockholders:
Basic	$	5.39			$	5.63			$	4.58
Diluted	$	5.29			$	5.50			$	4.51

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, 2018, 2017 AND 2016

(in millions)

	2018				2017				2016
Net income	$	788			$	824			$	696
Other comprehensive (loss) income:
Currency translation	(11		)		20				(34		)
Investment adjustments, net of taxes	—				3				(2		)
Net deferred loss on cash flow hedges, net of tax	2				1				2
Other comprehensive (loss) income	(9		)		24				(34		)
Comprehensive income	779				848				662
Less: Comprehensive income attributable to noncontrolling interests	52				52				51
Comprehensive income attributable to Quest Diagnostics	$	727			$	796			$	611

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, 2018, 2017 AND 2016

(in millions)

	2018				2017				2016
Cash flows from operating activities:
Net income	$	788			$	824			$	696
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	309				270				249
Provision for doubtful accounts	6				8				7
Deferred income tax provision	73				9				37
Stock-based compensation expense	61				79				69
Loss (gain) on disposition of business	4				—				(118		)
Payment of debt extinguishment costs	—				—				43
Other, net	8				(6		)		(2		)
Changes in operating assets and liabilities:
Accounts receivable	(65		)		9				(42		)
Accounts payable and accrued expenses	(19		)		(8		)		56
Income taxes payable	4				16				42
Termination of interest rate swap agreements	—				—				54
Other assets and liabilities, net	31				(26		)		25
Net cash provided by operating activities	1,200				1,175				1,116
Cash flows from investing activities:
Business acquisitions, net of cash acquired	(421		)		(581		)		(139		)
Proceeds from disposition of business	2				1				295
Capital expenditures	(383		)		(252		)		(293		)
Decrease in investments and other assets	1				2				10
Net cash used in investing activities	(801		)		(830		)		(127		)
Cash flows from financing activities:
Proceeds from borrowings	2,090				205				1,869
Repayments of debt	(1,966		)		(182		)		(1,728		)
Purchases of treasury stock	(322		)		(465		)		(590		)
Exercise of stock options	99				130				73
Employee payroll tax withholdings on stock issued under stock-based compensation plans	(21		)		(23		)		(10		)
Dividends paid	(266		)		(247		)		(223		)
Distributions to noncontrolling interest partners	(54		)		(51		)		(41		)
Payment of debt extinguishment costs	—				—				(43		)
Contributions from noncontrolling interest partners	16				4				—
Other financing activities, net	23				37				(45		)
Net cash used in financing activities	(401		)		(592		)		(738		)
Net change in cash and cash equivalents and restricted cash	(2		)		(247		)		251
Cash and cash equivalents and restricted cash, beginning of year	137				384				133
Cash and cash equivalents and restricted cash, end of year	$	135			$	137			$	384
Cash and cash equivalents	$	135			$	137			$	359
Restricted cash	—				—				25
Cash and cash equivalents and restricted cash, end of year	$	135			$	137			$	384

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, 2018, 2017 AND 2016

(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, 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 interest partners																		(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 interest partners																		(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		)
Contributions from noncontrolling interest partners																		4			4
Balance, December 31, 2017	135		$	2		$	2,612		$	7,138		$	(48	)	$	(4,783	)	$	34		$	4,955				$	80
Net income									736									45			781					7
Other comprehensive loss, net of tax												(9		)							(9		)
Dividends declared									(274		)										(274		)
Distributions to noncontrolling interest partners																		(44		)	(44		)			(10		)
Issuance of common stock under benefit plans						14									14						28
Stock-based compensation expense						56									5						61
Exercise of stock options	3					6									93						99
Shares to cover employee payroll tax withholdings on stock issued under stock-based compensation plans						(21		)													(21		)
Purchases of treasury stock	(3	)													(325		)				(325		)
Contributions from noncontrolling interest partners																		16			16
Reclassification of stranded tax effects resulting from enactment of the Tax Cuts and Jobs Act									2			(2		)							—
Balance, December 31, 2018	135		$	2		$	2,667		$	7,602		$	(59	)	$	(4,996	)	$	51		$	5,267				$	77

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 are the leading provider of risk assessment services for the life insurance industry and offer healthcare organizations and clinicians robust information technology solutions.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of all entities controlled by the Company through its direct or indirect ownership of a majority voting interest 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. 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.

Reclassifications

As a result of the adoption of the new accounting standard associated with clarifying presentation and classification in the statement of cash flows, certain reclassifications have been made to the prior period financial statements to conform to the current period presentation. In addition, the Company adopted the new revenue recognition accounting standard on a full retrospective basis, which requires the Company to restate certain previously reported results. For further details regarding the impact of these new accounting standards, see New Accounting Standards.

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 as revenue the amount that reflects the consideration to which it expects to be entitled in exchange for goods sold or services rendered upon completion of the testing process, when results are reported, or when services have been rendered (see Note 3). Net revenues from Medicare and Medicaid programs were approximately 16%, 17% and 17% of the Company's consolidated net revenues for the years ended December 31, 2018, 2017 and 2016, respectively.

Taxes on Income

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

Earnings Per Share

The Company's unvested restricted stock units that contain non-forfeitable rights to dividends are participating securities and, therefore, are included in the earnings allocation in computing earnings per share using the two-class method. Basic earnings per common share is calculated by dividing net income, 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.

Stock-Based Compensation

The Company measures stock-based compensation for equity awards at fair value on the date of grant and records stock-based compensation as a charge to earnings net of the estimated impact of forfeited awards. As such, the Company recognizes stock-based compensation cost only for those stock-based awards that are estimated to ultimately vest over their requisite service period, based on the vesting provisions of the individual grants. The cumulative effect on current and prior periods of a change in the estimated forfeiture rate is recognized as compensation cost in earnings in the period of the change. The terms of the Company's performance share 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 17.

F- 9

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

Fair Value Measurements

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

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

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

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

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

Foreign Currency

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

Cash and Cash Equivalents

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

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, 2018 and 2017, receivables due from government payers under the Medicare and Medicaid programs represent approximately 13% and 14%, respectively, of the Company's consolidated net accounts receivable. The portion of the Company's accounts receivable due from patients comprises the largest portion of credit risk. As of both December 31, 2018 and 2017, receivables due from patients represent approximately 20% of the Company's consolidated net accounts receivable. The Company applies assumptions and judgments including historical collection experience for assessing collectibility and determining net revenues and accounts receivable from patients.

F- 10

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

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. 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 finished goods 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, 2018 as follows:

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

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

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

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

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

F- 11

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

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, 2018, the Company performed the qualitative assessment for its DIS and risk assessment services reporting units. Based on the totality of information available for the DIS and risk assessment services reporting units, the Company concluded that it was more likely than not that the estimated fair values were greater than the carrying values of the reporting units, and as such, no further analysis was required. For the year ended December 31, 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.

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, 2018 and 2017, 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 equity investments (except for those accounted for under the equity method of accounting), are included in other assets in the consolidated balance sheets and include:

•

Equity investments with readily determinable fair values which are comprised of participant-directed investments of deferred employee compensation and related Company matching contributions held in trusts pursuant to the Company's supplemental deferred compensation plans (see Note 17). These investments are measured at fair value with both realized and unrealized gains and losses recorded in current earnings as a component of non-operating expense within other (expense) income, net in the consolidated statement of operations. For the years ended December 31, 2018, 2017 and 2016, gains and (losses) from these equity securities totaled $(2) million, $8 million, and $3 million, respectively. The carrying value of these investments, which are included in other assets on the consolidated balance sheet, were $53 million and $58 million at December 31, 2018 and 2017, respectively.

F- 12

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

•

Equity investments that do not have readily determinable fair values which consist of investments in preferred and common shares of privately held companies. These investments are measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes. The Company regularly evaluates these equity investments to determine if there are any indicators that the investment is impaired; no impairment charges were recognized related to these investments for the years ended December 31, 2018, 2017, and 2016. The carrying value of these investments, which are included in other assets on the consolidated balance sheet, were $10 million and $9 million at December 31, 2018 and 2017, respectively.

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 (expense) income, net in the consolidated statements of operations. For derivatives that have been formally designated as a cash flow hedge, the change in the fair value of the derivatives is recorded in accumulated other comprehensive loss. Upon maturity or early termination of an effective interest rate swap 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- 13

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

•	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 16).

Prior to adoption of the new accounting guidance on recognition and measurement of financial assets and liabilities (see New Accounting Standards), comprehensive income (loss) also included equity investment adjustments, which represented unrealized holding gains (losses), net of tax on available for sale securities, net of other-than-temporary impairment amounts reclassified to other (expense) income, net.

New Accounting Standards

Adoption of New Accounting Standards

On January 1, 2018, the Company adopted a new accounting standard issued by the Financial Accounting Standards Board ("FASB") on revenue recognition using the full retrospective method. This new accounting standard 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 revenue recognition 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. As a result of the Company's adoption of this standard, the majority of the amounts that were historically classified as bad debt expense, primarily related to patient responsibility, are now considered an implicit price concession in determining net revenues. Accordingly, the Company reports 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. In addition, the adoption of this new accounting standard resulted 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. For further details, see Note 3.

Adoption of the standard impacted the Company's previously reported results as follows:

	As Previously Reported				Adjustment for New Accounting Standard on Revenue Recognition				As Restated
Year Ended December 31, 2017
Consolidated Statements of Operations:
Net revenues	$	7,709			$	(307	)		$	7,402
Selling, general and administrative expenses	$	1,750			$	(307	)		$	1,443
Net income attributable to Quest Diagnostics	$	772			$	—			$	772
Consolidated Statements of Cash Flows:
Provision for doubtful accounts	$	315			$	(307	)		$	8
Changes in operating assets and liabilities:
Accounts receivable	$	(298	)		$	307			$	9

F- 14

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

	As Previously Reported				Adjustment for New Accounting Standard on Revenue Recognition				As Restated
Year Ended December 31, 2016
Consolidated Statements of Operations:
Net revenues	$	7,515			$	(301	)		$	7,214
Selling, general and administrative expenses	$	1,681			$	(301	)		$	1,380
Net income attributable to Quest Diagnostics	$	645			$	—			$	645
Consolidated Statements of Cash Flows:
Provision for doubtful accounts	$	308			$	(301	)		$	7
Changes in operating assets and liabilities:
Accounts receivable	$	(343	)		$	301			$	(42	)
Balance, December 31, 2017
Consolidated Balance Sheets:
Accounts receivable	$	1,193			$	(256	)		$	937
Allowance for doubtful accounts	$	269			$	(256	)		$	13
Accounts receivable, net of allowance for doubtful accounts	$	924			$	—			$	924

On January 1, 2018, the Company adopted a new accounting standard issued by the FASB on the recognition and measurement of financial assets and financial liabilities. This new accounting standard 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 new accounting standard eliminated 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 standard was adopted on a modified retrospective basis with amounts reported in accumulated other comprehensive income associated with equity securities previously classified as held for sale reclassified to retained earnings upon adoption. The adoption of this standard did not have a material impact on the Company's results of operations, financial position, or cash flows.

On January 1, 2018, the Company adopted two new accounting standards issued by the FASB that clarify presentation and classification in the statement of cash flows on a retrospective basis. As a result of adoption:

•

Amounts generally described as restricted cash and restricted cash equivalents are now 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. As a result of adoption, there was no impact to cash flows from operating, investing or financing activities for the year ended December 31, 2018. For the year ended December 31, 2016, proceeds from the disposition of business within cash flows from investing activities now includes $25 million of proceeds associated with the sale of the Focus Diagnostics products business which were initially held in escrow and included in restricted cash. The receipt of the escrow proceeds, which was previously reported as a cash inflow from investing activities for the year ended December 31, 2017, is no longer presented within the net change in cash and cash equivalents and restricted cash for 2017 as it is included in the beginning-of-period balance of restricted cash. Refer to Note 7 to the consolidated financial statements for more information regarding the disposition of the Focus Diagnostics products business.

•

The classification of how certain cash receipts and payments are presented within the statement of cash flows has been clarified. As a result, the payment of debt extinguishment costs and the repayment of original issue debt discount of $43 million and $4 million, respectively, for the year ended December 31, 2016 are now presented as a financing cash outflow in the consolidated statement of cash flows for the year ended

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(in millions unless otherwise indicated)

December 31, 2016 whereas they were previously presented as an operating cash outflow. There were no debt retirement costs for the years ended December 31, 2018 and 2017.

On January 1, 2018, the Company adopted a new accounting standard issued by the FASB that provides a framework for evaluating whether a transaction should be accounted for as an acquisition (or disposal) of assets or a business. If an entity determines that substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, then the set of transferred assets and activities is not a business. If this threshold is not met, in order to be considered a business the set of transferred assets and activities must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. The adoption of this standard, which was done on a prospective basis, will require future transactions to be evaluated under the new framework.

On April 1, 2018, the Company elected to adopt a new accounting standard issued by the FASB to reclassify stranded tax effects resulting from enactment of the Tax Cuts and Jobs Act ("TCJA") from accumulated other comprehensive income to retained earnings. The adoption of this standard did not have a material impact on the Company's results of operations, financial position or cash flows.

New Accounting Standards To Be Adopted

In October 2018, the FASB issued an Accounting Standard Update (“ASU”) that allows the Company to include the Overnight Index Swap Rate based on the Secured Overnight Financing Rate as an additional benchmark interest rate for hedge accounting purposes. This ASU is effective for the Company in the first quarter of 2019 with early adoption permitted and will be applied prospectively for new or redesignated hedges entered into after the adoption date. Adoption of this standard is not expected to have a material impact on the Company’s results of operations, financial position and cash flows.

In August 2018, the FASB issued an ASU that aligns the requirements for deferring implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This ASU is effective for the Company in the first quarter of 2020 with early adoption permitted and can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. 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 February 2016, the FASB issued an ASU that amends accounting for leases. Under the new guidance, a lessee will recognize assets and liabilities for most leases on its balance sheet but will recognize expense on its statement of operations similar to current lease accounting. The ASU is effective for the Company in the first quarter of 2019 with early adoption permitted. As a result of the adoption of the new standard the Company expects to record additional lease assets and lease liabilities of approximately $500 million as of January 1, 2019 with respect to the Company's operating leases. Accounting for the Company's finance leases will remain substantially unchanged. Additionally, the standard will not materially impact the Company's results of operations or cash flows. In July 2018, the FASB issued an ASU to provide an additional transition method to adopt the guidance by allowing entities to initially apply the new lease standard at the adoption date and recognize a cumulative effect to the opening balance of retained earnings, which the Company plans to elect. The Company will also elect the package of practical expedients, which among other things will allow the Company to carrying forward its historical lease classification.

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.

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(in millions unless otherwise indicated)

3. REVENUE RECOGNITION

DIS

Net revenues in the Company’s DIS business accounted for approximately 95% of the Company’s total net revenues for the years ended December 31, 2018, 2017 and 2016 and are primarily comprised of a high volume of relatively low-dollar transactions. The DIS business, which provides clinical testing services and other services, satisfies its performance obligation and recognizes revenues upon completion of the testing process, when results are reported, or when services have been rendered. The Company estimates the amount of consideration it expects to be entitled to receive from customer groups, determined using the portfolio approach, in exchange for providing services. These estimates include the impact of contractual allowances, including payer denials, and price concessions, as discussed below. The portfolios determined using the portfolio approach consist of the following groups of customers: healthcare insurers, government payers, client payers and patients. Contracts with customers in the DIS business do not contain significant financing components based on the typical period of time between performance of services and collection of consideration.

The process for estimating revenues and the ultimate collection of accounts receivable involves significant judgment and estimation. The Company follows a standard process, which considers historical denial and collection experience and other factors, to estimate contractual allowances and implicit price concessions, recording adjustments in the current period as changes in estimates. Further adjustments to the allowances, based on actual receipts, may be recorded upon settlement. Based on this process, during the fourth quarter of 2018, the Company increased its reserves for revenues and accounts receivable by approximately $35 million due to an increase in denials and a shift toward higher patient responsibility throughout the year.

The following are descriptions of the DIS business’ portfolios:

Healthcare Insurers

Reimbursements from healthcare insurers are based on negotiated fee-for-service schedules and on capitated payment rates. Under fee-for-service arrangements, healthcare insurers are billed at the Company's list price. Net revenues recognized consist of amounts billed net of contractual allowances for differences between amounts billed and the estimated consideration the Company expects to receive from such payers, which considers historical denial and collection experience and the terms of the Company’s contractual arrangements.

Collection of the Company's net revenues from healthcare insurers is normally a function of providing complete and correct billing information to the healthcare insurers within the various filing deadlines and generally occurs within 30 to 60 days of billing. Provided the Company has billed healthcare insurers accurately with complete information prior to the established filing deadline, there has historically been little to no credit risk. If there has been a delay in billing, the Company determines if the amounts in question will likely go past the filing deadline, and if so, it will reserve accordingly for the billing.

Under capitated arrangements with healthcare insurers, the Company recognizes revenue based on a predetermined monthly reimbursement rate for each member of an insurer's health plan regardless of the number or cost of services provided by the Company. Healthcare insurers typically reimburse the Company under capitated arrangements in the same month services are performed, essentially giving rise to no outstanding accounts receivable at the end of a reporting period. If any capitated payments are not received on a timely basis, the Company determines the cause and makes a separate determination as to whether or not the collection of the amount from the healthcare insurer is at risk and, if so, would reserve accordingly.

Government Payers

Reimbursements from government payers are based on fee-for-service schedules set by governmental authorities, including traditional Medicare and Medicaid. Net revenues recognized consist of amounts billed net of contractual allowances for differences between amounts billed and the estimated consideration the Company expects to receive from such payers, which considers historical denial and collection experience and other factors.

Collection of the Company's net revenues from government payers is normally a function of providing the complete and correct billing information within the various filing deadlines and generally occurs within 30 days of billing. Provided the Company has billed government payers accurately with complete information prior to the established filing deadline, there has

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

historically been little to no credit risk. If there has been a delay in billing, the Company determines if the amounts in question will likely go past the filing deadline, and, if so, it will reserve for the billing accordingly.

Client Payers

Client payers include physicians, hospitals, ACOs, IDNs, employers, other commercial laboratories and institutions for which services are performed on a wholesale basis, and are billed based on negotiated fee schedules. Credit risk and ability to pay are more of a consideration for these payers than healthcare insurers and government payers. Collection of consideration the Company expects to receive generally occurs within 60 to 90 days of billing.

Patients

Uninsured patients are billed based on established patient fee schedules or fees negotiated with physicians on behalf of their patients. Insured patients (includes coinsurance and deductible responsibilities) are billed based on fees negotiated with healthcare insurers. Collection of billings from patients is subject to credit risk and ability of the patients to pay. Net revenues consist of amounts billed net of discounts provided to uninsured patients in accordance with the Company’s policies and implicit price concessions. Implicit price concessions represent differences between amounts billed and the estimated consideration the Company expects to receive from patients, which considers historical collection experience and other factors including current market conditions. Patient billings 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. Allowances are further adjusted for estimated recoveries of amounts sent to collection agencies based on historical collection experience, which is regularly monitored. Collection of consideration the Company expects to receive generally occurs within 30 to 60 days of billing.

DS

The Company’s DS businesses primarily satisfy their performance obligations and recognize revenues when delivery has occurred or services have been rendered. Collection of consideration the Company expects to receive generally occurs within 30 to 60 days of billing.

The approximate percentage of net revenue by type of customer was as follows:

	Twelve Months Ended December 31,
	2018			2017			2016
Healthcare insurers:
Fee-for-service	32	%		34	%		34	%
Capitated	3			3			4
Total healthcare insurers	35			37			38
Government payers	16			17			17
Client payers	32			30			29
Patient	13			12			11
Total DIS	96			96			95
DS	4			4			5
Net revenues	100	%		100	%		100	%

For the years ended December 31, 2018, 2017 and 2016, substantially all of the Company’s services were provided within the United States, see Note 19.

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(in millions unless otherwise indicated)

4. EARNINGS PER SHARE

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

	2018				2017				2016
Amounts attributable to Quest Diagnostics’ common stockholders:
Net income attributable to Quest Diagnostics	$	736			$	772			$	645
Less: Earnings allocated to participating securities	3				3				3
Earnings available to Quest Diagnostics’ common stockholders – basic and diluted	$	733			$	769			$	642
Weighted average common shares outstanding – basic	136				137				140
Effect of dilutive securities:
Stock options and performance share units	3				3				2
Weighted average common shares outstanding – diluted	139				140				142
Earnings per share attributable to Quest Diagnostics’ common stockholders:
Basic	$	5.39			$	5.63			$	4.58
Diluted	$	5.29			$	5.50			$	4.51

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

	2018			2017			2016
Stock options	2			2			1

5. RESTRUCTURING ACTIVITIES

Invigorate Program

The Company is committed to a program called Invigorate which is designed to reduce its cost structure and improve performance. Invigorate consists 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. In addition to these programs, the Company identified key themes to change how it operates including reducing denials and patient concessions; further digitizing the business; standardization and automation; and optimization initiatives in the areas of lab network and patient service center network. The Invigorate program is 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 the Company to improve service quality and operating profitability.

Restructuring Charges

The following table provides a summary of the Company's pre-tax restructuring charges for the years ended December 31, 2018, 2017 and 2016:

	2018				2017				2016
Employee separation costs	$	45			$	29			$	9
Facility-related costs	4				1				2
Asset impairment charges	2				3				—
Total restructuring charges	$	51			$	33			$	11

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(in millions unless otherwise indicated)

The restructuring charges incurred for the years ended December 31, 2018, 2017 and 2016 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, 2018, $22 million and $29 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, 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.

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, 2018 and 2017, which is included in accrued expenses in Note 13:

	Employee Separation Costs				Facility-Related Costs				Total
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
Income statement expense	45				4				49
Cash payments	(29		)		(4		)		(33		)
Balance, December 31, 2018	$	37			$	1			$	38

6. BUSINESS ACQUISITIONS

2018 Acquisitions

During 2018, the Company completed acquisitions for an aggregate purchase price of $440 million, net of cash acquired, including the acquisitions discussed below. The 2018 acquisitions resulted in goodwill of $228 million, of which $190 million is deductible for tax purposes. These acquisitions also resulted in $178 million of intangible assets, principally comprised of customer-related intangibles. Net revenues attributable to the 2018 acquisitions were $84 million for the year ended December 31, 2018.

Acquisition of Mobile Medical Examination Services, LLC.

On February 1, 2018, the Company completed its acquisition of Mobile Medical Examination Services, LLC. ("MedXM"), in an all cash transaction for $142 million, net of $5 million cash acquired, which consisted of cash consideration of $130 million and contingent consideration estimated at $12 million. The contingent consideration arrangement is dependent upon the achievement of certain revenue targets. Subsequent to the acquisition, the estimated fair value of the contingent consideration was reduced to $0 as a result of updated revenue forecasts for 2018 compared to the earn-out revenue target included in the contingent consideration arrangement, resulting in a $12 million net gain recorded in other operating (income) expense, net. 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 assets acquired and liabilities assumed consist of $77 million of intangible assets, $57 million of goodwill (of which $45 million is tax deductible), $7 million of working capital and $1 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. For further details regarding the fair value of the contingent consideration, see Note 8.

Acquisition of the Outreach Laboratory Service Business of Cape Cod Healthcare, Inc.

On June 18, 2018, the Company completed the acquisition of the outreach laboratory service business of Cape Cod Healthcare, Inc., in an all cash transaction for $35 million. The assets acquired principally consist of tax deductible goodwill and customer-related intangible assets.

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(in millions unless otherwise indicated)

Acquisition of ReproSource, Inc.

On September 19, 2018, the Company completed the acquisition of ReproSource, Inc. ("ReproSource"), in an all cash transaction for $35 million, which consisted of cash consideration of $30 million and contingent consideration estimated at $5 million. The contingent consideration arrangement is dependent upon the achievement of certain revenue targets. ReproSource is a national leader in specialty fertility diagnostic services. Through the acquisition, the Company acquired all of ReproSource's operations. Based on the preliminary purchase price allocation, the assets acquired principally consist of goodwill, technology-related intangible assets and customer-related intangible assets. For further details regarding the fair value of the contingent consideration, see Note 8.

Acquisition of the U.S. Laboratory Service Business of Oxford Immunotec, Inc.

On November 6, 2018, the Company completed the acquisition of all of the operations of the U.S. laboratory service business of Oxford Immunotec, Inc. ("Oxford"), in an all cash transaction for $170 million, net of $1 million cash acquired. The acquisition included laboratories in Tennessee and Massachusetts that provide tuberculosis and tick-borne disease testing services. As part of the transaction, Oxford will sell test kits and related accessories to the Company under a long-term supply agreement. Based on the preliminary purchase price allocation, the assets acquired and liabilities assumed consist of $54 million of intangible assets, $99 million of tax deductible goodwill, $12 million of working capital and $5 million of property, plant and equipment. The intangible assets consist primarily of customer-related and contract-related assets which are being amortized over a useful life of 15 years and 5 years, respectively.

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.

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 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. 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, $64 million of goodwill (of which $62 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.

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(in millions unless otherwise indicated)

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. 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. 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. 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 8.

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.

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.

General Information

The acquisitions described above were accounted for under the acquisition method of accounting. As such, the assets acquired and liabilities assumed are recorded based on their estimated fair values as of the closing date. Supplemental pro forma combined financial information has not been presented as the impact of the acquisitions is not material to the Company's consolidated financial statements. The goodwill recorded primarily includes the expected synergies resulting from combining the operations of the acquired entities with those of the Company and the value associated with an assembled workforce and other intangible assets that do not qualify for separate recognition. All of the goodwill acquired in connection with these acquisitions has been allocated to the Company's DIS business. For further details regarding business segment information, see Note 19.

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(in millions unless otherwise indicated)

7. 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 19.

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(in millions unless otherwise indicated)

8. FAIR VALUE MEASUREMENTS

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

					Basis of Fair Value Measurements
	Total				Level 1				Level 2				Level 3
December 31, 2018
Assets:
Trading securities	$	53			$	53			$	—			$	—
Cash surrender value of life insurance policies	34				—				34				—
Total	$	87			$	53			$	34			$	—
Liabilities:
Deferred compensation liabilities	$	96			$	—			$	96			$	—
Interest rate swaps	93				—				93				—
Contingent consideration	14				—				—				14
Total	$	203			$	—			$	189			$	14
December 31, 2017
Assets:
Trading securities	$	58			$	58			$	—			$	—
Cash surrender value of life insurance policies	37				—				37				—
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

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

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(in millions unless otherwise indicated)

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.

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 equity securities represents an investment in registered shares of a publicly-held company. The Company's investment in 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. During 2018, the Company wrote off the remaining carrying value of its investment.

In April 2014, the Company completed the acquisition of Steward Health Care Systems, LLC's laboratory outreach business. In connection with the acquisition, the Company initially recorded a contingent consideration liability of $4 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. During 2018, the Company made the final payment associated with the contingent consideration arrangement.

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%. The estimated fair value of the contingent consideration associated with Shiel was increased to $7 million in 2018 as a result of the remeasurement of the liability. Any contingent consideration associated with Shiel is expected to be paid in 2019. For further details regarding the Shiel acquisition, see Note 6.

In February 2018, the Company completed the acquisition of MedXM which provides for up to $30 million of contingent consideration to be paid based on the achievement of certain revenue targets. In connection with the acquisition, the Company initially recorded a contingent consideration liability of $12 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 revenue and other market inputs including comparable company revenue volatility of 12.7% and a discount rate of 5.4%. Subsequent to the acquisition, the estimated fair value of the contingent consideration was reduced to $0 as a result of updated revenue forecasts for 2018 compared to the earn-out revenue target included in the contingent consideration arrangement. For further details regarding the MedXM acquisition, see Note 6.

In September 2018, the Company completed the acquisition of ReproSource which provides for up to $10 million of contingent consideration to be paid based on the achievement of certain revenue targets. In connection with the acquisition, the Company initially recorded a contingent consideration liability of $5 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 revenue and other market inputs including comparable company revenue volatility of 8.5% and a discount rate of 6.5%. The contingent consideration associated with ReproSource is expected to be paid in up to two installments in 2020 and 2021. For further details regarding the ReproSource acquisition, see Note 6.

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(in millions unless otherwise indicated)

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, 2016	$	3
Purchases, additions and issuances	6
Settlements	(2		)
Balance, December 31, 2017	7
Purchases, additions and issuances	19
Settlements	(1		)
Total (gains)/losses included in earnings - realized/unrealized	(11		)
Balance, December 31, 2018	$	14

The $11 million net gain included in earnings associated with the change in the fair value of contingent consideration for the year ended December 31, 2018 is reported in other operating (income) expense, net.

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 both December 31, 2018 and 2017, the fair value of the Company's debt was estimated at $4.0 billion. 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.

9. TAXES ON INCOME

The Company's pre-tax income before equity in earnings of equity method investees consisted of approximately $0.9 billion, $1.0 billion and $1.1 billion from U.S. operations and a pre-tax (loss) income of $(1) million, $(7) million and $4 million from foreign operations for the years ended December 31, 2018, 2017 and 2016, respectively.

The Company recognized the income tax effects of the 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 Accounting Standards Codification Topic 740, Income Taxes, in the reporting period in which the TCJA was signed into law. As such, the Company’s 2017 financial results reflected the provisional estimate of the income tax effects of the TCJA.

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. During the year ended December 31, 2018, the Company finalized the effect of the enactment of TCJA and recorded an additional $1 million of current income tax expense.

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 7). In addition, the Company recognized a non-taxable gain on an escrow recovery associated with an acquisition.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

The components of income tax expense (benefit) for 2018, 2017 and 2016 were as follows:

	2018				2017				2016
Current:
Federal	$	82			$	226			$	346
State and local	26				5				45
Foreign	1				1				1
Deferred:
Federal	66				(20		)		33
State and local	10				27				4
Foreign	(3		)		2				—
Total	$	182			$	241			$	429

A reconciliation of the federal statutory rate to the Company's effective tax rate for 2018, 2017 and 2016 was as follows:

	2018			2017			2016
Tax provision at statutory rate	21.0	%		35.0	%		35.0	%
State and local income taxes, net of federal benefit	4.7			3.8			3.3
Gains and losses on book and tax basis difference	—			(0.1	)		3.3
Impact of noncontrolling interests	(1.4	)		(1.9	)		(1.8	)
Excess tax benefits on stock-based compensation arrangements	(1.9	)		(3.6	)		(0.8	)
Return to provision true-ups	(1.4	)		(2.0	)		(0.8	)
Impact of TCJA enactment	0.1			(10.4	)		—
Change in accounting method	(1.6	)		—			—
Other, net	0.2			2.6			1.3
Effective tax rate	19.7	%		23.4	%		39.5	%

In 2018, the Company filed for a tax return accounting method change, effective for the tax year ending December 31, 2017, to accelerate the deduction of certain expenses on its 2017 tax return at the higher 2017 federal corporate statutory rate resulting in a $15 million income tax benefit.

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.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets (liabilities) as of December 31, 2018 and 2017 were as follows:

	2018				2017
Non-current deferred tax assets (liabilities):
Accounts receivable reserves	$	66			$	63
Liabilities not currently deductible	137				129
Stock-based compensation	38				41
Basis differences in investments, joint ventures and subsidiaries	(80		)		(79		)
Net operating loss carryforwards, net of valuation allowance	80				83
Depreciation and amortization	(484		)		(403		)
Total non-current deferred tax liabilities, net	$	(243	)		$	(166	)

As of 2017, non-current deferred tax assets of $4 million are recorded in other assets. As of December 31, 2018 and 2017, non-current deferred tax liabilities of $243 million and $170 million, respectively, are included in other liabilities.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

As of December 31, 2018, the Company had estimated net operating loss carryforwards for federal and state income tax purposes of $131 million and $1.3 billion, respectively, which expire at various dates through 2038. Estimated net operating loss carryforwards for foreign income tax purposes are $56 million as of December 31, 2018, some of which can be carried forward indefinitely while others expire at various dates through 2028. As of December 31, 2018, 2017 and 2016, deferred tax assets associated with net operating loss carryforwards of $147 million, $155 million and $204 million, respectively, have each been reduced by valuation allowances of $54 million, $57 million and $56 million, respectively.

Income taxes payable, including those classified as long-term in other liabilities as of December 31, 2018 and 2017, were $85 million and $82 million, respectively. Prepaid income taxes were $14 million and $37 million as of December 31, 2018 and 2017, respectively, and were recorded in prepaid expenses and other current assets.

The total amount of unrecognized tax benefits as of and for the years ended December 31, 2018, 2017 and 2016 consisted of the following:

	2018				2017				2016
Balance, beginning of year	$	115			$	98			$	91
Additions:
For tax positions of current year	2				5				3
For tax positions of prior years	11				23				12
Reductions:
Changes in judgment	(6		)		(2		)		(1		)
Expirations of statutes of limitations	(15		)		(6		)		(7		)
Settlements	—				(3		)		—
Balance, end of year	$	107			$	115			$	98

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, 2018, that, if recognized, would affect the effective income tax rate is $56 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 $34 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, 2018, 2017 and 2016 was approximately $1 million, $1 million and $2 million, respectively. As of December 31, 2018 and 2017, the Company has approximately $14 million and $13 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 2014 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, 2018, a summary of the tax years that

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

remain subject to examination, awaiting approval, are under appeal, or are otherwise unresolved for the Company's major jurisdictions are:

United States - federal 2009, 2015 - 2018

United States - various states 2009 - 2018

10. SUPPLEMENTAL CASH FLOW & OTHER DATA

Supplemental cash flow and other data for the years ended December 31, 2018, 2017 and 2016 was as follows:

	2018				2017				2016
Depreciation expense	$	219			$	196			$	177
Amortization expense	90				74				72
Depreciation and amortization expense	$	309			$	270			$	249
Interest expense	$	(169	)		$	(153	)		$	(144	)
Interest income	2				2				1
Interest expense, net	$	(167	)		$	(151	)		$	(143	)
Interest paid	$	174			$	159			$	148
Income taxes paid	$	84			$	243			$	361
Assets acquired under capital leases	$	1			$	7			$	—
Accounts payable associated with capital expenditures	$	11			$	26			$	9
Accounts payable associated with purchases of treasury stock	$	3			$	—			$	—
Dividends payable	$	71			$	61			$	62
Businesses acquired:
Fair value of assets acquired	$	453			$	657			$	139
Fair value of liabilities assumed	7				58				—
Fair value of net assets acquired	446				599				139
Merger consideration paid (payable), net	(19		)		(6		)		—
Cash paid for business acquisitions	427				593				139
Less: Cash acquired	6				12				—
Business acquisitions, net of cash acquired	$	421			$	581			$	139

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

11. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment as of December 31, 2018 and 2017 consisted of the following:

	2018				2017
Land	$	29			$	29
Buildings and improvements	429				430
Laboratory equipment and furniture and fixtures	1,691				1,594
Leasehold improvements	606				544
Computer software developed or obtained for internal use	1,013				934
Construction-in-progress	202				140
	3,970				3,671
Less: Accumulated depreciation and amortization	(2,682		)		(2,526		)
Total	$	1,288			$	1,145

12. GOODWILL AND INTANGIBLE ASSETS

The changes in goodwill for the years ended December 31, 2018 and 2017 were as follows:

	2018				2017
Balance, beginning of year	$	6,335			$	6,000
Goodwill acquired during the year	228				335
Balance, end of year	$	6,563			$	6,335

Principally all of the Company’s goodwill as of December 31, 2018 and 2017 was associated with its DIS business.

For the year ended December 31, 2018, goodwill acquired during the period was principally associated with the Oxford, MedXM, ReproSource and Cape Cod Healthcare, Inc. acquisitions (see Note 6).

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 6).

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

Intangible assets as of December 31, 2018 and 2017 consisted of the following:

	Weighted Average Amortization Period (in years)		December 31, 2018												December 31, 2017
		Cost				Accumulated Amortization				Net				Cost				Accumulated Amortization				Net
Amortizing intangible assets:
Customer-related	18		$	1,355			$	(478	)		$	877			$	1,210			$	(404	)		$	806
Non-compete agreements	8		3				(2		)		1				7				(5		)		2
Technology	17		104				(50		)		54				95				(45		)		50
Other	9		114				(75		)		39				105				(80		)		25
Total	17		1,576				(605		)		971				1,417				(534		)		883
Intangible assets not subject to amortization:
Trade names			235				—				235				235				—				235
Other			1				—				1				1				—				1
Total intangible assets			$	1,812			$	(605	)		$	1,207			$	1,653			$	(534	)		$	1,119

The estimated amortization expense related to amortizable intangible assets for each of the five succeeding fiscal years and thereafter as of December 31, 2018 is as follows:

Year Ending December 31,
2019	$	97
2020	96
2021	90
2022	86
2023	85
Thereafter	517
Total	$	971

13. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses as of December 31, 2018 and 2017 consisted of the following:

	2018				2017
Accrued wages and benefits (including incentive compensation)	$	249			$	325
Accrued expenses	274				246
Trade accounts payable	222				224
Overdrafts	98				71
Dividend payable	71				61
Accrued interest	47				46
Accrued insurance	29				32
Income taxes payable	17				9
Merger consideration payable	14				7
Total	$	1,021			$	1,021

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

14. DEBT

Long-term debt (including capital lease obligations) as of December 31, 2018 and 2017 consisted of the following:

	2018				2017
Secured Receivables Credit Facility (3.39% and 2.27% at December 31, 2018 and 2017, respectively)	$	160			$	30
2.70% Senior Notes due April 2019	300				300
4.75% Senior Notes due January 2020	507				514
2.50% Senior Notes due March 2020	300				300
4.70% Senior Notes due April 2021	557				559
4.25% Senior Notes due April 2024	299				303
3.50% Senior Notes due March 2025	562				566
3.45% Senior Notes due June 2026	469				470
6.95% Senior Notes due July 2037	175				174
5.75% Senior Notes due January 2040	244				244
4.70% Senior Notes due March 2045	300				300
Other	37				44
Debt issuance costs	(17		)		(20		)
Total long-term debt	3,893				3,784
Less: Current portion of long-term debt	464				36
Total long-term debt, net of current portion	$	3,429			$	3,748

Secured Receivables Credit Facility

On October 26, 2018, the Company amended the agreement for the $600 million secured receivables credit facility (the “Secured Receivables Credit Facility”) previously amended in October 2017, 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 2019, and a $250 million loan commitment maturing October 2020, and can issue up to $100 million of letters of credit (see Note 18) through October 2020. Borrowings under the Secured Receivables Credit Facility are collateralized by certain domestic receivables. As of December 31, 2018, 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, 2018 and 2017, there was $160 million and $30 million, respectively, of outstanding borrowings under the Secured Receivables Credit Facility.

Senior Unsecured Revolving Credit Facility

In March 2018, the Company amended and restated the agreement for its $750 million senior unsecured revolving credit facility (the “Credit Facility” or "Senior Unsecured Revolving Credit Facility"). As a result, the Credit Facility will mature in March 2023. Under the Credit Facility, the Company can issue letters of credit totaling $150 million (see Note 18). Issued letters of credit reduce the available borrowing capacity under the facility. Interest on the Credit Facility is based on certain published rates plus an applicable margin based on changes in the Company's public debt ratings. At the option of the Company, it may elect to lock into LIBOR-based interest rates for periods up to six months. Interest on any outstanding amounts not covered under LIBOR-based interest rate contracts is based on an alternate base rate, which is calculated by reference to the prime rate, the federal funds rate or an adjusted LIBOR rate. As of both December 31, 2018 and 2017, 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 a financial leverage ratio, which could impact the Company's ability to, among other things, incur additional indebtedness. As of both December 31, 2018 and 2017, there were no outstanding borrowings under the Credit Facility.

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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.

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.

For the year ended December 31, 2016, the Company recorded a loss on retirement of debt, principally comprised of premiums paid of $48 million in other (expense) income, net.

Maturities of Long-Term Debt

As of December 31, 2018, long-term debt matures as follows:

Year Ending December 31,
2019	$	464
2020	803
2021	553
2022	3
2023	1
Thereafter	2,148
Total maturities of long-term debt	3,972
Unamortized discount	(9		)
Debt issuance costs	(17		)
Fair value basis adjustments attributable to hedged debt	(53		)
Total long-term debt	3,893
Less: Current portion of long-term debt	464
Total long-term debt, net of current portion	$	3,429

15. 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’

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

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.

The total net loss, net of taxes, recognized in accumulated other comprehensive loss, related to the Company's cash flow hedges was $9 million as of both December 31, 2018 and 2017. 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, 2018 and 2017 was as follows:

		Notional Amount
Debt Instrument		2018				2017
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 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.

As of December 31, 2018 and 2017, the following amounts were recorded on the consolidated balance sheet related to cumulative basis adjustments for fair value hedges included in the carrying amount of long-term debt:

			Carrying Amount of Hedged Long-Term Debt				Hedge Accounting Basis Adjustment (a)				Carrying Amount of Hedged Long-Term Debt				Hedge Accounting Basis Adjustment (a)
Balance Sheet Classification			December 31, 2018				December 31, 2018				December 31, 2017				December 31, 2017
Long-term debt			$	1,125			$	(53	)		$	1,132			$	(33	)

(a) The balance includes $40 million and $56 million of remaining unamortized hedging adjustment on a discontinued relationship as of December 31, 2018 and 2017, respectively.

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

The following table presents the effect of fair value hedge accounting on the statement of operations for the years ended December 31, 2018 and 2017, respectively:

			Year Ended December 31,
			2018			2017
			Other (expense) income, net			Other (expense) income, net
Total for line item in which the effects of fair value hedges are recorded			(8	)		16
Gain (loss) on fair value hedging relationships:
Hedged items (Long-term debt)			4			1
Derivatives designated as hedging instruments			(4	)		(1	)

Interest Rate Derivatives - Economic Hedges

In March 2016, in connection with the retirement of debt (see Note 14), 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 (expense) income, net.

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

	December 31, 2018						December 31, 2017
	Balance Sheet Classification		Fair Value				Balance Sheet Classification		Fair Value
Derivatives Designated as Hedging Instruments
Interest rate swaps	Other liabilities		$	93			Other liabilities		$	89

16. STOCKHOLDERS’ EQUITY AND REDEEMABLE NONCONTROLLING INTEREST

Stockholders' Equity

Series Preferred Stock

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

Common Stock

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;

•	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).

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

Prior to adoption of the new accounting guidance on recognition and measurement of financial assets and liabilities, comprehensive income (loss) also included investment adjustments, which represented unrealized holding gains (losses), net of tax on available for sale securities, net of other-than-temporary impairment amounts reclassified to other (expense) income, net. Refer to Note 2 for details regarding the adoption of the new accounting standard related to the recognition and measurement of financial assets and liabilities.

For the years ended December 31, 2018, 2017 and 2016, the tax effects related to 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.

The changes in accumulated other comprehensive income (loss) by component for 2018, 2017 and 2016 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, 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		)
Other comprehensive loss before reclassifications	(15		)		—				—				—				(15		)
Amounts reclassified from accumulated other comprehensive loss	4				—				2								6
Net current period other comprehensive loss	(11		)		—				2				—				(9		)
Reclassification of stranded tax effects resulting from enactment of the Tax Cuts and Jobs Act	—				—				(2		)		—				(2		)
Balance, December 31, 2018	$	(49	)		$	—			$	(9	)		$	(1	)		$	(59	)

For the years ended December 31, 2018, 2017 and 2016, 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, 2018, foreign currency translation adjustment amounts were reclassified from accumulated other comprehensive loss to loss (gain) on disposition of business as a result of the sale of a foreign subsidiary.

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 (expense) income, net.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

Dividend Program

During each of the first three quarters of 2018, the Company's Board of Directors declared a quarterly cash dividend of $0.50 per common share. During the fourth quarter of 2018, the Company's Board of Directors declared a quarterly cash dividend of $0.53 per common share. 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.

Share Repurchase Program

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

As of December 31, 2018, $592 million remained available under the Company’s share repurchase authorization. The share repurchase authorization has no set expiration or termination date.

Share Repurchases

For the year ended December 31, 2018, the Company repurchased 3.4 million shares of its common stock for $325 million, which includes an accrual of $3 million recorded in accounts payable and accrued expenses in the consolidated balance sheet for share repurchases not settled.

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.

Shares Reissued from Treasury Stock

For the years ended December 31, 2018, 2017 and 2016 the Company reissued 3 million shares, 2 million shares and 2 million shares, respectively, from treasury stock for shares issued under the ESPP and stock option plans.

Redeemable Noncontrolling Interest

In connection with the sale of an 18.9% noncontrolling interest in a subsidiary to UMass Memorial Medical Center ("UMass") on July 1, 2015, the Company granted UMass the right to require the Company to purchase all of its interest in the subsidiary at fair value commencing July 1, 2020. The subsidiary performs diagnostic information services in a defined territory within the state of Massachusetts. Since the redemption of the noncontrolling interest is outside of the Company's control, it has been presented outside of stockholders' equity at the greater of its carrying amount or its fair value. The Company records changes in the fair value of the noncontrolling interest immediately as they occur. As of December 31, 2018 and 2017, the redeemable noncontrolling interest was $77 million and $80 million, respectively, and was presented at its fair value. The fair value measurement of the redeemable noncontrolling interest is classified within Level 3 of the fair value hierarchy because the fair value is based on a discounted cash flow analysis that takes into account, among other items, the Company's expected future cash flows, long term growth rates, and a discount rate commensurate with economic risk.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

17. STOCK OWNERSHIP AND COMPENSATION PLANS

Employee and Non-employee Directors Stock Ownership Programs

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

In 2005, the Company established the DLTIP to replace the Company's prior plan. The DLTIP provides for the grant to non-employee directors of non-qualified stock options to purchase shares of Company common stock at an exercise price no less than the fair market value of the Company's common stock on the date of grant. The DLTIP also permits awards of restricted stock and restricted stock units to non-employee directors. Stock options granted under the DLTIP expire on the date designated by the Board of Directors but in no event more than ten years from date of grant. For all award types, the vesting period is generally over three years from the date of grant, regardless of whether the award recipient remains a director of the Company. The maximum number of shares that may be issued under the DLTIP is 2.4 million shares. For the years ended December 31, 2018, 2017 and 2016, grants under the DLTIP totaled 15 thousand shares, 13 thousand shares and 21 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 16 for further information regarding the Company's share repurchase program.

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

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

	2018		2017		2016
Fair value at grant date	$18.14		$15.98		$10.35
Expected volatility	19.1%		19.8%		21.6%
Dividend yield	1.9%		1.9%		2.4%
Risk-free interest rate	2.8%		2.1%		1.4%
Expected holding period, in years	5.3		5.2		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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

The following summarizes the activity relative to stock option awards for 2018:

	Shares			Weighted Average Exercise Price				Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Options outstanding, beginning of year	8.5			$	70.11
Options granted	1.6			103.56
Options exercised	(1.6	)		63.08
Options forfeited and canceled	(0.1	)		93.51
Options outstanding, end of year	8.4			$	77.35			6.7		$	102
Exercisable, end of year	5.1			$	67.17			5.6		$	90
Vested and expected to vest, end of year	8.3			$	76.98			6.6		$	102

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 2018 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, 2018. This amount changes based on the fair market value of the Company's common stock. Total intrinsic value of options exercised in 2018, 2017 and 2016 was $67 million, $94 million and $30 million, respectively.

As of December 31, 2018, there was $14 million of unrecognized stock-based compensation cost related to nonvested stock options which is expected to be recognized over a weighted average period of 1.7 years.

The following summarizes the activity relative to stock awards, including restricted stock awards, restricted stock units and performance share units, for 2018, 2017 and 2016:

	2018							2017							2016
	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	1.3			$	77.90			1.5			$	63.88			1.7			$	59.92
Shares granted	0.4			103.51				0.4			96.27				0.6			67.26
Shares vested	(0.5	)		74.00				(0.6	)		57.59				(0.4	)		58.98
Shares forfeited and canceled	(0.1	)		90.16				—			—				(0.4	)		57.31
Shares outstanding, end of year	1.1			$	88.13			1.3			$	77.90			1.5			$	63.88

As of December 31, 2018, there was $22 million of unrecognized stock-based compensation cost related to nonvested stock awards, which is expected to be recognized over a weighted average period of 1.6 years. Total fair value of shares vested was $54 million, $58 million and $28 million for the years ended December 31, 2018, 2017 and 2016, 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, 2018, 2017 and 2016, stock-based compensation expense totaled $61 million, $79 million and $69 million, respectively. Income tax benefits recognized in the consolidated statements of operations related to stock-based compensation expense totaled $33 million, $67 million and $32 million for the years ended December 31, 2018, 2017 and 2016, respectively, which includes excess tax benefits associated with stock-based compensation arrangements of $18 million, $37 million and $9 million for the years ended December 31, 2018, 2017 and 2016, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

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 326 thousand, 278 thousand and 332 thousand shares of common stock were purchased by eligible employees in 2018, 2017 and 2016, 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 $78 million, $76 million and $76 million for 2018, 2017 and 2016, respectively.

Supplemental Deferred Compensation Plans

The Company has a supplemental deferred compensation plan that is an unfunded, non-qualified plan that provides for certain management and highly compensated employees to defer up to 50% of their salary in excess of their defined contribution plan limits and for certain eligible employees, up to 95% of their variable incentive compensation. The maximum Company matching contribution is 5% of eligible employee compensation. 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 $53 million and $58 million as of December 31, 2018 and 2017, respectively. Although the Company is currently contributing all participant deferrals and matching amounts to trusts, the funds in these trusts, totaling $53 million and $58 million as of December 31, 2018 and 2017, 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 $43 million and $45 million as of December 31, 2018 and 2017, 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 $34 million and $37 million as of December 31, 2018 and 2017, respectively.

For the years ended December 31, 2018, 2017 and 2016, the Company's expense for matching contributions to these plans were not material.

18. COMMITMENTS AND CONTINGENCIES

Letters of Credit and Contractual Obligations

The Company can issue letters of credit under its Secured Receivables Credit Facility and Senior Unsecured Revolving Credit Facility (see Note 14). 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, 2018. The letters of credit primarily represent collateral for current and future automobile liability and workers’ compensation loss payments.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

Minimum rental commitments under noncancelable operating leases, primarily real estate, in effect as of December 31, 2018 are as follows:

Year Ending December 31,
2019	$	181
2020	143
2021	106
2022	79
2023	60
Thereafter	122
Minimum lease payments	$	691

Operating lease rental expense for 2018, 2017 and 2016 totaled $220 million, $219 million and $216 million, respectively. Rent expense associated with operating leases that include scheduled rent increases and tenant incentives, such as rent holidays and improvement allowances, is recorded on a straight-line basis over the term of the lease.

The Company has certain noncancelable commitments, primarily under take-or-pay arrangements, to purchase products or services from various suppliers, mainly for consulting and other service agreements, and standing orders to purchase reagents and other laboratory supplies. As of December 31, 2018, the approximate total future purchase commitments are $157 million, of which $68 million are expected to be incurred in 2019, $66 million are expected to be incurred in 2020 through 2021 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 29 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 actions could involve claims for substantial compensatory and/

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

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 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, 2018, 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 $1 million and $2 million as of December 31, 2018 and 2017, 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 $125 million and $118 million as of December 31, 2018 and 2017, respectively. Management believes that established reserves and present insurance coverage are sufficient to cover currently estimated exposures.

19. BUSINESS SEGMENT INFORMATION

The Company's DIS business is the only reportable segment based on the manner in which the Chief Executive Officer, who is the Company's chief operating decision maker ("CODM"), assesses performance and allocates resources across the organization. The DIS business provides diagnostic information services to a broad range of customers, including patients, clinicians, hospitals, IDNs, health plans, employers 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 approximately 95% of net revenues in 2018, 2017 and 2016.

All other operating segments include the Company's DS businesses, which consists of its risk assessment services, healthcare information technology, and diagnostic products (prior to disposition on May 13, 2016) businesses. The Company's DS businesses are the leading provider of risk assessment services for the life insurance industry and offer healthcare organizations and clinicians robust information technology solutions.

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

In addition to the sale of Focus Diagnostics (see Note 7) 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, 2018, 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, 2018, 2017 and 2016. 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 of certain general corporate activity costs that are allocated to the DIS and DS businesses, and the gain on disposition of businesses associated with the dispositions of Focus Diagnostics (see Note 7). The accounting policies of the segments are the same as those of the Company as set forth in Note 2.

	2018				2017				2016
Net revenues:
DIS business	$	7,204			$	7,068			$	6,837
All other operating segments	327				334				377
Total net revenues	$	7,531			$	7,402			$	7,214
Operating earnings (loss):
DIS business	$	1,235			$	1,313			$	1,244
All other operating segments	47				52				64
General corporate activities	(181		)		(200		)		(31		)
Total operating income	1,101				1,165				1,277
Non-operating expenses, net	(175		)		(135		)		(191		)
Income before income taxes and equity in earnings of equity method investees	926				1,030				1,086
Income tax expense	(182		)		(241		)		(429		)
Equity in earnings of equity method investees, net of taxes	44				35				39
Net income	788				824				696
Less: Net income attributable to noncontrolling interests	52				52				51
Net income attributable to Quest Diagnostics	$	736			$	772			$	645

Depreciation and amortization expense for the years ended December 31, 2018, 2017 and 2016 were as follows:

	2018				2017				2016
DIS business	$	213			$	189			$	170
All other operating segments	6				6				6
General corporate	90				75				73
Total depreciation and amortization	$	309			$	270			$	249

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

Capital expenditures for the years ended December 31, 2018, 2017 and 2016 were as follows:

	2018				2017				2016
DIS business	$	330			$	219			$	264
All other operating segments	16				15				21
General corporate	37				18				8
Total capital expenditures	$	383			$	252			$	293

Net revenues by major service for the years ended December 31, 2018, 2017 and 2016 were as follows:

	2018				2017				2016
Routine clinical testing services	$	4,217			$	4,006			$	3,878
Gene-based and esoteric (including advanced diagnostics) testing services	2,409				2,449				2,335
Anatomic pathology testing services	578				612				624
All other	327				335				377
Total net revenues	$	7,531			$	7,402			$	7,214

20. RELATED PARTIES

The Company's equity method investees primarily consist of its clinical trials central laboratory services joint venture and its diagnostic information services joint ventures, which are accounted for under the equity method of accounting. During the years ended December 31, 2018, 2017 and 2016, the Company recognized net revenues of $36 million, $37 million and $33 million, respectively, associated with diagnostic information services provided to its equity method investees. As of both December 31, 2018 and 2017, there was $3 million of accounts receivable from equity method investees related to such services.

During the years ended December 31, 2018, 2017 and 2016, the Company recognized income of $15 million, $16 million and $19 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, 2018 and 2017, there was $3 million and $7 million, respectively, of other receivables from equity method investees included in prepaid expenses and other current assets related to these service agreements and other transition related items. In addition, accounts payable and accrued expenses as of both December 31, 2018 and 2017 included $1 million due to equity method investees.

During the year ended December 31, 2018, the Company contributed $10 million to an equity method investee to fund its share of an acquisition made by the equity method investee.

21. SUBSEQUENT EVENTS

On February 11, 2019, the Company completed the acquisition of the clinical laboratory service business of Boyce & Bynum Pathology Laboratories, P.C. ("Boyce & Bynum") in an all cash transaction for $55 million and up to $25 million of contingent consideration if certain testing volume benchmarks are achieved. Boyce and Bynum serves the Midwest region.

The preliminary purchase price allocation for the Boyce & Bynum 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)

2018 (a)	First Quarter				Second Quarter				Third Quarter				Fourth Quarter				Total Year
	(b)				(c)				(d)				(e)
Net revenues	$	1,884			$	1,919			$	1,889			$	1,839			$	7,531
Gross profit	658				676				667				604				2,605
Net income	189				233				227				139				788
Less: Net income attributable to noncontrolling interests	12				14				14				12				52
Net income attributable to Quest Diagnostics	$	177			$	219			$	213			$	127			$	736
Earnings per share attributable to Quest Diagnostics' stockholders:
Basic	$	1.30			$	1.60			$	1.56			$	0.93			$	5.39
Diluted	$	1.27			$	1.57			$	1.53			$	0.92			$	5.29

2017 (a)	First Quarter				Second Quarter				Third Quarter				Fourth Quarter				Total Year
	(f)				(g)				(h)				(i)
Net revenues	$	1,817			$	1,864			$	1,856			$	1,865			$	7,402
Gross profit	652				694				666				671				2,683
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

(a)

The process for estimating revenues and the ultimate collection of accounts receivable involves significant judgment and estimation. The Company follows a standard process, which considers historical denial and collection experience and other factors, to estimate contractual allowances and implicit price concessions, recording adjustments in the current period as changes in estimates. Based on this process, during the fourth quarter of 2018, the Company increased its reserves for revenues and accounts receivable by approximately $35 million (see Note 3 to the consolidated financial statements). Net revenues for 2017 have been restated to reflect the impact of new revenue recognition rules that became effective January 1, 2018 and were adopted on a retrospective basis (see Note 2 to the consolidated financial statements).

(b)

Included pre-tax charges of $31 million, primarily associated with workforce reduction, systems conversions and integration incurred in connection with further restructuring and integrating the Company ($12 million in cost of services, $18 million in selling, general and administrative expenses and $1 million in other operating (income) expense, net); and excess tax benefits associated with stock-based compensation arrangements of $8 million recorded in income tax expense.

(c)

Included pre-tax charges of $25 million, primarily associated with workforce reduction, systems conversions and integration incurred in connection with further restructuring and integrating the Company ($14 million in cost of services and $11 million in selling, general and administrative expenses); net pre-tax charges of $10 million, primarily associated with certain legal matters partially offset by a gain associated with an insurance claim for hurricane related losses ($11 million in cost of services offset by a $1 million gain in other operating (income) expense, net); excess tax benefits associated with stock-based compensation arrangements of $5 million recorded in income tax expense; and an income tax benefit of $15 million associated with a change in a tax return accounting method that enabled the company to accelerate the deduction of certain expenses on its 2017 tax return at the federal corporate statutory tax rate in effect during 2017.

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

Quarterly Operating Results (unaudited)

(in millions, except per share data)

(d)

Included pre-tax charges of $19 million, primarily associated with workforce reduction, systems conversions and integration incurred in connection with further restructuring and integrating the Company ($10 million in cost of services and $9 million in selling, general and administrative expenses); a pre-tax benefit of $12 million primarily associated with the decrease in the fair value of the contingent consideration accrual associated with the MedXM acquisition partially offset by non-cash asset impairment charges ($13 million gain in other operating (income) expense, net offset by $1 million in cost of services); and excess tax benefits associated with stock-based compensation arrangements of $4 million recorded in income tax expense.

(e)

Included pre-tax charges of $47 million, primarily associated with workforce reductions, systems conversions and integration incurred in connection with further restructuring and integrating the Company ($20 million in cost of services and $27 million in selling, general and administrative expenses); pre-tax charges of $4 million, primarily associated with the loss on the sale of a foreign subsidiary recorded in loss (gain) on disposition of business; $1 million of income tax expense associated with finalizing the impact of the enactment of TCJA; and excess tax benefits associated with stock-based compensation arrangements of $1 million recorded in income tax expense.

(f)

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.

(g)

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 (expense) income, 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.

(h)

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 (expense) income, net); and excess tax benefits associated with stock-based compensation arrangements of $7 million recorded in income tax expense.

(i)

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.

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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, 2018
Doubtful accounts and allowances	$	13			$	6			$	4		(a)	$	15
Year Ended December 31, 2017
Doubtful accounts and allowances	$	6			$	8			$	1		(a)	$	13
Year Ended December 31, 2016
Doubtful accounts and allowances	9				$	7			$	10		(a)	$	6

(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, 2018

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 10-Q for the quarter ended September 30, 2018 (Date of Report: October 24, 2018) 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: August 21, 2018) 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 5, 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 5, 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 5, 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 (Date of Report: March 12, 2014) 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‡	Form of Equity Award Agreement dated as of February 19, 2018 (filed as an exhibit to the Company’s 2018 quarterly report on Form 10-Q for the quarter ended March 31, 2018 and incorporated herein by reference) (Commission file number 001-12215)
10.5‡	Quest Diagnostics Supplemental Deferred Compensation Plan (Post 2004) amended and restated as of November 27, 2017 (filed as an exhibit to the Company's 2017 annual report on Form 10-K and incorporated herein by reference) (Commission file number 001-12215)
10.6‡	Quest Diagnostics Supplemental Deferred Compensation Plan (Pre-2005) amended November 27, 2012 (filed as an Exhibit to the Company's 2012 annual report on Form 10-K and incorporated herein by reference) (Commission File Number 001-12215)
10.7‡	Quest Diagnostics Incorporated Senior Management Incentive Plan (filed as Appendix A to the Company's Definitive Proxy Statement dated March 28, 2003 and incorporated herein by reference) (Commission File Number 001-12215)
10.8‡	Amended and Restated Quest Diagnostics Incorporated Executive Officer Severance Plan as amended February 20, 2017 (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)

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10.9‡	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)
10.10‡	Amendment No. 1 to The Profit Sharing Plan of Quest Diagnostics Incorporated, effective as of January 1, 2018 (filed as an exhibit to the Company's 2017 annual report on Form 10-K and incorporated herein by reference) (Commission file number 001-12215)
10.11‡*	Amendment No. 2 to The Profit Sharing Plan of Quest Diagnostics Incorporated
10.12‡	Quest Diagnostics Incorporated Amended and Restated Deferred Compensation Plan For Directors as amended effective January 1, 2016 (filed as an exhibit to the Company’s 2015 annual report on Form 10-K and incorporated herein by reference) (Commission File Number 001-12215)
10.13‡	Amended and Restated Quest Diagnostics Incorporated Long-Term Incentive Plan for Non-Employee Directors (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)
10.14‡	Form of Non-Employee Director Equity Award Agreement (filed as an Exhibit to the Company's 2011 annual report on Form 10-K and incorporated herein by reference) (Commission File Number 001-12215)
10.15‡	Form of Non-Employee Director Equity Award Agreement dated May 15, 2015 (filed as an exhibit to the Company’s 2015 annual report on Form 10-K and incorporated herein by reference) (Commission File Number 001-12215)
10.16‡	Form of Non-Employee Director Elective Option Award Agreement (filed as an Exhibit to the Company's 2011 annual report on Form 10-K and incorporated herein by reference) (Commission File Number 001-12215)
10.17‡	Employment Agreement between Stephen H. Rusckowski and Quest Diagnostics Incorporated, dated April 3, 2012 (filed as an Exhibit to the Company's current report on Form 8-K (Date of Report: April 9, 2012) and incorporated herein by reference) (Commission File Number 001-12215)
10.18‡	Amendment to Employment Agreement between Stephen H. Rusckowski and Quest Diagnostics Incorporated, dated June 11, 2015 (filed as an Exhibit to the Company’s current report on Form 8-K (Date of Report: June 11, 2015) and incorporated herein by reference) (Commission File Number 001-12215)
10.19‡	Aircraft Timesharing Agreement dated as of December 17, 2013 between Quest Diagnostics Incorporated and Stephen H. Rusckowski (filed as an Exhibit to the Company’s 2013 annual report on Form 10-K and incorporated herein by reference) (Commission File Number 001-12215)
11.1	Statement re: Computation of Earnings Per Common Share (the calculation of per share earnings is in Part II, Item 8, Note 4 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

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32.1**	Section 1350 Certification of Chief Executive Officer
32.2**	Section 1350 Certification of Chief Financial Officer
101.INS*	dgx-20181231.xml
101.SCH*	dgx-20181231.xsd
101.CAL*	dgx-20181231_cal.xml
101.DEF*	dgx-20181231_def.xml
101.LAB*	dgx-20181231_lab.xml
101.PRE*	dgx-20181231_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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