Quest Diagnostics Incorporated and Subsidiaries

Consolidated Statements of Operations

For the Three and Six Months Ended June 30, 2015 and 2014

(in millions, except per share data)

(unaudited)

Three Months Ended

June 30,

Six Months Ended

June 30,

2015

2014

2015

2014

Net revenues

$

1,925

$

1,902

$

3,764

$

3,648

Operating costs and expenses:

Cost of services

1,182

1,174

2,345

2,275

Selling, general and administrative

429

440

848

855

Amortization of intangible assets

20

25

41

47

Other operating (income) expense, net

(7)

1

1

1

Total operating costs and expenses

1,624

1,640

3,235

3,178

Operating income

301

262

529

470

Other income (expense):

Interest expense, net

(37)

(42)

(82)

(81)

Equity in earnings of equity method investees

7

6

14

12

Other (expense) income, net

(64)

3

(142)

4

Total non-operating expenses, net

(94)

(33)

(210)

(65)

Income before income taxes

207

229

319

405

Income tax expense

78

87

120

152

Net income

129

142

199

253

Less: Net income attributable to noncontrolling interests

11

9

20

16

Net income attributable to Quest Diagnostics

$

118

$

133

$

179

$

237

Earnings per share attributable to Quest Diagnostics' common stockholders:

Basic

$

0.82

$

0.92

$

1.24

$

1.64

Diluted

$

0.81

$

0.92

$

1.23

$

1.63

Weighted average common shares outstanding:

Basic

144

144

144

144

Diluted

145

145

145

145

Quest Diagnostics Incorporated and Subsidiaries

Consolidated Balance Sheets

June 30, 2015 and December 31, 2014

(in millions, except per share data)

(unaudited)

June 30,
 2015

December 31,
 2014

Assets

Current assets:

Cash and cash equivalents

$

150

$

192

Accounts receivable, net

937

932

Inventories

109

110

Deferred income taxes

161

169

Prepaid expenses and other current assets

173

200

Total current assets

1,530

1,603

Property, plant and equipment, net

906

933

Goodwill

5,987

6,032

Intangible assets, net

1,022

1,071

Other assets

219

218

Non-current assets held for sale

56

—

Total assets

$

9,720

$

9,857

Liabilities and Stockholders' Equity

Current liabilities:

Accounts payable and accrued expenses

$

1,074

$

1,191

Current portion of long-term debt

168

518

Total current liabilities

1,242

1,709

Long-term debt

3,568

3,224

Other liabilities

566

594

Stockholders' equity:

Quest Diagnostics stockholders' equity:

Common stock, par value $0.01 per share; 600 shares authorized at both June 30, 2015 and December 31, 2014; 216 shares and 215 shares issued at June 30, 2015 and December 31, 2014, respectively

2

2

Additional paid-in capital

2,444

2,418

Retained earnings

5,793

5,723

Accumulated other comprehensive loss

(25)

(27)

Treasury stock, at cost; 72 shares and 71 shares at June 30, 2015 and December 31, 2014, respectively

(3,900)

(3,815)

Total Quest Diagnostics stockholders' equity

4,314

4,301

Noncontrolling interests

30

29

Total stockholders' equity

4,344

4,330

Total liabilities and stockholders' equity

$

9,720

$

9,857

Quest Diagnostics Incorporated and Subsidiaries

Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2015 and 2014

(in millions)

(unaudited)

Six Months Ended June 30,

2015

2014

Cash flows from operating activities:

Net income

$

199

$

253

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

Depreciation and amortization

153

156

Provision for doubtful accounts

158

148

Deferred income tax benefit

(5)

(26)

Stock-based compensation expense

27

25

Excess tax benefits from stock-based compensation arrangements

(3)

—

Other, net

(5)

(2)

Changes in operating assets and liabilities:

Accounts receivable

(163)

(191)

Accounts payable and accrued expenses

(49)

(39)

Income taxes payable

17

44

Other assets and liabilities, net

(2)

(4)

Net cash provided by operating activities

327

364

Cash flows from investing activities:

Business acquisitions, net of cash acquired

(6)

(723)

Capital expenditures

(117)

(117)

Increase in investments and other assets

—

(1)

Net cash used in investing activities

(123)

(841)

Cash flows from financing activities:

Proceeds from borrowings

1,829

1,738

Repayments of debt

(1,821)

(1,159)

Purchases of treasury stock

(149)

(57)

Exercise of stock options

55

30

Excess tax benefits from stock-based compensation arrangements

3

—

Dividends paid

(103)

(91)

Distributions to noncontrolling interests

(19)

(14)

Other financing activities, net

(41)

(13)

Net cash (used in) provided by financing activities

(246)

434

Net change in cash and cash equivalents

(42)

(43)

Cash and cash equivalents, beginning of period

192

187

Cash and cash equivalents, end of period

$

150

$

144

Cash paid during the period for:

Interest

$

99

$

82

Income taxes

$

109

$

138

Notes to Financial Tables

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

Three Months Ended

June 30,

Six Months Ended

June 30,

2015

2014

2015

2014

(in millions, except per share data)

Amounts attributable to Quest Diagnostics' common stockholders:

Net income attributable to Quest Diagnostics

$

118

$

133

$

179

$

237

Less: earnings allocated to participating securities

1

—

1

1

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

$

117

$

133

$

178

$

236

Weighted average common shares outstanding - basic

144

144

144

144

Effect of dilutive securities:

Stock options and performance share units

1

1

1

1

Weighted average common shares outstanding - diluted

145

145

145

145

Earnings per share attributable to Quest Diagnostics' common stockholders:

Basic

$

0.82

$

0.92

$

1.24

$

1.64

Diluted

$

0.81

$

0.92

$

1.23

$

1.63

2)

Adjusted amounts for operating income and net income attributable to Quest Diagnostics represent the company's results before the impact of special items, such as the charges on retirement of debt and related refinancing charges, restructuring and integration charges and other items.  Adjusted diluted EPS excluding amortization expense represents the company's results before the impact of special items and amortization expense.  Adjusted cash provided by operations represents cash provided by operations before the cash impact of charges on retirement of debt.  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 table reconciles reported results to adjusted results:

Three Months Ended

June 30,

Six Months Ended

June 30,

2015

2014

2015

2014

(dollars in millions, except per share data)

Adjusted operating income:

Operating income

$

301

$

262

$

529

$

470

Restructuring and integration charges (a)

23

27

54

51

Other (b)

(3)

7

7

11

Adjusted operating income

$

321

$

296

$

590

$

532

Adjusted operating income as a percentage of net revenues:

Operating income as a percentage of net revenues

15.6

%

13.8

%

14.1

%

12.9

%

Restructuring and integration charges (a)

1.2

1.4

1.4

1.4

Other (b)

(0.1)

0.3

0.2

0.3

Adjusted operating income as a percentage of net revenues

16.7

%

15.5

%

15.7

%

14.6

%

Adjusted net income:

Net income attributable to Quest Diagnostics

$

118

$

133

$

179

$

237

Charges on retirement of debt and related refinancing charges (c) (d)

41

—

94

—

Restructuring and integration charges (d)

14

19

33

34

Other (d)

(3)

5

5

8

Adjusted net income

$

170

$

157

$

311

$

279

Adjusted diluted EPS excluding amortization expense:

Diluted earnings per common share

$

0.81

$

0.92

$

1.23

$

1.63

Charges on retirement of debt and related refinancing charges (c) (d)

0.28

—

0.64

—

Restructuring and integration charges (a) (d)

0.10

0.13

0.22

0.24

Other (b) (d)

(0.02)

0.03

0.04

0.05

Amortization expense (e)

0.08

0.11

0.17

0.20

Adjusted diluted EPS excluding amortization expense

$

1.25

$

1.19

$

2.30

$

2.12

Adjusted cash provided by operations:

Cash provided by operations

$

275

$

280

$

327

$

364

Cash charges on retirement of debt (f)

49

—

127

—

Adjusted cash provided by operations

$

324

$

280

$

454

$

364

(a)

Represents costs primarily associated with workforce reductions and professional fees incurred in connection with further restructuring and integrating our business.  The following table summarizes the impact of restructuring and integration charges on the company's consolidated statements of operations:

Three Months Ended

June 30,

Six Months Ended

June 30,

2015

2014

2015

2014

(dollars in millions)

Cost of services

$

11

$

11

$

31

$

23

Selling, general and administrative

12

16

23

28

$

23

$

27

$

54

$

51

(b)

For the three months ended June 30, 2015, primarily represents a gain of $13 million associated with a decrease in the fair value of the contingent consideration accrual associated with our Summit Health acquisition, partially offset by costs incurred related to legal matters and non-cash asset impairment charges.  For the six month ended June 30, 2015, primarily represents non-cash asset impairment charges primarily associated with our Celera Products business and costs incurred related to legal matters, partially offset by a gain of $13 million associated with a decrease in the fair value of the contingent consideration accrual associated with our Summit Health acquisition.

For the three and six months ended June 30, 2014, principally represents costs incurred related to the settlement of legal matters.

(c)

Charges on retirement of debt and related refinancing charges represent: charges associated with the March 2015 cash tender offer (the "Tender Offer") in which the company purchased $250 million aggregate principal amount of its 6.95% Senior Notes due July 2037 and 5.75% Senior Notes due January 2040; and charges associated with the April 2015 redemption (the "Redemption") in which the company redeemed all of its 5.45% Senior Notes due November 2015, $150 million of its 3.2% Senior Notes due April 2016 and all of its 6.4% Senior Notes due July 2017.  The following table summarizes the impact of pre-tax charges on retirement of debt and related refinancing charges on the company's consolidated statements of operations:

Three Months Ended

June 30,

Six Months Ended

June 30,

2015

2014

2015

2014

(dollars in millions)

Interest expense, net

$

1

$

—

$

6

$

—

Other (expense) income, net

65

—

144

—

$

66

$

—

$

150

$

—

(d)

For the charges on retirement of debt and related refinancing charges, income tax benefits were calculated such that the combined federal and state rate for the full year will be 40%.  For the restructuring and integration charges and other items, income tax impacts, where recorded, were calculated using combined federal and state rates of 38.9% and 38.2% for 2015 and 2014, respectively.

(e)

Represents the impact of amortization expense on diluted earnings per common share, net of the income tax benefit.  The income tax benefit was calculated using combined federal and state rates of 38.9% and 38.2% for 2015 and 2014, respectively.

(f)

Represents $146 million of pre-tax cash charges on retirement of debt in connection with our recent debt refinancing, net of the estimated cash tax benefit.

3)

Other operating (income)  expense, net includes miscellaneous income and expense items related to operating activities.  For the three months ended June 30, 2015, other operating (income) expense, net principally includes a gain of $13 million associated with a decrease in the fair value of the contingent consideration accrual associated with our Summit Health acquisition, partially offset by a non-cash asset impairment charge.  Other operating (income) expense, net for the six months ended June 30, 2015, principally includes non-cash asset impairment charges primarily associated with our Celera Products business, substantially offset by a gain of $13 million associated with a decrease in the fair value of the contingent consideration accrual associated with our Summit Health acquisition.

4)

Other (expense) 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 three and six months ended June 30, 2015, other (expense) income, net includes $65 million and $144 million, respectively, of pre-tax charges on the retirement of debt associated with the Tender Offer and Redemption.

5)

For the three months ended June 30, 2015, the company repurchased 0.6 million shares of its common stock at an average price of $72.03 per share for $39 million.  For the six months ended June 30, 2015, the company repurchased 2.1 million shares of its common stock at an average price of $71.62 per share for $149 million.  At June 30, 2015, $547 million remained available under the company's share repurchase authorizations.

6)

The outlook for adjusted diluted EPS excluding amortization expense represents management's estimates for the full year 2015 before the impact of special items and amortization expense.  The outlook for adjusted cash provided by operations represents management's estimate for the full year 2015 before the cash impact of charges on retirement of debt.  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.  Adjusted diluted EPS excluding amortization expense 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 alternatives to the corresponding amount determined under accounting principles generally accepted in the United States.

The following table reconciles our 2015 outlook for adjusted diluted EPS excluding amortization expense and adjusted cash provided by operations to the corresponding amounts determined under accounting principles generally accepted in the United States:

Low

High

Adjusted diluted EPS excluding amortization expense:

Diluted earnings per common share

$

3.43

$

3.58

Charges on retirement of debt and related refinancing charges (a)

0.64

0.64

Restructuring and integration charges (b)

0.22

0.22

Other (c)

0.04

0.04

Amortization expense, net of tax (d)

0.37

0.37

Adjusted diluted EPS excluding amortization expense

$

4.70

$

4.85

Adjusted cash provided by operations:

Cash provided by operations

$

723

Cash charges on retirement of debt (e)

127

Adjusted cash provided by operations

$

850

(a)

Represents pre-tax charges of $150 million, incurred through June 30, 2015, associated with the retirement of debt and related refinancing charges in connection with the Tender Offer and Redemption.

(b)

Represents pre-tax charges of $54 million primarily associated with workforce reductions and professional fees incurred in connection with further restructuring and integrating our business through June 30, 2015.

(c)

Represents pre-tax charges of $20 million associated with non-cash impairment charges primarily associated with our Celera Products business and costs incurred related to legal matters, partially offset by a gain of $13 million associated with a decrease in the fair value of the contingent consideration accrual associated with our Summit Health acquisition through June 30, 2015.

(d)

Represents the full year impact of amortization expense (including amortization expense associated with our equity in earnings of equity method investees), estimated at approximately $88 million or $54 million, net of an estimated tax benefit, on diluted earnings per common share.

(e)

Represents pre-tax cash charges of $146 million on retirement of debt in connection with our recent debt refinancing, net of the estimated cash tax benefit through June 30, 2015.

7)

The outlook for 2% to 3% revenue growth represents management's estimates for the full year 2015 versus reported full year 2014 revenues adjusted to exclude the third and fourth quarter 2014 clinical trials revenue.  Effective July 1, 2015, the company's clinical trials business was contributed to the clinical trials joint venture, consequently our full year 2015 revenues will not include these revenues in the second half of 2015.  Revenues for 2014 have been adjusted to exclude clinical trials revenues to provide an equivalent basis for our growth outlook.  The following table reconciles our 2014 net revenues determined under accounting principles generally accepted in the United States with equivalent revenue for 2014:

2014 Net

Revenues

2014 reported revenue

$

7,435

Excluded revenue (a)

(87)

2014 equivalent revenue

$

7,348

2015 Revenue Outlook

Low

High

2014 equivalent revenue

$

7,348

$

7,348

Growth outlook

2

%

3

%

2015 revenue outlook

$

7,490

$

7,570

(a)

The 2014 excluded revenue is comprised of $41 million and $46 million of clinical trials revenues reported in the third and fourth quarters of 2014, respectively.