10-Q 1 dgx-20220930.htm 10-Q dgx-20220930
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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 September 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
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 filerAccelerated filer
Non-accelerated filerSmaller 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 14, 2022, there were outstanding 113,887,466 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: 
  
  
  
 
 
  
 
 
  
 
 
  

1

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(unaudited)
(in millions, except per share data)

Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Net revenues $2,486 $2,774 $7,550 $8,044 
Operating costs and expenses and other operating income:    
Cost of services1,618 1,670 4,875 4,861 
Selling, general and administrative 464 427 1,311 1,263 
Amortization of intangible assets27 25 81 77 
Other operating income, net(15) (10)(2)
Total operating costs and expenses, net 2,094 2,122 6,257 6,199 
Operating income392 652 1,293 1,845 
Other income (expense):    
Interest expense, net(33)(38)(106)(114)
Other (expense) income, net(8)40 (61)366 
Total non-operating (expense) income, net(41)2 (167)252 
Income before income taxes and equity in earnings of equity method investees351 654 1,126 2,097 
Income tax expense(81)(153)(268)(483)
Equity in earnings of equity method investees, net of taxes6 26 41 53 
Net income276 527 899 1,667 
Less: Net income attributable to noncontrolling interests20 22 54 62 
Net income attributable to Quest Diagnostics$256 $505 $845 $1,605 
Earnings per share attributable to Quest Diagnostics’ common stockholders:    
Basic$2.20 $4.11 $7.17 $12.63 
Diluted$2.17 $4.02 $7.05 $12.41 
Weighted average common shares outstanding:    
Basic116 123 117 127 
Diluted118 125 119 129 









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 NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(unaudited)
(in millions)
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Net income$276 $527 $899 $1,667 
Other comprehensive income (loss):
Foreign currency translation adjustment(8)(4)(17)14 
Net change in available-for-sale debt securities, net of taxes   (7)
Net deferred gain on cash flow hedges, net of taxes 1  1 
Other comprehensive (loss) income(8)(3)(17)8
Comprehensive income268 524 882 1,675 
Less: Comprehensive income attributable to noncontrolling interests20 22 54 62 
Comprehensive income attributable to Quest Diagnostics$248 $502 $828 $1,613 




















The accompanying notes are an integral part of these statements.

3

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2022 AND DECEMBER 31, 2021
(unaudited)
(in millions, except per share data)
September 30,
2022
December 31,
2021
Assets  
Current assets:  
Cash and cash equivalents$700 $872 
Accounts receivable, net of allowance for credit losses of $29 and $31 as of September 30, 2022 and December 31, 2021, respectively
1,280 1,438 
Inventories183 208 
Prepaid expenses and other current assets171 223 
Total current assets2,334 2,741 
Property, plant and equipment, net1,707 1,707 
Operating lease right-of-use assets607 597 
Goodwill7,190 7,095 
Intangible assets, net1,115 1,167 
Investments in equity method investees138 141 
Other assets132 163 
Total assets$13,223 $13,611 
Liabilities and Stockholders’ Equity  
Current liabilities:  
Accounts payable and accrued expenses$1,447 $1,600 
Current portion of long-term debt2 2 
Current portion of long-term operating lease liabilities153 151 
Total current liabilities1,602 1,753 
Long-term debt3,980 4,010 
Long-term operating lease liabilities505 494 
Other liabilities787 792 
Commitments and contingencies
Redeemable noncontrolling interest77 79 
Stockholders’ equity:  
Quest Diagnostics stockholders’ equity:  
Common stock, par value $0.01 per share; 600 shares authorized as of both September 30, 2022 and December 31, 2021; 162 shares issued as of both September 30, 2022 and December 31, 2021
2 2 
Additional paid-in capital2,272 2,260 
Retained earnings8,263 7,649 
Accumulated other comprehensive loss(31)(14)
Treasury stock, at cost; 48 and 43 shares as of September 30, 2022 and December 31, 2021, respectively
(4,271)(3,453)
Total Quest Diagnostics stockholders’ equity6,235 6,444 
Noncontrolling interests37 39 
Total stockholders’ equity6,272 6,483 
Total liabilities and stockholders’ equity$13,223 $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 NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(unaudited)
(in millions)
Nine Months Ended September 30,
20222021
Cash flows from operating activities:  
Net income$899 $1,667 
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation and amortization321 302 
Provision for credit losses1 3 
Deferred income tax provision (benefit)45 (87)
Stock-based compensation expense55 60 
Gain on disposition of joint venture (314)
Other, net37 (48)
Changes in operating assets and liabilities:  
Accounts receivable162 45 
Accounts payable and accrued expenses(169)36 
Income taxes payable(1)49 
Other assets and liabilities, net34 39 
Net cash provided by operating activities1,384 1,752 
Cash flows from investing activities:  
Business acquisitions, net of cash acquired(106)(251)
Capital expenditures(257)(259)
Proceeds from disposition of joint venture 755 
(Increase) decrease in investments and other assets(6)3 
Net cash (used in) provided by investing activities(369)248 
Cash flows from financing activities:  
Repayments of debt(1)(2)
Purchases of treasury stock(947)(1,910)
Exercise of stock options96 108 
Employee payroll tax withholdings on stock issued under stock-based compensation plans(28)(22)
Dividends paid(230)(232)
Distributions to noncontrolling interest partners(58)(75)
Other financing activities, net(19)(38)
Net cash used in financing activities(1,187)(2,171)
Net change in cash and cash equivalents and restricted cash(172)(171)
Cash and cash equivalents and restricted cash, beginning of period872 1,158 
Cash and cash equivalents and restricted cash, end of period$700 $987 








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 NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(unaudited)
(in millions)

For the Three Months Ended September 30, 2022Quest 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, 2022117 $2 $2,250 $8,083 $(23)$(3,901)$39 $6,450 $77 
Net income25619 275 1 
Other comprehensive loss, net of taxes(8)(8)
Dividends declared(76)(76)
Distributions to noncontrolling interest partners(21)(21)(1)
Issuance of common stock under benefit plans2 5 7 
Stock-based compensation expense18 18 
Exercise of stock options2 26 28 
Shares to cover employee payroll tax withholdings on stock issued under stock-based compensation plans(1)(1)
Purchases of treasury stock(3)(400)(400)
Balance, September 30, 2022114 $2 $2,272 $8,263 $(31)$(4,271)$37 $6,272 $77 
For the Nine Months Ended September 30, 2022Quest 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, 2021119 $2 $2,260 $7,649 $(14)$(3,453)$39 $6,483 $79 
Net income845 49 894 5 
Other comprehensive loss, net of taxes(17)(17)
Dividends declared(231)(231)
Distributions to noncontrolling interest partners(51)(51)(7)
Issuance of common stock under benefit plans1 (38)59 21 
Stock-based compensation expense55 55 
Exercise of stock options1 5 91 96 
Shares to cover employee payroll tax withholdings on stock
     issued under stock-based compensation plans
(10)(18)(28)
Purchases of treasury stock(7)(950)(950)
Balance, September 30, 2022114 $2 $2,272 $8,263 $(31)$(4,271)$37 $6,272 $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 NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(unaudited)
(in millions)
For the Three Months Ended September 30, 2021Quest 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, 2021122 $2 $2,555 $10,246 $(10)$(6,894)$41 $5,940 $78 
Net income50519 524 3 
Other comprehensive loss, net of taxes(3)(3)
Dividends declared(76)(76)
Distributions to noncontrolling interest partners
(20)(20)(2)
Issuance of common stock under benefit plans
2 4 6 
Stock-based compensation expense
21 21 
Exercise of stock options1 7 33 40 
Retirement of treasury stock(649)(3,342)3,991  
Balance, September 30, 2021123 $2 $1,936 $7,333 $(13)$(2,866)$40 $6,432 $79 
For the Nine Months Ended September 30, 2021Quest 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, 2020133 $2 $2,841 $9,303 $(21)$(5,366)$50 $6,809 $82 
Net income1,60553 1,658 9 
Other comprehensive income, net of taxes8 8 
Dividends declared(233)(233)
Distributions to noncontrolling interest partners
(63)(63)(12)
Issuance of common stock under benefit plans
(25)42 17 
Stock-based compensation expense
60 60 
Exercise of stock options219 89 108 
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)
Retirement of treasury stock(649)(3,342)3,991  
Balance, September 30, 2021123 $2 $1,936 $7,333 $(13)$(2,866)$40 $6,432 $79 
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, 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. 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 nine months ended September 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 September 30,Nine Months Ended September 30,
 2022202120222021
Amounts attributable to Quest Diagnostics’ common stockholders:    
Net income attributable to Quest Diagnostics$256 $505 $845 $1,605 
Less: Earnings allocated to participating securities2 2 4 6 
Earnings available to Quest Diagnostics’ common stockholders – basic and diluted
$254 $503 $841 $1,599 
Weighted average common shares outstanding – basic116 123 117 127 
Effect of dilutive securities:    
Stock options and performance share units2 2 2 2 
Weighted average common shares outstanding – diluted118 125 119 129 
Earnings per share attributable to Quest Diagnostics’ common stockholders:    
Basic$2.20 $4.11 $7.17 $12.63 
Diluted$2.17 $4.02 $7.05 $12.41 
    
    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,
2022202120222021
Stock options and performance share units1    

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 three quarters of 2021 did not equal the total for the nine months ended September 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 nine months ended September 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., 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 nine months ended September 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 nine months ended September 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/LiabilitiesSignificant Other Observable InputsSignificant Unobservable Inputs
September 30, 2022TotalLevel 1Level 2Level 3
Assets:    
Deferred compensation trading securities$63 $63 $ $ 
Cash surrender value of life insurance policies43  43  
Equity investments14 14   
Total$120 $77 $43 $ 
Liabilities:    
Deferred compensation liabilities$113 $ $113 $ 
Contingent consideration17   17 
Total$130 $ $113 $17 
Redeemable noncontrolling interest$77 $ $— $77 
Basis of Fair Value Measurements
December 31, 2021TotalLevel 1Level 2Level 3
Assets:       
Deferred compensation trading securities$77 $77 $ $ 
Cash surrender value of life insurance policies57  57  
Equity investments44 44   
Available-for-sale debt securities1   1 
Total$179 $121 $57 $1 
Liabilities:    
Deferred compensation liabilities$143 $ $143 $ 
Contingent consideration5   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

11

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. 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%).

    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 issuances28 
Settlements(15)
Total fair value adjustments included in earnings - realized/unrealized(1)
Balance, September 30, 2022$17 

    The $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, 2022 is reported in other operating income, net.


12

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
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, 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 September 30, 2022 and December 31, 2021, the fair value of the Company’s debt was estimated at $3.6 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 nine months ended September 30, 2022 and for the year ended December 31, 2021 were as follows:
September 30, 2022December 31, 2021
Balance, beginning of period$7,095 $6,873 
Goodwill acquired during the period97 228 
Adjustments to goodwill(2)(6)
Balance, end of period$7,190 $7,095 
    
    Principally all of the Company’s goodwill as of September 30, 2022 and December 31, 2021 was associated with its DIS business.

    For the nine months ended September 30, 2022, goodwill acquired was principally associated with the acquisition of Pack Health, and adjustments to goodwill primarily related to foreign currency translation, largely offset by an adjustment of the purchase price allocation for Labtech (see Note 4). 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.     


13

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


    Intangible assets as of September 30, 2022 and December 31, 2021 consisted of the following:
Weighted
Average
Amortization
Period
(in years)
September 30, 2022December 31, 2021
CostAccumulated
Amortization
NetCostAccumulated
Amortization
Net
Amortizing intangible assets:      
Customer-related17$1,608 $(796)$812 $1,581 $(726)$855 
Non-compete agreements93 (3) 3 (2)1 
Technology15137 (80)57 141 (74)67 
Other6114 (104)10 109 (101)8 
Total171,862 (983)879