Item 16. Form 10-K Summary

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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 22, 2021.


			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 22, 2021.

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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/Wright L. Lassiter, III Wright L. Lassiter, III						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

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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,
	2020		2019		2018		2017		2016
	(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	$	9,437	$	7,726	$	7,531	$	7,402	$	7,214
Operating income	1,971		1,231		1,101		1,165		1,277

Income from continuing operations	1,499		886		788		824		696
Income from discontinued operations, net of taxes	—		20		—		—		—
Net income	1,499		906		788		824		696
Less: Net income attributable to noncontrolling interests	68		48		52		52		51
Net income attributable to Quest Diagnostics	$	1,431	$	858	$	736	$	772	$	645

Amounts attributable to Quest Diagnostics' common stockholders:
Income from continuing operations	$	1,431	$	838	$	736	$	772	$	645
Income from discontinued operations, net of taxes	—		20		—		—		—
Net income	$	1,431	$	858	$	736	$	772	$	645





Earnings per share attributable to Quest Diagnostics' common stockholders - basic:
Income from continuing operations	$	10.62	$	6.21	$	5.39	$	5.63	$	4.58
Income from discontinued operations	—		0.15		—		—		—
Net income	$	10.62	$	6.36	$	5.39	$	5.63	$	4.58

Earnings per share attributable to Quest Diagnostics' common stockholders - diluted:
Income from continuing operations	$	10.47	$	6.13	$	5.29	$	5.50	$	4.51
Income from discontinued operations	—		0.15		—		—		—
Net income	$	10.47	$	6.28	$	5.29	$	5.50	$	4.51

Dividends per common share	$	2.24	$	2.12	$	2.03	$	1.80	$	1.65

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	Year Ended December 31,
	2020		2019		2018		2017		2016
	(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	$	1,158	$	1,192	$	135	$	137	$	359



Total assets	14,026		12,843		11,003		10,503		10,100
Long-term debt	4,013		3,966		3,429		3,748		3,728

Total debt	4,015		4,770		3,893		3,784		3,734



Redeemable noncontrolling interest	82		76		77		80		77

Other Data:
Net cash provided by operating activities	$	2,005	$	1,243	$	1,200	$	1,175	$	1,116
Net cash used in investing activities	(772)		(411)		(801)		(830)		(127)
Net cash (used in) provided by financing activities	(1,267)		225		(401)		(592)		(738)


Capital expenditures	418		400		383		252		293
Purchases of treasury stock	325		353		322		465		590
Dividends paid	297		286		266		247		223

(a)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. Periods prior to 2019 have not been restated. 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 discontinued operations through 2019, at which point certain income tax contingencies related to NID were resolved. During 2020, our results were materially impacted by the COVID-19 pandemic including a decline in testing volume in our base business (which excludes COVID-19 molecular and antibody testing) which was more than offset by COVID-19 molecular and antibody testing.

(b)On January 21, 2020, we completed the acquisition of Blueprint Genetics Oy ("Blueprint Genetics"). On April 6, 2020, we completed the acquisition of select assets which constitute substantially all of the operations of Memorial Hermann Diagnostics Laboratories, the outreach laboratory division of Memorial Hermann Health System ("Memorial Hermann"). On August 1, 2020, we completed the acquisition of the remaining 56% interest in Mid America Clinical Laboratories, LLC ("MACL") from our joint venture partners. Consolidated operating results for 2020 included the results of operations of Blueprint Genetics, Memorial Hermann and MACL subsequent to the closing of these acquisitions. Prior to the acquisition, we accounted for our 44% interest in MACL as an equity method investment. For further details regarding our acquisitions, see Note 6 to the audited consolidated financial statements.

During May 2020, we completed a senior notes offering, consisting of $550 million aggregate principal amount of 2.80% senior notes due June 2031 (the "2031 Senior Notes"). During November 2020, the net proceeds from the 2031 Senior Notes, along with cash on hand, were used to redeem in full the outstanding indebtedness under our senior notes due April 2021.

(c)Operating income included (for 2020):

pre-tax amortization expense of $103 million;
pre-tax charges of $76 million, representing the impact of certain items resulting from the COVID-19 pandemic, principally including expense associated with payments to eligible employees to help offset expenses they incurred as a result of COVID-19, incremental costs incurred primarily to protect the health and safety of our employees and customers, and certain asset impairment charges;
pre-tax charges of $58 million, primarily associated with systems conversions and integration incurred in connection with further restructuring and integrating our business; and
pre-tax charges of $2 million, associated with Quest for Health Equity (our recently announced initiative with the Quest Diagnostics Foundation to reduce health disparities in underserved communities).

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

a pre-tax gain of $70 million recognized upon the acquisition of the remaining 56% interest in MACL as a result of the remeasurement of our previously held equity interest to fair value;
pre-tax amortization expense of $11 million included in equity in earnings of equity method investees, net of taxes;
a net pre-tax gain of $4 million principally related to a gain recognized by an equity method investee to adjust certain of its investments to fair value, partially offset by a loss on the retirement of debt;
a pre-tax gain of $4 million in equity in earnings of equity method investees, net of taxes, representing the impact of certain items resulting from the COVID-19 pandemic; and
excess tax benefits associated with stock-based compensation arrangements of $23 million.

Net cash provided by operating activities included $40 million of proceeds received from the termination of interest rate swap agreements.

(d)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.

(e)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 proceeds from 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.

(f)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.

(g)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 proceeds from 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;

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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.

(h)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 5 to the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017.

(i)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 statutory 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.

(j)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. For further details regarding acquisitions, see Note 5 to the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016. 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 6 to the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016.

(k)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

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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 pre-tax asset impairment charges of $7 million associated with certain investments;
$4 million of pre-tax restructuring and integration charges associated with our Q2 Solutions joint venture; and
excess tax benefits associated with stock-based compensation arrangements of $9 million.

Net cash provided by operating activities included:

a $17 million cash tax benefit on the retirement of debt;
$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.

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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, accountable care organizations ("ACOs"), and direct contract entities ("DCEs"). 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 2020, we processed approximately 187 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 53% and physician-office laboratories and other locations account for the balance. Our estimates of the clinical laboratories industry do not include the impact of COVID-19 testing.

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 (such as public health emergencies and health pandemics), 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.

We assess our revenue performance for the DIS business based upon, among other factors, volume (measured by test requisitions) and revenue per requisition.

Each requisition accompanies patient specimens, 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. Management uses number of requisitions and revenue per requisition data to assist with assessing the growth and performance of the business, including understanding trends affecting number of requisitions, pricing and test mix. Therefore, we believe that information related to changes in these metrics from period to period are useful information for investors as it allows them to assess the performance of the business.

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A summary of our revenue performance over the past three years is as follows:


	Year Ended December 31,
	2020	2019	2018
	(dollars in millions)

Net revenues	$9,437	$7,726	$7,531
DIS revenues	$9,139	$7,405	$7,204
Revenue per requisition change	16.2%	(1.3)%	(1.2)%
Requisition volume change	6.6%	4.3%	2.5%
Organic requisition volume change	4.5%	3.1%	0.5%

The impact that the COVID-19 pandemic had on our DIS revenues, including requisition volume and revenue per requisition are discussed further below under "2020 Highlights" and "Impact of COVID-19".

Diagnostic Solutions

In our Diagnostic Solutions ("DS") businesses, which represent 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.

2020 Highlights

Our total net revenues of $9.4 billion were up 22.1% from the prior year.
In DIS:

◦Revenues of $9.1 billion increased by 23.4% compared to the prior year, driven by demand for COVID-19 molecular and antibody testing, and, to a lesser extent, the impact of recent acquisitions, partially offset by a decline in testing volume in our base business (which excludes COVID-19 molecular and antibody testing).

◦Volume, measured by the number of requisitions, increased by 6.6% compared to the prior year, with organic growth (which excludes the impact of recent acquisitions) and acquisitions contributing approximately 4.5% and 2.1%, respectively. Organic volume growth was driven by demand for COVID-19 molecular testing, partially offset by declines in testing volume in the base business. Testing volume in the base business were negatively impacted by the COVID-19 pandemic and declined by 11.4% compared to the prior year.

◦Revenue per requisition increased by 16.2% compared to the prior year driven, in large part, by COVID-19 molecular testing.

DS revenues of $298 million decreased by 7.0% compared to the prior year and were negatively impacted by the COVID-19 pandemic.
Income from continuing operations attributable to Quest Diagnostics' stockholders was $1,431 million, or $10.47 per diluted share, in 2020, compared to $838 million, or $6.13 per diluted share, in 2019.
Net cash provided by operating activities was approximately $2.0 billion in 2020, compared to $1.2 billion in 2019.

Impact of COVID - 19

As a novel strain of coronavirus (COVID-19) continues to spread and severely impact the economy of the United States and other countries around the world, we are committed to being a part of the coordinated public and private sector response to this unprecedented challenge. We have made substantial investments to expand the amount of COVID-19 testing available to the country and are currently capable of performing approximately 225,000 COVID-19 molecular diagnostic tests per day to aid in the diagnosis of COVID-19 and approximately 200,000 COVID-19 antibody tests per day to aid in the detection of immune response. We have been effectively managing challenges in the global supply chain; and, at this point, we have sufficient supplies to conduct our business.

During 2020, our testing volume and revenues were materially impacted by the COVID-19 pandemic including a decline in testing volume in our base business (which excludes COVID-19 molecular and antibody testing) which was more than offset by COVID-19 molecular and antibody testing.

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During January and February 2020, we experienced growth in DIS revenues and volume compared to the prior year period. However, in March and April 2020, we experienced a material decline in testing volume due to the COVID-19 pandemic. During May and June 2020, we began to experience a recovery in base testing volume, which continued in the second half of 2020. Volume in our base business (which includes the impact of recent acquisitions) for the second, third and fourth quarters of 2020 decreased approximately 34%, 5% and 2%, respectively, compared to the prior year periods. However, at the end of November and into December 2020, the trend of recovery in our base business volume was impacted somewhat due to the increase in COVID-19 infections across the country.

The decrease in base testing volume was driven by federal, state and local governmental policies and initiatives designed to reduce the transmission of COVID-19, a significant reduction in physician office visits, the cancellation of elective medical procedures, customers closing or severely curtailing their operations (voluntarily or in response to government orders), and the adoption of work-from-home policies, all of which have had, and we believe will continue to have, an impact on our operating results, financial position and cash flows, including base testing volume.

Beginning during the second quarter of 2020, we experienced growing demand for COVID-19 testing services, which partially offset the decrease in base testing volume during that period. During the second half of 2020, as we have expanded our capacity in order to satisfy such demand, the impact of COVID-19 testing more than offset the decrease in base testing volume. Additionally, the impact of COVID-19 molecular testing drove an increase in revenue per requisition compared to the prior year.

In April 2020 the Centers for Medicare and Medicaid Services ("CMS") announced that it would increase the reimbursement for certain COVID-19 molecular tests making use of high-throughput technologies developed by the private sector that allow for increased testing capacity, faster results, and more effective means of combating the spread of the virus to $100 per test, effective April 14, 2020. Beginning January 1, 2021, Medicare changed the base reimbursement rate for COVID-19 diagnostic tests run on high-throughput technologies to $75 per test with an additional payment of $25 per test if the laboratory (1) completes the test in two calendar days or less and (2) completes the majority of its COVID-19 tests that use high throughput technology in two calendar days or less for all of its patients in the previous month. Certain healthcare insurers have now moved to a similar reimbursement model for COVID-19 molecular tests.

We believe the COVID-19 pandemic’s impact on our consolidated results of operations, financial position and cash flows will be primarily driven by: the severity and duration of the COVID-19 pandemic; healthcare insurer, government, and client payer reimbursement rates for COVID-19 molecular testing; the COVID-19 pandemic’s impact on the U.S. healthcare system and the U.S. economy; and the timing, scope and effectiveness of federal, state and local governmental responses to the COVID-19 pandemic. We may also be impacted by changes in the severity of the COVID-19 pandemic at different times in the various cities and regions where we operate and offer services. Even after the COVID-19 pandemic has moderated and the business and social distancing restrictions have eased, we may continue to experience similar effects to our businesses, consolidated results of operations, financial position and cash flows resulting from a recessionary economic environment that may persist. In the longer term, given the many challenges that hospitals will face, we may have more opportunities to partner with hospitals to help achieve their laboratory strategies, and the COVID-19 pandemic may also be a further catalyst for consolidation in the laboratory testing industry.

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act)

In March 2020, in response to the COVID-19 pandemic, the CARES Act was signed into law. The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes, technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property, and the creation of certain payroll tax credits associated with the retention of employees. Beginning in the second quarter of 2020, we started taking advantage of the temporary suspension of payment requirements for the employer portion of Social Security taxes.

The CARES Act also includes a number of benefits that are applicable to us and other healthcare providers including, but not limited to:

providing coverage for COVID-19 testing at no out-of-pocket cost to nearly all patients;
providing clinical laboratories a one-year reprieve from the reporting requirements under the Protecting Access to Medicare Act ("PAMA") as well as a one-year delay of reimbursement rate reductions for clinical laboratory services provided under Medicare that were scheduled to take place in 2021. Further revisions of the Medicare Clinical

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Laboratory Fee Schedule for years after 2022 will be based on future surveys of market rates. Reimbursement reduction from 2022-2024 is capped by PAMA at 15% annually;

appropriating $100 billion to healthcare providers for related expenses or lost revenues that are attributable to the COVID-19 pandemic. In April 2020 and August 2020, we received approximately $65 million and $73 million, respectively, of funds that were distributed to healthcare providers for related expenses or lost revenues that are attributable to the COVID-19 pandemic under the CARES Act. During the fourth quarter of 2020, we returned the entire $138 million of funds; and
suspending Medicare sequestration from May 2020 to December 2020. In December 2020, the suspension of the Medicare sequestration, which has resulted in a small benefit to us in the form of higher reimbursement rates for diagnostic testing services performed on behalf of Medicare beneficiaries, was extended through March 2021.

Senior Notes Offerings and Retirement of Debt

During January 2020, we redeemed in full the outstanding indebtedness under our senior notes due January 2020 and senior notes due March 2020 using the net proceeds from the issuance, in December 2019, of $800 million aggregate principal amount of 2.95% senior notes due June 2030 (the "2030 Senior Notes"), along with cash on hand. For the year ended December 31, 2020, we recorded a loss on retirement of debt in connection with the transaction, principally comprised of premiums paid, of $1 million in other income (expense), net.

During May 2020, we completed a senior notes offering, consisting of $550 million aggregate principal amount of 2.80% senior notes due June 2031 (the “2031 Senior Notes”), which were issued at an original issue discount of $1 million. During November 2020, the net proceeds from the 2031 Senior Notes, along with cash on hand, were used to redeem in full the outstanding indebtedness under our senior notes due April 2021. For the year ended December 31, 2020, we recorded a loss on retirement of debt in connection with the transaction, principally comprised of premiums paid, of $8 million in other income (expense), net.

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

Two Point Strategy

Our two point strategy is described in detail in "Item 1. Business: Our Strategy." We continued to execute our strategy during 2020 as follows:

Acquisition of Blueprint Genetics Oy

On January 21, 2020, we completed the acquisition of Blueprint Genetics Oy ("Blueprint Genetics"), in an all cash transaction for $108 million, net of $3 million cash acquired. Blueprint Genetics is a leading specialty genetic testing company with expertise in gene variant interpretation based on next generation sequencing and proprietary bioinformatics. Through the acquisition, we acquired all of Blueprint Genetics' operations. The acquired business is included in our DIS business.

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

On April 6, 2020, we completed the acquisition of select assets which constitute substantially all of the operations of Memorial Hermann Diagnostic Laboratories, the outreach laboratory division of Memorial Hermann Health System ("Memorial Hermann") in an all cash transaction for $120 million. Memorial Hermann is a not-for-profit health system in Southeast Texas. The acquired business is included in our DIS business.

Acquisition of the Remaining 56% Interest in Mid America Clinical Laboratories, LLC

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On August 1, 2020, we completed the acquisition of the remaining 56% interest in Mid America Clinical Laboratories, LLC ("MACL") from our joint venture partners in an all cash transaction for $93 million, net of $18 million cash acquired. MACL is the largest independent clinical laboratory provider in Indiana. Prior to the acquisition, we accounted for our 44% interest in MACL as an equity method investment, which was remeasured to its fair value of $87 million on the acquisition date, resulting in a gain of $70 million that was recognized in other income (expense), net in the consolidated statements of operations. As a result of the acquisition, MACL became our wholly owned subsidiary. The acquired business is included in our DIS business.

For further 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 2020 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 price 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, 2020, we incurred $42 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, including impacts of the COVID-19 pandemic, such as increased adoption of telemedicine, 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.

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, DCEs and patient-centered medical homes. The ongoing trend of rising patient responsibility and increasing payer denials 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 2020 and 2019, we derived approximately 3% of our consolidated net revenues from capitated payment arrangements. In 2020 and 2019, we derived approximately 8% and 10%, 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 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 2020 CLFS revenues comprised 8% of our consolidated net revenues), reimbursement rates for clinical laboratory testing were

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reduced in 2018, 2019 and 2020. PAMA calls for further revision of the CLFS for years after 2020, based on future surveys of market rates; reimbursement reduction from 2022-24 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 delayed PAMA's next data collection and reporting period until January 1, 2021 and ordered a study to determine ways to improve future collection of more representative market rate data under PAMA. In 2020, the CARES Act provided clinical laboratories with a one-year reprieve from the reporting requirements under PAMA as well as a one-year delay of reimbursement rate reductions that were scheduled to take place in 2021. Overall, we expect total reimbursement rate pressure for 2021 from all payers on a combined basis to be approximately 1%.

In addition, the trend of consolidating, converging and diversifying among our customers, payers and other healthcare industry participants has continued and may result in increased price transparency and bargaining power, and may encourage 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 a discussion of the impact of the COVID-19 pandemic on our business, see "Impact of COVID-19" above.

For additional information on our key trends, which present both opportunities and risks, see "Item 1. Business: The Clinical Testing Industry."

Critical Accounting Policies

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

Our revenues are primarily comprised of a high volume of relatively low-dollar transactions, and about one-half of our total costs and expenses consist of employee compensation and benefits. Due to the nature of our business, several of our accounting policies involve significant estimates and judgments:

revenues and accounts receivable associated with DIS;
reserves for general and professional liability claims;
reserves for other legal proceedings; 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 primarily 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 in exchange for providing services using the portfolio approach. These estimates include the impact of contractual allowances (including payer denials), and patient 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 patient 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 patient 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.

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We regularly assess the state of our billing operations in order to identify issues which may impact the collectability of receivables or revenue estimates. We believe that the collectability 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 patient 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 2020 applicable to each customer group:


	% of	% of
	Total	Consolidated
	Volume	Net Revenues

Healthcare insurers	44%	37%
Government payers	11	11
Client payers	40	38
Patients *	2	11
Total DIS	97%	97%

*Patients revenue includes coinsurance and deductible responsibilities but volume associated with such revenue is reported under Healthcare insurers.

The following table shows net accounts receivable as of December 31, 2020 applicable to each customer group:


			% of
			Consolidated
			Net Accounts
			Receivable

Healthcare insurers			34%
Government payers			6
Client payers			46
Patients (including coinsurance and deductible responsibilities)			11
Total DIS			97%

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 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 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

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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 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, DCEs, 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.

We principally estimate the allowance for credit losses for client payers based on historical collection experience, the current credit worthiness of the customers, current economic conditions, expectations of future economic conditions and the period that the receivables have been outstanding. To the extent that any individual client payers are identified that have deteriorated in credit quality, we establish allowances based on the individual risk characteristics of such customers.

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.

Although we believe that our estimates for contractual allowances and patient price concessions, as well as our allowance for credit losses, are appropriate, it is possible that we will experience an impact on cash collections as a result of the impact of the COVID-19 pandemic. For further details on revenue and receivables, see Note 3 to the audited consolidated financial statements.

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

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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 we are involved in.

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 2020:

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.

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 our fair value and our 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.

The annual impairment test for goodwill 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 (i) a discounted cash flows analysis that converts future cash flow

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amounts into a single discounted present value amount or (ii) 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 our market capitalization, 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.

We perform our annual impairment test during the fourth quarter of the fiscal year. For the year ended December 31, 2020, in accordance with our policy to perform the quantitative test on a periodic basis, we updated the fair value calculation of our reporting units, performed the quantitative impairment test and concluded that goodwill was not impaired. As a sensitivity, if the estimated fair values of each of our reporting units decreased by 10%, we would have concluded that our goodwill was not impaired.

Results of Operations

For the discussions on the year-over-year changes for the year ended December 31, 2019 compared to December 31, 2018 and the results of operations for the year ended December 31, 2018, 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, 2019.

Basis of Presentation

Our DIS business currently represents our one reportable business segment. The DIS business for the years ended December 31, 2020 and 2019 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:



	2020		2019		$ Change		% Change
	(dollars in millions, except per share data)
Net revenues:
DIS business	$	9,139	$	7,405	$	1,734	23.4	%
DS businesses	298		321		(23)		(7.0)
Total net revenues	$	9,437	$	7,726	$	1,711	22.1	%

Operating costs and expenses and other operating income:
Cost of services	$	5,804	$	5,037	$	767	15.2	%
Selling, general and administrative	1,550		1,457		93		6.4
Amortization of intangible assets	103		96		7		7.0

Other operating expense (income), net	9		(95)		104		NM
Total operating costs and expenses, net	$	7,466	$	6,495	$	971	14.9	%

Operating income	$	1,971	$	1,231	$	740	60.2	%

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Other income (expense):
Interest expense, net	$	(163)		$	(175)		$	12	(6.6)	%
Other income, net	76			20			56		NM
Total non-operating expense, net	$	(87)		$	(155)		$	68	(43.9)	%

Income tax expense	$	(460)		$	(247)		$	(213)	86.4	%
Effective income tax rate	24.5		%	23.0		%

Equity in earnings of equity method investees, net of taxes	$	75		$	57		$	18	32.0	%



Amounts attributable to Quest Diagnostics' common stockholders
Income from continuing operations	$	1,431		$	838		$	593	70.8	%
Income from discontinued operations, net of taxes	$	—		$	20		$	(20)	NM

Diluted earnings per common share from continuing operations attributable to Quest Diagnostics’ common stockholders	$	10.47		$	6.13		$	4.34	70.8	%

NM - Not Meaningful

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


	2020		2019

Net revenues:
DIS business	96.8	%	95.8	%
DS businesses	3.2		4.2
Total net revenues	100.0	%	100.0	%

Operating costs and expenses and other operating income:
Cost of services	61.5	%	65.2	%
Selling, general and administrative	16.4		18.9
Amortization of intangible assets	1.1		1.2


Other operating expense (income), net	0.1		(1.2)
Total operating costs and expenses, net	79.1	%	84.1	%

Operating income	20.9	%	15.9	%

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Operating Results

Results for the year ended December 31, 2020 were affected by certain items that on a net basis decreased diluted earnings per share from continuing operations by $0.71 as follows:

pre-tax amortization expense of $114 million ($103 million in amortization of intangible assets and $11 million in equity in earnings of equity method investees, net of taxes) or $0.63 per diluted share;
net pre-tax charges of $72 million ($57 million of charges in cost of services, $10 million of charges in selling, general and administrative expenses and $9 million of charges in other operating expense (income), net, partially offset by a $4 million gain in equity in earnings of equity method investees, net of taxes), or $0.39 per diluted share, representing the impact of certain items resulting from the COVID-19 pandemic, principally including expense associated with payments to eligible employees to help offset expenses they incurred as a result of COVID-19, incremental costs incurred primarily to protect the health and safety of our employees and customers, and certain asset impairment charges; and
pre-tax charges of $58 million ($27 million in cost of services and $31 million in selling, general and administrative expenses), or $0.32 per diluted share, primarily associated with systems conversions and integration incurred in connection with further restructuring and integrating our business; partially offset by
a pre-tax gain of $70 million, or $0.46 per diluted share, recognized in other income (expense), net upon the acquisition of the remaining 56% interest in MACL as a result of the remeasurement of our previously held equity interest to fair value;
excess tax benefits associated with stock-based compensation arrangements of $23 million, or $0.17 per diluted share, recorded in income tax expense; and
a net pre-tax gain of $2 million (a $14 million gain in equity in earnings of equity method investees, net of taxes, partially offset by a $10 million loss in other income (expense), net and $2 million of charges in selling, general and administrative expenses) primarily due to a gain recognized by an equity method investee to adjust certain of its investments to fair value, a loss on retirement of debt, and, to a lesser extent, costs associated with Quest for Health Equity, our recently announced initiative with the Quest Diagnostics Foundation to reduce health disparities in underserved communities.

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; and
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; partially offset by
a net pre-tax gain of $89 million (a $95 million gain in other operating expense (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 proceeds from an insurance claim for hurricane related losses, partially offset by costs incurred related to a 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.

Net Revenues

Net revenues for the year ended December 31, 2020 increased by 22.1% compared to the prior year.

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DIS revenues for the year ended December 31, 2020 increased by 23.4% compared to the prior year driven by demand for COVID-19 molecular and antibody testing, and, to a lesser extent, the impact of recent acquisitions, partially offset by a decline in testing volume in our base business (which excludes COVID-19 molecular and antibody testing).

Organic revenue and acquisitions contributed approximately 21.6% and 1.8%, respectively, to DIS revenue growth.
DIS volume increased by 6.6%, with organic growth and acquisitions contributing approximately 4.5% and 2.1%, respectively. Organic volume growth was driven by demand for COVID-19 molecular testing, partially offset by declines in testing volume in the base business. Testing volume in the base business was negatively impacted by the COVID-19 pandemic and declined by 11.4% compared to the prior year.
Revenue per requisition increased by 16.2% compared to the prior year primarily due to favorable mix, driven in large part by COVID-19 molecular testing, partially offset by reimbursement pressure, including unit price reductions associated with PAMA and all other sources, of approximately 1.7%.

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 $767 million for the year ended December 31, 2020 compared to the prior year. The increase was primarily driven by higher variable expenses related to increased testing volume as well as test mix and a higher supply cost associated with COVID-19 testing, additional operating costs associated with our acquisitions, higher performance-based compensation, and incremental costs incurred related to the COVID-19 pandemic including expense associated with payments to eligible employees to help offset expenses they incurred as a result of COVID-19 and costs incurred to protect the health and safety of our employees and customers. These increases were partially offset by lower compensation and benefit costs as a result of a series of temporary actions implemented to manage our workforce costs.

In order to mitigate the impact that the COVID-19 pandemic had on our business, we implemented a series of temporary actions in April 2020 to manage our workforce costs and preserve cash including temporary salary reductions; suspension of certain benefits; reduced hours for employees whose work had significantly declined; and approved furloughs for employees with diminished work requirements who expressed an interest. As our testing volume started to recover, we recalled the vast majority of employees from furlough and reinstated full working hours for almost all employees who were asked to work reduced hours. By the end of the third quarter of 2020, salaries were restored for all exempt employees that had temporary salary reductions.

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

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

SG&A increased by $93 million for the year ended December 31, 2020, compared to the prior year, primarily driven by higher performance-based compensation and additional operating costs associated with our acquisitions.

Amortization of Intangible Assets

The $7 million increase in amortization of intangible assets for the year ended December 31, 2020 compared to the prior year was a result of recent acquisitions.

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Other Operating Expense (Income), Net

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

For the year ended December 31, 2020, other operating expense (income), net primarily represents impairment charges due to the impact of the COVID-19 pandemic.

For the year ended December 31, 2019, other operating expense (income), net included a $73 million gain associated with the sale and leaseback of a property, a $12 million gain associated with proceeds from 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.

Interest Expense, Net

Interest expense, net decreased by $12 million for the year ended December 31, 2020 compared to the prior year, primarily driven by lower interest rates associated with our variable rate indebtedness, partially offset by higher average outstanding indebtedness.

Other Income, Net

Other income, 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, 2020, other income, net included a $70 million gain recognized as a result of the remeasurement of our previously held equity interest in MACL to fair value (see Note 6 to the audited consolidated financial statements) and gains associated with investments in our deferred compensation plans, partially offset by a $9 million loss on the retirement of debt, principally due to premiums paid.

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

Income Tax Expense

Income tax expense for the years ended December 31, 2020 and 2019 was $460 million and $247 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.

The effective income tax rate for the years ended December 31, 2020 and 2019 was 24.5% and 23.0%, respectively. The effective income tax rate for the year ended December 31, 2020 benefited from a lower effective income tax rate (11.8%) associated with a $70 million gain recognized as a result of the remeasurement of our previously held equity interest in MACL to fair value due to a permanent difference in the financial reporting and tax basis of goodwill, and $23 million of excess tax benefits associated with stock-based compensation arrangements. The effective income tax rate for the year ended December 31, 2019 benefited from a $12 million release of valuation allowances associated with net operating loss carryforwards, and $13 million of excess tax benefits associated with stock-based compensation arrangements.

Equity in Earnings of Equity Method Investees, Net of Taxes

For the year ended December 31, 2020, there was an $18 million increase in equity in earnings of equity method investees, net of taxes, compared to the prior year primarily due to a $14 million gain recognized by an equity method investee to adjust certain of its investments to fair value.

Discontinued Operations

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

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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 historically entered into interest rate swap agreements. Interest rate swap agreements 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, net. We believe that our exposures to foreign exchange impacts and changes in commodity prices are not material to our consolidated results of operations, financial position or cash flows. 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, 2020 and 2019, the fair value of our debt was estimated at approximately $4.6 billion and $5.1 billion, respectively, principally 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, 2020 and 2019, the estimated fair value exceeded the carrying value of the debt by $597 million and $313 million, respectively. A hypothetical 10% increase in interest rates (representing 17 basis points as of December 31, 2020 and 28 basis points as of December 31, 2019) would potentially reduce the estimated fair value of our debt by approximately $82 million and $100 million as of December 31, 2020 and 2019, 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 commercial paper rates for highly-rated issuers or LIBOR, plus a spread. As of December 31, 2020, interest on our senior unsecured revolving credit facility is based on certain published rates plus an applicable margin based on changes in our public debt ratings and our leverage ratio. As such, our borrowing cost under this credit arrangement is subject to fluctuations in interest rates, our leverage ratio and changes in our public debt ratings. As of December 31, 2020, 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 0.825% to 0.95%; and for our senior unsecured revolving credit facility, LIBOR plus 1.125%. As of December 31, 2020, there were no borrowings outstanding under either our $600 million secured receivables credit facility or our $750 million senior unsecured revolving credit facility.

In April 2020, we terminated our existing fixed-to-variable interest rate swap agreements. Based on our remaining net exposure to interest rate changes, a hypothetical 10% change to the variable rate component of our variable rate indebtedness would not materially change annual interest expense.

During March 2020, we entered into a forward-starting interest rate swap agreement with a financial institution for a total notional amount of $25 million. Additionally, during May 2020, we entered into interest rate lock agreements with several financial institutions for a total notional amount of $275 million. The forward-starting interest rate swap agreement and the interest rate lock agreements were entered into in order 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 and were accounted for as cash flow hedges. In connection with the issuance of the 2031 Senior Notes, these agreements were settled and we received net proceeds of $1 million. The net gain is deferred in stockholders' equity, net of taxes, as a component of accumulated other comprehensive loss, and is being 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 primarily includes equity investments comprised mostly of strategic 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, 2020.

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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.

In conjunction with the preparation of our audited consolidated financial statements for the year ended December 31, 2020, we considered whether the carrying values of our investments were impaired and concluded that no impairment existed. However, should the impact of the COVID-19 pandemic be worse than currently expected, it is possible that we could incur impairment charges in the future.

Liquidity and Capital Resources


	2020		2019		$ Change
	(dollars in millions)
Net cash provided by operating activities	$	2,005	$	1,243	$	762
Net cash used in investing activities	(772)		(411)		(361)
Net cash (used in) provided by financing activities	(1,267)		225		(1,492)
Net change in cash and cash equivalents and restricted cash	$	(34)	$	1,057	$	(1,091)

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, 2020 and 2019 totaled $1,158 million and $1,192 million, respectively.

As of December 31, 2020, approximately 4% of our $1,158 million of consolidated cash and cash equivalents were held outside of the United States.

Cash Flows from Operating Activities

Net cash provided by operating activities for the year ended December 31, 2020 was $2,005 million, and increased $762 million compared to the prior year primarily as a result of:

higher operating income in 2020 as compared to 2019; and, to a lesser extent
a $100 million increase due to the temporary suspension in 2020 of certain payment requirements for the employer portion of Social Security taxes; and
$40 million of proceeds received in 2020 from the termination of interest rate swap agreements; partially offset by
a $158 million increase in income tax payments;
higher performance-based compensation payments in 2020 compared to 2019; and
a $28 million refund received in the prior year period from the taxing authorities associated with the favorable resolution of certain tax contingencies related to a discontinued operation.

Days sales outstanding, a measure of billing and collection efficiency, was 46 days as of December 31, 2020 and 54 days as of December 31, 2019. The decrease in DSO is partially due to recent fluctuations in our monthly revenue due to the impact of the COVID-19 pandemic. Although we believe that our current revenue reserves and allowance for credit losses are appropriate, it is possible that we will experience an impact on cash collections as a result of the impact of the COVID-19 pandemic.

Cash Flows from Investing Activities

Net cash used in investing activities for the year ended December 31, 2020 was $772 million, compared to $411 million for the year ended December 31, 2019. This $361 million increase in cash used in investing activities was primarily a result of:

a $272 million increase in net cash paid for business acquisitions; and
an $88 million decrease in proceeds from disposition of property, plant and equipment, primarily due to proceeds in the prior year period associated with the sale and leaseback of a property.

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Cash Flows from Financing Activities

Net cash used in financing activities for the year ended December 31, 2020 was $1,267 million, compared to net cash provided by financing activities of $225 million for the year ended December 31, 2019. This $1,492 million change in cash flows from financing activities was primarily a result of:

$805 million of net debt repayments (repayments of debt less proceeds from borrowings) in 2020 compared to $832 million of net borrowings in 2019; partially offset by
a $76 million increase in overdrafts, which are generally settled in cash the following day; and
a $70 million increase in proceeds from the exercise of stock options, which was a result of an increase in the volume of stock options exercised and the average exercise price compared to the prior year.

During January 2020, we redeemed in full the outstanding indebtedness under our senior notes due January 2020 and senior notes due March 2020 using net proceeds from the issuance, in December 2019, of the 2030 Senior Notes, along with cash on hand. During May 2020, we completed the issuance of the 2031 Senior Notes, the net proceeds from which were used during November 2020, along with cash on hand, to redeem in full the outstanding indebtedness under our senior notes due April 2021. Additionally, during the year ended December 31, 2020, we borrowed $100 million under our secured receivables credit facility and $100 million under our senior unsecured revolving credit facility, both of which were repaid prior to December 31, 2020.

During March 2019, we completed the issuance of the $500 million aggregate principal amount of 4.20% senior notes due June 2029 and repaid in full, at maturity, our senior notes due April 2019. In December 2019, we completed the issuance of the 2030 Senior Notes. In addition, during the year ended December 31, 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.

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 2020, our Board of Directors declared a quarterly cash dividend of $0.56 per common share. During each of the four quarters of 2019, our Board of Directors declared a quarterly cash dividend of $0.53 per common share. On February 4, 2021, we announced that our Board of Directors authorized a 10.7% increase in our quarterly cash dividend from $0.56 to $0.62 per share, or $2.48 per share annually, commencing with the dividend payable in April 2021.

Share Repurchases

As of December 31, 2020, $0.9 billion remained available under our share repurchase authorization. In February 2021, our Board of Directors authorized us to repurchase an additional $1 billion of our common stock.

For the year ended December 31, 2020, we repurchased 2.7 million shares of our common stock for $325 million.

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

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

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Contractual Obligations and Commitments

The following table summarizes certain of our contractual obligations as of December 31, 2020 (dollars in millions):


	Payments due by period
Contractual Obligations	Total		Less than 1 year		1-3 years		4-5 years		After 5 years

Outstanding debt	$	3,976	$	—	$	—	$	901	$	3,075
Finance lease obligations	27		2		2		3		20
Interest payments on outstanding debt	1,648		154		307		277		910
Operating leases	837		195		314		165		163
Purchase obligations	1,545		334		547		418		246

Total contractual obligations	$	8,033	$	685	$	1,170	$	1,764	$	4,414

Interest payments on our outstanding debt include interest associated with finance lease obligations and have been calculated using the interest rates as of December 31, 2020 applied to the December 31, 2020 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 statement

Operating lease obligations include variable charges (primarily maintenance fees and utilities associated with our real estate leases) in effect as of December 31, 2020. A discussion and analysis regarding our operating lease obligations is contained in Note 14 to the audited consolidated financial statements.

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

As of December 31, 2020, our total liabilities associated with unrecognized tax benefits were approximately $93 million, which were excluded from the table above. We expect that these liabilities may decrease by less than $15 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, 2020, the fair value of the redeemable noncontrolling interest on the audited consolidated balance sheet was $82 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.

Equity Method Investees

Our equity method investees primarily consist of our clinical trials central laboratory services joint venture, our diagnostic information services joint venture, and an investment in a fund that purchases strategic holdings in private companies in the healthcare industry. Such investees are accounted for under the equity method of accounting. Our investment in equity method investees is 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 5% of our consolidated income from continuing operations before income taxes and equity in earnings of equity method investees. We partially guarantee a lease obligation of one of our equity method investees; payment under such guarantee is not likely at this time and we have no other material unconditional obligations or guarantees to, or in support of, our equity method investees and their operations.

In conjunction with the preparation of our audited consolidated financial statements for the year ended December 31, 2020, we considered whether the carrying values of our equity method investments were impaired and concluded that no such impairment existed. However, should the impact of the COVID-19 pandemic be worse than currently expected, it is possible that we could incur impairment charges in the future.

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For further details regarding related party transactions with our equity method investees, see Note 20 to the audited consolidated financial statements.

Requirements and Capital Resources

We estimate that we will invest approximately $350 million to $400 million during 2021 for capital expenditures, to support and grow our existing operations, principally related to investments in information technology; laboratory equipment and facilities, including COVID testing equipment and completion of our new multi-year laboratory construction in New Jersey; and investments in our advanced diagnostics and consumer growth strategies.

Together with the Quest Diagnostics Foundation, we launched a multi-year initiative to reduce health disparities in underserved communities, including those impacted by the COVID-19 pandemic. As part of this initiative, we plan to offer testing services and fund a range of initiatives estimated to total more than $100 million aimed at improving access to testing and awareness of the value of diagnostic insights in managing overall health, a significant portion of which will occur in 2021.

As of December 31, 2020, $1.3 billion of borrowing capacity was available under our existing credit facilities consisting of $530 million available under our secured receivables credit facility and $750 million available under our senior unsecured revolving credit facility. There were no borrowings under these credit facilities as of December 31, 2020. In support of our risk management program, to ensure our performance or payment to third parties, $70 million in letters of credit under the secured receivables credit facility were outstanding as of December 31, 2020. The secured receivables credit facility includes a $250 million loan commitment which matures October 2021, and a $250 million loan commitment and a $100 million letter of credit facility which mature October 2022. The senior unsecured revolving credit facility matures in March 2023. For further details regarding the credit facilities, see Note 13 to the audited consolidated financial statements.

Our secured receivables credit facility is subject to customary affirmative and negative covenants, and certain financial covenants with respect to the receivables that comprise the borrowing base and secure the borrowings under the facility. Our senior unsecured revolving credit facility is also subject to certain financial covenants and limitations on indebtedness. As of December 31, 2020, we were in compliance with all such applicable financial covenants.

In 2020, due to the impact of the COVID-19 pandemic, we took certain actions to preserve liquidity including temporarily suspending share repurchases under our existing share repurchase authorization (which suspension was lifted in November 2020) and implementing a series of temporary actions to manage our workforce costs.

In addition, we took certain steps to ensure adequate access to liquidity. In April 2020, we entered into an amendment to our senior unsecured revolving credit facility in order to provide for increased flexibility. Pursuant to the amendment, the leverage ratio covenant was increased as follows:


As of:						Applicable Covenant:

December 31, 2020						no more than 6.5 times EBITDA
March 31, 2021						no more than 6.25 times EBITDA
June 30, 2021						no more than 4.5 times EBITDA

Thereafter, the leverage ratio covenant reverts to no more than 3.5 times EBITDA. During the period that the increased covenant applies, which period may be terminated early by us provided that we are in compliance with the historical 3.5 times EBITDA leverage ratio, the amended credit agreement contains certain additional limitations and restrictions including, but not limited to, repurchases of our common stock, the amount of funds that can be used on business acquisitions, the incurrence of secured indebtedness and the payment of dividends.

In addition, in May 2020, we completed the issuance of the 2031 Senior Notes. In November 2020, we redeemed in full the outstanding indebtedness under our senior notes due April 2021 using the net proceeds from the issuance of the 2031 Senior Notes, along with cash on hand.

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. However, should it become necessary, we believe that our credit

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profile should provide us with access to additional financing in order to fund normal business operations, make interest payments, fund growth opportunities and satisfy upcoming debt maturities.

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 adoption of new accounting standards is discussed in Note 2 to the audited consolidated financial statements.

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.

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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, 2020 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, 2020 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, 2020 and issued their audit report on the Company's internal control over financial reporting included herein.

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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, 2020 and 2019, 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, 2020, including the related notes and financial statement schedule of valuation accounts and reserves for each of the three years in the period ended December 31, 2020 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, 2020, 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, 2020 and 2019**,** and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 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, 2020, 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 permit

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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.

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 Diagnostic 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 in exchange for providing services using the portfolio approach. These estimates include the impact of contractual allowances (including payer denials) and patient price concessions. The portfolio approach includes the following groups of customers: healthcare insurers, government payers, client payers and patients (34%, 6%, 46% and 11% of consolidated net accounts receivable as of December 31, 2020, respectively, as disclosed by management). The DIS business accounted for 97% of consolidated net accounts receivable ($1,520 million) as of December 31, 2020. 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, subjectivity and effort in performing procedures to evaluate the audit evidence 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 (i) evaluating the appropriateness of the methodology, (ii) testing the completeness and accuracy of the historical contractual allowance and collection data from the Company’s billing system, which is an input to the methodology, and (iii) evaluating the reasonableness of management’s assumptions used to estimate contractual allowances by comparing actual cash collected to the prior year estimate (net accounts receivable).


/s/			PricewaterhouseCoopers LLP

			Florham Park, New Jersey
			February 22, 2021

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

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2020 AND 2019

(in millions, except per share data)


	2020		2019
Assets
Current assets:
Cash and cash equivalents	$	1,158	$	1,192
Accounts receivable, net of allowance for credit losses of $28 and $15 as of December 31, 2020 and 2019, respectively	1,520		1,063
Inventories	223		123
Prepaid expenses and other current assets	157		112

Total current assets	3,058		2,490
Property, plant and equipment, net	1,627		1,453
Operating lease right-of-use assets	604		518
Goodwill	6,873		6,619
Intangible assets, net	1,167		1,121
Investments in equity method investees	521		482
Other assets	176		160

Total assets	$	14,026	$	12,843

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses	$	1,633	$	1,041
Current portion of long-term debt	2		804
Current portion of long-term operating lease liabilities	141		145
Total current liabilities	1,776		1,990
Long-term debt	4,013		3,966
Long-term operating lease liabilities	499		413
Other liabilities	847		711

Commitments and contingencies
Redeemable noncontrolling interest	82		76
Stockholders’ equity:
Quest Diagnostics stockholders’ equity:
Common stock, par value $0.01 per share; 600 shares authorized as of both December 31, 2020 and 2019; 217 shares issued as of both December 31, 2020 and 2019	2		2
Additional paid-in capital	2,841		2,722
Retained earnings	9,303		8,174
Accumulated other comprehensive loss	(21)		(39)
Treasury stock, at cost; 84 shares as of both December 31, 2020 and 2019	(5,366)		(5,218)
Total Quest Diagnostics stockholders’ equity	6,759		5,641
Noncontrolling interests	50		46
Total stockholders’ equity	6,809		5,687
Total liabilities and stockholders’ equity	$	14,026	$	12,843

The accompanying notes are an integral part of these statements.

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018

(in millions, except per share data)


	2020		2019		2018

Net revenues	$	9,437	$	7,726	$	7,531

Operating costs and expenses and other operating expense (income):
Cost of services	5,804		5,037		4,926
Selling, general and administrative	1,550		1,457		1,424
Amortization of intangible assets	103		96		90
Other operating expense (income), net	9		(95)		(10)
Total operating costs and expenses, net	7,466		6,495		6,430

Operating income	1,971		1,231		1,101

Other income (expense):
Interest expense, net	(163)		(175)		(167)
Other income (expense), net	76		20		(8)
Total non-operating expense, net	(87)		(155)		(175)

Income from continuing operations before income taxes and equity in earnings of equity method investees	1,884		1,076		926
Income tax expense	(460)		(247)		(182)
Equity in earnings of equity method investees, net of taxes	75		57		44


Income from continuing operations	1,499		886		788
Income from discontinued operations, net of taxes	—		20		—
Net income	1,499		906		788
Less: Net income attributable to noncontrolling interests	68		48		52
Net income attributable to Quest Diagnostics	$	1,431	$	858	$	736

Amounts attributable to Quest Diagnostics’ common stockholders:
Income from continuing operations	$	1,431	$	838	$	736
Income from discontinued operations, net of taxes	—		20		—
Net income	$	1,431	$	858	$	736

Earnings per share attributable to Quest Diagnostics’ common stockholders - basic:
Income from continuing operations	$	10.62	$	6.21	$	5.39
Income from discontinued operations	—		0.15		—
Net income	$	10.62	$	6.36	$	5.39

Earnings per share attributable to Quest Diagnostics’ common stockholders - diluted:
Income from continuing operations	$	10.47	$	6.13	$	5.29
Income from discontinued operations	—		0.15		—
Net income	$	10.47	$	6.28	$	5.29

The accompanying notes are an integral part of these statements.

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018

(in millions)


	2020		2019		2018

Net income	$	1,499	$	906	$	788

Other comprehensive income (loss):
Foreign currency translation adjustment	15		7		(11)
Net change in available-for-sale debt securities, net of taxes	—		8		—
Net deferred gain on cash flow hedges, net of taxes	3		5		2

Other comprehensive income (loss)	18		20		(9)

Comprehensive income	1,517		926		779
Less: Comprehensive income attributable to noncontrolling interests	68		48		52
Comprehensive income attributable to Quest Diagnostics	$	1,449	$	878	$	727

The accompanying notes are an integral part of these statements.

F-5

Table of Contents

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018

(in millions)


	2020		2019		2018
Cash flows from operating activities:
Net income	$	1,499	$	906	$	788
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	361		329		309
Provision for credit losses	19		11		6
Deferred income tax provision	85		15		73
Stock-based compensation expense	97		56		61





Losses (gains) on sale of property, plant and equipment	3		(70)		6
Other, net	(81)		(39)		6
Changes in operating assets and liabilities:
Accounts receivable	(455)		(63)		(65)
Accounts payable and accrued expenses	452		73		(19)

Income taxes payable	22		29		4
Termination of interest rate swap agreements	40		—		—
Other assets and liabilities, net	(37)		(4)		31
Net cash provided by operating activities	2,005		1,243		1,200

Cash flows from investing activities:
Business acquisitions, net of cash acquired	(330)		(58)		(421)


Proceeds from disposition of property, plant, and equipment	3		91		2
Capital expenditures	(418)		(400)		(383)

(Increase) decrease in investments and other assets	(27)		(44)		1
Net cash used in investing activities	(772)		(411)		(801)

Cash flows from financing activities:
Proceeds from borrowings	749		2,281		2,090
Repayments of debt	(1,554)		(1,449)		(1,966)
Purchases of treasury stock	(325)		(353)		(322)
Exercise of stock options	189		119		99
Employee payroll tax withholdings on stock issued under stock-based compensation plans	(15)		(16)		(21)
Dividends paid	(297)		(286)		(266)
Distributions to noncontrolling interest partners	(58)		(54)		(54)

Contributions from noncontrolling interest partners	—		—		16

Other financing activities, net	44		(17)		23
Net cash (used in) provided by financing activities	(1,267)		225		(401)

Net change in cash and cash equivalents and restricted cash	(34)		1,057		(2)

Cash and cash equivalents and restricted cash, beginning of year	1,192		135		137
Cash and cash equivalents and restricted cash, end of year	$	1,158	$	1,192	$	135

The accompanying notes are an integral part of these statements.

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Table of Contents

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018

(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, 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
Net income						1,431						53		1,484		15
Other comprehensive income, net of tax								18						18
Dividends declared						(302)								(302)
Distributions to noncontrolling interest partners												(49)		(49)		(9)
Issuance of common stock under benefit plans	1			11						14				25
Stock-based compensation expense				97										97
Exercise of stock options	2			26						163				189
Shares to cover employee payroll tax withholdings on stock issued under stock-based compensation plans				(15)										(15)
Purchases of treasury stock	(3)									(325)				(325)



Balance, December 31, 2020	133	$	2	$	2,841	$	9,303	$	(21)	$	(5,366)	$	50	$	6,809	$	82

The accompanying notes are an integral part of these statements.

F-7

Table of Contents

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, accountable care organizations ("ACOs"), and direct contract entities ("DCEs"). 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. 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 sheet.

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 through 2019, at which point certain income tax contingencies related to NID were resolved. 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.

F-8

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(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 sheet. 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 recognizes as revenue the amount that reflects the consideration to which it expects to be entitled in exchange for goods sold or services rendered primarily 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 11%, 15% and 16% of the Company's consolidated net revenues for the years ended December 31, 2020, 2019 and 2018, 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 attributable to Quest Diagnostics, 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 attributable to Quest Diagnostics, adjusted for earnings allocated to participating securities, by the weighted average number of common shares outstanding after giving effect to all potentially dilutive common shares outstanding during the period. Potentially dilutive common shares include the dilutive effect of outstanding stock options and performance share units granted under the Company's Amended and Restated Employee Long-Term Incentive Plan (“ELTIP”) and its Amended and Restated Non-Employee Director Long-Term Incentive Plan (“DLTIP”). Earnings allocable to participating securities include the portion of dividends declared as well as the portion of undistributed earnings during the period allocable to participating securities.

F-9

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

Stock-Based Compensation

The Company 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 units allow the recipients of such awards to earn a variable number of shares based on the achievement of the performance goals, which are based on the financial performance of the Company and the total shareholder return of the Company relative to an index of peer companies ("relative TSR"), specified in the awards. For performance share units with a goal based on the financial performance of the Company, stock-based compensation expense 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 for these awards is recognized as compensation cost in earnings in the period of the change. For performance share units with a market-based relative TSR goal, stock-based compensation expense is recognized based on the estimated fair value of the award regardless of the actual number of shares earned. 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 expense (income), 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.

F-10

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk are principally cash, cash equivalents, short-term investments, accounts receivable and derivative financial instruments. The Company's policy is to place its cash, cash equivalents and short-term investments in highly-rated financial instruments and institutions. Concentration of credit risk with respect to accounts receivable is mitigated by the diversity of the Company's payers and their dispersion across many different geographic regions, and is limited to certain payers who are large buyers of the Company's services. To reduce risk, the Company routinely assesses the financial strength of these payers and, consequently, believes that its accounts receivable credit risk exposure, with respect to these payers, is limited. While the Company has receivables due from federal and state governmental agencies, the Company does not believe that such receivables represent a credit risk since the related healthcare programs are funded by federal and state governments, and payment is primarily dependent on submitting appropriate documentation timely. As of December 31, 2020 and 2019, receivables due from government payers under the Medicare and Medicaid programs represented approximately 6% and 11%, respectively, of the Company's consolidated net accounts receivable. The portion of the Company's accounts receivable due from patients comprises the largest portion of credit risk. As of December 31, 2020 and 2019, receivables due from patients represented approximately 11% and 20%, respectively, 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 collectability and determining net revenues and accounts receivable from patients.

Accounts Receivable and Allowance for Credit Losses

Accounts receivable are reported net of allowances for credit losses.

When estimating its allowance for credit losses, the Company pools its trade receivables based on the following customer types: healthcare insurers, government payers, client payers and patients, which are described in Note 3. The Company principally estimates the allowance for credit losses by pool based on historical collection experience, the current credit worthiness of the customers, current economic conditions, expectations of future economic conditions and the period that the receivables have been outstanding. To the extent that any individual payers are identified that have deteriorated in credit quality, the Company removes the customers from their respective pools and establishes allowances based on the individual risk characteristics of such customers.

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, 2020 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.

F-11

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(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.

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 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 (i) a discounted cash flows analysis that converts future cash flow amounts into a single discounted present value amount or (ii) 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.

The Company performs its annual impairment test during the fourth quarter of the fiscal year. For the year ended December 31, 2020, in accordance with its policy to perform the quantitative test on a periodic basis, the Company updated the fair value calculation of its reporting units, performed the quantitative impairment test and concluded that goodwill was not impaired. For the year ended December 31, 2019, the Company performed a qualitative impairment test and, based on the totality of information available for the reporting units, the Company concluded that it was more-likely-than-not that the estimated fair values of the reporting units 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 (i) arises from contractual or other legal rights, or (ii) 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 lives, which generally range 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.

F-12

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(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 an indefinite-lived intangible 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 quarters of the years ended December 31, 2020 and 2019, 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 these 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 sheet 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, 2020, 2019 and 2018, gains and (losses) from these equity securities totaled $8 million, $10 million, and $(2) million, respectively. The carrying value of these investments were $67 million and $59 million at December 31, 2020 and 2019, 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, 2020, 2019, and 2018. The carrying value of these investments was $25 million at both December 31, 2020 and 2019.
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 (loss). The carrying amount of these investments was $12 million at both December 31, 2020 and 2019.

Derivative Financial Instruments

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

F-13

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(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 historically entered into interest rate swap agreements. Interest rate swap agreements 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 including certain financial information and certain assumptions regarding past, present and future market conditions. 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 agreement 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 initially 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;
Net changes in available-for-sale debt securities, 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 represent 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 Notes 15 and 16).

New Accounting Standards

Adoption of New Accounting Standards

On January 1, 2020, the Company adopted a new accounting standard issued by the Financial Accounting Standards Board ("FASB") which 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. The adoption of this standard, which the Company elected to do on a prospective basis, did not have a material impact on the Company's consolidated results of operations, financial position or cash flows.

On January 1, 2020, the Company adopted a new accounting standard issued by the FASB that changes the impairment model for most financial instruments, including trade receivables, from an incurred loss method to a new forward

F-14

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

looking approach, based on expected losses. The estimate of expected credit losses requires entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. The adoption of this new standard, which was done using a modified retrospective transition approach, did not have a material impact on the Company's consolidated results of operations, financial position or cash flows. See "Accounts Receivable and Allowance for Credit Losses" in this footnote for further details on the Company's allowance for credit losses policy.

On January 1, 2019, the Company adopted a new accounting standard issued by the 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 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 in the consolidated balance sheet. Accounting for the Company's finance leases remained 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.

New Accounting Standards To Be Adopted

In March 2020, the FASB issued a new accounting standard which provides temporary optional guidance to ease the potential burden in accounting for reference rate reform due to the risk of cessation of the London Interbank Offered Rate ("LIBOR"). The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The pronouncement is effective immediately and can be applied through December 31, 2022. The adoption of this standard is not expected to have a material impact on the Company’s consolidated 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, 2020, 2019 and 2018 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 primarily 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 in exchange for providing services using the portfolio approach. These estimates include the impact of contractual allowances (including payer denials), and patient 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

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, DCEs, 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.

The Company principally estimates the allowance for credit losses for client payers based on historical collection experience, the current credit worthiness of the customers, current economic conditions, expectations of future economic conditions and the period that the receivables have been outstanding. To the extent that any individual client payers are identified that have deteriorated in credit quality, the Company establishes allowances based on the individual risk characteristics of such customers.

Patients

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

Uninsured patients are billed based on established patient fee schedules or fees negotiated with physicians on behalf of their patients. Insured patients (includes coinsurance and deductible responsibilities) are billed based on fees negotiated with healthcare insurers. Collection of billings from patients is subject to credit risk and ability of the patients to pay. Net revenues consist of amounts billed net of discounts provided to uninsured patients in accordance with the Company’s policies and implicit price concessions. Implicit price concessions represent differences between amounts billed and the estimated consideration the Company expects to receive from patients, which considers historical collection experience (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.

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:


	Year Ended December 31,
	2020		2019		2018
Healthcare insurers:
Fee-for-service	34	%	33	%	32	%
Capitated	3		3		3
Total healthcare insurers	37		36		35
Government payers	11		15		16
Client payers	38		32		32
Patients	11		13		13
Total DIS	97		96		96
DS	3		4		4
Net revenues	100	%	100	%	100	%

For the years ended December 31, 2020, 2019 and 2018, 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, 2020 and 2019 was as follows:


	2020	2019

Healthcare insurers	34%	22%
Government payers	6	11
Client payers	46	42
Patients (including coinsurance and deductible responsibilities)	11	20
Total DIS	97	95
DS	3	5
Net accounts receivable	100%	100%

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

The following table summarizes the activity for the Company's allowance for credit losses during the year ended December 31, 2020, which principally relates to client payers:


	Allowance for Credit Losses

Balance, January 1, 2020	$	15
Provision for credit losses	19
Write-offs of accounts receivable, net of recoveries	(6)
Balance, December 31, 2020	$	28

4. EARNINGS PER SHARE

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


	2020		2019		2018
Amounts attributable to Quest Diagnostics’ common stockholders:
Income from continuing operations	$	1,431	$	838	$	736
Income from discontinued operations, net of taxes	—		20		—
Net income attributable to Quest Diagnostics' common stockholders	$	1,431	$	858	$	736

Income from continuing operations	$	1,431	$	838	$	736
Less: Earnings allocated to participating securities	6		3		3
Earnings available to Quest Diagnostics’ common stockholders – basic and diluted	$	1,425	$	835	$	733

Weighted average common shares outstanding – basic	134		134		136
Effect of dilutive securities:
Stock options and performance share units	2		2		3
Weighted average common shares outstanding – diluted	136		136		139

Earnings per share attributable to Quest Diagnostics’ common stockholders - basic:
Income from continuing operations	$	10.62	$	6.21	$	5.39
Income from discontinued operations	—		0.15		—
Net income	$	10.62	$	6.36	$	5.39

Earnings per share attributable to Quest Diagnostics’ common stockholders - diluted:
Income from continuing operations	$	10.47	$	6.13	$	5.29
Income from discontinued operations	—		0.15		—
Net income	$	10.47	$	6.28	$	5.29

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


	2020	2019	2018

Stock options and performance share units	1	3	2

5. RESTRUCTURING ACTIVITIES

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

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 price concessions; further digitizing the business; standardization and automation; and optimization initiatives in the areas of lab network and patient service center network. The Invigorate program is intended to partially offset reimbursement pressures and labor and benefit cost increases; free up additional resources to invest in science, innovation and other growth initiatives; and enable the Company to improve service quality and operating profitability.

Restructuring Charges

The following table provides a summary of the Company's pre-tax restructuring charges for the years ended December 31, 2020, 2019 and 2018:


	2020		2019		2018

Employee separation costs	$	14	$	(3)	$	45
Facility-related costs	—		1		4
Asset impairment charges	—		—		2

Total restructuring charges	$	14	$	(2)	$	51

The restructuring charges incurred for the year ended December 31, 2020 and 2018 were primarily associated with various workforce reduction initiatives as the Company continued to simplify and restructure its organization. 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. Of the total restructuring charges incurred during the year ended December 31, 2020, $9 million and $5 million were recorded in cost of services and selling, general and administrative expenses, respectively. 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.

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 2020 and 2019, which is included in accrued expenses in Note 12:


	Employee Separation Costs		Facility-Related Costs		Total

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
Income statement expense	14		—		14
Cash payments	(16)		—		(16)

Balance, December 31, 2020	$	7	$	—	$	7

6. BUSINESS ACQUISITIONS

2020 Acquisitions

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

During 2020, the Company completed acquisitions for an aggregate purchase price of $330 million, net of cash acquired, including the acquisitions discussed below. The 2020 acquisitions resulted in goodwill of $247 million, of which $210 million is deductible for tax purposes. These acquisitions also resulted in $146 million of intangible assets, principally comprised of customer-related and technology intangible assets. Net revenues attributable to the 2020 acquisitions were $127 million for the year ended December 31, 2020.

Acquisition of Blueprint Genetics Oy

On January 21, 2020, the Company completed its acquisition of Blueprint Genetics Oy ("Blueprint Genetics"), in an all cash transaction for $108 million, net of $3 million cash acquired. Blueprint Genetics is a leading specialty genetic testing company with expertise in gene variant interpretation based on next generation sequencing and proprietary bioinformatics. Through the acquisition, the Company acquired all of Blueprint Genetics' operations. In the fourth quarter of 2020, the Company made an election to treat the acquisition as a taxable business combination for income tax purposes, which resulted in an adjustment to the preliminary purchase price allocation to reverse the previously recorded $11 million deferred tax liability, with a corresponding decrease to goodwill. Based on the final purchase price allocation, the assets acquired and liabilities assumed primarily consist of $66 million of tax-deductible goodwill, $43 million of intangible assets, and $2 million of property, plant and equipment and working capital. The intangible assets primarily consist of technology and customer-related assets which are being amortized over a useful life of 10 years and15 years, respectively.

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

On April 6, 2020, the Company completed its acquisition of select assets which constitute substantially all of the operations of Memorial Hermann Diagnostic Laboratories, the outreach laboratory division of Memorial Hermann Health System ("Memorial Hermann"), in an all cash transaction for $120 million. Memorial Hermann is a not-for-profit health system in Southeast Texas. Based on the preliminary purchase price allocation, which may be revised as additional information becomes available during the measurement period, the assets acquired primarily consist of $27 million of customer-related intangible assets and $93 million of tax-deductible goodwill. The intangible assets are being amortized over a useful life of 15 years.

Acquisition of the Remaining 56% Interest in Mid America Clinical Laboratories, LLC

On August 1, 2020, the Company completed its acquisition of the remaining 56% interest in Mid America Clinical Laboratories, LLC ("MACL") from its joint venture partners in an all cash transaction for $93 million, net of $18 million cash acquired. MACL is the largest independent clinical laboratory provider in Indiana. Prior to the acquisition, the Company accounted for its 44% interest in MACL as an equity method investment, which was remeasured to its fair value of $87 million on the acquisition date, resulting in a gain of $70 million that was recognized in other income (expense), net in the consolidated statements of operations. The fair value of the previously held equity interest was determined using a discounted cash flow analysis that takes into account, among other items, MACL's expected future cash flows, long-term growth rate (1.5%), and a discount rate commensurate with economic risk (7.5%). Based on the preliminary purchase price allocation, which may be revised as additional information becomes available during the measurement period, the assets acquired and liabilities assumed consist of $84 million of goodwill (of which $47 million is tax-deductible), $74 million of intangible assets, $11 million of working capital and $11 million of property, plant and equipment. The intangible assets consist of customer-related assets which are being amortized over a useful life of 15 years. As a result of the acquisition, MACL became a wholly owned subsidiary of the Company.

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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

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 was 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 expense (income), 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 are being amortized over a useful life of 15 years.

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"), a leading national provider of home-based health risk assessments and related services, in an all cash transaction for $142 million, net of $5 million cash acquired, which consisted of cash consideration of $130 million and contingent consideration initially estimated at $12 million. The contingent consideration arrangement was 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 expense (income), net. 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 initially estimated at $5 million. The contingent consideration arrangement was 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 expense (income), net. 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.

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

F-21

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

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.

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, 2020
Assets:
Trading securities	$	67	$	67	$	—	$	—
Cash surrender value of life insurance policies	50		—		50		—

Available-for-sale debt securities	12		—		—		12


Total	$	129	$	67	$	50	$	12

Liabilities:
Deferred compensation liabilities	$	126	$	—	$	126	$	—






Redeemable noncontrolling interest	$	82	$	—	$	—	$	82

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	$	—
Fixed-to-variable interest rate swaps	28		—		28		—
Contingent consideration	7		—		—		7


Total	$	145	$	—	$	138	$	7

Redeemable noncontrolling interest	$	76	$	—	$	—	$	76

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. Changes in the fair value of the deferred compensation obligation are derived using quoted prices in active markets based on the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

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, which were terminated during April 2020 (see Note 15), were classified within Level 2 of the fair value hierarchy, and were model-derived valuations as of a given date in which all significant inputs were 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 had contingent consideration obligations that were to be paid based on the achievement of certain testing volume or revenue benchmarks. As of December 31, 2020, no contingent consideration obligations were outstanding. 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.

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, 2018	$	14
Purchases, additions and issuances	6
Settlements	(1)
Total (gains)/losses included in earnings - realized/unrealized	(12)



Balance, December 31, 2019	7

Settlements	(6)
Total (gains)/losses included in earnings - realized/unrealized	(1)
Balance, December 31, 2020	$	—

The $1 million and $12 million net gains included in earnings associated with the changes in the fair value of contingent consideration for the years ended December 31, 2020 and 2019, respectively, are reported in other operating expense (income), 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, 2020, 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 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, 2020 and 2019, the fair value of the Company’s debt was estimated at $4.6 billion and $5.1 billion, respectively. Principally all of the Company's debt is classified within Level 1 of the fair value hierarchy because the fair value of the debt is estimated based on rates currently offered to the Company with identical terms and maturities, using quoted active market prices and yields, taking into account the underlying terms of the debt instruments.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

8. TAXES ON INCOME

The Company's pre-tax income from continuing operations before equity in earnings of equity method investees consisted of approximately $1.9 billion, $1.1 billion and $0.9 billion from U.S. operations and pre-tax (loss) income of $(7) million, $15 million and $(1) million from foreign operations for the years ended December 31, 2020, 2019 and 2018, respectively.

As a result of the Tax Cuts and Jobs Act, 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 2020, 2019 and 2018 were as follows:


	2020		2019		2018
Current:
Federal	$	300	$	176	$	82
State and local	74		53		26
Foreign	1		3		1
Deferred:
Federal	55		21		66
State and local	29		(4)		10
Foreign	1		(2)		(3)
Total	$	460	$	247	$	182

A reconciliation of the federal statutory income tax rate to the Company's effective income tax rate for 2020, 2019 and 2018 was as follows:


	2020		2019		2018

Tax provision at statutory rate	21.0	%	21.0	%	21.0	%
State and local income taxes, net of federal benefit	4.5		4.6		4.7




Impact of noncontrolling interests	(0.9)		(1.1)		(1.4)

Excess tax benefits on stock-based compensation arrangements	(1.2)		(1.2)		(1.9)
Return to provision true-ups	(0.7)		(1.4)		(1.4)

Change in accounting method	—		—		(1.6)
Impact of equity earnings	0.8		1.1		1.0
Changes in reserves for uncertain tax positions	0.9		1.7		(0.8)
Change in valuation allowances associated with certain net operating losses	0.2		(1.1)		—
Other, net	(0.1)		(0.6)		0.1
Effective tax rate	24.5	%	23.0	%	19.7	%

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 tax 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, 2020 and 2019 were as follows:

F-25

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)


	2020		2019
Non-current deferred tax assets (liabilities):
Accounts receivable reserves	$	71	$	64
Liabilities not currently deductible	146		126
Stock-based compensation	47		35

Basis differences in investments, joint ventures and subsidiaries	(81)		(80)
Net operating loss carryforwards, net of valuation allowance	61		75
Operating lease right-of-use assets	(151)		(129)
Operating lease liabilities	161		139
Depreciation and amortization	(604)		(494)
Total non-current deferred tax liabilities, net	$	(350)	$	(264)

The non-current deferred tax assets (liabilities) disclosure at December 31, 2019 has been adjusted to separately state the gross deferred tax right-of-use asset and related gross deferred tax lease liability recognized in accordance with the new accounting standard for leases adopted on January 1, 2019. As of December 31, 2020 and 2019, non-current deferred tax liabilities of $350 million and $264 million, respectively, are included in other liabilities in the consolidated balance sheet.

As of December 31, 2020, the Company had estimated net operating loss carryforwards for federal and state income tax purposes of $60 million and $1.0 billion, respectively, which expire at various dates through 2040. Estimated net operating loss carryforwards for foreign income tax purposes are $76 million as of December 31, 2020, some of which can be carried forward indefinitely while others expire at various dates through 2040. As of December 31, 2020 and 2019, deferred tax assets associated with net operating loss carryforwards of $94 million and $101 million, respectively, have each been reduced by valuation allowances of $33 million and $26 million, respectively.

Income taxes payable, including those classified as long-term in other liabilities in the consolidated balance sheet as of December 31, 2020 and 2019, were $135 million and $113 million, respectively. Prepaid income taxes were $2 million and $3 million as of December 31, 2020 and 2019, respectively, and were recorded in prepaid expenses and other current assets in the consolidated balance sheet.

The total amount of unrecognized tax benefits as of and for the years ended December 31, 2020, 2019 and 2018 consisted of the following:


	2020		2019		2018

Balance, beginning of year	$	88	$	107	$	115
Additions:
For tax positions of current year	2		2		2
For tax positions of prior years	25		16		11
Reductions:
Changes in judgment	(9)		(3)		(6)
Expirations of statutes of limitations	(4)		(2)		(15)
Settlements	(9)		(32)		—
Balance, end of year	$	93	$	88	$	107

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, certain tax credits and the deductibility of certain expenses and settlement payments.

The total amount of unrecognized tax benefits as of December 31, 2020, that, if recognized, would affect the effective income tax rate is $75 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 $15 million within the next twelve months.

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

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, 2020, 2019 and 2018 was approximately $6 million, $5 million and $1 million, respectively. As of December 31, 2020 and 2019, the Company had approximately $21 million and $17 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 certain 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 2016 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, 2020, 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 2017 - 2020

United States - various states 2002 - 2020

F-27

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

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, 2020, 2019 and 2018 was as follows:


	2020		2019		2018

Depreciation expense	$	258	$	233	$	219
Amortization expense	103		96		90
Depreciation and amortization expense	$	361	$	329	$	309

Interest expense	$	(166)	$	(180)	$	(169)
Interest income	3		5		2
Interest expense, net	$	(163)	$	(175)	$	(167)

Interest paid	$	201	$	192	$	174
Income taxes paid	$	360	$	202	$	84

Accounts payable associated with capital expenditures	$	46	$	26	$	11
Accounts payable associated with purchases of treasury stock	$	—	$	—	$	3
Dividend payable	$	76	$	71	$	71

Businesses acquired:
Fair value of assets acquired	$	368	$	63	$	453
Fair value of liabilities assumed	17		—		7
Fair value of net assets acquired	351		63		446
Merger consideration payable	—		(5)		(19)
Cash paid for business acquisitions	351		58		427
Less: Cash acquired	21		—		6
Business acquisitions, net of cash acquired	$	330	$	58	$	421


	2020		2019		2018
Leases:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	185	$	180
Operating cash flows from finance leases	$	3	$	3
Financing cash flows from finance leases	$	3	$	4
Leased assets obtained in exchange for new operating lease liabilities	$	219	$	164
Leased assets obtained in exchange for new finance lease liabilities (a)	$	—	$	1	$	1

(a) For the year ended December 31, 2018, leased assets obtained in exchange for new finance lease liabilities reflects information prior to the adoption of the new accounting standard for leases on January 1, 2019. See Note 14 for further discussion of the Company's accounting for leases.

F-28

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

10. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment as of December 31, 2020 and 2019 consisted of the following:


	2020		2019

Land	$	42	$	25
Buildings and improvements	526		341
Laboratory equipment and furniture and fixtures	1,974		1,788
Leasehold improvements	666		639
Computer software developed or obtained for internal use	1,209		1,106
Construction-in-progress	202		330
	4,619		4,229
Less: Accumulated depreciation and amortization	(2,992)		(2,776)
Total	$	1,627	$	1,453

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

11. GOODWILL AND INTANGIBLE ASSETS

The changes in goodwill for the years ended December 31, 2020 and 2019 were as follows:


	2020		2019

Balance, beginning of year	$	6,619	$	6,563
Goodwill acquired during the year	247		43
Adjustments to goodwill	7		13
Balance, end of year	$	6,873	$	6,619

Principally all of the Company’s goodwill as of December 31, 2020 and 2019 was associated with its DIS business.

For the year ended December 31, 2020, goodwill acquired during the period was principally associated with the acquisitions of Blueprint Genetics, Memorial Hermann and MACL (see Note 6). For the year ended December 31, 2020, adjustments to goodwill related to foreign currency translation.

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).

Intangible assets as of December 31, 2020 and 2019 consisted of the following:

F-29

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)


	Weighted Average Amortization Period (in years)		2020									2019
		Cost			Accumulated Amortization			Net			Cost			Accumulated Amortization			Net
Amortizing intangible assets:
Customer-related	17		$	1,479		$	(638)		$	841		$	1,367		$	(556)		$	811
Non-compete agreements	9		3			(2)			1			3			(2)			1
Technology	15		141			(65)			76			104			(56)			48
Other	9		108			(95)			13			110			(85)			25
Total	17		1,731			(800)			931			1,584			(699)			885

Intangible assets not subject to amortization:
Trade names			235			—			235			235			—			235
Other			1			—			1			1			—			1
Total intangible assets			$	1,967		$	(800)		$	1,167		$	1,820		$	(699)		$	1,121

The estimated amortization expense related to amortizable intangible assets for each of the five succeeding fiscal years and thereafter as of December 31, 2020 is as follows:


Year Ending December 31,
2021	$	101
2022	98
2023	96
2024	93
2025	92
Thereafter	451
Total	$	931

12. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses as of December 31, 2020 and 2019 consisted of the following:


	2020		2019

Accrued wages and benefits (including incentive compensation)	$	502	$	287
Trade accounts payable	446		263
Accrued expenses	356		223
Overdrafts	153		88
Dividend payable	76		71
Income taxes payable	43		27
Accrued insurance	31		30
Accrued interest	26		45
Merger consideration payable	—		7
Total	$	1,633	$	1,041

F-30

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, 2020 and 2019 consisted of the following:


	2020		2019

4.75% Senior Notes due January 2020	$	—	$	500
2.50% Senior Notes due March 2020	—		300
4.70% Senior Notes due April 2021	—		554
4.25% Senior Notes due April 2024	316		308
3.50% Senior Notes due March 2025	622		593
3.45% Senior Notes due June 2026	512		490
4.20% Senior Notes due June 2029	499		499
2.95% Senior Notes due June 2030	798		798
2.80% Senior Notes due June 2031	549		—
6.95% Senior Notes due July 2037	175		175
5.75% Senior Notes due January 2040	245		245
4.70% Senior Notes due March 2045	300		300
Other	27		34
Debt issuance costs	(28)		(26)
Total long-term debt	4,015		4,770
Less: Current portion of long-term debt	2		804
Total long-term debt, net of current portion	$	4,013	$	3,966

Secured Receivables Credit Facility

On October 22, 2020, the Company amended the agreement for its $600 million secured receivables credit facility (the “Secured Receivables Credit Facility”), previously amended in October 2019, to extend the maturity dates for each underlying commitment by one year, while 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 2021 and a $250 million loan commitment maturing October 2022, and can issue up to $100 million of letters of credit (see Note 18) through October 2022. Borrowings under the Secured Receivables Credit Facility are collateralized by certain domestic receivables. As of December 31, 2020, interest on the borrowings under the Secured Receivables Credit Facility was based on either commercial paper rates for highly-rated issuers or LIBOR, plus a spread of 0.825% to 0.95%. The Secured Receivables Credit Facility is subject to customary affirmative and negative covenants and certain financial covenants with respect to the receivables that comprise the borrowing base and secure the borrowings under the facility. As of both December 31, 2020 and 2019, there were no outstanding borrowings under the Secured Receivables Credit Facility.

F-31

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

Senior Unsecured Revolving Credit Facility

The Company is party to a $750 million senior unsecured revolving credit facility (the “Credit Facility” or "Senior Unsecured Revolving Credit Facility") which matures 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 Credit 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 and its leverage ratio. 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, 2020 and 2019, 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. In April 2020, the Company amended the Credit Facility to provide increased covenant flexibility. As amended, the leverage ratio covenant (as defined in the Credit Facility) was increased as follows:


As of:						Applicable Covenant:

December 31, 2020						no more than 6.5 times EBITDA
March 31, 2021						no more than 6.25 times EBITDA
June 30, 2021						no more than 4.5 times EBITDA

Thereafter, the leverage ratio covenant reverts to no more than 3.5 times EBITDA. During the period that the increased covenant applies, which period may be terminated early by the Company provided that the Company is in compliance with the historical 3.5 times EBITDA leverage ratio, the amended Credit Facility contains certain additional limitations and restrictions including, but not limited to, repurchases of the Company's common stock, the amount of funds that can be used on business acquisitions, the incurrence of secured indebtedness and the payment of dividends.

As of both December 31, 2020 and 2019, there were no outstanding borrowings under the Senior Unsecured Revolving Credit Facility.

As of December 31, 2020, the Company was in compliance with all covenants for its credit facilities. As of December 31, 2020, the Company had $1.3 billion of borrowing capacity available under the facilities, including $530 million available under the Secured Receivables Credit Facility and $750 million available under the Senior Unsecured Revolving Credit Facility.

F-32

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

Senior Notes Offerings

In May 2020, the Company completed a senior notes offering, consisting of $550 million aggregate principal amount of 2.80% senior notes due June 2031 (the “2031 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 2031 Senior Notes, which are included as a reduction to the carrying amount of long-term debt and which are being amortized over the term of the related debt.

During November 2020, the net proceeds from the 2031 Senior Notes, along with cash on hand, were used to redeem in full the outstanding indebtedness under the Company's senior notes due April 2021.

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 are included as a reduction to the carrying amount of long-term debt and which are 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.

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 are included as a reduction to the carrying amount of long-term debt and which are 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.

For the year ended December 31, 2020, the Company recorded a loss on retirement of debt, principally comprised of premiums paid, of $9 million in other income (expense), net.

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 ("the par value redemption option"). 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.

F-33

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

Maturities of Long-Term Debt

As of December 31, 2020, long-term debt matures as follows:


Year Ending December 31,
2021	$	2
2022	1
2023	1
2024	302
2025	602
Thereafter	3,095
Total maturities of long-term debt	4,003
Unamortized discount	(11)
Debt issuance costs	(28)
Fair value basis adjustments attributable to hedged debt	51
Total long-term debt	4,015
Less: Current portion of long-term debt	2
Total long-term debt, net of current portion	$	4,013

F-34

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, 2020 and 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 to 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 16 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.

The Company's assets and liabilities for its lease agreements as of December 31, 2020 and 2019 were as follows:


Leases	Balance Sheet Classification	2020		2019
Assets
Operating	Operating lease right-of-use assets	$	604	$	518
Finance	Property, plant and equipment, net (a)	22		35
Total lease assets		$	626	$	553

Liabilities
Current:
Operating	Current portion of long-term operating lease liabilities	$	141	$	145
Finance	Current portion of long-term debt	2		3
Non-current:
Operating	Long-term operating lease liabilities	499		413
Finance	Long-term debt	25		30
Total lease liabilities		$	667	$	591

(a) Finance lease assets as of December 31, 2020 and 2019 were recorded net of accumulated amortization of $14 million and $24 million, respectively.

F-35

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

Components of lease cost for the years ended December 31, 2020 and 2019 were as follows:


Lease cost	2020		2019

Operating lease cost (a)	$	300	$	294
Finance lease cost:

Amortization of leased assets	6		7
Interest on lease liabilities	3		3
Net lease cost	$	309	$	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 each of the years ended December 31, 2020 and 2019.

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

The maturity of the Company's lease liabilities as of December 31, 2020 is as follows:


Maturity of lease liabilities	Operating leases		Finance leases		Total
2021	$	160	$	4	$	164
2022	140		3		143
2023	122		3		125
2024	87		3		90
2025	57		3		60
Thereafter	153		28		181
Total lease payments	719		44		763
Less: Interest	79		17		96
Present value of lease liabilities	$	640	$	27	$	667

Lease term and discount rate as of December 31, 2020 and 2019 were as follows:


Lease term and discount rate	2020		2019
Weighted-average remaining lease term (years):
Operating leases	6		5
Finance leases	13		12

Weighted-average discount rate:
Operating leases	3.2	%	3.4	%
Finance leases	8.1	%	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, 2020 and 2019.

F-36

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

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.

During March 2020, the Company entered into a forward-starting interest rate swap agreement with a financial institution for a total notional amount of $25 million. Additionally, during May 2020, the Company entered into interest rate lock agreements with several financial institutions for a total notional amount of $275 million. The forward-starting interest rate swap agreement and the interest rate lock agreements were entered into in order 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 an anticipated issuance of debt and were accounted for as cash flow hedges. In connection with the issuance of the 2031 Senior Notes (see Note 13), these agreements were settled and the Company received net proceeds of $1 million. The net gain is deferred in stockholders' equity, net of taxes, as a component of accumulated other comprehensive loss, and is being 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 $1 million and $4 million as of December 31, 2020 and 2019, 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 $1 million.

Interest Rate Derivatives – Fair Value Hedges

As of December 31, 2019, the Company had various fixed-to-variable interest rate swap agreements outstanding with an aggregate notional amount of $1.2 billion, which were entered into in order to convert a portion of the Company's long-term debt into variable interest rate debt. In April 2020, the Company terminated these existing fixed-to-variable interest rate swap agreements and received proceeds of $40 million. Such amount was reflected as a basis adjustment to the hedged debt instruments and is being amortized as a reduction of interest expense, net over their remaining terms.

As of December 31, 2020 and 2019, 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, 2020		December 31, 2020		December 31, 2019		December 31, 2019
Long-term debt	$	—	$	51	$	1,186	$	(3)

(a) As of December 31, 2020, the entire balance is associated with remaining unamortized hedging adjustments on discounted relationships. As of December 31, 2019, the balance includes $25 million of remaining unamortized hedging adjustments on discontinued relationships.

F-37

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

The following table presents the effect of fair value hedge accounting on the consolidated statements of operations for the years ended December 31, 2020, 2019 and 2018, respectively:



	2020		2019		2018
	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	$	76	$	20	$	(8)

Gain (loss) on fair value hedging relationships:
Hedged items (Long-term debt)	$	(68)	$	(65)	$	4
Derivatives designated as hedging instruments	$	68	$	65	$	(4)

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


	December 31, 2019
		Balance Sheet Classification	Fair Value
Derivatives Designated as Hedging Instruments





Fixed-to-variable interest rate swap agreements		Other liabilities	$	28

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

Under the Company's Restated Certificate of Incorporation the number of authorized shares of common stock, par value $0.01 per share, is 600 million shares.

Changes in Accumulated Other Comprehensive Loss by Component

Comprehensive income (loss) includes:

Foreign currency translation adjustments;
Net changes in available-for-sale debt securities, 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 represent 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).

For the years ended December 31, 2020, 2019, and 2018, the tax effects related to the deferred gains (losses) on cash flow hedges and net changes in available-for-sale debt securities 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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

The changes in accumulated other comprehensive loss by component for 2020, 2019 and 2018 were as follows:


	Foreign Currency Translation Adjustments		Net Changes in Available-for-Sale Debt Securities		Net Deferred Losses on Cash Flow Hedges, net of tax		Other		Accumulated Other Comprehensive Loss

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)
Other comprehensive income before reclassifications	12		—		1		—		13
Amounts reclassified from accumulated other comprehensive loss	3		—		2		—		5
Net current period other comprehensive income	15		—		3		—		18

Balance, December 31, 2020	$	(27)	$	8	$	(1)	$	(1)	$	(21)

For the years ended December 31, 2020, 2019 and 2018, the gross deferred losses on cash flow hedges were reclassified from accumulated other comprehensive loss to interest expense, net.

For the years ended December 31, 2020 and 2018, foreign currency translation adjustment amounts were reclassified from accumulated other comprehensive loss to other operating expense (income), net as a result of the sale of foreign subsidiaries.

Dividend Program

During each of the four quarters of 2020, the Company's Board of Directors declared a quarterly cash dividend of $0.56 per common share. 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. On February 4, 2021, the Company announced that its Board of Directors authorized a 10.7% increase in its quarterly cash dividend from $0.56 to $0.62 per share, or $2.48 per share annually, commencing with the dividend payable in April 2021.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

Share Repurchase Program

As of December 31, 2020, $0.9 billion remained available under the Company’s share repurchase authorization. In February 2021, the Company's Board of Directors authorized the Company to repurchase an additional $1 billion of the Company's common stock. The share repurchase authorization has no set expiration or termination date.

Share Repurchases

For the year ended December 31, 2020, the Company repurchased 2.7 million shares of its common stock for $325 million.

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.

Shares Reissued from Treasury Stock

For the years ended December 31, 2020, 2019 and 2018 the Company reissued 3 million shares, 2 million shares and 3 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, 2020 and 2019, the redeemable noncontrolling interest was $82 million and $76 million, respectively, and was presented at its fair value.

17. STOCK OWNERSHIP AND COMPENSATION PLANS

Employee and Non-employee Directors Stock Ownership Programs

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. Under the ELTIP, awards 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 units, the actual amount of shares earned is based on the achievement of the performance goals specified in the awards. The performance goals for awards granted for 2018 and 2019 were based on the financial performance of the Company. The performance goals for awards granted in 2020 were based on the financial performance of the Company as well as relative TSR. The maximum number of shares of Company common stock in respect of which awards may be granted under the ELTIP is approximately 79 million shares.

The DLTIP provides for the grant to non-employee directors of non-qualified stock options to purchase shares of Company common stock at an exercise price no less than the fair market value of the Company's common stock on the date of grant. The DLTIP also permits awards of restricted stock and restricted stock units to non-employee directors. Stock options

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

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, 2020, 2019 and 2018, grants under the DLTIP totaled 14 thousand shares, 14 thousand shares and 15 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:


	2020	2019	2018

Fair value at grant date	$17.25	$14.30	$18.14
Expected volatility	20.3%	20.4%	19.1%
Dividend yield	2.0%	2.4%	1.9%
Risk-free interest rate	1.5%	2.5%	2.8%
Expected holding period, in years	5.0	5.2	5.3

The following summarizes the activity relative to stock option awards for 2020:


	Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value

Options outstanding, beginning of year	8.0	$	81.67
Options granted	1.1	112.23
Options exercised	(2.6)	72.57

Options outstanding, end of year	6.5	$	90.32	6.7	$	187

Exercisable, end of year	3.9	$	83.72	5.6	$	138
Vested and expected to vest, end of year	6.4	$	90.14	6.7	$	185

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 2020 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, 2020. This amount changes based on the fair market value of the Company's common stock. Total intrinsic value of options exercised in 2020, 2019 and 2018 was $113 million, $62 million and $67 million, respectively.

As of December 31, 2020, there was $9 million of unrecognized stock-based compensation cost related to nonvested stock options which is expected to be recognized over a weighted average period of 1.6 years.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

The fair value of restricted stock awards and restricted stock units is the average market price of the Company's common stock at the date of grant. For performance share units with a goal based on the financial performance of the Company, the fair value is based on the average market price of the Company's common stock at the date of grant, adjusted for the present value of dividends expected to be paid on the Company's common stock during the vesting period. For performance share units with a market-based relative TSR goal, the fair value is estimated on the date of grant using a Monte Carlo valuation model. The expected volatility under the Monte Carlo valuation model is based on the historical volatility of the common stock of the Company and the common stock of the companies in the peer index. The dividend yield is based on the approved annual dividend rate in effect and current market price of the underlying common stock at the time of grant. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for bonds with maturities consistent with the performance period of the related award.

The weighted average assumptions used in valuing performance share units in 2020 with a market-based relative TSR goal were:


Fair value at grant date			$144.03
Expected volatility			20.1%
Dividend yield			2.0%
Risk-free interest rate			1.4%

The following summarizes the activity relative to stock awards, including restricted stock units and performance share units, for 2020, 2019 and 2018:


	2020			2019			2018
	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	1.0	$	93.30	1.1	$	88.13	1.3	$	77.90
Shares granted	0.4	112.43		0.4	86.28		0.4	103.51
Shares vested	(0.4)	96.36		(0.4)	75.58		(0.5)	74.00
Shares forfeited and canceled	—	—		(0.1)	94.09		(0.1)	90.16

Shares outstanding, end of year	1.0	$	100.12	1.0	$	93.30	1.1	$	88.13

As of December 31, 2020, there was $29 million of unrecognized stock-based compensation cost related to nonvested stock awards, which is expected to be recognized over a weighted average period of 1.5 years. Total fair value of shares vested was $37 million, $40 million and $54 million for the years ended December 31, 2020, 2019 and 2018, respectively. For performance share units with a goal based on financial performance of the Company, 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, 2020, 2019 and 2018, stock-based compensation expense totaled $97 million, $56 million and $61 million, respectively. Income tax benefits recognized in the consolidated statements of operations related to stock-based compensation expense totaled $39 million, $27 million and $33 million for the years ended December 31, 2020, 2019 and 2018, respectively, which includes excess tax benefits associated with stock-based compensation arrangements of $23 million, $13 million and $18 million for the years ended December 31, 2020, 2019 and 2018, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

Employee Stock Purchase Plan

Under the Company's ESPP, substantially all employees can elect to have up to 10% of their annual wages withheld to purchase Quest Diagnostics common stock. The purchase price of the stock is 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 225 thousand shares, 269 thousand shares and 326 thousand shares of common stock were purchased by eligible employees in 2020, 2019 and 2018, 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. During 2020, the Company temporarily suspended matching contributions for certain qualified defined contribution plans; matching contributions were reinstated in the third quarter of 2020. The Company's expense for contributions to its defined contribution plans aggregated $64 million, $84 million and $78 million for 2020, 2019 and 2018, respectively.

Supplemental Deferred Compensation Plans

The Company has a supplemental deferred compensation plan that is an unfunded, non-qualified plan that provides for certain management and highly compensated employees to defer up to 50% of their salary in excess of their defined contribution plan limits and for certain eligible employees, up to 95% of their variable incentive compensation. The maximum Company matching contribution is 5% of eligible employee compensation. During 2020, the Company temporarily suspended matching contributions; matching contributions were reinstated in the third quarter of 2020. 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 $67 million and $59 million as of December 31, 2020 and 2019, respectively. Although the Company is currently contributing all participant deferrals and matching amounts to a trust, the funds in this trust, totaling $67 million and $59 million as of December 31, 2020 and 2019, 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. 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 $59 million and $51 million as of December 31, 2020 and 2019, 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 $50 million and $43 million as of December 31, 2020 and 2019, respectively.

For each of the years ended December 31, 2020, 2019 and 2018, 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, $70 million in letters of credit under the Secured Receivables Credit Facility were outstanding as of December 31, 2020. The letters of credit primarily represent collateral for current and future automobile liability and workers’ compensation loss payments.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

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, 2020, the approximate total future purchase commitments are $334 million, of which $106 million are expected to be incurred in 2021, $103 million are expected to be incurred in 2022 through 2023 and the balance thereafter.

Billing and Collection Agreement

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

Contingent Lease Obligations

The Company remains subject to contingent obligations under certain real estate leases, including real estate leases that were entered into by certain predecessor companies of a subsidiary prior to the Company's acquisition of the subsidiary. While over the course of many years, the title to certain properties and interest in the subject leases have been transferred to third parties and the subject leases have been amended several times by such third parties, the lessors have not formally released the subsidiary predecessor companies from their original obligations under the leases and therefore remain contingently liable in the event of default. The remaining terms of the lease obligations and the Company's corresponding indemnifications range up to 27 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.

Certain Legal Matters

The Company may incur losses associated with these proceedings and investigations, but it is not possible to estimate the amount of loss or range of loss, if any, that might result from adverse judgments, settlements, fines, 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. The Company has insurance coverage rights in place (limited in amount; subject to deductible) for certain potential costs and liabilities related to these proceedings and investigations.

401(k) Plan Lawsuit

In 2020, two putative class action lawsuits were filed in the U.S. District Court for the District of New Jersey against the Company and other defendants with respect to the Company’s 401(k) plan. The complaint alleges, among other things, that the fiduciaries of the 401(k) plan breached their duties by failing to disclose the expenses and risks of plan investment options, allowing unreasonable administration expenses to be charged to plan participants, and selecting and retaining high cost and poor performing investments. In October 2020, the court consolidated the two lawsuits under the caption In re: Quest Diagnostics ERISA Litigation and plaintiffs filed a consolidated amended complaint. The Company plans to vigorously defend this matter and has filed a motion to dismiss the complaint.

AMCA Data Security Incident

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

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. The bankruptcy proceeding has been dismissed.

Numerous putative class action lawsuits were filed against the Company related to the AMCA Data Security Incident. The U.S. Judicial Panel on Multidistrict Litigation transferred the cases still pending to, and consolidated them for pre-trial proceedings in, the U.S. District Court for New Jersey. In November 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. In January 2020, the Company moved to dismiss the consolidated complaint; the motion to dismiss is pending.

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.

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 consolidated results of operations or cash flows in the period in which the impact of such matters is determined or paid.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

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, 2020, 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, 2020 and December 31, 2019.

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 $138 million and $132 million as of December 31, 2020 and December 31, 2019, respectively. Management believes that established reserves and present insurance coverage are sufficient to cover currently estimated exposures.

19. BUSINESS SEGMENT INFORMATION

The Company's DIS business is the only reportable segment based on the manner in which the Chief Executive Officer, who is the Company's chief operating decision maker ("CODM"), assesses performance and allocates resources across the organization. The DIS business provides diagnostic information services to a broad range of customers, including patients, clinicians, hospitals, IDNs, health plans, employers, ACOs, and DCEs. 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 2020, 2019 and 2018.

All other operating segments include the Company's DS businesses, which consist 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, 2020, 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(in millions unless otherwise indicated)

The following table is a summary of segment information for the years ended December 31, 2020, 2019 and 2018. 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.


	2020		2019		2018
Net revenues:
DIS business	$	9,139	$	7,405	$	7,204
All other operating segments	298		321		327
Total net revenues	$	9,437	$	7,726	$	7,531

Operating earnings (loss):
DIS business	$	2,201	$	1,298	$	1,235
All other operating segments	39		42		47
General corporate activities	(269)		(109)		(181)
Total operating income	1,971		1,231		1,101
Non-operating expenses, net	(87)		(155)		(175)
Income from continuing operations before income taxes and equity in earnings of equity method investees	1,884		1,076		926
Income tax expense	(460)		(247)		(182)
Equity in earnings of equity method investees, net of taxes	75		57		44
Income from continuing operations	1,499		886		788
Income from discontinued operations, net of taxes	—		20		—
Net income	1,499		906		788
Less: Net income attributable to noncontrolling interests	68		48		52
Net income attributable to Quest Diagnostics	$	1,431	$	858	$	736

Depreciation and amortization expense for the years ended December 31, 2020, 2019 and 2018 were as follows:


	2020		2019		2018

DIS business	$	249	$	226	$	213
All other operating segments	8		6		6
General corporate	104		97		90



Total depreciation and amortization	$	361	$	329	$	309

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(in millions unless otherwise indicated)

Capital expenditures for the years ended December 31, 2020, 2019 and 2018 were as follows:


	2020		2019		2018

DIS business	$	394	$	373	$	330
All other operating segments	15		20		16
General corporate	9		7		37



Total capital expenditures	$	418	$	400	$	383

Net revenues by major service for the years ended December 31, 2020, 2019 and 2018 were as follows:


	2020		2019		2018

Routine clinical testing services	$	3,836	$	4,206	$	4,217
COVID-19 testing services	2,723		—		—
Gene-based and esoteric (including advanced diagnostics) testing services	2,098		2,620		2,409
Anatomic pathology testing services	482		579		578
All other	298		321		327
Total net revenues	$	9,437	$	7,726	$	7,531

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, 2020, 2019 and 2018, the Company recognized net revenues of $34 million, $35 million, and $36 million, respectively, associated with diagnostic information services provided to its equity method investees. As of December 31, 2020 and 2019, there was $3 million and $4 million, respectively, of accounts receivable from equity method investees related to such services. During the years ended December 31, 2020 and 2019, the Company recognized net revenues of $3 million and $8 million, respectively, 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 in the consolidated balance sheet related to such services.

During the years ended December 31, 2020, 2019 and 2018, the Company recognized income of $16 million, $15 million and $15 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, 2020 and 2019, there was $3 million and $1 million, respectively, of other receivables from equity method investees included in prepaid expenses and other current assets in the consolidated balance sheet related to these service agreements and other transition related items. In addition, accounts payable and accrued expenses in the consolidated balance sheet as of December 31, 2020 and 2019 included $1 million and $2 million, respectively, due to equity method investees.

During the years ended December 31, 2020, 2019 and 2018, the Company received dividends from its equity method investees of $54 million, $48 million, and $74 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.

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.

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

Quarterly Operating Results (unaudited)

(in millions, except per share data)


2020 (a)	First Quarter		Second Quarter		Third Quarter		Fourth Quarter		Total Year
	(b)		(c)		(d)		(e)		(f)
Net revenues	$	1,822	$	1,827	$	2,786	$	3,002	$	9,437
Gross profit	552		606		1,206		1,269		3,633



Income from continuing operations	106		193		591		609		1,499
Income from discontinued operations, net of taxes	—		—		—		—		—
Net income	106		193		591		609		1,499
Less: Net income attributable to noncontrolling interests	7		8		23		30		68
Net income attributable to Quest Diagnostics	$	99	$	185	$	568	$	579	$	1,431






Earnings per share attributable to Quest Diagnostics' common stockholders - basic:
Income from continuing operations	$	0.74	$	1.38	$	4.20	$	4.28	$	10.62
Income from discontinued operations	—		—		—		—		—
Net income	$	0.74	$	1.38	$	4.20	$	4.28	$	10.62

Earnings per share attributable to Quest Diagnostics' common stockholders - diluted:
Income from continuing operations	$	0.73	$	1.36	$	4.14	$	4.21	$	10.47
Income from discontinued operations	—		—		—		—		—
Net income	$	0.73	$	1.36	$	4.14	$	4.21	$	10.47


2019 (a)	First Quarter		Second Quarter		Third Quarter		Fourth Quarter		Total Year
	(g)		(h)		(i)		(j)
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

F-49

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 through 2019, at which point certain income tax contingencies related to NID were resolved (see Note 21 to the audited consolidated financial statements).

(b)Included pre-tax amortization expense of $28 million ($25 million in amortization of intangible assets and $3 million in equity in earnings of equity method investees, net of taxes); pre-tax charges of $16 million ($7 million in cost of services and $9 million in selling, general and administrative expenses), primarily associated with systems conversions and integration incurred in connection with further restructuring and integrating the Company; and pre-tax charges of $9 million ($1 million in cost of services, $3 million in selling, general and administrative expenses and $5 million in other operating expense (income), net), associated with certain costs incurred as a result of the COVID-19 pandemic and resulting impact on the economy including incremental costs incurred primarily to protect the health and safety of the Company's employees and customers and to transition certain employees to a remote work environment, and certain asset impairment charges; partially offset by excess tax benefits associated with stock-based compensation arrangements of $8 million recorded in income tax expense.

(c)Included pre-tax amortization expense of $28 million ($25 million in amortization of intangible assets and $3 million in equity in earnings of equity method investees, net of taxes); and pre-tax charges of $9 million ($3 million in cost of services and $6 million in selling, general and administrative expenses), representing costs primarily associated with systems conversions and integration incurred in connection with further restructuring and integrating the Company; partially offset by a pre-tax gain of $26 million (charges of $34 million in cost of services and $5 million in selling, general and administrative expenses, offset by a $62 million gain in other operating expense (income), net, and a $3 million gain in equity in earnings of equity method investees, net of taxes), representing certain items resulting from the COVID-19 pandemic, including expense associated with a payment to eligible employees to help offset expenses they incurred as a result of COVID-19, incremental costs incurred primarily to protect the health and safety of the Company's employees and customers, and certain impairment charges, which were more than offset by $65 million of income recognized attributable to the receipt of the initial tranche of funds from the government that were appropriated to healthcare providers under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"); and excess tax benefits associated with stock-based compensation arrangements of $4 million recorded in income tax expense.

(d)Included net pre-tax charges of $69 million (charges of $3 million in cost of services, $65 million in other operating expense (income), net, and $1 million in equity in earnings of equity method investees, net of taxes), representing the impact of certain items resulting from the COVID-19 pandemic, including incremental costs incurred primarily to protect the health and safety of the Company's employees and customers and the reversal of $65 million of income previously recognized during the second quarter of 2020 attributable to the receipt of funds from the government that were appropriated to healthcare providers under the CARES Act; pre-tax amortization expense of $30 million ($27 million in amortization of intangible assets and $3 million in equity in earnings of equity method investees, net of taxes); and pre-tax charges of $18 million ($11 million in cost of services and $7 million in selling, general and administrative expenses), representing costs primarily associated with systems conversions and integration incurred in connection with further restructuring and integrating the Company; partially offset by a pre-tax gain of $70 million recognized in other income (expense), net upon the acquisition of the remaining 56% interest in Mid America Clinical Laboratories, LLC as a result of the remeasurement of the Company's previously held equity interest to fair value; and excess tax benefits associated with stock-based compensation arrangements of $3 million recorded in income tax expense.

(e)Included pre-tax amortization expense of $28 million ($26 million in amortization of intangible assets and $2 million in equity in earnings of equity method investees, net of taxes); pre-tax charges of $20 million (charges of $19 million in cost of services, $2 million in selling, general and administrative expenses and $1 million in other operating expense (income), net, partially offset by a $2 million gain in equity in earnings of equity method investees, net of taxes), representing the impact of certain items resulting from the COVID-19 pandemic, principally including expense associated with payments to eligible employees to help offset expenses they incurred as a result of COVID-19 and incremental costs incurred primarily to protect the health and safety of the Company's employees and customers; and pre-tax charges of $15 million ($6 million in cost of services and $9 million in selling, general and administrative expenses), primarily associated with systems conversions and integration incurred in connection with further restructuring and integrating the Company; partially offset by a pre-tax gain of $2 million ($2 million of charges in selling, general and administrative expenses and a $10 million loss in other income (expense), net, offset by a $14 million gain in equity in earnings of equity method investees, net of taxes) related to costs associated with Quest for Health Equity (the Company's recently announced initiative with the Quest

F-50

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

Quarterly Operating Results (unaudited)

(in millions, except per share data)

Diagnostics Foundation to reduce health disparities in underserved communities) and a loss on retirement of debt, which were more than offset by a gain recognized by an equity method investee to adjust certain of its investments to fair value; and excess tax benefits associated with stock-based compensation arrangements of $8 million recorded in income tax expense. In the fourth quarter of 2020, the Company returned the funds received from the government that were appropriated to healthcare providers under the CARES Act.

(f)The sum of basic and diluted earnings per share attributable to Quest Diagnostics' common stockholders for the four quarters of 2020 did not equal the totals for the year ended December 31, 2020 due to quarterly fluctuations in the Company's earnings and weighted average common shares outstanding throughout the period primarily due to the impact of the COVID-19 pandemic on the Company's results and the temporary suspension of repurchases under the Company's share repurchase program.

(g)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 ($11 million in cost of services and $11 million in selling, general and administrative expenses), primarily associated with system conversions and integration incurred in connection with further restructuring and integrating the Company; a pre-tax gain of $8 million ($1 million charge in selling, general and administrative expenses offset by a $9 million gain in other operating expense (income), net), due to non-cash asset impairment charges, which were more than offset by a gain associated with proceeds from an insurance claim for hurricane related losses; and excess tax benefits associated with stock-based compensation arrangements of $3 million recorded in income tax expense.

(h)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 ($11 million in cost of services and $15 million in selling, general and administrative expenses), primarily associated with system conversions and integration incurred in connection with further restructuring and integrating the Company; a pre-tax gain of $6 million in other operating expense (income), 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.

(i)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 ($7 million in cost of services and $9 million in selling, general and administrative expenses), primarily associated with system conversions and integration incurred in connection with further restructuring and integrating the Company; a pre-tax gain of $3 million ($4 million charge in selling, general and administrative expenses, offset by a $7 million gain in other operating expense (income), net), consisting of costs incurred related to the AMCA Data Security Incident, which were more than offset by 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 $3 million recorded in income tax expense.

(j)Includes a pre-tax gain of $72 million ($1 million charge in selling, general and administrative expenses, offset by a $73 million gain in other operating expense (income), net), primarily associated with the sale and leaseback of a property; 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 ($6 million in cost of services and $8 million in selling, general and administrative expenses), primarily associated with system conversions and integration incurred in connection with further restructuring and integrating the Company; and excess tax benefits associated with stock-based compensation arrangements of $2 million recorded in income tax expense.

F-51

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

SCHEDULE II - VALUATION ACCOUNTS AND RESERVES

(in millions)


	Balance at Beginning of Year		Provision for Credit Losses		Net Deductions and Other			Balance at End of Year
2020
Allowance for credit losses	$	15	$	19	$	6	(a)	$	28

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

2018
Doubtful accounts and allowances	$	13	$	6	$	4	(a)	$	15

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

F-52

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