Three Months Ended December 31,

Twelve Months Ended December 31,

2018

2017

2018

2017

(dollars in millions, except per share data)

Reported:

Net revenues (a) (c)

$

1,839

$

1,865

$

7,531

$

7,402

1.7

%

Diagnostic information services revenues (a) (c)

$

1,756

$

1,785

(1.5)%

$

7,204

$

7,068

1.9

%

Revenue per requisition (c)

(5.5)%

(1.2)%

Requisition volume

3.4

%

2.5

%

Organic requisition volume

1.1

%

0.5

%

Operating income (a) (b) (c)

$

220

$

269

(18.2)%

$

1,101

$

1,165

(5.5)%

Operating income as a percentage of net revenues (a) (b) (c)

12.0

%

14.4

%

-240 bps

14.6

%

15.7

%

-110 bps

Net income attributable to Quest Diagnostics (b) (c)

$

127

$

254

(50.0)%

$

736

$

772

(4.7)%

Diluted earnings per share (b) (c)

$

0.92

$

1.82

(49.5)%

$

5.29

$

5.50

(3.8)%

Cash provided by operations

$

295

$

323

(8.2)%

$

1,200

$

1,175

2.2

%

Capital expenditures

$

151

$

82

82.7

%

$

383

$

252

51.7

%

Adjusted:

Operating income (a) (c)

$

271

$

317

(14.6)%

$

1,225

$

1,282

(4.4)%

Operating income as a percentage of net revenues (a) (c)

14.7

%

17.0

%

-230 bps

16.3

%

17.3

%

-100 bps

Net income attributable to Quest Diagnostics (c)

$

166

$

179

(7.3)%

$

798

$

703

13.4

%

Diluted earnings per share excluding                             amortization (c)

$

1.36

$

1.38

(2.9)%

$

6.31

$

5.40

16.7

%

(a)

Net revenues and selling, general and administrative expenses for the three and twelve months ended December 31, 2017 have been restated to reflect the impact of new revenue recognition rules that became effective January 1, 2018 and were adopted on a full retrospective basis. Under the new rules, the company reports uncollectible balances associated with patient responsibility as a reduction in net revenues; historically these amounts were classified as bad debt expense within selling, general and administrative expenses.

(b)

For further details impacting the year-over-year comparisons related to operating income, operating income as a percentage of net revenues, net income attributable to Quest Diagnostics, and diluted EPS, see note 2 of the financial tables attached below.

(c)

As discussed in the company's periodic reports filed with the Securities and Exchange Commission, recording revenues and accounts receivable involves judgment and estimation.  The company follows a standard process, which considers historical denial and collection experience and other factors, to estimate contractual allowances and implicit patient price concessions, and regularly updates its estimates, recording adjustments in the current period as changes in estimates.  Based on this process, during the fourth quarter the company increased its reserves for revenues and accounts receivable.

Guidance for Full Year 2019

The company estimates full year 2019 results as follows:

Low

High

Net revenues

$7.60 billion

$7.75 billion

Net revenue increase

1%

3%

Reported diluted EPS

Greater than $5.16

Adjusted diluted EPS excluding amortization expense

Greater than $6.40

Cash provided by operations

Approximately $1.3 billion

Capital expenditures

$350 million

$400 million

Quest Diagnostics Incorporated and Subsidiaries

Consolidated Statements of Operations

For the Three and Twelve Months Ended December 31, 2018 and 2017

(in millions, except per share data)

(unaudited)

Three Months Ended

December 31,

Twelve Months Ended

December 31,

2018

2017

2018

2017

Net revenues

$

1,839

$

1,865

$

7,531

$

7,402

Operating costs and expenses and other operating income:

Cost of services

1,235

1,194

4,926

4,719

Selling, general and administrative

356

382

1,424

1,443

Amortization of intangible assets

24

20

90

74

Loss on disposition of business

4

—

4

—

Other operating (income) expense, net

—

—

(14)

1

Total operating costs and expenses, net

1,619

1,596

6,430

6,237

Operating income

220

269

1,101

1,165

Other (expense) income:

Interest expense, net

(43)

(39)

(167)

(151)

Other (expense) income, net

(10)

4

(8)

16

Total non-operating expenses, net

(53)

(35)

(175)

(135)

Income before income taxes and equity in earnings of equity method investees

167

234

926

1,030

Income tax (expense) benefit

(40)

23

(182)

(241)

Equity in earnings of equity method investees, net of taxes

12

10

44

35

Net income

139

267

788

824

Less: Net income attributable to noncontrolling interests

12

13

52

52

Net income attributable to Quest Diagnostics

$

127

$

254

$

736

$

772

Earnings per share attributable to Quest Diagnostics' common stockholders:

Basic

$

0.93

$

1.86

$

5.39

$

5.63

Diluted

$

0.92

$

1.82

$

5.29

$

5.50

Weighted average common shares outstanding:

Basic

136

136

136

137

Diluted

137

139

139

140

Quest Diagnostics Incorporated and Subsidiaries

Consolidated Balance Sheets

December 31, 2018 and 2017

(in millions, except per share data)

(unaudited)

December 31, 2018

December 31, 2017

Assets

Current assets:

Cash and cash equivalents

$

135

$

137

Accounts receivable, net

1,012

924

Inventories

99

95

Prepaid expenses and other current assets

144

150

Total current assets

1,390

1,306

Property, plant and equipment, net

1,288

1,145

Goodwill

6,563

6,335

Intangible assets, net

1,207

1,119

Investment in equity method investees

436

462

Other assets

119

136

Total assets

$

11,003

$

10,503

Liabilities and Stockholders' Equity

Current liabilities:

Accounts payable and accrued expenses

$

1,021

$

1,021

Current portion of long-term debt

464

36

Total current liabilities

1,485

1,057

Long-term debt

3,429

3,748

Other liabilities

745

663

Redeemable noncontrolling interest

77

80

Stockholders' equity:

Quest Diagnostics stockholders' equity:

Common stock, par value $0.01 per share; 600 shares authorized as of both December 31, 2018 and 2017; 217 and 216 shares issued as of December 31, 2018 and 2017, respectively

2

2

Additional paid-in capital

2,667

2,612

Retained earnings

7,602

7,138

Accumulated other comprehensive loss

(59)

(48)

Treasury stock, at cost; 82 shares and 81 shares as of December 31, 2018 and 2017, respectively

(4,996)

(4,783)

Total Quest Diagnostics stockholders' equity

5,216

4,921

Noncontrolling interests

51

34

Total stockholders' equity

5,267

4,955

Total liabilities and stockholders' equity

$

11,003

$

10,503

Quest Diagnostics Incorporated and Subsidiaries

Consolidated Statements of Cash Flows

For the Twelve Months Ended December 31, 2018 and 2017

(in millions)

(unaudited)

Twelve Months Ended

December 31,

2018

2017

Cash flows from operating activities:

Net income

$

788

$

824

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

Depreciation and amortization

309

270

Provision for doubtful accounts

6

8

Deferred income tax provision

73

9

Stock-based compensation expense

61

79

Loss on disposition of business

4

—

Other, net

8

(6)

Changes in operating assets and liabilities:

Accounts receivable

(65)

9

Accounts payable and accrued expenses

(19)

(8)

Income taxes payable

4

16

Other assets and liabilities, net

31

(26)

Net cash provided by operating activities

1,200

1,175

Cash flows from investing activities:

Business acquisitions, net of cash acquired

(421)

(581)

Proceeds from disposition of business

2

1

Capital expenditures

(383)

(252)

Decrease in investments and other assets

1

2

Net cash used in investing activities

(801)

(830)

Cash flows from financing activities:

Proceeds from borrowings

2,090

205

Repayments of debt

(1,966)

(182)

Purchases of treasury stock

(322)

(465)

Exercise of stock options

99

130

Employee payroll tax withholdings on stock issued under stock-based compensation plans

(21)

(23)

Dividends paid

(266)

(247)

Distributions to noncontrolling interest partners

(54)

(51)

Contributions from noncontrolling interest partners

16

4

Other financing activities, net

23

37

Net cash used in financing activities

(401)

(592)

Net change in cash and cash equivalents and restricted cash

(2)

(247)

Cash and cash equivalents and restricted cash, beginning of period

137

384

Cash and cash equivalents and restricted cash, end of period

$

135

$

137

Cash and cash equivalents

$

135

$

137

Restricted cash

—

—

Cash and cash equivalents and restricted cash, end of period

$

135

$

137

Cash paid during the period for:

Interest

$

174

$

159

Income taxes

$

84

$

243

Notes to Financial Tables

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

Three Months Ended

December 31,

Twelve Months Ended

December 31,

2018

2017

2018

2017

(in millions, except per share data)

Amounts attributable to Quest Diagnostics' common stockholders:

Net income attributable to Quest Diagnostics

$

127

$

254

$

736

$

772

Less: Earnings allocated to participating securities

1

1

3

3

Earnings available to Quest Diagnostics' common stockholders - basic and diluted

$

126

$

253

$

733

$

769

Weighted average common shares outstanding - basic

136

136

136

137

Effect of dilutive securities:

Stock options and performance share units

1

3

3

3

Weighted average common shares outstanding - diluted

137

139

139

140

Earnings per share attributable to Quest Diagnostics' common stockholders:

Basic

$

0.93

$

1.86

$

5.39

$

5.63

Diluted

$

0.92

$

1.82

$

5.29

$

5.50

2)       The following tables reconcile reported results to adjusted results:

Three Months Ended

December 31,

Twelve Months Ended

December 31,

2018

2017

2018

2017

(dollars in millions, except per share data)

Adjusted operating income:

Operating income

$

220

$

269

$

1,101

$

1,165

Restructuring and integration charges (a)

47

42

122

105

Other (b)

4

6

2

12

Adjusted operating income

$

271

$

317

$

1,225

$

1,282

Adjusted operating income as a percentage of net revenues:

Operating income as a percentage of net revenues

12.0

%

14.4

%

14.6

%

15.7

%

Restructuring and integration charges (a)

2.5

2.3

1.7

1.4

Other (b)

0.2

0.3

—

0.2

Adjusted operating income as a percentage of net revenues

14.7

%

17.0

%

16.3

%

17.3

%

Adjusted net income:

Net income attributable to Quest Diagnostics

$

127

$

254

$

736

$

772

Restructuring and integration charges (a)

47

42

122

106

Other (b)

4

6

2

10

Income tax benefit associated with the special items (c)

(12)

(16)

(30)

(42)

ETB

(1)

(1)

(18)

(37)

Certain income tax items (d)

1

(106)

(14)

(106)

Adjusted net income

$

166

$

179

$

798

$

703

Adjusted diluted EPS excluding amortization expense:

Diluted earnings per common share

$

0.92

$

1.82

$

5.29

$

5.50

Restructuring and integration charges (a) (c)

0.26

0.19

0.66

0.47

Other (b) (c)

0.02

0.05

0.01

0.07

Amortization expense (e)

0.16

0.11

0.57

0.40

ETB

(0.01)

(0.02)

(0.13)

(0.27)

Certain income tax items (d)

0.01

(0.77)

(0.09)

(0.77)

Adjusted diluted EPS excluding amortization expense

$

1.36

$

1.38

$

6.31

$

5.40

(a)

For the three and twelve months ended December 31, 2018, represents costs primarily associated with workforce reductions, systems conversions and integration incurred in connection with further restructuring and integrating our business. For the three and twelve months ended December 31, 2017, represents costs primarily associated with systems conversions, integration and workforce reductions incurred in connection with further restructuring and integrating our business.  The following table summarizes the pre-tax impact of restructuring and integration charges on the company's consolidated statements of operations:

Three Months Ended

December 31,

Twelve Months Ended

December 31,

2018

2017

2018

2017

(dollars in millions)

Cost of services

$

20

$

14

$

56

$

45

Selling, general and administrative

27

28

65

60

Other operating expense (income), net

—

—

1

—

Operating income

$

47

$

42

$

122

$

105

Equity in earnings of equity method investees, net of taxes

$

—

$

—

$

—

$

1

(b) 

For the three months ended December 31, 2018, primarily represents the loss on the sale of a foreign subsidiary.  For the twelve months ended December 31, 2018, primarily represents costs incurred related to certain legal matters and a loss on the sale of a foreign subsidiary which were partially offset by a gain associated with the decrease in the fair value of the contingent consideration accrual associated with our Mobile Medical Examination Services, LLC acquisition and an insurance claim for hurricane related losses.

For the three months ended December 31, 2017, primarily represents non-cash asset impairment charges and incremental costs incurred as a result of hurricanes.  For the twelve months ended December 31, 2017, primarily represents non-cash asset impairment charges associated with an investment, non-cash asset impairment charges and incremental costs incurred as a result of hurricanes and costs incurred related to certain legal matters, partially offset by a gain on the sale of an interest in an equity method investment.

The following table summarizes the pre-tax impact of these other items on the company's consolidated statement of operations:

Three Months Ended

December 31,

Twelve Months Ended

December 31,

2018

2017

2018

2017

(dollars in millions)

Cost of services

$

—

$

2

$

12

$

5

Selling, general and administrative

—

4

—

7

Other operating expense (income), net

4

—

(10)

—

Operating income

$

4

$

6

$

2

$

12

Other non-operating expense (income), net

$

—

$

—

$

—

$

(2)

(c)

For the restructuring and integration charges and other items, income tax impacts, where recorded, were primarily calculated using combined tax rates of 25.5% and 38.7% for 2018 and 2017, respectively.  For the three and twelve months ended December 31, 2017, other items also includes the impact of recording a valuation allowance against certain net operating loss carryforwards in a geography impacted by hurricanes. The following table summarizes the income tax benefit associated with the special items:

Three Months Ended

December 31,

Twelve Months Ended

December 31,

2018

2017

2018

2017

(dollars in millions)

Restructuring and integration charges

$

(12)

$

(16)

$

(31)

$

(41)

Other

—

—

1

(1)

$

(12)

$

(16)

$

(30)

$

(42)

(d)

For the three months ended December 31, 2018, represents an income tax expense associated with finalizing the impact of the enactment of TCJA.  For the twelve months ended December 31, 2018, represents an income tax benefit associated with a change in a tax return accounting method that enabled the company to accelerate the deduction of certain expenses on its 2017 tax return at the federal corporate statutory tax rate in effect during 2017 partially offset by an income tax expense associated with finalizing the impact of the enactment of TCJA. 

For the three and twelve months ended December 31, 2017, represents the net estimated tax benefit associated with the TCJA.  The company recorded an estimated net income tax benefit of $106 million in 2017 associated with the TCJA, including a deferred income tax benefit of $115 million primarily due to the remeasurement of net deferred tax liabilities and reserves at the new combined federal and state tax rate, partially offset by $9 million of current tax expense primarily due to the mandatory repatriation toll charge on undistributed foreign earnings and profits.

(e)

Represents the impact of amortization expense on diluted earnings per common share, net of the income tax benefit.  The income tax benefit was primarily calculated using combined tax rates of 25.5% and 38.7% for 2018 and 2017, respectively.  The pre-tax amortization expense that is excluded from the calculation of adjusted diluted EPS excluding amortization expense is recorded in the company's statements of operations as follows:

Three Months Ended

December 31,

Twelve Months Ended

December 31,

2018

2017

2018

2017

(dollars in millions)

Amortization of intangible assets

$

24

$

20

$

90

$

74

Equity in earnings of equity method investees, net of taxes

4

4

17

16

$

28

$

24

$

107

$

90

3)

For the three months ended December 31, 2018, the company repurchased 2.0 million shares of its common stock for $175 million, which included an accrual of $3 million recorded in accounts payable and accrued expenses in the consolidated balance sheet for share purchases not settled.  For the twelve months ended December 31, 2018, the company repurchased 3.4 million shares of its common stock for $325 million, which included an accrual of $3 million recorded in accounts payable and accrued expenses in the consolidated balance sheet for share purchases not settled.  As of December 31, 2018, $0.6 billion remained available under the company's share repurchase authorizations.

4)

For the twelve months ended December 31, 2018, net cash provided by operations benefited from a decrease in 2018 tax payments of $159 million primarily due to the impact of TCJA, partially offset by lower operating income in 2018 as compared to 2017 and timing of movements in our working capital accounts.  For the twelve months ended December 31, 2017, net cash provided by operations benefited from a $62 million decrease in 2017 tax payments associated with the realization of a deferred tax benefit and improved operating performance.

5)

The outlook for adjusted diluted EPS excluding amortization expense represents management's estimates for the full year 2019 before the impact of special items, including ETB, and amortization expense.  Further impacts to earnings related to special items may be incurred throughout 2019.  Additionally, the amount of ETB is dependent upon employee stock option exercises and the company's stock price, which are difficult to predict.  The following table reconciles our 2019 outlook for adjusted diluted EPS excluding amortization expense to the corresponding amount determined under GAAP:

Diluted earnings per common share

$

5.16

Restructuring and integration charges (a)

0.67

Amortization expense (b)

0.61

ETB

(0.04)

Adjusted diluted EPS excluding amortization expense

$

6.40

(a)

Represents estimated full year pre-tax charges of $125 million primarily associated with systems conversions and integration costs incurred in connection with further restructuring and integrating our business.  Income tax benefits were calculated using a combined tax rate of 25.5%.

(b)

Represents the estimated impact of amortization expense for 2019 on the calculation of adjusted diluted EPS excluding amortization expense.  Amortization expense used in the calculation is as follows (dollars in millions):

Amortization of intangible assets

$

99

Amortization expense included in equity in earnings of equity method investees, net of taxes

15

Total pre-tax amortization expense

$

114

Total amortization expense, net of an estimated tax benefit

$

85

6)

The outlook for 1% to 3% revenue growth in 2019 represents management's estimates for 2019 versus 2018 reported revenues (dollars in millions):

2019 Revenue outlook:

Low

High

2018 Revenue

$

7,531

$

7,531

2019 Revenue growth

1

%

3

%

2019 Revenue outlook

$

7,600

$

7,750