Item 2. 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 an 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.

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.

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.

Third Quarter Highlights

			Three Months Ended September 30,
			2021						2020
			(dollars in millions, except per share data)
Net revenues			$2,774						$2,786
DIS revenues			$2,703						$2,709
Revenue per requisition change			(5.4)%						20.9%
Requisition volume change			5.3%						19.7%
Organic requisition volume change			3.2%						16.6%
DS revenues			$71						$77
Net income attributable to Quest Diagnostics			$505						$568
Diluted earnings per share			$4.02						$4.14
Net cash provided by operating activities			$561						$862

For further discussion of the year-over-year changes for the three months ended September 30, 2021 compared to the three months ended September 30, 2020, see Results of Operations below.

Impact of COVID - 19

As a novel strain of coronavirus (COVID-19) continues to 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. 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 and 2021, our testing volume and revenues were materially impacted by the COVID-19 pandemic.

Beginning in March 2020, we experienced a material decline in base testing volume (which excludes COVID-19 testing) due to the COVID-19 pandemic. 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 may continue to have, an impact on our operating results, financial position and cash flows.

During May and June 2020, we began to experience a recovery in base testing volume, which continued in 2021. The recovery trend stalled somewhat in August 2021, but resumed in September 2021. The recovery has been driven by people returning to the healthcare system as well as contributions from new Professional Laboratory Services offerings. For the first, second and third quarters of 2021, our base testing volume, excluding volume associated with recent acquisitions, was 2.8% below, 1.9% above and 3.8% above our historical first, second and third quarter of 2019 levels, respectively. Recent agreements associated with our Professional Laboratory Services offerings contributed 5.2%, 5.8% and 5.2% volume growth compared to 2019 for the first, second and third quarters of 2021, respectively. Unless there is a change in the severity of the COVID-19 pandemic, we believe that there will be a continued return to healthcare with, in some cases, patients pursuing care delayed during the COVID-19 pandemic.

Beginning in the second quarter of 2020, we experienced growing demand for COVID-19 testing services and we expanded our capacity throughout 2020 in order to satisfy the demand, which has had a significant impact on our testing volumes. During 2021, demand for our COVID-19 testing has generally fluctuated in line with changes in the prevalence of the virus and related variants. We expect demand to trend down through the remainder of 2021.

Additionally, our revenue per requisition has been positively impacted by COVID-19 molecular testing. 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, including the impact of vaccination efforts. 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 as the COVID-19 pandemic moderates over time and the business and social distancing restrictions ease, we may continue to experience similar effects to our businesses, consolidated results of operations, financial position and cash flows. 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.

Acquisition of the Outreach Laboratory Services Business of Mercy Health

On June 1, 2021, we completed the acquisition of the outreach laboratory services business of Mercy Health, which serves providers and patients in Arkansas, Kansas, Missouri and Oklahoma, in an all-cash transaction for $225 million. The acquired business is included in our DIS business.

For further details, see Note 4 to the interim unaudited consolidated financial statements.

Sale of Ownership Interest in Q****2 Solutions® ("Q****2 Solutions") to IQVIA Holdings, Inc. ("IQVIA")

On April 1, 2021, we sold our 40% ownership interest in Q2 Solutions, our clinical trials central laboratory services joint venture, to IQVIA, our joint venture partner, for $760 million in an all-cash transaction. The sales price is subject to customary post-closing adjustments. Prior to the transaction, we accounted for our minority interest as an equity method investment. As a result of the transaction, during the nine months ended September 30, 2021, we recorded a $314 million pre-tax gain in other income, net in the consolidated statement of operations based on the difference between the net sales proceeds and the carrying value of the investment, including $20 million of cumulative translation losses which were previously recorded in accumulated other comprehensive loss. During the nine months ended September 30, 2021, we also recorded $55 million of income tax expense related to the gain, consisting of $127 million of current income tax expense, partially offset by $72 million of deferred income tax benefit.

Under a multi-year agreement, we will remain the strategic preferred laboratory provider for Q2 Solutions' clients, providing a range of lab testing capabilities to augment Q2 Solutions' core offerings and extend its industry leading suite of services.

For further details, see Note 5 to the interim unaudited consolidated financial statements.

Accelerated Share Repurchase Agreements ("ASRs")

In April 2021, we entered into ASRs with several financial institutions to repurchase $1.5 billion of our common stock as part of our share repurchase program. Each of the ASRs was structured to permit us to purchase shares immediately with the final purchase price of those shares determined by the volume-weighted average price of our common stock during the repurchase period, less a fixed discount. During the nine months ended September 30, 2021, we paid $1.5 billion to the financial institutions and received 9.1 million shares of our common stock, at an initial price of $132.27 per share for a value of $1.2 billion, which represents 80% of the total value of shares to be repurchased under the ASRs. The ASR contracts will be completed during the fourth quarter of 2021.

For further details regarding the ASRs and our repurchases of our common stock, see Note 9 to the interim unaudited consolidated financial statements.

Medicare Sequestration

In April 2021, the suspension of 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 the end of 2021.

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 deliver savings of approximately 3% of our costs.

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 nine months ended September 30, 2021, we incurred $47 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.

Critical Accounting Policies

There have been no significant changes to our critical accounting policies from those disclosed in our 2020 Annual Report on Form 10-K**.**

Impact of New Accounting Standards

The adoption of new accounting standards, if any, is discussed in Note 2 to the interim unaudited consolidated financial statements.

The impact of recent accounting pronouncements not yet effective on our consolidated financial statements, if any, is also discussed in Note 2 to the interim unaudited consolidated financial statements.

Results of Operations

The following tables set forth certain results of operations data for the periods presented:

			Three Months Ended September 30,																								Nine Months Ended September 30,
			2021						2020						$ Change						% Change						2021						2020						$ Change						% Change
			(dollars in millions, except per share amounts)
Net revenues:
DIS business			$	2,703					$	2,709					$	(6)					(0.2)		%				$	7,820					$	6,217					$	1,603					25.8		%
DS businesses			71						77						(6)						(8.0)						224						218						6						2.5
Total net revenues			$	2,774					$	2,786					$	(12)					(0.4)		%				$	8,044					$	6,435					$	1,609					25.0		%
Operating costs and expenses and other operating income:
Cost of services			$	1,670					$	1,580					$	90					5.6		%				$	4,861					$	4,071					$	790					19.4		%
Selling, general and administrative			427						396						31						7.9						1,263						1,103						160						14.4
Amortization of intangible assets			25						27						(2)						(2.8)						77						77						—						1.5
Other operating expense (income), net			—						65						(65)						NM						(2)						8						(10)						NM
Total operating costs and expenses, net			$	2,122					$	2,068					$	54					2.7		%				$	6,199					$	5,259					$	940					17.9		%
Operating income			$	652					$	718					$	(66)					(9.3)		%				$	1,845					$	1,176					$	669					56.9		%
Other income (expense):
Interest expense, net			$	(38)					$	(42)					$	4					(9.3)		%				$	(114)					$	(124)					$	10					(8.0)		%
Other income, net			40						77						(37)						NM						366						74						292						NM
Total non-operating income (expense), net			$	2					$	35					$	(33)					NM						$	252					$	(50)					$	302					NM
Income tax expense			$	(153)					$	(177)					$	24					(14.0)		%				$	(483)					$	(269)					$	(214)					79.7		%
Effective income tax rate			23.4		%				23.7		%																23.1		%				23.9		%
Equity in earnings of equity method investees, net of taxes			$	26					$	15					$	11					67.2		%				$	53					$	33					$	20					61.4		%
Net income attributable to Quest Diagnostics			$	505					$	568					$	(63)					(11.0)		%				$	1,605					$	852					$	753					88.4		%
Diluted earnings per common share attributable to Quest Diagnostics' common stockholders			$	4.02					$	4.14					$	(0.12)					(2.8)		%				$	12.41					$	6.25					$	6.16					98.5		%
NM - Not Meaningful

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

			Three Months Ended September 30,												Nine Months Ended September 30,
			2021						2020						2021						2020
Net revenues:
DIS business			97.4		%				97.2		%				97.2		%				96.6		%
DS businesses			2.6						2.8						2.8						3.4
Total net revenues			100.0		%				100.0		%				100.0		%				100.0		%
Operating costs and expenses and other operating income:
Cost of services			60.2		%				56.7		%				60.4		%				63.3		%
Selling, general and administrative			15.4						14.2						15.7						17.1
Amortization of intangible assets			0.9						1.0						1.0						1.2
Other operating expense (income), net			—						2.3						—						0.1
Total operating costs and expenses, net			76.5		%				74.2		%				77.1		%				81.7		%
Operating income			23.5		%				25.8		%				22.9		%				18.3		%

Operating Results

Results for the three months ended September 30, 2021 were affected by certain items that on a net basis increased diluted earnings per share by $0.06 as follows:

• a net pre-tax gain of $41 million (a $42 million gain recorded in other income, net and a $3 million gain recorded in equity in earnings of equity method investees, net of taxes, partially offset by $4 million of costs recorded in selling, general and administrative expenses), or $0.25 per diluted share, primarily due to gains associated with changes in the carrying value of our strategic investments, partially offset by costs associated with donations, contributions and other financial support through Quest for Health Equity, our initiative with the Quest Diagnostics Foundation to reduce health disparities in underserved communities; and

• excess tax benefits associated with stock-based compensation arrangements of $6 million, or $0.04 per diluted share, recorded in income tax expense; partially offset by

• pre-tax amortization expense of $25 million, or $0.15 per diluted share; and

• pre-tax charges of $13 million ($7 million in cost of services and $6 million in selling, general and administrative expenses), or $0.08 per diluted share, primarily associated with systems conversions and integration incurred in connection with further restructuring and integrating our business.

Results for the nine months ended September 30, 2021 were affected by certain items that on a net basis increased diluted earnings per share by $1.50 as follows:

• a pre-tax gain recorded in other income, net of $314 million, or $2.00 per diluted share, on the sale of our 40% ownership interest in Q2 Solutions;

• a net pre-tax gain of $28 million (a $42 million gain recorded in other income, net, partially offset by $9 million of costs recorded in selling, general and administrative expenses, and $5 million of net charges recorded in equity in earnings of equity method investees), or $0.18 per diluted share, primarily due to gains associated with changes in the carrying value of our strategic investments, partially offset by costs associated with donations, contributions and other financial support through Quest for Health Equity, and a non-cash impairment charge to the carrying value of an equity method investment; and

• excess tax benefits associated with stock-based compensation arrangements of $15 million, or $0.11 per diluted share, recorded in income tax expense; partially offset by

• pre-tax amortization expense of $79 million ($77 million in amortization of intangible assets and $2 million in equity in earnings of equity method investees, net of taxes) or $0.46 per diluted share;

• pre-tax charges of $51 million ($26 million in cost of services and $25 million in selling, general and administrative expenses), or $0.30 per diluted share, primarily associated with systems conversions and integration incurred in connection with further restructuring and integrating our business; and

• pre-tax charges of $4 million in cost of services, or $0.03 per diluted share, representing the impact of certain items resulting from the COVID-19 pandemic including incremental costs incurred to protect the health and safety of our employees and customers.

For both the three and nine months ended September 30, 2021, diluted earnings per share benefited from the impact of the ASRs on our weighted average shares outstanding as compared to the prior year periods.

Results for the three months ended September 30, 2020 were affected by certain items that on a net basis reduced diluted earnings per share by $0.17 as follows:

*•*net pre-tax charges of $69 million (charges of $65 million in other operating expense (income), net, $3 million in cost of services and $1 million 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, including 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 Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") and, to a lesser extent, incremental costs incurred primarily to protect the health and safety of our employees and customers;

• 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) or $0.16 per diluted share; and

• pre-tax charges of $18 million ($11 million in cost of services and $7 million in selling, general and administrative expenses), or $0.10 per diluted share, representing costs 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, net based on the difference between the fair value and the carrying value of an equity interest; and

• excess tax benefits associated with stock-based compensation arrangements of $3 million, or $0.02 per diluted share, recorded in income tax expense.

Results for the nine months ended September 30, 2020 were affected by certain items that on a net basis reduced diluted earnings per share by $0.44 as follows:

• pre-tax amortization expense of $86 million ($77 million in amortization of intangible assets and $9 million in equity in earnings of equity method investees, net of taxes) or $0.47 per diluted share;

• pre-tax charges of $52 million ($38 million of charges in cost of services, $8 million of charges in selling, general and administrative expenses and $8 million of charges in other operating expense (income), net, partially offset by a $2 million gain in equity in earnings of equity method investees, net of taxes), or $0.29 per diluted share, representing the impact of certain items resulting from the COVID-19 pandemic, principally including expense associated with a one-time payment to eligible employees to help offset expenses they incurred as a result of COVID-19, certain asset impairment charges, and incremental costs incurred primarily to protect the health and safety of our employees and customers; and

• pre-tax charges of $43 million ($21 million in cost of services and $22 million in selling, general and administrative expenses), or $0.25 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, net based on the difference between the fair value and the carrying value of an equity interest; and

• excess tax benefits associated with stock-based compensation arrangements of $15 million, or $0.11 per diluted share, recorded in income tax expense.

Net Revenues

Net revenues for the three months ended September 30, 2021 decreased by 0.4% compared to the prior year period.

DIS revenues for the three months ended September 30, 2021 decreased by 0.2% compared to the prior year period. For the three months ended September 30, 2021:

• Acquisitions contributed approximately 1.5% to DIS revenue with organic revenue (revenue excluding the impact of recent acquisitions) down by 1.7% compared to the prior year period. The decrease in organic revenue was driven by a decrease in COVID-19 molecular testing, partially offset by growth in the base business.

• Revenues in the base business (including the impact of recent acquisitions) increased by 14.3% compared to the prior year period, which was negatively impacted as a result of the COVID-19 pandemic. Compared to historical levels in the third quarter of 2019, revenues in the base business, excluding revenue associated with recent acquisitions, increased by 1.7%. Recent agreements associated with our Professional Laboratory Services offerings contributed 2.3% revenue growth compared to 2019.

• DIS volume increased by 5.3% with organic volume and acquisitions contributing approximately 3.2% and 2.1%, respectively. Organic volume growth was driven by growth in the base business, partially offset by a decrease in volume associated with COVID-19 molecular testing.

• Testing volume in the base business (including the impact of recent acquisitions) continued to recover and was up 13.6% compared to the prior year period, which was negatively impacted as a result of the COVID-19 pandemic. Compared to historical levels in the third quarter of 2019, testing volume in the base business, excluding volume associated with recent acquisitions, increased 3.8%. Recent agreements associated with our Professional Laboratory Services offerings contributed 5.2% volume growth compared to 2019.

• Revenue per requisition decreased by 5.4% compared to the prior year period driven in large part by the decrease in COVID-19 molecular testing and growth in our Professional Laboratory Services engagements, which carry a lower revenue per requisition than the average for the remainder of the DIS business.

Net revenues for the nine months ended September 30, 2021 increased by 25.0% compared to the prior year period.

DIS revenues for the nine months ended September 30, 2021 increased by 25.8% compared to the prior year period. For the nine months ended September 30, 2021:

• Organic revenue and acquisitions contributed approximately 23.6% and 2.2%, respectively, to DIS revenue growth compared to the prior year period. Organic revenue growth was driven by growth in the base business and demand for COVID-19 molecular testing.

• Revenues in the base business (including the impact of recent acquisitions) increased by 24.2% compared to the prior year period, which was negatively impacted as a result of the COVID-19 pandemic. Compared to historical levels in the first nine months of 2019, revenues in the base business, excluding revenue associated with recent acquisitions, increased by 0.1%. Recent agreements associated with our Professional Laboratory Services offerings contributed 2.3% revenue growth compared to 2019.

• DIS volume increased by 22.9% with organic volume and acquisitions contributing approximately 19.2% and 3.7%, respectively. Organic volume growth was driven by growth in the base business and, to a lesser extent, demand for COVID-19 molecular testing.

• Testing volume in the base business (including the impact of recent acquisitions) continued to recover and was up 22.6% compared to the prior year period, which was negatively impacted as a result of the COVID-19 pandemic. Compared to historical levels in the first nine months of 2019, testing volume in the base business, excluding volume associated with recent acquisitions, increased by 1.0%. Recent agreements associated with our Professional Laboratory Services offerings contributed 5.4% volume growth compared to 2019.

• Revenue per requisition increased by 2.2% compared to the prior year period driven, in large part, by COVID-19 molecular testing, partially offset by growth in our Professional Laboratory Services engagements, which carry a lower revenue per requisition than the average for the remainder of the DIS business.

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.

For the three months ended September 30, 2021, cost of services increased by $90 million compared to the prior year period. The increase was primarily driven by higher compensation and benefit costs, higher variable expenses related to increased testing volumes, expense associated with a payment to eligible employees to help offset expenses they incurred as a result of COVID-19, and additional operating costs associated with our acquisitions, partially offset by lower supplies expense as a result of test mix.

For the nine months ended September 30, 2021, cost of services increased by $790 million compared to the prior year period. The increase was primarily driven by higher variable expenses related to increased testing volumes as well as test mix and a higher supply cost associated with COVID-19 testing, higher compensation and benefits costs, and, to a lesser extent, additional operating costs associated with our acquisitions.

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

SG&A consist 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 $31 million for the three months ended September 30, 2021, compared to the prior year period, primarily driven by higher variable expenses to support our increase in testing volumes, partially offset by lower performance-based compensation.

SG&A increased by $160 million for the nine months ended September 30, 2021, compared to the prior year period, primarily driven by higher variable expenses to support our increase in testing volumes.

Amortization Expense

For the three months ended September 30, 2021, amortization expense decreased by $2 million.

For the nine months ended September 30, 2021, amortization expense was flat compared to the prior year period.

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 three months ended September 30, 2020, other operating expense (income), net primarily represents the reversal of $65 million of income that was previously recognized during the three months ended June 30, 2020 relating to the receipt of funds that were appropriated to healthcare providers under the CARES Act.

During the nine months ended September 30, 2020, other operating expense (income), net primarily represents impairment charges due to the impact of the COVID-19 pandemic.

Interest Expense, Net

Interest expense, net decreased for the three months ended September 30, 2021 compared to the prior year period, primarily due to lower average outstanding indebtedness.

Interest expense, net decreased for the nine months ended September 30, 2021 compared to the prior year period, primarily due to lower average outstanding indebtedness and, to a lesser extent, lower interest rates due to recent refinancing transactions, including the termination of our interest rate swap agreements in April 2020, which resulted in a deferred gain that is being amortized as a reduction of interest expense, net over the remaining term of the associated debt.

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 three months ended September 30, 2021, other income, net includes $42 million in gains associated with changes in the carrying value of our strategic investments. For the three months ended September 30, 2020, other income, net includes a $70 million gain recognized as a result of the remeasurement of our previously held equity interest in Mid America Clinical Laboratories, LLC ("MACL") to fair value in conjunction with our acquisition of the remaining 56% interest in MACL from our joint venture partners.

For the nine months ended September 30, 2021, other income, net includes a $314 million pre-tax gain on the sale of our 40% ownership interest in Q2 Solutions, our clinical trials central laboratory services joint venture, to IQVIA, our joint venture partner and $42 million in gains associated with changes in the carrying value of our strategic investments. For the nine months ended September 30, 2020, other income, net includes a $70 million gain recognized as a result of the remeasurement of our previously held equity interest in MACL.

Income Tax Expense

Income tax expense for the three months ended September 30, 2021 and 2020 was $153 million and $177 million, respectively. The decrease in income tax expense for the three months ended September 30, 2021 compared to the prior year period was primarily driven by a decrease in income before income taxes and equity in earnings of equity method investees.

For the three months ended September 30, 2021 and 2020, the effective income tax rate was 23.4% and 23.7%, respectively. The effective income tax rate for the three months ended September 30, 2021, benefited from a $6 million income tax benefit associated with changes in reserves for uncertain tax positions, and $6 million of excess tax benefits associated with stock-based compensation. The effective income tax rate for the three months ended September 30, 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, and $3 million of excess tax benefits associated with stock-based compensation.

Income tax expense for the nine months ended September 30, 2021 and 2020 was $483 million and $269 million, respectively. The increase in income tax expense for the nine months ended September 30, 2021 compared to the prior year period was primarily driven by an increase in income before income taxes and equity in earnings of equity method investees.

For the nine months ended September 30, 2021 and 2020, the effective income tax rate was 23.1% and 23.9%, respectively. For the nine months ended September 30, 2021, the effective income tax rate benefited from a lower effective income tax rate, 17.6%, on the gain on the sale of our 40% ownership interest in Q2 Solutions. For the nine months ended September 30, 2020, the effective income tax rate 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. In addition, the effective income tax rate benefited from $15 million of excess tax benefits associated with stock-based compensation arrangements for both the nine months ended September 30, 2021 and 2020.

Equity in Earnings of Equity Method Investees, Net of Taxes

Equity in earnings of equity method investees, net of taxes increased for the three months ended September 30, 2021 by $11 million compared to the prior year period primarily due to recovery in the base business (which excludes COVID-19 testing) of the investees, which was negatively impacted in 2020 as a result of the COVID-19 pandemic, and demand for COVID-19 testing services.

Equity in earnings of equity method investees, net of taxes increased for the nine months ended September 30, 2021 by $20 million compared to the prior year period primarily due to the demand for COVID-19 testing services and recovery in the base business of the investees, partially offset by lower equity earnings as a result of the sale of our 40% ownership interest in Q2 Solutions.

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.

As of September 30, 2021 and December 31, 2020, the fair value of our debt was estimated at approximately $4.5 billion and $4.6 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 September 30, 2021 and December 31, 2020, the estimated fair value exceeded the carrying value of the debt by $461 million and $597 million,

respectively. A hypothetical 10% increase in interest rates (representing 21 basis points as of September 30, 2021 and 17 basis points as of December 31, 2020) would potentially reduce the estimated fair value of our debt by approximately $86 million and $82 million as of September 30, 2021 and December 31, 2020, 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 September 30, 2021, 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 September 30, 2021, 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 0.950%; and for our senior unsecured revolving credit facility, LIBOR plus 1.125%. During October 2021, we amended the secured receivables credit facility and the borrowing rates are based on commercial paper rates for highly rated issuers, or, LIBOR, plus a spread, following the amendment, of 0.725% to 0.80%. As of September 30, 2021, there were no borrowings outstanding under either our $600 million secured receivables credit facility or our $750 million senior unsecured revolving credit facility. The amendment to the secured receivables credit facility did not change the total borrowing capacity under the facility.

A hypothetical 10% change to the variable rate component of our variable rate indebtedness would not materially change our annual interest expense.

For further details regarding our outstanding debt, see Note 13 to the audited consolidated financial statements included in our 2020 Annual Report on Form 10-K. For details regarding our financial instruments and hedging activities, see Note 8 to the interim unaudited consolidated financial statements and Note 15 to the audited consolidated financial statements included in our 2020 Annual Report on Form 10-K.

Risk Associated with Investment Portfolio

Our investment portfolio primarily includes equity investments comprised mostly of strategic holdings in companies 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 in prepaid expenses and other current assets in our consolidated balance sheet. Equity investments that do not have readily determinable fair values (which consist of investments in preferred and common shares of private companies) are measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes. During the three months ended September 30, 2021, certain of our equity investments became publicly-traded and, based on the readily determinable fair values of such investments, we recognized gains of $42 million in other income, net in our consolidated statement of operations.

We regularly evaluate equity investments that do not have readily determinable fair values to determine if there are any indicators that the investments are impaired. The carrying value of our equity investments that do not have readily determinable fair values was $6 million as of September 30, 2021.

We do not hedge our equity price risk. As of September 30, 2021, a 10% change in the fair values of our equity investments with readily determinable fair values would have impacted our consolidated statement of operations by $5 million. 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 September 30, 2021 financial statements, we considered whether the carrying values of our investments were impaired and concluded that no such impairment existed.

Liquidity and Capital Resources

			Nine Months Ended September 30,												Change
			2021						2020
			(dollars in millions)
Net cash provided by operating activities			$	1,752					$	1,464					$	288
Net cash provided by (used in) investing activities			248						(604)						852
Net cash used in financing activities			(2,171)						(447)						(1,724)
Net change in cash and cash equivalents and restricted cash			$	(171)					$	413					$	(584)

Cash and Cash Equivalents

Cash and cash equivalents consist of cash and highly-liquid short-term investments. Cash and cash equivalents as of September 30, 2021 totaled $987 million, compared to $1,158 million as of December 31, 2020.

As of September 30, 2021, approximately 5% of our $987 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 nine months ended September 30, 2021 and 2020 was $1,752 million and $1,464 million, respectively. The $288 million increase in net cash provided by operating activities for the nine months ended September 30, 2021, compared to the prior year period was primarily a result of:

• higher operating income in 2021 as compared to 2020; and, to a lesser extent,

• the timing of movements in our working capital accounts; partially offset by

• a $354 million increase in income tax payments due to higher operating income in 2021 as compared to 2020;

• higher performance-based compensation payments in 2021 compared to 2020; and

• $138 million in proceeds in the 2020 period that we received from funds that were appropriated to healthcare providers under the CARES Act, which funds were returned during the fourth quarter of 2020.

Days sales outstanding ("DSO"), a measure of billing and collection efficiency, was 47 days as of September 30, 2021, 46 days as of December 31, 2020 and 47 days as of September 30, 2020. Recent changes in our DSO are partially due to fluctuations in our monthly revenue due to the impact of the COVID-19 pandemic.

Cash Flows from Investing Activities

Net cash provided by (used in) investing activities for the nine months ended September 30, 2021 and 2020 was $248 million and $(604) million, respectively. This $852 million change in cash provided by (used in) investing activities for the nine months ended September 30, 2021, compared to the prior year period was primarily a result of $755 million of net cash proceeds received from the sale of our 40% ownership interest in Q2 Solutions, and, to a lesser extent, a $78 million decrease in business acquisitions, net of cash acquired.

Cash Flows from Financing Activities

Net cash used in financing activities for the nine months ended September 30, 2021 and 2020 was $2,171 million and $447 million, respectively. This $1,724 million increase in cash used in financing activities for the nine months ended September 30, 2021, compared to the prior year period was primarily a result of:

• a $1,835 million increase in repurchases of our common stock (see "Share Repurchase Program" for further details); and, to a lesser extent,

• a $41 million increase in distributions to noncontrolling interest partners; and

• a $36 million decrease in proceeds from the exercise of stock options, which was a result of a decrease in the volume of stock options exercised compared to the prior year; partially offset by

• $253 million of net debt repayments (repayments of debt less proceeds from borrowings) in 2020 compared to $2 million of net debt repayments in 2021.

During the nine months ended September 30, 2021, there were no borrowings or repayments under our secured receivables credit facility or senior unsecured revolving credit facility.

During the nine months ended September 30, 2020, we completed the issuance of our 2.80% senior notes due June 2031. Additionally, during the nine months ended September 30, 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 our 2.95% senior notes due June 2030, along with cash on hand. During the nine months ended September 30, 2020, we borrowed $100 million under our secured receivables credit facility and $100 million under our senior unsecured revolving credit facility, which were repaid prior to September 30, 2020.

Dividend Program

During each of the first three quarters of 2021, our Board of Directors declared a quarterly cash dividend of $0.62 per common share. During each of the four quarters of 2020, our Board of Directors declared a quarterly cash dividend of $0.56 per common share.

Share Repurchase Program

In each of February and March 2021, our Board of Directors increased the size of our share repurchase program by $1 billion. As of September 30, 2021, $1.3 billion remained available under our share repurchase authorization. The share repurchase authorization has no set expiration or termination date.

Share Repurchases

For the nine months ended September 30, 2021, we repurchased 12.5 million shares of our common stock for a value of $1.6 billion, including 9.1 million shares repurchased under ASRs. See "Third Quarter Highlights" above for further details.

For the nine months ended September 30, 2020, we repurchased 0.7 million shares of our common stock for $75 million.

Equity Method Investees

Our equity method investees primarily consist of a 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 before income taxes and equity in earnings of equity method investees. We have no material unconditional obligations or guarantees to, or in support of, our equity method investees and their operations.

In conjunction with the preparation of our September 30, 2021 financial statements, we considered whether the carrying values of our equity method investments were impaired and, during the nine months ended September 30, 2021, we recorded an $8 million impairment charge for one of the investments.

For further details regarding related party transactions with our equity method investees, see Note 20 to the audited consolidated financial statements in our 2020 Annual Report on Form 10-K.

Requirements and Capital Resources

We estimate that we will invest approximately $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-19 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, during 2020 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.

As of September 30, 2021, we had $1.3 billion of borrowing capacity available under our existing credit facilities, including $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 September 30, 2021. In support of our risk management program, $70 million in letters of credit under the secured receivables credit facility were outstanding as of September 30, 2021. The secured receivables credit facility includes a $250 million loan commitment which matures in October 2022, and a $250 million loan commitment and a $100 million letter of credit facility which matures in October 2023. The senior unsecured revolving credit facility matures in March 2023. For further details regarding our credit facilities, see Note 13 to the audited consolidated financial statements in our 2020 Annual Report on Form 10-K and Note 15 to the interim unaudited 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 September 30, 2021, we were in compliance with all such applicable financial covenants.

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 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.

Forward-Looking Statements

Some statements and disclosures in this document are forward-looking statements. Forward-looking statements include all statements that do not relate solely to historical or current facts and can be identified by the use of words such as “may,” “believe,” “will,” “expect,” “project,” “estimate,” “anticipate,” “plan” or “continue.” These forward-looking statements are based on our current plans and expectations and are subject to a number of risks and uncertainties that could cause our plans and expectations, including actual results, to differ materially from the forward-looking statements. Risks and uncertainties that may affect our future results include, but are not limited to, impacts of the COVID-19 pandemic and measures taken in response, adverse results from pending or future government investigations, lawsuits or private actions, the competitive environment, the complexity of billing, reimbursement and revenue recognition for clinical laboratory testing, changes in government regulations, changing relationships with customers, payers, suppliers and strategic partners and other factors discussed in our most recently filed Annual Report on Form 10-K and subsequently filed Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, including those discussed in the “Business,” “Risk Factors,” “Cautionary Factors that May Affect Future Results” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of those reports.