Quest Diagnostics 10-Q 2023-06-30

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 June 30, 2023

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 July 14, 2023, there were outstanding 112,234,999 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 SIX MONTHS ENDED JUNE 30, 2023 AND 2022

(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, consumers, 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.

Second 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 "Results of Operations".

For further discussion of the year-over-year changes for the three months ended June 30, 2023 compared to the three months ended June 30, 2022, see "Results of Operations" below.

Acquisition of select assets of the laboratory services business of New York-Presbyterian

On April 17, 2023, we completed the acquisition of select assets of the laboratory services business of New York-Presbyterian, which serves providers and patients in New York, as well as the Tri-State Area and beyond, in an all-cash transaction for $275 million. The acquired business is included in our DIS business.

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

Acquisition of Haystack Oncology, Inc.

On June 20, 2023, we acquired Haystack Oncology, Inc. ("Haystack"), an early-stage oncology company focused on minimal residual disease testing to aid in the detection of residual or recurring cancer and better inform therapy decisions. The acquisition was an all-cash transaction for $392 million, net of $1 million of cash acquired, which consisted of cash consideration of $304 million and contingent consideration initially estimated at $88 million. Under the contingent consideration obligation, the seller can receive up to $100 million of additional consideration dependent upon the achievement of certain revenue benchmarks through 2028 and up to an additional $50 million of consideration dependent upon us receiving reimbursement coverage from the Centers for Medicare and Medicaid Services. The acquired business is included in our DIS business.

For further details, see Notes 5 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; automation and artificial intelligence; optimization and selecting and retaining talent. 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 six months ended June 30, 2023, we incurred $26 million of pre-tax charges in connection with our Invigorate program and other restructuring activities, including $16 million of employee separation costs, with the remainder primarily consisting of integration costs. Most of the charges will result in cash expenditures. Additional restructuring charges may be incurred in future periods, including 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 2022 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 June 30, 2023 were affected by certain items that on a net basis decreased diluted earnings per share by $0.25 as follows:

• pre-tax amortization expense of $28 million recorded in amortization of intangible assets or $0.18 per diluted share;

• pre-tax charges of $7 million recorded in selling, general and administrative expenses, or $0.05 per diluted share, primarily associated with workforce reductions and integration costs incurred in connection with further restructuring and integrating our business; and

• pre-tax charges of $6 million recorded in selling, general and administrative expenses, or $0.04 per diluted share, primarily representing the impairment of a corporate facility that is currently held for sale; partially offset by

• excess tax benefits associated with stock-based compensation arrangements of $2 million, or $0.02 per diluted share, recorded in income tax expense.

Results for the six months ended June 30, 2023 were affected by certain items that on a net basis decreased diluted earnings per share by $0.51 as follows:

• pre-tax amortization expense of $54 million recorded in amortization of intangible assets or $0.35 per diluted share;

• pre-tax charges of $26 million ($10 million in cost of services and $16 million in selling, general and administrative expenses), or $0.17 per diluted share, primarily associated with workforce reductions and integration costs incurred in connection with further restructuring and integrating our business;

• pre-tax charges of $6 million recorded in selling, general and administrative expenses, or $0.04 per diluted share, primarily representing the impairment of a corporate facility that is currently held for sale, and

• pre-tax charges of $3 million in equity in earnings of equity method investees, net of tax, or $0.02 per diluted share, representing net losses associated with changes in the carrying value of our strategic investments; partially offset by

• excess tax benefits associated with stock-based compensation arrangements of $7 million, or $0.07 per diluted share, recorded in income tax expense.

For both the three and six months ended June 30, 2023, the year-over-year change in diluted weighted average common shares outstanding was principally driven by share repurchases, which positively benefited the year-over-year comparison of diluted earnings per share.

Results for the three months ended June 30, 2022 were affected by certain items that on a net basis decreased diluted earnings per share by $0.40 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 $21 million ($12 million in other income (expense), net and $9 million in equity in earnings of equity method investees, net of taxes), or $0.13 per diluted share, representing net losses associated with changes in the carrying value of our strategic investments;

• pre-tax charges of $12 million ($4 million in cost of services and $8 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 $8 million ($2 million in selling, general and administrative expenses and $6 million in other operating expense, net), or $0.05 per diluted share, primarily representing a loss associated with the increase in the fair value of the contingent consideration accruals associated with previous acquisitions, and 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); partially offset by

• excess tax benefits associated with stock-based compensation arrangements of $4 million, or $0.03 per diluted share, recorded in income tax expense.

Results for the six months ended June 30, 2022 were affected by certain items that on a net basis decreased diluted earnings per share by $0.70 as follows:

• pre-tax amortization expense of $54 million recorded in amortization of intangible assets or $0.33 per diluted share;

• pre-tax charges of $37 million ($28 million in other income (expense), net and $9 million in equity in earnings of equity method investees, net of taxes), or $0.23 per diluted share, representing net losses associated with changes in the carrying value of our strategic investments;

• pre-tax charges of $24 million ($7 million in cost of services and $17 million in selling, general and administrative expenses), or $0.15 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 $10 million ($4 million in selling, general and administrative expenses and $6 million in other operating expense, net), or $0.06 per diluted share, primarily representing a loss associated with the increase in the fair value of the contingent consideration accruals associated with previous acquisitions, and costs associated with donations, contributions and other financial support through Quest for Health Equity; partially offset by

• excess tax benefits associated with stock-based compensation arrangements of $9 million, or $0.07 per diluted share, recorded in income tax expense.

Net Revenues

Net revenues for the three months ended June 30, 2023 decreased by 4.7% compared to the prior year period.

DIS revenues for the three months ended June 30, 2023 decreased by 4.9% compared to the prior year period.

For the three months ended June 30, 2023:

• The decrease in DIS revenues 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 June 30, 2023, recent acquisitions contributed approximately 0.5% to DIS revenues.

• DIS volume increased by 0.2% compared to the prior year period driven by growth in the base business and the impact of recent acquisitions (which contributed approximately 0.5% to DIS volume), substantially offset by a decrease in COVID-19 testing.

• Revenue per requisition decreased by 4.9% compared to the prior year period driven by the decrease in COVID-19 molecular testing.

• DIS revenues in the base business (including the impact of recent acquisitions) increased by 9.7% compared to the prior year period.

• Testing volume in the base business (including the impact of recent acquisitions) was up 7.4% compared to the prior year period.

• Revenue per requisition in the base business increased by 2.5% compared to the prior year period principally due to an increase in the number of tests per requisition, changes in test mix and benefits recognized associated with certain value-based arrangements.

DS revenues for the three months ended June 30, 2023 increased by 1.6% compared to the prior year period primarily due to higher revenues associated with our risk assessment services offered to the life insurance industry.

Net revenues for the six months ended June 30, 2023 decreased by 7.8% compared to the prior year period.

DIS revenues for the six months ended June 30, 2023 decreased by 8.1% compared to the prior year period.

For the six months ended June 30, 2023:

• The decrease in DIS revenues 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 six months ended June 30, 2023, recent acquisitions contributed approximately 0.3% to DIS revenues.

• DIS volume decreased by 1.8% 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 0.3% to DIS volume.

• Revenue per requisition decreased by 6.3% compared to the prior year period driven by the decrease in COVID-19 molecular testing.

• DIS revenues in the base business (including the impact of recent acquisitions) increased by 10.0% compared to the prior year period.

• Testing volume in the base business (including the impact of recent acquisitions) was up 7.6% compared to the prior year period. We believe that our base testing volume was negatively impacted in the first half of 2022 by the surge in COVID-19 associated with the spread of the Omicron variant. We estimate that the recovery of our base testing volumes due to the easier compare accounted for approximately 2% of our total base testing volume growth during the first half of 2023.

• Revenue per requisition in the base business increased by 2.4% compared to the prior year period principally due to an increase in the number of tests per requisition, changes in test mix and benefits recognized associated with certain value-based arrangements.

DS revenues for the six months ended June 30, 2023 increased by 2.0% compared to the prior year period primarily due to higher 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 June 30, 2023, cost of services decreased by $65 million compared to the prior year period. The decrease was primarily driven by lower collection and supplies expenses associated with reduced COVID-19 testing volumes.

For the six months ended June 30, 2023, cost of services decreased by $151 million compared to the prior year period. The decrease was primarily driven by lower collection and supplies expenses associated with reduced COVID-19 testing volumes, partially offset by higher compensation and benefits costs (primarily related to wage increases).

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 decreased by $6 million for the three months ended June 30, 2023 compared to the prior year period. Higher costs associated with changes in the value of our deferred compensation obligations ($23 million) were more than offset by a decrease in other SG&A costs primarily driven by reductions in headcount and marketing expenses.

SG&A increased by $8 million for the six months ended June 30, 2023 compared to the prior year period primarily due to higher costs associated with changes in the value of our deferred compensation obligations ($38 million), which were partially offset by a decrease in other SG&A costs primarily driven by reductions in headcount and marketing expenses.

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 income (expense), net. For further details regarding our deferred compensation plans, see Note 18 to the audited consolidated financial statements included in our 2022 Annual Report on Form 10-K.

Amortization Expense

For both the three and six months ended June 30, 2023, amortization expense was principally consistent with the prior year periods.

Other Operating Expense, Net

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

For both the three and six months ended June 30, 2022, other operating expense, net primarily represents a loss associated with the increase in the fair value of the contingent consideration accruals associated with previous acquisitions.

Interest Expense, Net

For both the three and six months ended June 30, 2023, interest expense, net was principally consistent with the prior year periods.

Other Income (Expense), Net

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

For the three months ended June 30, 2023, other income (expense), net included $6 million of gains associated with investments in our deferred compensation plans.

For the six months ended June 30, 2023, other income (expense), net included $13 million of gains associated with investments in our deferred compensation plans.

For the three months ended June 30, 2022, other income (expense), net included $17 million of losses associated with investments in our deferred compensation plans and $12 million of losses associated with changes in the carrying value of our strategic investments.

For the six months ended June 30, 2022, other income (expense), net included $28 million of losses associated with changes in the carrying value of our strategic investments and $25 million of losses associated with investments in our deferred compensation plans.

Income Tax Expense

Income tax expense for the three months ended June 30, 2023 and 2022 was $75 million and $77 million, respectively.

The effective income tax rates for the three months ended June 30, 2023 and 2022 were 23.5% and 23.9%, respectively. The effective income tax rates benefited from $2 million and $4 million of excess tax benefits associated with stock-based compensation arrangements for the three months ended June 30, 2023 and 2022, respectively.

Income tax expense for the six months ended June 30, 2023 and 2022 was $140 million and $187 million, respectively. The decrease in income tax expense for the six months ended June 30, 2023 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.

The effective income tax rates for the six months ended June 30, 2023 and 2022 were 23.5% and 24.2%, respectively. The effective income tax rates benefited from $7 million and $9 million of excess tax benefits associated with stock-based compensation arrangements for the six months ended June 30, 2023 and 2022, respectively.

Equity in Earnings of Equity Method Investees, Net of Taxes

Equity in earnings of equity method investees, net of taxes increased by $3 million for the three months ended June 30, 2023 compared to the prior year period.

Equity in earnings of equity method investees, net of taxes decreased by $23 million for the six months ended June 30, 2023 compared to the prior year period primarily due to lower demand for COVID-19 testing services at our diagnostic information services joint venture.

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 June 30, 2023 and December 31, 2022, the fair value of our debt was estimated at approximately $4.0 billion and $3.7 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 June 30, 2023 and December 31, 2022, the estimated fair value was less than the carrying value of the debt by $280 million and $318 million, respectively. A hypothetical 10% increase in interest rates (representing 52 basis points as of June 30, 2023 and 51 basis points as of December 31, 2022) would potentially reduce the estimated fair value of our debt by approximately $115 million and $120 million as of June 30, 2023 and December 31, 2022, respectively.

Borrowings under our secured receivables credit facility and our senior unsecured revolving credit facility are subject to variable interest rates. As of June 30, 2023, interest on our secured receivables credit facility is based on either commercial paper rates for highly rated issuers, or the Term Secured Overnight Financing Rate ("Term SOFR"), plus a spread. As of June 30, 2023, 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 June 30, 2023, the borrowing rates under these debt instruments were: for our secured receivables credit facility, commercial paper rates for highly-rated issuers or adjusted Term SOFR, plus a spread of 0.725% to 0.80%; and for our senior unsecured revolving credit facility, adjusted Term SOFR, plus 1.00%. As of June 30, 2023, there was $320 million borrowed under the secured receivables credit facility and there were no borrowings under the senior unsecured revolving credit facility.

Based on our net exposure to interest rate changes, 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 7 to the interim unaudited consolidated financial statements and Note 14 to the audited consolidated financial statements included in our 2022 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 16 to the audited consolidated financial statements included in our 2022 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 $5 million as of June 30, 2023. In conjunction with the preparation of our June 30, 2023 financial statements, we considered whether the carrying values of our investments were impaired and concluded that no such impairment existed.

We do not hedge our equity price risk. The impact of an adverse movement in equity prices on our holdings in privately held companies cannot be easily quantified as our ability to realize returns on investments depends on, among other things, the enterprises’ ability to raise additional capital or derive cash inflows from continuing operations or through liquidity events such as initial public offerings, mergers or private sales.

Liquidity and Capital Resources

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 June 30, 2023 totaled $126 million, compared to $315 million as of December 31, 2022.

As of June 30, 2023, approximately 31% of our $126 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 six months ended June 30, 2023 and 2022 was $538 million and $882 million, respectively. The $344 million decrease in net cash provided by operating activities for the six months ended June 30, 2023, compared to the prior year period, was primarily a result of:

• lower operating income in 2023 as compared to 2022; and

• a year-over-year change in the timing and extent of the collection of COVID-19 testing revenues.

Days sales outstanding, a measure of billing and collection efficiency, was 47 days as of each of June 30, 2023, December 31, 2022 and June 30, 2022.

Cash Flows from Investing Activities

Net cash used in investing activities for the six months ended June 30, 2023 and 2022 was $840 million and $251 million, respectively. This $589 million increase in net cash used in investing activities for the six months ended June 30, 2023, compared to the prior year period, was primarily a result of increased cash used for business acquisitions (see above for further discussion) and, to a lesser extent, increased capital expenditures.

Cash Flows from Financing Activities

Net cash provided by (used in) financing activities for the six months ended June 30, 2023 and 2022 was $113 million and $(713) million, respectively. This $826 million change in net cash provided by (used in) financing activities for the six months ended June 30, 2023, compared to the prior year period, was primarily a result of the six months ended June 30, 2023 including $320 million of net borrowings under our secured receivables credit facility and the six months ended June 30, 2022 including $573 million of share repurchases.

During the six months ended June 30, 2023, we borrowed $1.0 billion under our secured receivables credit facility, $0.7 billion of which was repaid prior to June 30, 2023. Additionally, during the six months ended June 30, 2023, we borrowed $125 million under our senior unsecured revolving credit facility, which was repaid prior to June 30, 2023.

During the six months ended June 30, 2022, there were no borrowings or repayments under our secured receivables credit facility or senior unsecured revolving credit facility.

Dividend Program

During each of the first and second quarters of 2023, our Board of Directors declared a quarterly cash dividend of $0.71 per common share. During each of the four quarters of 2022, our Board of Directors declared a quarterly cash dividend of $0.66 per common share.

Share Repurchase Program

In February 2023, our Board of Directors increased the size of our share repurchase program by $1 billion. As of June 30, 2023, $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 six months ended June 30, 2023, we repurchased no shares of our common stock.

For the six months ended June 30, 2022, we repurchased 4.0 million shares of our common stock for $550 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 June 30, 2023 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 2023 for capital expenditures, to support and grow our existing operations, principally related to investments in laboratory equipment and facilities, including laboratory automations and information technology to support our diagnostic offerings.

As of June 30, 2023, we had $885 million of borrowing capacity available under our existing credit facilities, including $135 million available under our secured receivables credit facility and $750 million available under our senior unsecured revolving credit facility. There were $320 million of borrowings under the secured receivables credit facility as of June 30, 2023 and there were no borrowings under the senior unsecured revolving credit facility as of June 30, 2023. In support of our risk management program, $70 million in letters of credit under the secured receivables credit facility were outstanding as of June 30, 2023. For further details regarding our credit facilities, see Note 7 to the interim unaudited consolidated financial statements and Note 14 to the audited consolidated financial statements in our 2022 Annual Report on Form 10-K.

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 June 30, 2023, 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, including acquisitions, 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, 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 second quarter of 2023, 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 second quarter of 2023.

(A)In February 2023, 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 $13 billion of share repurchases of our common stock through June 30, 2023. 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.

None.

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.

July 27, 2023

Quest Diagnostics Incorporated