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.

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 billion were up 3.5% 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 by 0.5% compared to the prior year period.

•

Income from continuing operations attributable to Quest Diagnostics' 
stockholders was $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, net cash provided by operating 
activities was $895 million in 2019, compared to $905 million in the prior year 
period.

Senior Notes Offering

In March 2019, we completed a senior notes offering (the “2019 Senior Notes”), 
consisting of $500 million aggregate principal amount of 4.20% senior notes due 
June 2029, which were issued at an original issue discount of $1 million. The 
net proceeds from the 2019 Senior Notes were used to repay in full 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. For further details regarding our debt, see Note 8 
to the interim unaudited consolidated financial statements.


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.

On February 11, 2019, we completed our acquisition of certain assets of the 
clinical laboratory services business of Boyce & Bynum Pathology Laboratories, 
P.C. ("Boyce & Bynum"), in an all cash transaction for $61 million, which 
consisted of cash consideration of $55 million and contingent consideration 
initially estimated at $6 million. The contingent consideration arrangement is 
dependent upon the achievement of certain testing volume benchmarks. 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 consolidated 
financial statements in the Company's 2018 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, and in 2018 we achieved that 
goal.

Invigorate has consisted of several flagship programs, with structured plans in 
each, to drive savings and improve performance across the customer value chain. 
These flagship programs include: organization excellence; information 
technology excellence; procurement excellence; field and customer service 
excellence; lab excellence; and revenue services excellence. In addition to 
these programs, we 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, we incurred $49 million of 
pre-tax charges under our Invigorate program primarily consisting of systems 
conversion and integration costs, all of which result in cash expenditures. 
Additional restructuring charges may be incurred in future periods as we 
identify additional opportunities to achieve further cost savings.


Critical Accounting Policies

There have been no significant changes to our critical accounting policies from 
those disclosed in our 2018 Annual Report on Form 10-K.

Impact of New Accounting Standards

The adoption of new accounting standards, including the new standard related to 
accounting for leases, are 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 impacts of recent accounting pronouncements not yet effective on our 
consolidated financial statements are discussed in Note 2 to the interim 
unaudited consolidated financial statements.

Results of Operations


Three Months Ended September 30,



Nine Months Ended September 30,



Operating Results

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;

•

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;

•

a net pre-tax gain of $3 million (a $7 million gain in other operating income, 
net 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, 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;

•

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;

•

a net pre-tax gain of $17 million (a $22 million gain in other operating 
income, net 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, 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, 2019 increased by 3.5% 
compared to the prior year period.

DIS revenues for the three months ended September 30, 2019 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.


•

Organic growth and acquisitions contributed approximately 1.7% and 2.0%, 
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, which was partially offset by the impact of 
weather. We estimate that the net impact of these two items favorably affected 
the year-over-year comparison by approximately 1%.

•

Revenue per requisition decreased by 1.2% 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 
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, 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% and an 
increase in denials; partially offset by favorable mix, driven in part by 
acquisitions.

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, cost of services increased by 
$42 million compared to the prior year period. The increase was primarily 
driven by additional operating costs associated with our acquisitions 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.

For the nine months ended September 30, 2019, cost of services increased by $82 
million compared to the prior year period. The increase was primarily driven by 
additional operating costs associated with our acquisitions; incremental 
operating expenses associated with organic volume growth; and higher 
depreciation expense associated with increased capital expenditures. These 
increases were partially offset by 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 under our Invigorate program. These initiatives enabled 
productivity gains as we leveraged our fixed cost structure to support the 
increase in volume.

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

SG&A consist principally of the costs associated with our sales and marketing 
efforts, billing operations, bad debt expense and general management and 
administrative support as well as administrative facility costs.

SG&A increased by $8 million for the three months ended September 30, 2019, 
compared to the prior year period, primarily driven by additional operating 
costs associated with our acquisitions; 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 under our Invigorate program. These initiatives enabled 
productivity gains as we leveraged our fixed cost structure to support the 
increase in volume.

SG&A increased by $40 million for the nine months ended September 30, 2019, 
compared to the prior year period, primarily driven by additional operating 
costs associated with our acquisitions; higher costs associated with an 
increase in the value of our deferred compensation obligations; and incremental 
operating expenses associated with organic volume growth. These increases were 
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.

The increase in the value of our deferred compensation obligations is largely 
offset by gains due to the increase in the value of the associated investments, 
which are recorded in other income, net. For further details regarding the 
Company's deferred compensation plans, see Note 17 to the consolidated 
financial statements in our 2018 Annual Report on Form 10-K.

Amortization Expense

Amortization expense increased by $1 million for the three months ended 
September 30, 2019, compared to the prior year period 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, Net

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

For the three months ended September 30, 2019, other operating 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 months ended September 30, 2019, other operating 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 increased for both the three and nine months ended 
September 30, 2019 compared to the prior year period, primarily driven by 
higher interest rates associated with our indebtedness combined with 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 the nine months ended September 30, 2019 increased by $11 
million compared to the prior year period primarily due to gains associated 
with investments in our deferred compensation plans.

Income Tax Expense

Income tax expense for the three months ended September 30, 2019 and 2018 was 
$62 million and $48 million, respectively. The increase in income tax expense 
for the three months ended September 30, 2019, compared to the prior year 
period was primarily driven by:


•

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 the three months ended 
September 30, 2019 due to the release of a valuation allowance associated with 
net operating loss carryforwards.

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

Income tax expense for the nine months ended September 30, 2019 and 2018 was 
$175 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

•

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 nine months ended September 30, 2019 and 2018, we recognized $11 
million and $17 million, respectively, of excess tax benefits associated with 
stock-based compensation arrangements.

Equity in Earnings of Equity Method Investees, Net of Taxes

Equity in earnings of equity method investees, net of taxes increased for the 
three months ended September 30, 2019 by $9 million compared to the prior year 
period primarily associated with 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.

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. 
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 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.

As of September 30, 2019 and December 31, 2018, the fair value of our debt was 
estimated at approximately $4.3 billion and $4.0 billion, respectively, 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, 2019 and December 31, 2018, the estimated fair value 
exceeded the carrying value of the debt by $306 million and $85 million, 
respectively. A hypothetical 10% increase in interest rates (representing 28 
basis points as of September 30, 2019 and 39 basis points as of December 31, 
2018) would potentially reduce the estimated fair value of our debt by 
approximately $82 million and $88 million as of September 30, 2019 and December 
31, 2018, 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. Interest on our senior unsecured revolving 
credit facility is subject to a pricing schedule that can fluctuate based on 
changes in our credit ratings. As such, our borrowing cost under this credit 
arrangement will be subject to both fluctuations in interest rates and changes 
in our credit ratings. As of September 30, 2019, 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%. As of September 30, 2019, there were no borrowings outstanding 
under either our $600 million secured receivables credit facility or our $750 
million senior unsecured revolving credit facility.

The notional amount of 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.

Based on our 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 potentially change annual interest expense by $3 
million. A hypothetical 10% change in the forward one-month LIBOR curve 
(representing a 14 basis points change in the weighted average yield) would 
potentially change the fair value of our fixed-to-variable interest rate swap 
liabilities by $11 million.

In February 2019, 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 
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 into forward-starting interest 
rate swap agreements with several financial institutions for a total notional 
amount of $125 million 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 value of the 
forward-starting interest rate swaps was $2 million, in an asset position, as 
of September 30, 2019. A hypothetical 10% change in the forward three-month 
LIBOR curve (representing a 15 basis points change in the weighted average 
yield) would potentially change the fair value of our forward-starting interest 
rate swap asset by $2 million.

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. 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.

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

Liquidity and Capital Resources


Nine Months Ended September 30,


Cash and Cash Equivalents

Cash and cash equivalents consist of cash and highly liquid short-term 
investments. Cash and cash equivalents as of September 30, 2019 totaled $434 
million, compared to $135 million as of December 31, 2018.

As of September 30, 2019, approximately 8% of our $434 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, 2019 and 2018 was $895 million and $905 million, respectively. The $10 
million decrease in net cash provided by operating activities for the nine 
months ended September 30, 2019, 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 operating income in 2019 compared to 2018; partially offset by

•

timing of movements in our working capital accounts;

•

lower performance-based compensation payments in 2019 compared to 2018; and

39 Table of Contents


•

a $28 million refund 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 52 
days as of September 30, 2019, 54 days as of December 31, 2018 and 52 days as 
of September 30, 2018.

Cash Flows from Investing Activities

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


•

a $163 million decrease in net cash paid for business acquisitions; partially 
offset by

•

a $23 million increase in investments and other assets.

Cash Flows from Financing Activities

Net cash used in financing activities for the nine months ended September 30, 
2019 and 2018 was $285 million and $324 million, respectively. This $39 million 
decrease in cash used in financing activities for the nine months ended 
September 30, 2019, 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 $35 million of net debt repayments in 2018; partially 
offset by:

•

a $17 million increase in dividends paid.

During the nine months ended September 30, 2019, we completed the issuance of 
the 2019 Senior Notes and repaid in full our $300 million Senior 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 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 million remained available under our share 
repurchase authorizations. The share repurchase authorization has no set 
expiration or termination date.

Interest payments on our outstanding debt includes interest associated with 
finance lease obligations and has been calculated after giving effect to our 
interest rate swap agreements, using the interest rates as of September 30, 
2019 applied to the September 30, 2019 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. A discussion and analysis regarding our operating lease 
obligations is contained in Note 9 to the interim unaudited consolidated 
financial statements.

Purchase obligations include our noncancelable commitments to purchase products 
or services as described in Note 18 to the consolidated financial statements in 
our 2018 Annual Report on Form 10-K.

Merger consideration obligations include consideration owed on our business 
acquisitions.

As of September 30, 2019, our total liabilities associated with unrecognized 
tax benefits were approximately $74 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.

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, the fair value of the 
redeemable noncontrolling interest on the interim unaudited consolidated 
balance sheet was $76 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, 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, 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% of our consolidated income from 
continuing operations before income taxes and equity in earnings of equity 
method investees. We have no material unconditional obligations or guarantees 
to, or in support of, our equity method investees and their operations.

Requirements and Capital Resources

We estimate that we will invest approximately $350 million to $400 million 
during 2019 for capital expenditures, to support and grow our existing 
operations, principally related to investments in information technology, 
laboratory equipment and facilities, including our multi-year new laboratory 
construction in Clifton, New Jersey, and additional investments in our advanced 
and consumer growth strategies.

As of September 30, 2019, $1.3 billion of borrowing capacity was available 
under our existing credit facilities consisting of $529 million available under 
our secured receivables credit facility and $750 million available under our 
senior unsecured revolving credit facility. The secured receivables credit 
facility includes a $250 million loan commitment which matures October 2019, 
and a $250 million loan commitment and a $100 million letter of credit facility 
which mature October 2020. The senior unsecured revolving credit facility 
matures in March 2023. For further details regarding the credit facilities, see 
Note 14 to the consolidated financial statements in our 2018 Annual Report on 
Form 10-K and Note 8 to the interim unaudited consolidated financial 
statements.

We believe the borrowing capacity under the credit facilities described above 
continues to be available 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 expect that we will be able to 
replace our existing credit facilities with alternative arrangements prior to 
their expiration.

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. We believe that our credit 
profile should provide us with access to additional financing 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, to fund growth 
opportunities that cannot be funded from existing sources.