Action from Insight
2020 Annual Report
on Form 10-K
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2020
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
16-1387862
(I.R.S. Employer Identification Number)
Delaware
(State of Incorporation)
500 Plaza Drive
Secaucus, NJ 07094
(973) 520-2700
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $.01 par value
Trading Symbol(s)
DGX
Name of Each Exchange on Which Registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes X No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes No X
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 X 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 X 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.
Large accelerated filer
Non-accelerated filer
☒ Accelerated filer
☐ Smaller reporting company
Emerging growth company
☐
☐
☐
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its
internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public
accounting firm that prepared or issued its audit report. [☒]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No X
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As of June 30, 2020, the aggregate market value of the approximately 134 million shares of voting and non-voting common equity held by
non-affiliates of the registrant was approximately $15.2 billion, based on the closing price on such date of the registrant's Common Stock on
the New York Stock Exchange.
As of January 31, 2021, there were outstanding 133,454,761 shares of the registrant’s common stock, $.01 par value.
Documents Incorporated by Reference
Document
Portions of the registrant's Proxy Statement to be filed by April 30, 2021
Part of Form 10-K into
which incorporated
Part III
Such Proxy Statement, except for the portions thereof which have been specifically incorporated by reference, shall not be deemed “filed” as
part of this report on Form 10-K.
Table of Contents
TABLE OF CONTENTS
Item
Page
Item 1.
Business...............................................................................................................................
Introduction..........................................................................................................................
Our Strategy.........................................................................................................................
Our Strengths.......................................................................................................................
Business Operations.............................................................................................................
The Clinical Testing Industry...............................................................................................
General.................................................................................................................................
Regulation............................................................................................................................
Available Information..........................................................................................................
Information about Our Executive Officers..........................................................................
Risk Factors..........................................................................................................................
Cautionary Factors That May Affect Future Results...........................................................
Unresolved Staff Comments................................................................................................
Properties.............................................................................................................................
Legal Proceedings................................................................................................................
Mine Safety Disclosures......................................................................................................
Market for Registrant's Common Stock, Related Stockholder Matters and Issuer
Purchases of Equity Securities.........................................................................................
Selected Financial Data........................................................................................................
Management's Discussion and Analysis of Financial Condition and Results of
Operations.........................................................................................................................
Quantitative and Qualitative Disclosures About Market Risk.............................................
Financial Statements and Supplementary Data....................................................................
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.........................................................................................................................
Controls and Procedures......................................................................................................
Other Information.................................................................................................................
Directors, Executive Officers and Corporate Governance...................................................
Executive Compensation......................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholders' Matters.......................................................................................................
Certain Relationships and Related Transactions, and Director Independence.....................
Principal Accounting Fees and Services..............................................................................
Exhibits, Financial Statement Schedules.............................................................................
Form 10-K Summary...........................................................................................................
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16.
Selected Historical Financial Data of Our Company..................................................................................
Management's Discussion and Analysis of Financial Condition and Results of Operations......................
Report of Management on Internal Control Over Financial Reporting......................................................
Report of Independent Registered Public Accounting Firm.......................................................................
Consolidated Financial Statements and Related Notes...............................................................................
Supplementary Data: Quarterly Operating Results (unaudited).................................................................
Schedule II - Valuation Accounts and Reserves.........................................................................................
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F- 1
F- 3
F- 49
F- 52
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The discussion in Item 1 below includes several defined terms:
ACA - Affordable Care Act
ACO - Accountable Care Organization
CAP - The College of American Pathologists
CARES Act - Coronavirus Aid, Relief and Economic Security Act
CLIA - Clinical Laboratory Improvement Act
CMS - Centers for Medicare and Medicaid Services
DCE - Direct Contract Entity
FDA - U.S. Food and Drug Administration
FQHC - Federally Qualified Health Center
HHS - U. S. Department of Health and Human Services
IDN - Independent Delivery Network (including hospital health systems)
IPA - Independent Physician Association
LAB Act - Laboratory Access for Beneficiaries Act
LDT - Laboratory-Developed Test
PAMA - The Protecting Access to Medicare Act of 2014
The discussion also includes several tables, indexed in the following guide.
Guide to Tables
Services Portfolio
Approaches to Accelerate Growth
Key Professional Laboratory Services Offerings
Clinical Franchises
Consumer-Centric Initiatives
Major Themes to Drive Operational Excellence
Our Strengths
Assets and Capabilities
2020 Net Revenues
Clinical Testing Industry
Key Trends
Reducing Healthcare Costs and Improving Care
Customers
Potential Factors Considered When Selecting a Diagnostics Information Services Provider
2020 Medicare and Medicaid Revenues as % of Consolidated Net Revenues
Key Regulatory Schemes
Information Available at Our Corporate Governance Webpage
Executive Officers
Table 1
Table 2
Table 3
Table 4
Table 5
Table 6
Table 7
Table 8
Table 9
Table 10
Table 11
Table 12
Table 13
Table 14
Table 15
Table 16
Table 17
Table 18
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Item 1. Business
INTRODUCTION
Quest Diagnostics Incorporated is the world's leading provider of diagnostic information services. We play a crucial
role in the healthcare ecosystem, empowering people to take action to improve health outcomes. Derived from the world's
largest database of clinical lab results, our diagnostic insights reveal new avenues to identify and treat disease, inspire healthy
behaviors and improve healthcare management. In the right hands and with the right context, our diagnostic insights can
inspire actions that transform lives.
Quest Diagnostics was incorporated in Delaware in 1990; its predecessor companies date back to 1967. We conduct
business through our headquarters in Secaucus, New Jersey, and our laboratories, patient service centers, offices and other
facilities around the United States and in selected locations outside the United States. Unless the context otherwise requires, the
terms “Quest Diagnostics,” the “Company,” “we” and “our” mean Quest Diagnostics Incorporated and its consolidated
subsidiaries.
The patients we serve comprise approximately one-third of the adult population of the United States annually, and
approximately one-half of the adult population in the United States over a three-year period. We estimate that annually we
serve approximately half of the physicians and half of the hospitals in the United States.
During 2020, we generated net revenues of $9.4 billion. Additional financial information concerning Quest
Diagnostics for each of the years ended December 31, 2020, 2019 and 2018 is included in the consolidated financial statements
and notes thereto in “Financial Statements and Supplementary Data” in Part II, Item 8.
Our vision, aspirational goals and values are set forth below.
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We believe that our vision, aspirational goals and strategy align very well with, and our strong value proposition
supports, the triple aim of healthcare: improving medical quality and the patient experience while reducing the cost of care.
In 2020, Quest Diagnostics was at the forefront of the response to the COVID-19 pandemic, playing a pivotal role to
broaden access to laboratory insights to help people lead healthier and safer lives. We provided both molecular diagnostic and
antibody serology tests to aid in the diagnosis of COVID-19 and the detection of immune response to the virus, and performed
over 30 million of these tests. Beginning in March 2020, we worked closely with federal, state and local governments,
healthcare organizations, payers, suppliers, retailers, trade associations and other laboratories in the effort to bring as much
COVID-19 testing as possible to the American people. We also provided data on COVID-19 testing that we conducted to
federal, state and local public health authorities, including the federal Centers for Disease Control and Prevention, and
participated in studies with government and private institutions, aiding COVID-19 public health response and research. All of
our employees, including our dedicated laboratory professionals, phlebotomists, air fleet team, and couriers take tremendous
pride in the role we played and worked tirelessly to help patients and communities access quality COVID-19 testing.
During 2020, we also saw how underserved communities were disproportionately impacted by COVID-19 with tragic
consequences. With the Quest Diagnostics Foundation, we launched Quest for Health Equity, a $100 million-plus initiative to
reduce health disparities in underserved communities. This multi-year initiative, which will focus on people of color, elderly
and homeless populations in locations throughout the United States, will provide a combination of testing services, education
programs, alliances and financial support to efforts seeking to find new ways to address health disparities.
Our approach to fighting the pandemic has been rooted in our vision of empowering better health through diagnostic
insights. We believe that the challenges we are facing from the COVID-19 pandemic have brought us together, made us a
stronger company and will help us capture the substantial opportunities in front of us.
We have a two-point business strategy, reviewed by our Board of Directors, to achieve our vision and our goals.
OUR STRATEGY
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Accelerate Growth
Our strategy to accelerate revenue growth is based on the Company’s portfolio of services.
Services Portfolio (Table 1)
Key Characteristics
At A Glance
Quest Value Proposition
Activity
General Diagnostics
Testing services generating
strong cash flows and steady
growth
Advanced Diagnostics
Testing services targeting
faster growth through
innovation testing model
Diagnostic Services
Laboratory and data-related
healthcare opportunities
targeting faster growth
• Routine and non-routine
testing services
• Largest revenue stream
• Essential portion of
healthcare delivery
• Genetic and advanced
molecular testing services
• An important part of
precision medicine
• Innovation-based
competitors
• Enables partners to deliver
healthcare more efficiently
(e.g., risk assessment;
Professional Laboratory
Services; Employer Population
Health)
• Services to support
population health (e.g., data
analytics; extended care
services)
• Scale
• Operational excellence
• Access and convenience
• Rich clinical, scientific and
medical innovation expertise
• Quality and reliability of new
assays
• Ability to manage potential
new regulatory requirements
• Extensive diagnostic
capability
• Large and growing database
and analytics expertise
• Partnerships with industry
leaders across healthcare
landscape
We have identified the following five approaches to accelerate growth.
Approaches to Accelerate Growth (Table 2)
1. Delivering a compound annual revenue growth rate of more than 2% through accretive, strategic acquisitions
Plus organic growth through:
2. Partnering with health plans, IDNs and other risk bearing entities
3. Offering the broadest access to diagnostic innovation
4. Being recognized as the consumer-friendly provider of choice of diagnostic information services
5. Supporting population health with data analytics and extended care services
1. Growing through acquisitions. We have maintained a strategy since November 2018 to grow revenue each year by
more than 2% compound annual growth rate through accretive, strategic acquisitions. Although the merger and acquisition
environment significantly slowed in 2020 due to the COVID-19 pandemic, we were able to consummate important acquisitions
during 2020. Our approach to acquisitions is discussed below under the heading Deliver disciplined capital deployment.
2. Partnering with health plans, IDNs and other risk bearing entities. To help accelerate growth, we focus on large
opportunities to partner with outside entities. We strengthen our relationships with health plans and increase the volume of our
services for their members by driving value with employers and providing strong value propositions for members and
clinicians. This includes building an information platform to help health plans manage utilization and population health, and
enhancing processes to help health plans keep laboratory testing in network. For example, in 2020 we established a strategic
relationship with Anthem to collaborate on a variety of outcomes-based programs designed to create an improved healthcare
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experience for consumers and healthcare providers, and we advanced our position with UnitedHealthcare in its Preferred Lab
Network.
We believe that the growing market challenges faced by IDNs, including continued price transparency, cost and
utilization pressure, evolving healthcare payment models, capital needs, changing technology and limited resources, provides us
with an opportunity to more effectively partner with them as they consider their laboratory testing strategy and will drive
demand for our expertise. We have deployed a dedicated health systems team to strengthen our relationships with IDNs,
including with respect to their reference testing. We provide reference testing for approximately half of the hospitals in the
U.S., and are the leading provider of this testing in the country. In 2020, we logged a record amount of new Professional
Laboratory Services business, representing larger and longer term agreements than in the past, and implemented new
relationships with, among others, Memorial Hermann Health System, Hackensack Meridian Health, Montefiore Nyack Hospital
and Goshen Hospital.
Our industry-leading Professional Laboratory Services suite of solutions help IDNs build and execute their laboratory
strategy, improve quality, reduce the cost of care and focus on core competencies.
Key Professional Laboratory Services Offerings (Table 3)
Lab management outsourcing
Advanced data solutions
Joint venture
Outreach acquisition
Reference testing, including advanced diagnostics
Supply chain management and purchasing
Test menu optimization and spend consolidation
Blood utilization management
3. Offering the broadest access to diagnostic innovation. Our diagnostic solutions deliver high clinical value to the
medical community nationwide. We create value through scientific and product innovation and solution delivery for major
clinical opportunities. Starting with a clinical focus on a specific disease state or clinical problem, we take advantage of
advanced technology for more precise, comprehensive and actionable information, and deliver the information to the medical
community in a meaningful way. We make innovative diagnostic solutions available to community physicians through our
connectivity solutions, operational footprint and by making complex results actionable. We plan to expand our innovative
diagnostic solutions through research and development, as well as partnerships with academic institutions, other technology and
healthcare leaders and public health agencies. In 2020, our approach delivered numerous innovations, including those
discussed below under the headings "Innovation" (page 9), "Collaboration" (page 10), "Medical and Scientific Expertise" (page
10) and "Health Information Technology Solutions and Information Assets" (page 10).
Our clinical franchises enable us to perform like a boutique while maintaining our scale advantages, and work with our
research and development and commercial organizations to identify/deliver new and improved solutions.
Clinical Franchises (Table 4)
Cardiovascular, Metabolic and Endocrinology
Cancer Diagnostics
General Health and Wellness
Drug Monitoring and Toxicology
Infectious Diseases and Immunology
Sports Science and Human Performance
Neurology
Women’s and Reproductive Health
The performance in 2020 of our Infectious Disease and Immunology franchise, which was leading our COVID-19
pandemic response, is an example of the power of our franchises.
4. Being recognized as the consumer-friendly provider of choice of diagnostic information services. We are focused
on the consumer. The Company has a long history of focusing on consumer interests, and continues to focus on improving the
consumer experience, including through improved digitization and other enhancements of our operations. Examples of our
strong consumer focus during 2020 include the strong growth in our QuestDirectTM consumer-initiated testing and establishing
special hours at our patient service centers for non-COVID-19 testing to accommodate the needs of older and highly vulnerable
patients. Our industry-leading Net Promoter Scores reflect our consumer focus.
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Consumer reminders
Increasing consumer expectations inform our design for our consumer experience.
Consumer-Centric Initiatives (Table 5)
Enhanced consumer experience
Convenient access
Consumer-initiated testing
Consumer connectivity and access to information
Expanded access to basic healthcare services
Self-collection technology
Consumer satisfaction
• Consumers whose physicians have ordered a test for them
electronically can receive email reminders to complete the
test.
• Consumers who have made appointments can receive
appointment reminders via text messaging.
• Electronic check-in at patient service centers.
• Improved on-line pre-registration and appointment
scheduling.
• Real-time payment determination for payers.
• Partnerships with Walmart and Safeway to expand
convenient access to testing services at select Walmart and
Safeway locations across the United States (>200 locations at
year end).
• QuestDirectTM, our consumer-initiated testing service, is
available in nearly all states.
• Consumers can choose from test packages (e.g., general
health, men's and women's health, digestive health, heart
health, infectious disease, sexually transmitted disease), which
expanded in 2020 to include testing for COVID-19 with at-
home specimen collection.
• >14.5 million registered users in our MyQuest® health portal
and mobile connectivity solution.
• During 2020, partnered with The Commons Project to make
Quest lab results available for Android users through the
CommonHealth app.
• MyQuest® supports Health Records using the Apple Health
app.
• Using MyQuest,® consumers can manage healthcare for a
group of individuals.
• Partnership with Walmart to expand access to basic
healthcare services.
• Proprietary, consumer-friendly self-collection technology
offered to consumers at home.
• We are measuring consumer satisfaction, including Net
Promoter Score based on experience at our patient service
centers.
5. Supporting population health with data analytics and extended care services. We support population health by
offering services (e.g., home-based health risk assessments and related services) designed to identify gaps in care in a
population, provide clinical solutions to close the gaps and foster consumer engagement with a solution. Our services help
healthcare providers, health plans, sponsors and IDNs deliver better care to their patient populations by identifying and filling
gaps in care for their patient populations and by enabling them to deliver the most effective healthcare to the right populations
and individuals. Our offerings leverage the power of our assets and capabilities (e.g., call centers; patient service centers; and
mobile workforce, including professionals) and integrate our extensive clinical data, and include data analytics and extended
care services. For example, Quest Lab StewardshipTM employs machine learning to help optimize laboratory test utilization.
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Drive operational excellence
We strive to enhance operational excellence and improve our quality and efficiency across every portion of our value
chain and operations, from the time that we interact with a potential customer until the time we receive payment.
Major Themes to Drive Operational Excellence (Table 6)
Reduce denials and patient concessions
Standardize and automate
Digitize the customer experience
Optimize
Improving our operations will yield many benefits, including: enhancing customer experience; improving our quality
and competitiveness; strengthening our foundation for growth; and increasing employee engagement and shareholder value.
We are building a superior experience, at lower cost, for all of our customers, including consumers, health plans, IDNs and
clinicians. We endeavor to improve our processes and effectiveness at the same time. We are guided by a service dashboard
that focuses throughout our operations on quality for consumers, healthcare providers and employees, including medical
quality, on-time delivery, competitive costs and employee safety.
During 2020, our focus on and strength in operational excellence enabled us to rapidly scale up COVID-19 testing
capacity without sacrificing our other test offerings. We also made strong progress on our improvement initiatives. For
example, we continued (i) consolidating and simplifying our immunoassay platforms, moving to a single supplier to provide
greater throughput, autonomy and a more efficient footprint and (ii) optimizing our lab network through investments in our new
250,000 square foot flagship laboratory in Clifton, New Jersey, which we opened early in 2021 and will provide greater
capacity, increased throughput and improved productivity.
Our cost excellence program, Invigorate, includes structured plans to drive savings and improve performance across
the value chain, including in such areas as revenue services, information technology and procurement. We currently aim
annually to save approximately 3% of our costs. In 2020, we achieved our goal; our Invigorate program delivered
approximately $200 million of cost savings.
OUR STRENGTHS
We offer high value diagnostic information services and diagnostic solutions that are attractive to our customers.
Our Strengths (Table 7)
Quality
Strong Operating Principles
Assets and Capabilities to Deliver Value
Innovation
Collaboration
Quality
Health Information Technology Solutions and
Information Assets
Medical and Scientific Expertise
Customer Focus
Our goal is to provide every patient with services and products of superior quality. We strive to accomplish that
through commitment, leadership, and establishing rigorous processes which we measure and continually seek to improve, and
by using the Quest Management System, which provides best-in-class business performance tools to create and implement
effective and sustainable quality processes. The Quest Diagnostics Quality Program includes policies and procedures to
document, measure and monitor the effectiveness of our laboratory operations in providing and improving quality and meeting
applicable regulatory requirements. The Quality Program is designed so that the quality of laboratory services is monitored
objectively and evaluated systematically to deliver superior quality care, identify opportunities to improve patient care and
resolve identified problems. To help achieve our goal of becoming recognized as the undisputed quality leader in the
diagnostics information services industry, we have implemented our Quality System Framework, which serves as a reference
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guide for our employees and describes our Quality System Elements, which provide the structure for each laboratory to achieve
and maintain quality processes. We also have a robust Supplier Quality Program designed to ensure we have a high quality
supplier network and to raise the bar of quality expectations across that network. Being chosen by UnitedHealthcare as a
participant in the UnitedHealthcare Preferred Lab Network reflects the strength of our quality. For additional information about
our commitment to quality, see "General - Quality Assurance" on page 24.
Strong operating principles
We have a foundation of three strong operating principles:
•
•
•
strengthen organizational capabilities;
remain focused on diagnostic information services; and
deliver disciplined capital deployment.
Strengthen organizational capabilities. We continuously strive to strengthen our organizational capabilities to support
our two-point strategy, enable growth and productivity, better focus on our customers, speed decision-making and empower
employees. Highlights include:
•
•
Align for Growth, Execution and Efficiency. Our organization is designed to align around future growth
opportunities, coordinate business units for seamless execution and leverage our company-wide infrastructure to
gain more capability, value and efficiency. We relied on this organizational design to allow us to develop a
coordinated and sustained strategy to respond to the unprecedented challenges we face responding to the
COVID-19 pandemic. The value creation side of our business includes product and commercial marketing and is
organized by clinical franchise and focuses on customer solutions for the marketplace, including new test
development and diagnostic insights. The value delivery side includes sales, laboratory operations, field
operations, logistics and client services.
Quest Management System. This system provides a foundation for day-to-day management, and includes best-in-
class business performance tools to help develop new capabilities to improve our Company. The system enables
us to run the Company with a common language, approach and philosophy, and supports our efforts as we build a
high-performance culture, with employees focused on behaviors to make us more agile, transparent, customer-
focused, collaborative and performance oriented.
Remain focused on diagnostic information services. We maintain a sharp focus on providing diagnostic information
services.
Deliver disciplined capital deployment. Our disciplined capital deployment framework includes investment in our
business, dividends and share repurchases. The framework is grounded in maintaining an investment grade credit rating. We
expect to return a majority of our free cash flow to investors through a combination of dividends and share repurchases.
Consistent with that expectation, in February 2021 we announced that we increased our quarterly common stock cash dividend
by approximately 11%, from $0.56 per common share to $0.62 per common share. This represents our tenth increase in the
dividend since 2011. For many years, we have maintained a common stock repurchase program. Since the beginning of 2013,
we have returned approximately $3.4 billion to stockholders through repurchases of our common stock. Our share repurchases,
dividends and capital expenditures in each of the last three years are presented in our consolidated financial statements (Part II,
Item 8 of this Report). For most of 2020, we suspended our share repurchase program due to the challenges and uncertainty
associated with the COVID-19 pandemic.
The Company's strategy includes generating growth through value-creating, strategically-aligned acquisitions using
disciplined investment criteria. We screen potential acquisitions using guidelines that assess strategic fit and financial
considerations, including value creation, return on invested capital and impact on our earnings. In 2020, we consummated the
acquisition of Blueprint Genetics, acquired substantially all the operations of Memorial Hermann Diagnostics Laboratories, the
outreach laboratory division of Memorial Hermann Health System, and acquired from our joint venture partners the remaining
56% interest in Mid America Clinical Laboratories, LLC. Our material acquisitions in each of the last three years are further
discussed in Note 6 to the audited consolidated financial statements (Part II, Item 8 of this Report).
We will continue to invest in our business in a disciplined manner, including focusing on enhancing our solid
foundation of strategic assets and capabilities, accelerating growth and driving operational excellence. Our near-term
investments in growth are likely to focus on the strategies to accelerate growth set forth in table 2 above. Our near-term
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investments to drive operational excellence are likely to focus on improving the customer experience and gaining efficiency,
systems standardization, digital enablement of our processes and footprint optimization.
Assets and capabilities to deliver value
We use our unmatched size, scale and capabilities to deliver a very attractive value proposition to our customers.
Connectivity
● Provide healthcare connectivity solutions to >406,000 clinician and hospital accounts and interface
with approximately 760 electronic health records systems
Assets and Capabilities (Table 8)
Data
Logistics
● The largest private database of de-identifiable laboratory test results: >56 billion patient data points
● Strong logistics capabilities
• make approximately 72,000 stops daily
• approximately 4,000 courier vehicles
• 24 aircraft serving the U.S.
Medical and
Scientific Staff
● One of the largest medical and scientific staffs in the industry to provide interpretive consultation
• >600 M.D.s and Ph.Ds, many of whom are recognized leaders in their field
• Genetic counselors
Other Healthcare
Professionals
Consumer Access
Health Plan
Participation
● Approximately 23,000 phlebotomists, paramedics, nurses and other health and wellness professionals
● >6,850 patient access points, including phlebotomists in physician offices and the most extensive
patient service center network in the U.S. with >2,200 locations
● Access to approximately 90% of U.S. insured lives
Processing Volume ● Processed approximately 187 million test requisitions in 2020
Range of Testing
● Industry-leading test menu across clinical sub-specialty areas and diagnostic technologies
Patents
● Own or control approximately 1,100 issued and 450 pending patents worldwide in 2020
Innovation
We are a leading innovator in diagnostic information services. We develop and introduce new tests, including many
with a focus on personalized and targeted medicine, and new services. Our capabilities include discovery, technology
development and clinical validation of diagnostic tests. We also partner with other developers of new technologies, services
and tests to transfer their innovations to the marketplace, using our in-house expertise (e.g., strength in assay development and
commercialization of testing services). These developers include large commercial manufacturers, the academic community,
pharmaceutical and biotechnology firms, emerging medical technology companies and others that develop and commercialize
novel diagnostics, pharmaceutical and device technologies. We maintain relationships with advisers and consultants who are
leaders in key fields of science and medicine. As the industry leader with the largest and broadest U.S. network, we believe we
are the distribution channel of choice for developers of new solutions.
We seek innovations and solutions that help healthcare providers care for their patients through better testing for
predisposition, screening, monitoring, diagnosis, prognosis and treatment choices, and that will reduce the overall cost of
healthcare. We seek to develop innovations and solutions that help to determine a patient's genotype or gene expression profile
relative to a particular disease and its potential therapies, because they can help healthcare providers to determine a patient's
susceptibility to disease or to tailor medical care to an individual's needs. This would include determining if a medication might
be an optimum choice for a particular person, or tailoring the right dosage once the proper medicine is prescribed. We endeavor
to improve test processes, including through increased automation. In addition, we aim to develop holistic solutions responsive
to challenges that healthcare providers and patients face, by developing solutions of tests, information and services focused on
specific clinical challenges, and taking advantage of the latest informatics capabilities. We also look for innovations and
solutions that are less invasive than currently available options, to increase the choices that healthcare providers and patients
have for the collection of diagnostic samples. We additionally seek innovation in the ways we bring solutions to customers, and
in the customer experience, including enhanced services and end-to-end solutions for convenience and support. Further, we
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seek innovative solutions to other challenges related to diagnostics information services faced by IDNs, health plans and other
healthcare market participants.
In 2020, we secured Emergency Use Authorization from the FDA for pooled specimen testing in connection with
molecular diagnostic COVID-19 testing. We also developed and launched new test offerings to educational institutions, such
as colleges and universities, to help facilitate the return to classrooms. In addition, we launched automated next generation
genetic sequencing, which will enable genetic screening faster and at much lower cost. With government and private sector
partners, we developed and built "pop-up" COVID-19 testing sites that offered a new, efficient model for consumer access to
testing. These initiatives, along with other 2020 developments highlighted below under the headings "Collaboration," Medical
and Scientific Expertise," and "Healthcare Information Technology Solutions and Information Assets," demonstrated our
strength in innovation during 2020.
Collaboration
We believe that strategic relationships, including with healthcare providers, public health authorities, consumer-
focused entities and others, can position us for growth at the center of healthcare and that healthcare companies that can partner
effectively with others will be successful in the long term. We collaborate with partners that can help us to achieve our vision
of empowering better health through diagnostic insights and have relationships across the spectrum of healthcare, including
with world class healthcare and consumer-focused leaders, to foster important advances in healthcare, including in precision
medicine and healthcare delivery. We plan to continue to pursue strategic relationships to help accelerate growth and drive
operational excellence. Our collaborations with CVS Health, Walmart and other partners regarding expanding access to
COVID-19 testing during 2020 demonstrate this strength.
Medical and Scientific Expertise
We have strong medical and scientific expertise and aspire to be a trusted authority in diagnostic medicine, provide
insights and tools to support public and personal health, lead and facilitate scientific discussion and inspire innovation. Our
medical and scientific experts regularly provide presentations, symposia and webinars regarding diagnostic testing and
participate on scientific committees determining guidelines for diagnostic usage. They also publish research that demonstrates
the clinical value and importance of diagnostic testing, including in connection with our research and development efforts, in
peer-reviewed journals, textbooks and other publications. For over 30 years, the Company has published the Quest Diagnostics
Drug Testing Index,TM a series of reports on national workplace drug positivity trends based on the Company's employer
workplace drug testing data, that is widely cited by employers, the federal government and the media to help identify and
quantify drug abuse among the nation's workforce. The Company also publishes Quest Diagnostics Health Trends,TM a series
of scientific reports that provide insights into health topics, based on analysis of objective clinical laboratory data, to empower
better patient care, population health management and public health policy. Our role at the forefront of the response to the
COVID-19 pandemic demonstrated this strength. We secured numerous Emergency Use Authorizations from the FDA for
innovations in connection with COVID-19 testing and specimen collection, including regarding unobserved nasal specimen
self-collection, combined COVID-19 and respiratory virus tests, COVID-19 testing ordered by consumers, and methods to
increase testing capacity and expand the testing supply base. We also published over ten Health Trends reports on COVID-19
during 2020, including reports addressing the "hidden pandemic": reduced hemoglobin A1c diabetes monitoring as a
consequence of the COVID-19 pandemic; a 46% decrease in newly identified cancer patients during the COVID-19 pandemic;
and drug testing decreased by as much as 70%, while drug positivity rates increased (e.g., 35% increase for non-prescribed
fentanyl; 44% increase for heroin), during the COVID-19 pandemic.
Health Information Technology Solutions and Information Assets
We have a history of providing leading information technology for diagnostic information services, including for
patients, clinicians and healthcare organizations. We were the first national diagnostic information services provider to offer
online patient appointment scheduling and a patient connectivity solution. Our MyQuest® patient healthcare portal, with over
14.5 million registered users at year-end 2020, enables patients to manage healthcare and medical information for themselves
and a circle of others and, among other things, use their smartphone or computer to order a test, find a Quest Diagnostics
location, schedule appointments, receive appointment reminders, and receive and archive their test results. During 2020, we
collaborated with CLEAR to integrate CLEAR's safe and secure "Health Pass" technology with the Company's advanced
COVID-19 testing capabilities to foster safer public environments and help reduce public health risk. We also are a founding
member of the Synaptic Healthcare Alliance, which is working to create a platform, powered by blockchain technology, that
enables a culture of innovation, removes friction and solves shared challenges impacting constituents across healthcare today.
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We also have significant information assets and offer a robust portfolio of powerful analytics that inspire action and
deliver value to an array of customers. We offer an array of Quanum® solutions based on data insights, including retrospective
analytics solutions for healthcare professionals and practices, health plans, IDNs, pharmaceutical companies and public health.
We believe that solutions can tap the potential of large amounts of clinical information to: enhance the customer experience;
deliver more precise, comprehensive solutions and actionable information; provide increased and interactive insights and
analytics; foster greater adherence to clinical and reimbursement guidelines; and advance the development of precision
medicine. We believe that the breadth and depth of our data, combined with our powerful analytics capabilities, enables us to
take advantage of important data-based opportunities in diagnostics, and provides us a competitive advantage.
Customer Focus
Our brand -- Action from Insight® -- reflects our commitment to a superior customer experience. The customer is at
the center of everything we do; we strive to give them reason to put their trust in us. We use customer insights in developing
our approach, listening to the voice of customers to identify and implement solutions and processes that will result in a superior
customer experience. We also maintain our Everyday Excellence program, which includes guiding principles to support a
superior customer experience, inspiring our employees to be their best every day, with every person and with every customer
interaction.
BUSINESS OPERATIONS
The Company is made up of two businesses: Diagnostic Information Services and Diagnostic Solutions. Our
Diagnostic Information Services business develops and delivers diagnostic information services, providing insights that
empower and enable a broad range of customers, including patients, clinicians, hospitals, IDNs, health plans, employers, ACOs
and DCEs. Our Diagnostic Solutions group includes our risk assessment services business, which offers solutions for insurers,
and our healthcare information technology businesses, which offers solutions for healthcare providers. Our services primarily
are provided under the Quest Diagnostics brand, but we also provide services under other brands, including AmeriPath,®
Dermpath Diagnostics,® ExamOne,® and Quanum.®
We are the leading provider in the United States, where we conduct substantially all of our business, of clinical
laboratory and anatomic pathology testing, and related services. We see opportunities to bring our experience and expertise in
diagnostic information services to markets outside the United States, including leveraging existing facilities to serve new
markets. We have laboratory facilities in Mexico and Puerto Rico. We are a founding member, with other leading diagnostic
laboratories outside the United States, of the Global Diagnostics Network,TM a strategic working group of diagnostic
laboratories committed to unleashing and sharing local innovation to increase global access to diagnostic science, information
and services and generating enhanced diagnostic insights to improve the delivery of global healthcare. During 2020,
COVID-19 was a key focus area for the Global Diagnostics Network, as members shared experiences and best practices
regarding COVID-19 testing.
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Diagnostic Information Services
Background - clinical testing. Clinical testing is an essential element in the delivery of healthcare services. Clinicians
use clinical testing for predisposition, screening, monitoring, diagnosis, prognosis and treatment choices of diseases and other
medical conditions. Clinical testing is generally categorized as clinical laboratory testing and anatomic pathology services.
Anatomic pathology involves the diagnosis of cancer and other diseases and medical conditions through examination of tissue
and cell samples taken from patients.
Clinical laboratory testing, which can be characterized as routine, non-routine or advanced, generally is performed on
whole blood, serum, plasma and other body fluids, such as urine, and specimens such as microbiology samples. Clinical
laboratory tests which can be performed by most clinical laboratories are considered routine. Routine testing measures various
important bodily health parameters such as the functions of the kidney, heart, liver, thyroid and other organs. Commonly
ordered routine tests include blood chemistries, urinalysis, allergy tests and complete blood cell counts. Non-routine tests may
require professional “hands-on” attention from highly-skilled technical personnel, generally require more sophisticated
informatics, technology, equipment or materials, may be performed less frequently than routine tests and may be reimbursed at
higher levels than routine tests. It may not be practical, from a cost-effectiveness or infrastructure perspective, for many
hospitals, IDNs, ACOs, DCEs, commercial laboratories or physician office laboratories to develop and perform a broad menu
of non-routine tests, or to perform low-volume non-routine testing in-house. Such tests generally are outsourced to a clinical
testing laboratory which can perform these non-routine tests. Some non-routine tests are advanced. Advanced tests include
procedures in the areas of molecular diagnostics (including next-generation sequencing), oncology, neurology, companion
diagnostics and non-invasive pre-natal and other germline genetic testing.
Our services. We are the world's leading provider of diagnostic information services. We provide information and
insights based on the industry-leading menu of routine, non-routine and advanced clinical testing and anatomic pathology
testing, and other diagnostic information services. We have strong testing capabilities, including services for the predisposition,
diagnosis, treatment and monitoring of cancers and other diseases, and offer advanced tests in many fields, including
endocrinology, immunology, neurology and oncology. Increasingly, we are focused on providing solutions and insights to our
customers, based on the testing that we perform, the data that we gather and our extensive medical, information and
connectivity assets. We believe that offering services, solutions and insights based on a full range of tests, information assets
and other capabilities strengthens our market offering, market position and reputation.
We offer the broadest access in the United States to clinical testing. We maintain a nationwide network of
laboratories, including advanced laboratories (such as our world-renowned Quest Diagnostics Nichols Institute®) as well as
rapid response laboratories (smaller facilities where we can quickly perform an abbreviated menu of routine tests for customers
that require rapid turnaround times). We operate 24 hours a day, 365 days a year. Our nationwide network also includes
patient service centers, phlebotomists in physician offices, and our connectivity resources, including call centers and mobile
paramedics, nurses and other health and wellness professionals. Our large in-house staff of medical and scientific experts,
including medical directors, scientific directors, genetic counselors and board certified geneticists, provide medical and
scientific consultation to healthcare providers and patients regarding our tests and test results, and help them best utilize our
services to improve outcomes and enhance satisfaction. We also provide testing (including anatomic pathology) services and
medical director services at hospital laboratories.
We are a leading provider of diagnostic information services for infectious disease, such as COVID-19 (including
molecular diagnostic and serology antibody offerings), tuberculosis (e.g., our T.SPOT.TB and Quantiferon offerings) and tick-
borne disease (e.g., our Accutix® offering). We strive to be the first to provide diagnostic solutions for emerging infectious
diseases (e.g., our offerings for Zika, West Nile Virus, SARS and Influenza A H1N1). We have leading positions in drug
monitoring and toxicology, in neurology diagnostics, in advanced cardiovascular diagnostic information services (e.g., our
CardioIQ® and Cleveland HeartLab® offerings), and in cancer diagnostics (e.g., our QuestVantage® and Med FusionTM
offerings). We are a leader in providing testing for the detection of employee use of drugs of abuse, offering a full range of
solutions, including urine, hair, blood and oral fluid tests. We are the largest workplace drug testing provider certified by the
U.S. Department of Health and Human Services to perform drug testing using electronic custody and control forms for
federally-mandated, safety-sensitive workers.
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We are a leading provider of employer population health services, including biometric screenings, flu shots and related
preventative services that leverage clinical data to improve population health outcomes and reduce healthcare spend. Our
solutions enable employers to leverage screening insights to identify chronic disease risks, connect employees to needed in-
network care, and empower better health. Our offerings include connecting participants to the right care at the right time, such
as (i) a program designed to prevent diabetes and other chronic conditions, (ii) a program that enables participants to engage
with a board-certified physician about their results and to be guided about actions based on those results and (iii) a mental
health assessment program that links participants to virtual support. These services are sold directly to employers and through
reseller partnerships with health plans. During 2020, in response to the COVID-19 pandemic, we developed and offered to
employers COVID-19 Return to Work services, to assist organizations develop plans for safer workplaces. We also
collaborated with Catapult Health, the leading national provider of employer-sponsored preventative checkups, to help
organizations facilitate virtual telehealth access to clinical services for their employees and adult dependents, with emphasis on
reducing risks related to preventable chronic diseases.
We offer Quanum® health information technology solutions, including our products and national healthcare provider
network, to help healthcare organizations and clinicians empower better health by leveraging the power of our significant
information assets, including many years of test result data, and our technology prowess, including our history of providing
leading information technology for diagnostic information services. Our portfolio of offerings is designed to address analytic,
clinical and financial needs. The solutions help healthcare organizations and clinicians analyze and put in context data, and
enable them to connect across the healthcare system and engage with their stakeholders. They can enter, share and access
clinical information without costly information technology implementation or significant workflow disruption.
We offer an array of population health solutions. Our services build on the power of our information assets and data
capabilities and help clinicians, health plans, sponsors and IDNs deliver better care to their patient populations by identifying
gaps in care in a population, providing clinical solutions to close the gaps and fostering consumer engagement with a solution.
Our extended care services, including home-based health risk assessments and related services, leverage our assets and
capabilities (e.g., call centers, patient service centers and mobile workforce, including professionals) and focus on extending the
reach of clinician offices beyond their traditional four walls to assess the health of their populations, and doing so when and
where it is convenient for consumers. Once gaps are identified, we engage patients in our retail sites, in home or by telephone,
including through our call centers and our mobile base capabilities, including highly-trained healthcare professionals. We also
offer services such as diabetic retinopathy and bone density examinations.
We offer services to pharmaceutical companies, including clinical trials testing. We have expertise in developing
laboratory tests for FDA submission as companion diagnostics and laboratory developed tests for complementary diagnostics,
and offer an array of assets and services to support the development of companion diagnostics, including our robust data set and
patient services network. We also offer Quest Clinical Trials ConnectTM to help accelerate clinical trials (and thus the speed of
drugs to market) through better patient recruitment, involvement and management, and improved physician outreach.
We also offer sports teams, including at the professional and collegiate levels, our BluePrint for Athletes® performance
tools, based on biomarker testing, designed to optimize high-level athletic performance through actionable insights. This
service provides the context for athletes to consider performance variables holistically, including nutritional education and
intervention, maximum fitness, injury assessment and training load monitoring as well as sophisticated biometric analysis.
During 2020 we also expanded our test offerings for athletes to include COVID-19 testing, to foster the country's return to
athletic fields.
Diagnostic Solutions
We are the leading provider of risk assessment services for the life insurance industry. In addition, we offer healthcare
organizations and clinicians robust health information technology solutions.
Risk Assessment Services. ExamOne® is the largest provider of risk assessment services to the life insurance industry
in North America. Our risk assessment services comprise underwriting support services, including data gathering, paramedical
examinations and clinical laboratory testing and analytics, designed to assist life insurance companies objectively to evaluate
the mortality risks of applicants. Most specimen collections and paramedical examinations are performed by our network of
paramedical examiners at the applicant's home or workplace, but they also are offered at hundreds of Company patient service
centers and hundreds of additional North American locations.
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Healthcare Information Technology. Our healthcare information technology offerings, including Quanum® Practice
Solutions, our Electronic Health Record, Practice Management and Revenue Cycle Management Solutions for healthcare
providers, and our award-winning Quanum® Enterprise Content Solutions for hospitals and IDNs, connect data to decision-
making and help clinicians advance clinical and operational strategies. Healthcare organizations have contracted for the use of
Quanum® Enterprise Content Solutions at over 375 sites in North America. Our Quanum® Electronic Health Record is a cloud-
based, mobile-accessible offering that enables clinicians to generate a complete record of a clinical patient encounter, automates
and streamlines the clinician's workflow, provides clinical decision support tools, captures patient encounter notes and lab and
radiology results and enables secure communication with patients and other clinicians.
Other
Q2 Solutions,® our joint venture with IQVIA Holdings Inc., is the second largest central laboratory services company
in the world and provides services to customers across all segments of the biopharmaceutical industry. Central laboratory
testing services are critical to advances in genomics, precision medicine and drug development. We own a minority interest in
Q2 Solutions, which has helped develop many of the oncology precision medicine drugs approved by the FDA in recent years.
THE CLINICAL TESTING INDUSTRY
Our estimate in table 10 does not include the impact of COVID-19 testing.
Key Trends
The healthcare system in the United States is evolving; significant change is taking place in the system. We expect
that the evolution of the healthcare industry, including impacts of the COVID-19 pandemic, which include the increased
adoption of telemedicine, will continue, and that industry change is likely to be extensive. There are a number of key trends
that are having, and that we expect will continue to have, a significant impact on the diagnostic information services business in
the United States and on our business. These trends, discussed in the table below, present both opportunities and risks. We
believe that several of the trends, including consolidation, price transparency and consumerization, are favorable to our
business.
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Because diagnostic information services is an essential healthcare service and because of the key trends discussed
below, we believe that the industry will continue to grow over the long term. In addition, we believe that the clinical testing
market continued with fundamental changes in 2020. First, we believe that PAMA-driven reimbursement pressure is negatively
impacting access to care and hurting the clinical testing industry, and remains a catalyst for structural change in the market.
Second, we believe that health plans increasingly are focusing on driving better value in laboratory testing services. Third, we
believe that ongoing consumerization in healthcare, with increased cost being borne by consumers, is sharpening focus on price
disparities. We believe that these changing market fundamentals will benefit low-cost, high-value providers like Quest and that
we are well positioned to grow from the changing market conditions and benefit from the long-term growth expected in the
industry.
PAMA-driven
reimbursement
pressure
Pursuant to PAMA, reimbursement rates for many clinical laboratory tests provided under Medicare were
reduced in 2018, 2019 and 2020. PAMA calls for further revision of the Medicare Clinical Laboratory Fee
Schedule for years after 2020, based on future surveys of market rates; reimbursement rate reduction from
2022-24 is capped by PAMA at 15% annually.
Key Trends (Table 11)
Health plans
driving value in
lab spending
The LAB Act provided an opportunity for reforms to PAMA by delaying PAMA's next data collection and
reporting period until January 1, 2021 and by ordering a study to determine ways to improve future
collection of more representative market rate data under PAMA. The CARES Act, adopted in early 2020
in response to the COVID-19 pandemic, suspended the PAMA reimbursement rate cuts that had been
scheduled for 2021 and delayed PAMA's next data collection and reporting period until January 1, 2022.
The American Clinical Laboratory Association, of which the Company is a member, initiated a lawsuit
charging that in implementing PAMA, CMS failed to follow a Congressional directive to implement a
market-based laboratory payment system. The lawsuit is pending.
We believe that PAMA is negatively impacting participants in the laboratory testing industry generally,
including hospitals as well as independent clinical laboratories.
Hospitals, which provide outreach testing and may encourage clinicians to send their outreach testing
volume to the hospital's laboratory, historically were able to negotiate higher reimbursement rates with
health plans than commercial clinical laboratories for comparable services. In addition, health plans
generally reimburse non-participating laboratory testing providers at higher out-of-network rates. We are
finding increased interest among health plans in driving better value in spending for laboratory testing.
Health plans increasingly are taking steps to encourage the movement of testing volume to high value, low
cost providers like our Company, including by identifying preferred provider partners, plan design changes
(e.g., zero-dollar out-of-pocket costs for members using preferred providers) and better aligning
reimbursement rates for hospital-based providers and independent commercial laboratories. The
UnitedHealthcare Preferred Lab Network, in which we were chosen to participate, is a recent example of a
health plan taking these steps.
Health plans also are increasingly adopting policies, practices and procedures based on requirements
imposed by government payers such as Medicare and Medicaid. These policies, practices and procedures
are subject to change, and may be changed without notice to us.
Consumerization Consumers are our customers. Increasingly, consumers are engaged in their own healthcare, being
empowered to understand and manage their healthcare. Consumers are taking increased interest in and
responsibility for their healthcare, their expectations of healthcare providers are increasing and they are
becoming more sophisticated regarding healthcare. Some patients are interested in selecting their own
diagnostics tests, rather than relying upon a healthcare professional to select the tests. In addition,
consumers often are bearing increased financial responsibility for their healthcare (e.g., high deductible
health plans; rising deductibles). In our experience, consumers are more focused on transparency, ease of
doing business and understanding diagnostics information services than they have been in the past.
Consumers increasingly are demanding convenience; a superior and personalized experience relevant to
their needs; and to be empowered to make their own healthcare decisions. During the COVID-19
pandemic, we saw consumers increase their use of telemedicine capabilities, increase their responsibility
for their own healthcare (e.g., increased consumer-initiated testing; increased specimen self-collection) and
increase their openness to new delivery channels (e.g., retail; convenient "pop-up" test centers). In
addition, consumers are seeking prompt, direct access to their test results. Increasingly, consumers are
motivated to find high quality service providers with strong digital experience delivery engines, accessible
customer service and low prices, like our Company.
Prevention and
wellness
We believe that the value of detection, prevention, wellness and personalized care is well recognized.
Consumers, employers, ACOs, IDNs, health plans and government agencies increasingly focus on helping
the healthy stay healthy, detecting symptoms among those at risk and providing preventive insight and care
that helps avoid disease.
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Medical
innovation
Healthcare
industry
evolution
Pricing
transparency
Medical advances allow for more accurate and earlier diagnosis and treatment of diseases.
Continuing advances in genomics and proteomics are expected to yield new, more sophisticated and
specialized diagnostic tests. These advances also are spurring interest in and demand for precision
medicine, which relies on diagnostic and prognostic testing and in which data information services and
strategies are used to deliver the most effective healthcare to the right populations and individuals.
Pharmacogenomic testing increasingly is used as a parameter to help speed drug approval processes and to
better focus therapy based on patient and tumor-specific genetic markers.
Demand also is growing toward comprehensive care management solutions that serve patients, payers and
healthcare providers by improving clinical decision support and access to patient data, and by increasing
patient participation in care management and population health management.
Innovation also includes making healthcare services, including laboratory testing services, more
convenient for populations and consumers to access, including at home (e.g., telehealth) or in retail
settings.
There is increasing focus on access to patient data and data-driven insights.
Clinicians, health plans, IDNs, ACOs, employers and others, have been consolidating, converging and
diversifying. For example, a number of hospital systems are considering establishing or have established
health insurance plans, and health insurance plans are considering providing or are providing healthcare
services. In recent years, a leading provider of retail medical clinics and pharmacy benefits management
services has acquired a leading health insurance provider, a leading health insurance provider has acquired
a leading pharmacy benefits manager, and the corporate parent of a leading health insurance company
provides a wide array of healthcare services through its non-insurance company subsidiaries. Health plans
are entering agreements with other providers of healthcare services, including laboratory testing services
providers, to partner on value-based approaches to delivering healthcare to populations. DCEs have been
established.
Consolidation is increasing pricing transparency and bargaining power, and may encourage internalization
of clinical testing.
Physicians frequently now are employed by hospital systems, IDNs, ACOs, DCEs or large group practices
integrated with healthcare systems, instead of organizing physician-owned practices, which is impacting
the dynamics for whether clinical testing is performed in or outside of a hospital. Physicians and other
clinicians also increasingly are being employed by health plans or their affiliates.
Value-based reimbursement is contributing to changes in the healthcare system. ACOs and patient-
centered medical homes have grown as a means to deliver patient care. Healthcare services increasingly
are being provided by non-traditional providers (e.g., physician assistants), in non-traditional venues (e.g.,
retail medical clinics, urgent care centers) and using new technologies (e.g., telemedicine, digital
pathology).
In addition the ACA continues to result in changes in the way that some healthcare services are purchased
and delivered in the United States. Hospitals and IDNs are under significant pressure, and are evolving.
There has been a trend toward greater pricing transparency in healthcare, including in the laboratory testing
marketplace. Several states have taken action to foster greater pricing transparency in healthcare. For
example, Massachusetts launched a website to help consumers understand the wide variation in healthcare
costs. In addition, the federal government requires providers of COVID-19 testing to post on their
websites information regarding test pricing, and has adopted new legislation and issued new regulations
designed to increase transparency regarding pricing and quality in healthcare, including requiring
providers, group health plans and insurers to disclose cost information to consumers in advance of care
being provided.
Increased price transparency, combined with increased patient financial responsibility for medical care, is
enhancing purchasing sophistication and fostering changes in behavior in the healthcare marketplace. We
believe that increased price transparency should benefit low cost, high value providers like our Company.
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Competition
The diagnostic information services industry remains fragmented, is highly competitive and is subject to
new competition.
Competition is emerging from new technologies (e.g., digital pathology) and growing from non-traditional
competitors (e.g., a government agency or employer establishing its own clinical laboratory for testing).
Increased hospital acquisitions of physician practices may enhance clinician ties to hospital-affiliated
laboratories and may strengthen their competitive position. However, in light of other trends, including
continued reimbursement pressure, hospitals may change their approach to providing clinical testing
services.
New industry entrants with extensive resources may make acquisitions or expand into our traditional areas
of operations.
Healthcare
utilization
Healthcare utilization in the United States has fluctuated based on a number of factors. These factors
include, without limitation, the economy, healthcare benefits design, patients delaying medical care (e.g.,
due to the COVID-19 pandemic), and increased consumer financial responsibility for, interest in and
control of their healthcare.
Reimbursement
pressure;
affordability
The ACA contained provisions eliminating patient cost-sharing for preventative services, and additional
provisions that we believe increased the number of patients that have health insurance, including Medicaid,
and thus better access to diagnostic testing.
There is a strong focus in the United States on controlling the overall cost of healthcare.
Healthcare market participants, including governments, are focused on controlling costs. Examples of cost
control approaches include reducing reimbursement for healthcare services, changing reimbursement for
healthcare services (e.g., shift from fee for service to capitation), changing medical coverage policies (e.g.,
healthcare benefits design), denying coverage for services, requiring preauthorization of laboratory testing,
requiring co-pays, introducing laboratory spend management utilities and payment and patient care
innovations such as ACOs, DCEs and patient-centered medical homes. CMS has set goals for value-based
reimbursement to be achieved in Medicare. There is increased market activity regarding alternative
payment models, including bundled payment models.
The Health Transformation Alliance, a group of over 50 major U.S. companies, was formed to improve
and reform the healthcare system in the United States. The rising cost of healthcare in the United States
was a key driver for the formation of this alliance.
In 2018, a trio of high profile U.S. corporations, citing rising healthcare costs, announced plans to reduce
their workers' healthcare costs by forming a non-profit venture that would provide simplified, high-quality
healthcare for their workers. Although the venture announced in early 2021 that it was disbanding, we
believe that there will be other initiatives to transform healthcare.
While pressure to control healthcare costs poses a risk to our Company, it also creates opportunities, such
as an opportunity for increased proper utilization of testing as an efficient means to manage the total cost
of healthcare. We believe that it also creates greater opportunities for consolidation and gaining share for
high value, low-cost providers, like our Company, as compared to other providers.
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Legislative,
regulatory and
policy
environment
Government oversight of and attention to the healthcare industry in the United States is significant and
increasing; healthcare payment reform and cost transparency are significant issues.
Legislation introduced in Congress would enable the FDA to regulate LDTs, in vitro diagnostics, software
and other items used in the diagnosis of disease. If the legislation becomes law, the FDA could regulate
diagnostic tests and components and platforms used as part of these tests. The FDA and HHS also have
expressed views regarding the regulation of LDTs. Either new law or a revised approach to regulation of
LDTs could have a significant impact on the clinical laboratory testing industry, including regulating LDTs
in new ways, while creating avenues of opportunity and competition regarding clinical laboratory testing.
New competitors may enter the industry, and competition may come in new forms.
The ACA has created significant uncertainty as healthcare markets react to changes. For example, more
than half of the states have opted in to Medicaid expansion and employers may discontinue offering group
health insurance to their employees, shifting more people to exchange products.
Certain aspects of the ACA have been repealed, delayed or modified (e.g., the medical device excise tax).
The scope and timing of any further legislation to repeal, amend, replace, or reform the rest of the ACA is
uncertain, but if such legislation were to become law, it could have a significant impact on the U.S.
healthcare system. In addition, uncertainty regarding the status of the ACA prior to any such repeal,
amendment, replacement or reform could create uncertainty generally in the healthcare market.
Several federal courts have recently issued determinations that portions of the ACA are unconstitutional;
those rulings are not yet final, with appeals pending at the U.S. Supreme Court.
Informatics;
technology;
privacy concerns
The increased availability of healthcare data, including data made available as a result of next generation
DNA sequencing, and the increased ability to effectively analyze that data at population and patient levels,
is impacting healthcare practices. It is anticipated that the increased use of data in healthcare, coupled with
mobile healthcare IT solutions for doctors and patients, will help to improve patient outcomes and reduce
overall healthcare costs. In 2020, we launched automated next generation genetic sequencing, which will
enable genetic screening faster and at much lower cost.
Informatics, including integrated diagnostic and decision support solutions, predictive analytics, use of
population data and healthcare information technology, is spurring advances in precision medicine,
including medical decision making and value, for populations and individuals. The increased focus on
data and its use is increasing focus on maintaining the privacy of patient data.
There is a need for technology solutions to harness these opportunities. In addition, new technology, social
media and mobile technology are changing the way that healthcare markets interact with each other, and
the expectations that they have about how services are provided, what services are provided, and other
capabilities of healthcare market participants. These developments are creating new opportunities and new
challenges and disrupting the healthcare environment. For example, during 2020, telemedicine practices
became more commonly used; digital pathology is an emerging technology that may change the practice of
pathology. Information technology that includes self-learning or "artificial intelligence" features is
growing and may impact the healthcare industry.
Healthcare market participants, including pharmaceutical companies, health plans, clinicians, ACOs and
IDNs, are striving to leverage interoperability, informatics and analytics to positively influence the health
of patient populations while maintaining patient privacy.
Chronic diseases
and conditions;
gaps in care
We believe that the cost and challenges of identifying, treating and controlling chronic diseases and
conditions such as diabetes and heart disease are now well recognized. The COVID-19 pandemic called
attention to gaps in care in underserved populations.
As a result of multiple factors, including increased focus on population health management and pressure to
reduce the systemic costs associated with such diseases and conditions, there is increased focus on better
identifying and attempting to reduce or eliminate the gaps in care historically associated with these
diseases and conditions. Healthcare market participants are developing new approaches for this purpose.
We believe that there also is increased focus on reducing or eliminating gaps in care in underserved
populations.
Healthcare
services delivery
Healthcare delivery is moving out of hospitals, doctor offices and other traditional locations in which it had
been provided. Care is increasingly being provided in new settings, such as outpatient, consumer-focused
and home settings. In response to the COVID-19 pandemic, telemedicine practices became more
commonly used during 2020. In addition, see the discussion of Emerging Retail Healthcare Providers in
table 13. This dynamic offers new opportunities and challenges for healthcare providers and reflects not
only efforts to take advantage of new technologies, but also the trends of consumerization and
affordability, each of which are discussed above in this table.
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The Value of Diagnostic Information Services
As noted in table 11, there is an increased focus on the affordability of healthcare. There also is increased focus on a
disease-oriented approach to diagnostics, treatment and management. Healthcare providers, consumers and payers increasingly
recognize the value of diagnostic information services as a means to improve health and reduce the overall cost of healthcare
through early detection, prevention and treatment. Healthcare providers increasingly rely on diagnostic information services to
help identify risk for a disease, to detect the symptoms of disease earlier, to aid in the choice of therapeutic regimen, to monitor
patient compliance and to evaluate treatment results. Table 12 highlights how diagnostic information services contribute to
improving care and reducing healthcare costs.
Reducing Healthcare Costs and Improving Care (Table 12)
• Identifying patients at risk for disease before they require urgent care, hospital treatment or expensive therapies
• Helping clinicians to target the right medicines for the right patients at the right time
• Identifying treatment-related side effects
• Early assessment of the efficacy of a therapy, enabling changes or discontinuation of ineffective therapies
• Enabling population health management by utilizing diagnostic information, identifying gaps in care and delivering
targeted solutions to individuals who need care
• Identification and proactive management of individuals at risk for developing chronic diseases, to decrease progression
and associated costs and morbidity
• Providing telemedicine services along with laboratory testing to help individuals interpret and obtain appropriate advice
and referrals into needed care
Customers
We provide diagnostic information services to a broad range of customers, including those discussed below. As
discussed in table 11 above, customers are consolidating, converging and diversifying. In many cases, the customer that orders
our services is not responsible for paying for these services. Depending on the billing arrangement and applicable law, the payer
may be the patient or a third party, such as a health plan, Medicare or a Medicaid program. Increasingly, patients are bearing
greater responsibility for some portion of the payment for the services we provide to them, even if a third party is primarily
responsible for payment. In addition, patients are more frequently taking advantage of offerings like the Company's
QuestDirect offering, and requesting and paying for tests themselves.
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Health plans including
managed care
organizations and
other health insurance
providers
Customers (Table 13)
These customers typically reimburse us as a contracted (or out-of-network) provider on behalf of
their members. In certain locations, health plans may delegate to IPAs or other alternative delivery
systems (e.g., physician hospital organizations, ACOs, patient-centered medical homes) the ability
to negotiate for diagnostic information services on behalf of certain members.
Health plans and IPAs often require that diagnostic information services providers accept discounted
fee structures or assume all or a portion of the financial risk associated with providing such services
through capitated payment arrangements. Under capitated payment arrangements, we provide
services at a predetermined monthly reimbursement rate for each covered member, generally
regardless of the number or cost of services provided by us. Under some capitated programs, we
may provide certain services on a negotiated fee-for-service basis. Reimbursement under programs
that do not provide for capitated payments is typically negotiated on a fee-for-service basis.
Reimbursement from our five largest health plans totaled approximately 20%, and no one health
plan accounted for 10%, of our consolidated net revenues in 2020. Health plans typically negotiate
directly or indirectly with a number of diagnostic information services providers, and represent
approximately one-half of our total clinical testing volume and approximately 40% of our net
revenues from diagnostic information services. There has been a trend of consolidation among
health plans. Some health plans also have narrowed their provider networks. In addition, some
health plans have established "preferred provider" networks within their broader networks, in effect
distinguishing among contracted providers.
We are also sometimes a member of a “complementary network.” A complementary network
generally is a set of contractual arrangements that a third party will maintain with various providers
that provide discounted fees for the benefit of its customers. A member of a health plan may choose
to access a non-contracted provider that is a member of a complementary network; if so, the
provider will be reimbursed at a rate negotiated by the complementary network.
We offer to health plans services and programs that leverage our Company's expertise and resources,
including our superior access, extensive test menu, medical staff, data, information technology
solutions, and wellness and population health management capabilities.
Since the beginning of 2019, the Company has had access to a very high percentage of the insured
lives in the U.S., including very strong access in key high-population states. This is the best access
to health plan members that we have had in over a decade. We believe that this strong access
increases our attractiveness to other customer groups, including clinicians, patients and employers.
Clinicians
Clinicians, including primary care physicians, specialists and physician assistants, requiring
diagnostic information services for patients are the primary referral source for our services when
patients choose their diagnostic information services provider.
In recent years, there has been a marked increase in the number of physician practices owned by
IDNs and hospital systems. There also has been a notable increase in some branches of medicine of
the establishment of very large "rolled-up" specialty physician practice groups. Hospitals that own
physician practices may encourage or require the practices to refer outreach testing to the hospital's
affiliated laboratory. Large specialty physician groups may encourage their members to refer testing
to other members of the group. In each case, referrals to independent diagnostic services providers
may be reduced.
Clinicians determine which laboratory to recommend or use based on a variety of factors, including
those set forth in table 14.
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Hospitals
We believe that we are the industry's leader in servicing hospitals. We provide services to hospitals
throughout the United States, including advanced testing services, in some cases helping manage
their laboratories and serving as the medical directors of the hospital's histology or clinical
laboratory, including through our Professional Laboratory Services offerings (our industry-leading
Professional Lab Services offering is discussed in table 3 above). Hospitals generally maintain an
on-site laboratory to perform the significant majority of clinical testing for their patients (inpatients
and outpatients) and refer certain testing to outside service providers, which typically charge the
hospitals on a negotiated fee-for-service basis. Fee schedules for hospital reference testing services
often are negotiated on behalf of hospitals by group purchasing organizations.
We also have joint venture arrangements with leading hospitals or IDNs in several metropolitan
areas. These joint venture arrangements, which provide diagnostic information services for
affiliated hospitals as well as for unaffiliated clinicians and other local healthcare providers, serve as
our principal facilities in their service areas. Typically, we have either a majority ownership interest
in, or day-to-day management responsibilities for, our joint venture relationships.
In light of continued pressure to reduce systemic healthcare costs, hospitals may change their
approach to providing clinical testing services, including by insourcing tests, seeking ways to
improve profitability or to better utilize their laboratory capacity. We believe that our combination
of services positions us to be an attractive partner for hospitals, offering a full range of strategic
relationships.
ACOs, DCEs and
IDNs
An ACO is a network of providers and facilities that share financial risk in providing or arranging
for the provision of healthcare. A DCE is a healthcare provider that agrees to assume some level of
financial risk for providing Medicare services. An IDN is a network of providers and facilities
working together in providing or arranging for the provision of healthcare. ACOs, DCEs and IDNs
have increased in number; their impact on the provision of healthcare services to date has varied.
ACOs, DCEs and IDNs may exercise operational and financial control over providers across the
continuum of care, and may function as a payer. Thus, they may be able to manage the health of a
population group within a defined geography, and also may be able to influence the cost and quality
of healthcare delivery, for example through owned entities and through ancillary services. They
may be encouraged to consider exclusive arrangements with healthcare providers, or to limit service
providers.
We are actively engaging with ACOs, DCEs and IDNs to demonstrate the value of our services.
Employers use tests for drugs of abuse to determine an individual's employability and his or her
“fitness for duty.” Companies with high levels of employee hiring, safety conscious environments
or regulatory testing requirements provide the highest volumes of testing. Factors such as the
general economy, the job market and changes in the legal environment (e.g., marijuana
decriminalization) can impact the utilization of drugs-of-abuse testing.
Employers also are investing in population health services. We meet their needs by providing
nationwide access to our customizable services (discussed above at page 13), directly and through
health plan and health improvement providers. These services help employers, employees and
others manage healthcare costs, capitalize on trends in personalized health and improve health
outcomes. In response to the COVID-19 pandemic, we expanded our offerings to employers to
assist their pandemic response to create safer workplaces (discussed above at page 13).
We seek to grow our employer business through offering new and innovative programs to help them
with their goals of (1) maintaining a safe and productive workplace, (2) improving healthcare for
employees and (3) lowering healthcare costs for employees and employers.
We are well positioned to provide information and insights to patients to help them take actions to
improve their healthcare. The changing expectations of patients about their healthcare and their
healthcare transactions are influencing our services and the way we provide them. See the
discussions of our consumer strategy at page 5 and consumerization above in table 11.
Federally Qualified Health Centers offer a broad array of healthcare services, including to
historically underserved populations. We strive to offer an attractive array of services to FQHCs to
demonstrate the value of our services.
Employers
Consumers
FQHCs
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Emerging Retail
Healthcare Providers
In recent years, as the healthcare sector changes, retail providers of healthcare services have
emerged and are growing. These providers include "big-box" retailers, pharmacy chains,
supermarkets, urgent care centers and Internet-based service providers.
We are taking advantage of opportunities to work with these providers, not only to offer new access
points for our services (e.g., our collaboration with Safeway), but also to grow our business by
expanding our service offerings (e.g., our joint venture with Walmart). See the discussion of our
consumer strategy at page 5.
Government Agencies We provide services on a fee-for-service basis to federal, state and local governmental agencies.
Historically, most Medicare and Medicaid beneficiaries were covered under the traditional Medicare
and Medicaid programs administered by the federal government. Over the last several years, the
federal government has expanded its contracts with private health insurance plans for Medicare
beneficiaries and has encouraged such beneficiaries to switch from the traditional programs to the
private programs, called “Medicare Advantage” programs. There has been growth of health
insurance providers offering Medicare Advantage programs and of beneficiary enrollment in these
programs. States also have mandated that Medicaid beneficiaries enroll in private managed care
arrangements. During 2020, we provided additional services to and in conjunction with government
agencies across the United States in connection with the COVID-19 pandemic.
Pharmaceutical
companies
We have expertise with laboratory developed tests for companion and complementary diagnostics,
and offer an array of assets and services to support the development of companion diagnostics,
including our robust data set and patient services network.
We also offer Quest Clinical Trials Connect,TM to help accelerate clinical trials (and thus the speed
of drugs to market) through better patient recruitment, involvement and management, and improved
physician outreach.
Other Laboratories
We provide services on a fee-for-service basis to other commercial clinical laboratories.
Competition. While there has been consolidation in the diagnostic information services industry in recent years, our
industry remains fragmented and highly competitive. We primarily compete with three types of clinical testing providers:
commercial clinical laboratories, hospital-affiliated laboratories and physician-office laboratories. Our largest commercial
clinical laboratory competitor is Laboratory Corporation of America Holdings, Inc. In addition, we compete with many smaller
regional and local commercial clinical laboratories and specialized advanced laboratories. In anatomic pathology, we compete
with anatomic pathology practices, including those in academic institutions and large physician group practices, and providers
of emerging digital pathology solutions. There also has been a trend among specialty physician practices to establish their own
histology laboratory capabilities and/or bring pathologists into their practices, thereby reducing referrals from these practices
and increasing the competitive position of these practices.
Healthcare providers consider a number of factors when selecting a diagnostic information services provider.
Potential Factors Considered When Selecting a Diagnostic Information Services Provider (Table 14)
• Service capability and quality
• Reputation in the medical community
• Accuracy, timeliness and consistency in reporting test
• Healthcare information technology solutions, including
results
connectivity options
• Access to medical/scientific thought leaders for
• Patient access, including the number, convenience and
consultation
• Patient insurance coverage and experience
• Number and type of tests performed
• Pricing and overall value
• Real time payment determination
geographic coverage of patient service centers
• Ability to develop new and useful tests and services
• Qualifications of its staff
• Provider office workflow
• Capabilities to support population health initiatives
0
We believe that providing the most attractive service offering in the industry, including the most comprehensive test
menu, innovative test offerings, a positive customer experience, a staff including medical and scientific experts, strong quality,
unparalleled access and distribution, and data-powered integrated information technology solutions provide us with a
competitive advantage.
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We believe that large diagnostic information services providers have a competitive advantage due to their large
networks and lower cost structures, including as a result of PAMA. These advantages should enable larger providers to more
effectively serve customers. In addition, we believe that consolidation in the diagnostic information services industry will
continue. However, a significant portion of clinical testing is likely to continue to be performed by hospitals, which generally
have affiliations with community clinicians and may have more, or more convenient, locations in a market. As a result, we
compete against hospital-affiliated laboratories primarily on the basis of service capability, quality and pricing. In addition,
market activity may increase the competitive environment. For example, hospital ownership of physician practices may
enhance the ties of the clinicians to hospital-affiliated laboratories, enhancing the competitive position of hospital-affiliated
laboratories. ACOs, DCEs and IDNs, and their approach to contracts with healthcare providers, in addition to the impact of
informatics, also may impact competition to provide diagnostic information services.
The diagnostic information services industry is faced with changing technology, new product introductions and new
service offerings. Competitors may compete using advanced technology, including technology that enables more convenient or
cost-effective testing. Digital pathology, still in an emerging state, is an example of this. Competitors also may compete on the
basis of new service offerings. Competitors also may offer testing to be performed outside of a commercial clinical laboratory,
such as (1) point-of-care testing that can be performed by physicians in their offices; (2) testing that can be performed by
hospitals in their own laboratories; and (3) home testing that can be carried out without requiring the services of outside
providers.
The risk assessment and healthcare information technology industries are highly competitive. We have many
competitors, some of which have much more extensive experience in these industries and some of which have greater
resources. We compete in the risk assessment business by seeking to provide a wider array of quality, integrated services than
our competitors, faster services completion and a superior applicant experience. We compete in the healthcare information
technology industry by offering solutions that foster better patient care and improve performance for healthcare providers,
including smaller and medium sized physician practices.
GENERAL
Human Capital Management. Creating an inspiring workplace is one of our three corporate goals, and this goal
drives our approach to human capital management. Effectively managing our human capital resources is a priority with key
components that include culture, safety and well-being programs, employee engagement, and development and succession
planning. Our Board of Directors actively engages in oversight of our human capital management, including by receiving
management reports on key areas, strategies and initiatives. Additional information about our human capital management
strategies and initiatives is available in our annual corporate responsibility report.
As of January 4, 2021, we have approximately 49,000 employees, of whom approximately 40,000 are full-time and the
remainder are part-time or on-call. Our employee population is more diverse than the U.S. workforce, taken as a whole.
Approximately 72% of our employees globally are women; approximately 51% of our U.S. employees are people of color. A
majority of our employees work directly with our customers or in our laboratories. We believe that our overall relations with
our employees are good.
Culture. We strive to foster a strong culture, built on our Code of Ethics, which reinforces our commitment to
integrity and aligns with our vision, values, goals and brand. We are focused on building and maintaining a culture in which all
employees are empowered to raise and discuss difficult issues and valued for their strengths, experience and unique
perspectives. We encourage our employees to actively participate in their communities, and support their participation,
including offering incentives for participation. Our Everyday Excellence program includes guiding principles for our entire
organization to support a superior customer experience and inspire employees to be their best every day, with every person and
with every customer interaction; the program is integrated into performance assessments and frontline employee behavioral
standards.
Safety and Well-Being. The health and safety of our employees is of paramount concern. We use a systematic, risk-
based approach to develop tailored incident prevention and response programs designed to keep our employees safe in each of
our diverse functional areas, and use data insights and a detailed audit program to foster the effectiveness of our programs. We
have a comprehensive curriculum of annual safety training, as well as training for new employees. In 2020, our cross-
functional Safely Working Together Steering Committee designed and implemented tactics, techniques and procedures to
enable our colleagues to continue to work safely during the COVID-19 pandemic. As part of our comprehensive and
competitive compensation and benefits program, we also offer innovative initiatives to support the well-being of our employees
and their families through our HealthyQuest program. The cornerstone of our HealthyQuest program is our Blueprint for
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Wellness program, which empowers our employees and their dependents with health insights based on lab and biometric data
and invites them each year to take the initiative to improve their physical and mental health. We also offer other programs
designed to engage employees in managing their health, including access to medical expertise and support programs tailored to
their individual needs, helping them to adopt healthier behaviors and access better care at lower costs. These include
customized programs for conditions such as type 2 diabetes management, chronic kidney disease, cardiovascular disease, zero-
cost lab testing and specialty drugs, advocacy for mental health concerns and special support for orthopedic surgery and for
cancer and other serious diagnoses. In 2020, The Health Project named Quest Diagnostics the sole winner of the prestigious C.
Everett Koop National Health Award, which is given to health programs that deliver significant health improvements and
business results.
Inclusion and Diversity. We understand the need to create an environment where employees can bring their whole
selves to work. We aim to harness the unique mix of capabilities, talents, cultures, beliefs and experience of our employees and
create a workforce that is demographically diverse at all levels of the organization. In 2020, in light of societal issues raised
around us, our leadership and employees engaged squarely on the issue of racial equality in our country and the workplace.
Several hundred leaders participated in a session on the topic, received a toolkit to help simulate thinking and action and how to
address these issues and held dozens of meetings and panels with their teams to talk about racial inequities. We also launched,
with the Quest Diagnostics Foundation, Quest for Health Equity, a multi-year, $100 million-plus initiative to help reduce health
disparities in underserved communities.
Engagement. Since 1997, we have sought to foster the engagement and enablement of our employees, and have
regularly surveyed our employees to gauge their engagement. Employee engagement has been a metric in the annual incentive
plan for our executive officers since 2013. During 2020, we increased our engagement efforts, including by shifting to an
approach of surveying employees more frequently and, during the COVID-19 pandemic, holding near-weekly meetings among
hundreds of company leaders to foster increased communication across the company regarding topics of concern to employees.
Development and Succession Planning. We provide training on a wide array of topics to our employees. We also
offer a number of development opportunities for our employees, such as training, mentoring and education programs, including
a higher education tuition reimbursement program. In addition, we offer leadership training programs for employees at
different levels, including programs designed to strengthen our more senior employee leaders to create a high-performance
culture and sharpen the capabilities needed to lead our organization. We regularly engage in succession planning for our talent,
including at the most senior levels.
Sales and Marketing. Our Diagnostic Information Services business has a unified commercial organization focused
on the sale of most of our services. It coordinates closely with our clinical franchises (discussed above under the heading Our
Strategy) and marketing organization. The commercial organization is centrally led, and is organized regionally, in
conjunction with our operations organization, to focus on local customer needs and to ensure aligned delivery for our
customers. Our commercial organization employs world-class processes and tools and strong management discipline. We
provide industry-leading training and development, focus on opportunities with IDNs and specialty physicians, and foster a
customer-focused, performance-driven culture. We also maintain distinct sales and marketing organizations for our offerings
in Diagnostic Solutions and our employer drugs-of-abuse testing services.
Information Technology. We use information systems extensively in virtually all aspects of our business, including
clinical testing, test ordering and reporting, billing, customer service, logistics and management of medical data. We endeavor
to establish systems that create value and efficiencies for our Company and customers. The successful delivery of our services
depends, in part, on the continued and uninterrupted performance of our information technology systems. We take
precautionary measures to prevent problems that could affect our information technology systems.
Some of our historic growth has come through acquisitions and, as a result, we continue to use multiple information
systems. We have made significant progress implementing common systems in our regional laboratories, and we continue to
standardize laboratory information and billing systems across our operations. We expect that our standardization efforts will
take several more years to complete, and will result in significantly more centralized systems, improved operating efficiency,
more positive customer experiences and enhanced control over our operational environment. Even after we complete our
efforts to standardize our historic systems, we will need to focus on standardizing systems in connection with future business
acquisitions.
Quality Assurance. As discussed further under the heading Quality on page 7, our goal is to provide every patient
with services and products of superior quality, and to meet that goal we have adopted the Quest Diagnostics Quality Program
System. Employing root cause analysis, process improvements and rigorous tracking and measuring, we continuously seek to
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enhance quality, reduce defects, further increase the efficacy and efficiency of our operations and processes, eliminate waste
and help standardize operations across our Company.
In our laboratory operations, our quality assurance efforts focus on pre-analytic, analytic and post-analytic processes,
including positive patient identification of specimens, appropriate specimen transport, analysis and report accuracy, proficiency
testing, reference range relevance, process audits, statistical process control and personnel training for all of our laboratories
and patient service centers. As part of our quality assurance program, we utilize internal and external proficiency testing,
comprehensive quality control and rigorous process audits. We monitor test results to identify trends, biases or imprecision in
our analytical processes. We also focus on the licensing, credentialing, training and competence of our professional and
technical staff.
In addition, we have accreditation or licenses for our clinical laboratory operations from various regulatory agencies or
accrediting organizations, such as CMS, CAP and certain states. All of our laboratories participate in external quality
surveillance programs, including proficiency testing programs administered by CAP and several state agencies. CAP is an
independent, nongovernmental organization of board-certified pathologists approved by CMS to inspect clinical laboratories to
determine compliance with the standards required by CLIA. CAP offers an accreditation program to which clinical laboratories
may voluntarily subscribe. All of our major laboratories, including our laboratories outside the U.S., and a number of our rapid
response laboratories, are accredited by CAP. Accreditation includes on-site inspections and participation in the CAP (or
equivalent) proficiency testing program. Also, our cytotechnologists and pathologists participate in an internal peer-review
evaluation and one or more external individual proficiency testing programs. In addition, some of our laboratories also have
International Organization for Standardization certification for their quality management systems.
For additional information about our commitment to quality, see "Our Strengths - Quality " on page 7.
Intellectual Property Rights. We own significant intellectual property, including patents, patent applications,
technology, trade secrets, know-how, copyrights and trademarks in the United States and other countries. From time to time,
we also license patents, patent applications, technology, trade secrets, know-how, copyrights or trademarks owned by others;
we also may license our intellectual property to others. In the aggregate, our intellectual property assets and licenses are of
material importance to our business. We believe, however, that no single patent, technology, trademark, intellectual property
asset or license is material to our business as a whole. Our approach is to manage our intellectual property assets, to safeguard
them and to maximize their value to our enterprise. We actively defend our important intellectual property assets and pursue
protection of our products, processes and other intellectual property where possible.
Enterprise Risk Management Program. We maintain an enterprise risk management program designed to promote
a culture of risk awareness throughout the Company's key business, operations and support functions. Our program, which is
integrated with the Company’s governance, performance management and internal control frameworks, entails a formal
continuous process that identifies, assesses, mitigates and manages the risks from both internal and external conditions that
could significantly impact the Company and influence its business strategy and performance. The program is based on the most
recent framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, which focuses on the
following risk types:
•
•
•
•
Operational risk - risks arising from systems, processes, people and external events that affect the Company’s
operational objectives or fundamental reason for its existence, including: product life-cycle and execution; service
quality and performance; information management and data protection and security, including cybersecurity; supply
chain and business disruption; and other risks, including human capital and reputation.
Financial risk - risks arising from the Company’s ability to meet its financial obligations pursuant to its strategic and
operational objectives, including exposure to broad market and more specific industry risk that could impact liquidity,
interest rate, credit, pricing and reimbursement, and also to internal and external financial reporting.
Legal and compliance risk - risks arising from the regulatory and enforcement environment, legal proceedings and
adherence to ethics and compliance policies and procedures.
Strategic risk - risks that will impede the Company’s plan to achieve its mission and vision and apply its core values,
including changes in the broad market and Company's industry, business development and restructuring activities,
competitive threats and practices, technology and product innovation, and public policy.
As part of our program, we routinely assess our enterprise level risks, emerging risks, overall Company-level risk
tolerance and the effectiveness of risk management, and monitor the progress of and resources applied to risk mitigation; our
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Board of Directors actively oversees our program. Our primary risk factors are discussed in Risk Factors beginning on page
32.
Billing; Government Reimbursement. We generally bill for diagnostic information services on a fee-for-service
basis under one of two types of fee schedules; fees may be negotiated or discounted. The types of fee schedules are:
•
•
“Client” fees charged to physicians, hospitals and institutions for which services are performed on a wholesale
basis and which are billed on a monthly basis.
“Patient” fees charged to individual patients and certain third-party payers on a claim-by-claim basis.
Billing for diagnostic information services is very complicated. Patients, insurance companies, Medicare, Medicaid,
physicians, hospitals, IDNs, ACOs, DCEs and employer groups all have different billing requirements. Some billing
arrangements require us to bill multiple payers, and there are several other factors that complicate billing (e.g., disparity in
coverage and information requirements among payers; incomplete or inaccurate billing information provided by ordering
clinicians; and lack of access to patients before testing). We maintain compliance policies and procedures for our billing
practices, and we audit our practices for compliance with applicable laws and regulations and internal policies and procedures.
With regard to the clinical testing services performed on behalf of Medicare beneficiaries, we generally must bill
Medicare directly and must accept the Medicare carrier's fee schedule amount for covered services as payment in full. In
addition, state Medicaid programs are prohibited from paying more (and in most instances, pay significantly less) than
Medicare. Currently, Medicare does not require the beneficiary to pay a co-payment for diagnostic testing services reimbursed
under the Clinical Laboratory Fee Schedule, but generally does require a patient deductible and co-insurance for anatomic
pathology services.
Part B of the Medicare program contains fee schedule payment methodologies for clinical testing services performed
for covered patients, including a national ceiling on the amount that carriers could pay under their local Medicare clinical
testing fee schedules. Historically, the Medicare Clinical Laboratory Fee Schedule and the Medicare Physician Fee Schedule
established under that program have been subject to change, including each year. Pursuant to PAMA, reimbursement rates for
many clinical laboratory tests provided under Medicare were reduced in 2018, 2019 and 2020. PAMA calls for further revision
of the Medicare Clinical Laboratory Fee Schedule for years after 2020, based on future surveys of market rates; reimbursement
reduction from 2022-24 is capped by PAMA at 15% annually. The LAB Act provided an opportunity for reforms to PAMA by
delaying PAMA's next data collection and reporting period until January 1, 2021 and by ordering a study to determine ways to
improve future collection of more representative market rate data under PAMA. The CARES Act, adopted in early 2020 in
response to the COVID-19 pandemic, suspended the PAMA price cuts that had been scheduled for 2021 and delayed PAMA's
next data collection and reporting period until January 1, 2022.
Our net revenues reimbursed under Medicare and Medicaid in 2020 were lower as a percentage of our consolidated net
revenues than in recent years as a result of revenues attributable to COVID-19 testing. Excluding revenues attributable to
COVID-19 testing, our net revenues reimbursed under Medicare and Medicaid in 2020 were comparable, as a percentage of our
consolidated net revenues, to recent years.
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REGULATION
We are subject to extensive and frequently changing laws and regulations in the United States (at both the federal and state
levels) and other jurisdictions in which we conduct business, and to government inspections and audits.
CLIA and State
Clinical Laboratory
Licensing
CLIA regulates the operations of virtually all clinical laboratories, requiring that they be certified
by the federal government and that they comply with various technical, operational, personnel and
quality requirements intended to ensure that the services provided are accurate, reliable and timely.
Key Regulatory Schemes (Table 16)
State laws may require additional personnel qualifications or licenses, quality control, record
maintenance, proficiency testing or detailed review of our scientific method validations and
technical procedures for certain tests.
Violations of these laws and regulations may result in monetary fines, criminal and civil penalties
and/or suspension or exclusion from participation in Medicare, Medicaid and other federal or state
healthcare programs.
Medicare and
Medicaid; Fraud and
Abuse
Diagnostic testing services provided under Medicare and Medicaid programs are subject to
complex, evolving, stringent and frequently ambiguous federal and state laws and regulations,
including those relating to billing, coverage and reimbursement.
Anti-kickback laws and regulations prohibit making payments or furnishing other benefits to
influence the referral of tests billed to Medicare, Medicaid or certain other federal or state
healthcare programs.
In addition, federal and state anti-self-referral laws generally prohibit Medicare and Medicaid
payments for clinical tests referred by physicians who have an ownership or investment interest in,
or a compensation arrangement with, the testing laboratory, unless specific exceptions are met.
Federal substance abuse legislation enacted in 2018 contains anti-kickback provisions that are, by
their terms, applicable to laboratory testing paid for by all payers. We are attempting to clarify the
application of that legislation.
Some states have similar laws that are not limited in applicability to only Medicare and Medicaid
referrals and could also affect tests that are paid for by health plans and other non-governmental
payers.
Violations of these laws and regulations may result in monetary fines, criminal and civil penalties
and/or suspension or exclusion from participation in Medicare, Medicaid and other federal or state
healthcare programs.
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FDA
The FDA has regulatory responsibility over, among other areas, instruments, software, test kits,
reagents and other devices used by clinical laboratories to perform diagnostic testing in the United
States. The FDA also regulates drugs-of-abuse testing for employers and insurers, testing for
blood bank purposes and testing of donors of human cells for purposes such as in vitro
fertilization.
A number of advanced tests we develop internally are offered as LDTs. The FDA has claimed
regulatory authority over all LDTs, but has stated that it exercised enforcement discretion with
regard to most LDTs performed by high complexity CLIA-certified laboratories.
Pursuant to the 21st Century Cures Act, the FDA issued final guidance regarding its position on
the regulation of clinical decision software, which may be used in connection with LDTs. The
guidance attempts to address uncertainty regarding whether FDA approval of certain software is
required. It has been used by the FDA, in part, to assert authority over the annotation software
aspects of pharmacogenetic testing services. In addition, the FDA continued during 2020 to work
on a pre-certification program to help software developers have a speedier and less restrictive path
to clearance or approval of their software.
Legislation introduced in Congress would enable the FDA to regulate LDTs, in vitro diagnostics,
software and other items used in the diagnosis of disease. The FDA and the U. S. Department of
Health and Human Services also have expressed views regarding the regulation of LDTs. Either
new law or a revised approach to regulation of LDTs could have a significant impact on the
clinical laboratory testing industry, including regulating LDTs in new ways, while creating
avenues of opportunity and competition regarding clinical laboratory testing. New competitors
may enter the industry, and competition may come in new forms.
Environmental, Health
and Safety
We are subject to laws and regulations related to the protection of the environment, the health and
safety of employees and the handling, transportation and disposal of medical specimens, infectious
and hazardous waste and radioactive materials.
For example, the U.S. Occupational Safety and Health Administration has established extensive
requirements relating specifically to workplace safety for healthcare employers in the U.S. This
includes requirements to develop and implement multi-faceted programs to protect workers from
exposure to blood-borne pathogens, including preventing or minimizing any exposure through
needle stick injuries.
For purposes of transportation, some biological materials and laboratory supplies are classified as
hazardous materials and are subject to regulation by one or more of the following agencies: the
U.S. Department of Transportation, the U.S. Public Health Service, the U.S. Postal Service and the
International Air Transport Association.
Physicians
Our pathologists are required to hold a valid license to practice medicine in the jurisdiction in
which they practice.
Several jurisdictions in which our businesses are located prohibit business corporations from
engaging in the practice of medicine. In certain jurisdictions, business corporations are prohibited
from employing licensed healthcare professionals to provide services on behalf of the corporation;
these laws vary. In some jurisdictions, anatomic pathology services are delivered through
physician-owned entities that employ the practicing pathologists. The manner in which licensed
physicians can be organized to perform medical services may be governed by the laws of the
jurisdictions in which medical services are provided and by the medical boards or other entities
authorized by these jurisdictions to oversee the practice of medicine.
Privacy and Security of
Health and Personal
Information
We are subject to laws and regulations regarding protecting the security and privacy of certain
healthcare and personal information, including: (a) the federal Health Insurance Portability and
Accountability Act and the regulations thereunder, which establish (i) a complex regulatory
framework including requirements for safeguarding protected health information and (ii)
comprehensive federal standards regarding the uses and disclosures of protected health
information; (b) state laws, including the California Consumer Privacy Act; and (c) laws outside
the U.S., including the European Union's General Data Protection Regulation.
A healthcare provider may be subject to penalties for non-compliance and may be required to
notify individuals or state, federal or county governments if the provider discovers certain
breaches of personal information or protected health information.
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Drug Testing;
Controlled Substances
All U.S. laboratories that perform drug testing for certain public sector employees and employees
of certain federally regulated businesses are required to be certified as meeting the detailed
performance and quality standards of the Substance Abuse and Mental Health Services
Administration.
To obtain access to controlled substances used to perform drugs-of-abuse testing in the United
States, laboratories must be licensed by the Drug Enforcement Administration.
Compliance. We strive to conduct our business in compliance with all applicable laws and regulations. We license
and maintain appropriate accreditations for all of our laboratories and, where applicable, patient service centers, as required by
the appropriate federal and state agencies. We have a long-standing and well-established compliance program. The Quality,
Safety and Compliance Committee of our Board of Directors oversees, and receives periodic management reports regarding,
our compliance program. Our program includes detailed policies and procedures and training programs intended to ensure the
implementation and observance of all applicable laws and regulations (including regarding billing and reimbursement, and
privacy of protected health information and personally identifiable information) and Company policies. Further, we conduct in-
depth reviews of procedures and facilities to assure regulatory compliance throughout our operations. We conduct annual
training of our employees on these compliance policies and procedures.
As an integral part of our billing compliance program, we investigate reported or suspected failures to comply with
federal and state healthcare reimbursement requirements. Any Medicare or Medicaid overpayments resulting from non-
compliance are refunded by us. As a result of these efforts, we have periodically identified and reported overpayments,
refunded the payers for overpayments and taken appropriate corrective action.
AVAILABLE INFORMATION
The Securities and Exchange Commission (the “SEC”) maintains an internet site, www.sec.gov, that contains annual,
quarterly and current reports, proxy and information statements and other information that issuers file electronically with the
SEC. We file reports, proxy statements and other information with the SEC; they are publicly available at the SEC's internet
site.
Our internet address is www.QuestDiagnostics.com. You can access our Investor Relations webpage at
www.QuestDiagnostics.com/investor. The information on our website is not incorporated by reference into this Report. We
make available free of charge, on or through our Investor Relations webpage, our proxy statements, Annual Report on Form 10-
K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished
pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practical after such
material is filed with, or furnished to, the SEC.
www.QuestDiagnostics.com/investor provides information about our corporate governance.
Information Available at Our Corporate Governance Webpage (Table 17)
∙ Directors
∙ Corporate Governance Guidelines
∙ Composition of the committees of our Board of Directors
∙ Code of Ethics
∙ Senior management
∙ Certificate of Incorporation
∙ Charters for the standing committees of our Board of Directors
∙ Bylaws
∙ Information about our corporate political contributions
∙ Values
∙ Statements of beneficial ownership of our equity securities filed by our directors, officers and others under
Section 16 of the Exchange Act
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INFORMATION ABOUT OUR EXECUTIVE OFFICERS
Name, Age, Title
Stephen H. Rusckowski (63)
Chairman of the Board, Chief
Executive Officer and President
James E. Davis (58)
Executive Vice President, General
Diagnostics
Executive Officers (Table 18)
Background
Mr. Rusckowski joined the Company in May 2012 as Chief Executive
Officer and President and became Chairman of the Board on January 1,
2017. From October 2006 until he joined the Company, he was Chief
Executive Officer of Philips Healthcare, the largest unit of Royal
Philips Electronics, and a member of the Board of Management of
Royal Philips Electronics and its Executive Committee. Previously, he
was CEO of the Imaging Systems business of Royal Phillips
Electronics.
Before joining Philips in 2001, Mr. Rusckowski held numerous
management positions with the healthcare division of Hewlett-Packard/
Agilent Technologies.
Mr. Rusckowski has been a director of the Company since May 2012.
He was a director of Xerox Corporation from February 2015 to 2018,
and a director of Covidien plc from December 2013 to January 2015.
Mr. Rusckowski served as Chairman of the American Clinical
Laboratory Association from 2014 to 2017.
In January 2017, Mr. Davis became Executive Vice President, General
Diagnostics; previously he was Senior Vice President and Group
Executive - Regional Businesses. In January 2015, he assumed
responsibility for the general management of the Company's regional
Diagnostic Information Services business. Mr. Davis was responsible
for our products business from February 2014 until 2016. From
February 2014 to January 2015, he was responsible for operations for
the Company's Diagnostic Information Services business. He joined
Quest Diagnostics in April 2013 as Senior Vice President, Diagnostics
Solutions, with responsibility for the healthcare information
technology, risk assessment, clinical trials, diagnostic products and
employer solutions businesses.
Prior to joining Quest Diagnostics, from March 2012 to April 2013,
Mr. Davis served as Lead Director, and then as Chief Executive
Officer, of InSightec, Inc., a medical device company that designs and
develops ultrasound ablation devices that are guided by magnetic
resonance imaging systems.
Previously, Mr. Davis held a number of senior positions in General
Electric’s healthcare business, including from 2007 to 2012 as Vice
President and General Manager of GE Healthcare’s magnetic resonance
imaging business. Prior to joining GE Healthcare, Mr. Davis held
leadership positions in GE’s aviation business and led the development
of strategic and operational improvement initiatives for clients of
McKinsey & Company, Inc.
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Catherine T. Doherty (58)
Senior Vice President and Group
Executive - Clinical Franchise
Solutions and Marketing
Carrie Eglinton Manner (46)
Senior Vice President, Advanced
Diagnostics
Mark J. Guinan (59)
Executive Vice President and Chief
Financial Officer
Manuel O. Mendez (53)
Senior Vice President, Chief
Commercial Officer
Since January 2013, Ms. Doherty has been responsible for overseeing
the development of clinical franchise solutions in the areas of general
health and wellness, cardiovascular, metabolic and endocrinology,
infectious disease and immunology, and prescription drug monitoring
and toxicology, as well as enterprise-wide marketing. Ms. Doherty is
also responsible for the employer solutions and risk assessment
businesses, and since February 2020, our sports diagnostics franchise.
Additionally, in October 2018, QuestDirect, our consumer initiated
testing platform was launched under her leadership. She also was
responsible for clinical franchise solutions in the areas of neurology
and women's health from January 2013 to January 2017 and for the
healthcare information technology business from February 2014 to
January 2017.
Prior to January 2013, Ms. Doherty held a variety of positions of
increasing responsibility since joining the Company in 1990, including
Senior Vice President, Physician Services; Vice President, Hospital
Services; Vice President, Office of the Chairman; Vice President,
Finance and Administration for the Hospital business; Vice President,
Communications and Investor Relations; and Chief Accounting
Officer.
Ms. Eglinton Manner joined the Company in January 2017. She is
responsible for the Company's advanced testing activities, including
overseeing the development of clinical franchise solutions in the areas
of neurology, oncology, pathology and women's health, as well as the
Company's global business and pharmaceutical/diagnostic development
services. Ms. Eglinton Manner has served as a director of Repligen
Corporation since June 2020.
Previously, Ms. Eglinton Manner spent over 20 years in various
leadership roles in healthcare businesses at General Electric. From 2015
to 2016, she served as President and CEO of the Detection and
Guidance Solutions business, delivering advanced x-ray technologies
spanning the continuum of healthcare. From 2013 to 2015, Ms.
Eglinton Manner served as President and CEO of OEC Surgical Mobile
C-arm systems. She was President and CEO of General Electric's
diagnostic pathology laboratory services business from 2012 to 2013,
and President of the Maternal Infant Care Business from 2009 to 2012.
Mr. Guinan joined the Company in July 2013. From 2010 until joining
Quest Diagnostics in 2013, he served as Chief Financial Officer for
Hill-Rom Holdings Inc., a manufacturer and provider of medical
technologies and related services for the healthcare industry. Mr.
Guinan has served as a director of Myovant Sciences, Ltd. since July
2018.
Previously, he had served in a number of finance and operations roles
in a long career at Johnson & Johnson including 2009 to 2010 as Vice
President, Chief Procurement Officer, and 2005 to 2009 as Vice
President, Group Finance Pharmaceuticals. Before joining Johnson &
Johnson in 1997, he held a number of financial roles at Procter &
Gamble.
Mr. Mendez is responsible for the commercial organization for the
Company's Diagnostic Information Services business.
Prior to joining the Company in October 2019, Mr. Méndez was Senior
Vice President, Global Commercial Operations at QIAGEN, a
worldwide provider of molecular sample and assay technologies, where
he helped accelerate growth and led a global commercial team. From
2010-2014, Mr. Mendez served as Executive Vice President Americas
for bioMérieux. Previously, he held a variety of sales, marketing and
general management roles with Abbott Laboratories, Thermo Fisher
Scientific and OraSure Technologies - with leadership positions in the
United States, Latin America, Europe and Asian markets.
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Michael E. Prevoznik (59)
Senior Vice President and General
Counsel
Mr. Prevoznik joined the Company as Vice President and General
Counsel in August 1999. In 2003, he assumed responsibility for
governmental affairs. From 1999 until April 2009, Mr. Prevoznik also
had responsibility for the Company's Compliance Department.
In addition, from April 2011 to January 2017, he had management
responsibility for the Company's diagnostic information services
activities outside the U.S., and from April 2011 to January 2013, he had
management responsibility for the Company's clinical trials business.
Prior to joining the Company, Mr. Prevoznik served in positions of
increasing responsibility within the compliance organization at
SmithKline Beecham, most recently as Vice President, Compliance,
with responsibility for coordinating all SmithKline Beecham
compliance activities worldwide.
Item 1A. Risk Factors
You should carefully consider all of the information set forth in this Report, including the following risk factors,
before deciding to invest in any of our securities. The risks below are not the only ones that we face. Additional risks not
presently known to us, or that we presently deem immaterial, may also negatively impact us. Our business, consolidated
financial condition, revenues, results of operations, profitability, reputation or cash flows could be materially impacted by any
of these factors.
This Report also includes forward-looking statements that involve risks or uncertainties. Our results could differ
materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks we face
described below and elsewhere. See “Cautionary Factors that May Affect Future Results” on page 42.
RISKS RELATED TO OUR BUSINESS
The U.S. healthcare system is evolving and medical laboratory testing market fundamentals are changing, and our
business could be adversely impacted if we fail to adapt.
The U.S. healthcare system is evolving, in part in response to the ACA. The ACA established the Center for Medicare
and Medicaid Innovation to examine alternative payment methodologies and conduct demonstration programs. The ACA
provided for extensive health insurance reforms, including the elimination of pre-existing condition exclusions and other
limitations on coverage, fixed percentages on medical loss ratios, expansion in Medicaid and other programs, employer
mandates, individual mandates, creation of state and regional health insurance exchanges, and tax subsidies for individuals to
help cover the cost of individual insurance coverage. The ACA also permits the establishment of ACOs.
Certain aspects of the ACA have been repealed, delayed or modified. The scope and timing of any further legislation
to repeal, amend, replace, or reform the rest of the ACA is uncertain, but if such legislation were to become law, it could have a
significant impact on the U.S. healthcare system. In addition, uncertainty regarding the status of the ACA prior to any such
repeal, amendment, replacement or reform could create uncertainty generally in the healthcare market.
Several federal courts have issued determinations that portions of the ACA are unconstitutional; those rulings are net
yet final.
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Significant change is taking place in the healthcare system, including as discussed above under the heading The
Clinical Testing Industry, beginning on page 14. For example, value-based reimbursement is increasing (e.g.,
UnitedHealthcare's Preferred Lab Network); CMS has set goals for value-based reimbursement to be achieved. Patients are
encouraged to take increased interest in and responsibility for, and often are bearing increased responsibility for payment for,
their healthcare. Healthcare industry participants are evolving and consolidating. Healthcare services increasingly are being
provided by non-traditional providers (e.g., physician assistants), in non-traditional venues (e.g., retail medical clinics, urgent
care centers) and using new technologies (e.g., telemedicine, digital pathology). Utilization of the healthcare system is being
influenced by several factors and may result in a decline in the demand for diagnostic information services.
In addition, we believe that clinical testing market fundamentals are changing. We believe that PAMA-driven
reimbursement pressure is negatively impacting access to care and hurting the clinical testing industry, and remains a catalyst
for structural change in the market. We also believe that health plans increasingly are focusing on driving better value in
laboratory testing services. We also believe that ongoing consumerization in healthcare, with increased cost being borne by
consumers, is sharpening focus on price disparities. We expect that the evolution of the healthcare industry will continue, and
that industry change is likely to be extensive.
The clinical testing business is highly competitive, and if we fail to provide an appropriately priced level of service or
otherwise fail to compete effectively it could have a material adverse effect on our revenues and profitability.
The clinical testing business remains a fragmented and highly competitive industry. We primarily compete with three
types of clinical testing providers: other commercial clinical laboratories, hospital-affiliated laboratories and physician-office
laboratories. We also compete with other providers, including anatomic pathology practices and large physician group
practices. Hospitals generally maintain on-site laboratories to perform testing on their patients (inpatient or outpatient). In
addition, many hospitals compete with commercial clinical laboratories for outreach (non-hospital patients) testing. Hospitals
may seek to leverage their relationships with community clinicians and encourage the clinicians to send their outreach testing to
the hospital's laboratory. As a result of this affiliation between hospitals and community clinicians, we compete against
hospital-affiliated laboratories primarily based on quality and scope of service as well as pricing. In addition, hospitals that own
physician practices may encourage or require the practices to refer testing to the hospital's laboratory. In recent years, there has
been a trend of hospitals acquiring physician practices, increasing the percentage of physician practices owned by hospitals.
Increased hospital ownership of physician practices may enhance clinician ties to hospital-affiliated laboratories and may
strengthen their competitive position. The formation of ACOs, DCEs and IDNs, and their approach to contracts with healthcare
providers, in addition to the impact of informatics, also may increase competition to provide diagnostic information services. In
addition, new players have recently started to provide clinical lab testing services (e.g., employers; government agencies).
The diagnostic information services industry also is faced with changing technology and new product introductions.
Competitors may compete using advanced technology, including technology that enables more convenient or cost-effective
testing. Digital pathology, still in an emerging state, is an example of this. Competitors also may compete on the basis of new
service offerings. Competitors also may offer testing to be performed outside of a commercial clinical laboratory, such as (1)
point-of-care testing that can be performed by physicians in their offices; (2) advanced testing that can be performed by
hospitals in their own laboratories; and (3) home testing that can be carried out without requiring the services of outside
providers.
Government payers, such as Medicare and Medicaid, have taken steps to reduce the utilization and reimbursement of
healthcare services, including clinical testing services.
We face efforts by government payers to reduce utilization of and reimbursement for diagnostic information services.
One example of this is increased use of prior authorization requirements. We expect efforts to reduce reimbursements, to
impose more stringent cost controls and to reduce utilization of clinical test services will continue.
Pursuant to PAMA, reimbursement rates for many clinical laboratory tests provided under Medicare were reduced in
2018, 2019 and 2020. PAMA calls for further revision of the Medicare Clinical Laboratory Fee Schedule for years after 2020,
based on future surveys of market rates; reimbursement rate reduction from 2022-24 is capped by PAMA at 15% annually. The
LAB Act provides an opportunity for reforms to PAMA by delaying PAMA's next data collection and reporting period until
January 1, 2021 and by ordering a study to determine ways to improve future collection of more representative market rate data
under PAMA. The CARES Act, adopted in early 2020 in response to the COVID-19 pandemic, suspended the PAMA price
cuts that had been scheduled for 2021 and delayed PAMA's next data collection and reporting period until January 1, 2022.
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In addition, CMS has adopted policies limiting or excluding coverage for clinical tests that we perform. We also
provide physician services that are reimbursed by Medicare under a physician fee schedule, which is subject to adjustment on
an annual basis. Medicaid reimbursement varies by state and is subject to administrative and billing requirements and budget
pressures. The ACA includes further provisions that are designed to control utilization and payment levels.
In addition, over the last several years, the federal government has expanded its contracts with private health insurance
plans for Medicare beneficiaries, called “Medicare Advantage” programs, and has encouraged such beneficiaries to switch from
the traditional programs to the private programs. There has been growth of health insurance plans offering Medicare
Advantage programs, and of beneficiary enrollment in these programs. States have mandated that Medicaid beneficiaries enroll
in private managed care arrangements. In addition, state budget pressures have encouraged states to consider several courses of
action that may impact our business, such as delaying payments, reducing reimbursement, restricting coverage eligibility,
denying claims and service coverage restrictions.
From time to time, the federal government has considered whether competitive bidding could be used to provide
clinical testing services for Medicare beneficiaries at attractive rates while maintaining quality and access to care. Congress
periodically considers cost-saving initiatives. These initiatives have included coinsurance for clinical testing services, co-
payments for clinical testing and further laboratory fee schedule reductions.
Health plans and other third parties have taken steps to reduce the utilization and reimbursement of health services,
including clinical testing services.
We face efforts by non-governmental third-party payers, including health plans, to reduce utilization of and
reimbursement for clinical testing services. Examples include increased use of prior authorization requirements and increased
denial of coverage for services. Since the passage of ACA, there is increased market activity regarding alternative payment
models, including bundled payment models. We expect continuing efforts by third-party payers, including in their rules,
practices and policies, to reduce reimbursements, to impose more stringent cost controls and to reduce utilization of clinical
testing services. ACOs, DCEs and IDNs also may undertake efforts to reduce utilization of, or reimbursement for, diagnostic
information services.
The healthcare industry has experienced a trend of consolidation among health insurance plans, resulting in fewer but
larger insurance plans with significant bargaining power to negotiate fee arrangements with healthcare providers, including
clinical testing providers. These health plans, and independent physician associations, may demand that clinical testing
providers accept discounted fee structures or assume all or a portion of the financial risk associated with providing testing
services to their members through capitated payment arrangements. Some health plans also are reviewing test coding,
evaluating coverage decisions and requiring preauthorization of certain testing. There are also an increasing number of patients
enrolling in consumer driven products and high deductible plans that involve greater patient cost-sharing.
The increased consolidation among health plans also has increased pricing transparency and bargaining power and the
potential adverse impact of ceasing to be a contracted provider with any such insurer.
Government payers and third parties, including health plans, may establish reimbursement levels that do not properly
recognize the value of new and innovative solutions.
Government payers and third parties, including health plans, are taking steps to reduce utilization of, and
reimbursement for, some new and innovative healthcare solutions, including new tests and other solutions that we may offer.
In response to requests from payers to have a strategy to report a single or at most a few codes to describe procedures
used to perform molecular and toxicology testing, the American Medical Association CPT® Editorial Panel has established and
replaced billing codes used to report those procedures. The adoption of these revised codes has resulted in limited coverage
decisions on certain occasions, new requirements for documentation to facilitate payment from certain payers and increased
payment denials. While some payers have adopted the new payment methods, others have not yet modified their systems and
ask that laboratories continue to report their services using the previous reporting strategies, when those codes still exist.
These steps may discourage innovation and access to innovative solutions that we may offer.
Failure to develop, or acquire licenses for, new tests, technology and services could negatively impact our testing volume
and revenues.
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The diagnostic information services industry is faced with changing technology and new product introductions. Other
companies or individuals, including our competitors, may obtain patents or other property rights that would prevent, limit or
interfere with our ability to develop, perform or sell our solutions or operate our business or increase our costs. In addition, they
could introduce new tests, technologies or services that may result in a decrease in the demand for our services or cause us to
reduce the prices of our services. Our success in continuing to introduce new solutions, technology and services will depend, in
part, on our ability to license new and improved technologies on favorable terms. We may be unable to develop or introduce
new solutions or services. Other companies or individuals, including our competitors, may obtain patents or other property
rights on tests or processes that we may be performing, that could prevent, limit or interfere with our ability to develop, perform
or sell our tests or operate our business. We also may be unable to continue to negotiate acceptable licensing arrangements, and
arrangements that we do conclude may not yield commercially successful clinical tests. If we are unable to license these testing
methods at competitive rates, our research and development costs may increase as a result. In addition, if we are unable to
develop and introduce, or license, new solutions, technology and services to expand our advanced testing capabilities, our
services may become outdated when compared with our competition.
Failure to establish, and perform to, appropriate quality standards to assure that the appropriate standard of quality is
observed in the performance of our diagnostic information services could adversely affect the results of our operations
and adversely impact our reputation.
The provision of diagnostic information services involves certain inherent risks. The services that we provide are
intended to provide information for healthcare providers in providing patient care. Therefore, users of our services may have a
greater sensitivity to errors than the users of services or products that are intended for other purposes.
Negligence in performing our services can lead to injury or other adverse events. We may be sued under physician
liability or other liability law for acts or omissions by our pathologists, laboratory personnel and hospital employees who are
under the supervision of our hospital-based pathologists. We are subject to the attendant risk of substantial damages awards and
risk to our reputation.
RISKS RELATED TO CHANGE IN PUBLIC POLICY
AND THE REGULATORY AND LEGAL ENVIRONMENT
We are subject to numerous legal and regulatory requirements governing our activities, and we may face substantial
fines and penalties, and our business activities may be impacted, if we fail to comply.
Our business is subject to or impacted by extensive and frequently changing laws and regulations in the United States
(including at both the federal and state levels) and the other jurisdictions in which we engage in business. While we seek to
conduct our business in compliance with all applicable laws, many of the laws and regulations applicable to us are vague or
indefinite and have not been interpreted by the courts, including many of those relating to:
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•
billing and reimbursement of clinical testing;
certification or licensure of clinical laboratories;
the anti-self-referral and anti-kickback laws and regulations;
the laws and regulations administered by the FDA;
the corporate practice of medicine;
operational, personnel and quality requirements intended to ensure that clinical testing services are accurate, reliable
and timely;
physician fee splitting;
relationships with physicians and hospitals;
safety and health of laboratory employees; and
handling, transportation and disposal of medical specimens, infectious and hazardous waste and radioactive materials.
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These laws and regulations may be interpreted or applied by a prosecutorial, regulatory or judicial authority in a
manner that could require us to make changes in our operations, including our pricing and/or billing practices. We may not be
able to maintain, renew or secure required permits, licenses or any other regulatory approvals needed to operate our business or
commercialize our services. If we fail to comply with applicable laws and regulations, or if we fail to maintain, renew or obtain
necessary permits, licenses and approvals, we could suffer civil and criminal penalties, fines, exclusion from participation in
governmental healthcare programs and the loss of various licenses, certificates and authorizations necessary to operate our
business, as well as incur additional liabilities from third-party claims. If any of the foregoing were to occur, our reputation
could be damaged and important business relationships with third parties could be adversely affected.
We regularly receive requests for information, and occasionally subpoenas, from governmental authorities. We also
are subject from time to time to qui tam claims brought by former employees or other “whistleblowers.” The federal and state
governments continue aggressive enforcement efforts against perceived healthcare fraud. Legislative provisions relating to
healthcare fraud and abuse provide government enforcement personnel substantial funding, powers, penalties and remedies to
pursue suspected cases of fraud and abuse. In addition, the government has substantial leverage in negotiating settlements since
the amount of potential damages far exceeds the rates at which we are reimbursed for our services, and the government has the
remedy of excluding a non-compliant provider from participation in the Medicare and Medicaid programs. Regardless of merit
or eventual outcome, these types of investigations and related litigation can result in:
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diversion of management time and attention;
expenditure of large amounts of cash on legal fees, costs and payment of damages;
increases to our administrative, billing or other operating costs;
limitations on our ability to continue some of our operations;
enforcement actions, fines and penalties or the assertion of private litigation claims and damages;
decreases to the amount of reimbursement related to diagnostic information services performed;
adverse affects to important business relationships with third parties;
decreased demand for our services; and/or
injury to our reputation.
Changes in applicable laws and regulations may result in existing practices becoming more restricted, or subject our
existing or proposed services to additional costs, delay, modification, withdrawal or reconsideration. Such changes also could
require us to modify our business objectives.
Our business could be adversely impacted by the FDA's approach to regulation.
The FDA has regulatory responsibility over, among other areas, instruments, software, test kits, reagents and other
devices used by clinical laboratories to perform diagnostic testing in the U.S. A number of tests we develop internally are
offered as LDTs. The FDA has claimed regulatory authority over all LDTs, but has stated that it exercised enforcement
discretion with regard to most LDTs performed by high complexity CLIA-certified laboratories.
As the FDA moves to regulate more clinical laboratory testing, its approach to regulation is impacting industry
practices and participants, new competitors may enter the industry, and competition may come in new forms.
Legislation introduced in Congress would enable the FDA to regulate LDTs, in vitro diagnostics, software and other
items used in the diagnosis of disease. The FDA and the U. S. Department of Health and Human Services also have expressed
views regarding the regulation of LDTs. Either new law or a revised approach to regulation of LDTs could have a significant
impact on the clinical laboratory testing industry, including regulating LDTs in new ways, while creating avenues of
opportunity and competition regarding clinical laboratory testing. New competitors may enter the industry, and competition
may come in new forms.
Pursuant to the 21st Century Cures Act, the FDA issued final guidance regarding its position on the regulation of
clinical decision software, which may be used in connection with LDTs. The guidance attempts to clarify whether FDA
approval of certain software is required. It has been used by the FDA, in part, to assert authority over the annotation software
aspects of pharmacogenetic testing services. In addition, the FDA continued during 2020 to work on a pre-certification
program to help software developers have a speedier and less restrictive path to clearance or approval of their software.
Failure to accurately bill for our services, or to comply with applicable laws relating to government healthcare
programs, could have a material adverse effect on our business.
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Billing for diagnostic information services is complex and subject to extensive and non-uniform rules and
administrative requirements. Depending on the billing arrangement and applicable law, we bill various payers, such as patients,
insurance companies, Medicare, Medicaid, clinicians, hospitals and employer groups. The majority of billing and related
operations for our Company are being provided by a third party under the Company's oversight. Failure to accurately bill for
our services could have a material adverse effect on our business. In addition, failure to comply with applicable laws relating to
billing government healthcare programs may result in various consequences, including: civil and criminal fines and penalties,
exclusion from participation in governmental healthcare programs and the loss of various licenses, certificates and
authorizations necessary to operate our business, as well as incur additional liabilities from third-party claims, all of which
could have a material adverse effect on our business. Certain violations of these laws may also provide the basis for a civil
remedy under the federal False Claims Act, including fines and damages of up to three times the amount claimed. The qui tam
provisions of the federal False Claims Act and similar provisions in certain state false claims acts allow private individuals to
bring lawsuits against healthcare companies on behalf of government payers, private payers and/or patients alleging
inappropriate billing practices.
Although we believe that we are in compliance, in all material respects, with applicable laws and regulations, there can
be no assurance that a regulatory agency or tribunal would not reach a different conclusion. The federal or state government
may bring claims based on our current practices, which we believe are lawful. The federal and state governments have
substantial leverage in negotiating settlements since the amount of potential damages and fines far exceeds the rates at which
we are reimbursed, and the government has the remedy of excluding a non-compliant provider from participation in the
Medicare and Medicaid programs. We believe that federal and state governments continue aggressive enforcement efforts
against perceived healthcare fraud. Legislative provisions relating to healthcare fraud and abuse provide government
enforcement personnel with substantial funding, powers, penalties and remedies to pursue suspected cases of fraud and abuse.
We are subject to numerous political, legal, operational and other risks as a result of our international operations which
could impact our business in many ways.
Our international operations increase our exposure to risks inherent in doing business in non-U.S. markets, which may
vary by market and include: intellectual property legal protections and remedies; weak legal systems which may affect our
ability to enforce contractual rights; trade regulations and procedures and actions affecting approval, production, pricing,
reimbursement and marketing of services; and challenges based on differing languages and cultures. International operations
also require us to devote management resources to implement our controls and systems in new markets, and to comply with the
U.S. Foreign Corrupt Practices Act and similar anti-corruption laws in non-U.S. jurisdictions.
We may be unable to obtain, maintain or enforce our intellectual property rights and may be subject to intellectual
property litigation that could adversely impact our business.
We may be unable to obtain or maintain adequate patent or other proprietary rights for our solutions or services or to
successfully enforce our proprietary rights. In addition, we may be subject to intellectual property litigation and we may be
found to infringe on the proprietary rights of others, which could force us to do one or more of the following:
•
•
•
•
•
cease developing, performing or selling solutions or services that incorporate the challenged intellectual property;
obtain and pay for licenses from the holder of the infringed intellectual property right;
redesign or re-engineer our tests;
change our business processes; or
pay substantial damages, court costs and attorneys' fees, including potentially increased damages for any infringement
held to be willful.
Adverse results in material litigation could have an adverse financial impact and an adverse impact on our client base
and reputation.
We are involved in various legal proceedings arising in the ordinary course of business including, among other things,
disputes as to intellectual property, professional liability and employee-related matters, as well as inquiries from governmental
agencies and Medicare or Medicaid carriers. Some proceedings against us involve claims that are substantial in amount and
could divert management's attention from operations. These proceedings also may result in substantial monetary damages.
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Our outstanding debt may impair our financial and operating flexibility.
RISKS RELATED TO OUR INDEBTEDNESS
As of December 31, 2020, we had approximately $4.0 billion of debt outstanding. Other than credit facilities in the
normal course of business, we do not have any off-balance sheet financing arrangements in place or available. Our debt
agreements contain various restrictive covenants. These restrictions could limit our ability to use operating cash flow in other
areas of our business because we must use a portion of these funds to make principal and interest payments on our debt. We
have obtained ratings on our public debt from Standard and Poor's, Moody's Investor Services and Fitch Ratings. There can be
no assurance that any rating so assigned will remain for any given period of time or that a rating will not be lowered or
withdrawn entirely by a rating agency if in that rating agency's judgment future circumstances relating to the basis of the rating,
such as adverse changes in our Company or our industry, so warrant. If such ratings are lowered, our borrowing costs could
increase. Changes in our credit ratings, however, do not require repayment or acceleration of any of our debt.
We or our subsidiaries may incur additional indebtedness in the future. Our ability to make principal and interest
payments will depend on our ability to generate cash in the future. If we incur additional debt, a greater portion of our cash
flows may be needed to satisfy our debt service obligations and if we do not generate sufficient cash to meet our debt service
requirements, we may need to seek additional financing. In that case, it may be more difficult, or we may be unable, to obtain
financing on terms that are acceptable to us. As a result, we would be more vulnerable to general adverse economic, industry
and capital markets conditions as well as the other risks associated with indebtedness.
RISKS RELATED TO OUR OPERATIONS
The development of new technologies (including artificial intelligence technologies) may impact the healthcare industry,
and the development of new, more cost-effective solutions that can be performed by our customers or by patients, and
the continued internalization of testing by hospitals or clinicians, could negatively impact our testing volume and
revenues.
The diagnostic information services industry is faced with changing technology and new product introductions,
including technology that enables more convenient or cost-effective testing. For example, digital pathology is an emerging
technology that may change the practice of pathology. Information technology that includes self-learning or "artificial
intelligence" features is growing and may impact the healthcare industry.
Competitors also may offer testing to be performed outside of a commercial clinical laboratory, such as (1) point-of-
care testing that can be performed by clinicians in their offices; (2) complex testing that can be performed by hospitals in their
own laboratories; and (3) home testing that can be carried out without requiring the services of outside providers. Advances in
technology also may lead to the need for less frequent testing. Further, diagnostic tests approved or cleared by the FDA for
home use are automatically deemed to be “waived” tests under CLIA and may be performed by patients in their homes; test kit
manufacturers could seek to increase sales to patients of such test kits.
Some traditional customers for anatomic pathology services, including specialty physicians that generate biopsies
through surgical procedures, such as dermatologists, gastroenterologists, urologists and oncologists, are consolidating, have
added in-office histology labs or have retained pathologists to read cases on site. Hospitals also are internalizing clinical
laboratory testing, including some non-routine and advanced testing. Internalization of testing may reduce demand for services
previously referred to outside service providers, such as the Company.
Hardware and software failures or delays in our information technology systems, including failures resulting from our
systems conversions or otherwise, could disrupt our operations and cause the loss of confidential information, customers
and business opportunities or otherwise adversely impact our business.
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IT systems are used extensively in virtually all aspects of our business, including clinical testing, test reporting, billing,
customer service, logistics and management of medical data. Our success depends, in part, on the continued and uninterrupted
performance of our IT systems. A failure or delay in our IT systems could impede our ability to serve our customers and
patients and protect their confidential data. Despite redundancy and backup measures and precautions that we have
implemented, our IT systems may be vulnerable to damage, disruptions and shutdown from a variety of sources, including
telecommunications or network failures, system conversion or standardization initiatives, human acts and natural disasters.
These issues can also arise as a result of failures by third parties with whom we do business and over which we have limited
control. Any disruption or failure of our IT systems could have a material impact on our ability to serve our customers and
patients, including negatively affecting our reputation in the marketplace.
Our business could be negatively affected if we are unable to continue to strengthen our efficiency.
It is important that we continue to strengthen our efficiency to promote our competitive position and to enable us to
mitigate the impact on our profitability of steps taken by government payers and health insurers to reduce the utilization and
reimbursement of healthcare services, including diagnostic information services.
Our business operations and reputation may be materially impaired if we do not comply with privacy laws or
information security policies.
In our business, we collect, generate, process or maintain sensitive information, such as patient data and other personal
information. If we do use or not adequately safeguard that information in compliance with applicable requirements under
federal, state and international laws, or if it were disclosed to persons or entities that should not have access to it, our business
could be materially impaired, our reputation could suffer and we could be subject to fines, penalties and litigation. In the event
of a data security breach, we may be subject to notification obligations, litigation and governmental investigation or sanctions,
and may suffer reputational damage, which could have an adverse impact on our business.
We are subject to laws and regulations regarding protecting the security and privacy of certain healthcare and personal
information, including: (a) the federal Health Insurance Portability and Accountability Act and the regulations thereunder,
which establish (i) a complex regulatory framework including requirements for safeguarding protected health information and
(ii) comprehensive federal standards regarding the uses and disclosures of protected health information; (b) state laws,
including the California Consumer Privacy Act; and (c) laws outside the U.S., including the European Union's General Data
Protection Regulation.
The IT systems that we rely on may be subject to unauthorized tampering, cyberattack or other security breach.
Our IT systems have been and are subject to potential cyberattacks, tampering or other security breaches. These
attacks, if successful, could result in shutdowns or significant disruptions of our IT systems and/or in unauthorized persons
misappropriating intellectual property and other confidential information, including patient data that we obtain, transmit and
store on and through our IT systems.
External actors may develop and deploy viruses and other malicious software programs, including those that target our
employees, designed to attack our IT systems or otherwise exploit security vulnerabilities, such as electronic spamming,
phishing, spear phishing or similar tactics. As a result of the difficulty in detecting many of these attacks, intrusions and
breaches, failures or losses may be repeated or compounded before they are discovered or rectified, which could further
increase these costs and consequences.
From time to time, our IT systems have experienced other attacks, viruses, attempted intrusions or similar problems,
but each was mitigated. None materially disrupted, interrupted, damaged or shutdown the company's IT systems, materially
disrupted the Company's performance of its business or, to the Company's knowledge, resulted in material unauthorized access
to data.
In addition, certain third parties to whom we outsource certain of our services or functions, or with whom we interface,
store or process our confidential patient data or other confidential information, as well as those third parties’ providers, are also
subject to the risks outlined above. A breach or attack affecting these third parties could also harm our business, results of
operations and reputation and subject us to liability.
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On June 3, 2019, the Company reported that Retrieval-Masters Creditors Bureau, Inc./American Medical Collection
Agency (“AMCA”), informed the Company and Optum360 LLC, which provides revenue management services to the
Company, about a data security incident involving AMCA (the “AMCA Data Security Incident”). AMCA (which provided debt
collection services for Optum360) informed the Company and Optum360 that AMCA had learned that an unauthorized user
had access to AMCA’s system between August 1, 2018 and March 30, 2019. AMCA first informed the Company of the AMCA
Data Security Incident on May 14, 2019. AMCA’s affected system included financial information (e.g., credit card numbers
and bank account information), medical information and other personal information (e.g., social security numbers). Test results
were not included. Neither Optum360’s nor the Company’s systems or databases were involved in the incident. AMCA also
informed us that information pertaining to other laboratories’ customers was also affected.
Although the Company has robust security measures implemented, which are monitored and routinely tested both by
internal resources and external parties, cyber threats against us or our third party providers continue to evolve and are often not
recognized until such attacks are launched against a potential target. There can be no assurance that the Company or its third
party providers can anticipate all such evolving future attacks, viruses or intrusions, implement adequate preventative measures,
nor remediate any security vulnerabilities. Such breaches could expose our or our third party providers' IT systems to attack,
which could result in major disruption of our business, and compromise our customer’s confidential information, result in
litigation and potential liability for the Company, government investigation, significant damage to our reputation or otherwise
adversely affect our business. Any mitigation or remediation efforts that we undertake may require expenditures of significant
resources and the diversion of the attention of management.
We have taken, and continue to take, precautionary measures to reduce the risk of, and detect and respond to, future
cyber threats, and prevent or minimize vulnerabilities in our IT systems, including the loss or theft of intellectual property,
patient data or other confidential information that we obtain and store on our systems. We also have taken, and will continue to
take, measures to assess the cybersecurity protections used by our third-party providers. In addition, we collaborate with
government agencies regarding potential cyber threats and have worked with firms that have cyber security expertise to
evaluate and strengthen our systems. There can be no assurances that our precautionary measures or measures used by our
third-party providers will prevent, contain or successfully defend against cyber or information security threats that could have a
significant impact on our business, results of operations and reputation and subject us to liability.
Our ability to attract and retain qualified employees is critical to the success of our business and the failure to do so may
materially adversely affect our performance.
Our people are a critical resource. The supply of qualified personnel may be limited and competition for qualified
employees is strong. We may lose, or fail to attract and retain, key management personnel, or qualified skilled technical or
professional employees (e.g., pathologists).
Business development activities are inherently risky and integrating our operations with businesses we acquire may be
difficult.
We plan selectively to enhance our business from time to time through business development activities, such as
acquisitions, licensing arrangements, investments and alliances. However, these plans are subject to the availability of
appropriate opportunities and competition from other companies seeking similar opportunities. Moreover, the success of any
such effort may be affected by a number of factors, including our ability to properly assess and value the potential business
opportunity, and to integrate it into our business. The success of our strategic alliances depends not only on our contributions
and capabilities, but also on the property, resources, efforts and skills contributed by our strategic partners. Further, disputes
may arise with strategic partners, due to conflicting priorities or conflicts of interests.
Acquisitions are not all the same (e.g., asset acquisitions differ from acquisitions of equity interests); different
acquisitions offer different risks. Acquisitions may involve the integration of a separate company that has different systems,
processes, policies and cultures. Integration of acquisitions involves a number of risks including the diversion of management's
attention to the assimilation of the operations of assets or businesses we have acquired, difficulties in the integration of
operations and systems and the realization of potential operating synergies, the assimilation and retention of the personnel of the
acquired businesses, challenges in retaining the customers of the combined businesses, and potential adverse effects on
operating results. The process of combining acquisitions may be disruptive to our businesses and may cause an interruption of,
or a loss of momentum in, such businesses as a result of the following difficulties, among others:
•
•
•
loss of key customers or employees;
difficulty in standardizing information and other systems;
difficulty in consolidating facilities and infrastructure;
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•
•
•
failure to maintain the quality or timeliness of services that our Company has historically provided;
diversion of management's attention from the day-to-day business of our Company as a result of the need to deal with
the foregoing disruptions and difficulties; and
the added costs of dealing with such disruptions.
If we are unable successfully to integrate strategic acquisitions in a timely manner, our business and our growth
strategies could be negatively affected. Even if we are able to successfully complete the integration of the operations of other
assets or businesses we may acquire in the future, we may not be able to realize all or any of the benefits that we expect to result
from such integration, either in monetary terms or in a timely manner.
Our operations may be adversely impacted by the effects of natural disasters such as hurricanes and earthquakes,
public health emergencies and health pandemics, hostilities or acts of terrorism and other criminal activities.
Our operations may be adversely impacted by the effects of natural disasters such as hurricanes and earthquakes,
public health emergencies and health pandemics, hostilities or acts of terrorism or other criminal activities. Such events may
result in a decline in the number of patients who seek clinical testing services or in our employees' ability to perform their job
duties. In addition, such events may interrupt our ability to transport specimens, to receive materials from our suppliers or
otherwise to provide our services.
The COVID-19 pandemic has significantly affected our consolidated results of operations, financial position and cash
flows, and may continue to do so.
A pandemic caused by a novel strain of coronavirus (COVID-19) continues to severely impact the economy of the
United States and other countries around the world. Federal, state and local governmental authorities in the United States have
implemented numerous policies and initiatives to try and reduce the transmission of COVID-19, such as travel bans and
restrictions, quarantines, shelter-in-place orders, and business shutdowns. These policies and initiatives have resulted in, among
other things, 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), increased unemployment and loss of
healthcare insurance, and the adoption of work-from-home policies, all of which have had, and we believe will continue to
have, an impact on our consolidated results of operations, financial position and cash flows.
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 molecular and antibody
testing) and this volatility, including periods of material decline, could continue. Although we also have experienced heavy
demand for COVID-19 molecular testing as a result of the COVID-19 pandemic, which has had a positive impact on our
overall testing volume, the duration and level of the demand for, and reimbursement for, COVID-19 molecular testing is
uncertain. We may also experience an adverse impact on cash collections and supply chain disruptions, including shortages,
delays and price increases in testing equipment and supplies, as a result of the impact of the COVID-19 pandemic. Any of these
events could have an adverse impact on our business, consolidated results of operation, financial position and cash flows.
We believe the COVID-19 pandemic’s adverse 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; the COVID-19 pandemic’s
impact on the U.S. healthcare system and the U.S. economy; the timing, scope and effectiveness of federal, state and local
governmental responses; and the ability to effectively and comprehensively administer COVID-19 vaccines across the U.S.
These primary drivers are beyond our knowledge and control and will change over time, and as a result, at this time we cannot
reasonably estimate the adverse impact the COVID-19 pandemic will have on our businesses, consolidated results of
operations, financial position and cash flows, and the adverse impact may be material.
Our business also may 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, and by challenges faced in implementing nationwide COVID-19
vaccinations. Even after the COVID-19 pandemic has moderated and the business and social distancing restrictions have eased,
we may continue to experience similar adverse effects to our businesses, consolidated results of operations, financial position
and cash flows resulting from a recessionary economic environment that may persist. The impact that the COVID-19 pandemic
will have on our businesses, consolidated results of operations, financial position and cash flows could exacerbate other risks
identified in this Report.
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CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
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. Investors are cautioned not
to unduly rely on such forward-looking statements when evaluating the information presented in this document. The following
important factors could cause our actual financial results to differ materially from those projected, forecasted or estimated by us
in forward-looking statements:
(a) Heightened competition from commercial clinical testing companies, hospitals, physicians and others.
(b) Increased pricing pressure from customers, including payers and patients.
(c) A decline in economic conditions.
(d) Impact of changes in payment mix, including increased patient financial responsibility and any shift from fee-for-
service to discounted, capitated or bundled fee arrangements.
(e) Adverse actions by government or other third-party payers, including healthcare reform that focuses on reducing
healthcare costs but does not recognize the value and importance to healthcare of clinical testing or innovative
solutions, unilateral reduction of fee schedules payable to us, unilateral recoupment of amounts allegedly owed
and competitive bidding.
(f) The impact upon our testing volume and collected revenue or general or administrative expenses resulting from
compliance with policies and requirements imposed by Medicare, Medicaid and other third-party payers. These
include:
(1) the requirements of government and other payers to provide diagnosis codes and other information for many
tests;
(2) inability to obtain from patients a valid advance consent form for tests that cannot be billed without prior
receipt of the form;
(3) the impact of additional or expanded limited coverage policies and limits on the allowable number of test
units or ordering frequency of same; and
(4) the impact of increased prior authorization programs.
(g) Adverse results from pending or future government investigations, lawsuits or private actions. These include, in
particular, monetary damages, loss or suspension of licenses, and/or suspension or exclusion from the Medicare
and Medicaid programs and/or criminal penalties.
(h) Failure to efficiently integrate acquired businesses and to manage the costs related to any such integration, or to
retain key technical, professional or management personnel.
(i) Denial, suspension or revocation of CLIA certification or other licenses for any of our clinical laboratories under
the CLIA standards, revocation or suspension of the right to bill the Medicare and Medicaid programs or other
adverse regulatory actions by federal, state and local agencies.
(j) Changes in and complexity of federal, state or local laws or regulations, including changes that result in new or
increased federal or state regulation of commercial clinical laboratories, tests developed by commercial clinical
laboratories or other products or services that we offer or activities in which we are engaged, including regulation
by the FDA.
(k) Inability to achieve expected benefits from our acquisitions of other businesses.
(l) Inability to achieve additional benefits from our business performance tools and efficiency initiatives.
(m) Adverse publicity and news coverage about the diagnostic information services industry or us.
(n) Failure of the Company to maintain, defend and secure its financial, accounting, technology, customer data and
other operational systems from cyberattacks, IT system outages, telecommunications failures, malicious human
acts and failure of the systems of third parties upon which the Company relies.
(o) Development of technologies that substantially alter the practice of clinical testing, including technology changes
that lead to the development of more convenient or cost-effective testing, or testing to be performed outside of a
commercial clinical laboratory, such as (1) point-of-care testing that can be performed by physicians in their
offices, (2) advanced testing that can be performed by hospitals in their own laboratories or (3) home testing that
can be carried out without requiring the services of clinical laboratories.
(p) Negative developments regarding intellectual property and other property rights that could prevent, limit or
interfere with our ability to develop, perform or sell our tests or operate our business. These include:
(1) issuance of patents or other property rights to our competitors or others; and
(2) inability to obtain or maintain adequate patent or other proprietary rights for our products and services or to
successfully enforce our proprietary rights.
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(q) Development of tests by our competitors or others which we may not be able to license, or usage (or theft) of our
technology or similar technologies or our trade secrets or other intellectual property by competitors, any of which
could negatively affect our competitive position.
(r) Regulatory delay or inability to commercialize newly developed or licensed tests or technologies or to obtain
appropriate reimbursements for such tests.
(s) The complexity of billing and revenue recognition for clinical laboratory testing.
(t) Increases in interest rates and negative changes in our credit ratings from Standard & Poor's, Moody's Investor
Services or Fitch Ratings causing an unfavorable impact on our cost of or access to capital.
(u) Inability to hire or retain qualified or key senior management personnel.
(v) Terrorist and other criminal activities, hurricanes, earthquakes or other natural disasters, and public health
emergencies and health pandemics, which could affect our customers or suppliers, transportation or systems, or
our facilities, and for which insurance may not adequately reimburse us.
(w) Difficulties and uncertainties in the discovery, development, regulatory environment and/or marketing of new
services or solutions or new uses of existing tests.
(x) Failure to adapt to changes in the healthcare system (including the medical laboratory testing market) and
healthcare delivery, including those stemming from the ACA (or its repeal, amendment or replacement), PAMA,
trends in utilization of the healthcare system and increased patient financial responsibility for services.
(y) Results and consequences of governmental inquiries.
(z) Difficulty in implementing, or lack of success with, our strategic plan.
(aa) The impact of informatics on our industry and the ability of our Company to adapt to that impact.
(bb) Failure to adequately operationalize appropriate controls around use of our data, including risk of non-compliance
with privacy law requirements.
(cc) The COVID-19 pandemic.
Item 1B. Unresolved Staff Comments
There are no unresolved SEC comments that require disclosure.
Item 2. Properties
Our executive offices are located at 500 Plaza Drive, Secaucus, New Jersey. We maintain clinical testing laboratories
throughout the continental United States; in several instances a joint venture of which we are a partner maintains the laboratory.
We also maintain offices, data centers, call centers, distribution centers and patient service centers at locations throughout the
United States. In addition, we maintain offices, patient service centers and clinical laboratories in locations outside the United
States, including in Puerto Rico and Mexico. Our properties that are not owned are leased on terms and for durations that are
reflective of commercial standards in the communities where these properties are located. We believe that, in general, our
facilities are suitable and adequate for our current and anticipated future levels of operation and are adequately maintained. We
believe that if we were unable to renew a lease on any of our facilities, we could find alternative space at competitive market
rates and relocate our operations to such new location without material disruption to our business. Several of our principal
facilities are highlighted below.
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Location
3600 Northgate Blvd., Sacramento, California 95834 (laboratory)....................................................
8401 Fallbrook Avenue, West Hills, California 91304 (laboratory)...................................................
33608 Ortega Hwy., San Juan Capistrano, California 92675 (laboratory)...........................................
4151C East Fowler Avenue, Tampa, Florida 33617 (laboratory).......................................................
1777 Montreal Circle, Tucker, Georgia 30084-6802 (laboratory)......................................................
506 E State Parkway, Schaumburg, Illinois 60173 (laboratory)..........................................................
1355 Mittle Blvd., Wood Dale, Illinois 60191 (laboratory).................................................................
200 Forest Street, Marlborough, Massachusetts 01752 (laboratories)...............................................
1715 Twin Springs Road, Baltimore, Maryland 21227 (laboratory)..................................................
One Malcolm Avenue, Teterboro, New Jersey 07608 (laboratory)....................................................
800 Business Center Drive, Horsham, Pennsylvania 19044 (laboratory)...........................................
4770 Regent Blvd., Irving, Texas 75063 (laboratory).........................................................................
14225 Newbrook Drive, Chantilly, Virginia 22021 (laboratory)........................................................
10101 Renner Blvd., Lenexa, Kansas 66219 (laboratory)...................................................................
4380 Federal Drive, Greensboro, North Carolina 27410 (laboratory).................................................
2501 South State Hwy 121, Lewisville, Texas 75067 (laboratory)......................................................
6700 Euclid Avenue, Cleveland, Ohio 44103 (laboratory)..................................................................
Item 3. Legal Proceedings
Leased or Owned
Leased
Leased
Owned
Owned
Owned
Owned
Leased
Leased
Owned
Leased
Leased
Leased
Leased
Owned
Leased
Leased
Leased
See Note 18 to the Consolidated Financial Statements (Part II, Item 8 of this Report) for information regarding legal
proceedings in which we are involved.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Our common stock is listed and traded on the New York Stock Exchange under the symbol “DGX.” As of February 1,
2021, we had approximately 2,500 record holders of our common stock; we believe that the number of beneficial holders of our
common stock exceeds the number of record holders.
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 fourth quarter of 2020.
ISSUER PURCHASES OF EQUITY SECURITIES
Total Number
of
Shares
Purchased
Average Price
Paid per Share
Total Number
of
Shares
Purchased
as Part of
Publicly
Announced
Plans
or Programs
Approximate
Dollar Value of
Shares that
May
Yet Be
Purchased
Under the Plans
or Programs
(in thousands)
— $
5,871 $
423,301 $
226 $
1,605,678 $
1,141 $
2,028,979 $
7,238 $
—
114.01
124.76
122.06
122.81
124.44
123.21
115.91
— $
1,167,138
N/A
N/A
423,301 $
1,114,327
N/A
N/A
1,605,678 $
917,139
N/A
N/A
2,028,979 $
917,139
N/A
N/A
Period
October 1, 2020 – October 31, 2020
Share Repurchase Program (A)
Employee Transactions (B)
November 1, 2020 – November 30, 2020
Share Repurchase Program (A)
Employee Transactions (B)
December 1, 2020 – December 31, 2020
Share Repurchase Program (A)
Employee Transactions (B)
Total
Share Repurchase Program (A)
Employee Transactions (B)
(A) Since the share repurchase program's inception in May 2003, our Board of Directors has authorized $9 billion of share
repurchases of our common stock through December 31, 2020. The share repurchase authority has no set expiration or
termination date. On February 4, 2021, the Company announced that our Board of Directors had increased the size of its
repurchase program by $1 billion.
(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 share units and performance share units.
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Performance Graph
Set forth below is a line graph comparing the cumulative total shareholder return on Quest Diagnostics' common stock
since December 31, 2015 based on the market price of the Company's common stock and assuming reinvestment of dividends,
with the cumulative total shareholder return of companies on the Standard & Poor's 500 Stock Index and the S&P 500
Healthcare Equipment & Services Index.
Date
12/31/2016
12/31/2017
12/30/2018
12/29/2019
12/31/2020
Total Shareholder Return
Performance Graph Values
Closing DGX
Price
$
$
$
$
$
91.90
98.49
83.27
106.79
119.17
DGX
S&P 500
S&P 500
H.C.
DGX
S&P 500
S&P 500
H.C.
31.89 %
9.16 %
(13.84) %
31.15 %
14.04 %
11.96 %
21.83 %
(4.38) %
31.49 %
18.40 %
(2.69) % $
131.89 $
111.96 $
97.31
22.08 % $
143.97 $
136.40 $
118.79
6.47 % $
124.05 $
130.42 $
126.47
20.82 % $
162.68 $
171.49 $
152.81
13.45 % $
185.52 $
203.04 $
173.36
Item 6. Selected Financial Data
See page 58.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
See page 63.
46
Comparison of Cumulative Five Year Total ReturnQuest Diagnostics IncorporatedS&P 500 IndexS&P 500 Health Care Equipment & Services Index201520162017201820192020$50$100$150$200$250
Table of Contents
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
See Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 8. Financial Statements and Supplementary Data
See Item 15(a)1 and Item 15(a)2.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Conclusion Regarding Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and our
Chief Financial Officer, we have 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 annual report.
Report of Management on Internal Control Over Financial Reporting
See page 83.
Changes in Internal Control
During the fourth quarter of 2020, 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.
Item 9B. Other Information
None.
47
Table of Contents
Item 10. Directors, Executive Officers and Corporate Governance
PART III
Our Code of Ethics applies to all employees, executive officers and directors, including our Chief Executive Officer,
Chief Financial Officer and Corporate Controller. You can find our Code of Ethics on our corporate governance website,
www.QuestDiagnostics.com/investor. We will post any amendments to the Code of Ethics, and any waivers that are required to
be disclosed by the rules of either the SEC or the New York Stock Exchange, on our website.
Information regarding the Company's executive officers is contained in Part I, Item 1 of this Report under
“Information about our Executive Officers.” Information regarding the directors and executive officers of the Company
appearing in our Proxy Statement to be filed by April 30, 2021 (“Proxy Statement”) under the captions “Proposal No. 1 -
Election of Directors,” “Director Independence,” “Board Committees” and "Delinquent Section 16(a) Reports" is incorporated
by reference herein.
Item 11. Executive Compensation
Information appearing in our Proxy Statement under the captions “2020 Director Compensation Table,”
“Compensation Discussion and Analysis,” “Information Regarding Executive Compensation” and “Compensation Committee
Report” is incorporated by reference herein.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders' Matters
Information regarding security ownership of certain beneficial owners and management appearing in our Proxy
Statement under the captions “Stock Ownership Information” and "Equity Compensation Plan Information" is incorporated by
reference herein.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information regarding certain relationships and related transactions appearing in our Proxy Statement under the
captions “Related Person Transactions” and “Director Independence” is incorporated by reference herein.
Item 14. Principal Accounting Fees and Services
Information regarding principal accountant fees and services appearing in our Proxy Statement under the caption
“Audit" (excluding the information under the subheading “Audit and Finance Committee Report”) is incorporated by reference
herein.
48
Table of Contents
Item 15. Exhibits, Financial Statement Schedules
(a) Documents filed as part of this Report.
PART IV
1.
Index to financial statements and supplementary data filed as part of this Report.
Financial Statements
Item
Report of Independent Registered Public Accounting Firm.................................................................................
Consolidated Balance Sheets.................................................................................................................................
Consolidated Statements of Operations.................................................................................................................
Consolidated Statements of Comprehensive Income............................................................................................
Consolidated Statements of Cash Flows...............................................................................................................
Consolidated Statements of Stockholders' Equity.................................................................................................
Notes to Consolidated Financial Statements.........................................................................................................
Page
F- 1
F- 3
F- 4
F- 5
F- 6
F- 7
F- 8
Supplementary Data: Quarterly Operating Results (unaudited)............................................................................
F- 49
2. Financial Statement Schedule.
Item
Schedule II - Valuation Accounts and Reserves...................................................................................................
Page
F- 52
3. Exhibits
Exhibit
Number
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
Description
Restated Certificate of Incorporation (filed as an Exhibit to the Company's current report on Form 10-Q for the
quarter ended September 30, 2018 (Date of Report: October 24, 2018) and incorporated herein by reference)
(Commission File Number 001-12215)
Amended and Restated By-Laws of the Company (filed as an Exhibit to the Company's current report on Form
8-K (Date of Report: May 17, 2019) and incorporated herein by reference) (Commission File Number
001-12215)
Form of 6.95% Senior Note due 2037 (filed as an Exhibit to the Company's current report on Form 8-K (Date of
Report: June 19, 2007) and incorporated herein by reference) (Commission File Number 001-12215)
Form of 5.750% Senior Note due 2040 (filed as an Exhibit to the Company's current report on Form 8-K (Date
of Report: November 17, 2009) and incorporated herein by reference) (Commission File Number 001-12215)
Form of 4.250% Senior Note due 2024 (filed as an Exhibit to the Company's current report on Form 8-K (Date
of Report: March 12, 2014) and incorporated herein by reference) (Commission File Number 001-12215)
Form of 3.500% Senior Note due 2025 (filed as an Exhibit to the Company's current report on Form 8-K (Date
of Report: March 5, 2015) and incorporated herein by reference) (Commission File Number 001-12215)
Form of 4.700% Senior Note due 2045 (filed as an Exhibit to the Company's current report on Form 8-K (Date
of Report: March 5, 2015) and incorporated herein by reference) (Commission File Number 001-12215)
Form of 3.450% Senior Note due 2026 (filed as an Exhibit to the Company’s current report on Form 8-K (Date
of Report: May 23, 2016) and incorporated herein by reference) (Commission File Number 001-12215)
49
Table of Contents
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15
4.16
4.17
4.18
4.19
4.20
Form of 4.200% Senior Note due 2029 (filed as an Exhibit to the Company’s current report on Form 8-K (Date
of Report: March 7, 2019) and incorporated herein by reference) (Commission File Number 001-12215)
Form of 2.950% Senior Note due 2030 (filed as an Exhibit to the Company’s current report on Form 8-K (Date
of Report: December 9, 2019) and incorporated herein by reference) (Commission File Number 001-12215)
Form of 2.800% Senior Note due 2031 (filed as an Exhibit to the Company’s current report on Form 8-K (Date
of Report: May 11, 2020) and incorporated herein by reference) (Commission File Number 001-12215)
Indenture dated as of June 27, 2001, among the Company, the Subsidiary Guarantors, and the Trustee (filed as
an Exhibit to the Company's current report on Form 8-K (Date of Report: June 27, 2001) and incorporated herein
by reference) (Commission File Number 001-12215)
First Supplemental Indenture, dated as of June 27, 2001, among the Company, the Subsidiary Guarantors, and
The Bank of New York (filed as an Exhibit to the Company's current report on Form 8-K (Date of Report: June
27, 2001) and incorporated herein by reference) (Commission File Number 001-12215)
Second Supplemental Indenture, dated as of November 26, 2001, among the Company, the Subsidiary
Guarantors, and The Bank of New York (filed as an Exhibit to the Company's current report on Form 8-K (Date
of Report: November 26, 2001) and incorporated herein by reference) (Commission File Number 001-12215)
Third Supplemental Indenture, dated as of April 4, 2002, among the Company, the Additional Subsidiary
Guarantors, and The Bank of New York (filed as an Exhibit to the Company's current report on Form 8-K (Date
of Report: April 1, 2002) and incorporated herein by reference) (Commission File Number 001-12215)
Fourth Supplemental Indenture dated as of March 19, 2003, among Unilab Corporation (f/k/a Quest Diagnostics
Newco Incorporated), the Company, The Bank of New York, and the Subsidiary Guarantors (filed as an Exhibit
to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2003 and incorporated herein
by reference) (Commission File Number 001-12215)
Fifth Supplemental Indenture dated as of April 16, 2004, among Unilab Acquisition Corporation (d/b/a FNA
Clinics of America), the Company, The Bank of New York, and the Subsidiary Guarantors (filed as an Exhibit to
the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2004 and incorporated herein by
reference) (Commission File Number 001-12215)
Sixth Supplemental Indenture dated as of October 31, 2005, among the Company, The Bank of New York, and
the Subsidiary Guarantors (filed as an Exhibit to the Company's current report on Form 8-K (Date of Report:
October 31, 2005) and incorporated herein by reference) (Commission File Number 001-12215)
Seventh Supplemental Indenture dated as of November 21, 2005, among the Company, The Bank of New York,
and the Subsidiary Guarantors (filed as an Exhibit to the Company's current report on Form 8-K (Date of Report:
November 21, 2005) and incorporated herein by reference) (Commission File Number 001-12215)
Eighth Supplemental Indenture dated as of July 31, 2006, among the Company, The Bank of New York, and the
Subsidiary Guarantors (filed as an Exhibit to the Company's current report on Form 8-K (Date of Report: July
31, 2006) and incorporated herein by reference) (Commission File Number 001-12215)
Ninth Supplemental Indenture dated as of September 30, 2006, among the Company, The Bank of New York,
and the Subsidiary Guarantors (filed as an Exhibit to the Company's current report on Form 8-K (Date of Report:
September 30, 2006) and incorporated herein by reference) (Commission File Number 001-12215)
Tenth Supplemental Indenture dated as of June 22, 2007, among the Company, The Bank of New York, and the
Subsidiary Guarantors (filed as an Exhibit to the Company's current report on Form 8-K (Date of Report: June
19, 2007) and incorporated herein by reference) (Commission File Number 001-12215)
50
Table of Contents
4.21
4.22
4.23
4.24
4.25
4.26
4.27
4.28
4.29
4.30
4.31
4.32
10.1‡
Eleventh Supplemental Indenture dated as of June 22, 2007, among the Company, The Bank of New York, and
the Additional Subsidiary Guarantors (filed as an Exhibit to the Company's current report on Form 8-K (Date of
Report: June 19, 2007) and incorporated herein by reference) (Commission File Number 001-12215)
Twelfth Supplemental Indenture dated as of June 25, 2007, among the Company, The Bank of New York, and
the Additional Subsidiary Guarantors (filed as an Exhibit to the Company's current report on Form 8-K (Date of
Report: June 19, 2007) and incorporated herein by reference) (Commission File Number 001-12215)
Thirteenth Supplemental Indenture dated as of November 17, 2009, among the Company, The Bank of New
York, and the Subsidiary Guarantors (filed as an Exhibit to the Company's current report on Form 8-K (Date of
Report: November 17, 2009) and incorporated herein by reference) (Commission File Number 001-12215)
Fourteenth Supplemental Indenture dated as of March 24, 2011, among the Company, The Bank of New York,
and the Subsidiary Guarantors (filed as an Exhibit to the Company's current report on Form 8-K (Date of Report:
March 21, 2011) and incorporated herein by reference) (Commission File Number 001-12215)
Fifteenth Supplemental Indenture dated as of November 30, 2011, among the Company, The Bank of New York
Mellon Trust Company, N.A., as successor trustee to The Bank of New York, and the Subsidiary Guarantors
(filed as an Exhibit to the Company's 2011 annual report on Form 10-K and incorporated herein by reference)
(Commission File Number 001-12215)
Sixteenth Supplemental Indenture dated as of March 17, 2014, between the Company, The Bank of New York
Mellon Trust Company, N.A., (filed as an Exhibit to the Company's current report on Form 8-K (Date of Report:
March 12, 2014) and incorporated herein by reference) (Commission File Number 001-12215)
Seventeenth Supplemental Indenture dated as of March 10, 2015, between the Company and The Bank of New
York Mellon (filed as an Exhibit to the Company’s current report on Form 8-K (Date of Report: March 5, 2015)
and incorporated herein by reference) (Commission File Number 001-12215)
Eighteenth Supplemental Indenture dated as of May 26, 2016, between the Company and The Bank of New
York Mellon (filed as an Exhibit to the Company’s current report on Form 8-K (Date of Report: May 23, 2016)
and incorporated herein by reference) (Commission File Number 001-12215)
Nineteenth Supplemental Indenture dated as of March 12 2019, between the Company and The Bank of New
York Mellon (filed as an Exhibit to the Company’s current report on Form 8-K (Date of Report: March 7, 2019)
and incorporated herein by reference) (Commission File Number 001-12215)
Twentieth Supplemental Indenture dated as of December 16, 2019, between the Company and The Bank of New
York Mellon (filed as an Exhibit to the Company’s current report on Form 8-K (Date of Report: December 16,
2019) and incorporated herein by reference) (Commission File Number 001-12215)
Twenty-First Supplemental Indenture dated as of May 13, 2020, between the Company and The Bank of New
York Mellon (filed as an Exhibit to the Company’s current report on Form 8-K (Date of Report: May 11, 2020)
and incorporated herein by reference) (Commission File Number 001-12215)
Description of Securities (filed as an Exhibit to the Company’s 2019 annual report on Form 10-K and
incorporated herein by reference) (Commission File Number 001-12215)
Amended and Restated Employee Stock Purchase Plan, as amended, effective February 18, 2019 (filed as an
Exhibit to the Company's quarterly report on form 10-Q for the quarter ended March 31, 2019 and incorporated
herein by reference) (Commission File Number 001-12215)
51
Table of Contents
10.2‡
10.3‡
Amended and Restated Quest Diagnostics Incorporated Employee Long-Term Incentive Plan as amended May
14, 2019 (filed as an Exhibit to the Company's 2019 quarterly report on Form 10-Q for the quarter ended June
30, 2019 and incorporated herein by reference) (Commission file number 001-12215)
Form of Equity Award Agreement dated as of February 19, 2018 (filed as an Exhibit to the Company’s 2018
quarterly report on Form 10-Q for the quarter ended March 31, 2018 and incorporated herein by reference)
(Commission file number 001-12215)
10.4‡*
Quest Diagnostics Supplemental Deferred Compensation Plan (Post 2004) amended and restated as of January
15, 2020
10.5‡*
Quest Diagnostics Supplemental Deferred Compensation Plan (Pre-2005) amended and restated January 15,
2020
10.6‡
10.7‡
10.8‡
10.9‡
10.10‡
10.11‡
10.12‡
10.13‡
10.14‡
Quest Diagnostics Incorporated Senior Management Incentive Plan, as amended and restated February 18, 2019
(filed as an Exhibit to the Company's 2019 quarterly report on Form 10-Q for the quarter ended March 31, 2019
and incorporated herein by reference) (Commission File Number 001-12215)
Amended and Restated Quest Diagnostics Incorporated Executive Officer Severance Plan as amended
November 19, 2019 (filed as an Exhibit to the Company's current report on Form 8-K (Date of Report:
November 19, 2019) and incorporated herein by reference) (Commission File Number 001-12215)
The Profit Sharing Plan of Quest Diagnostics Incorporated (Amendment and Restatement, effective as of
January 1, 2016) (filed as an Exhibit to the Company’s 2015 annual report on Form 10-K and incorporated
herein by reference) (Commission File Number 001-12215)
Amendment No. 1 to The Profit Sharing Plan of Quest Diagnostics Incorporated, effective as of January 1, 2018
(filed as an Exhibit to the Company's 2017 annual report on Form 10-K and incorporated herein by reference)
(Commission file number 001-12215)
Amendment No. 2 to The Profit Sharing Plan of Quest Diagnostics Incorporated, as amended December 20,
2018 (filed as an Exhibit to the Company's 2018 annual report on Form 10-K and incorporated herein by
reference)(Commission file number 001-12215)
Amendment No. 3 to The Profit Sharing Plan of Quest Diagnostics Incorporated effective January 1, 2020 (filed
as an Exhibit to the Company’s 2019 annual report on Form 10-K and incorporated herein by reference)
(Commission File Number 001-12215)
Amendment No. 4 to The Profit Sharing Plan of Quest Diagnostics Incorporated effective March 1, 2020 (filed
as an Exhibit to the Company’s 2020 quarterly report on Form 10-Q for the quarter ended March 31, 2020 and
incorporated herein by reference) (Commission File Number 001-12215)
Amendment No. 5 to The Profit Sharing Plan of Quest Diagnostics Incorporated effective January 1, 2020 (filed
as an Exhibit to the Company’s 2020 quarterly report on Form 10-Q for the quarter ended March 31, 2020 and
incorporated herein by reference) (Commission File Number 001-12215)
Amendment No. 6 to The Profit Sharing Plan of Quest Diagnostics Incorporated effective January 1, 2021 (filed
as an Exhibit to the Company’s 2020 quarterly report on Form 10-Q for the quarter ended September 30, 2020
and incorporated herein by reference) (Commission File Number 001-12215)
10.15‡*
Amendment No. 7 to The Profit Sharing Plan of Quest Diagnostics Incorporated effective January 1, 2021
10.16‡
Quest Diagnostics Incorporated Amended and Restated Deferred Compensation Plan For Directors as amended
effective February 18, 2020 (filed as an Exhibit to the Company’s 2019 annual report on Form 10-K and
incorporated herein by reference) (Commission File Number 001-12215)
52
Table of Contents
10.17‡*
Amended and Restated Quest Diagnostics Incorporated Long-Term Incentive Plan for Non-Employee Directors,
as amended and restated as of November 18, 2020
10.18‡
Form of Non-Employee Director Equity Award Agreement (filed as an Exhibit to the Company's 2011 annual
report on Form 10-K and incorporated herein by reference) (Commission File Number 001-12215)
10.19‡
Form of Non-Employee Director Equity Award Agreement dated May 15, 2015 (filed as an Exhibit to the
Company’s 2015 annual report on Form 10-K and incorporated herein by reference) (Commission File Number
001-12215)
10.20‡
Form of Non-Employee Director Elective Option Award Agreement (filed as an Exhibit to the Company's 2011
annual report on Form 10-K and incorporated herein by reference) (Commission File Number 001-12215)
10.21‡
10.22‡
10.23‡
10.24‡
Employment Agreement between Stephen H. Rusckowski and Quest Diagnostics Incorporated, dated April 3,
2012 (filed as an Exhibit to the Company's current report on Form 8-K (Date of Report: April 9, 2012) and
incorporated herein by reference) (Commission File Number 001-12215)
Amendment to Employment Agreement between Stephen H. Rusckowski and Quest Diagnostics Incorporated,
dated June 11, 2015 (filed as an Exhibit to the Company’s current report on Form 8-K (Date of Report: June 11,
2015) and incorporated herein by reference) (Commission File Number 001-12215)
Aircraft Timesharing Agreement dated as of December 17, 2013 between Quest Diagnostics Incorporated and
Stephen H. Rusckowski (filed as an Exhibit to the Company’s 2013 annual report on Form 10-K and
incorporated herein by reference) (Commission File Number 001-12215)
Assignment and Amendment No. 1 to Aircraft Timesharing Agreement dated as of May 29, 2019 between Quest
Diagnostics Incorporated and Stephen H. Rusckowski (filed as an Exhibit to the Company’s 2019 quarterly
report on Form 10-Q for the quarter ended June 30, 2019 and incorporated herein by reference) (Commission
File Number 001-12215)
21.1*
Subsidiaries of Quest Diagnostics Incorporated
23.1*
Consent of PricewaterhouseCoopers LLP
24.1*
Power of Attorney (included on signature page)
31.1*
Rule 13a-14(a) Certification of Chief Executive Officer
31.2*
Rule 13a-14(a) Certification of Chief Financial Officer
32.1**
Section 1350 Certification of Chief Executive Officer
32.2**
Section 1350 Certification of Chief Financial Officer
99.1‡
99.2‡
Fourth Amended and Restated Receivables Sales Agreement, dated as of October 28, 2015, between Quest
Diagnostics Incorporated and the subsidiaries identified therein, as Sellers, and Quest Diagnostics Receivables
Inc., as Buyer (filed as an Exhibit to the Company’s current report on Form 8-K (Date of Report: May 4, 2020)
and incorporated herein by reference) (Commission File Number 001-12215)
Amendment No. 1 to Fourth Amended and Restated Receivables Sales Agreement, dated October 25, 2019 (filed
as an Exhibit to the Company’s current report on Form 8-K (Date of Report: May 4, 2020) and incorporated
herein by reference) (Commission File Number 001-12215)
53
Table of Contents
99.3‡
99.4‡
99.5‡
99.6‡
99.7‡*
99.8‡
Sixth Amended and Restated Credit and Security Agreement, dated as of October 27, 2017 among Quest
Diagnostics Receivables Inc., Quest Diagnostics Incorporated, as Initial Servicer, MUFG Bank, LTD., as
Administrative Agent, the Lenders party thereto, the financial institutions party thereto as agents for the conduit
lenders (filed as an Exhibit to the Company’s current report on Form 8-K (Date of Report: May 4, 2020) and
incorporated herein by reference) (Commission File Number 001-12215)
Amendment No. 1 to Sixth Amended and Restated Credit and Security Agreement, dated as of October 26, 2018
(filed as an Exhibit to the Company’s current report on Form 8-K (Date of Report: May 4, 2020) and
incorporated herein by reference) (Commission File Number 001-12215)
Amendment No. 2 to Sixth Amended and Restated Credit and Security Agreement, dated as of June 14, 2019
(filed as an Exhibit to the Company’s current report on Form 8-K (Date of Report: May 4, 2020) and
incorporated herein by reference) (Commission File Number 001-12215)
Amendment No. 3 to Sixth Amended and Restated Credit and Security Agreement, dated as of October 25, 2019
(filed as an Exhibit to the Company’s current report on Form 8-K (Date of Report: May 4, 2020) and
incorporated herein by reference) (Commission File Number 001-12215)
Amendment No. 4 to Sixth Amended and Restated Credit and Security Agreement, dated as of October 22, 2020
Amendment No. 1, dated as of April 30, 2020, relating to the Second Amended and Restated Credit Agreement,
dated as of March 22, 2018, among Quest Diagnostics Incorporated, as Borrower, the lenders identified therein,
JPMorgan Chase Bank, N.A., as Administrative Agent, and other agents party thereto and which includes, as
Exhibit A, the Second Restated Credit Agreement marked to show the amended text (filed as an Exhibit to the
Company’s current report on Form 8-K (Date of Report: May 4, 2020) and incorporated herein by reference)
(Commission File Number 001-12215)
101.INS
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its
XBRL tags are embedded within the Inline XBRL document
101.SCH
Inline XBRL Taxonomy Extension Schema Document - dgx-20201231.xsd
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document - dgx-20201231_cal.xml
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document - dgx-20201231_def.xml
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document - dgx-20201231_lab.xml
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document - dgx-20201231_pre.xml
104
The cover page from this annual report on Form 10-K, formatted in Inline XBRL.
*
**
‡
Filed herewith.
Furnished herewith.
Management contract or compensatory plan or arrangement required to be filed as an Exhibit to this Form 10-K
pursuant to Item 15(b) of Form 10-K.
(b) Exhibits filed as part of this Report.
The exhibit index in (a) above is incorporated herein by reference.
(c) None.
54
Table of Contents
Item 16. Form 10-K Summary
None.
55
Table of Contents
Signatures
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 22, 2021.
QUEST DIAGNOSTICS INCORPORATED
(Registrant)
By:
/s/Stephen H. Rusckowski
Stephen H. Rusckowski
Chairman of the Board, Chief Executive
Officer and President
Each individual whose signature appears below constitutes and appoints Michael E. Prevoznik and William J.
O'Shaughnessy, Jr., and each of them singly, his or her true and lawful attorneys-in-fact and agents with full power of
substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to
this Annual Report on Form 10-K filed with the Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be
done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all the said attorneys-in-fact and agents or any of them or their or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities indicated on February 22, 2021.
56
Table of Contents
Signature
/s/Stephen H. Rusckowski
Stephen H. Rusckowski
/s/Mark J. Guinan
Mark J. Guinan
/s/Michael J. Deppe
Michael J. Deppe
/s/Vicky B. Gregg
Vicky B. Gregg
/s/Wright L. Lassiter, III
Wright L. Lassiter, III
/s/Timothy L. Main
Timothy L. Main
/s/Denise M. Morrison
Denise M. Morrison
/s/Gary M. Pfeiffer
Gary M. Pfeiffer
/s/Timothy M. Ring
Timothy M. Ring
/s/Daniel C. Stanzione
Daniel C. Stanzione
/s/Helen I. Torley
Helen I. Torley
/s/Gail R. Wilensky
Gail R. Wilensky
Capacity
Chairman of the Board, Chief
Executive Officer and President
(Principal Executive Officer)
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
Vice President, Corporate Controller
and Chief Accounting Officer
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
Director
57
Table of Contents
SELECTED HISTORICAL FINANCIAL DATA OF OUR COMPANY
The following table summarizes selected historical financial data of our Company and our subsidiaries at the dates and
for each of the periods presented. The selected historical financial data is only a summary and should be read together with the
audited consolidated financial statements and related notes of our Company and management's discussion and analysis of
financial condition and results of operations included elsewhere in this Annual Report on Form 10-K.
Net income attributable to Quest Diagnostics
$
1,431 $
858 $
736 $
772 $
Year Ended December 31,
2020
2019
2018
2017
2016
(dollars in millions, except per share data)
(a) (b) (c)
(a) (d) (e)
(a) (f) (g)
(a) (h) (i)
(a) (j) (k)
$
9,437 $
7,726 $
7,531 $
7,402 $
1,971
1,499
—
1,499
68
1,231
1,101
1,165
886
20
906
48
788
—
788
52
824
—
824
52
1,431 $
838 $
736 $
772 $
—
20
—
—
1,431 $
858 $
736 $
772 $
10.62 $
6.21 $
5.39 $
5.63 $
—
0.15
—
—
10.62 $
6.36 $
5.39 $
5.63 $
10.47 $
6.13 $
5.29 $
5.50 $
—
0.15
—
—
10.47 $
6.28 $
5.29 $
5.50 $
2.24 $
2.12 $
2.03 $
1.80 $
1.65
7,214
1,277
696
—
696
51
645
645
—
645
4.58
—
4.58
4.51
—
4.51
Operations Data:
Net revenues
Operating income
Income from continuing operations
Income from discontinued operations, net of taxes
Net income
Less: Net income attributable to noncontrolling interests
Amounts attributable to Quest Diagnostics' common
stockholders:
Income from continuing operations
Income from discontinued operations, net of taxes
Net income
Earnings per share attributable to Quest Diagnostics' common
stockholders - basic:
Income from continuing operations
Income from discontinued operations
Net income
Earnings per share attributable to Quest Diagnostics' common
stockholders - diluted:
Income from continuing operations
Income from discontinued operations
Net income
Dividends per common share
$
$
$
$
$
$
$
58
Table of Contents
Balance Sheet Data (at end of year):
(a) (b) (c)
(a) (d) (e)
(a) (f) (g)
(a) (h) (i)
(a) (j) (k)
Cash and cash equivalents
$
1,158 $
1,192 $
135 $
137 $
359
Year Ended December 31,
2020
2019
2018
2017
2016
(dollars in millions)
Total assets
Long-term debt
Total debt
Redeemable noncontrolling interest
Other Data:
14,026
12,843
11,003
10,503
10,100
4,013
4,015
82
3,966
4,770
76
3,429
3,893
77
3,748
3,784
80
3,728
3,734
77
Net cash provided by operating activities
$
2,005 $
1,243 $
1,200 $
1,175 $
1,116
Net cash used in investing activities
Net cash (used in) provided by financing activities
Capital expenditures
Purchases of treasury stock
Dividends paid
(772)
(1,267)
418
325
297
(411)
225
400
353
286
(801)
(401)
383
322
266
(830)
(592)
252
465
247
(127)
(738)
293
590
223
(a) On January 1, 2019, we adopted a new lease accounting standard, which required us to recognize an asset and a liability for
most operating leases on our balance sheet. As of December 31, 2019, operating lease right-of-use assets and operating
lease liabilities totaled $518 million and $558 million, respectively. Periods prior to 2019 have not been restated. During
the third quarter of 2006, we completed the wind down of Nichols Institute Diagnostics ("NID"), a test kit manufacturing
subsidiary, which was reported as discontinued operations through 2019, at which point certain income tax contingencies
related to NID were resolved. During 2020, our results were materially impacted by the COVID-19 pandemic including a
decline in testing volume in our base business (which excludes COVID-19 molecular and antibody testing) which was
more than offset by COVID-19 molecular and antibody testing.
(b) On January 21, 2020, we completed the acquisition of Blueprint Genetics Oy ("Blueprint Genetics"). On April 6, 2020, we
completed the acquisition of select assets which constitute substantially all of the operations of Memorial Hermann
Diagnostics Laboratories, the outreach laboratory division of Memorial Hermann Health System ("Memorial Hermann").
On August 1, 2020, we completed the acquisition of the remaining 56% interest in Mid America Clinical Laboratories,
LLC ("MACL") from our joint venture partners. Consolidated operating results for 2020 included the results of operations
of Blueprint Genetics, Memorial Hermann and MACL subsequent to the closing of these acquisitions. Prior to the
acquisition, we accounted for our 44% interest in MACL as an equity method investment. For further details regarding our
acquisitions, see Note 6 to the audited consolidated financial statements.
During January 2020, we redeemed in full the outstanding indebtedness under our senior notes due January 2020 and
senior notes due March 2020 using the net proceeds from the issuance, in December 2019, of the 2.95% senior notes due
June 2030, along with cash on hand.
During May 2020, we completed a senior notes offering, consisting of $550 million aggregate principal amount of 2.80%
senior notes due June 2031 (the "2031 Senior Notes"). During November 2020, the net proceeds from the 2031 Senior
Notes, along with cash on hand, were used to redeem in full the outstanding indebtedness under our senior notes due April
2021.
(c) Operating income included (for 2020):
•
•
•
•
pre-tax amortization expense of $103 million;
pre-tax charges of $76 million, representing the impact of certain items resulting from the COVID-19 pandemic,
principally including expense associated with payments to eligible employees to help offset expenses they
incurred as a result of COVID-19, incremental costs incurred primarily to protect the health and safety of our
employees and customers, and certain asset impairment charges;
pre-tax charges of $58 million, primarily associated with systems conversions and integration incurred in
connection with further restructuring and integrating our business; and
pre-tax charges of $2 million, associated with Quest for Health Equity (our recently announced initiative with the Quest
Diagnostics Foundation to reduce health disparities in underserved communities).
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In addition to the items included in operating income, income from continuing operations included:
•
•
•
•
•
a pre-tax gain of $70 million recognized upon the acquisition of the remaining 56% interest in MACL as a result
of the remeasurement of our previously held equity interest to fair value;
pre-tax amortization expense of $11 million included in equity in earnings of equity method investees, net of
taxes;
a net pre-tax gain of $4 million principally related to a gain recognized by an equity method investee to adjust
certain of its investments to fair value, partially offset by a loss on the retirement of debt;
a pre-tax gain of $4 million in equity in earnings of equity method investees, net of taxes, representing the impact of
certain items resulting from the COVID-19 pandemic; and
excess tax benefits associated with stock-based compensation arrangements of $23 million.
Net cash provided by operating activities included $40 million of proceeds received from the termination of interest rate
swap agreements.
(d) On February 11, 2019, we completed the acquisition of certain assets of the clinical laboratory services business of Boyce
& Bynum Pathology Laboratories, P.C. ("Boyce & Bynum"). Consolidated operating results for 2019 included the results
of operations of Boyce & Bynum subsequent to the closing of the acquisition. For further details regarding our
acquisitions, see Note 6 to the audited consolidated financial statements.
In December 2019, we completed a senior notes offering, consisting of $800 million aggregate principal amount of 2.95%
senior notes due June 2030.
(e) Operating income included (for 2019):
•
•
•
pre-tax amortization expense of $96 million;
pre-tax charges of $78 million, primarily associated with systems conversions and integration incurred in
connection with further restructuring and integrating our business; and
a net pre-tax gain of $89 million, primarily due to a gain associated with the sale and leaseback of a property, a
gain associated with the decrease in the fair value of the contingent consideration accruals associated with
previous acquisitions, and a gain associated with proceeds from an insurance claim for hurricane related losses,
partially offset by costs incurred related to a data security incident and non-cash asset impairment charges.
In addition to the items included in operating income, income from continuing operations included:
•
•
pre-tax amortization expense of $15 million included in equity in earnings of equity method investees, net of
taxes; and
excess tax benefits associated with stock-based compensation arrangements of $13 million.
Discontinued operations, net of taxes, for the year ended December 31, 2019 includes discrete tax benefits of $20 million
associated with the favorable resolution of certain tax contingencies related to NID.
(f) On February 1, 2018, we completed the acquisition of Mobile Medical Examination Services, LLC. ("MedXM"). On June
18, 2018, we completed the acquisition of the outreach laboratory services business of Cape Cod Healthcare, Inc. On
September 19, 2018, we completed the acquisition of ReproSource, Inc. ("ReproSource"). On November 6, 2018, we
completed the acquisition of the U.S. laboratory services business of Oxford Immunotec, Inc. ("Oxford"). Consolidated
operating results for 2018 include the results of operations of MedXM, the outreach laboratory services business of Cape
Cod Healthcare, Inc., ReproSource and Oxford subsequent to the closing of the applicable acquisition. For further details
regarding our acquisitions, see Note 6 to the audited consolidated financial statements.
(g) Operating income included (for 2018):
•
•
•
pre-tax charges of $122 million, primarily associated with workforce reductions, systems conversions and
integration incurred in connection with further restructuring and integrating our business;
pre-tax amortization expense of $90 million; and
pre-tax charges of $2 million, primarily associated with costs incurred related to certain legal matters and a loss on
the sale of a foreign subsidiary, partially offset by a gain associated with the decrease in the fair value of the
contingent consideration accrual associated with a previous acquisition and proceeds from an insurance claim for
hurricane related losses.
In addition to the items included in operating income, income from continuing operations included:
•
pre-tax amortization expense of $17 million included in equity in earnings of equity method investees, net of
taxes;
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•
•
excess tax benefits associated with stock-based compensation arrangements of $18 million; and
an income tax benefit of $14 million primarily associated with a change in a tax return accounting method that
enabled us to accelerate the deduction of certain expenses on our 2017 tax return at the federal corporate statutory
income tax rate in effect during 2017, partially offset by an income tax expense associated with finalizing the
impact of the enactment of the Tax Cuts and Jobs Act ("TCJA").
Pursuant to the TCJA, among other changes to U.S. corporate income tax laws, the federal corporate statutory income tax
rate was reduced from 35% to 21% effective for 2018.
(h) On May 1, 2017, we completed the acquisition of the outreach laboratory services business of PeaceHealth Laboratories
("PHL"). On July 14, 2017, we completed the acquisition of Med Fusion, LLC and Clearpoint Diagnostic Laboratories,
LLC ("Med Fusion"). On September 28, 2017, we completed the acquisition of the outreach laboratory services businesses
of two hospitals of Hartford HealthCare Corporation ("HHC"), The William W. Backus Hospital and The Hospital of
Central Connecticut. On December 1, 2017, we completed the acquisition of Cleveland HeartLab, Inc. ("CHL"). On
December 7, 2017, we completed the acquisition of certain assets of the clinical and anatomic pathology laboratory
business of Shiel Holdings, LLC ("Shiel"). Consolidated operating results for 2017 include the results of operations of
PHL, Med Fusion, the outreach laboratory services businesses of The William W. Backus Hospital and The Hospital of
Central Connecticut, CHL and Shiel subsequent to the closing of the applicable acquisition. For further details regarding
our acquisitions, see Note 5 to the audited consolidated financial statements included in our Annual Report on Form 10-K
for the year ended December 31, 2017.
(i) Operating income included (for 2017):
•
•
•
pre-tax charges of $105 million, primarily associated with systems conversions, integration and workforce
reductions incurred in connection with further restructuring and integrating our business;
pre-tax amortization expense of $74 million; and
pre-tax charges of $12 million, primarily a result of non-cash asset impairment charges, incremental costs incurred
as a result of hurricanes and costs incurred related to certain legal matters.
In addition to the items included in operating income, income from continuing operations included:
•
•
•
•
•
•
pre-tax amortization expense of $16 million included in equity in earnings of equity method investees, net of
taxes;
a net pre-tax gain of $2 million, primarily a result of a gain on the sale of an interest in an equity method
investment, partially offset by non-cash asset impairment charges associated with an investment;
$1 million of pre-tax restructuring and integration charges associated with our Q2 Solutions joint venture;
a provisional estimated income tax benefit of $106 million associated with the TCJA, including a deferred income
tax benefit of $115 million primarily due to the remeasurement of our net deferred tax liabilities and reserves at
the new combined federal and state statutory income tax rate, partially offset by $9 million of current income tax
expense primarily due to the mandatory repatriation toll charge on undistributed foreign earnings and profits;
excess tax benefits associated with stock-based compensation arrangements of $37 million; and
income tax expense of $3 million primarily a result of recording a valuation allowance against certain net
operating loss carryforwards in a geography impacted by hurricanes.
Net cash provided by operating activities benefited from a decrease in tax payments associated with the realization of a $62
million deferred tax benefit.
(j) On February 29, 2016, we completed the acquisition of the outreach laboratory services business of Clinical Laboratory
Partners, LLC ("CLP"), a wholly-owned subsidiary of HHC. Consolidated operating results for 2016 include the results of
operations of CLP subsequent to the closing of the acquisition. For further details regarding acquisitions, see Note 5 to the
audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31,
2016. On May 13, 2016, we completed the sale of our Focus Diagnostics products business ("Focus Sale"). Our Focus
Diagnostics products business was not classified as a discontinued operation. For further details regarding dispositions, see
Note 6 to the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended
December 31, 2016.
(k) Operating income included (for 2016):
•
•
•
a pre-tax gain of $118 million associated with the Focus Sale;
pre-tax amortization expense of $72 million;
pre-tax charges of $78 million, primarily associated with systems conversions and integration incurred in
connection with further restructuring and integrating our business; and
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•
a net pre-tax gain of $7 million, primarily a result of a non-taxable gain on an escrow recovery associated with an
acquisition, partially offset by costs associated with winding down subsidiaries, non-cash asset impairment
charges and costs incurred related to certain legal matters.
In addition to the items included in operating income, income from continuing operations included:
•
•
•
•
•
•
pre-tax amortization expense of $16 million included in equity in earnings of equity method investees, net of
taxes;
income tax expense of $84 million associated with the Focus Sale, consisting of $91 million of current income tax
expense and a deferred income tax benefit of $7 million;
$48 million of pre-tax charges on the retirement of debt and the related income tax benefit of $18 million;
non-cash pre-tax asset impairment charges of $7 million associated with certain investments;
$4 million of pre-tax restructuring and integration charges associated with our Q2 Solutions joint venture; and
excess tax benefits associated with stock-based compensation arrangements of $9 million.
Net cash provided by operating activities included:
•
•
•
a $17 million cash tax benefit on the retirement of debt;
$54 million of proceeds received from the termination of interest rate swap agreements; and
$91 million of income taxes paid in connection with the Focus Sale.
Net cash used in investing activities included proceeds from the sale of businesses of $295 million, principally related to
the Focus Sale.
Net cash used in financing activities included $43 million of pre-tax cash charges on the retirement of debt, principally
comprised of premiums paid to retire the debt.
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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Our Company
Diagnostic Information Services
Quest Diagnostics empowers people to take action to improve health outcomes. We use our extensive database of
clinical lab results to derive diagnostic insights that reveal new avenues to identify and treat disease, inspire healthy behaviors
and improve healthcare management. Our diagnostic information services business ("DIS") provides information and insights
based on the industry-leading menu of routine, non-routine and advanced clinical testing and anatomic pathology testing, and
other diagnostic information services. We provide services to a broad range of customers, including patients, clinicians,
hospitals, independent delivery networks ("IDNs"), health plans, employers, accountable care organizations ("ACOs"), and
direct contract entities ("DCEs"). We offer the broadest access in the United States to diagnostic information services through
our nationwide network of laboratories, patient service centers and phlebotomists in physician offices and our connectivity
resources, including call centers and mobile paramedics, nurses and other health and wellness professionals. We are the world's
leading provider of diagnostic information services. We provide interpretive consultation with one of the largest medical and
scientific staffs in the industry. Our DIS business makes up greater than 95% of our consolidated net revenues. During 2020,
we processed approximately 187 million test requisitions through our extensive laboratory network.
The clinical testing that we perform is an essential element in the delivery of healthcare services. Clinicians use
clinical testing for predisposition, screening, monitoring, diagnosis, prognosis and treatment choices of diseases and other
medical conditions. The United States clinical testing industry consists of two segments. One segment, which we believe
makes up approximately 36% of the total industry, includes hospital inpatient and outpatient testing. The second segment,
which we believe makes up approximately 64% of the total industry, includes testing of persons who are not hospital patients,
including testing done in commercial clinical laboratories, physician-office laboratories and other locations, as well as hospital
outreach (non-hospital patients) testing. We believe that hospital-affiliated laboratories account for approximately 36% of the
second segment, commercial clinical laboratories approximately 53% and physician-office laboratories and other locations
account for the balance. Our estimates of the clinical laboratories industry do not include the impact of COVID-19 testing.
The clinical testing industry is subject to seasonal fluctuations in operating results and cash flows. Typically, testing
volume declines during vacation and major holiday periods, reducing net revenues and operating cash flows below annual
averages. Testing volume is also subject to declines due to severe weather or other events (such as public health emergencies
and health pandemics), which can deter patients from having testing performed and which can vary in duration and severity
from year to year. Additionally, orders for clinical testing generated from clinician offices, hospitals and employers can be
affected by factors such as changes in the United States economy and regulatory environment, which affect the number of
unemployed and uninsured, and design changes in healthcare plans, which affect utilization as well as patient responsibility for
healthcare costs.
We assess our revenue performance for the DIS business based upon, among other factors, volume (measured by test
requisitions) and revenue per requisition.
Each requisition accompanies patient specimens, indicating the test(s) to be performed and the party to be billed for the
test(s).
Revenue per requisition is impacted by various factors, including, among other items, the impact of fee schedule
changes (i.e. unit price), test mix, payer mix, and the number of tests per requisition. Management uses number of requisitions
and revenue per requisition data to assist with assessing the growth and performance of the business, including understanding
trends affecting number of requisitions, pricing and test mix. Therefore, we believe that information related to changes in these
metrics from period to period are useful information for investors as it allows them to assess the performance of the business.
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A summary of our revenue performance over the past three years is as follows:
Net revenues
DIS revenues
Revenue per requisition change
Requisition volume change
Organic requisition volume change
2020
$9,437
$9,139
16.2%
6.6%
4.5%
Year Ended December 31,
2019
(dollars in millions)
$7,726
$7,405
(1.3)%
4.3%
3.1%
2018
$7,531
$7,204
(1.2)%
2.5%
0.5%
The impact that the COVID-19 pandemic had on our DIS revenues, including requisition volume and revenue per
requisition are discussed further below under "2020 Highlights" and "Impact of COVID-19".
Diagnostic Solutions
In our Diagnostic Solutions ("DS") businesses, which represent the balance of our consolidated net revenues, we offer
a variety of solutions for life insurers and healthcare organizations and clinicians. We are the leading provider of risk
assessment services for the life insurance industry. In addition, we offer healthcare organizations and clinicians robust
information technology solutions.
2020 Highlights
•
•
•
•
•
Our total net revenues of $9.4 billion were up 22.1% from the prior year.
In DIS:
◦
Revenues of $9.1 billion increased by 23.4% compared to the prior year, driven by demand for COVID-19
molecular and antibody testing, and, to a lesser extent, the impact of recent acquisitions, partially offset by a
decline in testing volume in our base business (which excludes COVID-19 molecular and antibody testing).
Volume, measured by the number of requisitions, increased by 6.6% compared to the prior year, with organic
growth (which excludes the impact of recent acquisitions) and acquisitions contributing approximately 4.5%
and 2.1%, respectively. Organic volume growth was driven by demand for COVID-19 molecular testing,
partially offset by declines in testing volume in the base business. Testing volume in the base business were
negatively impacted by the COVID-19 pandemic and declined by 11.4% compared to the prior year.
Revenue per requisition increased by 16.2% compared to the prior year driven, in large part, by COVID-19
molecular testing.
◦
◦
DS revenues of $298 million decreased by 7.0% compared to the prior year and were negatively impacted by the
COVID-19 pandemic.
Income from continuing operations attributable to Quest Diagnostics' stockholders was $1,431 million, or $10.47 per
diluted share, in 2020, compared to $838 million, or $6.13 per diluted share, in 2019.
Net cash provided by operating activities was approximately $2.0 billion in 2020, compared to $1.2 billion in 2019.
Impact of COVID - 19
As a novel strain of coronavirus (COVID-19) continues to spread and severely impact the economy of the United
States and other countries around the world, we are committed to being a part of the coordinated public and private sector
response to this unprecedented challenge. We have made substantial investments to expand the amount of COVID-19 testing
available to the country and are currently capable of performing approximately 225,000 COVID-19 molecular diagnostic tests
per day to aid in the diagnosis of COVID-19 and approximately 200,000 COVID-19 antibody tests per day to aid in the
detection of immune response. We have been effectively managing challenges in the global supply chain; and, at this point, we
have sufficient supplies to conduct our business.
During 2020, our testing volume and revenues were materially impacted by the COVID-19 pandemic including a
decline in testing volume in our base business (which excludes COVID-19 molecular and antibody testing) which was more
than offset by COVID-19 molecular and antibody testing.
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During January and February 2020, we experienced growth in DIS revenues and volume compared to the prior year
period. However, in March and April 2020, we experienced a material decline in testing volume due to the COVID-19
pandemic. During May and June 2020, we began to experience a recovery in base testing volume, which continued in the
second half of 2020. Volume in our base business (which includes the impact of recent acquisitions) for the second, third and
fourth quarters of 2020 decreased approximately 34%, 5% and 2%, respectively, compared to the prior year periods. However,
at the end of November and into December 2020, the trend of recovery in our base business volume was impacted somewhat
due to the increase in COVID-19 infections across the country.
The decrease in base testing volume was driven by federal, state and local governmental policies and initiatives
designed to reduce the transmission of COVID-19, a significant reduction in physician office visits, the cancellation of elective
medical procedures, customers closing or severely curtailing their operations (voluntarily or in response to government orders),
and the adoption of work-from-home policies, all of which have had, and we believe will continue to have, an impact on our
operating results, financial position and cash flows, including base testing volume.
Beginning during the second quarter of 2020, we experienced growing demand for COVID-19 testing services, which
partially offset the decrease in base testing volume during that period. During the second half of 2020, as we have expanded
our capacity in order to satisfy such demand, the impact of COVID-19 testing more than offset the decrease in base testing
volume. Additionally, the impact of COVID-19 molecular testing drove an increase in revenue per requisition compared to the
prior year.
In April 2020 the Centers for Medicare and Medicaid Services ("CMS") announced that it would increase the
reimbursement for certain COVID-19 molecular tests making use of high-throughput technologies developed by the private
sector that allow for increased testing capacity, faster results, and more effective means of combating the spread of the virus to
$100 per test, effective April 14, 2020. Beginning January 1, 2021, Medicare changed the base reimbursement rate for
COVID-19 diagnostic tests run on high-throughput technologies to $75 per test with an additional payment of $25 per test if the
laboratory (1) completes the test in two calendar days or less and (2) completes the majority of its COVID-19 tests that use high
throughput technology in two calendar days or less for all of its patients in the previous month. Certain healthcare insurers have
now moved to a similar reimbursement model for COVID-19 molecular tests.
We believe the COVID-19 pandemic’s impact on our consolidated results of operations, financial position and cash
flows will be primarily driven by: the severity and duration of the COVID-19 pandemic; healthcare insurer, government, and
client payer reimbursement rates for COVID-19 molecular testing; the COVID-19 pandemic’s impact on the U.S. healthcare
system and the U.S. economy; and the timing, scope and effectiveness of federal, state and local governmental responses to the
COVID-19 pandemic. We may also be impacted by changes in the severity of the COVID-19 pandemic at different times in the
various cities and regions where we operate and offer services. Even after the COVID-19 pandemic has moderated and the
business and social distancing restrictions have eased, we may continue to experience similar effects to our businesses,
consolidated results of operations, financial position and cash flows resulting from a recessionary economic environment that
may persist. In the longer term, given the many challenges that hospitals will face, we may have more opportunities to partner
with hospitals to help achieve their laboratory strategies, and the COVID-19 pandemic may also be a further catalyst for
consolidation in the laboratory testing industry.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act)
In March 2020, in response to the COVID-19 pandemic, the CARES Act was signed into law. The CARES Act
provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future
utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, temporary
suspension of certain payment requirements for the employer portion of Social Security taxes, technical corrections from prior
tax legislation for tax depreciation of certain qualified improvement property, and the creation of certain payroll tax credits
associated with the retention of employees. Beginning in the second quarter of 2020, we started taking advantage of the
temporary suspension of payment requirements for the employer portion of Social Security taxes.
The CARES Act also includes a number of benefits that are applicable to us and other healthcare providers including,
but not limited to:
•
•
providing coverage for COVID-19 testing at no out-of-pocket cost to nearly all patients;
providing clinical laboratories a one-year reprieve from the reporting requirements under the Protecting Access to
Medicare Act ("PAMA") as well as a one-year delay of reimbursement rate reductions for clinical laboratory services
provided under Medicare that were scheduled to take place in 2021. Further revisions of the Medicare Clinical
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•
•
Laboratory Fee Schedule for years after 2022 will be based on future surveys of market rates. Reimbursement
reduction from 2022-2024 is capped by PAMA at 15% annually;
appropriating $100 billion to healthcare providers for related expenses or lost revenues that are attributable to the
COVID-19 pandemic. In April 2020 and August 2020, we received approximately $65 million and $73 million,
respectively, of funds that were distributed to healthcare providers for related expenses or lost revenues that are
attributable to the COVID-19 pandemic under the CARES Act. During the fourth quarter of 2020, we returned the
entire $138 million of funds; and
suspending Medicare sequestration from May 2020 to December 2020. In December 2020, the suspension of the
Medicare sequestration, which has resulted in a small benefit to us in the form of higher reimbursement rates for
diagnostic testing services performed on behalf of Medicare beneficiaries, was extended through March 2021.
Senior Notes Offerings and Retirement of Debt
During January 2020, we redeemed in full the outstanding indebtedness under our senior notes due January 2020 and
senior notes due March 2020 using the net proceeds from the issuance, in December 2019, of $800 million aggregate principal
amount of 2.95% senior notes due June 2030 (the "2030 Senior Notes"), along with cash on hand. For the year ended
December 31, 2020, we recorded a loss on retirement of debt in connection with the transaction, principally comprised of
premiums paid, of $1 million in other income (expense), net.
During May 2020, we completed a senior notes offering, consisting of $550 million aggregate principal amount of
2.80% senior notes due June 2031 (the “2031 Senior Notes”), which were issued at an original issue discount of $1 million.
During November 2020, the net proceeds from the 2031 Senior Notes, along with cash on hand, were used to redeem in full the
outstanding indebtedness under our senior notes due April 2021. For the year ended December 31, 2020, we recorded a loss on
retirement of debt in connection with the transaction, principally comprised of premiums paid, of $8 million in other income
(expense), net.
For further details regarding our debt, see Note 13 to the audited consolidated financial statements.
Two Point Strategy
Our two point strategy is described in detail in "Item 1. Business: Our Strategy." We continued to execute our strategy
during 2020 as follows:
Acquisition of Blueprint Genetics Oy
On January 21, 2020, we completed the acquisition of Blueprint Genetics Oy ("Blueprint Genetics"), in an all cash
transaction for $108 million, net of $3 million cash acquired. Blueprint Genetics is a leading specialty genetic testing company
with expertise in gene variant interpretation based on next generation sequencing and proprietary bioinformatics. Through the
acquisition, we acquired all of Blueprint Genetics' operations. The acquired business is included in our DIS business.
Acquisition of the Outreach Laboratory Services Business of Memorial Hermann Health System
On April 6, 2020, we completed the acquisition of select assets which constitute substantially all of the operations of
Memorial Hermann Diagnostic Laboratories, the outreach laboratory division of Memorial Hermann Health System ("Memorial
Hermann") in an all cash transaction for $120 million. Memorial Hermann is a not-for-profit health system in Southeast Texas.
The acquired business is included in our DIS business.
Acquisition of the Remaining 56% Interest in Mid America Clinical Laboratories, LLC
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On August 1, 2020, we completed the acquisition of the remaining 56% interest in Mid America Clinical Laboratories,
LLC ("MACL") from our joint venture partners in an all cash transaction for $93 million, net of $18 million cash acquired.
MACL is the largest independent clinical laboratory provider in Indiana. Prior to the acquisition, we accounted for our 44%
interest in MACL as an equity method investment, which was remeasured to its fair value of $87 million on the acquisition
date, resulting in a gain of $70 million that was recognized in other income (expense), net in the consolidated statements of
operations. As a result of the acquisition, MACL became our wholly owned subsidiary. The acquired business is included in our
DIS business.
For further details regarding our acquisitions, see Note 6 to the audited consolidated financial statements.
Invigorate Program
We are engaged in a multi-year program called Invigorate, which is designed to reduce our cost structure and improve
our performance. We currently aim annually to save approximately 3% of our costs, and in 2020 we achieved that goal.
Invigorate has consisted of several flagship programs, with structured plans in each, to drive savings and improve
performance across the customer value chain. These flagship programs include: organization excellence; information
technology excellence; procurement excellence; field and customer service excellence; lab excellence; and revenue services
excellence. In addition to these programs, we have identified key themes to change how we operate including reducing denials
and patient price concessions; further digitizing our business; standardization and automation; and optimization initiatives in
our lab network and patient service center network. We believe that our efforts to standardize our information technology
systems, equipment and data also foster our efforts to strengthen our foundation for growth and support the value creation
initiatives of our clinical franchises by enhancing our operational flexibility, empowering and enhancing the customer
experience, facilitating the delivery of actionable insights and bolstering our large data platform.
For the year ended December 31, 2020, we incurred $42 million of pre-tax charges under our Invigorate program
primarily consisting of systems conversion and integration costs, all of which result in cash expenditures. Additional
restructuring charges may be incurred in future periods as we identify additional opportunities to achieve further cost savings.
For further details of the Invigorate program and associated costs, see Note 5 to the audited consolidated financial
statements.
Outlook and Trends
The healthcare system in the United States is evolving; significant change is taking place in the system. We expect
that the evolution of the healthcare industry, including impacts of the COVID-19 pandemic, such as increased adoption of
telemedicine, will continue, and that industry change is likely to be extensive. There are a number of key trends that are having,
and that we expect will continue to have, a significant impact on the diagnostic information services business in the United
States and on our business. We believe that several of the trends, including consolidation, price transparency and
consumerization, are favorable to our business.
Healthcare market participants, including governments, are focusing on controlling costs, including potentially by
reducing reimbursement for healthcare services, changing reimbursement for healthcare services (including but not limited to a
shift from fee-for-service to capitation), changing medical coverage policies (e.g., healthcare benefits design), denying coverage
for services, requiring preauthorization of laboratory testing, requiring co-pays, introducing laboratory spend management
utilities and payment and patient care innovations such as ACOs, DCEs and patient-centered medical homes. The ongoing
trend of rising patient responsibility and increasing payer denials has resulted in an increase in our reserves for patient price
concessions. As health plans and government programs require greater levels of patient cost-sharing, our patient price
concessions may continue to be negatively impacted and adversely impact our results of operations. As previously mentioned,
there could be a shift to capitation arrangements where we agree to a predetermined monthly reimbursement rate for each
member enrolled in a restricted plan, generally regardless of the number or cost of services provided by us. In both 2020 and
2019, we derived approximately 3% of our consolidated net revenues from capitated payment arrangements. In 2020 and 2019,
we derived approximately 8% and 10%, respectively, of our testing volume from capitated payment arrangements.
Historically, the Medicare Clinical Laboratory Fee Schedule ("CLFS") and the Medicare Physician Fee Schedule
established under Part B of the Medicare program have been subject to change, including each year. Pursuant to PAMA, the
Centers for Medicare and Medicaid Services ("CMS") promulgated revised reimbursement schedules for 2018-2020 for clinical
laboratory testing services provided under Medicare. Under the revised Medicare Clinical Laboratory Fee Schedule (in 2020
CLFS revenues comprised 8% of our consolidated net revenues), reimbursement rates for clinical laboratory testing were
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reduced in 2018, 2019 and 2020. PAMA calls for further revision of the CLFS for years after 2020, based on future surveys of
market rates; reimbursement reduction from 2022-24 is capped by PAMA at 15%. In late 2019, the Laboratory Access for
Beneficiaries Act (the “LAB Act”) was signed into law. The LAB Act delayed PAMA's next data collection and reporting
period until January 1, 2021 and ordered a study to determine ways to improve future collection of more representative market
rate data under PAMA. In 2020, the CARES Act provided clinical laboratories with a one-year reprieve from the reporting
requirements under PAMA as well as a one-year delay of reimbursement rate reductions that were scheduled to take place in
2021. Overall, we expect total reimbursement rate pressure for 2021 from all payers on a combined basis to be approximately
1%.
In addition, the trend of consolidating, converging and diversifying among our customers, payers and other healthcare
industry participants has continued and may result in increased price transparency and bargaining power, and may encourage
internalization of clinical testing. We also believe that PAMA may be a further catalyst for consolidation as diagnostic
information services providers realize lower Medicare reimbursement rates and large diagnostic information services providers
may be able to increase their share of the overall diagnostic information services industry due to their large networks and lower
cost structures.
For a discussion of the impact of the COVID-19 pandemic on our business, see "Impact of COVID-19" above.
For additional information on our key trends, which present both opportunities and risks, see "Item 1. Business: The
Clinical Testing Industry."
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United
States requires us to make estimates and assumptions and select accounting policies that affect our reported financial results and
the disclosure of contingent assets and liabilities.
Our revenues are primarily comprised of a high volume of relatively low-dollar transactions, and about one-half of our
total costs and expenses consist of employee compensation and benefits. Due to the nature of our business, several of our
accounting policies involve significant estimates and judgments:
•
•
•
•
revenues and accounts receivable associated with DIS;
reserves for general and professional liability claims;
reserves for other legal proceedings; and
accounting for and recoverability of goodwill.
Revenues and accounts receivable associated with DIS
The process for estimating revenues and the ultimate collection of receivables associated with our DIS business
involves significant assumptions and judgments. We recognize as revenue the amount of consideration to which we expect to
be entitled primarily upon completion of the testing process (when results are reported) or when services have been rendered.
We estimate the amount of consideration we expect to be entitled to receive from customer groups in exchange for providing
services using the portfolio approach. These estimates include the impact of contractual allowances (including payer denials),
and patient price concessions, as discussed below. The portfolios determined using the portfolio approach consist of the
following customers:
•
•
•
•
Healthcare Insurers
Government Payers
Client Payers
Patients
We have a standardized approach to estimate the amount of consideration that we expect to be entitled to, including
the impact of contractual allowances (including payer denials), and patient price concessions. Historical collection and payer
reimbursement experience (along with the period the receivables have been outstanding) is an integral part of the estimation
process related to revenues and receivables. Adjustments to our estimated contractual allowances and implicit patient price
concessions are recorded in the current period as changes in estimates. Further adjustments to the allowances, based on actual
receipts, may be recorded upon settlement.
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We regularly assess the state of our billing operations in order to identify issues which may impact the collectability of
receivables or revenue estimates. We believe that the collectability of our receivables is directly linked to the quality of our
billing processes, most notably those related to obtaining the correct information in order to bill effectively for the services we
provide. As such, we continue to implement “best practices” and endeavor to increase the use of electronic ordering to reduce
the number of requisitions that we receive from healthcare providers with missing or incorrect billing information. We believe
that our collection and revenue estimation processes, along with our close monitoring of our billing operations, help to reduce
the risk associated with material adjustments to reserve estimates. However, changes to our estimate of the impact of
contractual allowances (including payer denials) and patient price concessions could have a material impact on our results of
operations and financial condition in the period that the estimates are adjusted.
The following table shows the approximate percentage of our total requisition volume and net revenues associated
with our DIS business during 2020 applicable to each customer group:
Healthcare insurers
Government payers
Client payers
Patients *
Total DIS
% of
Total
Volume
% of
Consolidated
Net Revenues
44%
11
40
2
97%
37%
11
38
11
97%
*Patients revenue includes coinsurance and deductible responsibilities but volume associated with such revenue is reported
under Healthcare insurers.
The following table shows net accounts receivable as of December 31, 2020 applicable to each customer group:
Healthcare insurers
Government payers
Client payers
Patients (including coinsurance and deductible responsibilities)
Total DIS
Healthcare insurers
% of
Consolidated
Net Accounts
Receivable
34%
6
46
11
97%
Reimbursements from healthcare insurers are based on fee-for-service schedules and on capitated payment rates.
Under fee-for-service arrangements, healthcare insurers are billed at our list price. Net revenues recognized consist of amounts
billed net of contractual allowances for differences between amounts billed and the estimated consideration we expect to
receive from such payers, which considers historical denial and collection experience and the terms of our contractual
arrangements.
Substantially all of the accounts receivable due from healthcare insurers represent amounts billed under fee-for-service
arrangements. Collection of our net revenues from healthcare insurers is normally a function of providing complete and correct
billing information to the healthcare insurers within the various filing deadlines and generally occurs within 30 to 60 days of
billing. Provided we have billed healthcare insurers accurately with complete information prior to the established filing
deadline, there has historically been little to no credit risk. If there has been a delay in billing, we determine if the amounts in
question will likely go past the filing deadline, and if so, we will reserve accordingly for the billing.
Under capitated arrangements with healthcare insurers, we recognize revenue based on a predetermined monthly
reimbursement rate for each member of an insurer's health plan regardless of the number or cost of services provided by us.
Under capitated payment arrangements, the healthcare insurers typically reimburse us in the same month services are
performed, essentially giving rise to no outstanding accounts receivable at the end of a reporting period. If any capitated
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payments are not received on a timely basis, we determine the cause and make a separate determination as to whether or not the
collection of the amount from the healthcare insurer is at risk and, if so, would reserve accordingly.
Government payers
Reimbursements from government payers are based on fee-for-service schedules set by governmental authorities,
including traditional Medicare and Medicaid. Net revenues recognized consist of amounts billed net of contractual allowances
for differences between amounts billed and the estimated consideration we expect to receive from such payers, which considers
historical denial and collection experience.
Collection of our net revenues from government payers is normally a function of providing the complete and correct
billing information within the various filing deadlines. Collection generally occurs within 30 days of billing. Provided we have
billed government payers accurately with complete information prior to the established filing deadline, there has historically
been little to no credit risk. If there has been a delay in billing, we determine if the amounts in question will likely go past the
filing deadline, and, if so, we will reserve for the billing accordingly.
Client payers
Client payers include physicians, hospitals, ACOs, DCEs, IDNs, employers, other commercial laboratories and
institutions for which services are performed on a wholesale basis, and are billed based on a negotiated fee schedule. Credit
risk and ability to pay are more of a consideration for these payers than healthcare insurers and government payers. Collection
of consideration we expect to receive generally occurs within 60 to 90 days of billing.
We principally estimate the allowance for credit losses for client payers based on historical collection experience, the
current credit worthiness of the customers, current economic conditions, expectations of future economic conditions and the
period that the receivables have been outstanding. To the extent that any individual client payers are identified that have
deteriorated in credit quality, we establish allowances based on the individual risk characteristics of such customers.
Patients
Uninsured patients are billed based on established patient fee schedules or fees negotiated with physicians on behalf of
their patients. Insured patients (includes coinsurance and deductible responsibilities) are billed based on fees negotiated with
healthcare insurers. Collection of billings from patients is subject to credit risk and ability of the patients to pay. Net revenues
consist of amounts billed net of discounts provided to uninsured patients in accordance with our policies and implicit price
concessions. Implicit price concessions represent differences between amounts billed and the estimated consideration we
expect to receive from patients, which considers historical collection experience (along with the period the receivables have
been outstanding) and other factors including current market conditions. Patient billings are generally fully reserved for when
the related billing reaches 210 days outstanding. Balances are automatically written off when they are sent to collection
agencies. Allowances are further adjusted for estimated recoveries of amounts sent to collection agencies based on historical
collection experience, which is regularly monitored. Collection of consideration we expect to receive generally occurs within
30 to 60 days of billing.
Although we believe that our estimates for contractual allowances and patient price concessions, as well as our
allowance for credit losses, are appropriate, it is possible that we will experience an impact on cash collections as a result of the
impact of the COVID-19 pandemic. For further details on revenue and receivables, see Note 3 to the audited consolidated
financial statements.
Reserves for general and professional liability claims
As a general matter, providers of diagnostic information services may be subject to lawsuits alleging negligence or
other similar claims. These suits could involve claims for substantial damages. Any professional liability litigation could also
have an adverse impact on our client base and reputation. We maintain various liability insurance coverages for claims that
could result from providing, or failing to provide, clinical testing services, including inaccurate testing results, and other
exposures. Our insurance coverage limits our maximum exposure on individual claims; however, we are essentially self-
insured for a significant portion of these claims. While the basis for claims reserves is actuarially determined losses based upon
our historical and projected loss experience, the process of analyzing, assessing and establishing reserve estimates relative to
these types of claims involves a high degree of judgment. Although we believe that our present reserves and insurance
coverage are sufficient to cover currently estimated exposures, it is possible that we may incur liabilities in excess of our
recorded reserves or insurance coverage. Changes in the facts and circumstances associated with claims could have a material
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impact on our results of operations (principally costs of services), cash flows and financial condition in the period that reserve
estimates are adjusted or paid. See Note 18 to the audited consolidated financial statements for a discussion of our reserves for
general and professional liability claims.
Reserves for other legal proceedings
Our businesses are subject to or impacted by extensive and frequently changing laws and regulations, including
inspections and audits by governmental agencies, in the United States (at both the federal and state levels) and the other
jurisdictions in which we conduct business. Although we believe that we are in compliance, in all material respects, with
applicable laws and regulations, there can be no assurance that a regulatory agency would not reach a different conclusion. Any
noncompliance by us with applicable laws and regulations could have a material adverse effect on our results of operations. In
addition, these laws and regulations may be interpreted or applied by a prosecutorial, regulatory or judicial authority in a
manner that could require us to make changes in our operations, including our pricing and/or billing practices. We have, in the
past, entered into several settlement agreements with various government and private payers relating to industry-wide billing
and marketing practices that had been substantially discontinued. The federal or state governments may bring claims based on
our current practices, which we believe are lawful. In addition, certain federal and state statutes, including the qui tam
provisions of federal and state false claims acts, allow private individuals to bring lawsuits against healthcare companies on
behalf of government or private payers alleging inappropriate billing practices. We are aware of certain pending lawsuits
including class action lawsuits, and have received subpoenas related to billing practices. See Note 18 to the audited
consolidated financial statements for a discussion of the various legal proceedings that we are involved in.
The process of analyzing, assessing and establishing reserve estimates relative to legal proceedings involves a high
degree of judgment. Management has established reserves for legal proceedings in accordance with generally accepted
accounting principles. Changes in facts and circumstances related to such proceedings could lead to significant adjustments to
reserve estimates for such matters and could have a material impact on our results of operations, cash flows and financial
condition in the period that reserve estimates are adjusted or paid.
Accounting for and recoverability of goodwill
We do not amortize goodwill, but evaluate the recoverability and measure the potential impairment of our goodwill
annually, or more frequently, in the case of other events that indicate a potential impairment. We have identified the following
reporting units for goodwill impairment testing in 2020:
•
•
DIS business;
Risk assessment services business, which is part of our DS businesses
The DIS reporting unit components have been aggregated into a single reporting unit because they have similar
economic characteristics, including similarities in financial performance, nature of products or services, nature of production
processes and types of customers.
On a quarterly basis, we perform a review of our business to determine if events or changes in circumstances have
occurred which could have a material adverse effect on our fair value and our goodwill. If such events or changes in
circumstances were deemed to have occurred, we would perform an impairment test of goodwill and record any noted
impairment loss.
The annual impairment test for goodwill includes an option to perform a qualitative assessment of whether it is more
likely than not that a reporting unit's fair value is less than its carrying value; the qualitative analysis may be performed prior to,
or as an alternative to, performing a quantitative goodwill impairment test. In evaluating whether it is more likely than not that
the fair value of a reporting unit is less than its carrying value, we assess relevant events and circumstances, such as: (a)
macroeconomic conditions; (b) industry and market considerations; (c) cost factors; (d) overall financial performance; (e) other
relevant entity-specific events; (f) events affecting a reporting unit; and (g) a sustained decrease in share price. If, after
assessing the totality of events or circumstances, we determine that it is more likely than not that the fair value of a reporting
unit is less than its carrying value, then we are required to perform the quantitative goodwill impairment test. Otherwise, no
further analysis is required. Additionally, our policy is to update the fair value calculation of our reporting units and perform
the quantitative goodwill impairment test on a periodic basis.
The quantitative impairment test involves the comparison of the fair value of the reporting unit to its carrying value. If
the carrying value is greater than our estimate of fair value, an impairment loss will be recognized in the amount of the excess.
We calculate the fair value of each reporting unit using either (i) a discounted cash flows analysis that converts future cash flow
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amounts into a single discounted present value amount or (ii) a market approach. We assess the valuation methodology based
upon the relevance and availability of the data at the time we perform the valuation. The discounted cash flows analysis
includes several unobservable inputs related to our own assumptions. The assumptions and estimates used in the discounted
cash flows model are based upon the best available information in the circumstances and include a forecast of expected future
cash flows, long-term growth rates, discount rates that are commensurate with economic risks, assumed income tax rates and
estimates of capital expenditures and working capital. The fair values of the reporting units could be different if, for example,
forecasted revenue growth rates, economic conditions, government regulations or actions by payers to control utilization of or
reimbursement for healthcare services, turn out to be different than our assumptions or estimates. Changes in the assumed
discount rates due to changes in interest rates could also affect the estimated fair values of the reporting units. We use a
discount rate that considers a weighted average cost of capital plus an appropriate risk premium based upon the reporting unit
being valued. Our analysis also considers publicly available information regarding our market capitalization, as well as (i) the
financial projections and future prospects of our business, including its growth opportunities and likely operational
improvements, and (ii) comparable sales prices, if available. We believe our estimation methods are reasonable and reflect
common valuation practices.
We perform our annual impairment test during the fourth quarter of the fiscal year. For the year ended December 31,
2020, in accordance with our policy to perform the quantitative test on a periodic basis, we updated the fair value calculation of
our reporting units, performed the quantitative impairment test and concluded that goodwill was not impaired. As a sensitivity,
if the estimated fair values of each of our reporting units decreased by 10%, we would have concluded that our goodwill was
not impaired.
Results of Operations
For the discussions on the year-over-year changes for the year ended December 31, 2019 compared to December
31, 2018 and the results of operations for the year ended December 31, 2018, see Item 7 - Management's Discussion and
Analysis of Financial Condition and Result of Operations of our Annual Report on Form 10-K for the year ended December
31, 2019.
Basis of Presentation
Our DIS business currently represents our one reportable business segment. The DIS business for the years ended
December 31, 2020 and 2019 accounted for greater than 95% of our consolidated net revenues. Our other operating segments
consist of our DS businesses. For further details regarding our business segment information, see Note 19 to the audited
consolidated financial statements.
Results of Operations
The following table sets forth certain results of operations data for the periods presented:
Net revenues:
DIS business
DS businesses
Total net revenues
Operating costs and expenses and other operating income:
Cost of services
Selling, general and administrative
Amortization of intangible assets
Other operating expense (income), net
Total operating costs and expenses, net
Operating income
2020
2019
$ Change % Change
(dollars in millions, except per share data)
$
$
$
$
$
9,139 $
298
9,437 $
7,405 $
321
7,726 $
1,734
(23)
1,711
5,804 $
1,550
103
9
7,466 $
5,037 $
1,457
96
(95)
6,495 $
1,971 $
1,231 $
767
93
7
104
971
740
23.4 %
(7.0)
22.1 %
15.2 %
6.4
7.0
NM
14.9 %
60.2 %
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Other income (expense):
Interest expense, net
Other income, net
Total non-operating expense, net
Income tax expense
Effective income tax rate
Equity in earnings of equity method investees, net of taxes
Amounts attributable to Quest Diagnostics' common stockholders
Income from continuing operations
Income from discontinued operations, net of taxes
$
$
$
$
(163)
76
(87)
(460)
24.5 %
75
$ 1,431
$ —
$
$
$
$
$
$
(175)
20
(155)
(247)
23.0 %
57
838
20
Diluted earnings per common share from continuing operations
attributable to Quest Diagnostics’ common stockholders
$ 10.47
$ 6.13
NM - Not Meaningful
$
$
$
$
$
$
$
12
56
68
(6.6) %
NM
(43.9) %
(213)
86.4 %
18
32.0 %
593
(20)
70.8 %
NM
4.34
70.8 %
The following table sets forth certain results of operations data as a percentage of net revenues for the periods
presented:
Net revenues:
DIS business
DS businesses
Total net revenues
Operating costs and expenses and other operating income:
Cost of services
Selling, general and administrative
Amortization of intangible assets
Other operating expense (income), net
Total operating costs and expenses, net
Operating income
2020
2019
96.8 %
3.2
100.0 %
95.8 %
4.2
100.0 %
61.5 %
16.4
1.1
0.1
79.1 %
65.2 %
18.9
1.2
(1.2)
84.1 %
20.9 %
15.9 %
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Operating Results
Results for the year ended December 31, 2020 were affected by certain items that on a net basis decreased diluted
earnings per share from continuing operations by $0.71 as follows:
•
•
•
•
•
•
pre-tax amortization expense of $114 million ($103 million in amortization of intangible assets and $11
million in equity in earnings of equity method investees, net of taxes) or $0.63 per diluted share;
net pre-tax charges of $72 million ($57 million of charges in cost of services, $10 million of charges in
selling, general and administrative expenses and $9 million of charges in other operating expense (income),
net, partially offset by a $4 million gain in equity in earnings of equity method investees, net of taxes), or
$0.39 per diluted share, representing the impact of certain items resulting from the COVID-19 pandemic,
principally including expense associated with payments to eligible employees to help offset expenses they
incurred as a result of COVID-19, incremental costs incurred primarily to protect the health and safety of our
employees and customers, and certain asset impairment charges; and
pre-tax charges of $58 million ($27 million in cost of services and $31 million in selling, general and
administrative expenses), or $0.32 per diluted share, primarily associated with systems conversions and
integration incurred in connection with further restructuring and integrating our business; partially offset by
a pre-tax gain of $70 million, or $0.46 per diluted share, recognized in other income (expense), net upon the
acquisition of the remaining 56% interest in MACL as a result of the remeasurement of our previously held
equity interest to fair value;
excess tax benefits associated with stock-based compensation arrangements of $23 million, or $0.17 per
diluted share, recorded in income tax expense; and
a net pre-tax gain of $2 million (a $14 million gain in equity in earnings of equity method investees, net of
taxes, partially offset by a $10 million loss in other income (expense), net and $2 million of charges in selling,
general and administrative expenses) primarily due to a gain recognized by an equity method investee to
adjust certain of its investments to fair value, a loss on retirement of debt, and, to a lesser extent, costs
associated with Quest for Health Equity, our recently announced initiative with the Quest Diagnostics
Foundation to reduce health disparities in underserved communities.
Results for the year ended December 31, 2019 were affected by certain items that on a net basis reduced diluted
earnings per share from continuing operations by $0.43 as follows:
•
•
•
•
pre-tax amortization expense of $111 million ($96 million in amortization of intangible assets and $15 million
in equity in earnings of equity method investees, net of taxes) or $0.61 per diluted share; and
pre-tax charges of $78 million ($35 million in cost of services and $43 million in selling, general and
administrative expenses), or $0.42 per diluted share, primarily associated with systems conversions and
integration incurred in connection with further restructuring and integrating our business; partially offset by
a net pre-tax gain of $89 million (a $95 million gain in other operating expense (income), net offset by a $6
million charge in selling, general and administrative expenses), or $0.50 per diluted share, primarily due to a
gain associated with the sale and leaseback of a property, a gain associated with the decrease in the fair value
of the contingent consideration accruals associated with previous acquisitions, and a gain associated with
proceeds from an insurance claim for hurricane related losses, partially offset by costs incurred related to a
data security incident, and non-cash asset impairment charges; and
excess tax benefits associated with stock-based compensation arrangements of $13 million, or $0.10 per
diluted share, recorded in income tax expense.
Net Revenues
Net revenues for the year ended December 31, 2020 increased by 22.1% compared to the prior year.
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DIS revenues for the year ended December 31, 2020 increased by 23.4% compared to the prior year driven by demand
for COVID-19 molecular and antibody testing, and, to a lesser extent, the impact of recent acquisitions, partially offset by a
decline in testing volume in our base business (which excludes COVID-19 molecular and antibody testing).
•
•
•
Organic revenue and acquisitions contributed approximately 21.6% and 1.8%, respectively, to DIS revenue
growth.
DIS volume increased by 6.6%, with organic growth and acquisitions contributing approximately 4.5% and
2.1%, respectively. Organic volume growth was driven by demand for COVID-19 molecular testing, partially
offset by declines in testing volume in the base business. Testing volume in the base business was negatively
impacted by the COVID-19 pandemic and declined by 11.4% compared to the prior year.
Revenue per requisition increased by 16.2% compared to the prior year primarily due to favorable mix, driven
in large part by COVID-19 molecular testing, partially offset by reimbursement pressure, including unit price
reductions associated with PAMA and all other sources, of approximately 1.7%.
Cost of Services
Cost of services consists principally of costs for obtaining, transporting and testing specimens as well as facility costs
used for the delivery of our services.
Cost of services increased by $767 million for the year ended December 31, 2020 compared to the prior year. The
increase was primarily driven by higher variable expenses related to increased testing volume as well as test mix and a higher
supply cost associated with COVID-19 testing, additional operating costs associated with our acquisitions, higher performance-
based compensation, and incremental costs incurred related to the COVID-19 pandemic including expense associated with
payments to eligible employees to help offset expenses they incurred as a result of COVID-19 and costs incurred to protect the
health and safety of our employees and customers. These increases were partially offset by lower compensation and benefit
costs as a result of a series of temporary actions implemented to manage our workforce costs.
In order to mitigate the impact that the COVID-19 pandemic had on our business, we implemented a series of
temporary actions in April 2020 to manage our workforce costs and preserve cash including temporary salary reductions;
suspension of certain benefits; reduced hours for employees whose work had significantly declined; and approved furloughs for
employees with diminished work requirements who expressed an interest. As our testing volume started to recover, we recalled
the vast majority of employees from furlough and reinstated full working hours for almost all employees who were asked to
work reduced hours. By the end of the third quarter of 2020, salaries were restored for all exempt employees that had temporary
salary reductions.
Selling, General and Administrative Expenses ("SG&A")
SG&A consists principally of the costs associated with our sales and marketing efforts, billing operations, credit loss
expense and general management and administrative support as well as administrative facility costs.
SG&A increased by $93 million for the year ended December 31, 2020, compared to the prior year, primarily driven
by higher performance-based compensation and additional operating costs associated with our acquisitions.
Amortization of Intangible Assets
The $7 million increase in amortization of intangible assets for the year ended December 31, 2020 compared to the
prior year was a result of recent acquisitions.
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Other Operating Expense (Income), Net
Other operating expense (income), net includes miscellaneous income and expense items and other charges related to
operating activities.
For the year ended December 31, 2020, other operating expense (income), net primarily represents impairment charges
due to the impact of the COVID-19 pandemic.
For the year ended December 31, 2019, other operating expense (income), net included a $73 million gain associated
with the sale and leaseback of a property, a $12 million gain associated with proceeds from an insurance claim for hurricane
related losses and a $12 million gain associated with the decrease in the fair value of the contingent consideration accruals
associated with previous acquisitions, partially offset by non-cash asset impairment charges of $2 million.
Interest Expense, Net
Interest expense, net decreased by $12 million for the year ended December 31, 2020 compared to the prior year,
primarily driven by lower interest rates associated with our variable rate indebtedness, partially offset by higher average
outstanding indebtedness.
Other Income, Net
Other income, net represents miscellaneous income and expense items related to non-operating activities, such as gains
and losses associated with investments and other non-operating assets.
For the year ended December 31, 2020, other income, net included a $70 million gain recognized as a result of the
remeasurement of our previously held equity interest in MACL to fair value (see Note 6 to the audited consolidated financial
statements) and gains associated with investments in our deferred compensation plans, partially offset by a $9 million loss on
the retirement of debt, principally due to premiums paid.
For the year ended December 31, 2019, other income, net included $19 million of gains associated with investments in
our deferred compensation plans.
Income Tax Expense
Income tax expense for the years ended December 31, 2020 and 2019 was $460 million and $247 million,
respectively. The increase in income tax expense compared to the prior year was primarily driven by an increase in income
from continuing operations before income taxes and equity in earnings of equity method investees.
The effective income tax rate for the years ended December 31, 2020 and 2019 was 24.5% and 23.0%, respectively.
The effective income tax rate for the year ended December 31, 2020 benefited from a lower effective income tax rate (11.8%)
associated with a $70 million gain recognized as a result of the remeasurement of our previously held equity interest in MACL
to fair value due to a permanent difference in the financial reporting and tax basis of goodwill, and $23 million of excess tax
benefits associated with stock-based compensation arrangements. The effective income tax rate for the year ended
December 31, 2019 benefited from a $12 million release of valuation allowances associated with net operating loss
carryforwards, and $13 million of excess tax benefits associated with stock-based compensation arrangements.
Equity in Earnings of Equity Method Investees, Net of Taxes
For the year ended December 31, 2020, there was an $18 million increase in equity in earnings of equity method
investees, net of taxes, compared to the prior year primarily due to a $14 million gain recognized by an equity method investee
to adjust certain of its investments to fair value.
Discontinued Operations
During the third quarter of 2006, we completed the wind down of Nichols Institute Diagnostics ("NID"), a test kit
manufacturing subsidiary, which was classified as discontinued operations for the year ended December 31, 2019. Income
from discontinued operations, net of taxes, for the year ended December 31, 2019 includes discrete income tax benefits of $20
million associated with the favorable resolution of certain tax contingencies related to NID.
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Quantitative and Qualitative Disclosures About Market Risk
We address our exposure to market risks, principally the risk of changes in interest rates, through a controlled program
of risk management that includes the use of derivative financial instruments. We do not hold or issue derivative financial
instruments for speculative purposes. We seek to mitigate the variability in cash outflows that result from changes in interest
rates by maintaining a balanced mix of fixed-rate and variable-rate debt obligations. In order to achieve this objective, we have
historically entered into interest rate swap agreements. Interest rate swap agreements involve the periodic exchange of
payments without the exchange of underlying principal or notional amounts. Net settlements are recognized as an adjustment
to interest expense, net. We believe that our exposures to foreign exchange impacts and changes in commodity prices are not
material to our consolidated results of operations, financial position or cash flows. For further details regarding our significant
accounting policies on interest rate risk and foreign currency, see Note 2 to the audited consolidated financial statements.
As of December 31, 2020 and 2019, the fair value of our debt was estimated at approximately $4.6 billion and $5.1
billion, respectively, principally using quoted prices in active markets and yields for the same or similar types of borrowings,
taking into account the underlying terms of the debt instruments. As of December 31, 2020 and 2019, the estimated fair value
exceeded the carrying value of the debt by $597 million and $313 million, respectively. A hypothetical 10% increase in interest
rates (representing 17 basis points as of December 31, 2020 and 28 basis points as of December 31, 2019) would potentially
reduce the estimated fair value of our debt by approximately $82 million and $100 million as of December 31, 2020 and 2019,
respectively.
Borrowings under our secured receivables credit facility and our senior unsecured revolving credit facility are subject
to variable interest rates. Interest on our secured receivables credit facility is based on either commercial paper rates for highly-
rated issuers or LIBOR, plus a spread. As of December 31, 2020, interest on our senior unsecured revolving credit facility is
based on certain published rates plus an applicable margin based on changes in our public debt ratings and our leverage ratio.
As such, our borrowing cost under this credit arrangement is subject to fluctuations in interest rates, our leverage ratio and
changes in our public debt ratings. As of December 31, 2020, the borrowing rates under these debt instruments were: for our
secured receivables credit facility, commercial paper rates for highly-rated issuers or LIBOR, plus a spread of 0.825% to
0.95%; and for our senior unsecured revolving credit facility, LIBOR plus 1.125%. As of December 31, 2020, there were no
borrowings outstanding under either our $600 million secured receivables credit facility or our $750 million senior unsecured
revolving credit facility.
In April 2020, we terminated our existing fixed-to-variable interest rate swap agreements. Based on our remaining net
exposure to interest rate changes, a hypothetical 10% change to the variable rate component of our variable rate indebtedness
would not materially change annual interest expense.
During March 2020, we entered into a forward-starting interest rate swap agreement with a financial institution for a
total notional amount of $25 million. Additionally, during May 2020, we entered into interest rate lock agreements with several
financial institutions for a total notional amount of $275 million. The forward-starting interest rate swap agreement and the
interest rate lock agreements were entered into in order to hedge a portion of our interest rate exposure associated with
variability in future cash flows attributable to changes in interest rates over a ten-year period related to an anticipated issuance
of debt and were accounted for as cash flow hedges. In connection with the issuance of the 2031 Senior Notes, these
agreements were settled and we received net proceeds of $1 million. The net gain is deferred in stockholders' equity, net of
taxes, as a component of accumulated other comprehensive loss, and is being amortized as an adjustment to interest expense,
net over a ten-year period.
For further details regarding our outstanding debt and our financial instruments and hedging activities, see Notes 13
and 15, respectively, to the audited consolidated financial statements.
Risk Associated with Investment Portfolio
Our investment portfolio primarily includes equity investments comprised mostly of strategic holdings in privately and
publicly held companies. These securities are exposed to price fluctuations and are generally concentrated in the life sciences
and healthcare industries. Equity investments (except those accounted for under the equity method of accounting or those that
result in consolidation of the investee) with readily determinable fair values are measured at fair value with changes in fair
value recognized in net income. Equity investments that do not have readily determinable fair values are measured at cost
minus impairment, if any, plus or minus changes resulting from observable price changes. We regularly evaluate these equity
investments to determine if there are any indicators that the investment is impaired. The carrying value of our equity
investments that do not have readily determinable fair values was $25 million as of December 31, 2020.
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We do not hedge our equity price risk. The impact of an adverse movement in equity prices on our holdings in
privately held companies cannot be easily quantified, as our ability to realize returns on investments depends on, among other
things, the enterprises’ ability to raise additional capital or derive cash inflows from continuing operations or through liquidity
events such as initial public offerings, mergers or private sales.
In conjunction with the preparation of our audited consolidated financial statements for the year ended December 31,
2020, we considered whether the carrying values of our investments were impaired and concluded that no impairment existed.
However, should the impact of the COVID-19 pandemic be worse than currently expected, it is possible that we could incur
impairment charges in the future.
Liquidity and Capital Resources
Net cash provided by operating activities
Net cash used in investing activities
Net cash (used in) provided by financing activities
Net change in cash and cash equivalents and restricted cash
Cash and Cash Equivalents
2020
2019
$ Change
(dollars in millions)
1,243 $
(411)
225
1,057 $
2,005 $
(772)
(1,267)
(34) $
$
$
762
(361)
(1,492)
(1,091)
Cash and cash equivalents consist of cash and highly-liquid short-term investments. Cash and cash equivalents as of
December 31, 2020 and 2019 totaled $1,158 million and $1,192 million, respectively.
As of December 31, 2020, approximately 4% of our $1,158 million of consolidated cash and cash equivalents were
held outside of the United States.
Cash Flows from Operating Activities
Net cash provided by operating activities for the year ended December 31, 2020 was $2,005 million, and increased
$762 million compared to the prior year primarily as a result of:
•
•
•
•
•
•
higher operating income in 2020 as compared to 2019; and, to a lesser extent
a $100 million increase due to the temporary suspension in 2020 of certain payment requirements for the
employer portion of Social Security taxes; and
$40 million of proceeds received in 2020 from the termination of interest rate swap agreements; partially
offset by
a $158 million increase in income tax payments;
higher performance-based compensation payments in 2020 compared to 2019; and
a $28 million refund received in the prior year period from the taxing authorities associated with the favorable
resolution of certain tax contingencies related to a discontinued operation.
Days sales outstanding, a measure of billing and collection efficiency, was 46 days as of December 31, 2020 and 54
days as of December 31, 2019. The decrease in DSO is partially due to recent fluctuations in our monthly revenue due to the
impact of the COVID-19 pandemic. Although we believe that our current revenue reserves and allowance for credit losses are
appropriate, it is possible that we will experience an impact on cash collections as a result of the impact of the COVID-19
pandemic.
Cash Flows from Investing Activities
Net cash used in investing activities for the year ended December 31, 2020 was $772 million, compared to $411
million for the year ended December 31, 2019. This $361 million increase in cash used in investing activities was primarily a
result of:
•
•
a $272 million increase in net cash paid for business acquisitions; and
an $88 million decrease in proceeds from disposition of property, plant and equipment, primarily due to
proceeds in the prior year period associated with the sale and leaseback of a property.
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Cash Flows from Financing Activities
Net cash used in financing activities for the year ended December 31, 2020 was $1,267 million, compared to net cash
provided by financing activities of $225 million for the year ended December 31, 2019. This $1,492 million change in cash
flows from financing activities was primarily a result of:
•
•
•
$805 million of net debt repayments (repayments of debt less proceeds from borrowings) in 2020 compared
to $832 million of net borrowings in 2019; partially offset by
a $76 million increase in overdrafts, which are generally settled in cash the following day; and
a $70 million increase in proceeds from the exercise of stock options, which was a result of an increase in the
volume of stock options exercised and the average exercise price compared to the prior year.
During January 2020, we redeemed in full the outstanding indebtedness under our senior notes due January 2020 and
senior notes due March 2020 using net proceeds from the issuance, in December 2019, of the 2030 Senior Notes, along with
cash on hand. During May 2020, we completed the issuance of the 2031 Senior Notes, the net proceeds from which were used
during November 2020, along with cash on hand, to redeem in full the outstanding indebtedness under our senior notes due
April 2021. Additionally, during the year ended December 31, 2020, we borrowed $100 million under our secured receivables
credit facility and $100 million under our senior unsecured revolving credit facility, both of which were repaid prior to
December 31, 2020.
During March 2019, we completed the issuance of the $500 million aggregate principal amount of 4.20% senior notes
due June 2029 and repaid in full, at maturity, our senior notes due April 2019. In December 2019, we completed the issuance
of the 2030 Senior Notes. In addition, during the year ended December 31, 2019 we borrowed a total of $985 million under our
secured receivables credit facility to fund periodic working capital requirements, as well as our 2019 acquisition, and repaid
$1,145 million under our secured receivables credit facility. During the year ended December 31, 2019, there were no
borrowings or repayments under our senior unsecured revolving credit facility.
For details regarding our debt and related transactions, see Note 13 to the audited consolidated financial statements.
Dividend Program
During each of the four quarters of 2020, our Board of Directors declared a quarterly cash dividend of $0.56 per
common share. During each of the four quarters of 2019, our Board of Directors declared a quarterly cash dividend of $0.53
per common share. On February 4, 2021, we announced that our Board of Directors authorized a 10.7% increase in our
quarterly cash dividend from $0.56 to $0.62 per share, or $2.48 per share annually, commencing with the dividend payable in
April 2021.
Share Repurchases
As of December 31, 2020, $0.9 billion remained available under our share repurchase authorization. In February 2021,
our Board of Directors authorized us to repurchase an additional $1 billion of our common stock.
For the year ended December 31, 2020, we repurchased 2.7 million shares of our common stock for $325 million.
For the year ended December 31, 2019, we repurchased 3.5 million shares of our common stock for $350 million.
For further details regarding our share repurchases, see Note 16 to the audited consolidated financial statements.
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Contractual Obligations and Commitments
The following table summarizes certain of our contractual obligations as of December 31, 2020 (dollars in millions):
Contractual Obligations
Total
Outstanding debt
Finance lease obligations
Interest payments on outstanding debt
Operating leases
Purchase obligations
Total contractual obligations
$
$
3,976 $
27
1,648
837
1,545
8,033 $
Payments due by period
Less than
1 year
1-3 years
4-5 years
After 5 years
— $
2
154
195
334
685 $
— $
2
307
314
547
1,170 $
901 $
3
277
165
418
1,764 $
3,075
20
910
163
246
4,414
Interest payments on our outstanding debt include interest associated with finance lease obligations and have been
calculated using the interest rates as of December 31, 2020 applied to the December 31, 2020 balances, which are assumed to
remain outstanding through their maturity dates. A description of the terms of our indebtedness and related debt service
requirements is contained in Note 13 to the audited consolidated financial statement
Operating lease obligations include variable charges (primarily maintenance fees and utilities associated with our real
estate leases) in effect as of December 31, 2020. A discussion and analysis regarding our operating lease obligations is
contained in Note 14 to the audited consolidated financial statements.
Purchase obligations include our noncancellable commitments to purchase products or services as described in Note 18
to the audited consolidated financial statements.
As of December 31, 2020, our total liabilities associated with unrecognized tax benefits were approximately $93
million, which were excluded from the table above. We expect that these liabilities may decrease by less than $15 million
within the next twelve months, primarily as a result of payments, settlements, expiration of statutes of limitations and/or the
conclusion of tax examinations on certain tax positions. For the remainder, we cannot make reasonably reliable estimates of the
timing of the future payments of these liabilities. See Note 8 to the audited consolidated financial statements for information
regarding our contingent tax liability reserves.
In connection with the sale of an 18.9% noncontrolling interest in a subsidiary to UMass Memorial Medical Center
("UMass"), we granted UMass the right to require us to purchase all of its interest in the subsidiary at fair value commencing
July 1, 2020. As of December 31, 2020, the fair value of the redeemable noncontrolling interest on the audited consolidated
balance sheet was $82 million, which was excluded from the table above. Since the redemption of the noncontrolling interest is
outside of our control, we cannot make a reasonably reliable estimate of the timing of the future payment, if any, of the
redeemable noncontrolling interest. For further details regarding the redeemable noncontrolling interest, see Note 16 to the
audited consolidated financial statements.
Equity Method Investees
Our equity method investees primarily consist of our clinical trials central laboratory services joint venture, our
diagnostic information services joint venture, and an investment in a fund that purchases strategic holdings in private companies
in the healthcare industry. Such investees are accounted for under the equity method of accounting. Our investment in equity
method investees is less than 5% of our consolidated total assets. Our proportionate share of income before income taxes
associated with our equity method investees is less than 5% of our consolidated income from continuing operations before
income taxes and equity in earnings of equity method investees. We partially guarantee a lease obligation of one of our equity
method investees; payment under such guarantee is not likely at this time and we have no other material unconditional
obligations or guarantees to, or in support of, our equity method investees and their operations.
In conjunction with the preparation of our audited consolidated financial statements for the year ended December 31,
2020, we considered whether the carrying values of our equity method investments were impaired and concluded that no such
impairment existed. However, should the impact of the COVID-19 pandemic be worse than currently expected, it is possible
that we could incur impairment charges in the future.
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For further details regarding related party transactions with our equity method investees, see Note 20 to the audited
consolidated financial statements.
Requirements and Capital Resources
We estimate that we will invest approximately $350 million to $400 million during 2021 for capital expenditures, to
support and grow our existing operations, principally related to investments in information technology; laboratory equipment
and facilities, including COVID testing equipment and completion of our new multi-year laboratory construction in New
Jersey; and investments in our advanced diagnostics and consumer growth strategies.
Together with the Quest Diagnostics Foundation, we launched a multi-year initiative to reduce health disparities in
underserved communities, including those impacted by the COVID-19 pandemic. As part of this initiative, we plan to offer
testing services and fund a range of initiatives estimated to total more than $100 million aimed at improving access to testing
and awareness of the value of diagnostic insights in managing overall health, a significant portion of which will occur in 2021.
As of December 31, 2020, $1.3 billion of borrowing capacity was available under our existing credit facilities
consisting of $530 million available under our secured receivables credit facility and $750 million available under our senior
unsecured revolving credit facility. There were no borrowings under these credit facilities as of December 31, 2020. In support
of our risk management program, to ensure our performance or payment to third parties, $70 million in letters of credit under
the secured receivables credit facility were outstanding as of December 31, 2020. The secured receivables credit facility
includes a $250 million loan commitment which matures October 2021, and a $250 million loan commitment and a $100
million letter of credit facility which mature October 2022. The senior unsecured revolving credit facility matures in March
2023. For further details regarding the credit facilities, see Note 13 to the audited consolidated financial statements.
Our secured receivables credit facility is subject to customary affirmative and negative covenants, and certain financial
covenants with respect to the receivables that comprise the borrowing base and secure the borrowings under the facility. Our
senior unsecured revolving credit facility is also subject to certain financial covenants and limitations on indebtedness. As of
December 31, 2020, we were in compliance with all such applicable financial covenants.
In 2020, due to the impact of the COVID-19 pandemic, we took certain actions to preserve liquidity including
temporarily suspending share repurchases under our existing share repurchase authorization (which suspension was lifted in
November 2020) and implementing a series of temporary actions to manage our workforce costs.
In addition, we took certain steps to ensure adequate access to liquidity. In April 2020, we entered into an amendment
to our senior unsecured revolving credit facility in order to provide for increased flexibility. Pursuant to the amendment, the
leverage ratio covenant was increased as follows:
As of:
Applicable Covenant:
December 31, 2020
no more than 6.5 times EBITDA
March 31, 2021
June 30, 2021
no more than 6.25 times EBITDA
no more than 4.5 times EBITDA
Thereafter, the leverage ratio covenant reverts to no more than 3.5 times EBITDA. During the period that the
increased covenant applies, which period may be terminated early by us provided that we are in compliance with the historical
3.5 times EBITDA leverage ratio, the amended credit agreement contains certain additional limitations and restrictions
including, but not limited to, repurchases of our common stock, the amount of funds that can be used on business acquisitions,
the incurrence of secured indebtedness and the payment of dividends.
In addition, in May 2020, we completed the issuance of the 2031 Senior Notes. In November 2020, we redeemed in
full the outstanding indebtedness under our senior notes due April 2021 using the net proceeds from the issuance of the 2031
Senior Notes, along with cash on hand.
We believe that our cash and cash equivalents and cash from operations, together with our borrowing capacity under
our credit facilities, will provide sufficient financial flexibility to fund seasonal and other working capital requirements, capital
expenditures, debt service requirements and other obligations, cash dividends on common shares, share repurchases and
additional growth opportunities for the foreseeable future. However, should it become necessary, we believe that our credit
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profile should provide us with access to additional financing in order to fund normal business operations, make interest
payments, fund growth opportunities and satisfy upcoming debt maturities.
Inflation
We believe that inflation generally does not have a material adverse effect on our results of operations or financial
condition.
Impact of New Accounting Standards
The adoption of new accounting standards is discussed in Note 2 to the audited consolidated financial statements.
The impacts of recent accounting pronouncements not yet effective on our audited consolidated financial statements
are discussed in Note 2 to the audited consolidated financial statements.
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REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of the Company, including its Chief Executive Officer and Chief Financial Officer, is responsible for
establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act of 1934, as amended. Management assessed the effectiveness of the Company's internal
control over financial reporting as of December 31, 2020 based on criteria for effective internal control over financial reporting
described in “Internal Control - Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this assessment, management has determined that the Company's internal control over
financial reporting as of December 31, 2020 is effective.
The Company's internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America. Internal control over financial reporting
includes policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted
in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with
authorization of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the consolidated
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited the financial statements
included in this annual report, audited the Company's internal control over financial reporting as of December 31, 2020 and
issued their audit report on the Company's internal control over financial reporting included herein.
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Quest Diagnostics Incorporated
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Quest Diagnostics Incorporated and its subsidiaries (the
“Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, comprehensive income,
stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, including the related
notes and financial statement schedule of valuation accounts and reserves for each of the three years in the period ended
December 31, 2020 listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial
statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2020, based on
criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United
States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013)
issued by the COSO.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for
leases in 2019.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included
in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express
opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting
based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United
States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,
whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material
respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement
of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.
Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit
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preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial
statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or
disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or
complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated
financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate
opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of Diagnostic Information Services (DIS) Business Accounts Receivable - Contractual Allowances
As described in Note 3 to the consolidated financial statements, management estimates the amount of consideration it expects to
be entitled to receive from customer groups in exchange for providing services using the portfolio approach. These estimates
include the impact of contractual allowances (including payer denials) and patient price concessions. The portfolio approach
includes the following groups of customers: healthcare insurers, government payers, client payers and patients (34%, 6%, 46%
and 11% of consolidated net accounts receivable as of December 31, 2020, respectively, as disclosed by management). The DIS
business accounted for 97% of consolidated net accounts receivable ($1,520 million) as of December 31, 2020. Net revenues
and accounts receivable recognized from healthcare insurers and government payers consist of amounts billed net of contractual
allowances for differences between amounts billed and the estimated consideration the Company expects to receive from such
payers, which considers historical denial and collection experience and, additionally for healthcare insurers, the terms of the
Company’s contractual arrangements. As disclosed by management, the process for estimating revenues and the ultimate
collection of receivables associated with the DIS business involves significant assumptions and judgments.
The principal considerations for our determination that performing procedures relating to the valuation of DIS business
accounts receivable - contractual allowances is a critical audit matter are the estimate of net collectible accounts receivable,
specifically contractual allowances, involves significant judgment and estimation on the part of management; this in turn led to
significant auditor judgment, subjectivity and effort in performing procedures to evaluate the audit evidence related to the
contractual allowances.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall
opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the
valuation of DIS business accounts receivable, which included controls over management’s methodology and data used to
estimate contractual allowances. These procedures also included, among others, testing management's process for developing
the estimate for contractual allowances, including (i) evaluating the appropriateness of the methodology, (ii) testing the
completeness and accuracy of the historical contractual allowance and collection data from the Company’s billing system,
which is an input to the methodology, and (iii) evaluating the reasonableness of management’s assumptions used to estimate
contractual allowances by comparing actual cash collected to the prior year estimate (net accounts receivable).
/s/ PricewaterhouseCoopers LLP
Florham Park, New Jersey
February 22, 2021
We have served as the Company’s auditor since 1995.
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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2020 AND 2019
(in millions, except per share data)
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, net of allowance for credit losses of $28 and $15 as of December 31,
2020
2019
$
1,158 $
1,192
2020 and 2019, respectively
Inventories
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net
Operating lease right-of-use assets
Goodwill
Intangible assets, net
Investments in equity method investees
Other assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses
Current portion of long-term debt
Current portion of long-term operating lease liabilities
Total current liabilities
Long-term debt
Long-term operating lease liabilities
Other liabilities
Commitments and contingencies
Redeemable noncontrolling interest
Stockholders’ equity:
Quest Diagnostics stockholders’ equity:
Common stock, par value $0.01 per share; 600 shares authorized as of both December 31,
2020 and 2019; 217 shares issued as of both December 31, 2020 and 2019
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Treasury stock, at cost; 84 shares as of both December 31, 2020 and 2019
Total Quest Diagnostics stockholders’ equity
Noncontrolling interests
Total stockholders’ equity
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these statements.
F-3
1,520
223
157
3,058
1,627
604
6,873
1,167
521
176
14,026 $
1,633 $
2
141
1,776
4,013
499
847
1,063
123
112
2,490
1,453
518
6,619
1,121
482
160
12,843
1,041
804
145
1,990
3,966
413
711
82
76
2
2,841
9,303
(21)
(5,366)
6,759
50
6,809
14,026 $
2
2,722
8,174
(39)
(5,218)
5,641
46
5,687
12,843
$
$
$
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Net revenues
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018
(in millions, except per share data)
Operating costs and expenses and other operating expense (income):
Cost of services
Selling, general and administrative
Amortization of intangible assets
Other operating expense (income), net
Total operating costs and expenses, net
Operating income
Other income (expense):
Interest expense, net
Other income (expense), net
Total non-operating expense, net
Income from continuing operations before income taxes and equity in
earnings of equity method investees
Income tax expense
Equity in earnings of equity method investees, net of taxes
Income from continuing operations
Income from discontinued operations, net of taxes
Net income
Less: Net income attributable to noncontrolling interests
Net income attributable to Quest Diagnostics
Amounts attributable to Quest Diagnostics’ common stockholders:
Income from continuing operations
Income from discontinued operations, net of taxes
Net income
Earnings per share attributable to Quest Diagnostics’ common
stockholders - basic:
Income from continuing operations
Income from discontinued operations
Net income
Earnings per share attributable to Quest Diagnostics’ common
stockholders - diluted:
Income from continuing operations
Income from discontinued operations
Net income
$
$
$
$
$
$
$
2020
2019
2018
$
9,437 $
7,726 $
7,531
5,804
1,550
103
9
7,466
5,037
1,457
96
(95)
6,495
4,926
1,424
90
(10)
6,430
1,971
1,231
1,101
(163)
76
(87)
(175)
20
(155)
1,884
(460)
75
1,499
—
1,499
68
1,431 $
1,431 $
—
1,431 $
1,076
(247)
57
886
20
906
48
858 $
838 $
20
858 $
10.62 $
—
10.62 $
6.21 $
0.15
6.36 $
10.47 $
—
10.47 $
6.13 $
0.15
6.28 $
(167)
(8)
(175)
926
(182)
44
788
—
788
52
736
736
—
736
5.39
—
5.39
5.29
—
5.29
The accompanying notes are an integral part of these statements.
F-4
Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018
(in millions)
Net income
Other comprehensive income (loss):
Foreign currency translation adjustment
Net change in available-for-sale debt securities, net of taxes
Net deferred gain on cash flow hedges, net of taxes
Other comprehensive income (loss)
2020
2019
2018
$
1,499 $
906 $
788
15
—
3
18
7
8
5
20
(11)
—
2
(9)
779
52
727
Comprehensive income
Less: Comprehensive income attributable to noncontrolling interests
Comprehensive income attributable to Quest Diagnostics
1,517
68
1,449 $
$
926
48
878 $
The accompanying notes are an integral part of these statements.
F-5
Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018
(in millions)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
2020
2019
2018
$
1,499 $
906 $
788
Depreciation and amortization
Provision for credit losses
Deferred income tax provision
Stock-based compensation expense
Losses (gains) on sale of property, plant and equipment
Other, net
Changes in operating assets and liabilities:
Accounts receivable
Accounts payable and accrued expenses
Income taxes payable
Termination of interest rate swap agreements
Other assets and liabilities, net
Net cash provided by operating activities
Cash flows from investing activities:
Business acquisitions, net of cash acquired
Proceeds from disposition of property, plant, and equipment
Capital expenditures
(Increase) decrease in investments and other assets
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from borrowings
Repayments of debt
Purchases of treasury stock
Exercise of stock options
Employee payroll tax withholdings on stock issued under stock-based compensation
plans
Dividends paid
Distributions to noncontrolling interest partners
Contributions from noncontrolling interest partners
Other financing activities, net
Net cash (used in) provided by financing activities
Net change in cash and cash equivalents and restricted cash
Cash and cash equivalents and restricted cash, beginning of year
361
19
85
97
3
(81)
(455)
452
22
40
(37)
329
11
15
56
(70)
(39)
(63)
73
29
—
(4)
309
6
73
61
6
6
(65)
(19)
4
—
31
2,005
1,243
1,200
(330)
3
(418)
(27)
(772)
749
(1,554)
(325)
189
(15)
(297)
(58)
—
44
(1,267)
(34)
1,192
(58)
91
(400)
(44)
(411)
2,281
(1,449)
(353)
119
(16)
(286)
(54)
—
(17)
225
1,057
135
(421)
2
(383)
1
(801)
2,090
(1,966)
(322)
99
(21)
(266)
(54)
16
23
(401)
(2)
137
135
Cash and cash equivalents and restricted cash, end of year
$
1,158 $
1,192 $
The accompanying notes are an integral part of these statements.
F-6
Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018
(in millions)
Quest Diagnostics Stockholders’ Equity
Shares of
Common
Stock Out-
standing
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Treasury
Stock, at
Cost
Non-
controlling
Interests
Total Stock-
holders’
Equity
Redeemable
Non-
controlling
Interest
Balance, December 31, 2017
135 $
2 $
2,612 $
7,138 $
(48) $
(4,783) $
34 $
4,955
$
Net income
Other comprehensive loss, net of tax
Dividends declared
Distributions to noncontrolling
interest partners
Issuance of common stock under
benefit plans
Stock-based compensation expense
Exercise of stock options
Shares to cover employee payroll tax
withholdings on stock issued
under stock-based compensation
plans
Purchases of treasury stock
Contributions from noncontrolling
interest partners
Reclassification of stranded tax
effects resulting from enactment
of the Tax Cuts and Jobs Act
736
(274)
(9)
45
781
(9)
(274)
(44)
(44)
(10)
14
56
6
(21)
3
(3)
14
5
93
(325)
16
2
(2)
28
61
99
(21)
(325)
16
—
Balance, December 31, 2018
135 $
2 $
2,667 $
7,602 $
(59) $
(4,996) $
51 $
5,267
$
858
(286)
20
42
900
20
(286)
Net income
Other comprehensive income, net of
tax
Dividends declared
Distributions to noncontrolling
interest partners
Issuance of common stock under
benefit plans
Stock-based compensation expense
Exercise of stock options
Shares to cover employee payroll tax
withholdings on stock issued
under stock-based compensation
plans
Purchases of treasury stock
9
55
7
(16)
2
(4)
Net income
Other comprehensive income, net of
tax
Dividends declared
Distributions to noncontrolling
interest partners
Issuance of common stock under
benefit plans
Stock-based compensation expense
Exercise of stock options
Shares to cover employee payroll tax
withholdings on stock issued
under stock-based compensation
plans
1
2
11
97
26
(15)
Purchases of treasury stock
(3)
Balance, December 31, 2019
133 $
2 $
2,722 $
8,174 $
(39) $
(5,218) $
46 $
5,687
$
1,431
(302)
18
53
1,484
18
(302)
80
7
77
6
76
15
(47)
(47)
(7)
15
1
112
(350)
24
56
119
(16)
(350)
(49)
(49)
(9)
14
163
(325)
25
97
189
(15)
(325)
Balance, December 31, 2020
133 $
2 $
2,841 $
9,303 $
(21) $
(5,366) $
50 $
6,809
$
82
The accompanying notes are an integral part of these statements.
F-7
Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions unless otherwise indicated)
1.
DESCRIPTION OF BUSINESS
Background
Quest Diagnostics Incorporated and its subsidiaries ("Quest Diagnostics" or the "Company") empower people to take
action to improve health outcomes. The Company uses its extensive database of clinical lab results to derive diagnostic insights
that reveal new avenues to identify and treat disease, inspire healthy behaviors and improve healthcare management. The
Company's diagnostic information services business ("DIS") provides information and insights based on the industry-leading
menu of routine, non-routine and advanced clinical testing and anatomic pathology testing, and other diagnostic information
services. The Company provides services to a broad range of customers, including patients, clinicians, hospitals, independent
delivery networks ("IDNs"), health plans, employers, accountable care organizations ("ACOs"), and direct contract entities
("DCEs"). The Company offers the broadest access in the United States to diagnostic information services through its
nationwide network of laboratories, patient service centers and phlebotomists in physician offices and the Company's
connectivity resources, including call centers and mobile paramedics, nurses and other health and wellness professionals. The
Company is the world's leading provider of diagnostic information services. The Company provides interpretive consultation
with one of the largest medical and scientific staffs in the industry. The Company's Diagnostic Solutions businesses ("DS") are
the leading provider of risk assessment services for the life insurance industry and offer healthcare organizations and clinicians
robust information technology solutions.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of all entities controlled by the Company through its direct
or indirect ownership of a majority voting interest. Additionally, the consolidated financial statements include the accounts of
variable interest entities (“VIEs”) in which the Company has a variable interest and for which the Company is the “primary
beneficiary” as it has both: (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic
performance and (2) the obligation to absorb losses of the VIE that potentially could be significant to the VIE or the right to
receive benefits from the VIE that potentially could be significant to the VIE. All significant intercompany accounts and
transactions are eliminated in consolidation.
Income attributable to the minority interest in the Company's majority owned and controlled consolidated subsidiaries
is recorded as net income attributable to noncontrolling interests in the consolidated statements of operations and the
noncontrolling interest is reflected as a separate component of consolidated stockholders' equity in the consolidated balance
sheet.
Basis of Presentation
During the third quarter of 2006, the Company completed the wind down of Nichols Institute Diagnostics ("NID"), a
test kit manufacturing subsidiary. The accompanying consolidated statements of operations and related disclosures report the
results of NID as discontinued operations through 2019, at which point certain income tax contingencies related to NID were
resolved. See Note 21 for a further discussion of discontinued operations.
Reclassifications
Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the
current period financial statements.
F-8
Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
Equity Method Investments
Investments in entities which the Company does not control, but in which it has a substantial ownership interest
(generally between 20% and 49%) and can exercise significant influence, are accounted for using the equity method of
accounting. These investments are classified as investments in equity method investees in the consolidated balance sheet. The
Company records its pro rata share of the earnings, adjusted for accretion of basis difference, of these investments in equity in
earnings of equity method investees, net of taxes in the consolidated statements of operations. The Company reviews its
investments in equity method investees for impairment whenever events or changes in circumstances indicate that the carrying
amounts may not be recoverable.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United
States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes as revenue the amount that reflects the consideration to which it expects to be entitled in
exchange for goods sold or services rendered primarily upon completion of the testing process (when results are reported) or
when services have been rendered (see Note 3). Net revenues from Medicare and Medicaid programs were approximately 11%,
15% and 16% of the Company's consolidated net revenues for the years ended December 31, 2020, 2019 and 2018,
respectively.
Taxes on Income
The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred
taxes during the year. Current and deferred income taxes are measured based on the tax laws that are enacted as of the balance
sheet date of the relevant reporting period. Deferred tax assets and liabilities are recognized for the expected future tax
consequences of differences between the carrying amounts of assets and liabilities and their respective tax bases using tax rates
in effect for the year in which the differences are expected to reverse. A valuation allowance is provided when it is more likely
than not that some portion or all of the deferred tax assets will not be realized. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period when the change is enacted. Tax benefits from uncertain tax
positions are recognized only if the tax position is more likely than not to be sustained upon examination by taxing authorities
based on the technical merits of the position.
Earnings Per Share
The Company's unvested restricted stock units that contain non-forfeitable rights to dividends are participating
securities and, therefore, are included in the earnings allocation in computing earnings per share using the two-class method.
Basic earnings per common share is calculated by dividing net income attributable to Quest Diagnostics, adjusted for earnings
allocated to participating securities, by the weighted average number of common shares outstanding. Diluted earnings per
common share is calculated by dividing net income attributable to Quest Diagnostics, adjusted for earnings allocated to
participating securities, by the weighted average number of common shares outstanding after giving effect to all potentially
dilutive common shares outstanding during the period. Potentially dilutive common shares include the dilutive effect of
outstanding stock options and performance share units granted under the Company's Amended and Restated Employee Long-
Term Incentive Plan (“ELTIP”) and its Amended and Restated Non-Employee Director Long-Term Incentive Plan (“DLTIP”).
Earnings allocable to participating securities include the portion of dividends declared as well as the portion of undistributed
earnings during the period allocable to participating securities.
F-9
Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
Stock-Based Compensation
The Company measures stock-based compensation for equity awards at fair value on the date of grant and records
stock-based compensation as a charge to earnings net of the estimated impact of forfeited awards. As such, the Company
recognizes stock-based compensation cost only for those stock-based awards that are estimated to ultimately vest over their
requisite service period, based on the vesting provisions of the individual grants. The cumulative effect on current and prior
periods of a change in the estimated forfeiture rate is recognized as compensation cost in earnings in the period of the change.
The terms of the Company's performance share units allow the recipients of such awards to earn a variable number of shares
based on the achievement of the performance goals, which are based on the financial performance of the Company and the total
shareholder return of the Company relative to an index of peer companies ("relative TSR"), specified in the awards. For
performance share units with a goal based on the financial performance of the Company, stock-based compensation expense is
recognized based on management's best estimates of the achievement of the performance goals specified in such awards and the
resulting number of shares that will be earned. The cumulative effect on current and prior periods of a change in the estimated
number of performance share units expected to be earned for these awards is recognized as compensation cost in earnings in the
period of the change. For performance share units with a market-based relative TSR goal, stock-based compensation expense is
recognized based on the estimated fair value of the award regardless of the actual number of shares earned. For further details
regarding stock-based compensation, see Note 17.
Fair Value Measurements
The Company determines fair value measurements used in its consolidated financial statements based upon the exit
price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
exclusive of any transaction costs, as determined by either the principal market or the most advantageous market.
Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy. The basis
for fair value measurements for each level within the hierarchy is described below with Level 1 having the highest priority and
Level 3 having the lowest.
Level 1: Quoted prices in active markets for identical assets or liabilities.
Level 2: Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar
instruments in markets that are not active; and model-derived valuations in which all significant inputs are
observable in active markets.
Level 3: Valuations derived from valuation techniques in which one or more significant inputs are unobservable.
Foreign Currency
The Company predominately uses the U.S. dollar as its functional currency. The functional currency of the Company's
foreign operating subsidiaries generally is the applicable local currency. Assets and liabilities denominated in non-U.S. dollars
are translated into U.S. dollars at exchange rates as of the end of the reporting period. Income and expense items are translated
at the average monthly exchange rates during the year. Resulting translation adjustments are recorded as a component of
accumulated other comprehensive loss within stockholders' equity. Gains and losses from foreign currency transactions, which
are denominated in a currency other than the functional currency, are included within other operating expense (income), net in
the consolidated statements of operations. Foreign currency transaction gains and losses have historically not been material.
The Company may be exposed to market risk for changes in foreign exchange rates primarily under certain intercompany
receivables and payables. From time to time, the Company uses foreign exchange forward contracts to mitigate the exposure of
the eventual net cash inflows or outflows resulting from these intercompany transactions. The Company's foreign exchange
exposure is not material to the Company's consolidated financial condition. The Company does not hedge its net investment in
non-U.S. subsidiaries because it views those investments as long-term in nature.
Cash and Cash Equivalents
Cash and cash equivalents include all highly-liquid investments with original maturities, at the time acquired by the
Company, of three months or less.
F-10
Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk are principally cash, cash
equivalents, short-term investments, accounts receivable and derivative financial instruments. The Company's policy is to place
its cash, cash equivalents and short-term investments in highly-rated financial instruments and institutions. Concentration of
credit risk with respect to accounts receivable is mitigated by the diversity of the Company's payers and their dispersion across
many different geographic regions, and is limited to certain payers who are large buyers of the Company's services. To reduce
risk, the Company routinely assesses the financial strength of these payers and, consequently, believes that its accounts
receivable credit risk exposure, with respect to these payers, is limited. While the Company has receivables due from federal
and state governmental agencies, the Company does not believe that such receivables represent a credit risk since the related
healthcare programs are funded by federal and state governments, and payment is primarily dependent on submitting
appropriate documentation timely. As of December 31, 2020 and 2019, receivables due from government payers under the
Medicare and Medicaid programs represented approximately 6% and 11%, respectively, of the Company's consolidated net
accounts receivable. The portion of the Company's accounts receivable due from patients comprises the largest portion of
credit risk. As of December 31, 2020 and 2019, receivables due from patients represented approximately 11% and 20%,
respectively, of the Company's consolidated net accounts receivable. The Company applies assumptions and judgments
including historical collection experience (including the period the receivables have been outstanding) for assessing
collectability and determining net revenues and accounts receivable from patients.
Accounts Receivable and Allowance for Credit Losses
Accounts receivable are reported net of allowances for credit losses.
When estimating its allowance for credit losses, the Company pools its trade receivables based on the following
customer types: healthcare insurers, government payers, client payers and patients, which are described in Note 3. The
Company principally estimates the allowance for credit losses by pool based on historical collection experience, the current
credit worthiness of the customers, current economic conditions, expectations of future economic conditions and the period that
the receivables have been outstanding. To the extent that any individual payers are identified that have deteriorated in credit
quality, the Company removes the customers from their respective pools and establishes allowances based on the individual risk
characteristics of such customers.
Inventories
Inventories, which consist principally of finished goods testing supplies and reagents, are valued at the lower of cost
(first in, first out method) or net realizable value.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Major renewals and improvements are capitalized, while
maintenance and repairs are expensed as incurred. Costs incurred for computer software developed or obtained for internal use
are capitalized for application development activities and expensed as incurred for preliminary project activities and post-
implementation activities. Capitalized costs include external direct costs of materials and services consumed in developing or
obtaining internal-use software, payroll and payroll-related costs for employees who are directly associated with the internal-
use software project, and interest costs incurred, when material, while developing internal-use software. Capitalization of such
costs ceases when the project is substantially complete and ready for its intended purpose. Costs for maintenance and training
are expensed as incurred. The Company capitalizes interest on borrowings during the active construction period of major
capital projects. Capitalized interest is added to the cost of the underlying assets and is amortized over the expected useful lives
of the assets. Depreciation and amortization are provided on the straight-line method over expected useful asset lives as of
December 31, 2020 as follows:
•
•
•
•
buildings and improvements, ranging up to thirty-one and a half years;
laboratory equipment and furniture and fixtures, ranging from five to twelve years;
leasehold improvements, the lesser of the useful life of the improvement or the remaining life of the building or
lease, as applicable; and
computer software developed or obtained for internal use, five to ten years.
F-11
Table of Contents
Goodwill
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
Goodwill represents the excess of the fair value of the acquiree (including the fair value of non-controlling interests)
over the recognized bases of the net identifiable assets acquired and includes the future economic benefits from other assets that
could not be individually identified and separately recognized. Goodwill is not amortized, but instead is periodically reviewed
for impairment and an impairment charge is recorded in the periods in which the recorded carrying value of goodwill exceeds
its fair value.
On a quarterly basis, the Company performs a review of its business to determine if events or changes in
circumstances have occurred which could have a material adverse effect on the fair value of the Company and its goodwill. If
such events or changes in circumstances were deemed to have occurred, the Company would perform an impairment test of
goodwill as of the end of the quarter and record any noted impairment loss.
The goodwill test is performed at least annually, or more frequently if events or changes in circumstances indicate that
the asset might be impaired. The annual impairment test includes an option to perform a qualitative assessment of whether it is
more likely than not that a reporting unit's fair value is less than its carrying value; the qualitative test may be performed prior
to, or as an alternative to, performing a quantitative goodwill impairment test. If, after assessing the totality of events or
circumstances, the Company determines that it is more likely than not that the fair value of a reporting unit is less than its
carrying value, then the Company is required to perform the quantitative goodwill impairment test. Otherwise, no further
analysis is required. Additionally, the Company's policy is to update the fair value calculation of its reporting units and perform
the quantitative goodwill impairment test on a periodic basis.
The quantitative impairment test involves the comparison of the fair value of the reporting unit to its carrying value.
The Company calculates the fair value of each reporting unit using either (i) a discounted cash flows analysis that converts
future cash flow amounts into a single discounted present value amount or (ii) a market approach. The Company assesses the
valuation methodology based upon the relevance and availability of the data at the time that the valuation is performed. The
Company compares the estimate of fair value for the reporting unit to the carrying value of the reporting unit. If the carrying
value is greater than the estimate of fair value, an impairment loss will be recognized in the amount of the excess.
The Company performs its annual impairment test during the fourth quarter of the fiscal year. For the year ended
December 31, 2020, in accordance with its policy to perform the quantitative test on a periodic basis, the Company updated the
fair value calculation of its reporting units, performed the quantitative impairment test and concluded that goodwill was not
impaired. For the year ended December 31, 2019, the Company performed a qualitative impairment test and, based on the
totality of information available for the reporting units, the Company concluded that it was more-likely-than-not that the
estimated fair values of the reporting units were greater than the carrying values of the reporting units and, as such, no further
analysis was required.
Intangible Assets
Intangible assets are recognized at fair value, as an asset apart from goodwill if the asset (i) arises from contractual or
other legal rights, or (ii) is separable. Intangible assets, principally representing the cost of customer-related intangibles, non-
competition agreements and technology acquired, are capitalized and amortized on the straight-line method over their expected
useful lives, which generally range from five to twenty years. Intangible assets with indefinite useful lives, consisting
principally of acquired tradenames, are not amortized, but instead are periodically reviewed for impairment.
F-12
Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
The Company reviews indefinite-lived intangible assets periodically for impairment and an impairment charge is
recorded in the periods in which the recorded carrying value of an indefinite-lived intangible is more than its estimated fair
value. The indefinite-lived intangible asset impairment test is performed at least annually, or more frequently in the case of
other events that indicate a potential impairment.
Based upon the Company’s most recent annual impairment tests completed during the fourth quarters of the years
ended December 31, 2020 and 2019, the Company concluded that indefinite-lived intangible assets were not impaired.
The Company reviews the recoverability of its long-lived assets (including amortizable intangible assets), other than
goodwill and indefinite-lived intangible assets, when events or changes in circumstances occur that indicate that the carrying
value of the asset may not be recoverable. Evaluation of possible impairment is based on the Company's ability to recover the
asset from the expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations. If
these cash flows are less than the carrying amount of such asset, an impairment loss is recognized for the difference between
the estimated fair value and carrying amount of the asset.
Investments
The Company's investments (except for those accounted for under the equity method of accounting), are included in
other assets in the consolidated balance sheet and include:
•
•
•
Equity investments with readily determinable fair values which are comprised of participant-directed investments of
deferred employee compensation and related Company matching contributions held in trusts pursuant to the
Company's supplemental deferred compensation plans (see Note 17). These investments are measured at fair value
with both realized and unrealized gains and losses recorded in current earnings within other income (expense), net in
the consolidated statements of operations. For the years ended December 31, 2020, 2019 and 2018, gains and (losses)
from these equity securities totaled $8 million, $10 million, and $(2) million, respectively. The carrying value of these
investments were $67 million and $59 million at December 31, 2020 and 2019, respectively.
Equity investments that do not have readily determinable fair values, which consist of investments in preferred and
common shares of privately held companies. These investments are measured at cost minus impairment, if any, plus
or minus changes resulting from observable price changes. The Company regularly evaluates these equity investments
to determine if there are any indicators that the investment is impaired; no impairment charges were recognized related
to these investments for the years ended December 31, 2020, 2019, and 2018. The carrying value of these investments
was $25 million at both December 31, 2020 and 2019.
Available-for-sale debt securities of privately-held companies. These investments are measured at fair value with
unrealized gains and losses presented in other comprehensive income (loss). The carrying amount of these
investments was $12 million at both December 31, 2020 and 2019.
Derivative Financial Instruments
The Company uses derivative financial instruments to manage its exposure to market risks for changes in interest rates
and, from time to time, foreign currencies. This strategy includes the use of interest rate swap agreements, forward-starting
interest rate swap agreements, interest rate lock agreements and foreign currency forward contracts to manage its exposure to
movements in interest and currency rates. The Company has established policies and procedures for risk assessment and the
approval, reporting and monitoring of derivative financial instrument activities. These policies prohibit holding or issuing
derivative financial instruments for speculative purposes. The Company does not enter into derivative financial instruments
that contain credit risk-related contingent features or requirements to post collateral.
F-13
Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
Interest Rate Risk
The Company is exposed to interest rate risk on its cash and cash equivalents and its debt obligations. Interest income
earned on cash and cash equivalents may fluctuate as interest rates change; however, due to their relatively short maturities, the
Company does not hedge these assets or their investment cash flows and the impact of interest rate risk is not material. The
Company's debt obligations consist of fixed-rate and variable-rate debt instruments. The Company's primary objective is to
achieve the lowest overall cost of funding while managing the variability in cash outflows within an acceptable range. In order
to achieve this objective, the Company has historically entered into interest rate swap agreements. Interest rate swap
agreements involve the periodic exchange of payments without the exchange of underlying principal or notional amounts. Net
settlements between the counterparties are recognized as an adjustment to interest expense, net.
The Company accounts for these derivatives as either an asset or liability measured at its fair value. The fair value is
based upon model-derived valuations in which all significant inputs are observable in active markets including certain financial
information and certain assumptions regarding past, present and future market conditions. For a derivative instrument that has
been formally designated as a fair value hedge, fair value gains or losses on the derivative instrument along with offsetting fair
value gains or losses on the hedged item that are attributable to the risk being hedged are reported in other income (expense),
net in the consolidated statements of operations. For derivatives that have been formally designated as a cash flow hedge, the
change in the fair value of the derivatives is recorded in accumulated other comprehensive loss. Upon maturity or early
termination of an effective interest rate swap agreement designated as a cash flow hedge, unrealized gains or losses are deferred
in stockholders' equity, as a component of accumulated other comprehensive loss, and are amortized as an adjustment to interest
expense over the period during which the hedged forecasted transaction affects earnings, which is when the Company
recognizes interest expense on the hedged cash flows. At inception and quarterly thereafter, the Company formally assesses
whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in the fair value or cash
flows of the hedged item. After the initial quantitative assessment, this analysis is initially performed on a qualitative basis and,
if it is determined that the hedging relationship was and continues to be highly effective, no further analysis is required. All
components of each derivative financial instrument's gain or loss are included in the assessment of hedge effectiveness. If it is
determined that a derivative ceases to be a highly effective hedge, the Company discontinues hedge accounting and any
deferred gains or losses related to a discontinued cash flow hedge shall continue to be reported in accumulated other
comprehensive loss, unless it is probable that the forecasted transaction will not occur. If it is probable that the forecasted
transaction will not occur by the originally specified time period, the Company discontinues hedge accounting and any deferred
gains or losses reported in accumulated other comprehensive loss are classified into earnings immediately.
Comprehensive Income (Loss)
Comprehensive income (loss) encompasses all changes in stockholders' equity (except those arising from transactions
with stockholders) and includes:
•
•
•
Foreign currency translation adjustments;
Net changes in available-for-sale debt securities, which represent unrealized holding gains (losses), net of tax,
on available-for-sale debt securities; and
Net deferred gains (losses) on cash flow hedges, which represent deferred gains (losses), net of tax, on
interest rate-related derivative financial instruments designated as cash flow hedges, net of amounts
reclassified to interest expense (see Notes 15 and 16).
New Accounting Standards
Adoption of New Accounting Standards
On January 1, 2020, the Company adopted a new accounting standard issued by the Financial Accounting Standards
Board ("FASB") which aligns the requirements for deferring implementation costs incurred in a cloud computing arrangement
that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use
software. The adoption of this standard, which the Company elected to do on a prospective basis, did not have a material
impact on the Company's consolidated results of operations, financial position or cash flows.
On January 1, 2020, the Company adopted a new accounting standard issued by the FASB that changes the
impairment model for most financial instruments, including trade receivables, from an incurred loss method to a new forward
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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
looking approach, based on expected losses. The estimate of expected credit losses requires entities to incorporate
considerations of historical information, current information and reasonable and supportable forecasts. The adoption of this
new standard, which was done using a modified retrospective transition approach, did not have a material impact on the
Company's consolidated results of operations, financial position or cash flows. See "Accounts Receivable and Allowance for
Credit Losses" in this footnote for further details on the Company's allowance for credit losses policy.
On January 1, 2019, the Company adopted a new accounting standard issued by the FASB on accounting for leases
using the modified retrospective method. This new accounting standard requires a lessee to recognize on its balance sheet an
asset and liability for most leases. The Company elected the optional transition method that allowed for a cumulative-effect
adjustment to the opening balance of retained earnings recorded on January 1, 2019 and did not restate previously reported
results in the comparative periods. The Company also elected the package of practical expedients, which among other things,
allowed it to carry forward its historical lease classification.
As a result of adoption of the new standard, the Company recorded operating lease assets and lease liabilities of
approximately $500 million and $550 million, respectively as of January 1, 2019. The operating lease liability was determined
based on the present value of the remaining minimum rental payments and the operating lease asset was determined based on
the value of the lease liability, adjusted for the deferred rent balances of approximately $50 million, which were previously
included in accounts payable and accrued expenses as well as other liabilities in the consolidated balance sheet. Accounting for
the Company's finance leases remained substantially unchanged. The adoption of the new standard did not materially impact
the Company's consolidated results of operations or cash flows.
In addition, the adoption of this new accounting standard resulted in increased qualitative and quantitative disclosures
regarding the amount, timing, and uncertainty of cash flows arising from leases. For further details, see Note 14.
New Accounting Standards To Be Adopted
In March 2020, the FASB issued a new accounting standard which provides temporary optional guidance to ease the
potential burden in accounting for reference rate reform due to the risk of cessation of the London Interbank Offered Rate
("LIBOR"). The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or
another reference rate expected to be discontinued because of reference rate reform. The pronouncement is effective
immediately and can be applied through December 31, 2022. The adoption of this standard is not expected to have a material
impact on the Company’s consolidated results of operations, financial position or cash flows.
3.
REVENUE RECOGNITION
DIS
Net revenues in the Company’s DIS business accounted for greater than 95% of the Company’s total net revenues for
the years ended December 31, 2020, 2019 and 2018 and are primarily comprised of a high volume of relatively low-dollar
transactions. The DIS business, which provides clinical testing services and other services, satisfies its performance obligation
and recognizes revenues primarily upon completion of the testing process (when results are reported) or when services have
been rendered. The Company estimates the amount of consideration it expects to be entitled to receive from customer groups in
exchange for providing services using the portfolio approach. These estimates include the impact of contractual allowances
(including payer denials), and patient price concessions, as discussed below. The portfolios determined using the portfolio
approach consist of the following groups of customers: healthcare insurers, government payers, client payers and patients.
Contracts with customers in the DIS business do not contain significant financing components based on the typical period of
time between performance of services and collection of consideration.
The process for estimating revenues and the ultimate collection of accounts receivable involves significant judgment
and estimation. The Company follows a standard process, which considers historical denial and collection experience and other
factors (including the period the receivables have been outstanding), to estimate contractual allowances and implicit price
concessions, recording adjustments in the current period as changes in estimates. Further adjustments to the allowances, based
on actual receipts, may be recorded upon settlement.
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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
The following are descriptions of the DIS business’ portfolios:
Healthcare Insurers
Reimbursements from healthcare insurers are based on negotiated fee-for-service schedules and on capitated payment
rates. Under fee-for-service arrangements, healthcare insurers are billed at the Company's list price. Net revenues recognized
consist of amounts billed net of contractual allowances for differences between amounts billed and the estimated consideration
the Company expects to receive from such payers, which considers historical denial and collection experience and the terms of
the Company’s contractual arrangements.
Collection of the Company's net revenues from healthcare insurers is normally a function of providing complete and
correct billing information to the healthcare insurers within the various filing deadlines and generally occurs within 30 to 60
days of billing. Provided the Company has billed healthcare insurers accurately with complete information prior to the
established filing deadline, there has historically been little to no credit risk. If there has been a delay in billing, the Company
determines if the amounts in question will likely go past the filing deadline, and if so, it will reserve accordingly for the billing.
Under capitated arrangements with healthcare insurers, the Company recognizes revenue based on a predetermined
monthly reimbursement rate for each member of an insurer's health plan regardless of the number or cost of services provided
by the Company. Healthcare insurers typically reimburse the Company under capitated arrangements in the same month
services are performed, essentially giving rise to no outstanding accounts receivable at the end of a reporting period. If any
capitated payments are not received on a timely basis, the Company determines the cause and makes a separate determination
as to whether or not the collection of the amount from the healthcare insurer is at risk and, if so, would reserve accordingly.
Government Payers
Reimbursements from government payers are based on fee-for-service schedules set by governmental authorities,
including traditional Medicare and Medicaid. Net revenues recognized consist of amounts billed net of contractual allowances
for differences between amounts billed and the estimated consideration the Company expects to receive from such payers,
which considers historical denial and collection experience and other factors.
Collection of the Company's net revenues from government payers is normally a function of providing the complete
and correct billing information within the various filing deadlines and generally occurs within 30 days of billing. Provided the
Company has billed government payers accurately with complete information prior to the established filing deadline, there has
historically been little to no credit risk. If there has been a delay in billing, the Company determines if the amounts in question
will likely go past the filing deadline, and, if so, it will reserve for the billing accordingly.
Client Payers
Client payers include physicians, hospitals, ACOs, DCEs, IDNs, employers, other commercial laboratories and
institutions for which services are performed on a wholesale basis, and are billed based on negotiated fee schedules. Credit risk
and ability to pay are more of a consideration for these payers than healthcare insurers and government payers. Collection of
consideration the Company expects to receive generally occurs within 60 to 90 days of billing.
The Company principally estimates the allowance for credit losses for client payers based on historical collection
experience, the current credit worthiness of the customers, current economic conditions, expectations of future economic
conditions and the period that the receivables have been outstanding. To the extent that any individual client payers are
identified that have deteriorated in credit quality, the Company establishes allowances based on the individual risk
characteristics of such customers.
Patients
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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
Uninsured patients are billed based on established patient fee schedules or fees negotiated with physicians on behalf of
their patients. Insured patients (includes coinsurance and deductible responsibilities) are billed based on fees negotiated with
healthcare insurers. Collection of billings from patients is subject to credit risk and ability of the patients to pay. Net revenues
consist of amounts billed net of discounts provided to uninsured patients in accordance with the Company’s policies and
implicit price concessions. Implicit price concessions represent differences between amounts billed and the estimated
consideration the Company expects to receive from patients, which considers historical collection experience (including the
period the receivables have been outstanding) and other factors including current market conditions. Patient billings are
generally fully reserved for when the related billing reaches 210 days outstanding. Balances are automatically written off when
they are sent to collection agencies. Allowances are further adjusted for estimated recoveries of amounts sent to collection
agencies based on historical collection experience, which is regularly monitored. Collection of consideration the Company
expects to receive generally occurs within 30 to 60 days of billing.
DS
The Company’s DS businesses primarily satisfy their performance obligations and recognize revenues when delivery
has occurred or services have been rendered. Collection of consideration the Company expects to receive generally occurs
within 30 to 60 days of billing.
The approximate percentage of net revenue by type of customer was as follows:
Healthcare insurers:
Fee-for-service
Capitated
Total healthcare insurers
Government payers
Client payers
Patients
Total DIS
DS
Net revenues
Year Ended December 31,
2020
2019
2018
34 %
33 %
32 %
3
37
11
38
11
97
3
3
36
15
32
13
96
4
3
35
16
32
13
96
4
100 %
100 %
100 %
For the years ended December 31, 2020, 2019 and 2018, substantially all of the Company’s services were provided
within the United States, see Note 19.
The approximate percentage of net accounts receivable by type of customer as of December 31, 2020 and 2019 was as
follows:
Healthcare insurers
Government payers
Client payers
Patients (including coinsurance and deductible responsibilities)
Total DIS
DS
Net accounts receivable
2020
34%
6
46
11
97
3
2019
22%
11
42
20
95
5
100%
100%
F-17
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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
The following table summarizes the activity for the Company's allowance for credit losses during the year ended
December 31, 2020, which principally relates to client payers:
Balance, January 1, 2020
Provision for credit losses
Write-offs of accounts receivable, net of recoveries
Balance, December 31, 2020
4.
EARNINGS PER SHARE
Allowance
for Credit
Losses
$
$
15
19
(6)
28
The computation of basic and diluted earnings per common share is as follows (in millions, except per share data):
2020
2019
2018
Amounts attributable to Quest Diagnostics’ common stockholders:
Income from continuing operations
Income from discontinued operations, net of taxes
Net income attributable to Quest Diagnostics' common stockholders
Income from continuing operations
Less: Earnings allocated to participating securities
Earnings available to Quest Diagnostics’ common stockholders – basic and
diluted
Weighted average common shares outstanding – basic
Effect of dilutive securities:
Stock options and performance share units
Weighted average common shares outstanding – diluted
Earnings per share attributable to Quest Diagnostics’ common
stockholders - basic:
Income from continuing operations
Income from discontinued operations
Net income
Earnings per share attributable to Quest Diagnostics’ common
stockholders - diluted:
Income from continuing operations
Income from discontinued operations
Net income
$
$
$
$
$
$
$
$
1,431 $
—
1,431 $
1,431 $
6
838 $
20
858 $
838 $
3
1,425 $
835 $
134
2
136
134
2
136
10.62 $
—
10.62 $
6.21 $
0.15
6.36 $
10.47 $
6.13 $
—
0.15
10.47 $
6.28 $
736
—
736
736
3
733
136
3
139
5.39
—
5.39
5.29
—
5.29
The following securities were not included in the calculation of diluted earnings per share due to their antidilutive
effect:
Stock options and performance share units
5.
RESTRUCTURING ACTIVITIES
F-18
2020
2019
2018
1
3
2
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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
Invigorate Program
The Company is committed to a program called Invigorate which is designed to reduce its cost structure and improve
performance. Invigorate consists of several flagship programs, with structured plans in each, to drive savings and improve
performance across the customer value chain. These flagship programs include: organization excellence; information
technology excellence; procurement excellence; service excellence; lab excellence; and revenue services excellence. In
addition to these programs, the Company identified key themes to change how it operates including reducing denials and
patient price concessions; further digitizing the business; standardization and automation; and optimization initiatives in the
areas of lab network and patient service center network. The Invigorate program is intended to partially offset reimbursement
pressures and labor and benefit cost increases; free up additional resources to invest in science, innovation and other growth
initiatives; and enable the Company to improve service quality and operating profitability.
Restructuring Charges
The following table provides a summary of the Company's pre-tax restructuring charges for the years ended
December 31, 2020, 2019 and 2018:
Employee separation costs
Facility-related costs
Asset impairment charges
Total restructuring charges
2020
2019
2018
$
$
14 $
—
—
14 $
(3) $
1
—
(2) $
45
4
2
51
The restructuring charges incurred for the year ended December 31, 2020 and 2018 were primarily associated with
various workforce reduction initiatives as the Company continued to simplify and restructure its organization. The
restructuring activity incurred for the year ended December 31, 2019 primarily represents a release of the liability relating to
restructuring charges recorded in prior periods, which were determined to no longer be required. Of the total restructuring
charges incurred during the year ended December 31, 2020, $9 million and $5 million were recorded in cost of services and
selling, general and administrative expenses, respectively. The $(2) million of restructuring charges recognized during the year
ended December 31, 2019 were recorded in selling, general and administrative expenses. Of the total restructuring charges
incurred during the year ended December 31, 2018, $22 million and $29 million were recorded in cost of services and selling,
general and administrative expenses, respectively.
Charges for all periods presented were primarily recorded in the Company's DIS business.
The following table summarizes the activity of the restructuring liability during 2020 and 2019, which is included in
accrued expenses in Note 12:
Employee
Separation
Costs
Facility-
Related
Costs
Total
$
$
37 $
(3)
(25)
—
9
14
(16)
7 $
1 $
—
—
(1)
—
—
—
— $
38
(3)
(25)
(1)
9
14
(16)
7
Balance, December 31, 2018
Income statement income
Cash payments
Other
Balance, December 31, 2019
Income statement expense
Cash payments
Balance, December 31, 2020
6.
BUSINESS ACQUISITIONS
2020 Acquisitions
F-19
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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
During 2020, the Company completed acquisitions for an aggregate purchase price of $330 million, net of cash
acquired, including the acquisitions discussed below. The 2020 acquisitions resulted in goodwill of $247 million, of which
$210 million is deductible for tax purposes. These acquisitions also resulted in $146 million of intangible assets, principally
comprised of customer-related and technology intangible assets. Net revenues attributable to the 2020 acquisitions were
$127 million for the year ended December 31, 2020.
Acquisition of Blueprint Genetics Oy
On January 21, 2020, the Company completed its acquisition of Blueprint Genetics Oy ("Blueprint Genetics"), in an
all cash transaction for $108 million, net of $3 million cash acquired. Blueprint Genetics is a leading specialty genetic testing
company with expertise in gene variant interpretation based on next generation sequencing and proprietary bioinformatics.
Through the acquisition, the Company acquired all of Blueprint Genetics' operations. In the fourth quarter of 2020, the
Company made an election to treat the acquisition as a taxable business combination for income tax purposes, which resulted in
an adjustment to the preliminary purchase price allocation to reverse the previously recorded $11 million deferred tax liability,
with a corresponding decrease to goodwill. Based on the final purchase price allocation, the assets acquired and liabilities
assumed primarily consist of $66 million of tax-deductible goodwill, $43 million of intangible assets, and $2 million of
property, plant and equipment and working capital. The intangible assets primarily consist of technology and customer-related
assets which are being amortized over a useful life of 10 years and15 years, respectively.
Acquisition of the Outreach Laboratory Services Business of Memorial Hermann Health System
On April 6, 2020, the Company completed its acquisition of select assets which constitute substantially all of the
operations of Memorial Hermann Diagnostic Laboratories, the outreach laboratory division of Memorial Hermann Health
System ("Memorial Hermann"), in an all cash transaction for $120 million. Memorial Hermann is a not-for-profit health
system in Southeast Texas. Based on the preliminary purchase price allocation, which may be revised as additional information
becomes available during the measurement period, the assets acquired primarily consist of $27 million of customer-related
intangible assets and $93 million of tax-deductible goodwill. The intangible assets are being amortized over a useful life of 15
years.
Acquisition of the Remaining 56% Interest in Mid America Clinical Laboratories, LLC
On August 1, 2020, the Company completed its acquisition of the remaining 56% interest in Mid America Clinical
Laboratories, LLC ("MACL") from its joint venture partners in an all cash transaction for $93 million, net of $18 million cash
acquired. MACL is the largest independent clinical laboratory provider in Indiana. Prior to the acquisition, the Company
accounted for its 44% interest in MACL as an equity method investment, which was remeasured to its fair value of $87 million
on the acquisition date, resulting in a gain of $70 million that was recognized in other income (expense), net in the consolidated
statements of operations. The fair value of the previously held equity interest was determined using a discounted cash flow
analysis that takes into account, among other items, MACL's expected future cash flows, long-term growth rate (1.5%), and a
discount rate commensurate with economic risk (7.5%). Based on the preliminary purchase price allocation, which may be
revised as additional information becomes available during the measurement period, the assets acquired and liabilities assumed
consist of $84 million of goodwill (of which $47 million is tax-deductible), $74 million of intangible assets, $11 million of
working capital and $11 million of property, plant and equipment. The intangible assets consist of customer-related assets
which are being amortized over a useful life of 15 years. As a result of the acquisition, MACL became a wholly owned
subsidiary of the Company.
2019 Acquisitions
During 2019, the Company completed acquisitions for an aggregate purchase price of $63 million, including the
acquisition discussed below. The 2019 acquisitions resulted in goodwill of $43 million, of which $36 million is deductible for
tax purposes. These acquisitions also resulted in $21 million of intangible assets, principally comprised of customer-related
intangibles.
Acquisition of the Clinical Laboratory Services Business of Boyce & Bynum Pathology Laboratories, P.C.
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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
On February 11, 2019, the Company completed its acquisition of certain assets of the clinical laboratory services
business of Boyce & Bynum Pathology Laboratories, P.C. ("Boyce & Bynum") in an all cash transaction for $61 million, which
consisted of cash consideration of $55 million and contingent consideration initially estimated at $6 million. The contingent
consideration arrangement was dependent upon the achievement of certain testing volume benchmarks. During 2019, the
liability was reduced to $0 as a result of updated testing volume forecasts for the earn-out period compared to the testing
volume target included in the contingent consideration arrangement, resulting in a $6 million gain recorded in other operating
expense (income), net. Based on the purchase price allocation, the assets acquired principally consist of $41 million of
goodwill (of which $35 million is tax deductible) and $20 million of customer-related intangible assets. The intangible assets
are being amortized over a useful life of 15 years.
2018 Acquisitions
During 2018, the Company completed acquisitions for an aggregate purchase price of $440 million, net of cash
acquired, including the acquisitions discussed below. The 2018 acquisitions resulted in goodwill of $241 million, of which
$205 million is deductible for tax purposes. These acquisitions also resulted in $167 million of intangible assets, principally
comprised of customer-related intangibles. Net revenues attributable to the 2018 acquisitions were $84 million for the year
ended December 31, 2018.
Acquisition of Mobile Medical Examination Services, LLC.
On February 1, 2018, the Company completed its acquisition of Mobile Medical Examination Services, LLC.
("MedXM"), a leading national provider of home-based health risk assessments and related services, in an all cash transaction
for $142 million, net of $5 million cash acquired, which consisted of cash consideration of $130 million and contingent
consideration initially estimated at $12 million. The contingent consideration arrangement was dependent upon the
achievement of certain revenue targets. Subsequent to the acquisition, the estimated fair value of the contingent consideration
was reduced to $0 as a result of updated revenue forecasts for 2018 compared to the earn-out revenue target included in the
contingent consideration arrangement, resulting in a $12 million net gain recorded in other operating expense (income), net.
Through the acquisition, the Company acquired all of MedXM's operations. The assets acquired and liabilities assumed consist
of $77 million of intangible assets, $57 million of goodwill (of which $45 million is tax deductible), $7 million of working
capital and $1 million of property, plant and equipment. The intangible assets consist primarily of customer-related assets which
are being amortized over a useful life of 15 years.
Acquisition of the Outreach Laboratory Services Business of Cape Cod Healthcare, Inc.
On June 18, 2018, the Company completed the acquisition of the outreach laboratory services business of Cape Cod
Healthcare, Inc., in an all cash transaction for $35 million. The assets acquired principally consist of tax deductible goodwill
and customer-related intangible assets.
Acquisition of ReproSource, Inc.
On September 19, 2018, the Company completed the acquisition of ReproSource, Inc. ("ReproSource"), in an all cash
transaction for $35 million, which consisted of cash consideration of $30 million and contingent consideration initially
estimated at $5 million. The contingent consideration arrangement was dependent upon the achievement of certain revenue
targets. During 2019, the liability was reduced to $0 as a result of updated revenue forecasts for 2019 compared to the earn-out
revenue target included in the contingent consideration arrangement, resulting in a net gain recorded in other operating expense
(income), net. ReproSource is a national leader in specialty fertility diagnostic services. Through the acquisition, the Company
acquired all of ReproSource's operations. The assets acquired principally consist of goodwill, technology-related intangible
assets and customer-related intangible assets.
Acquisition of the U.S. Laboratory Services Business of Oxford Immunotec, Inc.
On November 6, 2018, the Company completed the acquisition of all of the operations of the U.S. laboratory services
business of Oxford Immunotec, Inc. ("Oxford"), in an all cash transaction for $170 million, net of $1 million cash acquired.
The acquisition included laboratories in Tennessee and Massachusetts that provide tuberculosis and tick-borne disease testing
services. As part of the transaction, Oxford will sell test kits and related accessories to the Company under a long-term supply
agreement. In September 2019, the Company finalized its purchase price allocation and recorded a $13 million increase to
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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
goodwill, an $11 million decrease to intangible assets and a $2 million adjustment to other assets and liabilities. These
adjustments did not have a material impact on the Company's consolidated results of operations. Based on the final purchase
price allocation, the assets acquired and liabilities assumed primarily consist of $43 million of intangible assets, $112 million of
tax deductible goodwill, $13 million of working capital and $6 million of property, plant and equipment. The intangible assets
consist primarily of customer-related and contract-related assets which are being amortized over a useful life of 15 years and 5
years, respectively.
General Information
The acquisitions described above were accounted for under the acquisition method of accounting. As such, the assets
acquired and liabilities assumed are recorded based on their estimated fair values as of the closing date. Supplemental pro
forma combined financial information has not been presented as the impact of the acquisitions is not material to the Company's
consolidated financial statements. The goodwill recorded primarily includes the expected synergies resulting from combining
the operations of the acquired entities with those of the Company and the value associated with an assembled workforce and
other intangible assets that do not qualify for separate recognition. All of the goodwill acquired in connection with these
acquisitions has been allocated to the Company's DIS business. For further details regarding business segment information, see
Note 19.
F-22
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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
7.
FAIR VALUE MEASUREMENTS
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table provides a summary of the recognized assets and liabilities that are measured at fair value on a
recurring basis:
Total
Basis of Fair Value Measurements
Level 2
Level 3
Level 1
December 31, 2020
Assets:
Trading securities
Cash surrender value of life insurance policies
Available-for-sale debt securities
Total
Liabilities:
Deferred compensation liabilities
Redeemable noncontrolling interest
December 31, 2019
Assets:
Trading securities
Cash surrender value of life insurance policies
Available-for-sale debt securities
Total
Liabilities:
Deferred compensation liabilities
Fixed-to-variable interest rate swaps
Contingent consideration
Total
Redeemable noncontrolling interest
$
$
$
$
$
$
$
$
$
67 $
50
12
129 $
67 $
—
—
67 $
— $
50
—
50 $
126 $
— $
126 $
82 $
— $
— $
59 $
43
12
114 $
110 $
28
7
145 $
59 $
—
—
59 $
— $
—
—
— $
— $
43
—
43 $
110 $
28
—
138 $
76 $
— $
— $
—
—
12
12
—
82
—
—
12
12
—
—
7
7
76
The Company offers certain employees the opportunity to participate in a non-qualified supplemental deferred
compensation plan. A participant's deferrals, together with Company matching credits, are invested in a variety of participant-
directed stock and bond mutual funds that are classified as trading securities. The trading securities are classified within Level
1 of the fair value hierarchy because the changes in the fair value of these securities are measured using quoted prices in active
markets based on the market price per unit multiplied by the number of units held, exclusive of any transaction costs. A
corresponding adjustment for changes in fair value of the trading securities is also reflected in the changes in fair value of the
deferred compensation obligation. The deferred compensation liabilities are classified within Level 2 of the fair value hierarchy
because their inputs are derived principally from observable market data by correlation to the trading securities.
The Company offers certain employees the opportunity to participate in a non-qualified deferred compensation
program. A participant's deferrals, together with Company matching credits, are “invested” at the direction of the employee in
a hypothetical portfolio of investments which are tracked by an administrator. The Company purchases life insurance policies,
with the Company named as beneficiary of the policies, for the purpose of funding the program's liability. Changes in the cash
surrender value of the life insurance policies are based upon earnings and changes in the value of the underlying investments.
Changes in the fair value of the deferred compensation obligation are derived using quoted prices in active markets based on the
F-23
Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
market price per unit multiplied by the number of units. The cash surrender value and the deferred compensation obligation are
classified within Level 2 of the fair value hierarchy because their inputs are derived principally from observable market data by
correlation to the hypothetical investments. Deferrals under the plan currently may only be made by participants who made
deferrals under the plan in 2017.
The Company's available-for-sale debt securities are measured at fair value using discounted cash flows. These fair
value measurements are classified within Level 3 of the fair value hierarchy as the fair value is based on significant inputs that
are not observable. Significant inputs include cash flows projections and a discount rate.
The fair value measurements of the Company's fixed-to-variable interest rate swaps, which were terminated during
April 2020 (see Note 15), were classified within Level 2 of the fair value hierarchy, and were model-derived valuations as of a
given date in which all significant inputs were observable in active markets including certain financial information and certain
assumptions regarding past, present and future market conditions.
In connection with previous business acquisitions, the Company had contingent consideration obligations that were to
be paid based on the achievement of certain testing volume or revenue benchmarks. As of December 31, 2020, no contingent
consideration obligations were outstanding. Contingent consideration liabilities are measured at fair value using an option-
pricing method and are classified within Level 3 of the fair value hierarchy as the fair value is determined based on significant
inputs that are not observable. Significant inputs include management’s estimate of volume or revenue and other market inputs
including comparable company revenue volatility and a discount rate.
The following table provides a reconciliation of the beginning and ending balances of liabilities using significant
unobservable inputs (Level 3):
Balance, December 31, 2018
Purchases, additions and issuances
Settlements
Total (gains)/losses included in earnings - realized/unrealized
Balance, December 31, 2019
Settlements
Total (gains)/losses included in earnings - realized/unrealized
Balance, December 31, 2020
Contingent
Consideration
$
$
14
6
(1)
(12)
7
(6)
(1)
—
The $1 million and $12 million net gains included in earnings associated with the changes in the fair value of
contingent consideration for the years ended December 31, 2020 and 2019, respectively, are reported in other operating expense
(income), net.
In connection with the sale of an 18.9% noncontrolling interest in a subsidiary to UMass Memorial Medical Center
("UMass") on July 1, 2015, the Company granted UMass the right to require the Company to purchase all of its interest in the
subsidiary at fair value commencing July 1, 2020. As of December 31, 2020, the redeemable noncontrolling interest was
presented at its fair value. The fair value measurement of the redeemable noncontrolling interest is classified within Level 3 of
the fair value hierarchy because the fair value is based on a discounted cash flow analysis that takes into account, among other
items, the joint venture's expected future cash flows, long-term growth rates, and a discount rate commensurate with economic
risk.
The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable and accrued expenses
approximate fair value based on the short maturities of these instruments. As of December 31, 2020 and 2019, the fair value of
the Company’s debt was estimated at $4.6 billion and $5.1 billion, respectively. Principally all of the Company's debt is
classified within Level 1 of the fair value hierarchy because the fair value of the debt is estimated based on rates currently
offered to the Company with identical terms and maturities, using quoted active market prices and yields, taking into account
the underlying terms of the debt instruments.
F-24
Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
8.
TAXES ON INCOME
The Company's pre-tax income from continuing operations before equity in earnings of equity method investees
consisted of approximately $1.9 billion, $1.1 billion and $0.9 billion from U.S. operations and pre-tax (loss) income of $(7)
million, $15 million and $(1) million from foreign operations for the years ended December 31, 2020, 2019 and 2018,
respectively.
As a result of the Tax Cuts and Jobs Act, the Company changed its assertion that it intends to indefinitely reinvest
undistributed earnings from certain non-U.S. subsidiaries outside the U.S. The Company is indefinitely reinvested in the
remaining basis difference and it is not practicable to determine the associated amount of unrecognized deferred tax liability.
The components of income tax expense (benefit) for 2020, 2019 and 2018 were as follows:
Current:
Federal
State and local
Foreign
Deferred:
Federal
State and local
Foreign
Total
2020
2019
2018
$
$
300 $
74
1
55
29
1
460 $
176 $
53
3
21
(4)
(2)
247 $
82
26
1
66
10
(3)
182
A reconciliation of the federal statutory income tax rate to the Company's effective income tax rate for 2020, 2019 and
2018 was as follows:
Tax provision at statutory rate
State and local income taxes, net of federal benefit
Impact of noncontrolling interests
Excess tax benefits on stock-based compensation arrangements
Return to provision true-ups
Change in accounting method
Impact of equity earnings
Changes in reserves for uncertain tax positions
Change in valuation allowances associated with certain net operating losses
Other, net
Effective tax rate
2020
2019
2018
21.0 %
4.5
(0.9)
(1.2)
(0.7)
—
0.8
0.9
0.2
(0.1)
24.5 %
21.0 %
4.6
(1.1)
(1.2)
(1.4)
—
1.1
1.7
(1.1)
(0.6)
23.0 %
21.0 %
4.7
(1.4)
(1.9)
(1.4)
(1.6)
1.0
(0.8)
—
0.1
19.7 %
For the year ended December 31, 2019, the Company recognized a $12 million net income tax benefit due to the
release of valuation allowances associated with certain net operating loss carryforwards. In 2018, the Company filed for a tax
return accounting method change, effective for the tax year ending December 31, 2017, to accelerate the deduction of certain
expenses on its 2017 tax return at the higher 2017 federal corporate statutory income tax rate, resulting in a $15 million income
tax benefit. The net income tax benefit associated with changes in reserves for uncertain tax positions in 2018 was primarily
related to the expiration of the statute of limitations for certain income tax returns.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets (liabilities) as of
December 31, 2020 and 2019 were as follows:
F-25
Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
Non-current deferred tax assets (liabilities):
Accounts receivable reserves
Liabilities not currently deductible
Stock-based compensation
Basis differences in investments, joint ventures and subsidiaries
Net operating loss carryforwards, net of valuation allowance
Operating lease right-of-use assets
Operating lease liabilities
Depreciation and amortization
Total non-current deferred tax liabilities, net
2020
2019
$
$
71 $
146
47
(81)
61
(151)
161
(604)
(350) $
64
126
35
(80)
75
(129)
139
(494)
(264)
The non-current deferred tax assets (liabilities) disclosure at December 31, 2019 has been adjusted to separately state
the gross deferred tax right-of-use asset and related gross deferred tax lease liability recognized in accordance with the new
accounting standard for leases adopted on January 1, 2019. As of December 31, 2020 and 2019, non-current deferred tax
liabilities of $350 million and $264 million, respectively, are included in other liabilities in the consolidated balance sheet.
As of December 31, 2020, the Company had estimated net operating loss carryforwards for federal and state income
tax purposes of $60 million and $1.0 billion, respectively, which expire at various dates through 2040. Estimated net operating
loss carryforwards for foreign income tax purposes are $76 million as of December 31, 2020, some of which can be carried
forward indefinitely while others expire at various dates through 2040. As of December 31, 2020 and 2019, deferred tax assets
associated with net operating loss carryforwards of $94 million and $101 million, respectively, have each been reduced by
valuation allowances of $33 million and $26 million, respectively.
Income taxes payable, including those classified as long-term in other liabilities in the consolidated balance sheet as of
December 31, 2020 and 2019, were $135 million and $113 million, respectively. Prepaid income taxes were $2 million and $3
million as of December 31, 2020 and 2019, respectively, and were recorded in prepaid expenses and other current assets in the
consolidated balance sheet.
The total amount of unrecognized tax benefits as of and for the years ended December 31, 2020, 2019 and 2018
consisted of the following:
Balance, beginning of year
Additions:
For tax positions of current year
For tax positions of prior years
Reductions:
Changes in judgment
Expirations of statutes of limitations
Settlements
Balance, end of year
2020
2019
2018
$
88 $
107 $
115
2
25
(9)
(4)
(9)
93 $
2
16
(3)
(2)
(32)
88 $
2
11
(6)
(15)
—
107
$
The contingent liabilities for tax positions primarily relate to uncertainties associated with the realization of tax
benefits derived from the allocation of income and expense among state jurisdictions, the characterization and timing of certain
tax deductions associated with business combinations, certain tax credits and the deductibility of certain expenses and
settlement payments.
The total amount of unrecognized tax benefits as of December 31, 2020, that, if recognized, would affect the effective
income tax rate is $75 million. Based upon the expiration of statutes of limitations, settlements and/or the conclusion of tax
examinations, the Company believes it is reasonably possible that the total amount of unrecognized tax benefits may decrease
by up to $15 million within the next twelve months.
F-26
Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
Accruals for interest expense on contingent tax liabilities are classified in income tax expense in the consolidated
statements of operations. Accruals for penalties have historically been immaterial. Interest expense included in income tax
expense in each of the years ended December 31, 2020, 2019 and 2018 was approximately $6 million, $5 million and $1
million, respectively. As of December 31, 2020 and 2019, the Company had approximately $21 million and $17 million,
respectively, accrued, net of the benefit of a federal and state deduction, for the payment of interest on uncertain tax positions.
The recognition and measurement of certain tax benefits includes estimates and judgment by management and
inherently involves subjectivity. Changes in estimates may create volatility in the Company's effective tax rate in future periods
and may be due to settlements with various tax authorities (either favorable or unfavorable), the expiration of the statute of
limitations on certain tax positions and obtaining new information about particular tax positions that may cause management to
change its estimates.
In the regular course of business, various federal, state, local and foreign tax authorities conduct examinations of the
Company's income tax filings and the Company generally remains subject to examination until the statute of limitations expires
for the respective jurisdiction. The Internal Revenue Service has either completed its examinations of the Company's
consolidated federal income tax returns or the statute of limitations has expired up through and including the 2016 tax year. At
this time, the Company does not believe that there will be any material additional payments beyond its recorded contingent
liability reserves that may be required as a result of these tax audits. As of December 31, 2020, a summary of the tax years that
remain subject to examination, awaiting approval, are under appeal, or are otherwise unresolved for the Company's major
jurisdictions are:
United States - federal
United States - various states
2017 - 2020
2002 - 2020
F-27
Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
9.
SUPPLEMENTAL CASH FLOW AND OTHER DATA
Supplemental cash flow and other data for the years ended December 31, 2020, 2019 and 2018 was as follows:
Depreciation expense
Amortization expense
Depreciation and amortization expense
Interest expense
Interest income
Interest expense, net
Interest paid
Income taxes paid
Accounts payable associated with capital expenditures
Accounts payable associated with purchases of treasury stock
Dividend payable
Businesses acquired:
Fair value of assets acquired
Fair value of liabilities assumed
Fair value of net assets acquired
Merger consideration payable
Cash paid for business acquisitions
Less: Cash acquired
Business acquisitions, net of cash acquired
Leases:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
Operating cash flows from finance leases
Financing cash flows from finance leases
Leased assets obtained in exchange for new operating lease liabilities
Leased assets obtained in exchange for new finance lease liabilities (a)
2020
2019
2018
258 $
103
361 $
(166) $
3
(163) $
233 $
96
329 $
(180) $
5
(175) $
201 $
360 $
192 $
202 $
46 $
— $
76 $
368 $
17
351
—
351
21
330 $
26 $
— $
71 $
63 $
—
63
(5)
58
—
58 $
219
90
309
(169)
2
(167)
174
84
11
3
71
453
7
446
(19)
427
6
421
2020
2019
2018
185 $
3 $
3 $
219 $
— $
180
3
4
164
1 $
1
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
(a) For the year ended December 31, 2018, leased assets obtained in exchange for new finance lease liabilities reflects
information prior to the adoption of the new accounting standard for leases on January 1, 2019. See Note 14 for further
discussion of the Company's accounting for leases.
F-28
Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
10.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of December 31, 2020 and 2019 consisted of the following:
Land
Buildings and improvements
Laboratory equipment and furniture and fixtures
Leasehold improvements
Computer software developed or obtained for internal use
Construction-in-progress
Less: Accumulated depreciation and amortization
Total
2020
2019
$
$
42 $
526
1,974
666
1,209
202
4,619
(2,992)
1,627 $
25
341
1,788
639
1,106
330
4,229
(2,776)
1,453
For the year ended December 31, 2019, the Company recognized a $73 million gain in other operating expense
(income), net on the sale and leaseback of a property.
11.
GOODWILL AND INTANGIBLE ASSETS
The changes in goodwill for the years ended December 31, 2020 and 2019 were as follows:
Balance, beginning of year
Goodwill acquired during the year
Adjustments to goodwill
Balance, end of year
2020
2019
$
$
6,619 $
247
7
6,873 $
6,563
43
13
6,619
Principally all of the Company’s goodwill as of December 31, 2020 and 2019 was associated with its DIS business.
For the year ended December 31, 2020, goodwill acquired during the period was principally associated with the
acquisitions of Blueprint Genetics, Memorial Hermann and MACL (see Note 6). For the year ended December 31, 2020,
adjustments to goodwill related to foreign currency translation.
For the year ended December 31, 2019, goodwill acquired during the period was principally associated with the
acquisition of certain assets of the clinical laboratory services business of Boyce & Bynum and adjustments to goodwill
primarily related to the finalization of the purchase price allocation for Oxford (see Note 6).
Intangible assets as of December 31, 2020 and 2019 consisted of the following:
F-29
Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
Weighted
Average
Amortization
Period (in
years)
Amortizing intangible assets:
Customer-related
Non-compete
agreements
Technology
Other
Total
17
9
15
9
17
Intangible assets not subject to amortization:
Trade names
Other
235
1
2020
Accumulated
Amortization
Cost
Net
Cost
2019
Accumulated
Amortization
Net
$
1,479 $
(638) $
841 $
1,367 $
(556) $
811
3
141
108
1,731
(2)
(65)
(95)
(800)
—
—
1
76
13
931
235
1
3
104
110
1,584
235
1
(2)
(56)
(85)
(699)
—
—
1
48
25
885
235
1
Total intangible
assets
$
1,967 $
(800) $
1,167 $
1,820 $
(699) $
1,121
The estimated amortization expense related to amortizable intangible assets for each of the five succeeding fiscal years
and thereafter as of December 31, 2020 is as follows:
Year Ending December 31,
2021
2022
2023
2024
2025
Thereafter
Total
$
$
101
98
96
93
92
451
931
12.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses as of December 31, 2020 and 2019 consisted of the following:
Accrued wages and benefits (including incentive compensation)
Trade accounts payable
Accrued expenses
Overdrafts
Dividend payable
Income taxes payable
Accrued insurance
Accrued interest
Merger consideration payable
Total
F-30
2020
2019
502 $
446
356
153
76
43
31
26
—
1,633 $
287
263
223
88
71
27
30
45
7
1,041
$
$
Table of Contents
13.
DEBT
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
Long-term debt (including finance lease obligations) as of December 31, 2020 and 2019 consisted of the following:
4.75% Senior Notes due January 2020
2.50% Senior Notes due March 2020
4.70% Senior Notes due April 2021
4.25% Senior Notes due April 2024
3.50% Senior Notes due March 2025
3.45% Senior Notes due June 2026
4.20% Senior Notes due June 2029
2.95% Senior Notes due June 2030
2.80% Senior Notes due June 2031
6.95% Senior Notes due July 2037
5.75% Senior Notes due January 2040
4.70% Senior Notes due March 2045
Other
Debt issuance costs
Total long-term debt
Less: Current portion of long-term debt
Total long-term debt, net of current portion
Secured Receivables Credit Facility
2020
2019
$
— $
—
—
316
622
512
499
798
549
175
245
300
27
(28)
4,015
2
4,013 $
$
500
300
554
308
593
490
499
798
—
175
245
300
34
(26)
4,770
804
3,966
On October 22, 2020, the Company amended the agreement for its $600 million secured receivables credit facility (the
“Secured Receivables Credit Facility”), previously amended in October 2019, to extend the maturity dates for each underlying
commitment by one year, while maintaining the borrowing capacity under the facility at $600 million. Under the Secured
Receivables Credit Facility, the Company can borrow against a $250 million loan commitment maturing October 2021 and a
$250 million loan commitment maturing October 2022, and can issue up to $100 million of letters of credit (see Note 18)
through October 2022. Borrowings under the Secured Receivables Credit Facility are collateralized by certain domestic
receivables. As of December 31, 2020, interest on the borrowings under the Secured Receivables Credit Facility was based on
either commercial paper rates for highly-rated issuers or LIBOR, plus a spread of 0.825% to 0.95%. The Secured Receivables
Credit Facility is subject to customary affirmative and negative covenants and certain financial covenants with respect to the
receivables that comprise the borrowing base and secure the borrowings under the facility. As of both December 31, 2020 and
2019, there were no outstanding borrowings under the Secured Receivables Credit Facility.
F-31
Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
Senior Unsecured Revolving Credit Facility
The Company is party to a $750 million senior unsecured revolving credit facility (the “Credit Facility” or "Senior
Unsecured Revolving Credit Facility") which matures in March 2023. Under the Credit Facility, the Company can issue letters
of credit totaling $150 million (see Note 18). Issued letters of credit reduce the available borrowing capacity under the Credit
Facility. Interest on the Credit Facility is based on certain published rates plus an applicable margin based on changes in the
Company's public debt ratings and its leverage ratio. At the option of the Company, it may elect to lock into LIBOR-based
interest rates for periods up to six months. Interest on any outstanding amounts not covered under LIBOR-based interest rate
contracts is based on an alternate base rate, which is calculated by reference to the prime rate, the federal funds rate or an
adjusted LIBOR rate. As of both December 31, 2020 and 2019, the Company's borrowing rate for LIBOR-based loans under
the Credit Facility was LIBOR plus 1.125%. The Credit Facility contains various covenants, including the maintenance of a
financial leverage ratio, which could impact the Company's ability to, among other things, incur additional indebtedness. In
April 2020, the Company amended the Credit Facility to provide increased covenant flexibility. As amended, the leverage ratio
covenant (as defined in the Credit Facility) was increased as follows:
As of:
Applicable Covenant:
December 31, 2020
no more than 6.5 times EBITDA
March 31, 2021
June 30, 2021
no more than 6.25 times EBITDA
no more than 4.5 times EBITDA
Thereafter, the leverage ratio covenant reverts to no more than 3.5 times EBITDA. During the period that the
increased covenant applies, which period may be terminated early by the Company provided that the Company is in compliance
with the historical 3.5 times EBITDA leverage ratio, the amended Credit Facility contains certain additional limitations and
restrictions including, but not limited to, repurchases of the Company's common stock, the amount of funds that can be used on
business acquisitions, the incurrence of secured indebtedness and the payment of dividends.
As of both December 31, 2020 and 2019, there were no outstanding borrowings under the Senior Unsecured
Revolving Credit Facility.
As of December 31, 2020, the Company was in compliance with all covenants for its credit facilities. As of December
31, 2020, the Company had $1.3 billion of borrowing capacity available under the facilities, including $530 million available
under the Secured Receivables Credit Facility and $750 million available under the Senior Unsecured Revolving Credit
Facility.
F-32
Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
Senior Notes Offerings
In May 2020, the Company completed a senior notes offering, consisting of $550 million aggregate principal amount
of 2.80% senior notes due June 2031 (the “2031 Senior Notes”), which were issued at an original issue discount of $1 million.
The Company incurred $5 million of debt issuance costs associated with the 2031 Senior Notes, which are included as a
reduction to the carrying amount of long-term debt and which are being amortized over the term of the related debt.
During November 2020, the net proceeds from the 2031 Senior Notes, along with cash on hand, were used to redeem
in full the outstanding indebtedness under the Company's senior notes due April 2021.
In December 2019, the Company completed a senior notes offering, consisting of $800 million aggregate principal
amount of 2.95% senior notes due June 2030 (the "2030 Senior Notes"), which were issued at an original issue discount
of $2 million. The Company incurred $7 million of debt issuance costs associated with the 2030 Senior Notes, which are
included as a reduction to the carrying amount of long-term debt and which are being amortized over the term of the related
debt.
During January 2020, the net proceeds from the 2030 Senior Notes, along with cash on hand, were used to redeem in
full the outstanding indebtedness under the Company's senior notes due January 2020 and senior notes due March 2020.
In March 2019, the Company completed a senior notes offering, consisting of $500 million aggregate principal amount
of 4.20% senior notes due June 2029 (the "2029 Senior Notes"), which were issued at an original issue discount of $1 million.
The Company incurred $5 million of debt issuance costs associated with the 2029 Senior Notes, which are included as a
reduction to the carrying amount of long-term debt and which are being amortized over the term of the related debt.
The net proceeds from the 2029 Senior Notes were used to repay in full the outstanding indebtedness under the
Company's senior notes due April 2019, to repay outstanding indebtedness under the Secured Receivables Credit Facility and
for general corporate purposes.
For the year ended December 31, 2020, the Company recorded a loss on retirement of debt, principally comprised of
premiums paid, of $9 million in other income (expense), net.
All of the senior notes are unsecured obligations of the Company and rank equally with the Company's other senior
unsecured obligations. None of the Company's senior notes have a sinking fund requirement.
The Company may redeem its outstanding senior notes prior to scheduled maturity, as a whole or in part, at a
redemption price equal to the present value of the remaining scheduled payments of principal and interest, except for certain
notes for which the Company also has an option to redeem such instruments at par value on or after dates specified in the
indentures governing the notes ("the par value redemption option"). For notes with the par value redemption option, if such
notes are redeemed prior to the specified dates, the redemption price calculations exclude any interest that would have been due
after such dates.
F-33
Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
Maturities of Long-Term Debt
As of December 31, 2020, long-term debt matures as follows:
Year Ending December 31,
2021
2022
2023
2024
2025
Thereafter
$
Total maturities of long-term debt
Unamortized discount
Debt issuance costs
Fair value basis adjustments attributable to hedged debt
Total long-term debt
Less: Current portion of long-term debt
Total long-term debt, net of current portion
$
2
1
1
302
602
3,095
4,003
(11)
(28)
51
4,015
2
4,013
F-34
Table of Contents
14.
LEASES
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
The Company determines if an arrangement is or contains a lease at contract inception. The Company leases office
space, patient service centers, clinical laboratories, warehouses, logistic hubs and equipment primarily through operating leases,
with a limited number of finance leases. A right-of-use asset, representing the underlying asset during the lease term, and a
lease liability, representing the payment obligation arising from the lease, are recognized on the balance sheet at lease
commencement based on the present value of the payment obligation. For operating leases, expense is recognized on a straight-
line basis over the lease term. For finance leases, interest expense on the lease liability is recognized using the effective interest
method and amortization of the right-of-use asset is recognized on a straight-line basis over the shorter of the estimated useful
life of the asset or the lease term. Short-term leases with an initial term of 12 months or less are not recorded on the balance
sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. For the year ended
December 31, 2020 and 2019, lease expense associated with short-term leases was not material.
The Company primarily uses its collateralized incremental borrowing rate in determining the present value of lease
payments as the Company's leases generally do not provide an implicit rate. Such incremental borrowing rates, which take into
account interest rates offered to companies that have similar credit ratings to the Company, are determined using a portfolio
approach which groups the Company’s leases based on tenor.
The Company has lease agreements with (i) right-of-use asset payments and (ii) non-lease components (i.e., payments
related to maintenance fees, utilities, etc.) which have been combined and accounted for as a single lease component.
The Company's leases have remaining terms of less than 1 year to 16 years, some of which include options to extend
the leases for up to 15 years. The Company's lease terms may include renewal options that are reasonably certain to be
exercised and termination options that are reasonably certain not to be exercised. Certain leases also include options to purchase
the leased property.
Certain of the Company's lease agreements include rental payments adjusted periodically for inflation or a market rate
which are included in the lease liabilities.
The Company's assets and liabilities for its lease agreements as of December 31, 2020 and 2019 were as follows:
Leases
Assets
Operating
Finance
Total lease assets
Liabilities
Current:
Operating
Finance
Non-current:
Operating
Finance
Balance Sheet Classification
2020
2019
Operating lease right-of-use assets
Property, plant and equipment, net (a)
$
$
604 $
22
626 $
Current portion of long-term operating lease liabilities
$
141 $
Current portion of long-term debt
Long-term operating lease liabilities
Long-term debt
2
499
25
Total lease liabilities
$
667 $
518
35
553
145
3
413
30
591
(a) Finance lease assets as of December 31, 2020 and 2019 were recorded net of accumulated amortization of $14 million and
$24 million, respectively.
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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
Components of lease cost for the years ended December 31, 2020 and 2019 were as follows:
Lease cost
Operating lease cost (a)
Finance lease cost:
Amortization of leased assets
Interest on lease liabilities
Net lease cost
2020
2019
$
$
300 $
6
3
309 $
294
7
3
304
(a) Includes short-term leases and variable lease costs (primarily usage-based maintenance fees and utilities related to real estate
leases and certain equipment-related and vehicle-related costs) of $120 million for each of the years ended December 31, 2020
and 2019.
Rental expense for real estate, laboratory equipment and vehicles under operating leases amounted to $220 million for
the year ended December 31, 2018.
The maturity of the Company's lease liabilities as of December 31, 2020 is as follows:
Maturity of lease liabilities
2021
2022
2023
2024
2025
Thereafter
Total lease payments
Less: Interest
Operating
leases
Finance
leases
Total
$
160 $
4 $
140
122
87
57
153
719
79
3
3
3
3
28
44
17
Present value of lease liabilities
$
640 $
27 $
Lease term and discount rate as of December 31, 2020 and 2019 were as follows:
164
143
125
90
60
181
763
96
667
Lease term and discount rate
Weighted-average remaining lease term (years):
Operating leases
Finance leases
Weighted-average discount rate:
Operating leases
Finance leases
2020
2019
6
13
3.2 %
8.1 %
5
12
3.4 %
8.7 %
The Company's discount rates for its operating leases were primarily determined using the Company's incremental
borrowing rate. The Company's weighted-average discount rate for its finance leases principally reflects the implicit interest
rate on a lease obligation assumed in a business combination.
See Note 9 for cash flow information on cash paid for amounts included in the measurement of lease liabilities, leased
assets obtained in exchange for new operating lease liabilities, and leased assets obtained in exchange for new finance lease
liabilities for the years ended December 31, 2020 and 2019.
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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
15.
FINANCIAL INSTRUMENTS
Interest Rate Derivatives – Cash Flow Hedges
From time to time, the Company has entered into various interest rate lock agreements and forward-starting interest
rate swap agreements to hedge part of the Company's interest rate exposure associated with the variability in future cash flows
attributable to changes in interest rates.
During March 2020, the Company entered into a forward-starting interest rate swap agreement with a financial
institution for a total notional amount of $25 million. Additionally, during May 2020, the Company entered into interest rate
lock agreements with several financial institutions for a total notional amount of $275 million. The forward-starting interest
rate swap agreement and the interest rate lock agreements were entered into in order to hedge a portion of the Company's
interest rate exposure associated with variability in future cash flows attributable to changes in interest rates over a ten-year
period related to an anticipated issuance of debt and were accounted for as cash flow hedges. In connection with the issuance of
the 2031 Senior Notes (see Note 13), these agreements were settled and the Company received net proceeds of $1 million. The
net gain is deferred in stockholders' equity, net of taxes, as a component of accumulated other comprehensive loss, and is being
amortized as an adjustment to interest expense, net over a ten-year period.
The total net loss, net of taxes, recognized in accumulated other comprehensive loss, related to the Company's cash
flow hedges was $1 million and $4 million as of December 31, 2020 and 2019, respectively. The net amount of deferred losses
on cash flow hedges that is expected to be reclassified from accumulated other comprehensive loss into interest expense, net
within the next twelve months is $1 million.
Interest Rate Derivatives – Fair Value Hedges
As of December 31, 2019, the Company had various fixed-to-variable interest rate swap agreements outstanding with
an aggregate notional amount of $1.2 billion, which were entered into in order to convert a portion of the Company's long-term
debt into variable interest rate debt. In April 2020, the Company terminated these existing fixed-to-variable interest rate swap
agreements and received proceeds of $40 million. Such amount was reflected as a basis adjustment to the hedged debt
instruments and is being amortized as a reduction of interest expense, net over their remaining terms.
As of December 31, 2020 and 2019, the following amounts were recorded on the consolidated balance sheets related to
cumulative basis adjustments for fair value hedges included in the carrying amount of long-term debt:
Balance Sheet Classification
Long-term debt
Carrying
Amount of
Hedged Long-
Term Debt
December 31,
2020
Hedge
Accounting
Basis
Adjustment (a)
December 31,
2020
Carrying
Amount of
Hedged Long-
Term Debt
December 31,
2019
Hedge
Accounting
Basis
Adjustment (a)
December 31,
2019
$
— $
51 $
1,186 $
(3)
(a) As of December 31, 2020, the entire balance is associated with remaining unamortized hedging adjustments on discounted
relationships. As of December 31, 2019, the balance includes $25 million of remaining unamortized hedging adjustments on
discontinued relationships.
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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
The following table presents the effect of fair value hedge accounting on the consolidated statements of operations for
the years ended December 31, 2020, 2019 and 2018, respectively:
2020
Other income
(expense), net
2019
Other income
(expense), net
2018
Other income
(expense), net
Total for line item in which the effects of fair value hedges are recorded
$
76 $
20 $
Gain (loss) on fair value hedging relationships:
Hedged items (Long-term debt)
Derivatives designated as hedging instruments
$
$
(68) $
68 $
(65) $
65 $
(8)
4
(4)
A summary of the fair values of derivative instruments in the consolidated balance sheet was as follows:
Derivatives Designated as Hedging Instruments
Fixed-to-variable interest rate swap agreements
December 31, 2019
Balance Sheet
Classification
Fair Value
Other liabilities
$
28
16.
STOCKHOLDERS’ EQUITY AND REDEEMABLE NONCONTROLLING INTEREST
Stockholders' Equity
Series Preferred Stock
Quest Diagnostics is authorized to issue up to 10 million shares of Series Preferred Stock, par value $1.00 per share.
The Company's Board of Directors has the authority to issue such shares without stockholder approval and to determine the
designations, preferences, rights and restrictions of such shares. No shares are currently outstanding.
Common Stock
Under the Company's Restated Certificate of Incorporation the number of authorized shares of common stock, par
value $0.01 per share, is 600 million shares.
Changes in Accumulated Other Comprehensive Loss by Component
Comprehensive income (loss) includes:
•
•
•
Foreign currency translation adjustments;
Net changes in available-for-sale debt securities, which represent unrealized holding gains (losses), net of tax,
on available-for-sale debt securities; and
Net deferred gains (losses) on cash flow hedges, which represent deferred gains (losses), net of tax, on
interest rate-related derivative financial instruments designated as cash flow hedges, net of amounts
reclassified to interest expense (see Note 15).
For the years ended December 31, 2020, 2019, and 2018, the tax effects related to the deferred gains (losses) on cash
flow hedges and net changes in available-for-sale debt securities were not material. Foreign currency translation adjustments
related to indefinite investments in non-U.S. subsidiaries are not adjusted for income taxes.
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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
The changes in accumulated other comprehensive loss by component for 2020, 2019 and 2018 were as follows:
Foreign
Currency
Translation
Adjustments
Net Changes
in Available-
for-Sale Debt
Securities
Net Deferred
Losses on
Cash Flow
Hedges, net
of tax
Accumulated
Other
Comprehensive
Loss
Other
$
(38) $
— $
(9) $
(1) $
Balance, December 31, 2017
Other comprehensive loss before
reclassifications
Amounts reclassified from accumulated
other comprehensive loss
Net current period other comprehensive
(loss) income
Reclassification of stranded tax effects
resulting from enactment of the Tax
Cuts and Jobs Act
Balance, December 31, 2018
Other comprehensive income before
reclassifications
Amounts reclassified from accumulated
other comprehensive loss
Net current period other comprehensive
income
Balance, December 31, 2019
Other comprehensive income before
reclassifications
Amounts reclassified from accumulated
other comprehensive loss
Net current period other comprehensive
income
Balance, December 31, 2020
$
(15)
4
(11)
—
(49)
7
—
7
(42)
12
3
15
(27) $
—
—
—
—
—
8
—
8
8
—
—
—
8 $
—
2
2
(2)
(9)
3
2
5
(4)
1
2
3
(1) $
—
—
—
—
(1)
—
—
—
(1)
—
—
—
(1) $
(48)
(15)
6
(9)
(2)
(59)
18
2
20
(39)
13
5
18
(21)
For the years ended December 31, 2020, 2019 and 2018, the gross deferred losses on cash flow hedges were
reclassified from accumulated other comprehensive loss to interest expense, net.
For the years ended December 31, 2020 and 2018, foreign currency translation adjustment amounts were reclassified
from accumulated other comprehensive loss to other operating expense (income), net as a result of the sale of foreign
subsidiaries.
Dividend Program
During each of the four quarters of 2020, the Company's Board of Directors declared a quarterly cash dividend of
$0.56 per common share. During each of the four quarters of 2019, the Company's Board of Directors declared a quarterly cash
dividend of $0.53 per common share. During each of the first three quarters of 2018, the Company's Board of Directors
declared a quarterly cash dividend of $0.50 per common share. During the fourth quarter of 2018, the Company's Board of
Directors declared a quarterly cash dividend of $0.53 per common share. On February 4, 2021, the Company announced that
its Board of Directors authorized a 10.7% increase in its quarterly cash dividend from $0.56 to $0.62 per share, or $2.48 per
share annually, commencing with the dividend payable in April 2021.
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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
Share Repurchase Program
As of December 31, 2020, $0.9 billion remained available under the Company’s share repurchase authorization. In
February 2021, the Company's Board of Directors authorized the Company to repurchase an additional $1 billion of the
Company's common stock. The share repurchase authorization has no set expiration or termination date.
Share Repurchases
For the year ended December 31, 2020, the Company repurchased 2.7 million shares of its common stock for $325
million.
million.
For the year ended December 31, 2019, the Company repurchased 3.5 million shares of its common stock for $350
For the year ended December 31, 2018, the Company repurchased 3.4 million shares of its common stock for $325
million, which included an accrual of $3 million recorded in accounts payable and accrued expenses in the consolidated balance
sheet for share repurchases not settled until after December 31, 2018.
Shares Reissued from Treasury Stock
For the years ended December 31, 2020, 2019 and 2018 the Company reissued 3 million shares, 2 million shares and 3
million shares, respectively, from treasury stock for shares issued under the Employee Stock Purchase Plan ("ESPP") and stock
option plans.
Redeemable Noncontrolling Interest
In connection with the sale of an 18.9% noncontrolling interest in a subsidiary to UMass on July 1, 2015, the Company
granted UMass the right to require the Company to purchase all of its interest in the subsidiary at fair value commencing July 1,
2020. The subsidiary performs diagnostic information services in a defined territory within the state of Massachusetts. Since
the redemption of the noncontrolling interest is outside of the Company's control, it has been presented outside of stockholders'
equity at the greater of its carrying amount or its fair value. The Company records changes in the fair value of the
noncontrolling interest immediately as they occur. As of December 31, 2020 and 2019, the redeemable noncontrolling interest
was $82 million and $76 million, respectively, and was presented at its fair value.
17.
STOCK OWNERSHIP AND COMPENSATION PLANS
Employee and Non-employee Directors Stock Ownership Programs
The ELTIP provides for three types of awards: (a) stock options, (b) stock appreciation rights and (c) stock awards.
The ELTIP provides for the grant to eligible employees of either non-qualified or incentive stock options, or both, to purchase
shares of Company common stock at an exercise price no less than the fair market value of the Company's common stock on
the date of grant. Grants of stock appreciation rights allow eligible employees to receive a payment based on the appreciation
of Company common stock in cash, shares of Company common stock or a combination thereof. The stock appreciation rights
are granted at an exercise price no less than the fair market value of the Company's common stock on the date of grant. Stock
options and stock appreciation rights granted under the ELTIP expire on the date designated by the Board of Directors but in no
event more than ten years from date of grant. No stock appreciation rights have been granted under the ELTIP. Under the
ELTIP, awards are subject to forfeiture if employment terminates prior to the end of the vesting period prescribed by the Board
of Directors. For all award types, the vesting period is generally over three years from the date of grant. For performance share
units, the actual amount of shares earned is based on the achievement of the performance goals specified in the awards. The
performance goals for awards granted for 2018 and 2019 were based on the financial performance of the Company. The
performance goals for awards granted in 2020 were based on the financial performance of the Company as well as relative
TSR. The maximum number of shares of Company common stock in respect of which awards may be granted under the ELTIP
is approximately 79 million shares.
The DLTIP provides for the grant to non-employee directors of non-qualified stock options to purchase shares of
Company common stock at an exercise price no less than the fair market value of the Company's common stock on the date of
grant. The DLTIP also permits awards of restricted stock and restricted stock units to non-employee directors. Stock options
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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
granted under the DLTIP expire on the date designated by the Board of Directors but in no event more than ten years from date
of grant. For all award types, the vesting period is generally over three years from the date of grant, regardless of whether the
award recipient remains a director of the Company. The maximum number of shares that may be issued under the DLTIP is 2.4
million shares. For the years ended December 31, 2020, 2019 and 2018, grants under the DLTIP totaled 14 thousand shares, 14
thousand shares and 15 thousand shares, respectively.
The Company's practice has been to issue shares related to its stock-based compensation program from shares of its
common stock held in treasury or by issuing new shares of its common stock. See Note 16 for further information regarding
the Company's share repurchase program.
The fair value of each stock option award granted was estimated on the date of grant using a Black-Scholes option-
valuation model. The expected volatility under the Black-Scholes option-valuation model was based on historical volatilities of
the Company's common stock. The dividend yield was based on the approved annual dividend rate in effect and current market
price of the underlying common stock at the time of grant. The risk-free interest rate was based on the U.S. Treasury yield
curve in effect at the time of grant for bonds with maturities consistent with the expected holding period of the related award.
The expected holding period was estimated using the historical stock option exercise behavior of employees.
The weighted average assumptions used in valuing stock options granted in the periods presented were:
Fair value at grant date
Expected volatility
Dividend yield
Risk-free interest rate
Expected holding period, in years
2020
$17.25
20.3%
2.0%
1.5%
5.0
2019
$14.30
20.4%
2.4%
2.5%
5.2
2018
$18.14
19.1%
1.9%
2.8%
5.3
The following summarizes the activity relative to stock option awards for 2020:
Options outstanding, beginning of year
Options granted
Options exercised
Options outstanding, end of year
Exercisable, end of year
Vested and expected to vest, end of year
Weighted
Average
Remaining
Contractual
Term
(in years)
Weighted
Average
Exercise
Price
Aggregate
Intrinsic
Value
Shares
8.0 $
1.1
(2.6)
6.5 $
81.67
112.23
72.57
90.32
3.9 $
6.4 $
83.72
90.14
6.7
5.6
6.7
$
$
$
187
138
185
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the
Company's closing common stock price on the last trading day of 2020 and the exercise price, multiplied by the number of in-
the-money options) that would have been received by the option holders had all option holders exercised their options on
December 31, 2020. This amount changes based on the fair market value of the Company's common stock. Total intrinsic
value of options exercised in 2020, 2019 and 2018 was $113 million, $62 million and $67 million, respectively.
As of December 31, 2020, there was $9 million of unrecognized stock-based compensation cost related to nonvested
stock options which is expected to be recognized over a weighted average period of 1.6 years.
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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
The fair value of restricted stock awards and restricted stock units is the average market price of the Company's
common stock at the date of grant. For performance share units with a goal based on the financial performance of the
Company, the fair value is based on the average market price of the Company's common stock at the date of grant, adjusted for
the present value of dividends expected to be paid on the Company's common stock during the vesting period. For performance
share units with a market-based relative TSR goal, the fair value is estimated on the date of grant using a Monte Carlo valuation
model. The expected volatility under the Monte Carlo valuation model is based on the historical volatility of the common stock
of the Company and the common stock of the companies in the peer index. The dividend yield is based on the approved annual
dividend rate in effect and current market price of the underlying common stock at the time of grant. The risk-free interest rate
is based on the U.S. Treasury yield curve in effect at the time of grant for bonds with maturities consistent with the performance
period of the related award.
The weighted average assumptions used in valuing performance share units in 2020 with a market-based relative TSR
goal were:
Fair value at grant date
Expected volatility
Dividend yield
Risk-free interest rate
$144.03
20.1%
2.0%
1.4%
The following summarizes the activity relative to stock awards, including restricted stock units and performance share
units, for 2020, 2019 and 2018:
2020
2019
2018
Weighted
Average
Grant Date
Fair Value
Shares
Weighted
Average
Grant Date
Fair Value
Shares
Weighted
Average
Grant Date
Fair Value
Shares
Shares outstanding, beginning of year
Shares granted
Shares vested
Shares forfeited and canceled
Shares outstanding, end of year
1.0 $
0.4
(0.4)
—
1.0 $
93.30
112.43
96.36
—
100.12
1.1 $
0.4
(0.4)
(0.1)
1.0 $
88.13
86.28
75.58
94.09
93.30
1.3
0.4
(0.5)
(0.1)
1.1
$
$
77.90
103.51
74.00
90.16
88.13
As of December 31, 2020, there was $29 million of unrecognized stock-based compensation cost related to nonvested
stock awards, which is expected to be recognized over a weighted average period of 1.5 years. Total fair value of shares vested
was $37 million, $40 million and $54 million for the years ended December 31, 2020, 2019 and 2018, respectively. For
performance share units with a goal based on financial performance of the Company, the amount of unrecognized stock-based
compensation cost is subject to change based on changes, if any, to management's best estimates of the achievement of the
performance goals specified in such awards and the resulting number of shares that will be earned at the end of the performance
periods.
For the years ended December 31, 2020, 2019 and 2018, stock-based compensation expense totaled $97 million, $56
million and $61 million, respectively. Income tax benefits recognized in the consolidated statements of operations related to
stock-based compensation expense totaled $39 million, $27 million and $33 million for the years ended December 31, 2020,
2019 and 2018, respectively, which includes excess tax benefits associated with stock-based compensation arrangements of $23
million, $13 million and $18 million for the years ended December 31, 2020, 2019 and 2018, respectively.
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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
Employee Stock Purchase Plan
Under the Company's ESPP, substantially all employees can elect to have up to 10% of their annual wages withheld to
purchase Quest Diagnostics common stock. The purchase price of the stock is 95% of the market price of the Company's
common stock on the last business day of each calendar month. Under the ESPP, the maximum number of shares of Quest
Diagnostics common stock which may be purchased by eligible employees is 9 million. Approximately 225 thousand shares,
269 thousand shares and 326 thousand shares of common stock were purchased by eligible employees in 2020, 2019 and 2018,
respectively.
Defined Contribution Plans
The Company maintains qualified defined contribution plans covering substantially all of its employees. The
maximum Company matching contribution is 5% of eligible employee compensation. During 2020, the Company temporarily
suspended matching contributions for certain qualified defined contribution plans; matching contributions were reinstated in the
third quarter of 2020. The Company's expense for contributions to its defined contribution plans aggregated $64 million, $84
million and $78 million for 2020, 2019 and 2018, respectively.
Supplemental Deferred Compensation Plans
The Company has a supplemental deferred compensation plan that is an unfunded, non-qualified plan that provides for
certain management and highly compensated employees to defer up to 50% of their salary in excess of their defined
contribution plan limits and for certain eligible employees, up to 95% of their variable incentive compensation. The maximum
Company matching contribution is 5% of eligible employee compensation. During 2020, the Company temporarily suspended
matching contributions; matching contributions were reinstated in the third quarter of 2020. The compensation deferred under
this plan, together with Company matching amounts, are credited with earnings or losses measured by the mirrored rate of
return on investments elected by plan participants. Each plan participant is fully vested in all deferred compensation, Company
match and earnings credited to their account. The amounts accrued under the Company's deferred compensation plans were
$67 million and $59 million as of December 31, 2020 and 2019, respectively. Although the Company is currently contributing
all participant deferrals and matching amounts to a trust, the funds in this trust, totaling $67 million and $59 million as of
December 31, 2020 and 2019, respectively, are general assets of the Company and are subject to any claims of the Company's
creditors.
The Company also offers certain employees the opportunity to participate in a non-qualified deferred compensation
program. The Company matches employee contributions equal to 25%, up to a maximum of $5 thousand per plan year. A
participant's deferrals, together with Company matching credits, are “invested” at the direction of the employee in a
hypothetical portfolio of investments which are tracked by an administrator. Each participant is fully vested in their deferred
compensation and vests in Company matching contributions over a period of four years at 25% per year. This plan was
amended effective January 1, 2018 so that future deferrals under the plan may only be made by participants who made deferrals
under the plan in 2017. The amounts accrued under this plan were $59 million and $51 million as of December 31, 2020 and
2019, respectively. The Company purchases life insurance policies, with the Company named as beneficiary of the policies, for
the purpose of funding the program's liability. The cash surrender value of such life insurance policies was $50 million and $43
million as of December 31, 2020 and 2019, respectively.
For each of the years ended December 31, 2020, 2019 and 2018, the Company's expense for matching contributions
to these plans was not material.
18.
COMMITMENTS AND CONTINGENCIES
Letters of Credit and Contractual Obligations
The Company can issue letters of credit under its Secured Receivables Credit Facility and Senior Unsecured Revolving
Credit Facility (see Note 13). In support of its risk management program, to ensure the Company’s performance or payment to
third parties, $70 million in letters of credit under the Secured Receivables Credit Facility were outstanding as of December 31,
2020. The letters of credit primarily represent collateral for current and future automobile liability and workers’ compensation
loss payments.
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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
The Company has certain noncancelable commitments, primarily under take-or-pay arrangements, to purchase
products or services from various suppliers, mainly for consulting and other service agreements, and standing orders to
purchase reagents and other laboratory supplies. As of December 31, 2020, the approximate total future purchase
commitments are $334 million, of which $106 million are expected to be incurred in 2021, $103 million are expected to be
incurred in 2022 through 2023 and the balance thereafter.
Billing and Collection Agreement
In September 2016, the Company entered into a ten-year agreement with a third party to outsource its billing and
related operations for the majority of the Company’s revenues. Services under the agreement commenced during the fourth
quarter of 2016. The agreement includes an annual fee, which is subject to adjustment based on certain changes in the
Company's requisition volume and the achievement of various performance metrics.
Contingent Lease Obligations
The Company remains subject to contingent obligations under certain real estate leases, including real estate leases
that were entered into by certain predecessor companies of a subsidiary prior to the Company's acquisition of the subsidiary.
While over the course of many years, the title to certain properties and interest in the subject leases have been transferred to
third parties and the subject leases have been amended several times by such third parties, the lessors have not formally
released the subsidiary predecessor companies from their original obligations under the leases and therefore remain
contingently liable in the event of default. The remaining terms of the lease obligations and the Company's corresponding
indemnifications range up to 27 years. The lease payments under certain leases are subject to market value adjustments and
contingent rental payments and therefore, the total contingent obligations under the leases cannot be precisely determined
but are likely to total several hundred million dollars. A claim against the Company would be made only upon the current
lessee's default and, in certain cases, after a series of claims and corresponding defaults by third parties that precede the
Company in the order of liability. The Company also has certain indemnification rights from other parties to recover losses
in the event of default on the lease obligations. The Company believes that the likelihood of its performance under these
contingent obligations is remote and no liability has been recorded for any potential payments under the contingent lease
obligations.
Certain Legal Matters
The Company may incur losses associated with these proceedings and investigations, but it is not possible to estimate
the amount of loss or range of loss, if any, that might result from adverse judgments, settlements, fines, penalties, or other
resolution of these proceedings and investigations based on the stage of these proceedings and investigations, the absence of
specific allegations as to alleged damages, the uncertainty as to the certification of a class or classes and the size of any certified
class, if applicable, and/or the lack of resolution of significant factual and legal issues. The Company has insurance coverage
rights in place (limited in amount; subject to deductible) for certain potential costs and liabilities related to these proceedings
and investigations.
401(k) Plan Lawsuit
In 2020, two putative class action lawsuits were filed in the U.S. District Court for the District of New Jersey against
the Company and other defendants with respect to the Company’s 401(k) plan. The complaint alleges, among other things, that
the fiduciaries of the 401(k) plan breached their duties by failing to disclose the expenses and risks of plan investment options,
allowing unreasonable administration expenses to be charged to plan participants, and selecting and retaining high cost and
poor performing investments. In October 2020, the court consolidated the two lawsuits under the caption In re: Quest
Diagnostics ERISA Litigation and plaintiffs filed a consolidated amended complaint. The Company plans to vigorously defend
this matter and has filed a motion to dismiss the complaint.
AMCA Data Security Incident
F-44
Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
On June 3, 2019, the Company reported that Retrieval-Masters Creditors Bureau, Inc./American Medical Collection
Agency (“AMCA”) had informed the Company and Optum360 LLC that an unauthorized user had access to AMCA’s system
between August 1, 2018 and March 30, 2019 (the “AMCA Data Security Incident”). Optum360 provides revenue management
services to the Company, and AMCA provided debt collection services to Optum360. AMCA first informed the Company of
the AMCA Data Security Incident on May 14, 2019. AMCA’s affected system included financial information (e.g., credit card
numbers and bank account information), medical information and other personal information (e.g., social security numbers).
Test results were not included. Neither Optum360’s nor the Company’s systems or databases were involved in the incident.
AMCA also informed the Company that information pertaining to other laboratories’ customers was also affected. Following
announcement of the AMCA Data Security Incident, AMCA sought protection under the U.S. bankruptcy laws. The
bankruptcy proceeding has been dismissed.
Numerous putative class action lawsuits were filed against the Company related to the AMCA Data Security Incident.
The U.S. Judicial Panel on Multidistrict Litigation transferred the cases still pending to, and consolidated them for pre-trial
proceedings in, the U.S. District Court for New Jersey. In November 2019, the plaintiffs in the multidistrict proceeding filed a
consolidated putative class action complaint against the Company and Optum360 that named additional individuals as plaintiffs
and that asserted a variety of common law and statutory claims in connection with the AMCA Data Security Incident. In
January 2020, the Company moved to dismiss the consolidated complaint; the motion to dismiss is pending.
In addition, certain federal and state governmental authorities are investigating, or otherwise seeking information and/
or documents from the Company related to the AMCA Data Security Incident and related matters, including the Office for Civil
Rights of the U.S. Department of Health and Human Services, Attorneys General offices from numerous states and the District
of Columbia, and certain U.S. senators.
Other Legal Matters
In the normal course of business, the Company has been named, from time to time, as a defendant in various legal
actions, including arbitrations, class actions and other litigation, arising in connection with the Company's activities as a
provider of diagnostic testing, information and services. These actions could involve claims for substantial compensatory and/
or punitive damages or claims for indeterminate amounts of damages, and could have an adverse impact on the Company's
client base and reputation.
The Company is also involved, from time to time, in other reviews, investigations and proceedings by governmental
agencies regarding the Company's business which may result in adverse judgments, settlements, fines, penalties, injunctions or
other relief.
The federal or state governments may bring claims based on the Company's current practices, which it believes are
lawful. In addition, certain federal and state statutes, including the qui tam provisions of the federal False Claims Act, allow
private individuals to bring lawsuits against healthcare companies on behalf of government or private payers. The Company is
aware of lawsuits, and from time to time has received subpoenas, related to billing practices based on the qui tam provisions of
the Civil False Claims Act or other federal and state statutes, regulations or other laws. The Company understands that there
may be other pending qui tam claims brought by former employees or other "whistle blowers" as to which the Company cannot
determine the extent of any potential liability.
Management cannot predict the outcome of such matters. Although management does not anticipate that the ultimate
outcome of such matters will have a material adverse effect on the Company's financial condition, given the high degree of
judgment involved in establishing loss estimates related to these types of matters, the outcome of such matters may be material
to the Company's consolidated results of operations or cash flows in the period in which the impact of such matters is
determined or paid.
F-45
Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
These matters are in different stages. Some of these matters are in their early stages. Matters may involve responding
to and cooperating with various government investigations and related subpoenas. As of December 31, 2020, the Company
does not believe that material losses related to legal matters are probable.
Reserves for legal matters totaled $1 million as of both December 31, 2020 and December 31, 2019.
Reserves for General and Professional Liability Claims
As a general matter, providers of clinical testing services may be subject to lawsuits alleging negligence or other
similar legal claims. These suits could involve claims for substantial damages. Any professional liability litigation could also
have an adverse impact on the Company's client base and reputation. The Company maintains various liability insurance
coverages for, among other things, claims that could result from providing, or failing to provide, clinical testing services,
including inaccurate testing results, and other exposures. The Company's insurance coverage limits its maximum exposure on
individual claims; however, the Company is essentially self-insured for a significant portion of these claims. Reserves for such
matters, including those associated with both asserted and incurred but not reported claims, are established on an undiscounted
basis by considering actuarially determined losses based upon the Company's historical and projected loss experience. Such
reserves totaled $138 million and $132 million as of December 31, 2020 and December 31, 2019, respectively. Management
believes that established reserves and present insurance coverage are sufficient to cover currently estimated exposures.
19.
BUSINESS SEGMENT INFORMATION
The Company's DIS business is the only reportable segment based on the manner in which the Chief Executive
Officer, who is the Company's chief operating decision maker ("CODM"), assesses performance and allocates resources across
the organization. The DIS business provides diagnostic information services to a broad range of customers, including patients,
clinicians, hospitals, IDNs, health plans, employers, ACOs, and DCEs. The Company is the world's leading provider of
diagnostic information services, which includes providing information and insights based on the industry-leading menu of
routine, non-routine and advanced clinical testing and anatomic pathology testing, and other diagnostic information services.
The DIS business accounted for greater than 95% of net revenues in 2020, 2019 and 2018.
All other operating segments include the Company's DS businesses, which consist of its risk assessment services and
healthcare information technology businesses. The Company's DS businesses are the leading provider of risk assessment
services for the life insurance industry and offer healthcare organizations and clinicians robust information technology
solutions.
As of December 31, 2020, substantially all of the Company’s services were provided within the United States, and
substantially all of the Company’s assets were located within the United States.
F-46
Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
The following table is a summary of segment information for the years ended December 31, 2020, 2019 and 2018.
Segment asset information is not presented since it is not used by the CODM at the operating segment level. Operating
earnings (loss) of each segment represents net revenues less directly identifiable expenses to arrive at operating income (loss)
for the segment. General corporate activities included in the table below are comprised of general management and
administrative corporate expenses, amortization and impairment of intangibles assets and other operating income and expenses,
net of certain general corporate activity costs that are allocated to the DIS and DS businesses. The accounting policies of the
segments are the same as those of the Company as set forth in Note 2.
Net revenues:
DIS business
All other operating segments
Total net revenues
Operating earnings (loss):
DIS business
All other operating segments
General corporate activities
Total operating income
Non-operating expenses, net
Income from continuing operations before income taxes and equity in
earnings of equity method investees
Income tax expense
Equity in earnings of equity method investees, net of taxes
Income from continuing operations
Income from discontinued operations, net of taxes
Net income
Less: Net income attributable to noncontrolling interests
2020
2019
2018
$
$
9,139 $
7,405 $
298
321
9,437 $
7,726 $
7,204
327
7,531
$
2,201 $
1,298 $
1,235
39
(269)
1,971
(87)
1,884
(460)
75
1,499
—
1,499
68
42
(109)
1,231
(155)
1,076
(247)
57
886
20
906
48
47
(181)
1,101
(175)
926
(182)
44
788
—
788
52
736
Net income attributable to Quest Diagnostics
$
1,431 $
858 $
Depreciation and amortization expense for the years ended December 31, 2020, 2019 and 2018 were as follows:
DIS business
All other operating segments
General corporate
Total depreciation and amortization
2020
2019
2018
$
$
249 $
8
104
361 $
226 $
6
97
329 $
213
6
90
309
F-47
Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
Capital expenditures for the years ended December 31, 2020, 2019 and 2018 were as follows:
DIS business
All other operating segments
General corporate
Total capital expenditures
2020
2019
2018
$
$
394 $
15
9
418 $
373 $
20
7
400 $
330
16
37
383
Net revenues by major service for the years ended December 31, 2020, 2019 and 2018 were as follows:
Routine clinical testing services
COVID-19 testing services
Gene-based and esoteric (including advanced diagnostics) testing services
Anatomic pathology testing services
All other
Total net revenues
20.
RELATED PARTIES
2020
2019
2018
$
$
3,836 $
2,723
2,098
482
298
9,437 $
4,206 $
—
2,620
579
321
7,726 $
4,217
—
2,409
578
327
7,531
The Company's equity method investees primarily consist of its clinical trials central laboratory services joint venture
and its diagnostic information services joint ventures, which are accounted for under the equity method of accounting. During
the years ended December 31, 2020, 2019 and 2018, the Company recognized net revenues of $34 million, $35 million, and
$36 million, respectively, associated with diagnostic information services provided to its equity method investees. As of
December 31, 2020 and 2019, there was $3 million and $4 million, respectively, of accounts receivable from equity method
investees related to such services. During the years ended December 31, 2020 and 2019, the Company recognized net revenues
of $3 million and $8 million, respectively, associated with diagnostic information services provided to a noncontrolling interest
partner in a joint venture. As of December 31, 2019, there was $4 million of receivables from the noncontrolling interest
partner included in accounts receivable and other assets in the consolidated balance sheet related to such services.
During the years ended December 31, 2020, 2019 and 2018, the Company recognized income of $16 million, $15
million and $15 million, respectively, associated with the performance of certain corporate services, including transition
services, for its equity method investees, classified within selling, general and administrative expenses. As of December 31,
2020 and 2019, there was $3 million and $1 million, respectively, of other receivables from equity method investees included in
prepaid expenses and other current assets in the consolidated balance sheet related to these service agreements and other
transition related items. In addition, accounts payable and accrued expenses in the consolidated balance sheet as of
December 31, 2020 and 2019 included $1 million and $2 million, respectively, due to equity method investees.
During the years ended December 31, 2020, 2019 and 2018, the Company received dividends from its equity method
investees of $54 million, $48 million, and $74 million, respectively.
During the year ended December 31, 2018, the Company contributed $10 million to an equity method investee to fund
its share of an acquisition made by the equity method investee.
21.
DISCONTINUED OPERATIONS
Discontinued operations, net of taxes, for the year ended December 31, 2019 includes discrete tax benefits of $20
million associated with the favorable resolution of certain tax contingencies related to NID. In addition, net cash provided by
operating activities in the consolidated statement of cash flows for the year ended December 31, 2019 included a $28 million
refund from the taxing authorities related to discontinued operations.
F-48
Table of Contents
2020 (a)
Net revenues
Gross profit
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
Quarterly Operating Results (unaudited)
(in millions, except per share data)
First
Quarter
(b)
Second
Quarter
(c)
Third
Quarter
(d)
Fourth
Quarter
(e)
Total
Year
(f)
$
1,822 $
1,827 $
2,786 $
3,002 $
Income from continuing operations
Income from discontinued operations, net of taxes
Net income
Less: Net income attributable to noncontrolling
interests
Net income attributable to Quest Diagnostics
$
7
99 $
552
106
—
106
606
193
—
193
8
1,206
1,269
591
—
591
23
609
—
609
30
9,437
3,633
1,499
—
1,499
68
185 $
568 $
579 $
1,431
Earnings per share attributable to Quest
Diagnostics' common stockholders - basic:
Income from continuing operations
Income from discontinued operations
Net income
Earnings per share attributable to Quest
Diagnostics' common stockholders - diluted:
Income from continuing operations
Income from discontinued operations
Net income
2019 (a)
Net revenues
Gross profit
Income from continuing operations
Income from discontinued operations, net of taxes
Net income
Less: Net income attributable to noncontrolling
interests
$
$
$
$
0.74 $
1.38 $
4.20 $
4.28 $
10.62
—
—
—
—
—
0.74 $
1.38 $
4.20 $
4.28 $
10.62
0.73 $
1.36 $
4.14 $
4.21 $
10.47
—
—
—
—
—
0.73 $
1.36 $
4.14 $
4.21 $
10.47
First
Quarter
(g)
Second
Quarter
(h)
Third
Quarter
(i)
Fourth
Quarter
(j)
$
1,891 $
1,953 $
1,956 $
1,926 $
647
176
—
176
12
688
219
20
239
13
692
226
—
226
11
662
265
—
265
12
Net income attributable to Quest Diagnostics
$
164 $
226 $
215 $
253 $
Earnings per share attributable to Quest
Diagnostics' common stockholders - basic:
Income from continuing operations
Income from discontinued operations
Net income
Earnings per share attributable to Quest
Diagnostics' common stockholders - diluted:
Income from continuing operations
Income from discontinued operations
Net income
$
$
$
$
1.22 $
—
1.22 $
1.52 $
0.15
1.67 $
1.59 $
1.88 $
—
—
1.59 $
1.88 $
1.20 $
—
1.20 $
1.51 $
0.15
1.66 $
1.56 $
1.86 $
—
—
1.56 $
1.86 $
F-49
Total
Year
7,726
2,689
886
20
906
48
858
6.21
0.15
6.36
6.13
0.15
6.28
Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
Quarterly Operating Results (unaudited)
(in millions, except per share data)
(a) During the third quarter of 2006, the Company completed the wind down of Nichols Institute Diagnostics ("NID"), a test
kit manufacturing subsidiary. As a result, NID was classified as discontinued operations through 2019, at which point
certain income tax contingencies related to NID were resolved (see Note 21 to the audited consolidated financial
statements).
(b) Included pre-tax amortization expense of $28 million ($25 million in amortization of intangible assets and $3 million in
equity in earnings of equity method investees, net of taxes); pre-tax charges of $16 million ($7 million in cost of services
and $9 million in selling, general and administrative expenses), primarily associated with systems conversions and
integration incurred in connection with further restructuring and integrating the Company; and pre-tax charges of
$9 million ($1 million in cost of services, $3 million in selling, general and administrative expenses and $5 million in other
operating expense (income), net), associated with certain costs incurred as a result of the COVID-19 pandemic and
resulting impact on the economy including incremental costs incurred primarily to protect the health and safety of the
Company's employees and customers and to transition certain employees to a remote work environment, and certain asset
impairment charges; partially offset by excess tax benefits associated with stock-based compensation arrangements of $8
million recorded in income tax expense.
(c)
Included pre-tax amortization expense of $28 million ($25 million in amortization of intangible assets and $3 million in
equity in earnings of equity method investees, net of taxes); and pre-tax charges of $9 million ($3 million in cost of
services and $6 million in selling, general and administrative expenses), representing costs primarily associated with
systems conversions and integration incurred in connection with further restructuring and integrating the Company;
partially offset by a pre-tax gain of $26 million (charges of $34 million in cost of services and $5 million in selling, general
and administrative expenses, offset by a $62 million gain in other operating expense (income), net, and a $3 million gain in
equity in earnings of equity method investees, net of taxes), representing certain items resulting from the COVID-19
pandemic, including expense associated with a payment to eligible employees to help offset expenses they incurred as a
result of COVID-19, incremental costs incurred primarily to protect the health and safety of the Company's employees and
customers, and certain impairment charges, which were more than offset by $65 million of income recognized attributable
to the receipt of the initial tranche of funds from the government that were appropriated to healthcare providers under the
Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"); and excess tax benefits associated with stock-based
compensation arrangements of $4 million recorded in income tax expense.
(d) Included net pre-tax charges of $69 million (charges of $3 million in cost of services, $65 million in other operating
expense (income), net, and $1 million in equity in earnings of equity method investees, net of taxes), representing the
impact of certain items resulting from the COVID-19 pandemic, including incremental costs incurred primarily to protect
the health and safety of the Company's employees and customers and the reversal of $65 million of income previously
recognized during the second quarter of 2020 attributable to the receipt of funds from the government that were
appropriated to healthcare providers under the CARES Act; pre-tax amortization expense of $30 million ($27 million in
amortization of intangible assets and $3 million in equity in earnings of equity method investees, net of taxes); and pre-tax
charges of $18 million ($11 million in cost of services and $7 million in selling, general and administrative expenses),
representing costs primarily associated with systems conversions and integration incurred in connection with further
restructuring and integrating the Company; partially offset by a pre-tax gain of $70 million recognized in other income
(expense), net upon the acquisition of the remaining 56% interest in Mid America Clinical Laboratories, LLC as a result of
the remeasurement of the Company's previously held equity interest to fair value; and excess tax benefits associated with
stock-based compensation arrangements of $3 million recorded in income tax expense.
(e)
Included pre-tax amortization expense of $28 million ($26 million in amortization of intangible assets and $2 million in
equity in earnings of equity method investees, net of taxes); pre-tax charges of $20 million (charges of $19 million in cost
of services, $2 million in selling, general and administrative expenses and $1 million in other operating expense (income),
net, partially offset by a $2 million gain in equity in earnings of equity method investees, net of taxes), representing the
impact of certain items resulting from the COVID-19 pandemic, principally including expense associated with payments to
eligible employees to help offset expenses they incurred as a result of COVID-19 and incremental costs incurred primarily
to protect the health and safety of the Company's employees and customers; and pre-tax charges of $15 million ($6 million
in cost of services and $9 million in selling, general and administrative expenses), primarily associated with systems
conversions and integration incurred in connection with further restructuring and integrating the Company; partially offset
by a pre-tax gain of $2 million ($2 million of charges in selling, general and administrative expenses and a $10 million loss
in other income (expense), net, offset by a $14 million gain in equity in earnings of equity method investees, net of taxes)
related to costs associated with Quest for Health Equity (the Company's recently announced initiative with the Quest
F-50
Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
Quarterly Operating Results (unaudited)
(in millions, except per share data)
Diagnostics Foundation to reduce health disparities in underserved communities) and a loss on retirement of debt, which
were more than offset by a gain recognized by an equity method investee to adjust certain of its investments to fair value;
and excess tax benefits associated with stock-based compensation arrangements of $8 million recorded in income tax
expense. In the fourth quarter of 2020, the Company returned the funds received from the government that were
appropriated to healthcare providers under the CARES Act.
(f) The sum of basic and diluted earnings per share attributable to Quest Diagnostics' common stockholders for the four
quarters of 2020 did not equal the totals for the year ended December 31, 2020 due to quarterly fluctuations in the
Company's earnings and weighted average common shares outstanding throughout the period primarily due to the impact
of the COVID-19 pandemic on the Company's results and the temporary suspension of repurchases under the Company's
share repurchase program.
(g) Included pre-tax amortization expense of $29 million ($24 million in amortization of intangible assets and $5 million in
equity in earnings of equity method investees, net of taxes); pre-tax charges of $22 million ($11 million in cost of services
and $11 million in selling, general and administrative expenses), primarily associated with system conversions and
integration incurred in connection with further restructuring and integrating the Company; a pre-tax gain of $8 million
($1 million charge in selling, general and administrative expenses offset by a $9 million gain in other operating expense
(income), net), due to non-cash asset impairment charges, which were more than offset by a gain associated with proceeds
from an insurance claim for hurricane related losses; and excess tax benefits associated with stock-based compensation
arrangements of $3 million recorded in income tax expense.
(h) Included pre-tax amortization expense of $30 million ($25 million in amortization of intangible assets and $5 million in
equity in earnings of equity method investees, net of taxes); pre-tax charges of $26 million ($11 million in cost of services
and $15 million in selling, general and administrative expenses), primarily associated with system conversions and
integration incurred in connection with further restructuring and integrating the Company; a pre-tax gain of $6 million in
other operating expense (income), net, primarily due to a gain associated with the decrease in the fair value of the
contingent consideration accrual associated with a previous acquisition; and excess tax benefits associated with stock-based
compensation arrangements of $5 million recorded in income tax expense. Income from discontinued operations, net of
taxes includes discrete tax benefits of $20 million associated with the favorable resolution of certain tax contingencies
related to NID.
(i)
(j)
Included pre-tax amortization expense of $25 million ($23 million in amortization of intangible assets and $2 million in
equity in earnings of equity method investees, net of taxes); pre-tax charges of $16 million ($7 million in cost of services
and $9 million in selling, general and administrative expenses), primarily associated with system conversions and
integration incurred in connection with further restructuring and integrating the Company; a pre-tax gain of $3 million
($4 million charge in selling, general and administrative expenses, offset by a $7 million gain in other operating expense
(income), net), consisting of costs incurred related to the AMCA Data Security Incident, which were more than offset by a
gain associated with the decrease in the fair value of the contingent consideration accrual associated with a previous
acquisition; and excess tax benefits associated with stock-based compensation arrangements of $3 million recorded in
income tax expense.
Includes a pre-tax gain of $72 million ($1 million charge in selling, general and administrative expenses, offset by a
$73 million gain in other operating expense (income), net), primarily associated with the sale and leaseback of a property;
pre-tax amortization expense of $27 million ($24 million in amortization of intangible assets and $3 million in equity in
earnings of equity method investees, net of taxes); pre-tax charges of $14 million ($6 million in cost of services and
$8 million in selling, general and administrative expenses), primarily associated with system conversions and integration
incurred in connection with further restructuring and integrating the Company; and excess tax benefits associated with
stock-based compensation arrangements of $2 million recorded in income tax expense.
F-51
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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
SCHEDULE II - VALUATION ACCOUNTS AND RESERVES
(in millions)
Balance at
Beginning
of Year
Provision
for Credit
Losses
Net
Deductions
and Other
Balance at
End of
Year
2020
Allowance for credit losses.......................................................... $
15 $
19 $
6 (a) $
28
2019
Doubtful accounts and allowances.............................................. $
15 $
11 $
11 (a) $
15
2018
Doubtful accounts and allowances.............................................. $
13 $
6 $
4 (a) $
15
(a) Primarily represents the write-off of accounts receivable, net of recoveries.
F-52
MI10032