10-Q 1 dgx-20210930.htm 10-Q dgx-20210930
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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, 2021

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 15, 2021, there were outstanding 122,674,771 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, 2021 AND 2020
(unaudited)
(in millions, except per share data)

Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Net revenues $2,774 $2,786 $8,044 $6,435 
Operating costs and expenses and other operating income:    
Cost of services1,670 1,580 4,861 4,071 
Selling, general and administrative 427 396 1,263 1,103 
Amortization of intangible assets25 27 77 77 
Other operating expense (income), net 65 (2)8 
Total operating costs and expenses, net 2,122 2,068 6,199 5,259 
Operating income652 718 1,845 1,176 
Other income (expense):    
Interest expense, net(38)(42)(114)(124)
Other income, net40 77 366 74 
Total non-operating income (expense), net2 35 252 (50)
Income before income taxes and equity in earnings of equity method investees654 753 2,097 1,126 
Income tax expense(153)(177)(483)(269)
Equity in earnings of equity method investees, net of taxes26 15 53 33 
Net income527 591 1,667 890 
Less: Net income attributable to noncontrolling interests22 23 62 38 
Net income attributable to Quest Diagnostics$505 $568 $1,605 $852 
Earnings per share attributable to Quest Diagnostics’ common stockholders:    
Basic$4.11 $4.20 $12.63 $6.33 
Diluted$4.02 $4.14 $12.41 $6.25 
Weighted average common shares outstanding:    
Basic123 135 127 134 
Diluted125 137 129 136 










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, 2021 AND 2020
(unaudited)
(in millions)
Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Net income$527 $591 $1,667 $890 
Other comprehensive income (loss):
Foreign currency translation adjustment(4)10 14 (6)
Net change in available-for-sale debt securities, net of taxes  (7) 
Net deferred gain on cash flow hedges, net of taxes1 3 1 3 
Other comprehensive (loss) income(3)13 8 (3)
Comprehensive income524 604 1,675 887 
Less: Comprehensive income attributable to noncontrolling interests
22 23 62 38 
Comprehensive income attributable to Quest Diagnostics$502 $581 $1,613 $849 





















The accompanying notes are an integral part of these statements.

3

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2021 AND DECEMBER 31, 2020
(unaudited)
(in millions, except per share data)
September 30,
2021
December 31,
2020
Assets  
Current assets:  
Cash and cash equivalents$987 $1,158 
Accounts receivable, net of allowance for credit losses of $29 and $28 as of September 30, 2021 and December 31, 2020, respectively
1,473 1,520 
Inventories205 223 
Prepaid expenses and other current assets189 157 
Total current assets2,854 3,058 
Property, plant and equipment, net1,634 1,627 
Operating lease right-of-use assets596 604 
Goodwill7,057 6,873 
Intangible assets, net1,152 1,167 
Investments in equity method investees124 521 
Other assets155 176 
Total assets$13,572 $14,026 
Liabilities and Stockholders’ Equity  
Current liabilities:  
Accounts payable and accrued expenses$1,610 $1,633 
Current portion of long-term debt1 2 
Current portion of long-term operating lease liabilities148 141 
Total current liabilities1,759 1,776 
Long-term debt4,006 4,013 
Long-term operating lease liabilities495 499 
Other liabilities801 847 
Commitments and contingencies
Redeemable noncontrolling interest79 82 
Stockholders’ equity:  
Quest Diagnostics stockholders’ equity:  
Common stock, par value $0.01 per share; 600 shares authorized as of both September 30, 2021 and December 31, 2020; 162 and 217 shares issued as of September 30, 2021 and December 31, 2020, respectively
2 2 
Additional paid-in capital1,936 2,841 
Retained earnings7,333 9,303 
Accumulated other comprehensive loss(13)(21)
Treasury stock, at cost; 39 and 84 shares as of September 30, 2021 and December 31, 2020, respectively
(2,866)(5,366)
Total Quest Diagnostics stockholders’ equity6,392 6,759 
Noncontrolling interests40 50 
Total stockholders’ equity6,432 6,809 
Total liabilities and stockholders’ equity$13,572 $14,026 



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, 2021 AND 2020
(unaudited)
(in millions)
Nine Months Ended September 30,
20212020
Cash flows from operating activities:  
Net income$1,667 $890 
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation and amortization302 263 
Provision for credit losses3 18 
Deferred income tax (benefit) provision(87)12 
Stock-based compensation expense60 63 
Gain on disposition of joint venture(314) 
Other, net(48)(60)
Changes in operating assets and liabilities:  
Accounts receivable45 (355)
Accounts payable and accrued expenses36 514 
Income taxes payable49 95 
Termination of interest rate swap agreements 40 
Other assets and liabilities, net39 (16)
Net cash provided by operating activities1,752 1,464 
Cash flows from investing activities:  
Business acquisitions, net of cash acquired(251)(329)
Capital expenditures(259)(256)
Proceeds from disposition of joint venture755  
Decrease (increase) in investments and other assets3 (19)
Net cash provided by (used in) investing activities248 (604)
Cash flows from financing activities:  
Proceeds from borrowings 749 
Repayments of debt(2)(1,002)
Purchases of treasury stock(1,910)(75)
Exercise of stock options108 144 
Employee payroll tax withholdings on stock issued under stock-based compensation plans(22)(13)
Dividends paid(232)(222)
Distributions to noncontrolling interest partners(75)(34)
Other financing activities, net(38)6 
Net cash used in financing activities(2,171)(447)
Net change in cash and cash equivalents and restricted cash(171)413 
Cash and cash equivalents and restricted cash, beginning of period1,158 1,192 
Cash and cash equivalents and restricted cash, end of period$987 $1,605 





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, 2021 AND 2020
(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 plans2 4 6 
Stock-based compensation expense21 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 76 $82 
Net income1,605 53 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 expense60 60 
Exercise of stock options2 19 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.



6

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
(unaudited)
(in millions)
For the Three Months Ended September 30, 2020Quest Diagnostics Stockholders’ Equity
Shares of
Common Stock
Outstanding
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Compre-
hensive Loss
Treasury
Stock, at
Cost
Non-
controlling
Interests
Total
Stock-
holders’
Equity
Redeemable Non-controlling Interest
Balance, June 30, 2020134 $2 $2,764 $8,307 $(55)$(5,187)$50 $5,881 $77 
Net income56818 586 5 
Other comprehensive income, net of taxes13 13 
Dividends declared(75)(75)
Distributions to noncontrolling interest partners
(22)(22)(2)
Issuance of common stock under benefit plans
11 3 4 
Stock-based compensation expense
32 32 
Exercise of stock options4 23 27 
Balance, September 30, 2020135 $2 $2,801 $8,800 $(42)$(5,161)$46 $6,446 $80 
For the Nine Months Ended September 30, 2020Quest Diagnostics Stockholders’ Equity
Shares of
Common Stock
Outstanding
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Compre-
hensive Loss
Treasury
Stock, at
Cost
Non-
controlling
Interests
Total
Stock-
holders’
Equity
Redeemable Non-controlling Interest
Balance, December 31, 2019133 $2 $2,722 $8,174 $(39)$(5,218)$46 $5,687 $76 
Net income85231 883 7 
Other comprehensive loss, net of taxes(3)(3)
Dividends declared(226)(226)
Distributions to noncontrolling interest partners
(31)(31)(3)
Issuance of common stock under benefit plans
1 7 10 17 
Stock-based compensation expense
63 63 
Exercise of stock options222 122 144 
Shares to cover employee payroll tax withholdings on stock issued under stock-based compensation plans
(13)(13)
Purchases of treasury stock
(1)(75)(75)
Balance, September 30, 2020135 $2 $2,801 $8,800 $(42)$(5,161)$46 $6,446 $80 





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 2020 Annual Report on Form 10-K. The year-end balance sheet data was derived from the audited consolidated financial statements as of December 31, 2020 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 2020 Annual Report on Form 10-K.

    A novel strain of coronavirus (“COVID-19”) continues to impact the economy of the United States and other countries around the world. The Company's testing volume and revenues have been materially impacted by the COVID-19 pandemic, including periods of decline in testing volume in the Company's base business (which excludes COVID-19 testing) compared to historical 2019 levels and periods of significant demand for COVID-19 testing. As a result, operating results for the three and nine months ended September 30, 2021 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

8

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


common share is calculated by dividing net income attributable to Quest Diagnostics, adjusted for earnings allocated to participating securities, by the weighted average number of common shares outstanding after giving effect to all potentially dilutive common shares outstanding during the period. Potentially dilutive common shares include the dilutive effect of outstanding stock options and performance share units granted under the Company's Amended and Restated Employee Long-Term Incentive Plan and its Amended and Restated Non-Employee Director Long-Term Incentive Plan, as well as the dilutive effect of accelerated share repurchase agreements ("ASRs"). 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 through December 31, 2022. The adoption of this standard is not expected to have a material impact on the Company’s consolidated results of operations, financial position or cash flows.

3.    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,
 2021202020212020
Amounts attributable to Quest Diagnostics’ common stockholders:    
Net income attributable to Quest Diagnostics$505 $568 $1,605 $852 
Less: Earnings allocated to participating securities2 2 6 3 
Earnings available to Quest Diagnostics’ common stockholders – basic and diluted
$503 $566 $1,599 $849 
Weighted average common shares outstanding – basic123 135 127 134 
Effect of dilutive securities:    
Stock options and performance share units2 2 2 2 
Weighted average common shares outstanding – diluted125 137 129 136 
Earnings per share attributable to Quest Diagnostics’ common stockholders:    
Basic$4.11 $4.20 $12.63 $6.33 
Diluted$4.02 $4.14 $12.41 $6.25 
    
    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,
2021202020212020
Stock options and performance share units 1  1 

9

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


    
    In April 2021, the Company entered into ASRs with several financial institutions to repurchase $1.5 billion of the Company's common stock as part of the Company's share repurchase program. See Note 9 for further details. 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 the ASRs.

4.     BUSINESS ACQUISITIONS

    On June 1, 2021, the Company completed the acquisition of the outreach laboratory services business of Mercy Health, which serves providers and patients in Arkansas, Kansas, Missouri and Oklahoma, in an all-cash transaction for $225 million. Based on the preliminary purchase price allocation, which may be revised as additional information becomes available during the measurement period, the assets acquired primarily consist of $54 million of customer-related intangible assets and $171 million of tax-deductible goodwill. The intangible assets are being amortized over a useful life of 15 years.
    
    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.

    For details regarding the Company's 2020 acquisitions, see Note 6 to the audited consolidated financial statements in the Company's 2020 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. The sales price is subject to customary post-closing adjustments. 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 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.

    Under a multi-year agreement, the Company will remain the strategic preferred laboratory provider for Q2 Solutions' clients, providing a range of lab testing capabilities to augment Q2 Solutions' core offerings and extend its industry leading suite of services.




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, 2021TotalLevel 1Level 2Level 3
Assets:    
Deferred compensation trading securities$75 $75 $ $ 
Cash surrender value of life insurance policies54  54  
Equity investments49 49   
Available-for-sale debt securities1   1 
Total$179 $124 $54 $1 
Liabilities:    
Deferred compensation liabilities$139 $ $139 $ 
Redeemable noncontrolling interest$79 $ $— $79 
Basis of Fair Value Measurements
December 31, 2020TotalLevel 1Level 2Level 3
Assets:       
Deferred compensation trading securities$67 $67 $ $ 
Cash surrender value of life insurance policies50  50  
Available-for-sale debt securities12   12 
Total$129 $67 $50 $12 
Liabilities:    
Deferred compensation liabilities$126 $ $126 $ 
Redeemable noncontrolling interest$82 $ $— $82 
    
    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 2020 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 investment options that are classified as trading securities. These trading securities are classified within Level 1 of the fair value hierarchy because the changes in the fair value of these securities are measured using quoted prices in active markets based on the market price per unit multiplied by the number of units held, exclusive of any transaction costs. A corresponding adjustment for changes in fair value of the trading securities is also reflected in the changes in fair value of the deferred compensation obligation. The deferred compensation liabilities are classified within Level 2 of the fair value hierarchy because their inputs are derived principally from observable market data by correlation to the trading securities.

11

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



    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. Equity investments that do not have readily determinable fair values (which consist of investments in preferred and common shares of private companies) are measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes. During the three months ended September 30, 2021, certain of the Company's equity investments became publicly-traded and, based on the readily determinable fair values, the Company recognized gains of $42 million in other income, net in the Company's consolidated statement of operations. Such equity investments are now 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 based on estimated future 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, including cash flow projections.
        
    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, 2021, 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.

    During the nine months ended September 30, 2021, the Company recorded an $8 million impairment charge, which is included in equity in earnings of equity method investees, net of taxes, in order to adjust to fair value an investment that is accounted for under the equity method of accounting. Following the impairment charge, the carrying value of the investment is not material. The fair value measurement was classified within Level 3 of the fair value hierarchy as it was based on significant inputs that are not observable, including cash flow projections.
    
    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, 2021 and December 31, 2020, the fair value of the Company’s debt was estimated at $4.5 billion and $4.6 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.


12

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


7.    GOODWILL AND INTANGIBLE ASSETS

    The changes in goodwill for the nine months ended September 30, 2021 and for the year ended December 31, 2020 were as follows:
September 30, 2021December 31, 2020
Balance, beginning of period$6,873 $6,619 
Goodwill acquired during the period188 247 
Adjustments to goodwill(4)7 
Balance, end of period$7,057 $6,873 
    
    Principally all of the Company’s goodwill as of September 30, 2021 and December 31, 2020 was associated with its DIS business.

    For the nine months ended September 30, 2021, goodwill acquired was principally associated with the acquisition of the outreach laboratory services businesses of Mercy Health and adjustments to goodwill primarily related to foreign currency translation. For the year ended December 31, 2020, goodwill acquired was principally associated with the acquisitions of Blueprint Genetics Oy; Memorial Hermann Diagnostic Laboratories, the outreach laboratory division of Memorial Hermann Health System; and the remaining 56% interest in Mid America Clinical Laboratories, LLC (see Note 6 to the audited consolidated financial statements in the Company's 2020 Annual Report on Form 10-K). For the year ended December 31, 2020, adjustments to goodwill primarily related to foreign currency translation.     

    Intangible assets as of September 30, 2021 and December 31, 2020 consisted of the following:
Weighted
Average
Amortization
Period
(in years)
September 30, 2021December 31, 2020
CostAccumulated
Amortization
NetCostAccumulated
Amortization
Net
Amortizing intangible assets:      
Customer-related17$1,541 $(704)$837 $1,479 $(638)$841 
Non-compete agreements93 (2)1 3 (2)1 
Technology14142 (72)70 141 (65)76 
Other5108 (100)8 108 (95)13 
Total171,794 (878)916 1,731 (800)931 
Intangible assets not subject to amortization:     
Trade names 235 — 235 235 — 235 
Other 1 — 1 1 — 1 
Total intangible assets$2,030 $(878)$1,152 $1,967 $(800)$1,167 

13

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 September 30, 2021 is as follows:
Year Ending December 31, 
Remainder of 2021$26 
2022102 
2023100 
202497 
202596 
202690 
Thereafter405 
Total$916 

8.    FINANCIAL INSTRUMENTS

    The Company uses derivative financial instruments to manage its exposure to market risks for changes in interest rates and, from time to time, foreign currencies. This strategy includes the use of interest rate swap agreements, forward-starting interest rate swap agreements, interest rate lock agreements and foreign currency forward contracts to manage its exposure to movements in interest and currency rates. The Company has established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. These policies prohibit holding or issuing derivative financial instruments for speculative purposes. The Company does not enter into derivative financial instruments that contain credit-risk-related contingent features or requirements to post collateral.

    Interest Rate Risk
    
    The Company is exposed to interest rate risk on its cash and cash equivalents and its debt obligations. Interest income earned on cash and cash equivalents may fluctuate as interest rates change; however, due to their relatively short maturities, the Company does not hedge these assets or their investment cash flows and the impact of interest rate risk is not material. The Company's debt obligations consist of fixed-rate and variable-rate debt instruments. The Company's primary objective is to achieve the lowest overall cost of funding while managing the variability in cash outflows within an acceptable range. In order to achieve this objective, the Company has historically entered into interest rate swap agreements.

    Interest rate swaps involve the periodic exchange of payments without the exchange of underlying principal or notional amounts. Net settlements between the counterparties are recognized as an adjustment to interest expense, net.

    Interest Rate Derivatives – Cash Flow Hedges

    From time to time, the Company has entered into various interest rate lock agreements and forward-starting interest rate swap agreements to hedge part of the Company's interest rate exposure associated with the variability in future cash flows attributable to changes in interest rates.

    Interest Rate Derivatives – Fair Value Hedges

    Historically, the Company has entered into various fixed-to-variable interest rate swap agreements in order to convert a portion of the Company's long-term debt into variable interest rate debt. All such fixed-to-variable interest rate swap agreements have been terminated and proceeds from the terminations have been reflected as basis ad