Quest Diagnostics 10-Q 2022-09-30

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

Or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-12215

Quest Diagnostics Incorporated

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of October 14, 2022, there were outstanding 113,887,466 shares of the registrant’s common stock, $.01 par value.

PART I - FINANCIAL INFORMATION

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

(unaudited)

(in millions, except per share data)

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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 and accountable care organizations ("ACOs"). We offer the broadest access in the United States to diagnostic information services through our nationwide network of laboratories, patient service centers and phlebotomists in physician offices and our connectivity resources, including call centers and mobile paramedics, nurses and other health and wellness professionals. We are the world's leading provider of diagnostic information services. We provide interpretive consultation with one of the largest medical and scientific staffs in the industry. Our DIS business makes up greater than 95% of our consolidated net revenues.

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

(a) Excludes COVID-19 testing.

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

For further discussion of the year-over-year changes for the three months ended September 30, 2022 compared to the three months ended September 30, 2021, 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 and maintain 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.

Due to the COVID-19 pandemic, we have experienced significant volatility, including periods of material decline compared to prior year periods in testing volume in our base business (which excludes COVID-19 testing) and periods of significant demand for COVID-19 testing services, with demand generally fluctuating in line with changes in the prevalence of the virus and related variants. Additionally, compared to historical levels, our revenue per requisition has been positively impacted by COVID-19 molecular testing.

Acquisition of Pack Health, LLC ("Pack Health")

On February 1, 2022, we completed the acquisition of Pack Health, a patient engagement company that helps individuals adopt healthier behaviors to improve outcomes, in an all cash transaction for $123 million, net of $4 million cash acquired, which consisted of cash consideration of $105 million and contingent consideration initially estimated at $18 million. The contingent consideration arrangement is dependent upon the achievement of certain revenue benchmarks. The acquired business is included in our DIS business.

For further details, see Notes 4 and 6 to the interim unaudited 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 achieve savings and productivity improvements of approximately 3% of our costs, which we believe will help offset pressures from the current inflationary environment.

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, 2022, we incurred $32 million of pre-tax charges under our Invigorate program primarily consisting of systems conversion and integration costs, all of which resulted in cash expenditures. Additional restructuring charges may be incurred in future periods as we identify additional opportunities to achieve further savings and productivity improvements.

Critical Accounting Policies

There have been no significant changes to our critical accounting policies from those disclosed in our 2021 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:

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

Operating Results

Results for the three months ended September 30, 2022 were affected by certain items that on a net basis decreased diluted earnings per share by $0.19 as follows:

• pre-tax amortization expense of $27 million recorded in amortization of intangible assets or $0.17 per diluted share;

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

• pre-tax charges of $2 million in other (expense) income, net or $0.01 per diluted share, representing net losses associated with changes in the carrying value of our strategic investments; partially offset by

• a net pre-tax gain of $9 million ($2 million of charges in cost of services, and $5 million of charges in selling, general and administrative expenses offset by $16 million of gains in other operating income, net), or $0.06 per diluted share, primarily representing a $10 million gain from a payroll tax credit under the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") associated with the retention of employees and a $7 million gain associated with the decrease in the fair value of the contingent consideration accrual associated with previous acquisitions, partially offset by $5 million of 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 $1 million, or $0.01 per diluted share, recorded in income tax expense.

Results for the nine months ended September 30, 2022 were affected by certain items that on a net basis decreased diluted earnings per share by $0.89 as follows:

• pre-tax amortization expense of $81 million recorded in amortization of intangible assets or $0.50 per diluted share;

• pre-tax charges of $39 million ($30 million in other (expense) income, net and $9 million in equity in earnings of equity method investees, net of taxes), or $0.24 per diluted share, representing net losses associated with changes in the carrying value of our strategic investments;

• pre-tax charges of $37 million ($13 million in cost of services and $24 million in selling, general and administrative expenses), or $0.23 per diluted share, primarily associated with workforce reductions, systems conversions and integration incurred in connection with further restructuring and integrating our business; and

• net pre-tax charges of $1 million ($2 million of charges in cost of services, and $9 million of charges in selling, general and administrative expenses largely offset by $10 million of gains in other operating income, net), or $0.00 per diluted share, primarily representing $9 million of costs associated with donations, contributions and other financial support through Quest for Health Equity offset by a $10 million gain from a payroll tax credit under the CARES Act associated with the retention of employees; partially offset by

• excess tax benefits associated with stock-based compensation arrangements of $10 million, or $0.08 per diluted share, recorded in income tax expense.

For the three and nine months ended September 30, 2022, diluted earnings per share benefited from the impact of share repurchases, including under accelerated share repurchase agreements ("ASRs") entered into in April 2021 to repurchase $1.5 billion of our common stock, on our weighted average shares outstanding as compared to the prior year periods.

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 $45 million (a $42 million gain recorded in other (expense) income, net and a $3 million gain recorded in equity in earnings of equity method investees, net of taxes), or $0.26 per diluted share, primarily due to gains associated with changes in the carrying value of our strategic investments; 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;

• 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; and

• pre-tax charges of $4 million in selling, general and administrative expenses, or $0.01 per diluted share, primarily due to costs associated with donations, contributions and other financial support through Quest for Health Equity.

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 (expense) income, net of $314 million, or $2.00 per diluted share, on the sale of our 40% ownership interest in Q2 Solutions® ("Q2 Solutions"), our clinical trials central laboratory services joint venture, to IQVIA Holdings, Inc. ("IQVIA"), our joint venture partner (see Note 5 to the interim unaudited consolidated financial statements);

• a net pre-tax gain of $37 million (a $42 million gain recorded in other (expense) income, net, partially offset by $5 million of net charges recorded in equity in earnings of equity method investees), or $0.22 per diluted share, primarily due to gains associated with changes in the carrying value of our strategic investments, partially offset by 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;

• pre-tax charges of $9 million in selling, general and administrative expenses, or $0.04 per diluted share, primarily due to costs associated with donations, contributions and other financial support through Quest for Health Equity; 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.

Net Revenues

Net revenues for the three months ended September 30, 2022 decreased by 10.4% compared to the prior year period.

DIS revenues for the three months ended September 30, 2022 decreased by 10.5% compared to the prior year period.

For the three months ended September 30, 2022:

• The decrease in revenue compared to the prior year period was driven by a decrease in COVID-19 testing, partially offset by growth in the base business (which excludes COVID-19 testing) and, to a lesser extent, the impact of recent acquisitions. For the three months ended September 30, 2022, recent acquisitions contributed approximately 0.5% to DIS revenues.

• DIS volume decreased by 6.2% compared to the prior year period driven by a decrease in COVID-19 testing, partially offset by growth in the base business and the impact of recent acquisitions, which contributed approximately 0.2% to DIS volume.

• Revenue per requisition decreased by 5.1% compared to prior year period driven in large part by the decrease in COVID-19 molecular testing, and unit price pressure of approximately 0.5%, partially offset by favorable test mix.

• Revenues in the base business (including the impact of recent acquisitions) increased by 5.4% compared to the prior year period.

• Testing volume in the base business (including the impact of recent acquisitions) was up 1.6% compared to the prior year period.

• Revenue per requisition in the base business increased by 3.3% compared to the prior year period primarily due to favorable test mix.

DS revenues for the three months ended September 30, 2022 decreased by 5.9% compared to the prior year period primarily due to lower revenues associated with our risk assessment services offered to the life insurance industry.

Net revenues for the nine months ended September 30, 2022 decreased by 6.1% compared to the prior year period.

DIS revenues for the nine months ended September 30, 2022 decreased by 6.1% compared to the prior year period.

For the nine months ended September 30, 2022:

• The decrease in revenue compared to the prior year period was driven by a decrease in COVID-19 testing, partially offset by growth in the base business and the impact of recent acquisitions. For the nine months ended September 30, 2022, recent acquisitions contributed approximately 0.9% to DIS revenues.

• DIS volume decreased by 2.2% compared to the prior year period driven by a decrease in COVID-19 testing, partially offset by growth in the base business and the impact of recent acquisitions, which contributed approximately 0.8% to DIS volume.

• Revenue per requisition decreased by 4.3% compared to the prior year period driven in large part by the decrease in COVID-19 molecular testing and unit price pressure of approximately 0.5%, partially offset by favorable test mix.

• Revenues in the base business (including the impact of recent acquisitions) increased by 5.2% compared to the prior year period.

• Testing volume in the base business (including the impact of recent acquisitions) was up 3.1% compared to the prior year period.

• Revenue per requisition in the base business increased by 1.7% compared to the prior year period primarily due to favorable test mix.

DS revenues for the nine months ended September 30, 2022 decreased by 7.9% compared to the prior year period primarily due to lower revenues associated with our risk assessment services offered to the life insurance industry.

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, 2022, cost of services decreased by $52 million compared to the prior year period. The decrease was primarily driven by lower expense associated with reduced COVID-19 testing volumes, and $20 million of expense in the prior year period associated with a payment to eligible employees to help offset expenses they incurred as a result of COVID-19. These decreases were partially offset by higher compensation and benefits costs (primarily related to wage increases).

For the nine months ended September 30, 2022, cost of services increased by $14 million compared to the prior year period. The increase was primarily driven by higher compensation and benefits costs (primarily related to wage increases), and additional costs associated with our acquisitions. These increases were partially offset by lower supplies expense associated with reduced COVID-19 testing volumes.

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 $37 million for the three months ended September 30, 2022, compared to the prior year period primarily due to additional costs associated with investments in our strategic growth initiatives and higher compensation and benefits costs (including headcount and wage increases).

SG&A increased by $48 million for the nine months ended September 30, 2022, compared to the prior year period, primarily driven by additional costs associated with investments in our strategic growth initiatives and higher compensation and benefits costs (including headcount and wage increases), partially offset by $42 million of lower costs associated with changes in the value of our deferred compensation obligations.

The changes in the value of our deferred compensation obligations is largely offset by changes in the value of the associated investments, which are recorded in other (expense) income, net. For further details regarding our deferred compensation plans, see Note 17 to the audited consolidated financial statements included in our 2021 Annual Report on Form 10-K.

Amortization Expense

For the three and nine months ended September 30, 2022, amortization expense increased by $2 million and $4 million, respectively, compared to the prior year periods as a result of recent acquisitions.

Other Operating Income, Net

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

For both the three and nine months ended September 30, 2022, other operating income, net includes a $10 million gain from a payroll tax credit under the CARES Act associated with the retention of employees. The three months ended September 30, 2022 also includes a gain associated with the decrease in the fair value of the contingent consideration accrual associated with previous acquisitions.

Interest Expense, Net

For the three and nine months ended September 30, 2022, interest expense, net decreased by $5 million and $8 million, respectively, compared to the prior year periods due to increased interest income resulting from the impact of rising interest rates on our cash and cash equivalents.

Other (Expense) Income, Net

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

For the three months ended September 30, 2022, other (expense) income, net included $6 million of losses associated with investments in our deferred compensation plans.

For the three months ended September 30, 2021, other (expense) income, net included $42 million of gains associated with changes in the carrying value of our strategic investments.

For the nine months ended September 30, 2022, other (expense) income, net included $31 million of losses associated with investments in our deferred compensation plans and $30 million of losses associated with changes in the carrying value of our strategic investments.

For the nine months ended September 30, 2021, other (expense) income, net primarily included 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 (see Note 5 to the interim unaudited consolidated financial statements) and $42 million of gains associated with changes in the carrying value of our strategic investments.

Income Tax Expense

Income tax expense for the three months ended September 30, 2022 and 2021 was $81 million and $153 million, respectively. The decrease in income tax expense for the three months ended September 30, 2022 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.

Income tax expense for the nine months ended September 30, 2022 and 2021 was $268 million and $483 million, respectively. The decrease in income tax expense for the nine months ended September 30, 2022 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 nine months ended September 30, 2022 and 2021, the effective income tax rate was 23.8% and 23.1%, 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 the Company's 40% ownership interest in Q2 Solutions. In addition, the effective income tax rate benefited from $10 million and $15 million of excess tax benefits associated with stock-based compensation arrangements for the nine months ended September 30, 2022 and 2021, respectively.

Equity in Earnings of Equity Method Investees, Net of Taxes

Equity in earnings of equity method investees, net of taxes decreased for the three months ended September 30, 2022 by $20 million compared to the prior year period primarily due to lower demand for COVID-19 testing services at our diagnostic information services joint venture.

Equity in earnings of equity method investees, net of taxes decreased for the nine months ended September 30, 2022 by $12 million compared to the prior year period primarily due to $14 million of lower equity earnings in the current year period associated with changes in the carrying value of strategic investments of an equity method investee and lower demand for COVID-19 testing services at our diagnostic information services joint venture, partially offset by a non-cash impairment to the carrying value of an equity method investment of $8 million in the prior year period.

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, 2022 and December 31, 2021, the fair value of our debt was estimated at approximately $3.6 billion and $4.4 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, 2022 and December 31, 2021, the estimated fair value (was less than) exceeded the carrying value of the debt by $(354) million and $403 million, respectively. A hypothetical 10% increase in interest rates (representing 52 basis points as of September 30, 2022 and 23 basis points as of December 31, 2021) would potentially reduce the estimated fair value of our debt by approximately $124 million and $89 million as of September 30, 2022 and December 31, 2021, respectively.

Borrowings under our secured receivables credit facility and our senior unsecured revolving credit facility are subject to variable interest rates. As of September 30, 2022, interest on our secured receivables credit facility is based on either commercial paper rates for highly rated issuers, or London Interbank Offered Rate ("LIBOR"), plus a spread. As of

September 30, 2022, 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. As such, our borrowing cost under this credit arrangement is subject to fluctuations in interest rates and changes in our public debt ratings. As of September 30, 2022, 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 0.725% to 0.80%; and for our senior unsecured revolving credit facility, LIBOR plus 1.00%. As of September 30, 2022, there were no borrowings outstanding under either our $600 million secured receivables credit facility or our $750 million senior unsecured revolving credit facility. During October 2022, we amended the secured receivables credit facility and, subsequent to the amendment, borrowing rates are based on commercial paper rates for highly rated issuers, or the Term Secured Overnight Financing Rate ("Term SOFR"), plus a spread of 0.725% to 0.80%. In conjunction with the amendment we decreased the aggregate borrowing capacity to $525 million.

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 15 to the interim unaudited consolidated financial statements and Note 13 to the audited consolidated financial statements included in our 2021 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 2021 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 with changes in fair value recorded in current earnings in our consolidated statement of operations. 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. 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 $4 million as of September 30, 2022.

We do not hedge our equity price risk. As of September 30, 2022, a 10% change in the fair values of our equity investments with readily determinable fair values would have impacted our consolidated income before income taxes and equity in earnings of equity method investees by $1 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, 2022 financial statements, we considered whether the carrying values of our investments were impaired and concluded that no such impairment existed.

Liquidity and Capital Resources

Cash and Cash Equivalents

Cash and cash equivalents consist of cash and highly-liquid short-term investments with original maturities, at the time of acquisition, of three months or less. Cash and cash equivalents as of September 30, 2022 totaled $700 million, compared to $872 million as of December 31, 2021.

As of September 30, 2022, approximately 5% of our $700 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, 2022 and 2021 was $1,384 million and $1,752 million, respectively. The $368 million decrease in net cash provided by operating activities for the nine months ended September 30, 2022, compared to the prior year period was primarily a result of:

• lower operating income in 2022 as compared to 2021; and

• higher payments associated with an additional payroll cycle in 2022 as compared to 2021; partially offset by

• a $335 million decrease in income tax payments in 2022 as compared to 2021.

Days sales outstanding, a measure of billing and collection efficiency, was 47 days as of September 30, 2022, 48 days as of December 31, 2021 and 47 days as of September 30, 2021.

Cash Flows from Investing Activities

Net cash (used in) provided by investing activities for the nine months ended September 30, 2022 and 2021 was $(369) million and $248 million, respectively. This $617 million change in net cash (used in) provided by investing activities for the nine months ended September 30, 2022, compared to the prior year period was primarily a result of $755 million of net cash proceeds received in 2021 from the sale of our 40% ownership interest in Q2 Solutions, partially offset by a $145 million decrease in net cash paid for business acquisitions.

Cash Flows from Financing Activities

Net cash used in financing activities for the nine months ended September 30, 2022 and 2021 was $1,187 million and $2,171 million, respectively. This $984 million decrease in net cash used in financing activities for the nine months ended September 30, 2022, compared to the prior year period was primarily a result of a $963 million decrease in repurchases of our common stock.

During both the nine months ended September 30, 2022 and 2021, there were no borrowings or repayments under our secured receivables credit facility or senior unsecured revolving credit facility.

Dividend Program

During each of the three quarters of 2022, our Board of Directors declared a quarterly cash dividend of $0.66 per common share. During each of the four quarters of 2021, our Board of Directors declared a quarterly cash dividend of $0.62 per common share.

Share Repurchase Program

In February 2022, our Board of Directors increased the size of our share repurchase program by $1 billion. As of September 30, 2022, $746 million 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, 2022, we repurchased 7.1 million shares of our common stock for $950 million.

For the nine months ended September 30, 2021, we repurchased 12.5 million shares of our common stock for $1.6 billion, including 9.1 million shares repurchased under ASRs.

For further details regarding our share repurchases, see Note 9 to the interim unaudited consolidated financial statements.

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, 2022 financial statements, we considered whether the carrying values of our equity method investments were impaired and concluded that no such impairment existed.

Requirements and Capital Resources

We estimate that we will invest approximately $400 million during 2022 for capital expenditures, to support and grow our existing operations, principally related to investments in information technology, laboratory equipment and facilities, including laboratory automations and footprint optimization; and in our advanced diagnostics and consumer growth strategies.

As of September 30, 2022, 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, 2022. 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, 2022. During October 2022, we amended our secured receivables credit facility and decreased the aggregate borrowing capacity under the secured receivables credit facility to $525 million. The amended secured receivables credit facility includes a $425 million loan commitment, half of which matures in October 2023 and half of which matures in October 2024. Additionally, the amended secured receivables credit facility includes a $100 million letter of credit facility which matures in October 2024. The senior unsecured revolving credit facility matures in November 2026. For further details regarding our credit facilities, see Note 13 to the audited consolidated financial statements in our 2021 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, 2022, we were in compliance with all such applicable financial covenants.

We have assessed the impact of the cessation of LIBOR and have identified and evaluated financial instruments and other contracts that refer to LIBOR. Our underlying exposure to LIBOR includes our senior unsecured revolving credit facility (see discussion above) under which we had no outstanding borrowings as of September 30, 2022. During October 2022, we amended our secured receivables credit facility and, subsequent to the amendment, borrowing rates are based on commercial paper rates for highly rated issuers, or the Term SOFR, plus a spread of 0.725% to 0.80%. We expect to be able to transition all LIBOR based instruments and contracts to an alternative reference rate on or before the cessation of LIBOR and we do not believe that the cessation of LIBOR, or its replacement with an alternative reference rate or rates, will have a material impact on us.

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.

See Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations."

Management, including our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended). Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

During the third quarter of 2022, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended) that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

See Note 11 to the interim unaudited consolidated financial statements for information regarding the status of legal proceedings involving the Company.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The table below sets forth the information with respect to purchases made by or on behalf of the Company of its common stock during the third quarter of 2022.

(A)In February 2022, our Board of Directors increased the size of our share repurchase program by $1 billion. Since the share repurchase program’s inception in May 2003, our Board of Directors has authorized $12 billion of share repurchases of our common stock through September 30, 2022. The share repurchase authorization has no set expiration or termination date.

(B)Includes: (1) shares delivered or attested to in satisfaction of the exercise price and/or tax withholding obligations by holders of stock options (granted under the Company’s Amended and Restated Employee Long-Term Incentive Plan) who exercised options; and (2) shares withheld (under the terms of grants under the Amended and Restated Employee Long-Term Incentive Plan) to offset tax withholding obligations that occur upon the delivery of outstanding common shares underlying restricted stock units and performance share units.

Exhibits:

Signatures

Pursuant to the requirements 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.

October 21, 2022

Quest Diagnostics Incorporated