Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q
FORM
10-Q

(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20192020

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

Incorporated
Delaware16-1387862
(State of Incorporation)(I.R.S. Employer Identification Number)
500 Plaza Drive
Secaucus,NJ07094
(973)520-2700

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 Par ValueDGXNew York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer☒Accelerated filer☐
Non-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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 16, 2019,15, 2020, there were outstanding 134,697,086134,765,984 shares of the registrant’s common stock, $.01 par value.


Table of Contents
PART I - FINANCIAL INFORMATION
Page
Item 1. Financial Statements (unaudited)
Index to unaudited consolidated financial statements filed as part of this report:
2
3
4
5
6
8
3130
4245
4345


1
Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 20192020 AND 20182019
(unaudited)
(in millions, except per share data)


 Three Months Ended September 30, Nine Months Ended September 30,
 2019 2018 2019 2018
Net revenues$1,956
 $1,889
 $5,800
 $5,692
        
Operating costs and expenses and other operating income: 
  
  
  
Cost of services1,264
 1,222
 3,773
 3,691
Selling, general and administrative362
 354
 1,108
 1,068
Amortization of intangible assets23
 22
 72
 66
Other operating income, net(6) (13) (21) (14)
Total operating costs and expenses, net1,643
 1,585
 4,932
 4,811
        
Operating income313
 304
 868
 881
        
Other income (expense): 
  
  
  
Interest expense, net(44) (41) (133) (124)
Other income, net1
 3
 13
 2
Total non-operating expenses, net(43) (38) (120) (122)
        
Income from continuing operations before income taxes and equity in earnings of equity method investees270
 266
 748
 759
Income tax expense(62) (48) (175) (142)
Equity in earnings of equity method investees, net of taxes18
 9
 48
 32
Income from continuing operations226
 227
 621
 649
Income from discontinued operations, net of taxes—
 —
 20
 —
Net income226
 227
 641
 649
Less: Net income attributable to noncontrolling interests11
 14
 36
 40
Net income attributable to Quest Diagnostics$215
 $213
 $605
 $609
        
Amounts attributable to Quest Diagnostics’ common stockholders: 
  
  
  
Income from continuing operations$215
 $213
 $585
 $609
Income from discontinued operations, net of taxes—
 —
 20
 —
Net income$215
 $213
 $605
 $609
        
Earnings per share attributable to Quest Diagnostics’ common stockholders - basic: 
  
  
  
Income from continuing operations$1.59
 $1.56
 $4.33
 $4.46
Income from discontinued operations—
 —
 0.15
 —
Net income$1.59
 $1.56
 $4.48
 $4.46
        
Earnings per share attributable to Quest Diagnostics’ common stockholders - diluted: 
  
  
  
Income from continuing operations$1.56
 $1.53
 $4.27
 $4.37
Income from discontinued operations—
 —
 0.15
 —
Net income$1.56
 $1.53
 $4.42
 $4.37
        
Weighted average common shares outstanding: 
  
  
  
Basic135
 136
 135
 136
        
Diluted137
 139
 136
 139


Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Net revenues$2,786 $1,956 $6,435 $5,800 
Operating costs and expenses and other operating income:    
Cost of services1,580 1,264 4,071 3,773 
Selling, general and administrative396 362 1,103 1,108 
Amortization of intangible assets27 23 77 72 
Other operating expense (income), net65 (6)8 (21)
Total operating costs and expenses, net2,068 1,643 5,259 4,932 
Operating income718 313 1,176 868 
Other income (expense):    
Interest expense, net(42)(44)(124)(133)
Other income, net77 1 74 13 
Total non-operating income (expense), net35 (43)(50)(120)
Income from continuing operations before income taxes and equity in earnings of equity method investees753 270 1,126 748 
Income tax expense(177)(62)(269)(175)
Equity in earnings of equity method investees, net of taxes15 18 33 48 
Income from continuing operations591 226 890 621 
Income from discontinued operations, net of taxes0 0 0 20 
Net income591 226 890 641 
Less: Net income attributable to noncontrolling interests23 11 38 36 
Net income attributable to Quest Diagnostics$568 $215 $852 $605 
Amounts attributable to Quest Diagnostics’ common stockholders:    
Income from continuing operations$568 $215 $852 $585 
Income from discontinued operations, net of taxes0 0 0 20 
Net income$568 $215 $852 $605 
Earnings per share attributable to Quest Diagnostics’ common stockholders - basic:    
Income from continuing operations$4.20 $1.59 $6.33 $4.33 
Income from discontinued operations0 0 0 0.15 
Net income$4.20 $1.59 $6.33 $4.48 
Earnings per share attributable to Quest Diagnostics’ common stockholders - diluted:    
Income from continuing operations$4.14 $1.56 $6.25 $4.27 
Income from discontinued operations0 0 0 0.15 
Net income$4.14 $1.56 $6.25 $4.42 
Weighted average common shares outstanding:    
Basic135 135 134 135 
Diluted137 137 136 136 

The accompanying notes are an integral part of these statements.


2
Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 20192020 AND 20182019
(unaudited)
(in millions)

Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Net income$591 $226 $890 $641 
Other comprehensive income (loss):
Foreign currency translation adjustment10 (6)(6)(6)
Net change in available-for-sale debt securities, net of taxes0 8 0 8 
Net deferred gain on cash flow hedges, net of taxes3 1 3 2 
Other comprehensive income (loss)13 3 (3)4 
Comprehensive income604 229 887 645 
Less: Comprehensive income attributable to noncontrolling interests23 11 38 36 
Comprehensive income attributable to Quest Diagnostics$581 $218 $849 $609 

 Three Months Ended September 30, Nine Months Ended September 30,
 2019 2018 2019 2018
Net income$226
 $227
 $641
 $649
        
Other comprehensive income (loss):       
Currency translation(6) (2) (6) (10)
Net change on available-for-sale debt securities, net of taxes8
 —
 8
 —
Net deferred gain on cash flow hedges, net of taxes1
 1
 2
 2
Other comprehensive income (loss)3
 (1) 4
 (8)
        
Comprehensive income229
 226
 645
 641
Less: Comprehensive income attributable to noncontrolling interests11
 14
 36
 40
Comprehensive income attributable to Quest Diagnostics$218
 $212
 $609
 $601




















The accompanying notes are an integral part of these statements.


3
Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 20192020 AND DECEMBER 31, 20182019
(unaudited)
(in millions, except per share data)
September 30,
2019		 December 31,
2018		September 30,
2020		December 31,
2019
Assets 
  
Assets  
Current assets: 
  
Current assets:  
Cash and cash equivalents$434
 $135
Cash and cash equivalents$1,605 $1,192 
Accounts receivable, net of allowance for doubtful accounts of $15 as of both September 30, 2019 and December 31, 20181,117
 1,012
Accounts receivable, net of allowance for credit losses of $27 and $15 as of September 30, 2020 and December 31, 2019, respectivelyAccounts receivable, net of allowance for credit losses of $27 and $15 as of September 30, 2020 and December 31, 2019, respectively1,421 1,063 
Inventories112
 99
Inventories205 123 
Prepaid expenses and other current assets116
 144
Prepaid expenses and other current assets117 112 
Total current assets1,779
 1,390
Total current assets3,348 2,490 
Property, plant and equipment, net1,351
 1,288
Property, plant and equipment, net1,544 1,453 
Operating lease right-of-use assets508
 —
Operating lease right-of-use assets535 518 
Goodwill6,617
 6,563
Goodwill6,880 6,619 
Intangible assets, net1,138
 1,207
Intangible assets, net1,192 1,121 
Investment in equity method investees474
 436
Investments in equity method investeesInvestments in equity method investees480 482 
Other assets152
 119
Other assets164 160 
Total assets$12,019
 $11,003
Total assets$14,143 $12,843 
   
Liabilities and Stockholders’ Equity 
  
Liabilities and Stockholders’ Equity  
Current liabilities: 
  
Current liabilities:  
Accounts payable and accrued expenses$1,059
 $1,021
Accounts payable and accrued expenses$1,686 $1,041 
Current portion of long-term debt805
 464
Current portion of long-term debt555 804 
Current portion of long-term operating lease liabilities147
 —
Current portion of long-term operating lease liabilities148 145 
Total current liabilities2,011
 1,485
Total current liabilities2,389 1,990 
Long-term debt3,188
 3,429
Long-term debt4,018 3,966 
Long-term operating lease liabilities405
 —
Long-term operating lease liabilities428 413 
Other liabilities685
 745
Other liabilities782 711 
Commitments and contingencies


 


Commitments and contingencies
Redeemable noncontrolling interest76
 77
Redeemable noncontrolling interest80 76 
Stockholders’ equity: 
  
Stockholders’ equity:  
Quest Diagnostics stockholders’ equity: 
  
Quest Diagnostics stockholders’ equity:  
Common stock, par value $0.01 per share; 600 shares authorized as of both September 30, 2019 and December 31, 2018; 217 shares issued as of both September 30, 2019 and December 31, 20182
 2
Common stock, par value $0.01 per share; 600 shares authorized as of both September 30, 2020 and December 31, 2019; 217 shares issued as of both September 30, 2020 and December 31, 2019Common stock, par value $0.01 per share; 600 shares authorized as of both September 30, 2020 and December 31, 2019; 217 shares issued as of both September 30, 2020 and December 31, 20192 2 
Additional paid-in capital2,705
 2,667
Additional paid-in capital2,801 2,722 
Retained earnings7,992
 7,602
Retained earnings8,800 8,174 
Accumulated other comprehensive loss(55) (59)Accumulated other comprehensive loss(42)(39)
Treasury stock, at cost; 82 shares as of both September 30, 2019 and December 31, 2018(5,039) (4,996)
Treasury stock, at cost; 82 and 84 shares as of September 30, 2020 and December 31, 2019, respectivelyTreasury stock, at cost; 82 and 84 shares as of September 30, 2020 and December 31, 2019, respectively(5,161)(5,218)
Total Quest Diagnostics stockholders’ equity5,605
 5,216
Total Quest Diagnostics stockholders’ equity6,400 5,641 
Noncontrolling interests49
 51
Noncontrolling interests46 46 
Total stockholders’ equity5,654
 5,267
Total stockholders’ equity6,446 5,687 
Total liabilities and stockholders’ equity$12,019
 $11,003
Total liabilities and stockholders’ equity$14,143 $12,843 


The accompanying notes are an integral part of these statements.


4
Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 20192020 AND 20182019
(unaudited)
(in millions)

Nine Months Ended September 30,
20202019
Cash flows from operating activities:  
Net income$890 $641 
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation and amortization263 247 
Provision for credit losses18 9 
Deferred income tax provision12 15 
Stock-based compensation expense63 44 
Other, net(60)(44)
Changes in operating assets and liabilities:  
Accounts receivable(355)(113)
Accounts payable and accrued expenses514 80 
Income taxes payable95 9 
Termination of interest rate swap agreements40 0 
Other assets and liabilities, net(16)7 
Net cash provided by operating activities1,464 895 
Cash flows from investing activities:  
Business acquisitions, net of cash acquired(329)(56)
Capital expenditures(256)(228)
Increase in investments and other assets(19)(27)
Net cash used in investing activities(604)(311)
Cash flows from financing activities:  
Proceeds from borrowings749 1,484 
Repayments of debt(1,002)(1,448)
Purchases of treasury stock(75)(153)
Exercise of stock options144 98 
Employee payroll tax withholdings on stock issued under stock-based compensation plans(13)(16)
Dividends paid(222)(215)
Distributions to noncontrolling interest partners(34)(39)
Other financing activities, net6 4 
Net cash used in financing activities(447)(285)
Net change in cash and cash equivalents and restricted cash413 299 
Cash and cash equivalents and restricted cash, beginning of period1,192 135 
Cash and cash equivalents and restricted cash, end of period$1,605 $434 

 Nine Months Ended September 30,
 2019 2018
Cash flows from operating activities: 
  
Net income$641
 $649
Adjustments to reconcile net income to net cash provided by operating activities: 
  
Depreciation and amortization247
 228
Provision for doubtful accounts9
 2
Deferred income tax provision15
 52
Stock-based compensation expense44
 53
Other, net(44) 7
Changes in operating assets and liabilities: 
  
Accounts receivable(113) (166)
Accounts payable and accrued expenses80
 51
Income taxes payable9
 (1)
Other assets and liabilities, net7
 30
Net cash provided by operating activities895
 905
    
Cash flows from investing activities: 
  
Business acquisitions, net of cash acquired(56) (219)
Capital expenditures(228) (232)
Increase in investments and other assets(27) (4)
Net cash used in investing activities(311) (455)
    
Cash flows from financing activities: 
  
Proceeds from borrowings1,484
 1,630
Repayments of debt(1,448) (1,665)
Purchases of treasury stock(153) (150)
Exercise of stock options98
 95
Employee payroll tax withholdings on stock issued under stock-based compensation plans(16) (20)
Dividends paid(215) (198)
Distributions to noncontrolling interest partners(39) (41)
Contributions from noncontrolling interest partners—
 12
Other financing activities, net4
 13
Net cash used in financing activities(285) (324)
    
Net change in cash and cash equivalents and restricted cash299
 126
Cash and cash equivalents and restricted cash, beginning of period135
 137
Cash and cash equivalents and restricted cash, end of period$434
 $263
    
Cash and cash equivalents$434
 $263
Restricted cash—
 —
Cash and cash equivalents and restricted cash, end of period$434
 $263





The accompanying notes are an integral part of these statements.


5
Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 20192020 AND 20182019
(unaudited)
(in millions)
For the Three Months Ended September 30, 2020Quest Diagnostics Stockholders’ Equity
Shares of
Common Stock
Outstanding		Common
Stock		Additional
Paid-In
Capital		Retained
Earnings		Accumulated
Other
Compre-
hensive Loss		Treasury
Stock, at
Cost		Non-
controlling
Interests		Total
Stock-
holders’
Equity		Redeemable Non-controlling Interest
Balance, June 30, 2020134 $2 $2,764 $8,307 $(55)$(5,187)$50 $5,881 $77 
Net income56818 586 5 
Other comprehensive income, net of taxes13 13 
Dividends declared(75)(75)
Distributions to noncontrolling interest partners(22)(22)(2)
Issuance of common stock under benefit plans11 3 4 
Stock-based compensation expense32 32 
Exercise of stock options4 23 27 
Balance, September 30, 2020135 $2 $2,801 $8,800 $(42)$(5,161)$46 $6,446 $80 
For the Nine Months Ended September 30, 2020Quest Diagnostics Stockholders’ Equity
Shares of
Common Stock
Outstanding		Common
Stock		Additional
Paid-In
Capital		Retained
Earnings		Accumulated
Other
Compre-
hensive Loss		Treasury
Stock, at
Cost		Non-
controlling
Interests		Total
Stock-
holders’
Equity		Redeemable Non-controlling Interest
Balance, December 31, 2019133 $2 $2,722 $8,174 $(39)$(5,218)$46 $5,687 $76 
Net income85231 883 7 
Other comprehensive loss, net of taxes(3)(3)
Dividends declared(226)(226)
Distributions to noncontrolling interest partners(31)(31)(3)
Issuance of common stock under benefit plans1 7 10 17 
Stock-based compensation expense63 63 
Exercise of stock options2 22 122 144 
Shares to cover employee payroll tax withholdings on stock issued under stock-based compensation plans(13)(13)
Purchases of treasury stock(1)(75)(75)
Balance, September 30, 2020135 $2 $2,801 $8,800 $(42)$(5,161)$46 $6,446 $80 
For the Three Months Ended September 30, 2019  Quest Diagnostics Stockholders’ Equity      
 Shares of
Common Stock
Outstanding		 Common
Stock		 Additional
Paid-In
Capital		 Retained
Earnings		 Accumulated
Other
Compre-
hensive Loss		 Treasury
Stock, at
Cost		 Non-
controlling
Interests		 Total
Stock-
holders’
Equity		 Redeemable Non-controlling Interest
Balance, June 30, 2019135
 $2
 $2,686
 $7,849
 $(58) $(5,020) $50
 $5,509
 $76
Net income

 

 

 215
 

 

 10
 225
 1
Other comprehensive income, net of taxes

 

 

 

 3
 

 

 3
  
Dividends declared

 

 

 (72) 

 

 

 (72)  
Distributions to noncontrolling interest partners

 

 

 

 

 

 (11) (11) (1)
Issuance of common stock under benefit plans

 

 3
 

 

 3
 

 6
  
Stock-based compensation expense

 

 12
 

 

 


 

 12
  
Exercise of stock options1
 

 4
 

 

 28
 

 32
  
Purchases of treasury stock(1) 

 

 

 

 (50) 

 (50)  
Balance, September 30, 2019135
 $2
 $2,705
 $7,992
 $(55) $(5,039) $49
 $5,654
 $76

For the Nine Months Ended September 30, 2019  Quest Diagnostics Stockholders’ Equity      
 Shares of
Common Stock
Outstanding		 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Compre-
hensive Loss
 
Treasury
Stock, at
Cost
 
Non-
controlling
Interests
 
Total
Stock-
holders’
Equity
 Redeemable Non-controlling Interest
Balance, December 31, 2018135
 $2
 $2,667
 $7,602
 $(59) $(4,996) $51
 $5,267
 $77
Net income      605
     32
 637
 4
Other comprehensive income, net of taxes        4
     4
  
Dividends declared      (215)       (215)  
Distributions to noncontrolling interest partners            (34) (34) (5)
Issuance of common stock under benefit plans    7
     12
   19
  
Stock-based compensation expense    43
     1
   44
  
Exercise of stock options2
   4
     94
   98
  
Shares to cover employee payroll tax withholdings on stock issued under stock-based compensation plans    (16)         (16)  
Purchases of treasury stock(2)         (150)   (150)  
Balance, September 30, 2019135
 $2
 $2,705
 $7,992
 $(55) $(5,039) $49
 $5,654
 $76





The accompanying notes are an integral part of these statements.



6

Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 20192020 AND 20182019
(unaudited)
(in millions)
For the Three Months Ended September 30, 2019Quest Diagnostics Stockholders’ Equity
Shares of
Common Stock
Outstanding		Common
Stock		Additional
Paid-In
Capital		Retained
Earnings		Accumulated
Other
Compre-
hensive Loss		Treasury
Stock, at
Cost		Non-
controlling
Interests		Total
Stock-
holders’
Equity		Redeemable Non-controlling Interest
Balance, June 30, 2019135 $2 $2,686 $7,849 $(58)$(5,020)$50 $5,509 $76 
Net income21510 225 1 
Other comprehensive income, net of taxes3 3 
Dividends declared(72)(72)
Distributions to noncontrolling interest partners(11)(11)(1)
Issuance of common stock under benefit plans3 3 6 
Stock-based compensation expense12 12 
Exercise of stock options1 4 28 32 
Purchases of treasury stock(1)(50)(50)
Balance, September 30, 2019135 $2 $2,705 $7,992 $(55)$(5,039)$49 $5,654 $76 
For the Nine Months Ended September 30, 2019Quest Diagnostics Stockholders’ Equity
Shares of
Common Stock
Outstanding		Common
Stock		Additional
Paid-In
Capital		Retained
Earnings		Accumulated
Other
Compre-
hensive Loss		Treasury
Stock, at
Cost		Non-
controlling
Interests		Total
Stock-
holders’
Equity		Redeemable Non-controlling Interest
Balance, December 31, 2018135 $2 $2,667 $7,602 $(59)$(4,996)$51 $5,267 $77 
Net income60532 637 4 
Other comprehensive income, net of taxes4 4 
Dividends declared(215)(215)
Distributions to noncontrolling interest partners(34)(34)(5)
Issuance of common stock under benefit plans7 12 19 
Stock-based compensation expense43 1 44 
Exercise of stock options24 94 98 
Shares to cover employee payroll tax withholdings on stock issued under stock-based compensation plans(16)(16)
Purchases of treasury stock(2)(150)(150)
Balance, September 30, 2019135 $2 $2,705 $7,992 $(55)$(5,039)$49 $5,654 $76 
For the Three Months Ended September 30, 2018  Quest Diagnostics Stockholders’ Equity      
 Shares of
Common Stock
Outstanding		 Common
Stock		 Additional
Paid-In
Capital		 Retained
Earnings		 Accumulated
Other
Compre-
hensive Loss		 Treasury
Stock, at
Cost		 Non-
controlling
Interests		 Total
Stock-
holders’
Equity		 Redeemable Non-controlling Interest
Balance, June 30, 2018136
 $2
 $2,633
 $7,401
 $(57) $(4,756) $40
 $5,263
 $76
Net income      213
     11
 224
 3
Other comprehensive loss, net of taxes        (1)     (1)  
Dividends declared      (68)       (68)  
Distributions to noncontrolling interest partners            (11) (11) (2)
Issuance of common stock under benefit plans    4
     3
   7
  
Stock-based compensation expense    17
     2
   19
  
Exercise of stock options1
   2
     22
   24
  
Purchases of treasury stock(1)         (100)   (100)  
Contributions from noncontrolling interest partners            8
 8
  
Balance, September 30, 2018136
 $2
 $2,656
 $7,546
 $(58) $(4,829) $48
 $5,365
 $77

For the Nine Months Ended September 30, 2018  Quest Diagnostics Stockholders’ Equity      
 Shares of
Common Stock
Outstanding		 Common
Stock		 Additional
Paid-In
Capital		 Retained
Earnings		 Accumulated
Other
Compre-
hensive Loss		 Treasury
Stock, at
Cost		 Non-
controlling
Interests		 Total
Stock-
holders’
Equity		 Redeemable Non-controlling Interest
Balance, December 31, 2017135
 $2
 $2,612
 $7,138
 $(48) $(4,783) $34
 $4,955
 $80
Net income      609
     34
 643
 6
Other comprehensive loss, net of taxes        (8)     (8)  
Dividends declared      (203)       (203)  
Distributions to noncontrolling interest partners            (32) (32) (9)
Issuance of common stock under benefit plans    10
     10
   20
  
Stock-based compensation expense    49
     4
   53
  
Exercise of stock options2
   5
     90
   95
  
Shares to cover employee payroll tax withholdings on stock issued under stock-based compensation plans    (20)         (20)  
Purchases of treasury stock(1)         (150)   (150)  
Contributions from noncontrolling interest partners            12
 12
  
Reclassification of stranded tax effects resulting from enactment of the Tax Cut and Jobs Act      2
 (2)     —
  
Balance, September 30, 2018136
 $2
 $2,656
 $7,546
 $(58) $(4,829) $48
 $5,365
 $77

The accompanying notes are an integral part of these statements.


7
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in millions, except per share data)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 and accountable care organizations ("ACOs"). 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 and hundreds of M.D.s and Ph.D.s, many of whom are recognized leaders in their fields. 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

Basis of Presentation
    
The interim unaudited consolidated financial statements reflect all adjustments which in the opinion of management are necessary for a fair statement of results of operations, comprehensive income, financial condition, cash flows and stockholders' equity for the periods presented. Except as otherwise disclosed, all such adjustments are of a normal recurring nature. Operating results for the interim periods are not necessarily indicative of the results that may be expected for the full year. These interim unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s 20182019 Annual Report on Form 10-K. The year-end balance sheet data was derived from the audited consolidated financial statements as of December 31, 2018,2019, but does not include all the disclosures required by accounting principles generally accepted in the United States (“GAAP”).

The accounting policies of the Company are the same as those set forth in Note 2 to the audited consolidated financial statements contained in the Company’s 20182019 Annual Report on Form 10-K except for the impact of the adoption of new accounting standards discussed under New Accounting Pronouncements.

    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. Since March 2020, federal, state and local governmental policies and initiatives designed to reduce the transmission of COVID-19 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), and the adoption of work-from-home policies, all of which have had, and the Company believes will continue to have, an impact on the Company’s consolidated results of operations, financial position, and cash flows. Additionally, beginning during the second quarter of 2020, the Company experienced growing demand for COVID-19 molecular and antibody testing services and has expanded its capacity in order to satisfy such demand. As a result, operating results for the three and nine months ended September 30, 2020 may not be indicative of the results that may be expected for the full year.

    
Use of Estimates
    
The preparation of financial statements in conformity with 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.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(unaudited)
(in millions, unless otherwise indicated)


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, 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, 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 and its Amended and Restated Non-Employee

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(unaudited)
(in millions, except per share data)


Director Long-Term Incentive Plan. 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.

New Accounting Pronouncements
    
Adoption of New Accounting Standards    
    
On January 1, 2019,2020, the Company adopted a new accounting standard issued by the Financial Accounting Standards Board ("FASB") on accounting for leases using the modified retrospective method. This new accounting standard requires a lessee to recognize an asset and liability for most leases on its balance sheet. 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. Accounting for the Company's finance leases remains 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 9.

On January 1, 2019, the Company adopted a new accounting standard issued by the FASB that includes the overnight index swap rate based on the Secured Overnight Financing Rate as an additional benchmark interest rate for hedge accounting purposes. Adoption of this new accounting standard applies prospectively to new or redesignated hedges entered into after the adoption date and, therefore, did not have an impact on the Company's existing interest rate swap agreements.

New Accounting Standards To Be Adopted

In August 2018, the FASB issued an Accounting Standard Update (“ASU”) that 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. This ASU is effective for the Company in the first quarter of 2020 with early adoption permitted and can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is currently assessing the impact of the adoption of this ASUstandard, which the Company elected to do on a prospective basis, did not have a material impact on the Company’sCompany's consolidated results of operations, financial position andor cash flows.


In June 2016,    On January 1, 2020, the FASBCompany adopted a new accounting standard issued an ASUby the FASB that changes the impairment model for most financial instruments, including trade receivables, from an incurred loss method to a new forward-looking approach, based on expected losses. The estimate of expected credit losses will requirerequires entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. This ASU is effective for the Company in the first quarterThe adoption of 2020 and must be adoptedthis new standard, which was done using a modified retrospective transition approach. The Company is currently assessing theapproach, did not have a material impact of the adoption of this ASU on the Company’sCompany's consolidated results of operations, financial position andor cash flows. See Note 15 for further details on the Company's allowance for credit losses policy.


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.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(unaudited)
(in millions, except per share data)unless otherwise indicated)


3.    EARNINGS PER SHARE

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

Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
Amounts attributable to Quest Diagnostics’ common stockholders:    
Income from continuing operations$568 $215 $852 $585 
Income from discontinued operations, net of taxes0 0 0 20 
Net income attributable to Quest Diagnostics’ common stockholders$568 $215 $852 $605 
Income from continuing operations$568 $215 $852 $585 
Less: Earnings allocated to participating securities2 1 3 2 
Earnings available to Quest Diagnostics’ common stockholders – basic and diluted$566 $214 $849 $583 
Weighted average common shares outstanding – basic135 135 134 135 
Effect of dilutive securities:    
Stock options and performance share units2 2 2 1 
Weighted average common shares outstanding – diluted137 137 136 136 
Earnings per share attributable to Quest Diagnostics’ common stockholders - basic:    
Income from continuing operations$4.20 $1.59 $6.33 $4.33 
Income from discontinued operations0 0 0 0.15 
Net income$4.20 $1.59 $6.33 $4.48 
Earnings per share attributable to Quest Diagnostics’ common stockholders – diluted:    
Income from continuing operations$4.14 $1.56 $6.25 $4.27 
Income from discontinued operations0 0 0 0.15 
Net income$4.14 $1.56 $6.25 $4.42 
 Three Months Ended September 30, Nine Months Ended September 30,
 2019 2018 2019 2018
Amounts attributable to Quest Diagnostics’ common stockholders: 
  
  
  
Income from continuing operations$215
 $213
 $585
 $609
Income from discontinued operations, net of taxes—
 —
 20
 —
Net income attributable to Quest Diagnostics’ common stockholders$215
 $213
 $605
 $609
        
Income from continuing operations$215
 $213
 $585
 $609
Less: Earnings allocated to participating securities1
 1
 2
 2
Earnings available to Quest Diagnostics’ common stockholders – basic and diluted$214
 $212
 $583
 $607
        
Weighted average common shares outstanding – basic135
 136
 135
 136
Effect of dilutive securities: 
  
  
  
Stock options and performance share units2
 3
 1
 3
Weighted average common shares outstanding – diluted137
 139
 136
 139
        
Earnings per share attributable to Quest Diagnostics’ common stockholders - basic: 
  
  
  
Income from continuing operations$1.59
 $1.56
 $4.33
 $4.46
Income from discontinued operations—
 —
 0.15
 —
Net income$1.59
 $1.56
 $4.48
 $4.46
        
Earnings per share attributable to Quest Diagnostics’ common stockholders – diluted: 
  
  
  
Income from continuing operations$1.56
 $1.53
 $4.27
 $4.37
Income from discontinued operations—
 —
 0.15
 —
Net income$1.56
 $1.53
 $4.42
 $4.37


The following securities were not included in the calculation of diluted earnings per share due to their antidilutive effect:
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Stock options1 2 1 3 
 Three Months Ended September 30, Nine Months Ended September 30,
 2019 2018 2019 2018
Stock options2
 2
 3
 2


    The sum of basic and diluted earnings per share attributable to Quest Diagnostics' common stockholders for the first three quarters of 2020 did not equal the totals for the nine months ended September 30, 2020 due to quarterly fluctuations in the Company's earnings and weighted average common shares outstanding throughout the period as a result of the impact of COVID-19 (see Note 2 for further details) and the temporary cessation of repurchases under the Company's share repurchase program (see Note 10 for further details).


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(unaudited)
(in millions, except per share data)unless otherwise indicated)


4.    RESTRUCTURING ACTIVITIES

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 billingrevenue services excellence. In addition to these programs, the Company identified key themes to change how it operates including reducing denials and patient 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 three and nine months ended September 30, 20192020 and 2018:2019:

Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Employee separation costs$6 $0 $13 $(3)
 Three Months Ended September 30, Nine Months Ended September 30,
 2019 2018 2019 2018
Employee separation costs$—
 $4
 $(3) $19
Facility-related costs—
 —
 —
 4
Total restructuring charges$—
 $4
 $(3) $23
    The restructuring charges incurred for the three and nine months ended September 30, 2020 were primarily associated with various workforce reduction initiatives as the Company continued to simplify and restructure its organization. The $6 million of restructuring charges incurred during the three months ended September 30, 2020 were recorded in cost of services. Of the total restructuring charges incurred during the nine months ended September 30, 2020, $9 million and $4 million were recorded in cost of services and selling, general and administrative expenses, respectively.


The restructuring activity recorded in the nine months ended September 30, 2019 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 release recorded in the nine months ended September 30, 2019, $(1) million and $(2) million were recorded in cost of services and selling, general and administrative expenses, respectively.

The restructuring charges incurred for the three and nine months ended September 30, 2018 were primarily associated with various workforce reduction initiatives as the Company continued to simplify and restructure its organization. Of the total restructuring charges incurred during the three months ended September 30, 2018, $2 million was recorded in each of cost of services and selling, general and administrative expenses. Of the total restructuring charges incurred during the nine months ended September 30, 2018, $9 million and $14 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 restructuring liability as of both September 30, 20192020 and December 31, 2018,2019, which is included in accounts payable and accrued expenses, was $11 million and $38 million, respectively.$9 million.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(unaudited)
(in millions, except per share data)unless otherwise indicated)


5.     BUSINESS ACQUISITIONS

On February 11, 2019,January 21, 2020, the Company completed its acquisition of certain assets of the clinical laboratory services business of Boyce & Bynum Pathology Laboratories, P.C.Blueprint Genetics Oy ("Boyce & Bynum"Blueprint Genetics"), in an all cash transaction for $61$108 million, which consistednet of $3 million cash considerationacquired. Blueprint Genetics is a leading specialty genetic testing company with deep expertise in gene variant interpretation based on next generation sequencing and proprietary bioinformatics. Through the acquisition, the Company acquired all of $55 million and contingent consideration initially estimated at $6 million. The contingent consideration arrangement is dependent upon the achievement of certain testing volume benchmarks. During the third quarter of 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 income, net.Blueprint Genetics' operations. Based on the preliminary purchase price allocation, which may be revised as additional information becomes available during the measurement period, the assets acquired principallyand liabilities assumed primarily consist of $41$77 million of goodwill (0ne of which is tax-deductible), $43 million of intangible assets, an $11 million deferred tax liability, 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 and 15 years, respectively.

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.

    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. The final consideration is subject to post closing adjustments related to working capital. 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, 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 $35$47 million is currently tax deductible) and $20tax-deductible), $74 million of customer-related intangible assets.assets, $11 million of working capital and $11 million of property, plant and equipment. The intangible assets will beconsist of customer-related assets which are being amortized over a useful life of 15 years. For further details regarding the fair valueAs a result of the contingent consideration, see Note 6.

On November 6, 2018, the Company completed the acquisition, of allMACL became a wholly owned subsidiary of the operations of the U.S. laboratory service business of Oxford Immunotec, Inc. ("Oxford") and recorded the assets acquired and liabilities assumed based on a preliminary purchase price allocation. In September 2019, the Company finalized its purchase price allocation and recorded a $13 million increase to 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. Company.

The acquisitions were accounted for under the acquisition method of accounting. As such, the assets acquired and liabilities assumed were 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 areis 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 thethese acquisitions has been allocated to the Company's DIS business. For further details regarding business segment information, see Note 14.

13.

For details regarding the Company's 20182019 acquisitions, see Note 6 to the audited consolidated financial statements in the Company's 20182019 Annual Report on Form 10-K.    


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(unaudited)
(in millions, except per share data)unless otherwise indicated)


6.     FAIR VALUE MEASUREMENTS

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table provides a summary of the recognized assets and liabilities that are measured at fair value on a recurring basis:
Basis of Fair Value Measurements
Quoted Prices in Active Markets for Identical Assets/LiabilitiesSignificant Other Observable InputsSignificant Unobservable Inputs
September 30, 2020TotalLevel 1Level 2Level 3
Assets:    
Trading securities$60 $60 $0 $0 
Cash surrender value of life insurance policies45 0 45 0 
Available-for-sale debt securities12 0 0 12 
Total$117 $60 $45 $12 
Liabilities:    
Deferred compensation liabilities$114 $0 $114 $0 
Redeemable noncontrolling interest$80 $0 $— $80 
Basis of Fair Value Measurements
December 31, 2019December 31, 2019TotalLevel 1Level 2Level 3
Assets:Assets:       
Trading securitiesTrading securities$59 $59 $0 $0 
Cash surrender value of life insurance policiesCash surrender value of life insurance policies43 0 43 0 
Available-for-sale debt securitiesAvailable-for-sale debt securities12 0 0 12 
  Basis of Fair Value Measurements
  
Quoted
Prices in
Active
Markets for
Identical
Assets /
Liabilities
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
September 30, 2019Total Level 1 Level 2 Level 3
Assets: 
  
  
  
Trading securities$55
 $55
 $—
 $—
Cash surrender value of life insurance policies41
 —
 41
 —
Available-for-sale debt securities12
 —
 —
 12
Forward-starting interest rate swaps2
 —
 2
 —
Total$110
 $55
 $43
 $12
Total$114 $59 $43 $12 
       
Liabilities: 
  
  
  
Liabilities:    
Deferred compensation liabilities$104
 $—
 $104
 $—
Deferred compensation liabilities$110 $0 $110 $0 
Fixed-to-variable interest rate swaps17
 —
 17
 —
Fixed-to-variable interest rate swaps28 0 28 0 
Contingent consideration7
 —
 —
 7
Contingent consideration7 0 0 7 
Total$128
 $—
 $121
 $7
Total$145 $0 $138 $7 
       
Redeemable noncontrolling interest$76
 $—
 $—
 $76
Redeemable noncontrolling interest$76 $0 $— $76 

   Basis of Fair Value Measurements
December 31, 2018Total Level 1 Level 2 Level 3
Assets: 
  
  
  
Trading securities$53
 $53
 $—
 $—
Cash surrender value of life insurance policies34
 —
 34
 —
Total$87
 $53
 $34
 $—
        
Liabilities: 
  
  
  
Deferred compensation liabilities$96
 $—
 $96
 $—
Fixed-to-variable interest rate swaps93
 —
 93
 —
Contingent consideration14
 —
 —
 14
Total$203
 $—
 $189
 $14
        
Redeemable noncontrolling interest$77
 $—
 $—
 $77


A detailed description regarding the Company's fair value measurements is contained in Note 87 to the audited consolidated financial statements in the Company's 20182019 Annual Report on Form 10-K.    



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(unaudited)
(in millions, except per share data)


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

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(unaudited)
(in millions, unless otherwise indicated)


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 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, and forward-starting interest rate swapswhich were terminated during April 2020 (see Note 9), were classified within Level 2 of the fair value hierarchy areand were based on model-derived valuations as of a given date in which all significant inputs are 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 has contingent consideration obligationsliabilities that are to be paid based on the achievement of certain testing volume or revenue benchmarks. As of September 30, 2020, the fair value of these contingent consideration liabilities was immaterial. These 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. A summary of the significant inputs as of September 30, 2020 is as follows:

Business AcquisitionBenchmarkComparable Company Revenue VolatilityDiscount rateMaximum Contingent Consideration Payment
ReproSource, Inc.Revenue8.5%6.5%$10 

Business Acquisition Fair Value of Contingent Consideration Benchmark Comparable Company Revenue Volatility Discount rate Maximum Contingent Consideration Payment
           
Certain assets of the clinical and anatomic pathology laboratory business of Shiel Holdings, LLC in December 2017 $7
 Volume 6.9% 4.5% $15
ReproSource, Inc. in September 2018 $—
 Revenue 8.5% 6.5% $10
Certain assets of the clinical laboratory services business of Boyce & Bynum in February 2019 $—
 Volume 8.0% 7.2% $25


For further details regarding the Company's acquisitions, see Note 6 to the audited consolidated financial statements in the Company's 20182019 Annual Report on Form 10-K and Note 5 to the interim unaudited consolidated financial statements.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(unaudited)
(in millions, except per share data)


The following table provides a reconciliation of the beginning and ending balances of liabilities using significant unobservable inputs (Level 3)3 of the fair value hierarchy):
 Contingent Consideration
  
Balance, December 31, 2018$14
Purchases, additions and issuances6
Settlements(1)
Total gains/losses included in earnings - realized/unrealized(12)
Balance, September 30, 2019$7

Contingent Consideration
Balance, December 31, 2019$7 
Settlements(6)
Total (gains)/losses included in earnings - realized/unrealized(1)
Balance, September 30, 2020$0 
    
The $12$1 million net gain included in earnings associated with the change in the fair value of contingent consideration for the nine months ended September 30, 20192020 is reported in other operating income,expense (income), net.
    

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(unaudited)
(in millions, unless otherwise indicated)


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 September 30, 2019,2020, 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 September 30, 20192020 and December 31, 2018,2019, the fair value of the Company’s debt was estimated at $4.3$5.2 billion and $4.0$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.

7.    GOODWILL AND INTANGIBLE ASSETS

The changes in goodwill for the nine months ended September 30, 20192020 and for the year ended December 31, 20182019 were as follows:
 September 30,
2019		 December 31,
2018
Balance, beginning of period$6,563
 $6,335
Goodwill acquired during the period42
 228
Adjustments to goodwill12
 —
Balance, end of period$6,617
 $6,563

September 30, 2020December 31, 2019
Balance, beginning of period$6,619 $6,563 
Goodwill acquired during the period258 43 
Adjustments to goodwill3 13 
Balance, end of period$6,880 $6,619 

Principally all of the Company’s goodwill as of September 30, 20192020 and December 31, 20182019 was associated with its DIS business.


For the nine months ended September 30, 2019,2020, goodwill acquired during the period was primarily associated with the acquisitionacquisitions of Blueprint Genetics, Memorial Hermann and MACL (see Note 5) and adjustments to goodwill primarily related to foreign currency translation. For the year ended December 31, 2019, goodwill acquired was principally associated with the acquisitions of certain assets of the clinical laboratory services business of Boyce & Bynum (see Note 5). For the year ended December 31, 2018, goodwill acquired was principally associated with the acquisitions of Oxford, Mobile Medical Examination Services, LLC., ReproSource, Inc.Pathology Laboratories, P.C. and the outreach laboratory service business of Cape Cod Healthcare, Inc. For the nine months ended September 30, 2019, adjustments to goodwill primarily related to the finalization of the purchase price allocation for the acquisition of the U.S. laboratory services business of Oxford Immunotec, Inc. (see Note 5). For details regarding the Company's 2018 acquisitions, see Note 6 to the audited consolidated financial statements in the Company's 20182019 Annual Report on Form 10-K.10-K).     



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(unaudited)
(in millions, except per share data)unless otherwise indicated)



Intangible assets at September 30, 20192020 and December 31, 20182019 consisted of the following:
 
Weighted
Average
Amortization
Period
(in years)
 September 30, 2019 December 31, 2018
  Cost 
Accumulated
Amortization
 Net Cost 
Accumulated
Amortization
 Net
Amortizing intangible assets:  
  
  
  
  
  
Customer-related18 $1,359
 $(536) $823
 $1,355
 $(478) $877
Non-compete agreements9 3
 (2) 1
 3
 (2) 1
Technology17 104
 (54) 50
 104
 (50) 54
Other9 110
 (82) 28
 114
 (75) 39
Total17 1,576
 (674) 902
 1,576
 (605) 971
              
Intangible assets not subject to amortization:  
  
  
  
  
Trade names  235
 —
 235
 235
 —
 235
Other  1
 —
 1
 1
 —
 1
Total intangible assets  $1,812
 $(674) $1,138
 $1,812
 $(605) $1,207

Weighted
Average
Amortization
Period
(in years)		September 30, 2020December 31, 2019
CostAccumulated
Amortization		NetCostAccumulated
Amortization		Net
Amortizing intangible assets:      
Customer-related17$1,479 $(617)$862 $1,367 $(556)$811 
Non-compete agreements93 (2)1 3 (2)1 
Technology15140 (63)77 104 (56)48 
Other9110 (94)16 110 (85)25 
Total171,732 (776)956 1,584 (699)885 
Intangible assets not subject to amortization:     
Trade names 235 — 235 235 — 235 
Other 1 — 1 1 — 1 
Total intangible assets$1,968 $(776)$1,192 $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 September 30, 20192020 is as follows:

Year Ending December 31, 
Remainder of 2020$27 
2021101 
202298 
202396 
202493 
202591 
Thereafter450 
Total$956 
Year Ending December 31, 
Remainder of 2019$24
202096
202189
202286
202385
202481
Thereafter441
Total$902



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(unaudited)
(in millions, except per share data)unless otherwise indicated)


8.    DEBT
    
Long-term debt (including finance lease obligations) as of September 30, 20192020 and December 31, 20182019 consisted of the following:
September 30, 2020December 31, 2019
4.75% Senior Notes due January 2020$0 $500 
2.50% Senior Notes due March 20200 300 
4.70% Senior Notes due April 2021551 554 
4.25% Senior Notes due April 2024317 308 
3.50% Senior Notes due March 2025623 593 
3.45% Senior Notes due June 2026513 490 
4.20% Senior Notes due June 2029499 499 
2.95% Senior Notes due June 2030798 798 
2.80% Senior Notes due June 2031549 0 
6.95% Senior Notes due July 2037175 175 
5.75% Senior Notes due January 2040245 245 
4.70% Senior Notes due March 2045300 300 
Other32 34 
Debt issuance costs(29)(26)
Total long-term debt4,573 4,770 
Less: Current portion of long-term debt555 804 
Total long-term debt, net of current portion$4,018 $3,966 
 
September 30,
2019
 December 31,
2018
    
Secured Receivables Credit Facility (3.39% at December 31, 2018)$—
 $160
2.70% Senior Notes due April 2019—
 300
4.75% Senior Notes due January 2020501
 507
2.50% Senior Notes due March 2020300
 300
4.70% Senior Notes due April 2021554
 557
4.25% Senior Notes due April 2024310
 299
3.50% Senior Notes due March 2025600
 562
3.45% Senior Notes due June 2026494
 469
4.20% Senior Notes due June 2029499
 —
6.95% Senior Notes due July 2037175
 175
5.75% Senior Notes due January 2040244
 244
4.70% Senior Notes due March 2045300
 300
Other35
 37
Debt issuance costs(19) (17)
Total long-term debt3,993
 3,893
Less: Current portion of long-term debt805
 464
Total long-term debt, net of current portion$3,188
 $3,429
Retirement of Debt


During January 2020, the Company redeemed in full the outstanding indebtedness under the Company's senior notes due January 2020 and senior notes due March 2020 using proceeds from the issuance, in December 2019, of the 2.95% senior notes due June 2030, along with cash on hand. For the nine months ended September 30, 2020, the Company recorded a loss on retirement of debt, principally comprised of premiums paid, of $1 million in other income, net.
2019
May 2020 Senior Notes Offering


In March 2019,
    During May 2020, the Company completed a senior unsecured notes offering, (the “2019 Senior Notes”), consisting of $500$550 million aggregate principal amount of 4.20%2.80% senior notes due June 2029,2031 (the "2031 Senior Notes"), which were issued at an original issue discount of $1 million. The 20192031 Senior Notes are unsecured obligations of the Company that rank equally with the Company's other senior unsecured obligations. The 20192031 Senior Notes do not have a sinking fund requirement. The Company incurred $5 million of debt issuance costs associated with the 20192031 Senior Notes, which isare included as a reduction to the carrying amount of long-term debt and iswhich are being amortized over the term of the related debt.


    During October 2020, the Company issued a redemption notice to the holders of the Company's $550 million aggregate principal amount of 4.70% senior notes due April 2021. The Company intends to use the net proceeds from the 20192031 Senior Notes, were usedalong with cash on hand, to repay in fullsatisfy the outstanding indebtednessredemption. See Note 18 for further details.

    Credit Facilities

    As of September 30, 2020, the Company had cash and cash equivalents on hand of $1,605 million and had $1.3 billion of borrowing capacity available under the Company's Senior Notes due April 1, 2019, to repay outstanding indebtednessits existing credit facilities, including $529 million available under theits secured receivables credit facility and for general corporate purposes.
Secured Receivables Credit Facility

During$750 million available under its senior unsecured revolving credit facility. There were 0 outstanding borrowings under the nine months endedCompany's existing credit facilities as of September 30, 2019, there were $985 million in cumulative borrowings under the2020. The secured receivables credit facility primarily associated with working capital requirements as well aswas amended in October 2020 in order to extend the funding of the Company's 2019 business acquisition. During the nine months ended September 30, 2019, there were $1,145 million in repayments under the secured receivables credit facility.


maturity dates for each underlying commitment by one year, while maintaining

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(unaudited)
(in millions, except per share data)unless otherwise indicated)



the borrowing capacity at $600 million. See Note 18 for further details. 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 in the Company's 2019 Annual Report on Form 10-K.

    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. The Company's senior unsecured revolving credit facility is also subject to certain financial covenants and limitations on indebtedness. On April 30, 2020, the Company entered into an amendment to the senior unsecured revolving credit facility in order to provide for increased flexibility. Pursuant to the amendment, the leverage ratio covenant (as defined in the senior unsecured revolving credit facility) was increased as follows:
As of:Applicable Covenant:
September 30, 2020no more than 5.5 times EBITDA
December 31, 2020no more than 6.5 times EBITDA
March 31, 2021no more than 6.25 times EBITDA
June 30, 2021no 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 it is 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 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 September 30, 2020, the Company was in compliance with all such applicable financial covenants. Interest on the amended senior unsecured revolving credit facility is subject to a pricing schedule that can fluctuate based on changes in the Company's credit ratings and its leverage ratio.

    During the nine months ended September 30, 2020, the Company borrowed $100 million under its secured receivables credit facility and $100 million under its senior unsecured revolving credit facility, both of which were repaid prior to September 30, 2020.

Maturities of Long-Term Debt    

As of September 30, 2019,2020, long-term debt matures as follows:

Year Ending December 31,
Remainder of 2020$1 
2021553 
20223 
20232 
2024302 
Thereafter3,696 
Total maturities of long-term debt4,557 
Unamortized discount(11)
Debt issuance costs(29)
Fair value basis adjustments attributable to hedged debt56 
Total long-term debt4,573 
Current portion of long-term debt555 
Total long-term debt, net of current portion$4,018 
Year Ending December 31, 
Remainder of 2019$1
2020803
2021553
20223
20231
Thereafter2,649
  
Total maturities of long-term debt4,010
Unamortized discount(9)
Debt issuance costs(19)
Fair value basis adjustments attributable to hedged debt11
  
Total long-term debt3,993
Current portion of long-term debt805
  
Total long-term debt, net of current portion$3,188





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(unaudited)
(in millions, except per share data)unless otherwise indicated)


9.     LEASES
The Company determines if an arrangement is or contains a lease at contract inception. The Company leases office space, patient service centers, clinical laboratories, warehouses, logistic hubs and equipment primarily through operating leases with a limited number of finance leases. A right-of-use asset, representing the underlying asset during the lease term, and a lease liability, representing the payment obligation arising from the lease, are recognized on the balance sheet at lease commencement based on the present value of the payment obligation. For operating leases, expense is recognized on a straight-line basis over the lease term. For finance leases, interest expense on the lease liability is recognized using the effective interest method and amortization of the right-of-use asset is recognized on a straight-line basis over the shorter of the estimated useful life of the asset or the lease term. Short-term leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term.

The Company primarily uses its incremental borrowing rate in determining the present value of lease payments as the Company's leases generally do not provide an implicit rate.

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 generally been combined and accounted for as a single lease component.

The Company's leases have remaining terms of less than 1 year to 15 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.

Leases Balance Sheet Classification September 30, 2019
Assets    
Operating Operating lease right-of-use assets $508
Finance Property, plant and equipment, net (a) 37
Total lease assets   $545
     
Liabilities    
Current:    
Operating Current portion of long-term operating lease liabilities $147
Finance Current portion of long-term debt 3
Non-current:    
Operating Long-term operating lease liabilities 405
Finance Long-term debt 31
Total lease liabilities   $586

(a) Finance lease assets were recorded net of accumulated amortization of $23 million as of September 30, 2019.









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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(unaudited)
(in millions, except per share data)


Components of lease cost for the three and nine months ended September 30, 2019 were as follows:
Lease cost Three Months Ended September 30, 2019 Nine Months Ended September 30, 2019
     
Operating lease cost (a) $75
 $221
Finance lease cost:    
Amortization of leased assets 1
 5
Interest on lease liabilities —
 2
Net lease cost $76
 $228

(a) Includes short-term leases and variable lease costs (primarily maintenance fees and utilities related to real estate leases and certain equipment-related and vehicle-related costs) of $32 million and $90 million for the three and nine months ended September 30, 2019, respectively.

Rental expense for real estate, laboratory equipment and vehicles under operating leases amounted to $55 million and $167 million for the three and nine months ended September 30, 2018, respectively.

The maturity of the Company's lease liabilities as of September 30, 2019 is as follows:
Maturity of lease liabilities Operating leases Finance leases Total
Remainder of 2019 $32
 $1
 $33
2020 155
 6
 161
2021 118
 5
 123
2022 93
 5
 98
2023 74
 3
 77
Thereafter 138
 35
 173
Total lease payments 610
 55
 665
Less: Interest (a) 58
 21
 79
Present value of lease liabilities $552
 $34
 $586

(a) Primarily calculated using the Company's incremental borrowing rate.

Minimum rental commitments under noncancelable operating leases, primarily real estate, in effect as of December 31, 2018 are as follows:
Year Ending December 31, 
2019$181
2020143
2021106
202279
202360
Thereafter122
Minimum lease payments$691








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(unaudited)
(in millions, except per share data)



Lease term and discount rate as of September 30, 2019 were as follows:9.    FINANCIAL INSTRUMENTS
Lease term and discount rate
Weighted-average remaining lease term (years):
Operating leases5
Finance leases12
Weighted-average discount rate:
Operating leases3.3%
Finance leases8.7%

    
See Note 12 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 three and nine months ended September 30, 2019.

10.    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, treasury 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.

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 enteredenters into interest rate swaps.

Interest rate swaps 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.

expense.

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.

In February 2019,    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 $250 million, which were accounted for as cash flow hedges. These agreements were entered into to hedge a portion of the Company's interest rate exposure associated with variability in future cash flows attributable to changes in the ten-year treasury rates related to the expected issuance of the 2019 Senior Notes. In connection with the issuance of the 2019 Senior Notes in March 2019, these agreements were settled, and the Company paid $1$275 million. These losses are deferred in stockholders' equity, net of taxes, as a component of accumulated other comprehensive loss, and amortized as an adjustment to interest expense, net over the term of the 2019 Senior Notes.

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(unaudited)
(in millions, except per share data)



During the third quarter of 2019, the Company entered intoThe forward-starting interest rate swap agreement and the interest rate lock agreements with several financial institutions for a total notional amount of $125 million. The swap agreements, which are accounted for as cash flow hedges, 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 during 2020.and were accounted for as cash flow hedges. In connection with the issuance of the 2031 Senior Notes (see Note 8), these agreements were settled and the Company received net proceeds of $1 million. The new debt will replace certain senior notes that are maturing at such time. Prior to their maturity or settlement, the forward-starting interest rate swaps will be recognized as either an asset or liability, measured at their fair value. To the extent they are effective, gains and losses related to recording the forward-starting interest rate swap agreements at fair value will benet gain is deferred in stockholders' equity, net of taxes, as a component of accumulated other comprehensive loss. Subsequent to the issuance of the debtloss, and settlement of the forward-starting interest rate swaps, the deferred gain/loss will beis being amortized as an adjustment to interest expense, net over the term of such debt.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 $7$1 million and $9$4 million as of September 30, 20192020 and December 31, 2018,2019, 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

The    As of December 31, 2019, the Company maintainshad various fixed-to-variable interest rate swapsswap 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. A summary ofIn April 2020, the notional amounts ofCompany terminated these interest rate swaps as of September 30, 2019 and December 31, 2018 was as follows:
  Notional Amount
Debt Instrument September 30, 2019 December 31, 2018
     
4.25% Senior Notes due April 2024 $250
 $250
3.50% Senior Notes due March 2025 600
 600
3.45% Senior Notes due June 2026 350
 350
  $1,200
 $1,200

Theexisting fixed-to-variable interest rate swap agreements inand received proceeds of $40 million. Such amount was reflected as a basis adjustment to the table above have variablehedged debt instruments and is being amortized as a reduction of interest rates ranging from one-month LIBOR plus 2.2% to one-month LIBOR plus 3.0%.    expense, net over their remaining terms.

As of September 30, 20192020 and December 31, 2018,2019, the following amounts were recorded on the consolidated balance sheetsheets related to cumulative basis adjustments for fair value hedges included in the carrying amount of long-term debt:

19
   Carrying Amount of Hedged Long-Term Debt Hedge Accounting Basis Adjustment (a) Carrying Amount of Hedged Long-Term Debt Hedge Accounting Basis Adjustment (a)
Balance Sheet Classification September 30, 2019 September 30, 2019 December 31, 2018 December 31, 2018
Long-term debt $1,198
 $11
 $1,125
 $(53)

(a) The balance includes $28 million and $40 million of remaining unamortized hedging adjustment on a discontinued relationship as of September 30, 2019 and December 31, 2018, respectively.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(unaudited)
(in millions, except per share data)unless otherwise indicated)



Carrying Amount of Hedged Long-Term DebtHedge Accounting Basis Adjustment (a)Carrying Amount of Hedged Long-Term DebtHedge Accounting Basis Adjustment (a)
Balance Sheet ClassificationSeptember 30, 2020September 30, 2020December 31, 2019December 31, 2019
Long-term debt$0 $56 $1,186 $(3)

(a) As of September 30, 2020, the entire balance is associated with remaining unamortized hedging adjustments on discontinued relationships. As of December 31, 2019, the balance includes $25 million of remaining unamortized hedging adjustments on discontinued relationships.

The following table presents the effect of fair value hedge accounting on the statementCompany's consolidated statements of operations for the three and nine months ended September 30, 20192020 and 2018:2019:
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Other income, netOther income, netOther income, netOther income, net
Total for line item in which the effects of fair value hedges are recorded$77 $1 $74 $13 
Gain (loss) on fair value hedging relationships:
Hedged items (Long-term debt)$0 $(20)$(68)$(76)
Derivatives designated as hedging instruments$0 $20 $68 $76 
   
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
   2019 2018 2019 2018
  Other income, net Other income, net Other income, net Other income, net
Total for line item in which the effects of fair value hedges are recorded $1
 $3
 $13
 $2
         
Gain (loss) on fair value hedging relationships:        
Hedged items (Long-term debt) $(20) $10
 $(76) $42
Derivatives designated as hedging instruments $20
 $(10) $76
 $(42)

A summary of the fair values of derivative instruments in the consolidated balance sheets was as follows:
  September 30, 2019 December 31, 2018
Derivatives Designated as Hedging Instruments 
Balance Sheet
Classification
 Fair Value 
Balance Sheet
Classification
 Fair Value
Forward-starting interest rate swaps Prepaid expenses and other current assets $2
 Prepaid expenses and other current assets $—
Fixed-to-variable interest rate swaps Other liabilities $17
 Other liabilities $93


A detailed description regarding the Company's use of derivative financial instruments is contained in Note 15 to the audited consolidated financial statements in the Company's 20182019 Annual Report on Form 10-K.        

11.10.    STOCKHOLDERS’ EQUITY AND REDEEMABLE NONCONTROLLING INTEREST
    
Stockholders' Equity    

Changes in Accumulated Other Comprehensive Income (Loss)Loss by Component

Comprehensive income (loss) includes:

•Foreign currency translation adjustments;
•Net deferred gain on cash flow hedges, which represents deferred gains/losses, net of tax, on interest rate relatedrate-related derivative financial instruments designated as cash flow hedges, net of amounts reclassified to interest expense (see Note 10)9); and
•Net change on available-for-sale debt securities, which represents unrealized holding gains, net of taxes on available-for-sale debt securities.

    
For the three and nine months ended September 30, 20192020 and 2018,2019, the tax effects related to the deferred gains/losses on cash flow hedges and net change on 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.

Dividend Program
    
During each of the first three 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.

23

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(unaudited)
(in millions, except per share data)unless otherwise indicated)



Share Repurchase Program
        
As of September 30, 2019, $442 million2020, $1.2 billion remained available under the Company’s share repurchase authorizations.authorizations; however, in April 2020, the Company temporarily suspended additional share repurchases under the existing authorization. The share repurchase authorization has no set expiration or termination date.

Share Repurchases

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

For the nine months ended September 30, 2019, the Company repurchased 1.6 million shares of its common stock for $150 million.

Shares Reissued from Treasury Stock

For the nine months ended September 30, 2018, the Company repurchased 1.4 million shares of its common stock for $150 million.

Shares Reissued from Treasury Stock

For the nine months ended September 30,2020 and 2019, and 2018, the Company reissued 1.82.1 million shares and 1.71.8 million shares, respectively, from treasury stock for shares issued under the Employee Stock Purchase Plan and stock option plans. For details regarding the Company's stock ownership and compensation plans, see Note 17 to the audited consolidated financial statements in the Company's 20182019 Annual Report on Form 10-K.    

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 September 30, 2020 and December 31, 2019, the redeemable noncontrolling interest was presented at its fair value. For further information regarding the fair value of the redeemable noncontrolling interest, see Note 6.


11.    SUPPLEMENTAL CASH FLOW AND OTHER DATA

    Supplemental cash flow and other data for the three and nine months ended September 30, 2020 and 2019 was as follows:
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(unaudited)
(in millions, except per share data)unless otherwise indicated)



12.    SUPPLEMENTAL CASH FLOW AND OTHER DATA

Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Depreciation expense$62 $59 $186 $175 
Amortization expense27 23 77 72 
Depreciation and amortization expense$89 $82 $263 $247 
Interest expense$(42)$(45)$(126)$(136)
Interest income0 1 2 3 
Interest expense, net$(42)$(44)$(124)$(133)
Interest paid$33 $58 $136 $149 
Income taxes paid$148 $65 $168 $148 
Accounts payable associated with capital expenditures$55 $24 $55 $24 
Dividends payable$76 $72 $76 $72 
Businesses acquired:    
Fair value of assets acquired$126 $— $377 $61 
Fair value of liabilities assumed(9)0 (29)0 
Fair value of net assets acquired117 — 348 61 
Merger consideration receivable/payable2 0 2 (5)
Cash paid for business acquisitions119 0 350 56 
Less: Cash acquired18 0 21 0 
Business acquisitions, net of cash acquired$101 $— $329 $56 
Leases:
Leased assets obtained in exchange for new operating lease liabilities$40 $38 $119 $116 
Leased assets obtained in exchange for new finance lease liabilities$0 $1 $0 $1 
Supplemental cash flow
    In March 2020, in response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was signed into law. The CARES Act provides numerous tax provisions and other datastimulus 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 threeemployer portion of social security taxes, technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property, and nine months ended September 30, 2019the creation of certain payroll tax credits associated with the retention of employees. The CARES Act also includes a number of benefits that are applicable to the Company and 2018 was as follows:other healthcare providers including, but not limited to, the appropriation of $100 billion to health care providers for related expenses or lost revenues that are attributable to the COVID-19 pandemic.
 Three Months Ended September 30, Nine Months Ended September 30,
 2019 2018 2019 2018
Depreciation expense$59
 $55
 $175
 $162
Amortization expense23
 22
 72
 66
Depreciation and amortization expense$82
 $77
 $247
 $228
        
Interest expense$(45) $(42) $(136) $(126)
Interest income1
 1
 3
 2
Interest expense, net$(44) $(41) $(133) $(124)
        
Interest paid$58
 $28
 $149
 $114
Income taxes paid$65
 $29
 $148
 $70
        
Accounts payable associated with capital expenditures$24
 $13
 $24
 $13
Dividends payable$72
 $68
 $72
 $68
        
Businesses acquired: 
  
  
  
Fair value of assets acquired$—
 $59
 $61
 $242
Fair value of liabilities assumed—
 —
 —
 1
Fair value of net assets acquired—
 59
 61
 241
Merger consideration paid (payable), net—
 (5) (5) (17)
Cash paid for business acquisitions—
 54
 56
 224
Less: Cash acquired—
 —
 —
 5
Business acquisitions, net of cash acquired$—
 $54
 $56
 $219

    In April 2020 and August 2020, the Company 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. In October 2020, the Company announced that it plans to return the entire $138 million of funds received.
 Three Months Ended September 30, Nine Months Ended September 30,
 2019 2018 2019 2018
Leases:       
Cash paid for amounts included in the measurement of lease liabilities:       
Operating cash flows from operating leases$45
 

 $135
 

Operating cash flows from finance leases$—
 

 $2
 

Financing cash flows from finance leases$1
 

 $3
 

Leased assets obtained in exchange for new operating lease liabilities$38
 

 $116
 

Leased assets obtained in exchange for new finance lease liabilities (a)$1
 $—
 $1
 $1


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(unaudited)
(in millions, except per share data)unless otherwise indicated)



(a) For    The Company accounts for the receipt of the funds under a gain contingency model. Accordingly, such amounts are recognized when the funds are received and the Company has determined that it has satisfied the associated terms and conditions. During the three months ended June 30, 2020, based on the terms and conditions that were in effect at such time, the Company concluded that it had satisfied such terms and conditions for the $65 million of funds that were received in April 2020 and, therefore, the Company recognized such amount in other operating expense (income), net during the second quarter. During the three months ended September 30, 2020, the Company reversed the $65 million of funds that had previously been recognized in other operating expense (income), net. As of September 30, 2020, no amounts are recorded in the Company's year-to-date consolidated statement of operations and the entire $138 million of funds that the Company intends to return are recorded in accounts payable and accrued expenses on the Company’s consolidated balance sheet. For the nine months ended September 30, 2018, leased assets obtained in exchange for new finance lease liabilities reflects information prior2020, net cash provided by operating activities included the $138 million that the Company received from the funds that were distributed to healthcare providers under the adoption of the new accounting standard related to accounting for leases. See Note 2 for further details on the adoption of the new accounting standard.CARES Act.


13.
12.     COMMITMENTS AND CONTINGENCIES

Letters of Credit

The Company can issue letters of credit totaling $100 million under its secured receivables credit facility and $150 million under its senior unsecured revolving credit facility. For further discussion regarding the Company's secured receivables credit facility and senior unsecured revolving credit facility, see Note 1413 to the audited consolidated financial statements in the Company's 20182019 Annual Report on Form 10-K and Note 8 to the interim unaudited consolidated financial statements.    
    
In support of its risk management program, to ensure the Company’s performance or payment to third parties, $71 million in letters of credit under the secured receivables credit facility were outstanding as of September 30, 2019.2020. The letters of credit primarily represent collateral for current and future automobile liability and workers’ compensation loss payments.

Contingent Lease Obligations
    
The Company remains subject to contingent obligations under certain real estate leases, including leases that were entered into by certain predecessor companies of a subsidiary prior to the Company's acquisition of the subsidiary. No liability has been recorded for any of these potential contingent obligations. For further details, see Note 18 to the audited consolidated financial statements in the Company’s 20182019 Annual Report on Form 10-K.

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 June 2020, a putative class action lawsuit, House Johnson v. Quest Diagnostics Incorporated, et. al, was filed in the U.S. District Court for 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 July 2020, a putative class action lawsuit, Rice, et. al v. Quest Diagnostics Incorporated, et. al, was filed in the U.S. District Court for New Jersey. The plaintiffs in the Rice case named the same defendants as those named in the House Johnson case and alleged substantially similar claims to those made in the House Johnson matter. In October 2020, the court consolidated the two lawsuits and plaintiffs filed a consolidated amended complaint. The Company plans to vigorously defend this matter.


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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(unaudited)
(in millions, unless otherwise indicated)


AMCA Data Security Incident.

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 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, 2019.2019 (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 has also informed usthe 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.

To date, approximately 39    Numerous putative class action lawsuits were filed against the Company related to the AMCA Data Security Incident have beenIncident. 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 most of which name other defendants, in federal courts in a number of districts and in state courts. Most of the cases are putative class actions in which theOptum360 that named additional individuals as plaintiffs who purport to represent various classes of consumers, assertand that asserted a variety of common law and statutory claims in connection with the AMCA Data Security Incident and most of them have been transferredIncident. In January 2020, the Company moved to anddismiss the consolidated in the U.S. District Court for New Jersey by the U.S. Judicial Panel on Multidistrict Litigation.complaint.

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.

The Company has insurance coverage rights in place for certain potential costs and liabilities related to the AMCA Data Security Incident; this insurance coverage is limited in amount and subject to a deductible. While management believes it is reasonably possible that the Company may incur losses associated with these proceedings and investigations, 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,

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(unaudited)
(in millions, except per share data)


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.

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 including, among other matters, operational matters, which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief. The number of these reviews, investigations and proceedings has increased in recent years with regard to many firms in the healthcare services industry, including the Company.

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.

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 September 30, 2019,2020, the Company does not believe that material losses related to legal matters are probable.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(unaudited)
(in millions, unless otherwise indicated)


Reserves for legal matters totaled $1 million as of both September 30, 20192020 and December 31, 2018.

2019, respectively.

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 $132$134 million and $125$132 million as of September 30, 20192020 and December 31, 2018,2019, respectively. Management believes that established reserves and present insurance coverage are sufficient to cover currently estimated exposures.


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(unaudited)
(in millions, except per share data)


14.13.    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 and ACOs. 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 20192020 and 2018.2019.

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 September 30, 2019,2020, 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.

The following table is a summary of segment information for the three and nine months ended September 30, 20192020 and 2018.2019. 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 intangible 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 to the audited consolidated financial statements contained in the Company’s 20182019 Annual Report on Form 10-K and Note 2 to the interim unaudited consolidated financial statements.
 Three Months Ended September 30, Nine Months Ended September 30,
 2019 2018 2019 2018
Net revenues: 
  
  
  
DIS business$1,877
 $1,810
 $5,561
 $5,448
All other operating segments79
 79
 239
 244
Total net revenues$1,956
 $1,889
 $5,800
 $5,692
        
Operating earnings (loss): 
  
  
  
DIS business$345
 $333
 $963
 $982
All other operating segments10
 11
 31
 33
General corporate activities(42) (40) (126) (134)
Total operating income313
 304
 868
 881
Non-operating expenses, net(43) (38) (120) (122)
Income from continuing operations before income taxes and equity in earnings of equity method investees270
 266
 748
 759
Income tax expense(62) (48) (175) (142)
Equity in earnings of equity method investees, net of taxes18
 9
 48
 32
Income from continuing operations226
 227
 621
 649
Income from discontinued operations, net of taxes—
 —
 20
 —
Net income226
 227
 641
 649
Less: Net income attributable to noncontrolling interests11
 14
 36
 40
Net income attributable to Quest Diagnostics$215
 $213
 $605
 $609


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(unaudited)
(in millions, except per share data)unless otherwise indicated)



Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Net revenues:    
DIS business$2,709 $1,877 $6,217 $5,561 
All other operating segments77 79 218 239 
Total net revenues$2,786 $1,956 $6,435 $5,800 
Operating earnings (loss):    
DIS business$840 $345 $1,325 $963 
All other operating segments16 10 29 31 
General corporate activities(138)(42)(178)(126)
Total operating income718 313 1,176 868 
Non-operating income (expense), net35 (43)(50)(120)
Income from continuing operations before income taxes and equity in earnings of equity method investees753 270 1,126 748 
Income tax expense(177)(62)(269)(175)
Equity in earnings of equity method investees, net of taxes15 18 33 48 
Income from continuing operations591 226 890 621 
Income from discontinued operations, net of taxes0 0 0 20 
Net income591 226 890 641 
Less: Net income attributable to noncontrolling interests23 11 38 36 
Net income attributable to Quest Diagnostics$568 $215 $852 $605 
15.
14.    RELATED PARTIES

The Company's equity method investees primarily consist of its clinical trials central laboratory services joint venture and its diagnostic information services joint ventures, which are accounted for under the equity method of accounting. During the three months ended September 30, 20192020 and 2018,2019, the Company recognized net revenues of $8$10 million and $9$8 million, respectively, associated with diagnostic information services provided to its equity method investees. During the nine months ended September 30, 20192020 and 2018,2019, the Company recognized net revenues of $26$25 million and $27$26 million, respectively, associated with such services.diagnostic information services provided to its equity method investees. As of both September 30, 20192020 and December 31, 2018,2019, there was $3$4 million of accounts receivable from equity method investees related to such services. During both the three and nine months ended September 30, 2020 and 2019, the Company recognized net revenues of $1 million associated with diagnostic information services provided to a noncontrolling interest partner in a joint venture. During the nine months ended September 30, 2020 and 2019, the Company recognized net revenues of $2 million and $6 million, respectively, associated with diagnostic information services provided to a noncontrolling interest partner in a joint venture. As of September 30,December 31, 2019, there was $2$4 million of accounts receivablereceivables from the noncontrolling interest partner included in accounts receivable and other assets related to such services.

During both the three months ended September 30, 20192020 and 2018,2019, the Company recognized income of $4 million associated with the performance of certain corporate services, including transition services, for its equity method investees, classified within selling, general and administrative expenses. During both the nine months ended September 30, 20192020 and 2018,2019, the Company recognized income of $12 million associated with the performance of suchcertain corporate services, including transition services, for its equity method investees, classified within selling, general and administrative expenses. As of September 30, 20192020 and December 31, 2018,2019, there was $1$2 million and $3$1 million, respectively, of other receivables from equity method investees included in prepaid expenses and other current assets related to these service agreements and other transition related items. In addition, accounts payable and accrued expenses as of both September 30, 20192020 and December 31, 20182019 included $1 million and $2 million, respectively, due to equity method investees.


16.    REVENUE RECOGITION



26
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(unaudited)
(in millions, unless otherwise indicated)


    During the nine months ended September 30, 2020 and 2019, the Company received dividends from its equity method investees of $34 million and $27 million, respectively.

15.    REVENUE RECOGNITION AND ALLOWANCE FOR CREDIT LOSSES

DIS

Net revenues in the Company’s DIS business accounted for over 95% of the Company’s total net revenues for the three and nine months ended September 30, 20192020 and 20182019 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 obligations 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, by applyingusing the portfolio approach, in exchange for providing services. These estimates include the impact of contractual allowances, including payer denials and price concessions. The portfolios determined using the portfolio approach consist of the following groups of customers: healthcare insurers, government payers (Medicare and Medicaid programs), client payers and patients.

DS

The Company’s DS businesses primarily satisfy their performance obligations and recognize revenues when delivery has occurred or services have been rendered.

The approximate percentage of net revenue by type of customer was as follows:

Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Healthcare insurers:
Fee-for-service33 %32 %33 %33 %
Capitated2 3 3 3 
Total healthcare insurers35 35 36 36 
Government payers10 15 12 15 
Client payers40 33 37 32 
Patients12 13 12 13 
Total DIS97 96 97 96 
DS3 4 3 4 
Net revenues100 %100 %100 %100 %
    The approximate percentage of net accounts receivable by type of customer was as follows:
September 30, 2020December 31, 2019
Healthcare Insurers30 %22 %
Government Payers6 11 
Client Payers48 42 
Patients (including coinsurance and deductible responsibilities)12 20 
Total DIS96 95 
DS4 5 
Net accounts receivable100 %100 %
29

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(unaudited)
(in millions, except per share data)unless otherwise indicated)


 Three Months Ended September 30, Nine Months Ended September 30,
 2019 2018 2019 2018 
Healthcare insurers:        
Fee-for-service32% 32% 33% 32% 
Capitated3
 3
 3
 4
 
Total healthcare insurers35
 35
 36
 36
 
Government payers15
 16
 15
 16
 
Client payers33
 32
 32
 31
 
Patients13
 13
 13
 13
 
Total DIS96
 96
 96
 96
 
DS4
 4
 4
 4
 
Net revenues100% 100% 100% 100% 



    Allowance for Credit Losses Policy
17.
    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. 

    For the healthcare insurers and government payers, collection of the Company’s net revenues is normally a function of providing the complete and correct billing information within the various filing deadlines, and provided that the Company has billed the payers accurately with complete information prior to the established filing deadline, there has historically been little to no collection risk. 

    Client payers primarily include physicians, hospitals, IDNs, ACOs, 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. 

    With respect to patients, implicit price concessions, which represent differences between amounts billed and the estimated consideration the Company expects to receive from patients, are recognized as a reduction of revenue.  Estimates of implicit price concessions consider historical collection experience (including the period the receivables have been outstanding) and other factors including current market conditions.

    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.

    Although the Company believes that its estimates for contractual allowances and patient price concessions as well as its allowance for credit losses are appropriate, it is possible that the Company will experience an impact on cash collections as a result of the impact of the COVID-19 pandemic.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(unaudited)
(in millions, unless otherwise indicated)


16.    TAXES ON INCOME

For the three months ended September 30, 20192020 and 2018,2019, the effective income tax rate was 22.9%23.7% and 18.1%22.9%, respectively. DuringThe effective income tax rate for the three months ended September 30, 2020, benefited from a lower effective income tax rate associated with a $70 million gain recognized as a result of the remeasurement of the Company's previously held equity interest in MACL to fair value (see Note 5); and $3 million of excess tax benefits associated with stock-based compensation arrangements. The effective income tax rate for the three months ended September 30, 2019 the Company recognizedbenefited from a $6 million income tax benefit due to the release of a valuation allowance associated with net operating loss carryforwards. During the three months ended September 30, 2018, the Company recognized a $13 million income tax benefit due to the release of tax reserves associated with the expiration of the statue of limitations for certain income tax returns. In addition, the effective income tax rate for the three months ended September 30, 2019carryforwards; and 2018 benefited from $3 million and $4 million, respectively, of excess tax benefits associated with stock-based compensation arrangements.

For the nine months ended September 30, 20192020 and 2018,2019, the effective income tax rate was 23.4%23.9% and 18.8%23.4%, respectively. DuringThe effective income tax rate for the nine months ended September 30, 2020, benefited from a lower effective income tax rate associated with a $70 million gain recognized as a result of the remeasurement of the Company's previously held equity interest in MACL to fair value (see Note 5); and $15 million of excess tax benefits associated with stock-based compensation arrangements. The effective income tax rate for the nine months ended September 30, 2019 the Company recognizedbenefited from $11 million of excess tax benefits associated with stock-based compensation arrangements; and a $10 million income tax benefit due to the release of valuation allowances associated with net operating loss carryforwards. During

    The effective income tax rate associated with the $70 million gain recognized as a result of the remeasurement of the Company's previously held equity interest in MACL to fair value was 11.8% due to a permanent difference in the financial reporting and tax basis of goodwill.

    For the three and nine months ended September 30, 2018,2020, the Company recognized a $15 millionutilized the most likely estimate of its annual income tax benefit associated with a change in a tax return accounting method that enabledbefore taxes to determine the Company to accelerate the deduction of certain expenses on its 2017 tax return at the federal corporate statutory tax rate in effect during 2017, and a $13 million income tax benefit due to the release of tax reserves associated with the expiration of the statue of limitations for certain income tax returns. In addition, theannual effective income tax rate for the nine months ended September 30, 2019 and 2018 benefited from $11 million and $17 million, respectively,2020. As a result of excess tax benefitsuncertainty associated with stock-based compensation arrangements.the impact of the COVID-19 pandemic, it is possible that the Company will experience variability in the annual projections and, as a result, the annual effective income tax rate.


18.17.    DISCONTINUED OPERATIONS

During the third quarter of 2006, the Company completed the wind down of Nichols Institute Diagnostics ("NID"), a test kit manufacturing subsidiary, which was reported as a discontinued operation for the nine months ended September 30, 2019 and 2018.2019. Discontinued operations, net of taxes, for the nine months ended September 30, 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 nine months ended September 30, 2019 included a $28 million refund from the taxing authorities related to discontinued operations.


18.    SUBSEQUENT EVENTS

    During October 2020, the Company amended its $600 million secured receivables credit facility in order 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. Additionally, the Company can issue up to $100 million of letters of credit through October 2022. Borrowings under the facility are collateralized by certain domestic receivables. Interest on borrowings under the facility is based on either commercial paper rates for highly-rated issuers or LIBOR, plus a spread of 0.825% to 0.95%.

    In October 2020, the Company issued a redemption notice to the holders of the Company's $550 million aggregate principal amount of 4.70% senior notes due April 2021, to redeem such notes in November 2020. Upon redemption, the Company will recognize a loss on extinguishment of debt based on the difference between the reacquisition price of the debt and the net carrying amount. The Company will pay a redemption premium in accordance with the requirements of such notes using a treasury rate calculated on the third business day preceding the redemption date.




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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our Company

Diagnostic Information Services

Quest Diagnostics empowers people to take action to improve health outcomes. We use our extensive database of clinical lab results to derive diagnostic insights that reveal new avenues to identify and treat disease, inspire healthy behaviors and improve healthcare management. Our diagnostic information services business ("DIS") provides information and insights based on 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 and accountable care organizations ("ACOs"). We offer the broadest access in the United States to diagnostic information services through our nationwide network of laboratories, patient service centers and phlebotomists in physician offices and our connectivity resources, including call centers and mobile paramedics, nurses and other health and wellness professionals. We are the world's leading provider of diagnostic information services. We provide interpretive consultation with one of the largest medical and scientific staffs in the industry. Our DIS business makes up over 95% of our consolidated net revenues.

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

    Each requisition accompanies patient specimens, indicating the test(s) to be performed and the party to be billed for the test(s). Management utilizes requisition data to assist with assessing the growth of the business. Therefore, we believe that the change in the number of requisitions from period to period is useful information for investors as it allows them to assess our growth.

    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 utilizes revenue per requisition data in order to assist with assessing various factors impacting the performance of the business, including pricing and trends impacting mix. Therefore, we believe that the change in this metric from period to period is useful information for investors as it allows them to assess such factors, which are relevant to assessing the revenue performance of the business.

Diagnostic Solutions

In our Diagnostic Solutions ("DS") businesses, which represents the balance of our consolidated net revenues, we are the leading provider of risk assessment services for the life insurance industry and we offer healthcare organizations and clinicians robust information technology solutions.

Third Quarter Highlights
    
•Our total net revenues of $1.96$2.79 billion were up 3.5%42.5% from the prior year period.
•In DIS:
◦
◦Revenues of $1.88 billion increased by 3.7% compared to the prior year period, driven by organic volume growth (growth excluding the impact of acquisitions) and the impact of recent acquisitions, partially offset by a decline in revenue per requisition.
◦Volume, measured by the number of requisitions, increased by 5.1% compared to the prior year period, with organic growth and acquisitions contributing approximately 3.7% and 1.4%, respectively.
◦Revenue per requisition decreased by 1.2% compared to the prior year period.
DS revenues of $79 million decreased$2.71 billion increased by 0.5%44.3% compared to the prior year period, 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 19.7% compared to the prior year period, with organic growth (which excludes the impact of recent acquisitions) and acquisitions contributing approximately 16.6% and 3.1%, respectively. Organic volume growth was driven by demand for COVID-19 molecular testing, partially offset by declines in testing volumes in the base business. Testing volumes in the base business were negatively impacted by the COVID-19 pandemic and declined by 5% compared to the prior year period.
◦Revenue per requisition increased by 20.9% compared to the prior year period driven, in large part, by COVID-19 molecular testing.
•DS revenues of $77 million decreased by 1.9% compared to the prior year period.
•Income from continuing operations attributable to Quest Diagnostics' stockholders was $568 million, or $4.14 per diluted share, in 2020, compared to $215 million, or $1.56 per diluted share, in 2019, compared to $213 million, or $1.53 per diluted share, in the prior year period.
•For the nine months ended September 30, 2019,2020, net cash provided by operating activities was $895$1,464 million, in 2019, compared to $905$895 million in the prior year period.

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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 more than 200,000 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.

    We have put preparedness plans in place at our facilities to maintain continuity of operations, while also taking steps to keep colleagues and customers healthy and safe. In line with recommendations to reduce large gatherings and increase social distancing, many of our office-based colleagues are working in a remote environment. We are evaluating the best way to bring them back into the office.

    During January and February 2020, we experienced growth in DIS revenues and volumes compared to the prior year period. However, in March and April 2020, we experienced a material decline in testing volumes due to the COVID-19 pandemic. During the last two weeks of March, volumes declined in excess of 40% compared to the prior year period, inclusive of COVID-19 testing, which continued in April with volume declines in the range of 50 to 60% compared to the prior year period as government policies were implemented to reduce the transmission of COVID-19. During May and June 2020, we began to experience a recovery in base testing volumes (which excludes COVID-19 molecular and antibody testing), which continued in the third quarter of 2020. Additionally, beginning during the second quarter, we experienced growing demand for COVID-19 testing services and have expanded our capacity in order to satisfy such demand. Volumes in our base business for the second and third quarters of 2020 decreased approximately 34% and 5%, respectively, compared to the prior year periods.

    The decrease in base testing volumes was driven by federal, state and local governmental policies and initiatives designed to reduce the transmission of COVID-19 which 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), 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 continued declines in base testing volumes. It is also possible that we will experience an impact on cash collections as a result of the impact of the COVID-19 pandemic. 

    During the second quarter of 2020, the decrease in base testing volumes was partially offset by COVID-19 molecular and antibody testing, including an increase in revenue per requisition driven in large part by COVID-19 molecular testing. During the third quarter of 2020, the decrease in base testing volumes was more than offset by the impact of the COVID-19 testing.

    In April 2020 the Centers for Medicare and Medicaid Services ("CMS") announced that it would increase the reimbursement for certain COVID-19 molecular tests making use of high-throughput technologies developed by the private sector that allow for increased testing capacity, faster results, and more effective means of combating the spread of the virus to $100 per test, effective April 14, 2020. In October 2020, CMS announced that, beginning January 1, 2021, Medicare will change 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 certain additional requirements are met. In conjunction with our trade association, we are currently reviewing how this reimbursement policy will impact laboratories and the patients we serve.

    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 has significantly declined; and approved furloughs for employees with diminished work requirements who expressed an interest. As our testing volumes 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.

    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; 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

31
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 Laboratory Fee Schedule for years after 2021 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 health care 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. In October 2020, we announced that we plan to return the entire $138 million of funds received. During the three months ended June 30, 2020, we recognized $65 million in other operating expense (income), net related to the first tranche of funds. During the three months ended September 30, 2020, we reversed the $65 million of funds that had previously been recognized in other operating expense (income), net. As of September 30, 2020, no amounts are recorded in our year-to-date consolidated statement of operations and the entire $138 million of funds that we intend to return are recorded in accounts payable and accrued expenses on our consolidated balance sheet; and
•suspending Medicare sequestration from May 2020 to December 2020. The suspension of the Medicare sequestration 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.

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 proceeds from the issuance, in December 2019, of the 2.95% senior notes due June 2030, along with cash on hand. For the nine months ended September 30, 2020, we recorded a loss on retirement of debt, principally comprised of premiums paid, of $1 million in other income, net.

Senior Notes Offering

In March 2019,    During May 2020, we completed a senior notes offering, (the “2019 Senior Notes”), consisting of $500$550 million aggregate principal amount of 4.20%2.80% senior notes due June 2029,2031 (the “2031 Senior Notes”), which were issued at an original issue discount of $1 million. TheIn October 2020, we issued a redemption notice to the holders of our $550 million aggregate principal amount of 4.70% senior notes due April 2021, to redeem such notes in November 2020. We intend to use the net proceeds from the 20192031 Senior Notes, were usedalong with cash on hand, to repay in fullsatisfy the outstanding indebtedness under our Senior Notes due April 1, 2019, to repay outstanding indebtedness under the secured receivables credit facility and for general corporate purposes.redemption.

    For further details regarding our debt, see NoteNotes 8 and 18 to the interim unaudited consolidated financial statements.


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AMCA Data Security Incident

On June 3, 2019, the Company reported that Retrieval-Masters Creditors Bureau, Inc./American Medical Collection Agency (“AMCA”), informed the Company and Optum360 LLC ("Optum360"), 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 has also informed us 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. While the impact of this incident to the Company's results of operations and cash flows was not material for the nine months ended September 30, 2019, our future financial results may be negatively impacted by costs associated with the incident and disruption of our accounts receivable collection processes.

Acquisition of the Clinical Laboratory Services Business of Boyce & Bynum Pathology Laboratories, P.C.

Blueprint Genetics Oy

On February 11, 2019,January 21, 2020, we completed ourthe acquisition of certain assets of the clinical laboratory services business of Boyce & Bynum Pathology Laboratories, P.C.Blueprint Genetics Oy ("Boyce & Bynum"Blueprint Genetics"), in an all cash transaction for $61$108 million, which consistednet of $3 million cash considerationacquired. Blueprint Genetics is a leading specialty genetic testing company with deep expertise in gene variant interpretation based on next generation sequencing and proprietary bioinformatics. Through the acquisition, we acquired all of $55 million and contingent consideration initially estimated at $6 million. The contingent consideration arrangement is dependent upon the achievement of certain testing volume benchmarks.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

    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, 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 5 to the interim unaudited consolidated financial statements and Note 6 to the audited consolidated financial statements in the Company's 2018our 2019 Annual Report on Form 10-K.

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, andcosts. We are assessing whether the COVID-19 pandemic will impact our ability to achieve that objective in 2018 we achieved that goal.2020.

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 identified key themes to change how we operate including reducing denials and patient concessions; further digitizing our business; standardization and automation; and optimization initiatives in our lab network and patient service center network. We believe that our efforts to standardize our information technology systems, equipment and data also foster our efforts to strengthen our foundation for growth and support the value creation initiatives of our clinical franchises by enhancing our operational flexibility, empowering and enhancing the customer experience, facilitating the delivery of actionable insights and bolstering our large data platform.

For the nine months ended September 30, 2019,2020, we incurred $49$34 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 4 to the interim unaudited consolidated financial statements.    

Critical Accounting Policies and Estimates
    
There have been no significant changes to our critical accounting policies from those disclosed in our 20182019 Annual Report on Form 10-K.10-K except for the adoption of new accounting standards as described in Note 2 to the interim unaudited consolidated financial statements.

    Revenues and accounts receivable associated with DIS


33
    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, using the portfolio approach, in exchange for providing services. These estimates include the impact of contractual allowances, including payer denials, and price concessions. The portfolios determined using the portfolio approach consist of the following customers:

•Healthcare Insurers
•Government Payers (Medicare and Medicaid programs)
•Client Payers
•Patients

    We have a standardized approach to estimate the amount of consideration that we expect to be entitled to; this standardized approach considers, among other things, the impact of contractual allowances, including payer denials, and price concessions. Historical collection and payer reimbursement experience (along with the period the receivables have been outstanding), as well as other factors including current market conditions, are integral parts of the estimation process related to revenues and receivables. Adjustments to our estimated contractual allowances and implicit price concessions are recorded in the current period as changes in estimates. Further adjustments, based on actual receipts, may be recorded upon settlement.

    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 15 to the interim unaudited consolidated financial statements.

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.
    Goodwill is evaluated for impairment 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 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, we are required to perform the quantitative goodwill impairment test. Otherwise, no further analysis is required.
    On a quarterly basis, we perform a review of our business to determine if events or changes in circumstances have occurred that indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying value. 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. In conjunction with the preparation of our September 30, 2020 financial statements, we performed such review and concluded that no impairment test was necessary. However, should the impact of the COVID-19 pandemic be significantly worse than currently expected, it is possible that we could incur impairment charges in the future.
Impact of New Accounting Standards

The adoption of new accounting standards including the new standard related to accounting for leases, areis discussed in Note 2 to the interim unaudited consolidated financial statements. For further details regarding our leases, refer to Note 9 to the interim unaudited consolidated financial statements.


The impactsimpact of recent accounting pronouncements not yet effective on our consolidated financial statements areis discussed in Note 2 to the interim unaudited consolidated financial statements.


34
Results of Operations    

The following tables set forth certain results of operations data for the periods presented:
Three Months Ended September 30,Nine Months Ended September 30,
20202019$ Change% Change20202019$ Change% Change
(dollars in millions, except per share amounts)
Net revenues:
DIS business$2,709 $1,877 $832 44.3 %$6,217 $5,561 $656 11.8 %
DS businesses77 79 (2)(1.9)218 239 (21)(8.6)
Total net revenues$2,786 $1,956 $830 42.5 %$6,435 $5,800 $635 11.0 %
Operating costs and expenses and other operating income:  
Cost of services$1,580 $1,264 $316 25.0 %$4,071 $3,773 $298 7.9 %
Selling, general and administrative396 362 34 9.5 1,103 1,108 (5)(0.4)
Amortization of intangible assets27 23 4 12.8 77 72 5 5.9 
Other operating expense (income), net65 (6)71 NM8 (21)29 NM
Total operating costs and expenses, net$2,068 $1,643 $425 25.9 %$5,259 $4,932 $327 6.6 %
Operating income$718 $313 $405 129.5 %$1,176 $868 $308 35.5 %
Other income (expense):
Interest expense, net$(42)$(44)$2 (3.3)%$(124)$(133)$9 (6.6)%
Other income, net77 1 76 NM74 13 61 NM
Total non-operating income (expense), net$35 $(43)$78 NM$(50)$(120)$70 NM
Income tax expense$(177)$(62)$(115)187.2 %$(269)$(175)$(94)54.0 %
Effective income tax rate23.7 %22.9 %23.9 %23.4 %
Equity in earnings of equity method investees, net of taxes$15 $18 $(3)(9.1)%$33 $48 $(15)(29.9)%
Amounts attributable to Quest Diagnostics’ common stockholders:
Income from continuing operations$568 $215 $353 164.7 %$852 $585 $267 45.6 %
Income from discontinued operations, net of taxes$— $— $— NM$— $20 $(20)NM
Diluted earnings per common share from continuing operations attributable to Quest Diagnostics' common stockholders$4.14 $1.56 $2.58 164.6 %$6.25 $4.27 $1.98 46.0 %
NM - Not Meaningful



35
 Three Months Ended September 30, Nine Months Ended September 30,
 2019 2018 $ Change % Change 2019 2018 $ Change % Change
 (dollars in millions, except per share amounts)
Net revenues:               
DIS business$1,877
 $1,810
 $67
 3.7 % $5,561
 $5,448
 $113
 2.1 %
DS businesses79
 79
 —
 (0.5) 239
 244
 (5) (2.2)
Total net revenues$1,956
 $1,889
 $67
 3.5 % $5,800
 $5,692
 $108
 1.9 %
                
Operating costs and expenses and other operating income: 
  
            
Cost of services$1,264
 $1,222
 $42
 3.5 % $3,773
 $3,691
 $82
 2.2 %
Selling, general and administrative362
 354
 8
 1.9
 1,108
 1,068
 40
 3.7
Amortization of intangible assets23
 22
 1
 5.8
 72
 66
 6
 9.8
Other operating income, net(6) (13) 7
 NM
 (21) (14) (7) NM
Total operating costs and expenses, net$1,643
 $1,585
 $58
 3.6 % $4,932
 $4,811
 $121
 2.5 %
                
Operating income$313
 $304
 $9
 2.9 % $868
 $881
 $(13) (1.5)%
                
Other income (expense):               
Interest expense, net$(44) $(41) $(3) 3.7 % $(133) $(124) $(9) 6.5 %
Other income, net1
 3
 (2) NM
 13
 2
 11
 NM
Total non-operating expenses, net$(43) $(38) $(5) 8.9 % $(120) $(122) $2
 (2.5)%
                
Income tax expense$(62) $(48) $(14) 29.2 % $(175) $(142) $(33) 22.8 %
Effective income tax rate22.9% 18.1%     23.4% 18.8%    
                
Equity in earnings of equity method investees, net of taxes$18
 $9
 $9
 89.9 % $48
 $32
 $16
 47.3 %
                
Amounts attributable to Quest Diagnostics’ common stockholders:               
Income from continuing operations$215
 $213
 $2
 0.8 % $585
 $609
 $(24) (3.9)%
Income from discontinued operations, net of taxes$—
 $—
 $—
 NM
 $20
 $—
 $20
 NM
                
Diluted earnings per common share from continuing operations attributable to Quest Diagnostics' common stockholders$1.56
 $1.53
 $0.03
 2.8 % $4.27
 $4.37
 $(0.10) (2.0)%
                
NM - Not Meaningful               


The following table sets forth certain results of operations data as a percentage of net revenues for the periods presented:
 Three Months Ended September 30, Nine Months Ended September 30,
 2019 2018 2019 2018
Net revenues:       
DIS business96.0 % 95.8 % 95.9 % 95.7 %
DS businesses4.0
 4.2
 4.1
 4.3
Total net revenues100.0 % 100.0 % 100.0 % 100.0 %
        
Operating costs and expenses and other operating income: 
  
    
Cost of services64.6 % 64.6 % 65.1 % 64.8 %
Selling, general and administrative18.5
 18.8
 19.1
 18.8
Amortization of intangible assets1.2
 1.2
 1.2
 1.2
Other operating income, net(0.3) (0.7) (0.4) (0.3)
Total operating costs and expenses, net84.0 % 83.9 % 85.0 % 84.5 %
        
Operating income16.0 % 16.1 % 15.0 % 15.5 %

Operating Results
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Net revenues:
DIS business97.2 %96.0 %96.6 %95.9 %
DS businesses2.8 4.0 3.4 4.1 
Total net revenues100.0 %100.0 %100.0 %100.0 %
Operating costs and expenses and other operating income:  
Cost of services56.7 %64.6 %63.3 %65.1 %
Selling, general and administrative14.2 18.5 17.1 19.1 
Amortization of intangible assets1.0 1.2 1.2 1.2 
Other operating expense (income), net2.3 (0.3)0.1 (0.4)
Total operating costs and expenses, net74.2 %84.0 %81.7 %85.0 %
Operating income25.8 %16.0 %18.3 %15.0 %
    
Operating Results
    Results for the three months ended September 30, 2020 were affected by certain items that on a net basis reduced diluted earnings per share by $0.17 as follows:

•net pre-tax charges of $69 million (charges of $65 million in other operating expense (income), net, $3 million in cost of services and $1 million in equity in earnings of equity method investees, net of taxes), or $0.39 per diluted share, representing the impact of certain items resulting from the COVID-19 pandemic, including the reversal of $65 million of income previously recognized during the second quarter of 2020 attributable to the receipt of funds from the government that were appropriated to healthcare providers under the CARES Act and, to a lesser extent, incremental costs incurred primarily to protect the health and safety of our employees and customers;
•pre-tax amortization expense of $30 million ($27 million in amortization of intangible assets and $3 million in equity in earnings of equity method investees, net of taxes) or $0.16 per diluted share; and
•pre-tax charges of $18 million ($11 million in cost of services and $7 million in selling, general and administrative expenses), or $0.10 per diluted share, representing costs primarily associated with systems conversions and integration incurred in connection with further restructuring and integrating our business; partially offset by
•a pre-tax gain of $70 million, or $0.46 per diluted share, recognized in other income, net based on the difference between the fair value and the carrying value of an equity interest; and
•excess tax benefits associated with stock-based compensation arrangements of $3 million, or $0.02 per diluted share, recorded in income tax expense.

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

•pre-tax amortization expense of $86 million ($77 million in amortization of intangible assets and $9 million in equity in earnings of equity method investees, net of taxes) or $0.47 per diluted share;
•pre-tax charges of $52 million ($38 million of charges in cost of services, $8 million of charges in selling, general and administrative expenses and $8 million of charges in other operating expense (income), net, partially offset by a $2 million gain in equity in earnings of equity method investees, net of taxes), or $0.29 per diluted share, representing the impact of certain items resulting from the COVID-19 pandemic, principally including expense associated with a one-time payment to eligible employees to help offset expenses they incurred as a result of COVID-19, certain asset impairment charges, and incremental costs incurred primarily to protect the health and safety of our employees and customers; and
•pre-tax charges of $43 million ($21 million in cost of services and $22 million in selling, general and administrative expenses), or $0.25 per diluted share, primarily associated with systems conversions and integration incurred in connection with further restructuring and integrating our business; partially offset by
•a pre-tax gain of $70 million, or $0.46 per diluted share, recognized in other income, net based on the difference between the fair value and the carrying value of an equity interest; and

36
•excess tax benefits associated with stock-based compensation arrangements of $15 million, or $0.11 per diluted share, recorded in income tax expense.
Results for the three months ended September 30, 2019 were affected by certain items that on a net basis reduced diluted earnings per share by $0.20 as follows:

•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) or $0.14 per diluted share; and
•pre-tax charges of $16 million ($7 million in cost of services and $9 million in selling, general and administrative expenses), or $0.09 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 $3 million (a $7 million gain in other operating income,expense (income), net partially offset by a $4 million charge in selling, general and administrative expenses), or $0.01 per diluted share, primarily due to a gain associated with the decrease in the fair value of the contingent consideration accrual associated with a previous acquisition partially offset by costs incurred related to the AMCA Data Security Incident,a data security incident, and
•excess tax benefits associated with stock-based compensation arrangements of $3 million, or $0.02 per diluted share, recorded in income tax expense.

Results for the nine months ended September 30, 2019 were affected by certain items that on a net basis reduced diluted earnings per share by $0.62 as follows:

•pre-tax amortization expense of $84 million ($72 million in amortization of intangible assets and $12 million in equity in earnings of equity method investees, net of taxes) or $0.46 per diluted share; and
•pre-tax charges of $64 million ($29 million in cost of services and $35 million in selling, general and administrative expenses), or $0.35 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 $17 million (a $22 million gain in other operating income,expense (income), net partially offset by a $5 million charge in selling, general and administrative expenses), or $0.11 per diluted share, primarily due to a gain associated with an insurance claim for hurricane related losses, and a 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, and costs incurred related to the AMCA Data Security Incident,a data security incident, and
•excess tax benefits associated with stock-based compensation arrangements of $11 million, or $0.08 per diluted share, recorded in income tax expense.

Results for the three months ended September 30, 2018 were affected by certain items that on a net basis reduced diluted earnings per share by $0.15 as follows:

pre-tax amortization expense of $27 million ($22 million in amortization of intangible assets and $5 million in equity in earnings of equity method investees, net of taxes), or $0.13 per diluted share;

pre-tax charges of $19 million ($10 million in cost of services and $9 million in selling, general and administrative expenses), or $0.10 per diluted share, primarily associated with workforce reductions, systems conversions and integration incurred in connection with further restructuring and integrating our business;
net pre-tax benefit of $12 million (a $13 million gain in other operating income, net partially offset by a $1 million charge in cost of services), or $0.06 per diluted share, primarily attributable to a gain associated with the decrease in the fair value of the contingent consideration accrual associated with a previous acquisition partially offset by non-cash asset impairment charges; and
excess tax benefits associated with stock-based compensation arrangements of $4 million, or $0.02 per diluted share, recorded in income tax expense.

Results for the nine months ended September 30, 2018 were affected by certain items that on a net basis reduced diluted earnings per share by $0.58 as follows:

pre-tax amortization expense of $79 million ($66 million in amortization of intangible assets and $13 million in equity in earnings of equity method investees, net of taxes), or $0.41 per diluted share;
pre-tax charges of $75 million ($36 million in cost of services, $38 million in selling, general and administrative expenses, and $1 million in other operating income, net), or $0.40 per diluted share, primarily associated with workforce reductions, systems conversions and integration incurred in connection with further restructuring and integrating our business;
excess tax benefits associated with stock-based compensation arrangements of $17 million, or $0.12 per diluted share, recorded in income tax expense;
an income tax benefit of $15 million, or $0.10 per diluted share, 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 tax rate in effect during 2017; and
net pre-tax gain of $2 million (a $14 million gain in other operating income, net partially offset by a $12 million charge in cost of services), or $0.01 per diluted share, primarily attributable to a gain associated with the decrease in the fair value of the contingent consideration accrual associated with a previous acquisition and an insurance claim for hurricane related losses partially offset by costs incurred related to certain legal matters and non-cash asset impairment charges.


Net Revenues

Net revenues for the three months ended September 30, 20192020 increased by 3.5%42.5% compared to the prior year period.

DIS revenues for the three months ended September 30, 20192020 increased by 3.7%44.3% compared to the prior year period driven by organic volume growth (growth excluding the impact of acquisitions)demand for COVID-19 molecular and antibody testing, and, to a lesser extent, the impact of recent acquisitions, partially offset by a decline in revenue per requisition.testing volume in our base business (which excludes COVID-19 molecular and antibody testing). For the three months ended September 30, 2020:

•Organic growthrevenue and acquisitions contributed approximately 1.7%41.8% and 2.0%2.5%, respectively, to DIS revenue growth.
DIS volume increased by 5.1%, with organic growth and acquisitions contributing approximately 3.7% and 1.4%, respectively, to DIS volume growth. Organic volume growth benefited from expanded in-network access primarily as a result of becoming a participating provider to UnitedHealthcare and Horizon Blue Cross Blue Shield of New Jersey. In addition, there was one more business day compared to the prior year period, whichperiod.
•DIS volume increased by 19.7% with organic volume and acquisitions contributing approximately 16.6% and 3.1%, respectively. Organic volume growth was driven by demand for COVID-19 molecular testing, partially offset by declines in testing volumes in the impact of weather. We estimate thatbase business. Testing volumes in the net impact of these two items favorably affectedbase business were negatively impacted by the year-over-year comparisonCOVID-19 pandemic and declined by approximately 1%.5% compared to the prior year period.
•Revenue per requisition decreasedincreased by 1.2%20.9% compared to the prior year period primarily due to reimbursement pressure, including unit price reductions associated with the Protecting Access to Medicare Act ("PAMA") and all other sources, of approximately 2.5%; partially offset by favorable mix, driven in large part by acquisitions.

Net revenues for the nine months ended September 30, 2019 increased by 1.9% compared to the prior year period.

DIS revenues for the nine months ended September 30, 2019 increased by 2.1% compared to the prior year period driven by organic volume growth and the impact of recent acquisitions,COVID-19 molecular testing; partially offset by a decline in revenue per requisition.

Organic growth and acquisitions contributed approximately 0.2% and 1.9%, respectively, to DIS revenue growth.
DIS volume increased by 4.3%, with organic growth and acquisitions contributing approximately 3.0% and 1.3%, respectively, to DIS volume growth. Organic volume growth benefited from expanded in-network access primarily as a result of becoming a participating provider to UnitedHealthcare and Horizon Blue Cross Blue Shield of New Jersey.

Revenue per requisition decreased by 2.1% compared to the prior year period primarily due to reimbursement pressure, including unit price reductions associated with PAMA and all other sources, of approximately 2.4%1.7%.

    Net revenues for the nine months ended September 30, 2020 increased by 11.0% compared to the prior year period.

    DIS revenues for the nine months ended September 30, 2020 increased by 11.8% compared to the prior year period driven by demand for COVID-19 molecular and an increase in denials;antibody testing, and, to a lesser extent, the impact of recent acquisitions, partially offset by a decline in testing volume in our base business. For the nine months ended September 30, 2020:

•Organic revenue and acquisitions contributed approximately 10.5% and 1.3%, respectively, to DIS revenue growth compared to the prior year period.

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•DIS volume decreased by 0.1%, with organic volume down approximately 1.4%, partially offset by volume associated with recent acquisitions of 1.3%. Organic volume was negatively impacted by declines in testing volumes in the base business due to the COVID-19 pandemic, partially offset by COVID-19 molecular and antibody testing and, to a lesser extent, the impact of an extra business day in 2020 and the impact of weather in the prior year period, both of which favorably impacted the comparison by approximately 1.0%. Testing volumes in the base business declined approximately 14.4% for the nine months ended September 30, 2020 compared to the prior year period.
•Revenue per requisition increased by 12.4% compared to the prior year period primarily due to favorable mix, driven in large part by acquisitions.COVID-19 molecular testing; partially offset by reimbursement pressure, including unit price reductions associated with PAMA and all other sources, of approximately 1.8%.

Cost of Services

Cost of services consists principally of costs for obtaining, transporting and testing specimens as well as facility costs used for the delivery of our services.

For the three months ended September 30, 2019,2020, cost of services increased by $42$316 million compared to the prior year period. The increase was primarily driven by additional operating costshigher variable expenses related to increased testing volumes as well as test mix and a higher supply cost associated with our acquisitionsCOVID-19 testing, and incremental operating expenses associated with organic volume growth. These increases were partially offset by incremental expense incurred in the prior year period associated with reinvestments in the business with savings from tax reform; and cost reduction initiatives primarily under our Invigorate program. These initiatives enabled productivity gains as we leveraged our fixed cost structure to support the increase in volume.higher performance-based compensation.

For the nine months ended September 30, 2019,2020, cost of services increased by $82$298 million compared to the prior year period. The increase was primarily driven by additional operating costshigher variable expenses related to test mix and a higher supply cost associated with our acquisitions;COVID-19 testing, higher performance-based compensation, and incremental operating expenses associated with organic volume growth; and higher depreciationcosts incurred related to the COVID-19 pandemic including expense associated with increased capital expenditures.a one-time payment to eligible employees to help offset expenses they incurred as a result of COVID-19. These increases were partially offset by lower compensation and benefit costs as a decrease in costs associated with legal matters; incremental expense incurred in the prior year period associated with reinvestments in the business with savings from tax reform; and cost reduction initiatives primarily underresult of a series of temporary actions implemented to manage our Invigorate program. These initiatives enabled productivity gains as we leveraged our fixed cost structure to support the increase in volume.
workforce costs.

Selling, General and Administrative Expenses ("SG&A")
    
SG&A consist principally of the costs associated with our sales and marketing efforts, billing operations, bad debtcredit loss expense and general management and administrative support as well as administrative facility costs.
    
SG&A increased by $8$34 million for the three months ended September 30, 2019,2020, compared to the prior year period, primarily driven by additional operatinghigher performance-based compensation costs, and higher costs associated with changes in the value of our acquisitions; and incremental operating expenses associated with organic volume growth. These increases weredeferred compensation obligations, partially offset by incremental expense incurred in the prior year period associated with reinvestments in the business with savings from tax reform; and cost reduction initiatives under our Invigorate program. These initiatives enabled productivity gains as we leveraged our fixed cost structure to support the increase in volume.lower travel related costs.

SG&A increaseddecreased by $40$5 million for the nine months ended September 30, 2019,2020, compared to the prior year period primarily driven by additional operatinglower compensation and benefit costs as a result of a series of temporary actions implemented to manage our workforce costs, lower travel related costs, lower costs associated with our acquisitions; higherInvigorate program, and lower costs associated with an increasechanges in the value of our deferred compensation obligations; and incremental operating expenses associated with organic volume growth. These increases wereobligations, partially offset by lower restructuring costs associated with workforce reductions; incremental expense incurred in the prior year period associated with reinvestments in the business with savings from tax reform; and cost reduction initiatives primarily under our Invigorate program. These initiatives enabled productivity gains as we leveraged our fixed cost structure to support the increase in volume.higher performance-based compensation costs.

The increasechange in the value of our deferred compensation obligations is largely offset by gains or losses due to the increasechanges in the value of the associated investments, which are recorded in other income, net. For further details regarding the Company'sour deferred compensation plans, see Note 17 to the audited consolidated financial statements in our 20182019 Annual Report on Form 10-K.
    
Amortization Expense

Amortization expense increased by $1 million forFor the three and nine months ended September 30, 2019,2020, amortization expense increased by $4 million and $5 million, respectively, compared to the prior year periodperiods as a result of recent acquisitions.

Amortization expense increased by $6 million for the nine months ended September 30, 2019, compared to the prior year period as a result of recent acquisitions.    

Other Operating Income,Expense (Income), Net

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


For the three months ended September 30, 2020, other operating expense (income), net primarily represents the reversal of $65 million of income that was previously recognized during the three months ended June 30, 2020 relating to the receipt of funds that were appropriated to healthcare providers under the CARES Act (see Note 11 to the interim unaudited consolidated financial statements).


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

For the three months ended September 30, 2019, other operating income,expense (income), net primarily represents a gain associated with the decrease in the fair value of a contingent consideration accrual associated with a previous acquisition.

For the nine monthsended September 30, 2019, other operating income,expense (income), net includes a $12 million gain associated with 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.

For the three and nine months ended September 30, 2018, other operating income, net includes a gain of $13 million associated with a decrease in the fair value of the contingent consideration accrual associated with a previous acquisition.

Interest Expense, Net

Interest expense, net increaseddecreased for both the three and nine months ended September 30, 20192020 compared to the prior year period,periods, primarily driven by higherlower interest rates associated with our variable rate indebtedness, combined withpartially 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.


Other income, net for    For the three and nine months ended September 30, 20192020, other income, net increased by $11$76 million and $61 million, respectively, compared to the prior year periodperiods. For the three months ended September 30, 2020, the increase was primarily due to a $70 million gain recognized as a result of the remeasurement of our previously held equity interest in MACL to fair value (see Note 5 to the interim unaudited consolidated financial statements) and higher gains associated with investments in our deferred compensation plans.plans compared to the prior year period. For the nine months ended September 30, 2020, the increase was primarily due to a $70 million gain recognized as a result of the remeasurement of our previously held equity interest in MACL to fair value (see Note 5 to the interim unaudited consolidated financial statements), partially offset by lower gains associated with investments in our deferred compensation plans compared to the prior year period.

Income Tax Expense

Income tax expense for the three months ended September 30, 2020 and 2019 was $177 million and 2018 was $62 million, respectively. Income tax expense for the nine months ended September 30, 2020 and $482019 was $269 million and $175 million, respectively. The increase in income tax expense for both the three and nine months ended September 30, 2019,2020 compared to the prior year period was primarily driven by:by an increase in income from continuing operations before income taxes and equity in earnings of equity method investees.

a $13 million income tax benefit recognized in the prior year period due to the release of tax reserves associated with the expiration of the statute of limitations for certain income tax returns; partially offset by
a $6 million income tax benefit recognized during    For the three months ended September 30, 2020 and 2019, the effective income tax rate was 23.7% and 22.9%, respectively. The effective income tax rate for the three months ended September 30, 2020, benefited from a lower effective income tax rate associated with a $70 million gain recognized as a result of the remeasurement of our previously held equity interest in MACL to fair value; and $3 million of excess tax benefits associated with stock-based compensation arrangements. The effective income tax rate for the three months ended September 30, 2019 benefited from a $6 million income tax benefit due to the release of a valuation allowance associated with net operating loss carryforwards.

During the three months ended September 30, 2019carryforwards; and 2018, we recognized $3 million and $4 million, respectively, of excess tax benefits associated with stock-based compensation arrangements.

Income    For the nine months ended September 30, 2020 and 2019, the effective income tax expenserate was 23.9% and 23.4%, respectively. The effective income tax rate for the nine months ended September 30, 2020, benefited from a lower effective income tax rate associated with a $70 million gain recognized as a result of the remeasurement of our previously held equity interest in MACL to fair value; and $15 million of excess tax benefits associated with stock-based compensation arrangements. The effective income tax rate for the nine months ended September 30, 2019 and 2018 was $175benefited from $11 million and $142 million, respectively. The increase in income tax expense for the nine months ended September 30, 2019, compared to the prior year period was primarily driven by:

a $15 million income tax benefit recognized in the prior year period 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 tax rate in effect during 2017;
a $13 million income tax benefit recognized in the prior year period due to the release of tax reserves associated with the expiration of the statute of limitations for certain income tax returns;
a decrease in excess tax benefits associated with stock-based compensation arrangements; partially offset by
and a $10 million income tax benefit recognized during the nine months ended September 30, 2019 due to the release of valuation allowances associated with net operating loss carryforwards.

During    The effective income tax rate associated with the $70 million gain recognized as a result of the remeasurement of our previously held equity interest in MACL to fair value was 11.8% due to a permanent difference in the financial reporting and tax basis of goodwill.

39

    For both the three and nine months ended September 30, 2019 and 2018,2020, we recognized $11 million and $17 million, respectively,utilized the most likely estimate of excessour annual income before taxes to determine the annual effective income tax benefitsrate for 2020. As a result of uncertainty associated with stock-based compensation arrangements.the impact of the COVID-19 pandemic, it is possible that we will experience variability in the annual projections and, as a result, the annual effective income tax rate.

Equity in Earnings of Equity Method Investees, Net of Taxes


Equity in earnings of equity method investees, net of taxes increaseddecreased for the three and nine months ended September 30, 20192020 by $9$3 million and $15 million, respectively, compared to the prior year periodperiods primarily associated withdue to the impact of the COVID-19 pandemic on our investment in the Q2 Solutions joint venture.


Equity in earnings of equity method investees, net of taxes increased for the nine months ended September 30, 2019 by $16 million compared to the prior year period primarily associated with our investment in the Q2 Solutions joint venture.investees.

Discontinued Operations

During the third quarter of 2006, we completed the wind down of Nichols Institute Diagnostics ("NID"), a test kit manufacturing subsidiary, which has been classified as discontinued operations for all periods presented. Discontinuedthe nine months ended September 30, 2019. Income from discontinued operations, net of taxes, for the nine months ended September 30, 2019 includes discrete tax benefits of $20 million associated with the favorable resolution of certain tax contingencies related to NID.


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 swaps. Interest rate swaps 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. We believe that our exposures to foreign exchange impacts and changes in commodity prices are not material to our consolidated financial condition or results of operations.operations or financial position.
    
As of September 30, 20192020 and December 31, 2018,2019, the fair value of our debt was estimated at approximately $4.3$5.2 billion and $4.0$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 September 30, 20192020 and December 31, 2018,2019, the estimated fair value exceeded the carrying value of the debt by $306$609 million and $85$313 million, respectively. A hypothetical 10% increase in interest rates (representing 2817 basis points as of September 30, 20192020 and 3928 basis points as of December 31, 2018)2019) would potentially reduce the estimated fair value of our debt by approximately $82$84 million and $88$100 million as of September 30, 20192020 and December 31, 2018,2019, 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 a rate that is intended to approximate commercial paper rates for highly rated issuers, or LIBOR, plus a spread. InterestAs of September 30, 2020, interest on our senior unsecured revolving credit facility is subject to a pricing schedule that can fluctuate based on changes in our credit ratings.ratings and our leverage ratio. As such, our borrowing cost under this credit arrangement will be subject to both fluctuations in interest rates, our leverage ratio and changes in our credit ratings. As of September 30, 2019,2020, 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 0.70% to 0.725%; and for our senior unsecured revolving credit facility, LIBOR plus 1.125%. During October 2020, we amended the secured receivables credit facility and the borrowing rates are now based on commercial paper rates for highly rated issuers, or LIBOR, plus a spread of 0.825% to 0.95%. As of September 30, 2019,2020, there were no borrowings outstanding under either our $600 million secured receivables credit facility or our $750 million senior unsecured revolving credit facility. The amendment to the secured receivables credit facility did not change the total borrowing capacity under the facility.

    
The notional amount ofIn April 2020, we terminated our existing fixed-to-variable interest rate swaps outstanding as of both September 30, 2019 and December 31, 2018 was $1.2 billion. The aggregate fair value of the fixed-to-variable interest rate swaps was $17 million, in a liability position, as of September 30, 2019.

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 (representing 21 basis points) would potentiallynot materially change annual interest expense by $3 million. A hypothetical 10% change in the forward one-month LIBOR curve (representingexpense.

    During March 2020, we entered into a 14 basis points change in the weighted average yield) would potentially change the fair value of our fixed-to-variableforward-starting interest rate swap liabilities by $11agreement with a financial institution for a total notional amount of $25 million.

In February 2019, Additionally, during May 2020, we entered into interest rate lock agreements with several financial institutions for a total notional amount of $250 million to hedge a portion of our interest rate exposure associated with variability in future cash flows attributable to changes in the ten-year treasury rates related to the planned issuance of the 2019 Senior Notes. In connection with the issuance of the 2019 Senior Notes, these agreements were settled, and we paid $1$275 million. These losses are deferred in stockholders' equity, net of taxes, as a component of accumulated other comprehensive loss, and amortized as an adjustment to interest expense, net over the term of the 2019 Senior Notes.

During the third quarter of 2019, we entered intoThe forward-starting interest rate swap agreement and the interest rate lock agreements with several financial institutions for a total notional amount of $125 millionwere 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 during 2020. The new debt will be issued to replace certain senior notes that are maturing at such time. The aggregate fair valueand were accounted for as cash flow hedges. In connection with the issuance of the forward-starting interest rate swaps was $2 million, in an asset position, as2031 Senior Notes, these agreements were settled

40

hypothetical 10% changeand we received net proceeds of $1 million. The net gain is deferred in the forward three-month LIBOR curve (representingstockholders' equity, net of taxes, as a 15 basis points change in the weighted average yield) would potentially change the fair valuecomponent of our forward-startingaccumulated other comprehensive loss, and is being amortized as an adjustment to interest rate swap asset by $2 million.expense, net over a ten-year period.

For further details regarding our outstanding debt, see NoteNotes 8 and 18 to the interim unaudited consolidated financial statements and Note 1413 to the audited consolidated financial statements included in our 20182019 Annual Report on Form 10-K. For details regarding our financial instruments and hedging activities, see Note 109 to the interim unaudited consolidated financial statements and Note 15 to the audited consolidated financial statements included in our 20182019 Annual Report on Form 10-K.

Risk Associated with Investment Portfolio

Our investment portfolio includes equity investments comprised primarily of strategic equity holdings in privately and publicly held companies. These securities are exposed to price fluctuations and are generally concentrated in the life sciences industry.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 September 30, 2019.2020.
    
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 September 30, 2020 financial statements, we considered whether the carrying values of such 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.

Liquidity and Capital Resources
Nine Months Ended September 30, ChangeNine Months Ended September 30,Change
2019 2018 20202019Change
(dollars in millions)  (dollars in millions)
Net cash provided by operating activities$895
 $905
 $(10)Net cash provided by operating activities$1,464 $895 $569 
Net cash used in investing activities(311) (455) 144
Net cash used in investing activities(604)(311)(293)
Net cash used in financing activities(285) (324) 39
Net cash used in financing activities(447)(285)(162)
Net change in cash and cash equivalents and restricted cash$299
 $126
 $173
Net change in cash and cash equivalents and restricted cash$413 $299 $114 

Cash and Cash Equivalents

Cash and cash equivalents consist of cash and highly liquidhighly-liquid short-term investments. Cash and cash equivalents as of September 30, 20192020 totaled $434$1,605 million, compared to $135$1,192 million as of December 31, 2018.2019.

As of September 30, 2019,2020, approximately 8%2% of our $434$1,605 million of consolidated cash and cash equivalents were held outside of the United States. Our current liquidity position does not require repatriation of these funds in order to fund operations in the United States. However, as a result of changes introduced by the Tax Cuts and Jobs Act, we may repatriate back to the United States the portion of these foreign funds not expected to be used to maintain or expand operations (including through acquisitions) outside of the United States.


Cash Flows from Operating Activities

Net cash provided by operating activities for the nine months ended September 30, 2020 and 2019 and 2018 was $895$1,464 million and $905$895 million, respectively. The $10$569 million decreaseincrease in net cash provided by operating activities for the nine months ended September 30, 2019,2020, compared to the prior year period was primarily a result of:

a $78 million increase in income tax payments;
a $35 million increase in interest payments due to timing; and
lower•higher operating income in 20192020 as compared to 2018; partially offset by2019;
•$138 million of proceeds that we received in 2020 from funds that were appropriated to healthcare providers under the CARES Act (during October 2020 we announced our plan to return such funds);
•timing of movements in our working capital accounts;accounts including as a result of the temporary suspension of certain payment requirements for the employer portion of Social Security taxes; and
lower•$40 million of proceeds received in 2020 from the termination of interest rate swaps; partially offset by
•higher performance-based compensation payments in 20192020 compared to 2018;2019; and


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•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 5247 days as of September 30, 2019,2020, 54 days as of December 31, 20182019 and 52 days as of September 30, 2018.

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 nine months ended September 30, 2020 and 2019 and 2018 was $311$604 million and $455$311 million, respectively. This $144$293 million decreaseincrease in cash used in investing activities for the nine months ended September 30, 2019,2020, compared to the prior year period was primarily a result of:

•a $163$273 million decreaseincrease in net cash paid for business acquisitions; partially offset byand
•a $23$28 million increase in investments and other assets.

capital expenditures.

Cash Flows from Financing Activities

Net cash used in financing activities for the nine months ended September 30, 2020 and 2019 and 2018 was $285$447 million and $324$285 million, respectively. This $39$162 million decreaseincrease in cash used in financing activities for the nine months ended September 30, 2019,2020, compared to the prior year period was primarily a result of:

•$36 million of net borrowings (proceeds from borrowing less repayments of debt) in 2019 compared to $35253 million of net debt repayments (repayments of debt less proceeds from borrowings) in 2018;2020 compared to $36 million of net borrowings in 2019; partially offset by:
•
a by$17 million increase in dividends paid.

•a $78 million decrease in repurchases of our common stock (see "Share Repurchase Program" for further details); and
•a $46 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 the nine months ended September 30, 2020, we completed the issuance of the 2031 Senior Notes. Additionally, during the nine months ended September 30, 2020, we redeemed in full the outstanding indebtedness under our senior notes due January 2020 and senior notes due March 2020 using proceeds from the issuance, in December 2019, of the 2.95% senior notes due June 2030, along with cash on hand. During the nine months ended September 30, 2020, we borrowed $100 million under our secured receivables credit facility and $100 million under our senior unsecured revolving credit facility, both of which were repaid prior to September 30, 2020.

During the nine months ended September 30, 2019, we completed the issuance of the 2019 Senior Notessenior notes due June 2029 and repaid in full our $300 million Senior Notessenior notes due April 1, 2019 at maturity. In addition, there were $985 million in cumulative borrowings under the secured receivables credit facility primarily associated with working capital requirements as well as the funding of our 2019 acquisition and $1,145 million in repayments under our secured receivables credit facility. During the nine months ended September 30, 2019, there were no borrowings under our senior unsecured revolving credit facility.    

During the nine months ended September 30, 2018, there were $1,630 million in cumulative borrowings under the secured receivable credit facility primarily associated with working capital requirements as well as the funding of our 2018 acquisitions. During the nine months ended September 30, 2018, there were $1,660 million in repayments under our secured receivables credit facility. During the nine months ended September 30, 2018, there were no borrowings under our senior unsecured revolving credit facility.    

Dividend Program
    
During each of the first three 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. During each of the first three quarters of 2018, our Board of Directors declared a quarterly cash dividend of $0.50 per common share. During the fourth quarter of 2018, our Board of Directors declared a quarterly cash dividend of $0.53 per common share.
    
Share Repurchase Program

As of September 30, 2019, $442 million2020, $1.2 billion remained available under our share repurchase authorizations.authorizations; however, in April 2020, we temporarily suspended additional share repurchases under the existing authorization. The share repurchase authorization has no set expiration or termination date.

Share Repurchases

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


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For the nine months ended September 30, 2019, we repurchased 1.6 million shares of our common stock for $150 million.
For the nine months ended September 30, 2018, we repurchased 1.4 million shares of our common stock for $150 million.


Contractual Obligations and Commitments

The following table summarizes certain of our contractual obligations as of September 30, 20192020:
Payments due by period
Contractual ObligationsTotalRemainder of 20201-3 years4-5 yearsAfter 5 years
(dollars in millions)
Outstanding debt$4,526 $— $551 $300 $3,675 
Finance lease obligations31 1 5 4 21 
Interest payments on outstanding debt1,716 60 321 301 1,034 
Operating leases748 41 335 215 157 
Purchase obligations1,677 86 625 494 472 
Total contractual obligations$8,698 $188 $1,837 $1,314 $5,359 
:

  Payments due by period
Contractual Obligations Total Remainder of 2019 1-3 years 4-5 years After 5 years
  (dollars in millions)
Outstanding debt $3,976
 $—
 $1,350
 $—
 $2,626
Finance lease obligations 34
 1
 6
 4
 23
Interest payments on outstanding debt 1,532
 42
 306
 250
 934
Operating leases 755
 55
 337
 203
 160
Purchase obligations 1,705
 88
 600
 471
 546
Merger consideration obligations 7
 7
 —
 —
 —
Total contractual obligations $8,009
 $193
 $2,599
 $928
 $4,289

A description of the terms of our indebtedness and related debt service requirements and future payments of our outstanding debt is contained in Note 8 to the interim unaudited consolidated financial statements and Note 1413 to the audited consolidated financial statements in our 20182019 Annual Report on Form 10-K.
    
Interest payments on our outstanding debt includesinclude interest associated with finance lease obligations and hashave been calculated after giving effect to our interest rate swap agreements, using the interest rates as of September 30, 20192020 applied to the September 30, 20192020 balances, which are assumed to remain outstanding through their maturity dates.

Operating lease obligations include variable charges (primarily maintenance fees and utilities associated with our real estate leases) in effect as of September 30, 2019.2020. A discussion and analysis regarding our operating lease obligations is contained in Note 914 to the interim unauditedaudited consolidated financial statements.statements in our 2019 Annual Report on Form 10-K.

Purchase obligations include our noncancelable commitments to purchase products or services as described in Note 18 to the audited consolidated financial statements in our 20182019 Annual Report on Form 10-K.

Merger consideration obligations include consideration owed on our business acquisitions. For details regarding our acquisitions, see Note 5 to the interim unaudited consolidated financial statements and Note 6 to the consolidated financial statements in our 2018 Annual Report on Form 10-K.

As of September 30, 2019,2020, our total liabilities associated with unrecognized tax benefits were approximately $74$79 million, which were excluded from the table above. We expect that these liabilities may decrease by less than $10 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 98 to the audited consolidated financial statements in our 20182019 Annual Report on Form 10-K 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 September 30, 2019,2020, the fair value of the redeemable noncontrolling interest on the interim unaudited consolidated balance sheet was $76$80 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 1110 to the interim unaudited consolidated financial statements and Note 16 to the audited consolidated financial statements in our 20182019 Annual Report on Form 10-K.

Our credit agreements contain various covenants and conditions, including the maintenance of certain financial ratios, that could impact our ability to, among other things, incur additional indebtedness. As of September 30, 2019, we were in compliance with the various financial covenants included in our credit agreements and we do not expect these covenants to adversely impact our ability to execute our growth strategy or conduct normal business operations.


Equity Method Investees

Our equity method investees primarily consist of our clinical trials central laboratory services joint venture and our diagnostic information services joint ventures,venture, which 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 10%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.


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    In conjunction with the preparation of our September 30, 2020 financial statements, 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.

For further details regarding related party transactions with our equity method investees, see Note 1514 to the interim unaudited consolidated financial statements and Note 20 to the audited consolidated financial statements in our 20182019 Annual Report on Form 10-K.
    
Requirements and Capital Resources

We estimate that we will invest approximately $350 million to $400 million during 20192020 for capital expenditures, to support and grow our existing operations, principally related to investments in information technology, laboratory equipment and facilities, including our new multi-year new laboratory construction in Clifton, New Jersey, and additional investments in our advanced 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 donate 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.

    In April 2020 and August 2020, we received approximately $65 million and $73 million, respectively, of funds from the government 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 October 2020, we announced our plan to return the entire $138 million of funds received.

As of September 30, 2019,2020, we had $1.3 billion of borrowing capacity was available under our existing credit facilities, consisting ofincluding $529 million available under our secured receivables credit facility and $750 million available under our senior unsecured revolving credit facility. There were no outstanding borrowings under these credit facilities as of September 30, 2020. The secured receivables credit facility includes a $250 million loan commitment which matures in October 2019,2021, and a $250 million loan commitment and a $100 million letter of credit facility which mature in October 2020.2022. The senior unsecured revolving credit facility matures in March 2023. For further details regarding the credit facilities, see Note 1413 to the audited consolidated financial statements in our 20182019 Annual Report on Form 10-K and NoteNotes 8 and 18 to the interim unaudited consolidated financial statements.

    Our secured receivables credit facility is subject to customary affirmative and negative covenants, and certain financial covenants with respect to the receivables that comprise the borrowing base and secure the borrowings under the facility. Our senior unsecured revolving credit facility is also subject to certain financial covenants and limitations on indebtedness. As of September 30, 2020, we were in compliance with all such applicable financial covenants.

We believe that the borrowing capacity underCOVID-19 pandemic has had and may continue to have an impact our consolidated results of operations, financial position, and cash flows, including declines in testing volumes for our base business (which excludes COVID-19 molecular and antibody testing), the credit facilities described above continuesextent of which will continue to be availableprimarily 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; and the timing, scope and effectiveness of federal, state and local governmental responses to us. Should one or several banks no longer participate in either of our credit facilities, we would not expect it to impact our ability to fund operations. We expectthe COVID-19 pandemic. It is also possible that we will be ableexperience an impact on cash collections of our accounts receivable as a result of the impact of the COVID-19 pandemic.

    We took certain actions to replacepreserve liquidity. We temporarily suspended share repurchases under our existing credit facilities with alternative arrangements priorshare repurchase authorization, and, in April 2020, implemented a series of temporary actions to their expiration.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:
September 30, 2020no more than 5.5 times EBITDA
December 31, 2020no more than 6.5 times EBITDA
March 31, 2021no more than 6.25 times EBITDA
June 30, 2021no more than 4.5 times EBITDA

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    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. Interest on the amended senior unsecured revolving credit facility is subject to a pricing schedule that can fluctuate based on changes in our credit ratings and current EBITDA leverage ratio.

    In addition, in May 2020, we completed a senior notes offering, consisting of $550 million aggregate principal amount of 2.80% senior notes due June 2031, which were issued at an original issue discount of $1 million. In October 2020, we issued a redemption notice to the holders of our $550 million aggregate principal amount of 4.70% senior notes due April 2021, to redeem such notes in November 2020. We intend to use the net proceeds from the 2031 Senior Notes, along with cash on hand, to satisfy the redemption.

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. WeHowever, should it become necessary, we believe that our credit profile should provide us with access to additional financing in order to refinance upcoming debt maturities including the 4.75% Senior Notes due January 2020 and 2.50% Senior Notes due March 2020 and, if necessary, tofund normal business operations, make interest payments, fund growth opportunities that cannot be funded from existing sources. and satisfy upcoming debt maturities.



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

Item 3.    Quantitative and Qualitative Disclosures About Market Risk
      
See Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations."


Item 4.    Controls and Procedures

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

During the third quarter of 2019,2020, 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.





PART II - OTHER INFORMATION

Item 1.    Legal Proceedings
    
See Note 1312 to the interim unaudited consolidated financial statements for information regarding the status of legal proceedings involving the Company.


45
Item 1A. Risk Factors

Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 20182019 and Part II, Item 1A. of our Quarterly Report on Form 10-Q for the quarter ended June 30, 20192020 include a discussion of our risk factors. There have been no material changes in the risk factors described in those reports.


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

The table below sets forth the information with respect to purchases made by or on behalf of the Company of its common stock during the third quarter of 2020.
ISSUER PURCHASES OF EQUITY SECURITIES
PeriodTotal 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)
July 1, 2020 – July 31, 2020    
Share Repurchase Program (A)— $— — $1,167,138 
Employee Transactions (B)— $— N/AN/A
August 1, 2020 – August 31, 2020   
Share Repurchase Program (A)— $— — $1,167,138 
Employee Transactions (B)875 $120.58 N/AN/A
September 1, 2020 – September 30, 2020  
Share Repurchase Program (A)— $— — $1,167,138 
Employee Transactions (B)— $— N/AN/A
Total    
Share Repurchase Program (A)— $— — $1,167,138 
Employee Transactions (B)875 $120.58 N/AN/A
2019.
(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 September 30, 2020. The share repurchase authorization has no set expiration or termination date.

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




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ISSUER PURCHASES OF EQUITY SECURITIES
Period 
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)
July 1, 2019 – July 31, 2019  
  
  
  
Share Repurchase Program (A) 85,454
 $102.39
 85,454
 $483,379
Employee Transactions (B) —
 $—
 N/A
 N/A
August 1, 2019 – August 31, 2019    
  
  
Share Repurchase Program (A) 388,450
 $100.96
 388,450
 $444,160
Employee Transactions (B) 785
 $100.99
 N/A
 N/A
September 1, 2019 – September 30, 2019      
  
Share Repurchase Program (A) 19,919
 $101.91
 19,919
 $442,130
Employee Transactions (B) 73
 $102.45
 N/A
 N/A
Total  
  
  
  
Share Repurchase Program (A) 493,823
 $101.25
 493,823
 $442,130
Employee Transactions (B) 858
 $101.11
 N/A
 N/A

Table of Contents
(A)
Since the share repurchase program’s inception in May 2003, our Board of Directors has authorized $8 billion of share repurchases of our common stock through September 30, 2019. The share repurchase authorization has no set expiration or termination date.

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




Item 6.Exhibits

    Exhibits:
Item 6.Exhibits

Exhibits:
31.1
31.2
32.1
32.2
101.INS10.1
101.INSInline 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.SCHInline XBRL Taxonomy Extension Schema Document - dgx-20190930.xsddgx-20200930.xsd
101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document - dgx-20190930_cal.xmldgx-20200930_cal.xml
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document - dgx-20190930_def.xmldgx-20200930_def.xml
101.LABInline XBRL Taxonomy Extension Label Linkbase Document - dgx-20190930_lab.xmldgx-20200930_lab.xml
101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document - dgx-20190930_pre.xmldgx-20200930_pre.xml
104Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)


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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
October 23, 20192020
Quest Diagnostics Incorporated

By /s/ Stephen H. Rusckowski
Stephen H. Rusckowski
Chairman, Chief Executive Officer
and President
By/s/ Mark J. Guinan
Mark J. Guinan
Executive Vice President and
Chief Financial Officer



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