UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2022

Or

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

For the transition period from to

Commission file number 001-12215

Quest Diagnostics Incorporated

Delaware			16-1387862
(State of Incorporation)			(I.R.S. Employer Identification Number)
500 Plaza Drive
Secaucus,	NJ	07094
(973)	520-2700

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 Par Value	DGX	New 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 July 15, 2022, there were outstanding 116,606,294 shares of the registrant’s common stock, $.01 par value.

PART I - FINANCIAL INFORMATION

		Page
Item 1. Financial Statements (unaudited)
	Index to unaudited consolidated financial statements filed as part of this report:
	Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2022 and 2021	2
	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2022 and 2021	3
	Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021	4
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2022 and 2021	5
	Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2022 and 2021	6
	Notes to Consolidated Financial Statements (unaudited)	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3. Quantitative and Qualitative Disclosures About Market Risk
	See Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”	36
Item 4. Controls and Procedures
	Controls and Procedures	36

1

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(unaudited)

(in millions, except per share data)

	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Net revenues	$	2,453	$	2,550	$	5,064	$	5,270
Operating costs and expenses and other operating income:
Cost of services	1,611		1,565		3,257		3,191
Selling, general and administrative	422		429		847		836
Amortization of intangible assets	27		25		54		52
Other operating expense (income), net	5		(2)		5		(2)
Total operating costs and expenses, net	2,065		2,017		4,163		4,077
Operating income	388		533		901		1,193
Other income (expense):
Interest expense, net	(36)		(38)		(73)		(76)
Other (expense) income, net	(29)		322		(53)		326
Total non-operating (expense) income, net	(65)		284		(126)		250
Income before income taxes and equity in earnings of equity method investees	323		817		775		1,443
Income tax expense	(77)		(177)		(187)		(330)
Equity in earnings of equity method investees, net of taxes	4		10		35		27
Net income	250		650		623		1,140
Less: Net income attributable to noncontrolling interests	16		19		34		40
Net income attributable to Quest Diagnostics	$	234	$	631	$	589	$	1,100
Earnings per share attributable to Quest Diagnostics’ common stockholders:
Basic	$	2.00	$	5.05	$	4.97	$	8.52
Diluted	$	1.96	$	4.96	$	4.88	$	8.38
Weighted average common shares outstanding:
Basic	117		125		118		129
Diluted	119		127		120		131

The accompanying notes are an integral part of these statements.

2

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(unaudited)

(in millions)

	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Net income	$	250	$	650	$	623	$	1,140
Other comprehensive income (loss):
Foreign currency translation adjustment	(7)		21		(9)		18
Net change in available-for-sale debt securities, net of taxes	—		—		—		(7)
Other comprehensive (loss) income	(7)		21		(9)		11
Comprehensive income	243		671		614		1,151
Less: Comprehensive income attributable to noncontrolling interests	16		19		34		40
Comprehensive income attributable to Quest Diagnostics	$	227	$	652	$	580	$	1,111

The accompanying notes are an integral part of these statements.

3

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2022 AND DECEMBER 31, 2021

(unaudited)

(in millions, except per share data)

	June 30, 2022		December 31, 2021
Assets
Current assets:
Cash and cash equivalents	$	790	$	872
Accounts receivable, net of allowance for credit losses of $29 and $31 as of June 30, 2022 and December 31, 2021, respectively	1,293		1,438
Inventories	187		208
Prepaid expenses and other current assets	156		223
Total current assets	2,426		2,741
Property, plant and equipment, net	1,664		1,707
Operating lease right-of-use assets	599		597
Goodwill	7,195		7,095
Intangible assets, net	1,144		1,167
Investments in equity method investees	147		141
Other assets	137		163
Total assets	$	13,312	$	13,611
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses	$	1,420	$	1,600
Current portion of long-term debt	2		2
Current portion of long-term operating lease liabilities	155		151
Total current liabilities	1,577		1,753
Long-term debt	3,983		4,010
Long-term operating lease liabilities	497		494
Other liabilities	728		792
Commitments and contingencies
Redeemable noncontrolling interest	77		79
Stockholders’ equity:
Quest Diagnostics stockholders’ equity:
Common stock, par value $0.01 per share; 600 shares authorized as of both June 30, 2022 and December 31, 2021; 162 shares issued as of both June 30, 2022 and December 31, 2021	2		2
Additional paid-in capital	2,250		2,260
Retained earnings	8,083		7,649
Accumulated other comprehensive loss	(23)		(14)
Treasury stock, at cost; 45 and 43 shares as of June 30, 2022 and December 31, 2021, respectively	(3,901)		(3,453)
Total Quest Diagnostics stockholders’ equity	6,411		6,444
Noncontrolling interests	39		39
Total stockholders’ equity	6,450		6,483
Total liabilities and stockholders’ equity	$	13,312	$	13,611

The accompanying notes are an integral part of these statements.

4

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(unaudited)

(in millions)

	Six Months Ended June 30,
	2022		2021
Cash flows from operating activities:
Net income	$	623	$	1,140
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	213		201
Provision for credit losses	1		2
Deferred income tax benefit	(20)		(89)
Stock-based compensation expense	37		39
Gain on disposition of investment	—		(314)
Other, net	33		1
Changes in operating assets and liabilities:
Accounts receivable	150		265
Accounts payable and accrued expenses	(201)		(199)
Income taxes payable	(4)		85
Other assets and liabilities, net	50		60
Net cash provided by operating activities	882		1,191
Cash flows from investing activities:
Business acquisitions, net of cash acquired	(106)		(231)
Capital expenditures	(139)		(170)
Proceeds from disposition of investment	—		755
Increase in investments and other assets	(6)		(10)
Net cash (used in) provided by investing activities	(251)		344
Cash flows from financing activities:
Repayments of debt	(1)		(1)
Purchases of treasury stock	(573)		(1,910)
Exercise of stock options	68		68
Employee payroll tax withholdings on stock issued under stock-based compensation plans	(27)		(22)
Dividends paid	(152)		(156)
Distributions to noncontrolling interest partners	(36)		(53)
Other financing activities, net	8		(59)
Net cash used in financing activities	(713)		(2,133)
Net change in cash and cash equivalents and restricted cash	(82)		(598)
Cash and cash equivalents and restricted cash, beginning of period	872		1,158
Cash and cash equivalents and restricted cash, end of period	$	790	$	560

The accompanying notes are an integral part of these statements.

5

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(unaudited)

(in millions)

For the Three Months Ended June 30, 2022		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, March 31, 2022	117	$	2	$	2,226	$	7,926	$	(16)	$	(3,761)	$	38	$	6,415	$	78
Net income						234						14		248		2
Other comprehensive loss, net of taxes								(7)						(7)
Dividends declared						(77)								(77)
Distributions to noncontrolling interest partners												(13)		(13)		(3)
Issuance of common stock under benefit plans				1						6				7
Stock-based compensation expense				19										19
Exercise of stock options	1			4						54				58
Purchases of treasury stock	(1)									(200)				(200)
Balance, June 30, 2022	117	$	2	$	2,250	$	8,083	$	(23)	$	(3,901)	$	39	$	6,450	$	77
For the Six Months Ended June 30, 2022		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, 2021	119	$	2	$	2,260	$	7,649	$	(14)	$	(3,453)	$	39	$	6,483	$	79
Net income						589						30		619		4
Other comprehensive loss, net of taxes								(9)						(9)
Dividends declared						(155)								(155)
Distributions to noncontrolling interest partners												(30)		(30)		(6)
Issuance of common stock under benefit plans	1			(40)						54				14
Stock-based compensation expense				37										37
Exercise of stock options	1			3						65				68
Shares to cover employee payroll tax withholdings on stock      issued under stock-based compensation plans				(10)						(17)				(27)
Purchases of treasury stock	(4)									(550)				(550)
Balance, June 30, 2022	117	$	2	$	2,250	$	8,083	$	(23)	$	(3,901)	$	39	$	6,450	$	77

The accompanying notes are an integral part of these statements.

6

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(unaudited)

(in millions)

For the Three Months Ended June 30, 2021		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, March 31, 2021	131	$	2	$	2,824	$	9,690	$	(31)	$	(5,740)	$	45	$	6,790	$	79
Net income						631						17		648		2
Other comprehensive income, net of taxes								21						21
Dividends declared						(75)								(75)
Distributions to noncontrolling interest partners												(21)		(21)		(3)
Issuance of common stock under benefit plans				2						4				6
Stock-based compensation expense				21										21
Exercise of stock options				9						42				51
Shares to cover employee payroll tax withholdings on stock issued under stock-based compensation plans				(1)										(1)
Purchases of treasury stock	(9)			(300)						(1,200)				(1,500)
Balance, June 30, 2021	122	$	2	$	2,555	$	10,246	$	(10)	$	(6,894)	$	41	$	5,940	$	78
For the Six Months Ended June 30, 2021		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, 2020	133	$	2	$	2,841	$	9,303	$	(21)	$	(5,366)	$	50	$	6,809	$	82
Net income						1,100						34		1,134		6
Other comprehensive income, net of taxes								11						11
Dividends declared						(157)								(157)
Distributions to noncontrolling interest partners												(43)		(43)		(10)
Issuance of common stock under benefit plans				(27)						38				11
Stock-based compensation expense				39										39
Exercise of stock options	1			12						56				68
Shares to cover employee payroll tax withholdings on stock issued under stock-based compensation plans				(10)						(12)				(22)
Purchases of treasury stock	(12)			(300)						(1,610)				(1,910)
Balance, June 30, 2021	122	$	2	$	2,555	$	10,246	$	(10)	$	(6,894)	$	41	$	5,940	$	78

The accompanying notes are an integral part of these statements.

7

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(in millions, unless otherwise indicated)

1.    DESCRIPTION OF BUSINESS

    Background

    Quest Diagnostics Incorporated and its subsidiaries ("Quest Diagnostics" or the "Company") empower people to take action to improve health outcomes.  The Company uses its extensive database of clinical lab results to derive diagnostic insights that reveal new avenues to identify and treat disease, inspire healthy behaviors and improve healthcare management.  The Company's diagnostic information services business ("DIS") provides information and insights based on an industry-leading menu of routine, non-routine and advanced clinical testing and anatomic pathology testing, and other diagnostic information services. The Company provides services to a broad range of customers, including patients, clinicians, hospitals, independent delivery networks ("IDNs"), health plans, employers, accountable care organizations ("ACOs"), and direct contract entities ("DCEs"). The Company offers the broadest access in the United States to diagnostic information services through its nationwide network of laboratories, patient service centers and phlebotomists in physician offices and the Company's connectivity resources, including call centers and mobile paramedics, nurses and other health and wellness professionals. The Company is the world's leading provider of diagnostic information services. The Company provides interpretive consultation with one of the largest medical and scientific staffs in the industry. The Company's Diagnostic Solutions businesses ("DS") are the leading provider of risk assessment services for the life insurance industry and offer healthcare organizations and clinicians robust information technology solutions.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    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 2021 Annual Report on Form 10-K. The year-end balance sheet data was derived from the audited consolidated financial statements as of December 31, 2021 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 2021 Annual Report on Form 10-K.

    The Company's testing volume and revenues have been materially impacted by the COVID-19 pandemic, including periods of significant demand for COVID-19 testing. As a result, operating results for the three and six months ended June 30, 2022 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.

    Earnings Per Share

    The Company's unvested restricted stock units that contain non-forfeitable rights to dividends are participating securities and, therefore, are included in the earnings allocation in computing earnings per share using the two-class method. Basic earnings per common share is calculated by dividing net income attributable to Quest Diagnostics, adjusted for earnings allocated to participating securities, by the weighted average number of common shares outstanding. Diluted earnings per common share is calculated by dividing net income attributable to Quest Diagnostics, adjusted for earnings allocated to participating securities, by the weighted average number of common shares outstanding after giving effect to all potentially

8

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(unaudited)

(in millions, unless otherwise indicated)

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 outstanding stock options granted under its Amended and Restated Non-Employee Director Long-Term Incentive Plan, as well as the dilutive effect of accelerated share repurchase agreements, if applicable. 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 Standards to be Adopted

    In March 2020, the Financial Accounting Standards Board 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 to contract modifications through December 31, 2022. To the extent that, prior to December 31, 2022, the Company enters into any contract modifications for which the optional expedients are applied, the adoption of this standard is not expected to have a material impact on the Company’s consolidated results of operations, financial position or cash flows.

3.    EARNINGS PER SHARE

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Amounts attributable to Quest Diagnostics’ common stockholders:
Net income attributable to Quest Diagnostics	$	234	$	631	$	589	$	1,100
Less: Earnings allocated to participating securities	1		3		2		4
Earnings available to Quest Diagnostics’ common stockholders – basic and diluted	$	233	$	628	$	587	$	1,096
Weighted average common shares outstanding – basic	117		125		118		129
Effect of dilutive securities:
Stock options and performance share units	2		2		2		2
Weighted average common shares outstanding – diluted	119		127		120		131
Earnings per share attributable to Quest Diagnostics’ common stockholders:
Basic	$	2.00	$	5.05	$	4.97	$	8.52
Diluted	$	1.96	$	4.96	$	4.88	$	8.38

    The following securities were not included in the calculation of diluted earnings per share due to their antidilutive effect:

	Three Months Ended June 30,		Six Months Ended June 30,
	2022	2021	2022	2021
Stock options and performance share units	1	1	—	1

9

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(unaudited)

(in millions, unless otherwise indicated)

    The sum of basic and diluted earnings per share attributable to Quest Diagnostics' common stockholders for the first two quarters of 2021 did not equal the total for the six months ended June 30, 2021 due to both quarterly fluctuations in the Company's earnings and in the weighted average common shares outstanding throughout the period as a result of the impact of share repurchases (see Note 9 for further details regarding the Company's share repurchases).    

4.     BUSINESS ACQUISITIONS

    On February 1, 2022, the Company acquired Pack Health, LLC ("Pack Health"), a patient engagement company that helps individuals adopt healthier behaviors to improve outcomes, in an all cash transaction for $123 million, net of $4 million cash acquired, which consisted of cash consideration of $105 million and contingent consideration initially estimated at $18 million. The contingent consideration arrangement is dependent upon the achievement of certain revenue benchmarks. 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 $96 million of goodwill (of which $78 million is tax-deductible), $30 million of intangible assets, $5 million of operating lease right-of-use assets, $5 million of operating lease liabilities and $(3) million of working capital. The intangible assets consist primarily of customer-related assets which are being amortized over a useful life of 15 years. For further details regarding the fair value of the contingent consideration, see Note 6.

    The acquisition was 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 acquisition is not material to the Company's consolidated financial statements. The goodwill recorded primarily includes the expected synergies resulting from combining the operations of the acquired entity 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 the acquisition has been allocated to the Company's DIS business. For further details regarding business segment information, see Note 12.

    On December 13, 2021, the Company completed the acquisition of assets of Labtech Diagnostics, LLC ("Labtech"), an independent clinical diagnostic laboratory provider serving physicians and patients primarily in South Carolina, North Carolina, Florida and Georgia, and recorded the assets acquired and liabilities assumed based on a preliminary purchase price allocation. During the six months ended June 30, 2022, the Company revised its purchase price allocation and recorded an $8 million increase to goodwill, a $3 million increase to customer-related intangible assets, a $1 million decrease to inventories and a $10 million increase to the estimated contingent consideration accrual. These adjustments did not have a material impact on the Company's consolidated results of operations. For further details regarding the fair value of the contingent consideration, see Note 6.

    For details regarding the Company's 2021 acquisitions, see Note 5 to the audited consolidated financial statements in the Company's 2021 Annual Report on Form 10-K.    

5.    DISPOSITION

    On April 1, 2021, the Company sold its 40% ownership interest in Q2 Solutions® ("Q2 Solutions"), its clinical trials central laboratory services joint venture, to IQVIA Holdings, Inc. ("IQVIA"), its joint venture partner, for $760 million in an all-cash transaction. Prior to the transaction, the Company accounted for its minority interest as an equity method investment. As a result of the transaction, during the three months ended June 30, 2021, the Company recorded a $314 million pre-tax gain in other (expense) income, net in the consolidated statement of operations based on the difference between the net sales proceeds and the carrying value of the investment, including $20 million of cumulative translation losses which were previously recorded in accumulated other comprehensive loss. During the three months ended June 30, 2021, the Company also recorded $55 million of income tax expense related to the gain, consisting of $127 million of current income tax expense, partially offset by $72 million of deferred income tax benefit.

10

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(unaudited)

(in millions, 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/Liabilities		Significant Other Observable Inputs		Significant Unobservable Inputs
June 30, 2022	Total		Level 1		Level 2		Level 3
Assets:
Deferred compensation trading securities	$	65	$	65	$	—	$	—
Cash surrender value of life insurance policies	46		—		46		—
Equity investments	17		17		—		—
Total	$	128	$	82	$	46	$	—
Liabilities:
Deferred compensation liabilities	$	119	$	—	$	119	$	—
Contingent consideration	39		—		—		39
Total	$	158	$	—	$	119	$	39
Redeemable noncontrolling interest	$	77	$	—	$	—	$	77

			Basis of Fair Value Measurements
December 31, 2021	Total		Level 1		Level 2		Level 3
Assets:
Deferred compensation trading securities	$	77	$	77	$	—	$	—
Cash surrender value of life insurance policies	57		—		57		—
Equity investments	44		44		—		—
Available-for-sale debt securities	1		—		—		1
Total	$	179	$	121	$	57	$	1
Liabilities:
Deferred compensation liabilities	$	143	$	—	$	143	$	—
Contingent consideration	5		—		—		5
Total	$	148	$	—	$	143	$	5
Redeemable noncontrolling interest	$	79	$	—	$	—	$	79

    A detailed description regarding the Company's fair value measurements is contained in Note 7 to the audited consolidated financial statements in the Company's 2021 Annual Report on Form 10-K.    

    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

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(unaudited)

(in millions, unless otherwise indicated)

1 of the fair value hierarchy because the changes in the fair value of these securities are measured using quoted prices in active markets based on the market price per unit multiplied by the number of units held, exclusive of any transaction costs. A corresponding adjustment for changes in fair value of the trading securities is also reflected in the changes in fair value of the deferred compensation obligation. The deferred compensation liabilities are classified within Level 2 of the fair value hierarchy because their inputs are derived principally from observable market data by correlation to the trading securities.

    The Company offers certain employees the opportunity to participate in a non-qualified deferred compensation program. A participant's deferrals, together with Company matching credits, are “invested” at the direction of the employee in a hypothetical portfolio of investments which are tracked by an administrator. The Company purchases life insurance policies, with the Company named as beneficiary of the policies, for the purpose of funding the program's liability. Changes in the cash surrender value of the life insurance policies are based upon earnings and changes in the value of the underlying investments. Changes in the fair value of the deferred compensation obligation are derived using quoted prices in active markets based on the 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 investment portfolio primarily includes equity investments comprised mostly of strategic holdings in companies concentrated in the life sciences and healthcare industries. Equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) with readily determinable fair values are measured at fair value in prepaid expenses and other current assets in the Company's consolidated balance sheet. Such equity investments are classified within Level 1 of the fair value hierarchy because the changes in the fair values of the securities are measured using quoted prices in active markets based on the market price per share multiplied by the number of shares held, exclusive of any transaction costs.

    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.

    In connection with the acquisitions of Pack Health and Labtech, the Company has contingent consideration obligations, with a potential maximum aggregate payment of $40 million, that are to be paid based on the achievement of certain testing volume or revenue benchmarks. As of June 30, 2022, the fair value of these contingent consideration accruals totaled $39 million. These contingent consideration accruals are measured at fair value using either an option-pricing method or a Monte Carlo 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 (7.5%) and a discount rate (ranging from 2.5% to 3.0%). During the three months ended June 30, 2022, the contingent consideration accruals were increased primarily as a result of actual performance during the quarter, resulting in a $6 million loss recorded in other operating expense (income), net.

    For further details regarding the Company's acquisitions, see Note 5 to the audited consolidated financial statements in the Company's 2021 Annual Report on Form 10-K and Note 4.

    The following table provides a reconciliation of the beginning and ending balances of liabilities using significant unobservable inputs (Level 3):

	Contingent Consideration
Balance, December 31, 2021	$	5
Purchases, additions and issuances	28
Total fair value adjustments included in earnings - realized/unrealized	6
Balance, June 30, 2022	$	39

    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

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(unaudited)

(in millions, unless otherwise indicated)

subsidiary at fair value commencing July 1, 2020. As of June 30, 2022, 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 June 30, 2022 and December 31, 2021, the fair value of the Company’s debt was estimated at $3.8 billion and $4.4 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 six months ended June 30, 2022 and for the year ended December 31, 2021 were as follows:

	June 30, 2022		December 31, 2021
Balance, beginning of period	$	7,095	$	6,873
Goodwill acquired during the period	97		228
Adjustments to goodwill	3		(6)
Balance, end of period	$	7,195	$	7,095

    Principally all of the Company’s goodwill as of June 30, 2022 and December 31, 2021 was associated with its DIS business.

    For the six months ended June 30, 2022, goodwill acquired was principally associated with the acquisition of Pack Health, and adjustments to goodwill primarily related to an adjustment of the purchase price allocation for Labtech (see Note 4), partially offset by foreign currency translation. For the year ended December 31, 2021, goodwill acquired was principally associated with the acquisitions of the assets of the outreach laboratory services business of Mercy Health and the assets of Labtech (see Note 5 to the audited consolidated financial statements in the Company's 2021 Annual Report on Form 10-K), and adjustments to goodwill related to foreign currency translation.     

    Intangible assets as of June 30, 2022 and December 31, 2021 consisted of the following:

	Weighted Average Amortization Period (in years)	June 30, 2022						December 31, 2021
		Cost		Accumulated Amortization		Net		Cost		Accumulated Amortization		Net
Amortizing intangible assets:
Customer-related	17	$	1,609	$	(773)	$	836	$	1,581	$	(726)	$	855
Non-compete agreements	9	3		(3)		—		3		(2)		1
Technology	14	139		(78)		61		141		(74)		67
Other	6	114		(103)		11		109		(101)		8
Total	17	1,865		(957)		908		1,834		(903)		931
Intangible assets not subject to amortization:
Trade names		235		—		235		235		—		235
Other		1		—		1		1		—		1
Total intangible assets		$	2,101	$	(957)	$	1,144	$	2,070	$	(903)	$	1,167

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

(unaudited)

(in millions, unless otherwise indicated)

    The estimated amortization expense related to amortizable intangible assets for each of the five succeeding fiscal years and thereafter as of June 30, 2022 is as follows:

Year Ending December 31,
Remainder of 2022	$	53
2023	106
2024	102
2025	101
2026	95
2027