Quest Diagnostics Incorporated and Subsidiaries

Consolidated Statements of Operations

For the Three and Nine Months Ended September 30, 2013 and 2012

(in millions, except per share and percentage data)

(unaudited)

Three Months Ended

September 30,

Nine Months Ended

September 30,

2013

2012

2013

2012

Net revenues

$

1,787.1

$

1,821.8

$

5,389.5

$

5,608.8

Operating costs and expenses:

Cost of services

1,088.5

1,081.0

3,274.0

3,292.1

Selling, general and administrative

423.0

416.9

1,289.4

1,324.2

Amortization of intangible assets

20.2

18.6

59.2

56.2

Gain on sale of royalty rights

(474.1)

—

(474.1)

—

Other operating expense, net

40.0

0.7

35.8

0.5

Total operating costs and expenses

1,097.6

1,517.2

4,184.3

4,673.0

Operating income

689.5

304.6

1,205.2

935.8

Other income (expense):

Interest expense, net

(40.0)

(40.7)

(119.8)

(124.6)

Equity earnings in unconsolidated joint ventures

4.9

4.6

18.3

19.6

Other income, net

3.0

2.6

6.6

6.0

Total non-operating expenses, net

(32.1)

(33.5)

(94.9)

(99.0)

Income from continuing operations before taxes

657.4

271.1

1,110.3

836.8

Income tax expense

245.9

104.0

413.7

320.3

Income from continuing operations

411.5

167.1

696.6

516.5

Income from discontinued operations, net of taxes

2.4

4.5

35.5

10.0

Net income

413.9

171.6

732.1

526.5

Less: Net income attributable to noncontrolling interests

8.8

8.5

25.7

26.6

Net income attributable to Quest Diagnostics

$

405.1

$

163.1

$

706.4

$

499.9

Amounts attributable to Quest Diagnostics' common stockholders:  

Income from continuing operations

$

402.7

$

158.6

$

670.9

$

489.9

Income from discontinued operations, net of taxes

2.4

4.5

35.5

10.0

Net income

$

405.1

$

163.1

$

706.4

$

499.9

Earnings per share attributable to Quest Diagnostics' common

   stockholders - basic:

Income from continuing operations

$

2.68

$

0.99

$

4.36

$

3.07

Income from discontinued operations

0.02

0.03

0.23

0.07

Net income

$

2.70

$

1.02

$

4.59

$

3.14

Earnings per share attributable to Quest Diagnostics' common

   stockholders - diluted:

Income from continuing operations

$

2.66

$

0.98

$

4.32

$

3.04

Income from discontinued operations

0.02

0.03

0.23

0.07

Net income

$

2.68

$

1.01

$

4.55

$

3.11

Weighted average common shares outstanding:

Basic

149.6

158.8

153.5

158.5

Diluted

150.9

160.7

154.8

160.1

Operating income as a percentage of net revenues

38.6

%

16.7

%

22.4

%

16.7

%

Quest Diagnostics Incorporated and Subsidiaries

Consolidated Balance Sheets

September 30, 2013 and December 31, 2012

(in millions, except per share data)

September 30, 2013

December 31, 2012

(unaudited)

Assets

Current assets:

Cash and cash equivalents

$

158.3

$

295.6

Accounts receivable, net

920.8

867.0

Inventories

85.2

93.1

Deferred income taxes

152.8

174.2

Prepaid expenses and other current assets

108.5

91.0

Current assets held for sale

—

40.2

Total current assets

1,425.6

1,561.1

Property, plant and equipment, net

749.4

755.8

Goodwill

5,628.8

5,535.8

Intangible assets, net

903.9

872.2

Other assets

219.8

204.6

Non-current assets held for sale

—

354.4

Total assets

$

8,927.5

$

9,283.9

Liabilities and Stockholders' Equity

Current liabilities:

Accounts payable and accrued expenses

$

994.3

$

1,016.2

Short-term borrowings and current portion of long-term debt

244.7

9.4

Current liabilities held for sale

—

22.0

Total current liabilities

1,239.0

1,047.6

Long-term debt

3,122.2

3,354.2

Other liabilities

694.7

635.5

Non-current liabilities held for sale

—

60.8

Stockholders' equity:

Quest Diagnostics stockholders' equity:

Common stock, par value $0.01 per share; 600 shares authorized at both September 30, 2013

   and December 31, 2012; 215.4 shares and 215.1 shares issued at September 30, 2013 and

   December 31, 2012, respectively

2.2

2.2

Additional paid-in capital

2,306.4

2,370.7

Retained earnings

5,259.7

4,690.4

Accumulated other comprehensive (loss) income

(8.0)

14.3

Treasury stock, at cost; 70.0 shares and 56.7 shares at September 30, 2013 and December 31,

   2012, respectively

(3,717.6)

(2,914.5)

Total Quest Diagnostics stockholders' equity

3,842.7

4,163.1

Noncontrolling interests

28.9

22.7

Total stockholders' equity

3,871.6

4,185.8

Total liabilities and stockholders' equity

$

8,927.5

$

9,283.9

Quest Diagnostics Incorporated and Subsidiaries

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2013 and 2012

(in millions)

(unaudited)

Nine Months Ended

September 30,

2013

2012

Cash flows from operating activities:

Net income

$

732.1

$

526.5

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

211.0

215.3

Provision for doubtful accounts

204.1

208.4

Deferred income tax (benefit) provision

(3.1)

0.1

Stock-based compensation expense

24.1

43.1

Excess tax benefits from stock-based compensation arrangements

(3.6)

(3.8)

Gain on sale of royalty rights

(474.1)

—

Loss on sale of businesses, net

17.4

—

Other, net

(0.7)

(5.3)

Changes in operating assets and liabilities:

Accounts receivable

(252.4)

(231.4)

Accounts payable and accrued expenses

(76.8)

(56.1)

Income taxes payable

77.0

32.3

Termination of interest rate swap agreements

—

71.8

Other assets and liabilities, net

(13.3)

5.9

Net cash provided by operating activities

441.7

806.8

Cash flows from investing activities:

Business acquisitions, net of cash acquired

(179.9)

(50.6)

Proceeds from sale of businesses

296.3

—

Proceeds from sale of royalty rights

474.3

—

Capital expenditures

(155.5)

(122.3)

Increase in investments and other assets

(1.6)

(2.1)

Net cash provided by (used in) investing activities

433.6

(175.0)

Cash flows from financing activities:

Proceeds from borrowings

789.6

715.0

Repayments of debt

(757.2)

(1,222.0)

Purchases of treasury stock

(994.1)

(150.0)

Exercise of stock options

98.1

143.9

Excess tax benefits from stock-based compensation arrangements

3.6

3.8

Dividends paid

(141.0)

(81.0)

Distributions to noncontrolling interests

(21.4)

(24.1)

Other financing activities, net

(7.4)

9.5

Net cash used in financing activities

(1,029.8)

(604.9)

Net change in cash and cash equivalents

(154.5)

26.9

Add: Decrease in cash and cash equivalents included in assets held for sale

17.2

—

Cash and cash equivalents, beginning of period

295.6

164.9

Cash and cash equivalents, end of period

$

158.3

$

191.8

Cash paid during the period for:

Interest

$

135.7

$

129.4

Income taxes

$

332.2

$

292.1

Notes to Financial Tables

1) The computation of basic and diluted earnings per common share is as follows:

Three Months Ended September 30,

Nine Months Ended September 30,

2013

2012

2013

2012

(in millions, except per share data)

Amounts attributable to Quest Diagnostics' common stockholders: 

Income from continuing operations

$

402.7

$

158.6

$

670.9

$

489.9

Income from discontinued operations, net of taxes

2.4

4.5

35.5

10.0

Net income available to common stockholders

$

405.1

$

163.1

$

706.4

$

499.9

Income from continuing operations

$

402.7

$

158.6

$

670.9

$

489.9

Less: Earnings allocated to participating securities

1.5

0.6

2.4

2.0

Earnings available to Quest Diagnostics' common stockholders - basic

    and diluted

$

401.2

$

158.0

$

668.5

$

487.9

Weighted average common shares outstanding - basic

149.6

158.8

153.5

158.5

Effect of dilutive securities:

Stock options and performance share units

1.3

1.9

1.3

1.6

Weighted average common shares outstanding - diluted

150.9

160.7

154.8

160.1

Earnings per share attributable to Quest Diagnostics' common  

    stockholders - basic:

Income from continuing operations

$

2.68

$

0.99

$

4.36

$

3.07

Income from discontinued operations

0.02

0.03

0.23

0.07

Net income

$

2.70

$

1.02

$

4.59

$

3.14

Earnings per share attributable to Quest Diagnostics' common

    stockholders - diluted:

Income from continuing operations

$

2.66

$

0.98

$

4.32

$

3.04

Income from discontinued operations

0.02

0.03

0.23

0.07

Net income

$

2.68

$

1.01

$

4.55

$

3.11

Earnings per common share are computed independently for each quarterly period. Therefore, the sum of quarterly earnings per common share will not equal earnings per common share for the nine months ended September 30, 2013.

2) Adjusted amounts for operating income, operating income as a percentage of net revenues, income from continuing operations attributable

    to Quest Diagnostics' stockholders, and diluted earnings per common share represent the Company's results before the impact of the gain

    on sale of Ibrutinib royalty rights, restructuring and integration charges, loss on sale of the Enterix business and first and second quarter

    2012 costs associated with the succession of our prior CEO.  Adjusted measures are presented because management believes those

    measures are useful adjuncts to reported results under accounting principles generally accepted in the United States when comparing

    results of operations from period to period.  Adjusted measures should not be considered as an alternative to the corresponding measures

    determined under accounting principles generally accepted in the United States.  The following tables reconcile reported results to adjusted

    results:

Three Months Ended September 30, 2013

(dollars in millions, except per share data)

Gain on Sale

of Ibrutinib Royalty

Rights

Restructuring and

Integration Charges

Loss on Sale of Enterix

As Reported

(a)

(b)

As Adjusted

Operating income

$

689.5

$

(474.1)

$

39.3

$

39.6

$

294.3

Operating income as a % of net revenues

38.6

%

(26.5)%

2.2

%

2.2

%

16.5

%

Income from continuing operations 

   attributable to Quest Diagnostics'

   stockholders (c)

$

402.7

$

(298.5)

$

24.3

$

25.4

$

153.9

Diluted earnings per common share

2.66

(1.97)

0.16

0.17

1.02

(a) Represents the gain, net of transaction costs, associated with the sale of the Company's Ibrutinib royalty rights.

(b) Represents costs primarily associated with workforce reductions and professional fees incurred in connection

      with further restructuring and integrating our business.

(c) For the gain on sale of Ibrutinib royalty rights, income tax expense was calculated using a combined federal and 

      state rate of 37.1%.  For the restructuring and integration charges and loss on sale of Enterix, income tax benefits

      were calculated using combined federal and state rates of 38.4% and 35.9%, respectively

Nine Months Ended September 30, 2013

(dollars in millions, except per share data)

Gain on Sale

of Ibrutinib

Royalty

Rights

Restructuring and

Integration Charges

Loss on Sale

of Enterix

As Reported

(d)

(e)

As Adjusted

Operating income

$

1,205.2

$

$

102.6

$

39.6

$

873.3

Operating income as a % of net revenues

22.4

%

(8.8)%

1.9

%

0.7

%

16.2

%

Income from continuing operations

   attributable to Quest Diagnostics'

   stockholders (f)

$

670.9

$

(298.5)

$

63.2

$

25.4

$

461.0

Diluted earnings per common share

4.32

(1.92)

0.41

0.16

2.97

(d) Represents the gain, net of transaction costs, associated with the sale of the Company's Ibrutinib royalty rights.

(e) Represents costs primarily associated with workforce reductions and professional fees incurred in connection with further

      restructuring and integrating our business.

(f) For the gain on sale of Ibrutinib royalty rights, income tax expense was calculated using a combined federal and state rate of

     37.1%. For the restructuring and integration charges and loss on sale of Enterix, income tax benefits were calculated using

     combined federal and state rates of 38.4% and 35.9%, respectively.

Three Months Ended September 30, 2012

(dollars in millions, except per share data)

Restructuring

and

Integration Charges

As Reported

(g)

As Adjusted

Operating income

$

304.6

$

44.2

$

348.8

Operating income as a % of net revenues

16.7

%

2.4

%

19.1

%

Income from continuing operations attributable to Quest Diagnostics'

    stockholders (h)

$

158.6

$

27.1

$

185.7

Diluted earnings per common share

0.98

0.17

1.15

(g) Represents costs primarily associated with workforce reductions and professional fees incurred in

      connection with further restructuring and integrating our business.

(h) For the restructuring and integration charges, income tax benefits were calculated using a combined

      federal and state rate of 38.7%.

Nine Months Ended September 30, 2012

(dollars in millions, except per share data)

Restructuring and Integration Charges

CEO Succession Costs

As Reported

(i)

(j)

As Adjusted

Operating income

$

935.8

$

69.6

$

10.1

$

1,015.5

Operating income as a % of net revenues

16.7

%

1.2

%

0.2

%

18.1

%

Income from continuing operations attributable to Quest  

    Diagnostics' stockholders (k)

$

489.9

$

42.7

$

6.1

$

538.7

Diluted earnings per common share

3.04

0.27

0.04

3.35

(i) Represents costs primarily associated with workforce reductions and professional fees incurred in connection

     with further restructuring and integrating our business.

(j) Principally represents accrued severance and accelerated vesting of equity awards in connection with the

    succession of our prior CEO.

(k) For the restructuring and integration charges and CEO succession costs, income tax benefits were calculated

     using a combined federal and state rate of 38.7%.

3) The following tables summarize the impact to the year over year comparisons for the restructuring and integration charges

    and CEO succession costs on certain reported results for the three and nine months ended September 30, 2013 and 2012

    (in millions, except per share data):

Three months ended September 30, 2013 and 2012

(dollars in millions, except per share data)

Restructuring and Integration Charges

2013

2012

Better (Worse)

Cost of services

$

11.0

$

20.1

$

9.1

Selling, general and administrative

28.3

24.1

(4.2)

Operating income

39.3

44.2

4.9

Income from continuing operations attributable

    to Quest Diagnostics' stockholders

24.3

27.1

2.8

Diluted earnings per common share

0.16

0.17

0.01

Nine months ended September 30, 2013 and 2012

(dollars in millions, except per share data)

Restructuring and Integration Charges

CEO Succession Costs

2013

2012

Better (Worse)

2013

2012

Better (Worse)

Cost of services

$

38.4

$

28.7

$

(9.7)

$

—

$

—

$

—

Selling, general and administrative

64.2

40.9

(23.3)

—

10.1

10.1

Operating income

102.6

69.6

(33.0)

—

10.1

10.1

Income from continuing operations attributable

    to Quest Diagnostics' stockholders

63.2

42.7

(20.5)

—

6.1

6.1

Diluted earnings per common share

0.41

0.27

(0.14)

—

0.04

0.04

4) For both the three and nine months ended September 30, 2013, gain on sale of royalty rights represents

     the sale of the Company's Ibrutinib royalty rights for $474.1 million, net of transaction costs.  For the three

     and nine months ended September 30, 2013, income tax expense includes $175.6 million associated with

     the gain on sale of royalty rights.

5) Other operating expense, net includes miscellaneous income and expense items related to operating

     activities. For the three and nine months ended September 30, 2013, other operating expense, net includes

     the pre-tax loss on sale of Enterix of $39.6 million. In addition, other operating expense, net, for the nine

     months ended September 30, 2013, includes a gain of $5.7 million resulting from consideration associated

     with certain non-compete agreements.

6) Other income, net represents miscellaneous income and expense items related to non-operating activities,

     such as gains and losses associated with investments and other non-operating assets. For the nine months

     ended September 30, 2013 and 2012, other income, net includes gains of $6.5 million and $6.0 million,

     respectively, associated with investments held in trusts pursuant to our supplemental deferred compensation

     plans.

7) On April 19, 2013, the Company entered into an accelerated share repurchase ("ASR") agreement with a

     financial institution to repurchase $450 million of the Company's common stock as part of the Company's

     Common Stock repurchase program. The ASR was structured as a combination of two transactions: (1) a

     treasury stock repurchase and (2) a forward contract which permits the Company to purchase shares

     immediately with the final purchase price of those shares determined by the volume weighted average price

     of the Company's common stock during the purchase period, less a fixed discount. Under the ASR

     agreement, the Company paid $450 million to the financial institution and received 7.6 million shares of

     common stock, resulting in a final price per share of $59.46. The Company initially received 7.2 million shares

     of its common stock during the second quarter of 2013 and an additional 0.4 million shares upon completion

     of the ASR agreement during the third quarter of 2013. As of June 30, 2013, the Company recorded this

     transaction as an increase in treasury stock of $405 million, and recorded the remaining $45 million as a

     decrease to additional paid-in capital on our Consolidated Balance Sheets. Upon completion of the ASR

     agreement in the third quarter of 2013, the Company reclassified the $45 million to treasury stock from

     additional paid-in capital on our Consolidated Balance Sheets.

     On September 4, 2013, the Company entered into an ASR agreement with a financial institution to repurchase

     $350 million of the Company's common stock as part of the Company's Common Stock repurchase program.

     The ASR is structured as a combination of two transactions: (1) a treasury stock repurchase and (2) a

     forward contract which permits the Company to purchase shares immediately with the final purchase price

     of those shares determined by the volume weighted average price of the Company's common stock during

     the purchase period, less a fixed discount. For the three and nine months ended September 30, 2013, the

     Company repurchased 4.7 million shares of its common stock under the ASR at an initial price of $59.93 per

     share for a total of $280 million, which represents approximately 80 percent of the total shares expected to

     be repurchased under the ASR. The forward contract will settle the remaining shares upon the completion of

     the ASR in the fourth quarter of 2013. The Company recorded this transaction as an increase to treasury

     stock of $280 million, and recorded the remaining $70 million as a decrease to additional paid-in capital in the

     Company's Consolidated Balance Sheets at September 30, 2013. The $70 million recorded in additional paid-in

     capital will be reclassified to treasury stock upon completion of the ASR.

     In addition to the ASRs previously discussed, the Company repurchased shares of its common stock on the

     open market. For the three months ended September 30, 2013, the Company repurchased 2.2 million shares

     of its common stock at an average price of $59.06 per share for $132 million. For the nine months ended

     September 30, 2013, the Company repurchased 3.3 million shares of its common stock at an average price of

     $58.66 per share for $194 million.

     At September 30, 2013, $871 million remained available under the Company's share repurchase

     authorizations.

8) On April 9, 2013, the Company completed the sale of its HemoCue diagnostic products business. As a result,

     income from discontinued operations, net of taxes, for the nine months ended September 30, 2013, includes

     a gain of $13.5 million associated with the sale of HemoCue. In addition, income from discontinued operations,

     net of taxes, for the nine months ended September 30, 2013, includes discrete tax benefits of $19.8 million

     associated with favorable resolution of certain tax contingencies related to our NID business, which was

     wound down in 2006.

9) The outlook for adjusted diluted earnings per common share represents management's estimates for the full

     year 2013 before the impact of the gain on sale of Ibrutinib royalty rights, restructuring and integration

     charges and loss on sale of the Enterix business. The outlook for adjusted cash provided by operations

     represents management's estimate for the full year 2013 before the impact of the estimated income tax

     payment, expected in the fourth quarter of 2013, associated with the sale of Ibrutinib royalty rights. These

     measures are presented because management believes they are useful adjuncts to the corresponding

     amounts determined under accounting principles generally accepted in the United States since they are

     meaningful to evaluate the Company's ongoing operating performance and are on a basis consistent with

     previous estimates of diluted earnings per common share and cash provided by operations. Adjusted diluted

     earnings per common share and adjusted cash provided by operations are not measures of financial

     performance under accounting principles generally accepted in the United States and should not be

     considered as an alternative to the corresponding amount determined under accounting principles generally

     accepted in the United States.

     The following table reconciles our 2013 diluted earnings per common share outlook, on an adjusted basis, to

     the corresponding amounts determined under accounting principles generally accepted in the United States.

     The outlook, on an adjusted basis, excludes the impact of the gain on sale of Ibrutinib royalty rights,

     restructuring and integration charges and loss on sale of Enterix.

Outlook for 2013 Before Special Items

Gain on Sale of

Ibrutinib

Royalty Rights

Restructuring

and

Integration

Charges

Loss on

Sale of Enterix

As Reported

(a)

(b)

(c)

As Adjusted

Diluted earnings per common share

$5.20 - $5.30

($1.92)

$0.41

$0.16

$3.85 - $3.95

(a) Represents pre-tax gain, net of transaction costs, of $474.1 million associated with the sale of the Company's

      Ibrutinib royalty rights.

(b) Represents pre-tax costs of $102.6 million primarily associated with workforce reductions and professional fees

      incurred in connection with further restructuring and integrating our business.

(c) Represents pre-tax loss of $39.6 million associated with the sale of Enterix.

The following table reconciles our 2013 cash provided by operations outlook, on an adjusted basis, to the corresponding amounts determined under accounting principles generally accepted in the United States. The outlook, on an adjusted basis, excludes the impact of the estimated income tax payment, expected in the fourth quarter of 2013, associated with the sale of Ibrutinib royalty rights.

Outlook for 2013 Before Special Items

(dollars in millions)

Income Tax

Payment

Associated

with the Sale

of Ibrutinib

Royalty

Rights

As Reported

(d)

As Adjusted

Cash provided by operations

$674

$176

$850

(d) Represents the estimated income tax payment, expected in the fourth quarter of 2013, associated

     with the sale of Ibrutinib royalty rights.