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 20, 2020.

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

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 20, 2020.

Signature		Capacity
/s/Stephen H. Rusckowski Stephen H. Rusckowski		Chairman of the Board, Chief Executive Officer and President (Principal Executive Officer)
/s/Mark J. Guinan Mark J. Guinan		Executive Vice President and Chief Financial Officer (Principal Financial Officer)
/s/Michael J. Deppe Michael J. Deppe		Vice President, Corporate Controller and Chief Accounting Officer (Principal Accounting Officer)
/s/Vicky B. Gregg Vicky B. Gregg		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 Daniel C. Stanzione		Director
/s/Helen I. Torley Helen I. Torley		Director
/s/Gail R. Wilensky Gail R. Wilensky		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. 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,
	2019				2018				2017				2016				2015
	(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	$	7,726			$	7,531			$	7,402			$	7,214			$	7,493
Operating income	1,231				1,101				1,165				1,277				1,399
Income from continuing operations	886				788				824				696				753
Income from discontinued operations, net of taxes	20				—				—				—				—
Net income	906				788				824				696				753
Less: Net income attributable to noncontrolling interests	48				52				52				51				44
Net income attributable to Quest Diagnostics	$	858			$	736			$	772			$	645			$	709
Amounts attributable to Quest Diagnostics' common stockholders:
Income from continuing operations	$	838			$	736			$	772			$	645			$	709
Income from discontinued operations, net of taxes	20				—				—				—				—
Net income	$	858			$	736			$	772			$	645			$	709

Earnings per share attributable to Quest Diagnostics' common stockholders - basic:
Income from continuing operations	$	6.21			$	5.39			$	5.63			$	4.58			$	4.92
Income from discontinued operations	0.15				—				—				—				—
Net income	$	6.36			$	5.39			$	5.63			$	4.58			$	4.92
Earnings per share attributable to Quest Diagnostics' common stockholders - diluted:
Income from continuing operations	$	6.13			$	5.29			$	5.50			$	4.51			$	4.87
Income from discontinued operations	0.15				—				—				—				—
Net income	$	6.28			$	5.29			$	5.50			$	4.51			$	4.87
Dividends per common share	$	2.12			$	2.03			$	1.80			$	1.65			$	1.52

	Year Ended December 31,
	2019				2018				2017				2016				2015
	(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	$	1,192			$	135			$	137			$	359			$	133
Total assets	12,843				11,003				10,503				10,100				9,962
Long-term debt	3,966				3,429				3,748				3,728				3,492
Total debt	4,770				3,893				3,784				3,734				3,651
Redeemable noncontrolling interest	76				77				80				77				70
Other Data:
Net cash provided by operating activities	$	1,243			$	1,200			$	1,175			$	1,116			$	967
Net cash used in investing activities	(411		)		(801		)		(830		)		(127		)		(362		)
Net cash provided by (used in) financing activities	225				(401		)		(592		)		(738		)		(664		)
Capital expenditures	400				383				252				293				263
Purchases of treasury stock	353				322				465				590				224
Dividends paid	286				266				247				223				212

(a)

Net revenues for the years ended December 31, 2019, 2018, 2017 and 2016 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 year ended December 31, 2015 have not been restated. On January 1, 2019, we adopted a new lease accounting standard, which required us to recognize an asset and a liability for most operating leases on our balance sheet. As of December 31, 2019, operating lease right-of-use assets and operating lease liabilities totaled $518 million and $558 million, respectively. Prior periods have not been restated. See Note 2 to the audited 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 Nichols Institute Diagnostics ("NID"), a test kit manufacturing subsidiary, which was reported as a discontinued operation for all periods presented.

(b)

On February 11, 2019, we completed the acquisition of certain assets of the clinical laboratory services business of Boyce & Bynum Pathology Laboratories, P.C. ("Boyce & Bynum"). Consolidated operating results for 2019 included the results of operations of Boyce & Bynum subsequent to the closing of the acquisition. For further details regarding our acquisitions, see Note 6 to the audited consolidated financial statements.

In December 2019, we completed a senior notes offering, consisting of $800 million aggregate principal amount of 2.95% senior notes due June 2030 (the "2030 Senior Notes"), which were issued at an original issue discount of $2 million. During January 2020, the net proceeds from the 2030 Senior Notes, along with cash on hand, were used to redeem in full the outstanding indebtedness under our senior notes due January 2020 and our senior notes due March 2020.

(c)	Operating income included (for 2019):

•	pre-tax amortization expense of $96 million;

•	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 $89 million, primarily due to a gain associated with the sale and leaseback of a property, a gain associated with the decrease in the fair value of the contingent consideration accruals associated with previous acquisitions, and a gain associated with an insurance claim for hurricane related losses, partially offset by costs incurred related to a data security incident and non-cash asset impairment charges.

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

•	pre-tax amortization expense of $15 million included in equity in earnings of equity method investees, net of taxes; and

•	excess tax benefits associated with stock-based compensation arrangements of $13 million.

Discontinued operations, net of taxes, for the year ended December 31, 2019 includes discrete tax benefits of $20 million associated with the favorable resolution of certain tax contingencies related to NID.

(d)

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 services 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 services business of Oxford Immunotec, Inc. ("Oxford"). Consolidated operating results for 2018 include the results of operations of MedXM, the outreach laboratory services 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 audited consolidated financial statements.

(e)	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;

•	pre-tax amortization expense of $90 million; 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 a previous acquisition and an insurance claim for hurricane related losses.

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

•	pre-tax amortization expense of $17 million included in equity in earnings of equity method investees, net of taxes;

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

•

an income tax benefit of $14 million primarily associated with a change in a tax return accounting method that enabled us to accelerate the deduction of certain expenses on our 2017 tax return at the federal corporate statutory income 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.

(f)

On May 1, 2017, we completed the acquisition of the outreach laboratory services 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 services 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, the outreach laboratory services businesses of The William W. Backus Hospital and The Hospital of Central Connecticut, CHL and Shiel subsequent to the closing of the applicable acquisition. For further details regarding our acquisitions, see Note 6 to the audited consolidated financial statements.

(g)	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;

•	pre-tax amortization expense of $74 million; and

•	pre-tax charges of $12 million, primarily a result of non-cash asset impairment charges, 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:

•	pre-tax amortization expense of $16 million included in equity in earnings of equity method investees, net of taxes;

•	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 income tax rate, partially offset by $9 million of current income 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.

(h)

On February 29, 2016, we completed the acquisition of the outreach laboratory services 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 was not classified as a discontinued operation. For further details regarding dispositions, see Note 7 to the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018.

(i)	Operating income included (for 2016):

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

•	pre-tax amortization expense of $72 million;

•	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:

•	pre-tax amortization expense of $16 million included in equity in earnings of equity method investees, net of taxes;

•	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 and the related income tax benefit of $18 million;

•	non-cash asset pre-tax 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;

•	$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, principally comprised of premiums paid to retire the debt.

(j)

On August 3, 2015, we completed the acquisition of MemorialCare Health System's laboratory outreach services 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.

(k)	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;

•	pre-tax amortization expense of $81 million; 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, and costs incurred related to

certain legal matters, partially offset by a pre-tax gain of $13 million associated with a decrease in the fair value of the contingent consideration accrual associated with our Summit Health, Inc. acquisition.

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

•	$144 million of pre-tax charges on retirement of debt 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;

•	pre-tax amortization expense of $9 million included in equity in earnings of equity method investees, net of taxes; 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;

•	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, 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.

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 greater than 95% of our consolidated net revenues. During 2019, we processed approximately 175 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 utilization as well as patient responsibility for healthcare costs.

The Company assess its revenue performance for the DIS business in part based upon volume, measured by test requisitions, and revenue per requisition. Each requisition form accompanies a patient specimen, indicating the test(s) to be performed and the party to be billed for the test(s). Revenue per requisition is impacted by various factors, including, among other items, the impact of fee schedule changes (i.e. unit price), test mix, payer mix, and the number of tests per requisition.

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.

2019 Highlights

•	Our total net revenues of $7.7 billion were up 2.6% from the prior year.

•	In DIS:

◦	Revenues of $7.4 billion increased by 2.8% compared to the prior year, driven by organic volume growth (growth excluding the impact of acquisitions) and the impact of recent acquisitions, partially offset by a decline in revenue per requisition.

◦	Volume, measured by the number of requisitions, increased by 4.3% compared to the prior year, with organic growth and acquisitions contributing approximately 3.1% and 1.2%, respectively.

◦	Revenue per requisition decreased by 1.3% compared to the prior year.

•	DS revenues of $321 million decreased by 1.8% compared to the prior year.

•	Income from continuing operations attributable to Quest Diagnostics' stockholders was $838 million, or $6.13 per diluted share, in 2019, compared to $736 million, or $5.29 per diluted share, in 2018.

•	Net cash provided by operating activities was approximately $1.2 billion in both 2019 and 2018.

Senior Notes Offering

In March 2019, we completed a senior notes offering, consisting of $500 million aggregate principal amount of 4.20% senior notes due June 2029 (the "2029 Senior Notes"), which were issued at an original issue discount of $1 million. The net proceeds from the 2029 Senior Notes were used to repay in full the outstanding indebtedness under our senior notes due April 2019, to repay outstanding indebtedness under our secured receivables credit facility and for general corporate purposes.

In December 2019, we completed a senior notes offering, consisting of $800 million aggregate principal amount of 2.95% senior notes due June 2030 (the "2030 Senior Notes"), which were issued at an original issue discount of $2 million. During January 2020, the net proceeds from the 2030 Senior Notes, along with cash on hand, were used to redeem in full the outstanding indebtedness under our senior notes due January 2020 and our senior notes due March 2020.

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

AMCA Data Security Incident

On June 3, 2019, the Company reported that Retrieval-Masters Creditors Bureau, Inc./American Medical Collection Agency (“AMCA”) had informed the Company and Optum360 LLC ("Optum360"), which provides revenue management services to the Company, about a data security incident involving AMCA (the “AMCA Data Security Incident”). AMCA (which provided debt collection services to Optum360) informed the Company and Optum360 that AMCA had learned that an unauthorized user had access to AMCA’s system between August 1, 2018 and March 30, 2019. AMCA first informed the Company of the AMCA Data Security Incident on May 14, 2019. AMCA’s affected system included financial information (e.g., credit card numbers and bank account information), medical information and other personal information (e.g., social security numbers). Test results were not included. Neither Optum360’s nor the Company’s systems or databases were involved in the incident. AMCA also informed us that information pertaining to other laboratories’ customers was also affected. Following announcement of the AMCA Data Security Incident, AMCA sought protection under the U.S. bankruptcy laws. While the impact of this incident to the Company's results of operations and cash flows was not material for the year ended December 31, 2019, our future financial results may be negatively impacted by costs associated with the incident and disruption of our accounts receivable collection processes.

Two Point Strategy

Our two point strategy is described in detail in "Item 1. Business: Our Strategy." We continued to execute our strategy during 2019 as follows:

Long-term Strategic Partnership with UnitedHealthcare

Effective January 1, 2019, we established a long-term strategic partnership with UnitedHealthcare, including collaborating on a variety of value-based programs. On July 1, 2019, we became a UnitedHealthcare Preferred Lab Network provider, meeting exceptional criteria for access, cost, data, quality and service.

Acquisition of the Clinical Laboratory Services Business of Boyce & Bynum Pathology Laboratories, P.C.

On February 11, 2019, we completed our acquisition of certain assets of the clinical laboratory services business of Boyce & Bynum Pathology Laboratories, P.C. ("Boyce & Bynum"), in an all cash transaction for $61 million, which consisted of cash consideration of $55 million and contingent consideration initially estimated at $6 million. The contingent consideration arrangement is dependent upon the achievement of certain testing volume benchmarks. 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 currently aim annually to save approximately 3% of our costs, and in 2019 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 have 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, 2019, we incurred $60 million of pre-tax charges under our Invigorate program 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. We believe that several of the trends, including consolidation, price transparency and consumerization, are favorable to our business. For additional information on our key trends, which present both opportunities and risks, see "Item 1. Business: The Clinical Testing Industry."

Healthcare market participants, including governments, are focusing on controlling costs, including potentially by reducing reimbursement for healthcare services, 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, requiring 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 2019 and 2018, we derived approximately 3% of our consolidated net revenues from capitated payment arrangements. In 2019 and 2018, we derived approximately 10% and 11%, respectively, of our testing volume 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. Pursuant to the Protecting Access to Medicare Act ("PAMA"), the Centers for Medicare and Medicaid Services ("CMS") promulgated revised reimbursement schedules for 2018-2020 for clinical laboratory testing services provided under Medicare. Under the revised

Medicare Clinical Laboratory Fee Schedule (in 2019 CLFS revenues comprised 11% of our consolidated net revenues), reimbursement rates for clinical laboratory testing were reduced in 2018 and 2019 and are scheduled to be reduced again by approximately 10% in 2020. PAMA calls for further revision of the CLFS for years after 2020, based on future surveys of market rates; reimbursement reduction from 2021-23 is capped by PAMA at 15%. In late 2019, the Laboratory Access for Beneficiaries Act (the “LAB Act”) was signed into law. The LAB Act delays PAMA's next data collection and reporting period until January 1, 2021 and orders a study to determine ways to improve future collection of more representative market rate data under PAMA. We expect total reimbursement rate pressure for 2020 to be slightly more than 2%, of which PAMA and associated impacts are expected to be $80 million to $85 million. We expect a similar impact from PAMA in 2021.

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, which present both opportunities and risks, see "Item 1. Business: The Clinical Testing Industry."

Impact of New Accounting Standards

The adoption of new accounting standards, including the new standard related to accounting for leases, are discussed in Note 2 to the audited consolidated financial statements. For further details regarding our leases, refer to Note 14 to the audited consolidated financial statements.

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; and

•	accounting for and recoverability of goodwill.

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, 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 (along with the period the receivables have been outstanding) 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.

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 2019 applicable to each customer group:

	% of		% of
	Total		Consolidated
	Volume		Net Revenues
Healthcare Insurers	46%		36%
Government Payers	12		15
Client Payers	37		32
Patients *	1		13
Total DIS	96%		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, 2019 applicable to each payer group:

	% of
	Consolidated
	Net Accounts
	Receivable
Healthcare Insurers	22%
Government Payers	11
Client Payers	42
Patients (including coinsurance and deductible responsibilities)	20
Total DIS	95%

Healthcare insurers

Reimbursements from healthcare insurers are based on fee-for-service schedules and on capitated payment rates. 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. Under capitated payment arrangements, 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 we expect 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 the receivables 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 (along with the period the receivables have been outstanding) 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, clinical testing 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 2019:

•	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, 2019, 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.

Results of Operations

For the discussions on the year-over-year changes for the year ended December 31, 2018 compared to December 31, 2017 and the results of operations for the year ended December 31, 2017, see Item 7 - Management's Discussion and Analysis of Financial Condition and Result of Operations of our Annual Report on Form 10-K for the year ended December 31, 2018.

Basis of Presentation

Our DIS business currently represents our one reportable business segment. The DIS business for the years ended December 31, 2019 and 2018 accounted for greater than 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:

	2019				2018				$ Change				% Change
	(dollars in millions, except per share data)
Net revenues:
DIS business	$	7,405			$	7,204			$	201			2.8	%
DS businesses	321				327				(6		)		(1.8	)
Total net revenues	$	7,726			$	7,531			$	195			2.6	%
Operating costs and expenses and other operating income:
Cost of services	$	5,037			$	4,926			$	111			2.3	%
Selling, general and administrative	1,457				1,424				33				2.3
Amortization of intangible assets	96				90				6				7.8
Other operating income, net	(95		)		(10		)		(85		)		NM
Total operating costs and expenses, net	$	6,495			$	6,430			$	65			1.0	%
Operating income	$	1,231			$	1,101			$	130			11.8	%

Other (expense) income:
Interest expense, net	$	(175	)		$	(167	)		$	(8	)		4.7	%
Other income (expense), net	20				(8		)		28				NM
Total non-operating expenses, net	$	(155	)		$	(175	)		$	20			(11.6	)%
Income tax expense	$	(247	)		$	(182	)		$	(65	)		35.7	%
Effective income tax rate	23.0		%		19.7		%
Equity in earnings of equity method investees, net of taxes	$	57			$	44			$	13			28.7	%
Amounts attributable to Quest Diagnostics' common stockholders
Income from continuing operations	$	838			$	736			$	102			13.8	%
Income from discontinued operations, net of taxes	$	20			$	—			$	20			NM
Diluted earnings per common share from continuing operations attributable to Quest Diagnostics’ common stockholders	$	6.13			$	5.29			$	0.84			15.9	%

NM - Not Meaningful

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

	2019			2018
Net revenues:
DIS business	95.8	%		95.7	%
DS businesses	4.2			4.3
Total net revenues	100.0	%		100.0	%
Operating costs and expenses and other operating income:
Cost of services	65.2	%		65.4	%
Selling, general and administrative	18.9			18.9
Amortization of intangible assets	1.2			1.2
Other operating income, net	(1.2	)		(0.1	)
Total operating costs and expenses, net	84.1	%		85.4	%
Operating income	15.9	%		14.6	%

Operating Results

Results for the year ended December 31, 2019 were affected by certain items that on a net basis reduced diluted earnings per share from continuing operations by $0.43 as follows:

•	pre-tax amortization expense of $111 million ($96 million in amortization of intangible assets and $15 million in equity in earnings of equity method investees, net of taxes) or $0.61 per diluted share;

•	pre-tax charges of $78 million ($35 million in cost of services and $43 million in selling, general and administrative expenses), or $0.42 per diluted share, primarily associated with systems conversions and integration incurred in connection with further restructuring and integrating our business;

•

a net pre-tax gain of $89 million (a $95 million gain in other operating income, net offset by a $6 million charge in selling, general and administrative expenses), or $0.50 per diluted share, primarily due to a gain associated with the sale and leaseback of a property, a gain associated with the decrease in the fair value of the contingent consideration accruals associated with previous acquisitions, and a gain associated with an insurance claim for hurricane related losses, partially offset by costs incurred related to the AMCA Data Security Incident, and non-cash asset impairment charges; and

•	excess tax benefits associated with stock-based compensation arrangements of $13 million, or $0.10 per diluted share, recorded in income tax expense.

Results for the year ended December 31, 2018 were affected by certain items that on a net basis reduced diluted earnings per share from continuing operations by $1.02 as follows:

•	pre-tax amortization expense of $107 million ($90 million in amortization of intangible assets and $17 million in equity in earnings of equity method investees, net of taxes) or $0.57 per diluted share;

•	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, 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 us to accelerate the deduction of certain expenses on our 2017 tax return at the federal corporate statutory income 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"); and

•

net pre-tax charges of $2 million ($12 million in cost of services partially offset by a $10 million gain in other operating income, 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 a previous acquisition and an insurance claim for hurricane related losses.

Net Revenues

Net revenues for the year ended December 31, 2019 increased by 2.6% compared to the prior year.

DIS revenues for the year ended December 31, 2019 increased by 2.8% compared to the prior year driven by organic volume growth and the impact of recent acquisitions, partially offset by a decline in revenue per requisition.

•	Organic growth and acquisitions contributed approximately 1.1% and 1.7%, respectively, to DIS revenue growth.

•	DIS volume increased by 4.3%, with organic growth and acquisitions contributing approximately 3.1% and 1.2%, respectively, to DIS volume growth. Organic volume growth benefited from expanded in-network access primarily as a result of becoming a participating provider to UnitedHealthcare and Horizon Blue Cross Blue Shield of New Jersey.

•	Revenue per requisition decreased by 1.3% compared to the prior year primarily due to reimbursement pressure, including unit price reductions associated with PAMA and all other sources, of approximately 2.5%, and an increase in denials; partially offset by favorable mix, driven in part by acquisitions.

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 $111 million for the year ended December 31, 2019 compared to the prior year. The increase was primarily driven by additional operating costs associated with our acquisitions; incremental operating expenses associated with organic volume growth; and higher depreciation expense associated with increased capital expenditures. These increases were partially offset by lower restructuring charges; incremental expense incurred in the prior year associated with reinvestments in the business with savings from tax reform; and cost reduction initiatives primarily under our Invigorate program. These initiatives enabled productivity gains as we leveraged our fixed cost structure to support the increase in 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 increased by $33 million for the year ended December 31, 2019, compared to the prior year, primarily driven by additional operating costs associated with our acquisitions; incremental operating expenses associated with organic volume growth; and higher costs associated with an increase in the value of our deferred compensation obligations. These increases were partially offset by incremental expense incurred in the prior year associated with reinvestments in the business with savings from tax reform; and cost reduction initiatives under our Invigorate program. These initiatives enabled productivity gains as we leveraged our fixed cost structure to support the increase in volume.

The increase in the value of our deferred compensation obligations is largely offset by gains due to the increase in the value of the associated investments, which are recorded in other income (expense), net. For further details regarding the Company's deferred compensation plans, see Note 17 to the audited consolidated financial statements.

Amortization of Intangible Assets

The $6 million increase in amortization of intangible assets for the year ended December 31, 2019 compared to the prior year was associated with our acquisitions.

Other Operating Income, net

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

For the year ended December 31, 2019, other operating income, net includes a $73 million gain associated with the sale and leaseback of a property, a $12 million gain associated with an insurance claim for hurricane related losses and a $12 million gain associated with the decrease in the fair value of the contingent consideration accruals associated with previous acquisitions, partially offset by non-cash asset impairment charges of $2 million.

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

Interest Expense, net

Interest expense, net increased by $8 million for the year ended December 31, 2019 compared to the prior year, primarily driven by higher interest rates associated with our indebtedness, combined with higher average outstanding indebtedness due to refinancing activity during the year.

Other Income (Expense), net

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

For the year ended December 31, 2019, other income (expense), net included $19 million of gains associated with investments in our deferred compensation plans.

For the year ended December 31, 2018, other income (expense), 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.

Income Tax Expense

Income tax expense for the years ended December 31, 2019 and 2018 was $247 million and $182 million, respectively. The increase in income tax expense compared to the prior year was primarily driven by:

•	an increase in income from continuing operations before income taxes and equity in earnings of equity method investees;

•	a $15 million income tax benefit recognized in the prior year associated with a change in tax return accounting method that enabled us to accelerate the deduction of certain expenses on our 2017 tax return at the federal corporate statutory income tax rate in effect during 2017; and

•	$18 million of net income tax expense in 2019 associated with changes in reserves for uncertain tax positions compared to a $7 million net income tax benefit associated with changes in reserves for uncertain tax positions in the prior year primarily related to the expiration of the statute of limitations for certain income tax returns; partially offset by

•	a $12 million income tax benefit recognized in 2019 due to the release of valuation allowances associated with net operating loss carryforwards.

Equity in Earnings of Equity Method Investees, Net of Taxes

For the year ended December 31, 2019, there was a $13 million increase in equity in earnings of equity method investees, net of taxes, compared to the prior year, primarily associated with our investment in the Q2 Solutions joint venture.

Discontinued Operations

During the third quarter of 2006, we completed the wind down of Nichols Institute Diagnostics ("NID"), a test kit manufacturing subsidiary, which has been classified as discontinued operations for all periods presented. Discontinued operations, net of taxes, for the year ended December 31, 2019 includes discrete tax benefits of $20 million associated with the favorable resolution of certain tax contingencies related to NID.

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 December 31, 2019 and 2018, the fair value of our debt was estimated at approximately $5.1 billion and $4.0 billion, respectively, using quoted prices in active markets and yields for the same or similar types of borrowings, taking into account the underlying terms of the debt instruments. As of December 31, 2019 and 2018, the estimated fair value exceeded the carrying value of the debt by $313 million and $85 million, respectively. A hypothetical 10% increase in interest rates (representing 28 basis points as of December 31, 2019 and 39 basis points as of December 31, 2018) would potentially reduce the estimated fair value of our debt by approximately $100 million and $88 million as of December 31, 2019 and 2018, 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, 2019, 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, 2019, there were no borrowings outstanding under either our $600 million secured receivables credit facility or our $750 million senior unsecured revolving credit facility.

The notional amount of fixed-to-variable interest rate swaps outstanding as of both December 31, 2019 and 2018 was $1.2 billion. The aggregate fair value of the fixed-to-variable interest rate swaps was $28 million and $93 million, in a liability position, as of December 31, 2019 and 2018, 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 17 basis points) would potentially change annual interest expense by $2 million. A hypothetical 10% change in the forward one-month LIBOR curve (representing a 16 basis points change in the weighted average yield) would potentially change the fair value of our fixed-to-variable interest rate swap liabilities by $11 million.

In February 2019, we entered into interest rate lock agreements with several financial institutions for a total notional amount of $250 million to hedge a portion of our interest rate exposure associated with variability in future cash flows attributable to changes in the ten-year treasury rates related to the anticipated issuance of debt during 2019. In connection with the issuance of the 2029 Senior Notes, the agreements were settled and we paid $1 million. These losses are deferred in stockholders' equity, net of taxes, as a component of accumulated other comprehensive loss, and amortized as an adjustment to interest expense, net over the term of the 2029 Senior Notes.

During the third and fourth quarters of 2019, we entered into forward-starting interest rate swap agreements with several financial institutions for a total notional amount of $400 million to hedge a portion of our interest rate exposure associated with variability in future cash flows attributable to changes in interest rates over a ten-year period related to an anticipated issuance of debt. In connection with the issuance of the 2030 Senior Notes, these agreements were settled and we received $6 million. These gains are deferred in stockholders' equity, net of taxes, as a component of accumulated other comprehensive loss, and amortized as an adjustment to interest expense, net over a ten-year period.

For further details regarding our outstanding debt and our financial instruments and hedging activities, see Notes 13 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 and healthcare industries. 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 $25 million as of December 31, 2019.

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

	2019				2018				$ Change
	(dollars in millions)
Net cash provided by operating activities	$	1,243			$	1,200			$	43
Net cash used in investing activities	(411		)		(801		)		390
Net cash provided by (used in) financing activities	225				(401		)		626
Net change in cash and cash equivalents and restricted cash	$	1,057			$	(2	)		$	1,059

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, 2019 and 2018 totaled $1,192 million and $135 million, respectively.

As of December 31, 2019, approximately 3% of our $1,192 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, 2019 was $1,243 million, and increased $43 million compared to the prior year primarily as a result of:

•	lower compensation payments in 2019 compared to 2018;

•	higher operating income in 2019 as compared to 2018;

•	timing of movements in our working capital accounts; and

•	a $28 million refund from the taxing authorities associated with the favorable resolution of certain tax contingencies related to a discontinued operation; partially offset by

•	a $118 million increase in income tax payments.

Days sales outstanding, a measure of billing and collection efficiency, was 54 days as of both December 31, 2019 and 2018.

Cash Flows from Investing Activities

Net cash used in investing activities for the year ended December 31, 2019 was $411 million, compared to $801 million for the year ended December 31, 2018. This $390 million decrease in cash used in investing activities was primarily a result of a $363 million decrease in net cash paid for business acquisitions.

Cash Flows from Financing Activities

Net cash provided by financing activities for the year ended December 31, 2019 was $225 million, compared to net cash used in financing activities of $401 million for the year ended December 31, 2018. This $626 million increase in cash provided by financing activities was primarily a result of $832 million of net borrowings (proceeds from borrowing less repayments of debt) in 2019 compared to $124 million of net borrowings in 2018.

In March 2019, we completed the issuance of the 2029 Senior Notes and repaid in full, at maturity, our $300 million senior notes due April 1, 2019. In December 2019, we completed the issuance of the 2030 Senior Notes, and, in January 2020, we used the net proceeds, along with cash on hand, to redeem in full our $500 million senior notes due January 2020 and our $300 million senior notes due March 2020. In addition, during 2019 we borrowed a total of $985 million under our secured receivables credit facility to fund periodic working capital requirements as well as our 2019 acquisition and repaid $1,145 million under our secured receivables credit facility. During the year ended December 31, 2019, there were no borrowings or repayments under our senior unsecured revolving credit facility.

In 2018, there were $2,090 million in cumulative borrowings under our 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.

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

Dividend Program

During each of the four quarters of 2019, our Board of Directors declared a quarterly cash dividend of $0.53 per common share. 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. On January 30, 2020, we announced that our Board of Directors authorized a 5.7% increase in our quarterly cash dividend from $0.53 to $0.56 per share, or $2.24 per share annually, commencing with the dividend payable in April 2020.

Share Repurchases

In November 2019, our Board of Directors authorized us to repurchase an additional $1 billion of our common stock. As of December 31, 2019, $1.2 billion remained available under the Company’s share repurchase authorization.

For the year ended December 31, 2019, we repurchased 3.5 million shares of our common stock for $350 million.

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 until after December 31, 2018.

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, 2019 (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		$	4,776			$	800			$	550			$	300			$	3,126
Finance lease obligations		33				3				6				3				21
Interest payments on outstanding debt		1,706				187				301				280				938
Operating leases		741				194				274				156				117
Purchase obligations		1,684				315				563				438				368
Merger consideration obligation		7				7				—				—				—
Total contractual obligations		$	8,947			$	1,506			$	1,694			$	1,177			$	4,570

Interest payments on our outstanding debt include interest associated with finance lease obligations and have been calculated after giving effect to our interest rate swap agreements, using the interest rates as of December 31, 2019 applied to the December 31, 2019 balances, which are assumed to remain outstanding through their maturity dates. A description of the terms of our indebtedness and related debt service requirements is contained in Note 13 to the audited consolidated financial statements.

Operating lease obligations include variable charges (primarily maintenance fees and utilities associated with our real estate leases) in effect as of December 31, 2019. A discussion and analysis regarding our operating lease obligations is contained in Note 14 to the audited consolidated financial statements.

Purchase obligations include our noncancelable commitments to purchase products or services as described in Note 18 to the audited consolidated financial statements.

Merger consideration obligations include consideration owed on our business acquisitions. For details regarding our acquisitions, see Note 6 to the audited consolidated financial statements.

As of December 31, 2019, our total liabilities associated with unrecognized tax benefits were approximately $88 million, which were excluded from the table above. We expect that these liabilities may decrease by up to $10 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. See Note 8 to the audited consolidated financial statements for information regarding our contingent tax liability reserves.

In connection with the sale of an 18.9% noncontrolling interest in a subsidiary to UMass Memorial Medical Center ("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, 2019, the fair value of the redeemable noncontrolling interest on the audited consolidated balance sheet was $76 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, 2019, 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 less than 10% of our consolidated income from continuing operations 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 $375 million to $400 million during 2020 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 diagnostics and consumer growth strategies.

In January 2020, we redeemed in full our $500 million senior notes due January 2020 and $300 million senior notes due March 2020 using cash on hand principally associated with the net proceeds from the 2030 Senior Notes offering in December.

As of December 31, 2019, $1.3 billion of borrowing capacity was available under our existing credit facilities consisting of $529 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 2020, and a $250 million loan commitment and a $100 million letter of credit facility which mature October 2021. 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, 2019 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, 2019 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, 2019 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, 2019 and 2018, 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, 2019, including the related notes and schedule of valuation accounts and reserves for each of the three years in the period ended December 31, 2019 listed in the index appearing 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, 2019, 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, 2019 and 2018**,** and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 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, 2019, 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 leases in 2019.

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.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Valuation of Diagnostics Information Services (DIS) Business Accounts Receivable - Contractual Allowances

As described in Note 3 to the consolidated financial statements, management estimates the amount of consideration it expects to be entitled to receive from customer groups, using the portfolio approach, in exchange for providing services. These estimates include the impact of contractual allowances, including payer denials, and price concessions. The portfolio approach includes the following groups of customers: healthcare insurers, government payers, client payers and patients (22%, 11%, 42% and 20% of consolidated net accounts receivable as of December 31, 2019, respectively, as disclosed by management). The DIS business accounted for 95% of consolidated net accounts receivable ($1,063 million) as of December 31, 2019. Net revenues and accounts receivable recognized from healthcare insurers and government payers 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, additionally for healthcare insurers, the terms of the Company’s contractual arrangements. As disclosed by management, the process for estimating revenues and the ultimate collection of receivables associated with the DIS business involves significant assumptions and judgments.

The principal considerations for our determination that performing procedures relating to the valuation of DIS business accounts receivable - contractual allowances is a critical audit matter are the estimate of net collectible accounts receivable, specifically contractual allowances, involves significant judgment and estimation on the part of management. This in turn led to significant auditor judgment and effort in performing procedures to evaluate the audit evidence obtained related to the contractual allowances.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the valuation of DIS business accounts receivable, which included controls over management’s methodology and data used to estimate contractual allowances. These procedures also included, among others, testing management's process for developing the estimate for contractual allowances, including evaluating the appropriateness of the methodology and testing the historical contractual allowance and collection data from the Company’s billing system, which is an input to the methodology. Additionally, the reasonableness of management’s assumptions for contractual allowances was evaluated by comparing actual cash collected to the prior year estimate (net accounts receivable).

/s/	PricewaterhouseCoopers LLP
	Florham Park, New Jersey
	February 20, 2020

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

F- 2

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2019 AND 2018

(in millions, except per share data)

	2019				2018
Assets
Current assets:
Cash and cash equivalents	$	1,192			$	135
Accounts receivable, net of allowance for doubtful accounts of $15 as of both December 31, 2019 and 2018	1,063				1,012
Inventories	123				99
Prepaid expenses and other current assets	112				144
Total current assets	2,490				1,390
Property, plant and equipment, net	1,453				1,288
Operating lease right-of-use assets	518				—
Goodwill	6,619				6,563
Intangible assets, net	1,121				1,207
Investments in equity method investees	482				436
Other assets	160				119
Total assets	$	12,843			$	11,003
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses	$	1,041			$	1,021
Current portion of long-term debt	804				464
Current portion of long-term operating lease liabilities	145				—
Total current liabilities	1,990				1,485
Long-term debt	3,966				3,429
Long-term operating lease liabilities	413				—
Other liabilities	711				745
Commitments and contingencies
Redeemable noncontrolling interest	76				77
Stockholders’ equity:
Quest Diagnostics stockholders’ equity:
Common stock, par value $0.01 per share; 600 shares authorized as of both December 31, 2019 and 2018; 217 shares issued as of both December 31, 2019 and 2018	2				2
Additional paid-in capital	2,722				2,667
Retained earnings	8,174				7,602
Accumulated other comprehensive loss	(39		)		(59		)
Treasury stock, at cost; 84 shares and 82 shares as of December 31, 2019 and 2018, respectively	(5,218		)		(4,996		)
Total Quest Diagnostics stockholders’ equity	5,641				5,216
Noncontrolling interests	46				51
Total stockholders’ equity	5,687				5,267
Total liabilities and stockholders’ equity	$	12,843			$	11,003

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, 2019**,** 2018 AND 2017

(in millions, except per share data)

	2019				2018				2017
Net revenues	$	7,726			$	7,531			$	7,402
Operating costs and expenses and other operating (income) expense:
Cost of services	5,037				4,926				4,719
Selling, general and administrative	1,457				1,424				1,443
Amortization of intangible assets	96				90				74
Other operating (income) expense, net	(95		)		(10		)		1
Total operating costs and expenses, net	6,495				6,430				6,237
Operating income	1,231				1,101				1,165
Other (expense) income:
Interest expense, net	(175		)		(167		)		(151		)
Other income (expense), net	20				(8		)		16
Total non-operating expenses, net	(155		)		(175		)		(135		)
Income from continuing operations before income taxes and equity in earnings of equity method investees	1,076				926				1,030
Income tax expense	(247		)		(182		)		(241		)
Equity in earnings of equity method investees, net of taxes	57				44				35
Income from continuing operations	886				788				824
Income from discontinued operations, net of taxes	20				—				—
Net income	906				788				824
Less: Net income attributable to noncontrolling interests	48				52				52
Net income attributable to Quest Diagnostics	$	858			$	736			$	772
Amounts attributable to Quest Diagnostics’ common stockholders:
Income from continuing operations	$	838			$	736			$	772
Income from discontinued operations, net of taxes	20				—				—
Net income	$	858			$	736			$	772
Earnings per share attributable to Quest Diagnostics’ common stockholders - basic:
Income from continuing operations	$	6.21			$	5.39			$	5.63
Income from discontinued operations	0.15				—				—
Net income	$	6.36			$	5.39			$	5.63
Earnings per share attributable to Quest Diagnostics’ common stockholders - diluted:
Income from continuing operations	$	6.13			$	5.29			$	5.50
Income from discontinued operations	0.15				—				—
Net income	$	6.28			$	5.29			$	5.50

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, 2019**,** 2018 AND 2017

(in millions)

	2019				2018				2017
Net income	$	906			$	788			$	824
Other comprehensive income (loss):
Foreign currency translation adjustment	7				(11		)		20
Investment adjustments, net of taxes	8				—				3
Net deferred gain on cash flow hedges, net of taxes	5				2				1
Other comprehensive income (loss)	20				(9		)		24
Comprehensive income	926				779				848
Less: Comprehensive income attributable to noncontrolling interests	48				52				52
Comprehensive income attributable to Quest Diagnostics	$	878			$	727			$	796

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, 2019**,** 2018 AND 2017

(in millions)

	2019				2018				2017
Cash flows from operating activities:
Net income	$	906			$	788			$	824
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	329				309				270
Provision for doubtful accounts	11				6				8
Deferred income tax provision	15				73				9
Stock-based compensation expense	56				61				79
(Gains) losses on sale of property, plant and equipment	(70		)		6				2
Other, net	(39		)		6				(8		)
Changes in operating assets and liabilities:
Accounts receivable	(63		)		(65		)		9
Accounts payable and accrued expenses	73				(19		)		(8		)
Income taxes payable	29				4				16
Other assets and liabilities, net	(4		)		31				(26		)
Net cash provided by operating activities	1,243				1,200				1,175
Cash flows from investing activities:
Business acquisitions, net of cash acquired	(58		)		(421		)		(581		)
Proceeds from disposition of business	—				2				1
Proceeds from disposition of property, plant, and equipment	91				2				1
Capital expenditures	(400		)		(383		)		(252		)
(Increase) decrease in investments and other assets	(44		)		(1		)		1
Net cash used in investing activities	(411		)		(801		)		(830		)
Cash flows from financing activities:
Proceeds from borrowings	2,281				2,090				205
Repayments of debt	(1,449		)		(1,966		)		(182		)
Purchases of treasury stock	(353		)		(322		)		(465		)
Exercise of stock options	119				99				130
Employee payroll tax withholdings on stock issued under stock-based compensation plans	(16		)		(21		)		(23		)
Dividends paid	(286		)		(266		)		(247		)
Distributions to noncontrolling interest partners	(54		)		(54		)		(51		)
Contributions from noncontrolling interest partners	—				16				4
Other financing activities, net	(17		)		23				37
Net cash provided by (used in) financing activities	225				(401		)		(592		)
Net change in cash and cash equivalents and restricted cash	1,057				(2		)		(247		)
Cash and cash equivalents and restricted cash, beginning of year	135				137				384
Cash and cash equivalents and restricted cash, end of year	$	1,192			$	135			$	137
Cash and cash equivalents	$	1,192			$	135			$	137
Restricted cash	—				—				—
Cash and cash equivalents and restricted cash, end of year	$	1,192			$	135			$	137

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, 2019**,** 2018 AND 2017

(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, 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
Net income									858									42			900					6
Other comprehensive income, net of tax												20									20
Dividends declared									(286		)										(286		)
Distributions to noncontrolling interest partners																		(47		)	(47		)			(7		)
Issuance of common stock under benefit plans						9									15						24
Stock-based compensation expense						55									1						56
Exercise of stock options	2					7									112						119
Shares to cover employee payroll tax withholdings on stock issued under stock-based compensation plans						(16		)													(16		)
Purchases of treasury stock	(4	)													(350		)				(350		)
Balance, December 31, 2019	133		$	2		$	2,722		$	8,174		$	(39	)	$	(5,218	)	$	46		$	5,687				$	76

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.Ds, many of whom are recognized leaders in their fields. The Company's Diagnostic Solutions businesses ("DS") 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. Additionally, the consolidated financial statements include the accounts of variable interest entities (“VIEs”) in which the Company has a variable interest and for which the Company is the “primary beneficiary” as it has both: (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (2) the obligation to absorb losses of the VIE that potentially could be significant to the VIE or the right to receive benefits from the VIE that potentially could be 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 in the consolidated balance sheets.

Basis of Presentation

During the third quarter of 2006, the Company completed the wind down of Nichols Institute Diagnostics ("NID"), a test kit manufacturing subsidiary. The accompanying consolidated statements of operations and related disclosures report the results of NID as discontinued operations for all periods presented. See Note 21 for a further discussion of discontinued operations.

Reclassifications

Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial statements.

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(in millions unless otherwise indicated)

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.

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 15%, 16% and 17% of the Company's consolidated net revenues for the years ended December 31, 2019, 2018 and 2017, 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.

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(in millions unless otherwise indicated)

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. For further details regarding stock-based compensation, see Note 17.

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. Foreign currency 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.

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(in millions unless otherwise indicated)

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk are principally cash, cash equivalents, short-term investments, accounts receivable and derivative financial instruments. The Company's policy is to place its cash, cash equivalents and short-term investments in highly-rated financial instruments and institutions. Concentration of credit risk with respect to accounts receivable is mitigated by the diversity of the Company's payers and their dispersion across many different geographic regions, and is limited to certain payers who are large buyers of the Company's services. To reduce risk, the Company routinely assesses the financial strength of these payers and, consequently, believes that its accounts receivable credit risk exposure, with respect to these payers, is limited. While the Company has receivables due from federal and state governmental agencies, the Company does not believe that such receivables represent a credit risk since the related healthcare programs are funded by federal and state governments, and payment is primarily dependent on submitting appropriate documentation. As of December 31, 2019 and 2018, receivables due from government payers under the Medicare and Medicaid programs represented approximately 11% and 13%, 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, 2019 and 2018, receivables due from patients represented approximately 20% of the Company's consolidated net accounts receivable. The Company applies assumptions and judgments including historical collection experience (including the period the receivables have been outstanding) for assessing collectibility and determining net revenues and accounts receivable from patients.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are reported at realizable value, net of allowances for doubtful accounts, which 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) or 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, 2019 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.

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(in millions unless otherwise indicated)

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 exceeds its fair value.

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

The quantitative impairment test involves the comparison of the fair value of the reporting unit to its carrying value. The Company calculates the fair value of each reporting unit using either a discounted cash flows analysis that converts future cash flow amounts into a single discounted present value amount or a market approach. The Company assesses the valuation methodology based upon the relevance and availability of the data at the time that the valuation is performed. The Company compares the estimate of fair value for the reporting unit to the carrying value of the reporting unit. If the carrying value is greater than the estimate of fair value, an impairment loss will be recognized in the amount of the excess.

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

The Company performs its annual impairment test during the fourth quarter of the fiscal year. For the year ended December 31, 2019 and 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.

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.

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(in millions unless otherwise indicated)

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, 2019 and 2018, the Company concluded that indefinite-lived intangible assets were not impaired.

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

Investments

The Company's investments (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 within other income (expense), net in the consolidated statements of operations. For the years ended December 31, 2019, 2018 and 2017, gains and (losses) from these equity securities totaled $10 million, $(2) million, and $8 million, respectively. The carrying value of these investments were $59 million and $53 million at December 31, 2019 and 2018, respectively.

•

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, 2019, 2018, and 2017. The carrying value of these investments were $25 million and $10 million at December 31, 2019 and 2018, respectively.

•	Available-for-sale debt securities of privately-held companies. These investments are measured at fair value with unrealized gains and losses presented in other comprehensive income. The carrying amount of these investments was $12 million and $0 million at December 31, 2019 and 2018, 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.

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(in millions unless otherwise indicated)

Interest Rate Risk

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

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

Comprehensive Income (Loss)

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

•	Foreign currency translation adjustments;

•	Investment adjustments, which represent unrealized holding gains (losses), net of tax on available for sale debt securities; and

•	Net deferred gains (losses) on cash flow hedges, which represents deferred gains (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 and 16).

Prior to adoption of the new accounting guidance on recognition and measurement of financial assets and liabilities in 2018, investment adjustments also included unrealized holding gains (losses), net of tax, on available-for-sale equity securities, net of other-than-temporary impairment amounts reclassified to other income (expense), net.

New Accounting Standards

Adoption of New Accounting Standards

On January 1, 2019, the Company adopted a new accounting standard issued by the Financial Accounting Standards Board ("FASB") on accounting for leases using the modified retrospective method. This new accounting standard requires a lessee to recognize on its balance sheet an asset and liability for most leases. The Company elected the optional transition method that allowed for a cumulative-effect adjustment to the opening balance of retained earnings recorded on January 1, 2019

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(in millions unless otherwise indicated)

and did not restate previously reported results in the comparative periods. The Company also elected the package of practical expedients, which among other things, allowed it to carry forward its historical lease classification.

As a result of adoption of the new standard, the Company recorded operating lease assets and lease liabilities of approximately $500 million and $550 million, respectively as of January 1, 2019. The operating lease liability was determined based on the present value of the remaining minimum rental payments and the operating lease asset was determined based on the value of the lease liability, adjusted for the deferred rent balances of approximately $50 million, which were previously included in accounts payable and accrued expenses as well as other liabilities. Accounting for the Company's finance leases remains substantially unchanged. The adoption of the new standard did not materially impact the Company's consolidated results of operations or cash flows.

In addition, the adoption of this new accounting standard resulted in increased qualitative and quantitative disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases. For further details, see Note 14.

On January 1, 2019, the Company adopted a new accounting standard issued by the FASB that includes the overnight index swap rate based on the Secured Overnight Financing Rate as an additional benchmark interest rate for hedge accounting purposes. Adoption of this new accounting standard applies prospectively to new or redesignated hedges entered into after the adoption date and, therefore, did not have an impact on the Company's existing interest rate swap agreements.

New Accounting Standards To Be Adopted

In August 2018, the FASB issued an Accounting Standard Update (“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 and can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The adoption of this standard, which the Company expects to do on a prospective basis, is not expected to have a material impact on the Company’s results of operations, financial position or cash flows.

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 adoption of this standard is not expected to have a material impact on the Company’s results of operations, financial position or cash flows.

3. REVENUE RECOGNITION

DIS

Net revenues in the Company’s DIS business accounted for greater than 95% of the Company’s total net revenues for the years ended December 31, 2019, 2018 and 2017 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, 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 (including the period the receivables have been outstanding), 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

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(in millions unless otherwise indicated)

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 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. In addition to our standard approach to establishing allowances for doubtful accounts (which considers a number of factors including the period the receivables 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 the Company’s policies and implicit price concessions. Implicit price concessions represent differences between amounts billed and the estimated

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(in millions unless otherwise indicated)

consideration the Company expects to receive from patients, which considers historical collection experience (including the period the receivables have been outstanding) 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,
	2019			2018			2017
Healthcare insurers:
Fee-for-service	33	%		32	%		34	%
Capitated	3			3			3
Total healthcare insurers	36			35			37
Government payers	15			16			17
Client payers	32			32			30
Patients	13			13			12
Total DIS	96			96			96
DS	4			4			4
Net revenues	100	%		100	%		100	%

For the years ended December 31, 2019, 2018 and 2017, substantially all of the Company’s services were provided within the United States, see Note 19.

The approximate percentage of net accounts receivable by type of customer as of December 31, 2019 and 2018 was as follows:

	2019		2018
Healthcare Insurers	22%		22%
Government Payers	11		13
Client Payers	42		41
Patients (including coinsurance and deductible responsibilities)	20		20
Total DIS	95		96
DS	5		4
Net accounts receivable	100%		100%

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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):

	2019				2018				2017
Amounts attributable to Quest Diagnostics’ common stockholders:
Income from continuing operations	$	838			$	736			$	772
Income from discontinued operations, net of taxes	20				—				—
Net income attributable to Quest Diagnostics' common stockholders	$	858			$	736			$	772
Income from continuing operations	$	838			$	736			$	772
Less: Earnings allocated to participating securities	3				3				3
Earnings available to Quest Diagnostics’ common stockholders – basic and diluted	$	835			$	733			$	769
Weighted average common shares outstanding – basic	134				136				137
Effect of dilutive securities:
Stock options and performance share units	2				3				3
Weighted average common shares outstanding – diluted	136				139				140
Earnings per share attributable to Quest Diagnostics’ common stockholders - basic:
Income from continuing operations	$	6.21			$	5.39			$	5.63
Income from discontinued operations	0.15				—				—
Net income	$	6.36			$	5.39			$	5.63
Earnings per share attributable to Quest Diagnostics’ common stockholders - diluted:
Income from continuing operations	$	6.13			$	5.29			$	5.50
Income from discontinued operations	0.15				—				—
Net income	$	6.28			$	5.29			$	5.50

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

	2019			2018			2017
Stock options	3			2			2

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 revenue services 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

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, 2019, 2018 and 2017:

	2019				2018				2017
Employee separation costs	$	(3	)		$	45			$	29
Facility-related costs	1				4				1
Asset impairment charges	—				2				3
Total restructuring charges	$	(2	)		$	51			$	33

The restructuring activity incurred for the year ended December 31, 2019 primarily represents a release of the liability relating to restructuring charges recorded in prior periods, which were determined to no longer be required. The restructuring charges incurred for the years ended December 31, 2018 and 2017 were primarily associated with various workforce reduction initiatives as the Company continued to simplify and restructure its organization. The $(2) million of restructuring charges recognized during the year ended December 31, 2019 were recorded in selling, general and administrative expenses. 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.

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

The following table summarizes the activity of the restructuring liability during 2019 and 2018, which is included in accrued expenses in Note 12:

	Employee Separation Costs				Facility-Related Costs				Total
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
Income statement income	(3		)		—				(3		)
Cash payments	(25		)		—				(25		)
Other	—				(1		)		(1		)
Balance, December 31, 2019	$	9			$	—			$	9

Subsequent to the adoption of the new accounting standard related to accounting for leases, facility-related costs are recognized as a reduction of the Company's operating lease right-of-use assets. See Note 2 for further details on the adoption of the new accounting standard.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

6. BUSINESS ACQUISITIONS

2019 Acquisitions

During 2019, the Company completed acquisitions for an aggregate purchase price of $63 million, including the acquisition discussed below. The 2019 acquisitions resulted in goodwill of $43 million, of which $36 million is deductible for tax purposes. These acquisitions also resulted in $21 million of intangible assets, principally comprised of customer-related intangibles.

Acquisition of the Clinical Laboratory Services Business of Boyce & Bynum Pathology Laboratories, P.C.

On February 11, 2019, the Company completed its acquisition of certain assets of the clinical laboratory services business of Boyce & Bynum Pathology Laboratories, P.C. ("Boyce & Bynum") in an all cash transaction for $61 million, which consisted of cash consideration of $55 million and contingent consideration initially estimated at $6 million. The contingent consideration arrangement is dependent upon the achievement of certain testing volume benchmarks. During 2019, the liability was reduced to $0 as a result of updated testing volume forecasts for the earn-out period compared to the testing volume target included in the contingent consideration arrangement, resulting in a $6 million gain recorded in other operating (income) expense, net. Based on the purchase price allocation, the assets acquired principally consist of $41 million of goodwill (of which $35 million is tax deductible) and $20 million of customer-related intangible assets. The intangible assets will be amortized over a useful life of 15 years. For further details regarding the fair value of the contingent consideration, see Note 7.

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 $241 million, of which $205 million is deductible for tax purposes. These acquisitions also resulted in $167 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.

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

On June 18, 2018, the Company completed the acquisition of the outreach laboratory services 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.

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. During 2019, the liability was reduced to $0 as a result of updated revenue forecasts for 2019 compared to the earn-out revenue target included in the contingent consideration arrangement, resulting in a net gain recorded in other operating (income) expense, net.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

ReproSource is a national leader in specialty fertility diagnostic services. Through the acquisition, the Company acquired all of ReproSource's operations. 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 7.

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

On November 6, 2018, the Company completed the acquisition of all of the operations of the U.S. laboratory services 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. In September 2019, the Company finalized its purchase price allocation and recorded a $13 million increase to goodwill, an $11 million decrease to intangible assets and a $2 million adjustment to other assets and liabilities. These adjustments did not have a material impact on the Company's consolidated results of operations. Based on the final purchase price allocation, the assets acquired and liabilities assumed primarily consist of $43 million of intangible assets, $112 million of tax deductible goodwill, $13 million of working capital and $6 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 Services Business of PeaceHealth Laboratories

On May 1, 2017, the Company completed the acquisition of the outreach laboratory services 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 Services 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 services businesses of two hospitals of Hartford HealthCare Corporation, The William W. Backus Hospital and The Hospital of Central Connecticut, in an all cash transaction for $30 million. The assets acquired principally consist of tax deductible goodwill and customer-related intangible assets.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(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 currently tax deductible) and $70 million of customer-related intangible assets. The intangible assets are being amortized over a useful life of 15 years. For further details regarding the fair value of the contingent consideration, see Note 7.

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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

7. 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, 2019
Assets:
Trading securities	$	59			$	59			$	—			$	—
Cash surrender value of life insurance policies	43				—				43				—
Available-for-sale debt securities	12				—				—				12
Total	$	114			$	59			$	43			$	12
Liabilities:
Deferred compensation liabilities	$	110			$	—			$	110			$	—
Fix-to-variable interest rate swaps	28				—				28				—
Contingent consideration	7				—				—				7
Total	$	145			$	—			$	138			$	7
Redeemable noncontrolling interest	$	76			$	—			$	—			$	76
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			$	—
Fix-to-variable interest rate swaps	93				—				93				—
Contingent consideration	14				—				—				14
Total	$	203			$	—			$	189			$	14
Redeemable noncontrolling interest	$	77			$	—			$	—			$	77

The Company offers certain employees the opportunity to participate in a non-qualified supplemental deferred compensation plan. 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 of the fair value hierarchy 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 of the fair value hierarchy 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

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 obligation are classified within Level 2 of the fair value hierarchy because their inputs are derived principally from observable market data by correlation to the hypothetical investments. Deferrals under the plan currently may only be made by participants who made deferrals under the plan in 2017.

The Company's available-for-sale debt securities are measured at fair value using discounted cash flows. These fair value measurements are classified within Level 3 of the fair value hierarchy as the fair value is based on significant inputs that are not observable. Significant inputs include cash flows projections and a discount rate.

The fair value measurements of the Company's fixed-to-variable 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.

In connection with previous business acquisitions, the Company has contingent consideration obligations that are to be paid based on the achievement of certain testing volume or revenue benchmarks. As of December 31, 2019, the fair value of these contingent consideration liabilities totaled $7 million. These contingent consideration liabilities are measured at fair value using an option-pricing method and are classified within Level 3 of the fair value hierarchy as the fair value is determined based on significant inputs that are not observable. Significant inputs include management’s estimate of volume or revenue and other market inputs including comparable company revenue volatility and a discount rate. A summary of the significant inputs is as follows:

Business Acquisition		Benchmark		Comparable Company Revenue Volatility		Discount rate		Maximum Contingent Consideration Payment
Shiel		Volume		6.9%		4.5%		$	15
ReproSource		Revenue		8.5%		6.5%		$	10
Boyce & Bynum		Volume		8.0%		7.2%		$	25

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, 2017	$	7
Purchases, additions and issuances	19
Settlements	(1		)
Total (gains)/losses included in earnings - realized/unrealized	(11		)
Balance, December 31, 2018	14
Purchases, additions and issuances	6
Settlements	(1		)
Total (gains)/losses included in earnings - realized/unrealized	(12		)
Balance, December 31, 2019	$	7

The $12 million and $11 million net gains included in earnings associated with the changes in the fair value of contingent consideration for the years ended December 31, 2019 and 2018, respectively, is reported in other operating (income) expense, net.

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. As of December 31, 2019, the redeemable noncontrolling interest 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

items, the joint venture's expected future cash flows, long term growth rates, and a discount rate commensurate with economic risk.

The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable and accrued expenses approximate fair value based on the short maturities of these instruments. As of December 31, 2019 and 2018, the fair value of the Company’s debt was estimated at $5.1 billion and $4.0 billion, respectively. Principally all of the Company's debt is classified within Level 1 of the fair value hierarchy because the fair value of the debt is estimated based on rates currently offered to the Company with identical terms and maturities, using quoted active market prices and yields, taking into account the underlying terms of the debt instruments.

8. TAXES ON INCOME

The Company's pre-tax income from continuing operations before equity in earnings of equity method investees consisted of approximately $1.1 billion, $0.9 billion and $1.0 billion from U.S. operations and pre-tax income (loss) of $15 million, $(1) million and $(7) million from foreign operations for the years ended December 31, 2019, 2018 and 2017, respectively.

The Company recognized the income tax effects of the Tax Cut and Jobs Act ("TCJA") in its 2017 consolidated financial statements in accordance with Staff Accounting Bulletin No. 118, which provides Securities and Exchange Commission staff guidance for the application of 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 had 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.

The components of income tax expense (benefit) for 2019, 2018 and 2017 were as follows:

	2019				2018				2017
Current:
Federal	$	176			$	82			$	226
State and local	53				26				5
Foreign	3				1				1
Deferred:
Federal	21				66				(20		)
State and local	(4		)		10				27
Foreign	(2		)		(3		)		2
Total	$	247			$	182			$	241

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

A reconciliation of the federal statutory rate to the Company's effective tax rate for 2019, 2018 and 2017 was as follows:

	2019			2018			2017
Tax provision at statutory rate	21.0	%		21.0	%		35.0	%
State and local income taxes, net of federal benefit	4.6			4.7			3.8
Gains and losses on book and tax basis difference	—			—			(0.1	)
Impact of noncontrolling interests	(1.1	)		(1.4	)		(1.9	)
Excess tax benefits on stock-based compensation arrangements	(1.2	)		(1.9	)		(3.6	)
Return to provision true-ups	(1.4	)		(1.4	)		(2.0	)
Impact of TCJA enactment	—			0.1			(10.4	)
Change in accounting method	—			(1.6	)		—
Impact of equity earnings	1.1			1.0			1.1
Changes in reserves for uncertain tax positions	1.7			(0.8	)		1.6
Change in valuation allowances associated with certain net operating losses	(1.1	)		—			0.4
Other, net	(0.6	)		—			(0.5	)
Effective tax rate	23.0	%		19.7	%		23.4	%

For the year ended December 31, 2019, the Company recognized a $12 million net income tax benefit due to the release of valuation allowances associated with certain net operating loss carryforwards. 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 income rate, resulting in a $15 million income tax benefit. The net income tax benefit associated with changes in reserves for uncertain tax positions in 2018 was primarily related to the expiration of the statute of limitations for certain income tax returns.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets (liabilities) as of December 31, 2019 and 2018 were as follows:

	2019				2018
Non-current deferred tax assets (liabilities):
Accounts receivable reserves	$	64			$	66
Liabilities not currently deductible	126				137
Stock-based compensation	35				38
Basis differences in investments, joint ventures and subsidiaries	(80		)		(80		)
Net operating loss carryforwards, net of valuation allowance	75				80
Depreciation and amortization	(484		)		(484		)
Total non-current deferred tax liabilities, net	$	(264	)		$	(243	)

As of December 31, 2019 and 2018, non-current deferred tax liabilities of $264 million and $243 million, respectively, are included in other liabilities.

As of December 31, 2019, the Company had estimated net operating loss carryforwards for federal and state income tax purposes of $92 million and $1.1 billion, respectively, which expire at various dates through 2039. Estimated net operating loss carryforwards for foreign income tax purposes are $49 million as of December 31, 2019, some of which can be carried forward indefinitely while others expire at various dates through 2039. As of December 31, 2019 and 2018, deferred tax assets associated with net operating loss carryforwards of $101 million and $126 million, respectively, have each been reduced by valuation allowances of $26 million and $46 million, respectively.

Income taxes payable, including those classified as long-term in other liabilities as of December 31, 2019 and 2018, were $113 million and $85 million, respectively. Prepaid income taxes were $3 million and $14 million as of December 31, 2019 and 2018, respectively, and were recorded in prepaid expenses and other current assets.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

The total amount of unrecognized tax benefits as of and for the years ended December 31, 2019, 2018 and 2017 consisted of the following:

	2019				2018				2017
Balance, beginning of year	$	107			$	115			$	98
Additions:
For tax positions of current year	2				2				5
For tax positions of prior years	16				11				23
Reductions:
Changes in judgment	(3		)		(6		)		(2		)
Expirations of statutes of limitations	(2		)		(15		)		(6		)
Settlements	(32		)		—				(3		)
Balance, end of year	$	88			$	107			$	115

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, 2019, that, if recognized, would affect the effective income tax rate is $72 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 $10 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, 2019, 2018 and 2017 was approximately $5 million, $1 million and $1 million, respectively. As of December 31, 2019 and 2018, the Company has approximately $17 million and $14 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. 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, 2019, a summary of the tax years that remain subject to examination, awaiting approval, are under appeal, or are otherwise unresolved for the Company's major jurisdictions are:

United States - federal 2015 - 2019

United States - various states 2002 - 2019

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

9. SUPPLEMENTAL CASH FLOW AND OTHER DATA

Supplemental cash flow and other data for the years ended December 31, 2019, 2018 and 2017 was as follows:

	2019				2018				2017
Depreciation expense	$	233			$	219			$	196
Amortization expense	96				90				74
Depreciation and amortization expense	$	329			$	309			$	270
Interest expense	$	(180	)		$	(169	)		$	(153	)
Interest income	5				2				2
Interest expense, net	$	(175	)		$	(167	)		$	(151	)
Interest paid	$	192			$	174			$	159
Income taxes paid	$	202			$	84			$	243
Accounts payable associated with capital expenditures	$	26			$	11			$	26
Accounts payable associated with purchases of treasury stock	$	—			$	3			$	—
Dividends payable	$	71			$	71			$	61
Businesses acquired:
Fair value of assets acquired	$	63			$	453			$	657
Fair value of liabilities assumed	—				7				58
Fair value of net assets acquired	63				446				599
Merger consideration payable	(5		)		(19		)		(6		)
Cash paid for business acquisitions	58				427				593
Less: Cash acquired	—				6				12
Business acquisitions, net of cash acquired	$	58			$	421			$	581

	2019				2018				2017
Leases:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	180
Operating cash flows from finance leases	$	3
Financing cash flows from finance leases	$	4
Leased assets obtained in exchange for new operating lease liabilities	$	164
Leased assets obtained in exchange for new finance lease liabilities (a)	$	1			$	1			$	7

(a) For the years ended December 31, 2018 and 2017, leased assets obtained in exchange for new finance lease liabilities reflects information prior to the adoption of the new accounting standard related to accounting for leases. See Note 2 for further details on the adoption of the new accounting standard.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

10. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment as of December 31, 2019 and 2018 consisted of the following:

	2019				2018
Land	$	25			$	29
Buildings and improvements	341				429
Laboratory equipment and furniture and fixtures	1,788				1,691
Leasehold improvements	639				606
Computer software developed or obtained for internal use	1,106				1,013
Construction-in-progress	330				202
	4,229				3,970
Less: Accumulated depreciation and amortization	(2,776		)		(2,682		)
Total	$	1,453			$	1,288

For the year ended December 31, 2019, the Company recognized a $73 million gain in other operating (income) expense, net on the sale and leaseback of a property.

11. GOODWILL AND INTANGIBLE ASSETS

The changes in goodwill for the years ended December 31, 2019 and 2018 were as follows:

	2019				2018
Balance, beginning of year	$	6,563			$	6,335
Goodwill acquired during the year	43				228
Adjustments to goodwill	13				—
Balance, end of year	$	6,619			$	6,563

Principally all of the Company’s goodwill as of December 31, 2019 and 2018 was associated with its DIS business.

For the year ended December 31, 2019, goodwill acquired during the period was principally associated with the acquisition of certain assets of the clinical laboratory services business of Boyce & Bynum and adjustments to goodwill primarily related to the finalization of the purchase price allocation for Oxford (see Note 6).

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).

Intangible assets as of December 31, 2019 and 2018 consisted of the following:

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

	Weighted Average Amortization Period (in years)		December 31, 2019												December 31, 2018
		Cost				Accumulated Amortization				Net				Cost				Accumulated Amortization				Net
Amortizing intangible assets:
Customer-related	18		$	1,367			$	(556	)		$	811			$	1,355			$	(478	)		$	877
Non-compete agreements	9		3				(2		)		1				3				(2		)		1
Technology	17		104				(56		)		48				104				(50		)		54
Other	9		110				(85		)		25				114				(75		)		39
Total	17		1,584				(699		)		885				1,576				(605		)		971
Intangible assets not subject to amortization:
Trade names			235				—				235				235				—				235
Other			1				—				1				1				—				1
Total intangible assets			$	1,820			$	(699	)		$	1,121			$	1,812			$	(605	)		$	1,207

The estimated amortization expense related to amortizable intangible assets for each of the five succeeding fiscal years and thereafter as of December 31, 2019 is as follows:

Year Ending December 31,
2020	$	96
2021	90
2022	87
2023	85
2024	82
Thereafter	445
Total	$	885

12. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses as of December 31, 2019 and 2018 consisted of the following:

	2019				2018
Accrued wages and benefits (including incentive compensation)	$	287			$	249
Accrued expenses	223				274
Trade accounts payable	263				222
Overdrafts	88				98
Dividend payable	71				71
Accrued interest	45				47
Accrued insurance	30				29
Income taxes payable	27				17
Merger consideration payable	7				14
Total	$	1,041			$	1,021

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

13. DEBT

Long-term debt (including finance lease obligations) as of December 31, 2019 and 2018 consisted of the following:

	2019				2018
Secured Receivables Credit Facility (3.39% at December 31, 2018)	$	—			$	160
2.70% Senior Notes due April 2019	—				300
4.75% Senior Notes due January 2020	500				507
2.50% Senior Notes due March 2020	300				300
4.70% Senior Notes due April 2021	554				557
4.25% Senior Notes due April 2024	308				299
3.50% Senior Notes due March 2025	593				562
3.45% Senior Notes due June 2026	490				469
4.20% Senior Notes due June 2029	499				—
2.95% Senior Notes due June 2030	798				—
6.95% Senior Notes due July 2037	175				175
5.75% Senior Notes due January 2040	245				244
4.70% Senior Notes due March 2045	300				300
Other	34				37
Debt issuance costs	(26		)		(17		)
Total long-term debt	4,770				3,893
Less: Current portion of long-term debt	804				464
Total long-term debt, net of current portion	$	3,966			$	3,429

Secured Receivables Credit Facility

On October 25, 2019, the Company amended the agreement for its $600 million secured receivables credit facility (the “Secured Receivables Credit Facility”) previously amended in October 2018, 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 2020, and a $250 million loan commitment maturing October 2021, and can issue up to $100 million of letters of credit (see Note 18) through October 2021. Borrowings under the Secured Receivables Credit Facility are collateralized by certain domestic receivables. As of December 31, 2019, 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, 2019 and 2018, there was $0 million and $160 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, 2019 and 2018, 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, 2019 and 2018, there were no outstanding borrowings under the Credit Facility.

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

March 2019 Senior Notes Offering

In March 2019, the Company completed a senior notes offering, consisting of $500 million aggregate principal amount of 4.20% senior notes due June 2029 (the "2029 Senior Notes"), which were issued at an original issue discount of $1 million. The Company incurred $5 million of debt issuance costs associated with the 2029 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 2029 Senior Notes were used to repay in full the outstanding indebtedness under the Company's Senior Notes due April 2019, to repay outstanding indebtedness under the Secured Receivables Credit Facility and for general corporate purposes.

December 2019 Senior Notes Offering

In December 2019, the Company completed a senior notes offering, consisting of $800 million aggregate principal amount of 2.95% senior notes due June 2030 (the "2030 Senior Notes"), which were issued at an original issue discount of $2 million. The Company incurred $7 million of debt issuance costs associated with the 2030 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.

During January 2020, the net proceeds from the 2030 Senior Notes, along with cash on hand, were used to redeem in full the outstanding indebtedness under the Company's Senior Notes due January 2020 and Senior Notes due March 2020.

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.

The Company may redeem its outstanding senior notes prior to scheduled maturity, as a whole or in part, at a redemption price equal to the present value of the remaining scheduled payments of principal and interest, except for certain notes for which the Company also has an option to redeem such instruments at par value on or after dates specified in the indentures governing the notes. For notes with the par value redemption option, if such notes are redeemed prior to the specified dates, the redemption price calculations exclude any interest that would have been due after such dates.

Maturities of Long-Term Debt

As of December 31, 2019, long-term debt matures as follows:

Year Ending December 31,
2020	$	803
2021	553
2022	3
2023	1
2024	302
Thereafter	3,147
Total maturities of long-term debt	4,809
Unamortized discount	(10		)
Debt issuance costs	(26		)
Fair value basis adjustments attributable to hedged debt	(3		)
Total long-term debt	4,770
Less: Current portion of long-term debt	804
Total long-term debt, net of current portion	$	3,966

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

14. LEASES

The Company determines if an arrangement is or contains a lease at contract inception. The Company leases office space, patient service centers, clinical laboratories, warehouses, logistic hubs and equipment primarily through operating leases with a limited number of finance leases. A right-of-use asset, representing the underlying asset during the lease term, and a lease liability, representing the payment obligation arising from the lease, are recognized on the balance sheet at lease commencement based on the present value of the payment obligation. For operating leases, expense is recognized on a straight-line basis over the lease term. For finance leases, interest expense on the lease liability is recognized using the effective interest method and amortization of the right-of-use asset is recognized on a straight-line basis over the shorter of the estimated useful life of the asset or the lease term. Short-term leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. For the year ended December 31, 2019, lease expense associated with short-term leases was not material.

The Company primarily uses its collateralized incremental borrowing rate in determining the present value of lease payments as the Company's leases generally do not provide an implicit rate. Such incremental borrowing rates, which take into account interest rates offered to companies that have similar credit ratings as the Company, are determined using a portfolio approach which groups the Company’s leases based on tenor.

The Company has lease agreements with (i) right-of-use asset payments and (ii) non-lease components (i.e. payments related to maintenance fees, utilities, etc,) which have been combined and accounted for as a single lease component.

The Company's leases have remaining terms of less than 1 year to 15 years, some of which include options to extend the leases for up to 15 years. The Company's lease terms may include renewal options that are reasonably certain to be exercised and termination options that are reasonably certain not to be exercised. Certain leases also include options to purchase the leased property.

Certain of the Company's lease agreements include rental payments adjusted periodically for inflation or a market rate which are included in the lease liabilities.

Leases		Balance Sheet Classification		December 31, 2019
Assets
Operating		Operating lease right-of-use assets		$	518
Finance		Property, plant and equipment, net (a)		35
Total lease assets				$	553
Liabilities
Current:
Operating		Current portion of long-term operating lease liabilities		$	145
Finance		Current portion of long-term debt		3
Non-current:
Operating		Long-term operating lease liabilities		413
Finance		Long-term debt		30
Total lease liabilities				$	591

(a) Finance lease assets were recorded net of accumulated amortization of $24 million as of December 31, 2019.

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

Components of lease cost for the year ended December 31, 2019 were as follows:

Lease cost			Year Ended December 31, 2019
Operating lease cost (a)			$	294
Finance lease cost:
Amortization of leased assets			7
Interest on lease liabilities			3
Net lease cost			$	304

(a) Includes short-term leases and variable lease costs (primarily usage-based maintenance fees and utilities related to real estate leases and certain equipment-related and vehicle-related costs) of $120 million for the year ended December 31, 2019.

Rental expense for real estate, laboratory equipment and vehicles under operating leases amounted to $220 million and $219 million for the years ended December 31, 2018 and 2017, respectively.

The maturity of the Company's lease liabilities as of December 31, 2019 is as follows:

Maturity of lease liabilities		Operating leases				Finance leases				Total
2020		$	151			$	6			$	157
2021		129				6				135
2022		102				5				107
2023		82				3				85
2024		52				3				55
Thereafter		105				31				136
Total lease payments		621				54				675
Less: Interest		63				21				84
Present value of lease liabilities		$	558			$	33			$	591

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

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

Lease term and discount rate as of December 31, 2019 were as follows:

Lease term and discount rate
Weighted-average remaining lease term (years):
Operating leases	5
Finance leases	12
Weighted-average discount rate:
Operating leases	3.4	%
Finance leases	8.7	%

The Company's discount rates for its operating leases were primarily determined using the Company's incremental borrowing rate. The Company's weighted-average discount rate for its finance leases principally reflects the implicit interest rate on a lease obligation assumed in a business combination.

See Note 9 for cash flow information on cash paid for amounts included in the measurement of lease liabilities, leased assets obtained in exchange for new operating lease liabilities, and leased assets obtained in exchange for new finance lease liabilities for the years ended December 31, 2019.

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 February 2019, 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 anticipated issuance of debt during 2019. In connection with the issuance of the 2029 Senior Notes, these agreements were settled and the Company paid $1 million. These losses are deferred in stockholders' equity, net of taxes, as a component of accumulated other comprehensive loss, and amortized as an adjustment to interest expense, net over the term of the 2029 Senior Notes.

During the third and fourth quarters of 2019, the Company entered into forward-starting interest rate swap agreements with several financial institutions for a total notional amount of $400 million, which were accounted for as cash flow hedges. The swap 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 interest rates over a ten-year period related to the anticipated issuance of debt. In connection with the issuance of the 2030 Senior Notes, these agreements were settled and the Company received $6 million. These gains are deferred in stockholders' equity, net of taxes, as a component of accumulated other comprehensive loss, and amortized as an adjustment to interest expense, net over a ten-year period.

The total net loss, net of taxes, recognized in accumulated other comprehensive loss, related to the Company's cash flow hedges was $4 million and $9 million as of December 31, 2019 and 2018, respectively. The net amount of deferred losses on cash flow hedges that is expected to be reclassified from accumulated other comprehensive loss into interest expense, net within the next twelve months is $2 million.

Interest Rate Derivatives – Fair Value Hedges

The Company maintains various fixed-to-variable interest rate swap agreements 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 swap agreements as of December 31, 2019 and 2018 was as follows:

F- 35

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

		Notional Amount
Debt Instrument		2019				2018
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, 2019 and 2018, the following amounts were recorded on the consolidated balance sheets 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, 2019				December 31, 2019				December 31, 2018				December 31, 2018
Long-term debt			$	1,186			$	(3	)		$	1,125			$	(53	)

(a) The balance includes $25 million and $40 million of remaining unamortized hedging adjustment on a discontinued relationship as of December 31, 2019 and 2018, respectively.

The following table presents the effect of fair value hedge accounting on the consolidated statements of operations for the years ended December 31, 2019, 2018 and 2017, respectively:

			Year Ended December 31,
			2019				2018				2017
			Other income (expense), net				Other income (expense), net				Other income (expense), net
Total for line item in which the effects of fair value hedges are recorded			$	20			$	(8	)		$	16
Gain (loss) on fair value hedging relationships:
Hedged items (Long-term debt)			$	(65	)		$	4			$	1
Derivatives designated as hedging instruments			$	65			$	(4	)		$	(1	)

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

	December 31, 2019						December 31, 2018
	Balance Sheet Classification		Fair Value				Balance Sheet Classification		Fair Value
Derivatives Designated as Hedging Instruments
Fix-to-variable interest rate swap agreements	Other liabilities		$	28			Other liabilities		$	93

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

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 Loss by Component

Comprehensive income (loss) includes:

•	Foreign currency translation adjustments;

•	Net deferred gain on cash flow hedges, which represents deferred gains/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); and

•	Investment adjustments, which represent unrealized holding gains/losses, net of tax on available-for-sale debt securities.

Prior to adoption of the new accounting guidance on recognition and measurement of financial assets and liabilities in 2018, investment adjustments also included unrealized holding gains (losses), net of tax, on available-for-sale equity securities, net of other-than-temporary impairment amounts reclassified to other income (expense), net.

For the years ended December 31, 2019, 2018, and 2017, the tax effects related to the deferred gains/losses on cash flow hedges and investment adjustments were not material. Foreign currency translation adjustments related to indefinite investments in non-U.S. subsidiaries are not adjusted for income taxes.

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

The changes in accumulated other comprehensive loss by component for 2019, 2018 and 2017 were as follows:

	Foreign Currency Translation Adjustment				Investment Adjustments, Net of Taxes				Net Deferred Loss on Cash Flow Hedges, Net of taxes				Other				Accumulated Other Comprehensive Income (Loss)
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) income	(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		)
Other comprehensive income before reclassifications	7				8				3				—				18
Amounts reclassified from accumulated other comprehensive loss	—				—				2				—				2
Net current period other comprehensive income	7				8				5				—				20
Balance, December 31, 2019	$	(42	)		$	8			$	(4	)		$	(1	)		$	(39	)

For the years ended December 31, 2019, 2018 and 2017, 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 other operating (income) expense, net 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, net of tax were reclassified from accumulated other comprehensive loss to other income (expense), net.

Dividend Program

During each of the four quarters of 2019, the Company's Board of Directors declared a quarterly cash dividend of $0.53 per common share. 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, the Company's Board of Directors declared a quarterly cash dividend of $0.45 per common share. On January 30, 2020, the Company announced that its Board of Directors authorized a 5.7% increase in its quarterly cash dividend from $0.53 to $0.56 per share, or $2.24 per share annually, commencing with the dividend payable in April 2020.

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

Share Repurchase Program

In November 2019, 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, 2019, $1.2 billion remained available under the Company’s share repurchase authorization. The share repurchase authorization has no set expiration or termination date.

Share Repurchases

For the year ended December 31, 2019, the Company repurchased 3.5 million shares of its common stock for $350 million.

For the year ended December 31, 2018, the Company repurchased 3.4 million shares of its 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 until after December 31, 2018.

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

Shares Reissued from Treasury Stock

For the years ended December 31, 2019, 2018 and 2017 the Company reissued 2 million shares, 3 million shares and 2 million shares, respectively, from treasury stock for shares issued under the Employee Stock Purchase Plan ("ESPP") and stock option plans.

Redeemable Noncontrolling Interest

In connection with the sale of an 18.9% noncontrolling interest in a subsidiary to 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, 2019 and 2018, the redeemable noncontrolling interest was $76 million and $77 million, respectively, and was presented at its fair value.

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 79 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

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

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, 2019, 2018 and 2017, grants under the DLTIP totaled 14 thousand shares, 15 thousand shares and 13 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:

	2019		2018		2017
Fair value at grant date	$14.30		$18.14		$15.98
Expected volatility	20.4%		19.1%		19.8%
Dividend yield	2.4%		1.9%		1.9%
Risk-free interest rate	2.5%		2.8%		2.1%
Expected holding period, in years	5.2		5.3		5.2

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

The following summarizes the activity relative to stock option awards for 2019:

	Shares			Weighted Average Exercise Price				Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Options outstanding, beginning of year	8.4			$	77.35
Options granted	1.8			87.16
Options exercised	(1.8	)		65.03
Options forfeited and canceled	(0.4	)		94.68
Options outstanding, end of year	8.0			$	81.67			6.7		$	202
Exercisable, end of year	5.0			$	74.72			5.5		$	161
Vested and expected to vest, end of year	7.9			$	81.51			6.6		$	200

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 2019 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, 2019. This amount changes based on the fair market value of the Company's common stock. Total intrinsic value of options exercised in 2019, 2018 and 2017 was $62 million, $67 million and $94 million, respectively.

As of December 31, 2019, there was $11 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

The following summarizes the activity relative to stock awards, including restricted stock units and performance share units, for 2019, 2018 and 2017:

	2019							2018							2017
	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	1.1			$	88.13			1.3			$	77.90			1.5			$	63.88
Shares granted	0.4			86.28				0.4			103.51				0.4			96.27
Shares vested	(0.4	)		75.58				(0.5	)		74.00				(0.6	)		57.59
Shares forfeited and canceled	(0.1	)		94.09				(0.1	)		90.16				—			—
Shares outstanding, end of year	1.0			$	93.30			1.1			$	88.13			1.3			$	77.90

As of December 31, 2019, there was $20 million of unrecognized stock-based compensation cost related to nonvested stock awards, which is expected to be recognized over a weighted average period of 1.7 years. Total fair value of shares vested was $40 million, $54 million and $58 million for the years ended December 31, 2019, 2018 and 2017, 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, 2019, 2018 and 2017, stock-based compensation expense totaled $56 million, $61 million and $79 million, respectively. Income tax benefits recognized in the consolidated statements of operations related to stock-based compensation expense totaled $27 million, $33 million and $67 million for the years ended December 31, 2019, 2018 and 2017, respectively, which includes excess tax benefits associated with stock-based compensation arrangements of $13 million, $18 million and $37 million for the years ended December 31, 2019, 2018 and 2017, respectively.

Employee Stock Purchase Plan

Under the Company's ESPP, substantially all employees can elect to have up to 10% of their annual wages withheld to purchase Quest Diagnostics common stock. The purchase price of the stock is 95% 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 269 thousand, 326 thousand and 278 thousand shares of common stock were purchased by eligible employees in 2019, 2018 and 2017, 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 $84 million, $78 million and $76 million for 2019, 2018 and 2017, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

Supplemental Deferred Compensation Plans

The Company has a supplemental deferred compensation plan that is an unfunded, non-qualified plan that provides for certain management and highly compensated employees to defer up to 50% of their salary in excess of their defined contribution plan limits and for certain eligible employees, up to 95% of their variable incentive compensation. The maximum Company matching contribution is 5% of eligible employee compensation. The compensation deferred under this plan, together with Company matching amounts, are credited with earnings or losses measured by the mirrored rate of return on investments elected by plan participants. Each plan participant is fully vested in all deferred compensation, Company match and earnings credited to their account. The amounts accrued under the Company's deferred compensation plans were $59 million and $53 million as of December 31, 2019 and 2018, respectively. Although the Company is currently contributing all participant deferrals and matching amounts to trusts, the funds in these trusts, totaling $59 million and $53 million as of December 31, 2019 and 2018, 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 period of four years 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 $51 million and $43 million as of December 31, 2019 and 2018, 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 $43 million and $34 million as of December 31, 2019 and 2018, respectively.

For each of the years ended December 31, 2019, 2018 and 2017, the Company's expense for matching contributions to these plans was 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 13). In support of its risk management program, to ensure the Company’s performance or payment to third parties, $71 million in letters of credit under the Secured Receivables Credit Facility were outstanding as of December 31, 2019. The letters of credit primarily represent collateral for current and future automobile liability and workers’ compensation loss payments.

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, 2019, the approximate total future purchase commitments are $210 million, of which $83 million are expected to be incurred in 2020, $91 million are expected to be incurred in 2021 through 2022 and the balance thereafter.

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

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 28 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.

AMCA Data Security Incident

On June 3, 2019, the Company reported that Retrieval-Masters Creditors Bureau, Inc./American Medical Collection Agency (“AMCA”) had informed the Company and Optum360 LLC that an unauthorized user had access to AMCA’s system between August 1, 2018 and March 30, 2019 (the “AMCA Data Security Incident”). Optum360 provides revenue management services to the Company, and AMCA provided debt collection services to Optum360. AMCA first informed the Company of the AMCA Data Security Incident on May 14, 2019. AMCA’s affected system included financial information (e.g., credit card numbers and bank account information), medical information and other personal information (e.g., social security numbers). Test results were not included. Neither Optum360’s nor the Company’s systems or databases were involved in the incident. AMCA also informed the Company that information pertaining to other laboratories’ customers was also affected. Following announcement of the AMCA Data Security Incident, AMCA sought protection under the U.S. bankruptcy laws.

Following the AMCA Data Security Incident, 39 lawsuits were filed against the Company related to the incident; two of those suits subsequently have been dismissed. All but one of the remaining lawsuits are putative class actions in which the plaintiffs purport to represent various classes of consumers. In the pending cases, (most of which also name other defendants), plaintiffs assert a variety of common law and statutory claims in connection with the AMCA Data Security Incident. The U.S. Judicial Panel on Multidistrict Litigation transferred the cases to, and consolidated them for pre-trial proceedings in, the U.S. District Court for New Jersey. On November 15, 2019, the plaintiffs in the multidistrict proceeding filed a consolidated putative class action complaint against the Company and Optum360 that named additional individuals as plaintiffs and that asserted a variety of common law and statutory claims in connection with the AMCA Data Security Incident. On January 22, 2020, the Company moved to dismiss the consolidated complaint.

In addition, certain federal and state governmental authorities are investigating, or otherwise seeking information and/or documents from the Company related to the AMCA Data Security Incident and related matters, including the Office for Civil Rights of the U.S. Department of Health and Human Services, Attorneys General offices from numerous states and the District of Columbia, and certain U.S. senators.

The Company has insurance coverage rights in place for certain potential costs and liabilities related to the AMCA Data Security Incident; this insurance coverage is limited in amount and subject to a deductible. While management believes it is reasonably possible that the Company may incur losses associated with these proceedings and investigations, it is not possible to estimate the amount of loss or range of loss, if any, that might result from adverse judgments, settlements, fines,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

penalties, or other resolution of these proceedings and investigations based on the stage of these proceedings and investigations, the absence of specific allegations as to alleged damages, the uncertainty as to the certification of a class or classes and the size of any certified class, if applicable, and/or the lack of resolution of significant factual and legal issues.

Other Legal Matters

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/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 which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief.

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, 2019, the Company does not believe that material losses related to legal matters are probable.

Reserves for legal matters totaled $1 million as of both December 31, 2019 and December 31, 2018.

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 $132 million and $125 million as of December 31, 2019 and December 31, 2018, respectively. Management believes that established reserves and present insurance coverage are sufficient to cover currently estimated exposures.

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

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 greater than 95% of net revenues in 2019, 2018 and 2017.

All other operating segments include the Company's DS businesses, which consists of its risk assessment services and healthcare information technology 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.

As of December 31, 2019, 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, 2019, 2018 and 2017. 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 and other operating income and expenses, net of certain general corporate activity costs that are allocated to the DIS and DS businesses. The accounting policies of the segments are the same as those of the Company as set forth in Note 2.

	2019				2018				2017
Net revenues:
DIS business	$	7,405			$	7,204			$	7,068
All other operating segments	321				327				334
Total net revenues	$	7,726			$	7,531			$	7,402
Operating earnings (loss):
DIS business	$	1,298			$	1,235			$	1,313
All other operating segments	42				47				52
General corporate activities	(109		)		(181		)		(200		)
Total operating income	1,231				1,101				1,165
Non-operating expenses, net	(155		)		(175		)		(135		)
Income from continuing operations before income taxes and equity in earnings of equity method investees	1,076				926				1,030
Income tax expense	(247		)		(182		)		(241		)
Equity in earnings of equity method investees, net of taxes	57				44				35
Income from continuing operations	886				788				824
Income from discontinued operations, net of taxes	20				—				—
Net income	906				788				824
Less: Net income attributable to noncontrolling interests	48				52				52
Net income attributable to Quest Diagnostics	$	858			$	736			$	772

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

Depreciation and amortization expense for the years ended December 31, 2019, 2018 and 2017 were as follows:

	2019				2018				2017
DIS business	$	226			$	213			$	189
All other operating segments	6				6				6
General corporate	97				90				75
Total depreciation and amortization	$	329			$	309			$	270

Capital expenditures for the years ended December 31, 2019, 2018 and 2017 were as follows:

	2019				2018				2017
DIS business	$	373			$	330			$	219
All other operating segments	20				16				15
General corporate	7				37				18
Total capital expenditures	$	400			$	383			$	252

Net revenues by major service for the years ended December 31, 2019, 2018 and 2017 were as follows:

	2019				2018				2017
Routine clinical testing services	$	4,206			$	4,217			$	4,006
Gene-based and esoteric (including advanced diagnostics) testing services	2,620				2,409				2,449
Anatomic pathology testing services	579				578				612
All other	321				327				335
Total net revenues	$	7,726			$	7,531			$	7,402

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, 2019, 2018 and 2017, the Company recognized net revenues of $35 million, $36 million, and $37 million, respectively, associated with diagnostic information services provided to its equity method investees. As of December 31, 2019 and December 31, 2018, there was $4 million and $3 million of accounts receivable from equity method investees related to such services, respectively. During the year ended December 31, 2019, the Company recognized net revenues of $8 million associated with diagnostic information services provided to a noncontrolling interest partner in a joint venture. As of December 31, 2019, there was $4 million of receivables from the noncontrolling interest partner included in accounts receivable and other assets related to such services.

During the years ended December 31, 2019, 2018 and 2017, the Company recognized income of $15 million, $15 million and $16 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, 2019 and December 31, 2018, there was $1 million and $3 million, respectively, of other receivables from equity method investees included in prepaid expenses and other current assets related to these service agreements and other transition related items. In addition, accounts payable and accrued expenses as of December 31, 2019 and December 31, 2018 included $2 million and $1 million, respectively, due to equity method investees.

During the years ended December 31, 2019, 2018 and 2017, the Company received dividends from its equity method investees of $48 million, $74 million, and $35 million, respectively.

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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

21. DISCONTINUED OPERATIONS

Discontinued operations, net of taxes, for the year ended December 31, 2019 includes discrete tax benefits of $20 million associated with the favorable resolution of certain tax contingencies related to NID. In addition, net cash provided by operating activities in the consolidated statement of cash flows for the year ended December 31, 2019 included a $28 million refund from the taxing authorities related to discontinued operations.

22. SUBSEQUENT EVENTS

Acquisition of Blueprint Genetics Oy

On January 21, 2020, the Company completed its acquisition of Blueprint Genetics Oy ("Blueprint"), in an all cash transaction for approximately $110 million. The final consideration is subject to post closing adjustments related to working capital. Blueprint is a leading specialty genetic testing company with deep expertise in gene variant interpretation based on next generation sequencing and proprietary bioinformatics. Through the acquisition, the Company acquired all of Blueprint's operations. Based on the preliminary purchase price allocation, the Company expects to recognize approximately $40 million of intangible assets, including customer relationships and technology, and approximately $70 million of goodwill.

Acquisition of the Outreach Laboratory Services Business of Memorial Hermann Health System

On January 27, 2020, the Company entered into a definitive agreement to acquire the outreach laboratory services business of Memorial Hermann Health System ("Memorial Hermann"). Memorial Hermann is a not-for-profit health system in Southeast Texas. Closing of the transaction remains subject to customary closing conditions.

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

Quarterly Operating Results (unaudited)

(in millions, except per share data)

2019 (a)	First Quarter				Second Quarter				Third Quarter				Fourth Quarter				Total Year
	(b)				(c)				(d)				(e)
Net revenues	$	1,891			$	1,953			$	1,956			$	1,926			$	7,726
Gross profit	647				688				692				662				2,689
Income from continuing operations	176				219				226				265				886
Income from discontinued operations, net of taxes	—				20				—				—				20
Net income	176				239				226				265				906
Less: Net income attributable to noncontrolling interests	12				13				11				12				48
Net income attributable to Quest Diagnostics	$	164			$	226			$	215			$	253			$	858
Earnings per share attributable to Quest Diagnostics' common stockholders - basic:
Income from continuing operations	$	1.22			$	1.52			$	1.59			$	1.88			$	6.21
Income from discontinued operations	—				0.15				—				—				0.15
Net income	$	1.22			$	1.67			$	1.59			$	1.88			$	6.36
Earnings per share attributable to Quest Diagnostics' common stockholders - diluted:
Income from continuing operations	$	1.20			$	1.51			$	1.56			$	1.86			$	6.13
Income from discontinued operations	—				0.15				—				—				0.15
Net income	$	1.20			$	1.66			$	1.56			$	1.86			$	6.28

2018 (a)	First Quarter				Second Quarter				Third Quarter				Fourth Quarter				Total Year
	(f)				(g)				(h)				(i)
Net revenues	$	1,884			$	1,919			$	1,889			$	1,839			$	7,531
Gross profit	658				676				667				604				2,605
Income from continuing operations	189				233				227				139				788
Income from discontinued operations, net of taxes	—				—				—				—				—
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' common stockholders - basic:
Income from continuing operations	$	1.30			$	1.60			$	1.56			$	0.93			$	5.39
Income from discontinued operations	—				—				—				—				—
Net income	$	1.30			$	1.60			$	1.56			$	0.93			$	5.39
Earnings per share attributable to Quest Diagnostics' common stockholders - diluted:
Income from continuing operations	$	1.27			$	1.57			$	1.53			$	0.92			$	5.29
Income from discontinued operations	—				—				—				—				—
Net income	$	1.27			$	1.57			$	1.53			$	0.92			$	5.29

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

Quarterly Operating Results (unaudited)

(in millions, except per share data)

(a)

During the third quarter of 2006, the Company completed the wind down of Nichols Institute Diagnostics ("NID"), a test kit manufacturing subsidiary. As a result, NID was classified as discontinued operations for all periods presented (see Note 21 to the audited consolidated financial statements). 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).

(b)

Included pre-tax amortization expense of $29 million ($24 million in amortization of intangible assets and $5 million in equity in earnings of equity method investees, net of taxes); pre-tax charges of $22 million, primarily associated with system conversions and integration incurred in connection with further restructuring and integrating the Company ($11 million in cost of services and $11 million in selling, general and administrative expenses); a net pre-tax gain of $8 million, primarily due to a gain associated with an insurance claim for hurricane related losses partially offset by non-cash asset impairment charges ($1 million charge in selling, general and administrative expenses offset by a $9 million gain in other operating (income) expense, net); and excess tax benefits associated with stock-based compensation arrangements of $3 million recorded in income tax expense.

(c)

Included pre-tax amortization expense of $30 million ($25 million in amortization of intangible assets and $5 million in equity in earnings of equity method investees, net of taxes); pre-tax charges of $26 million, primarily associated with system conversions and integration incurred in connection with further restructuring and integrating the Company ($11 million in cost of services and $15 million in selling, general and administrative expenses); a net pretax gain of $6 million in other operating (income) expense, net, primarily due to a gain associated with the decrease in the fair value of the contingent consideration accrual associated with a previous acquisition; and excess tax benefits associated with stock-based compensation arrangements of $5 million recorded in income tax expense. Income from discontinued operations, net of taxes includes discrete tax benefits of $20 million associated with the favorable resolution of certain tax contingencies related to NID.

(d)

Included pre-tax amortization expense of $25 million ($23 million in amortization of intangible assets and $2 million in equity in earnings of equity method investees, net of taxes); pre-tax charges of $16 million, primarily associated with system conversions and integration incurred in connection with further restructuring and integrating the Company ($7 million in cost of services and $9 million in selling, general and administrative expenses); a net pre-tax gain of $3 million, primarily due to a gain associated with the decrease in the fair value of the contingent consideration accrual associated with a previous acquisition partially offset by costs incurred related to the AMCA Data Security Incident (a $7 million gain in other operating (income) expense, net offset by a $4 million charge in selling, general and administrative expenses); and excess tax benefits associated with stock-based compensation arrangements of $3 million recorded in income tax expense.

(e)

Includes a net pre-tax gain of $72 million, primarily associated with the sale and leaseback of a property (a $73 million gain in other operating (income) expense, net offset by a $1 million charge in selling, general and administrative expenses); pre-tax amortization expense of $27 million ($24 million in amortization of intangible assets and $3 million in equity in earnings of equity method investees, net of taxes); pre-tax charges of $14 million, primarily associated with system conversions and integration incurred in connection with further restructuring and integrating the Company ($6 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 $2 million recorded in income tax expense.

(f)

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); pre-tax amortization expense of $26 million ($22 million in amortization of intangible assets and $4 million in equity in earnings of equity method investees, net of taxes); and excess tax benefits associated with stock-based compensation arrangements of $8 million recorded in income tax expense.

(g)	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); pre-tax amortization expense of $26 million ($22 million

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

Quarterly Operating Results (unaudited)

(in millions, except per share data)

in amortization of intangible assets and $4 million in equity in earnings of equity method investees, net of taxes); 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.

(h)

Included pre-tax amortization expense of $27 million ($22 million in amortization of intangible assets and $5 million in equity in earnings of equity method investees, net of taxes); 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 a previous acquisition partially offset by non-cash asset impairment charges ($13 million gain in other operating (income) expense, net offset by $1 million charge in cost of services); and excess tax benefits associated with stock-based compensation arrangements of $4 million recorded in income tax expense.

(i)

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 amortization expense of $28 million ($24 million in amortization of intangible assets and $4 million in equity in earnings of equity method investees, net of taxes); pre-tax charges of $4 million, primarily associated with the loss on the sale of a foreign subsidiary recorded in other operating (income) expense, net; $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.

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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, 2019
Doubtful accounts and allowances	$	15			$	11			$	11		(a)	$	15
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

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

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