# QUEST DIAGNOSTICS INC (DGX) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from QUEST DIAGNOSTICS INC's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1022079/000102207924000041/dgx-20231231.htm
Accession: 0001022079-24-000041
Filing date: 2024-02-22
Report date: 2023-12-31
Extracted from a later financial-section MD&A body after the formal Item 7 span was a short reference.
Confidence: high

Company profile: /company/DGX/
All MD&A years: /company/DGX/mda/
Previous year: /company/DGX/mda/fy2022/ (FY 2022)
Next year: /company/DGX/mda/fy2024/ (FY 2024)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our Company

    Diagnostic Information Services

    Quest Diagnostics works across the healthcare ecosystem to create a healthier world, one life at a time. Our diagnostic information services ("DIS") business provides diagnostic insights from the results of our laboratory testing to empower people, physicians, and organizations to take action to improve health outcomes. Derived from one of the world's largest databases of de-identifiable clinical lab results, our diagnostic insights reveal new avenues to identify and treat disease, inspire healthy behaviors and improve healthcare management. In the right hands and with the right context, our diagnostic insights can inspire actions that transform lives and create a healthier world. We provide services to a broad range of customers within our primary customer channels - physicians (including those associated with accountable care organizations ("ACOs") and Federally Qualified Health Centers ("FQHCs")), hospitals, and patients and consumers. Our other customers include health plans, employers, emerging retail healthcare providers, government agencies, pharmaceutical companies and other commercial clinical laboratories. We offer broad access to clinical testing through a nationwide network of laboratories, patient service centers, phlebotomists in physician offices, and our connectivity resources, including call centers and mobile phlebotomists, nurses and other health and wellness professionals. Our large in-house staff of medical and scientific experts, including medical directors, scientific directors, genetic counselors and board-certified geneticists, provide medical and scientific consultation to healthcare providers and patients regarding our tests and test results, and help them best utilize our services to improve outcomes and enhance satisfaction. During 2023, we processed approximately 206 million test requisitions through our extensive laboratory network.

    Clinical testing is an essential element in the delivery of healthcare services. Clinical testing is used for predisposition, screening, monitoring, diagnosis, prognosis and treatment choices of diseases and other medical conditions.We primarily compete with three types of clinical testing providers: commercial clinical laboratories, hospital-affiliated laboratories and physician-office laboratories. In addition, we compete with many smaller regional and local commercial clinical laboratories, specialized advanced laboratories and providers of consumer-initiated testing.

    The clinical testing industry is subject to seasonal fluctuations in operating results and cash flows. Typically, testing volume declines during vacation and major holiday periods, reducing net revenues and operating cash flows below annual averages. Testing volume is also subject to declines due to severe weather or other events (such as public health emergencies and health pandemics), which can deter patients from having testing performed and which can vary in duration and severity from year to year. Additionally, orders for clinical testing generated from customers, including physicians, hospitals, and consumers, can be affected by factors such as changes in the United States economy and regulatory environment, which affect the number of unemployed and uninsured, and design changes in healthcare plans, which affect utilization as well as patient responsibility for healthcare costs.

    We assess our revenue performance for our DIS business based upon, among other factors, volume (measured by test requisitions) and revenue per requisition. Each test requisition accompanies patient specimens, indicating the test(s) to be performed and the party to be billed for the test(s). Revenue per requisition is impacted by various factors, including, among other items, the impact of fee schedule changes (i.e., unit price), test mix, payer mix, business mix, and the number of tests per requisition. Management uses number of requisitions and revenue per requisition data to assist with assessing the growth and performance of the business, including understanding trends affecting number of requisitions, pricing and test mix. Therefore, we believe that information related to changes in these metrics from period to period are useful information for investors as it allows them to assess the performance of the business.

    Diagnostic Solutions

    Our Diagnostic Solutions ("DS") group, which represents the balance of our consolidated net revenues, includes our risk assessment services business, which offers solutions for insurers, and our healthcare information technology businesses, which offer solutions for healthcare providers and payers.

2023 Highlights    

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[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022","","2021"],["","(dollars in millions, except per share data)"],["Net revenues","$9,252","","$9,883","","$10,788"],["Base business revenues (a)","$9,029","","$8,429","","$8,018"],["COVID-19 testing revenues","$223","","$1,454","","$2,770"],["DIS revenues","$8,976","","$9,609","","$10,494"],["Revenue per requisition change","(5.9)%","","(4.5)%","","(1.6)%"],["Requisition volume change","(0.6)%","","(4.5)%","","16.5%"],["Organic requisition volume change","(1.0)%","","(5.1)%","","13.6%"],["DS revenues","$276","","$274","","$294"],["Operating income","$1,262","","$1,428","","$2,381"],["Net income attributable to Quest Diagnostics","$854","","$946","","$1,995"],["Diluted earnings per share","$7.49","","$7.97","","$15.55"],["Net cash provided by operating activities","$1,272","","$1,718","","$2,233"],["Capital expenditures","$408","","$404","","$403"]]
[[/GREPCENT_TABLE]]

(a) Excludes COVID-19 testing.

    The impact that the COVID-19 pandemic had on our DIS revenues, including requisition volume and revenue per requisition, are discussed further below under "Results of Operations".

    For further discussion of the year-over-year changes for the year ended December 31, 2023 compared to the year ended December 31, 2022, see "Results of Operations" below.

Acquisitions

    Acquisition of select assets of the laboratory services business of New York-Presbyterian

    On April 17, 2023, we completed the acquisition of select assets of the laboratory services business of New York-Presbyterian, which serves providers and patients in New York, as well as the tri-state area and beyond, in an all cash transaction for $275 million. The acquired business is included in our DIS business.

    For further details, see Note 6 to the audited consolidated financial statements.

    Acquisition of Haystack Oncology, Inc.

    On June 20, 2023, we acquired Haystack Oncology, Inc., an early-stage oncology company focused on minimal residual disease testing to aid in the detection of residual or recurring cancer and better inform therapy decisions. The acquisition was an all-cash transaction for $392 million, net of $1 million of cash acquired, which consisted of cash consideration of $304 million and contingent consideration initially estimated at $88 million. Under the contingent consideration obligation, the seller can receive up to $100 million of additional consideration dependent upon the achievement of certain revenue benchmarks through 2028 and up to an additional $50 million of consideration dependent upon us receiving reimbursement coverage from the Centers for Medicare and Medicaid Services. The acquired business is included in our DIS business.

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    For further details, see Notes 6 and 8 to the audited consolidated financial statements.

Senior Notes Offering

    During November 2023, we completed a senior notes offering, consisting of $750 million aggregate principal amount of 6.40% senior notes due November 2033 (the "2033 Senior Notes"). We expect to use the net proceeds from the offering for general corporate purposes, which may include the redemption or repayment of indebtedness, including our $300 million aggregate principal amount of 4.25% senior notes due April 2024.

     For further details regarding our debt, see Note 14 to the audited consolidated financial statements.

Invigorate Program

    We are engaged in a multi-year program called Invigorate, which includes structured plans to drive savings and improve productivity across the value chain, including in such areas as patient services, logistics and laboratory operations, revenue services, information technology and procurement. The Invigorate program aims to deliver 3% annual cost savings and productivity improvements to partially offset pressures from the current inflationary environment, including labor and benefit cost increases and reimbursement pressures. We are leveraging automation and artificial intelligence to improve productivity and also improve quality across our entire value chain, not just in the laboratory. Other areas of focus include reducing denials and patient concessions, enhancing the digital experience, and selecting and retaining talent.

    For the year ended December 31, 2023, we incurred $43 million of pre-tax charges in connection with our Invigorate program and other restructuring activities, including $25 million of employee separation costs, with the remainder primarily consisting of integration costs. Most of the charges will result in cash expenditures. Additional restructuring charges may be incurred in future periods, including as we identify additional opportunities to achieve further savings and productivity improvements.

    For further details of the Invigorate program and associated costs, see Note 5 to the audited consolidated financial statements.

Outlook and Trends

    The healthcare system in the United States continues to evolve and industry change is likely to be extensive. Because diagnostic information services is an essential healthcare service, we believe that the industry will continue to grow over the long term. There are a number of key trends that we expect will continue to have a significant impact on the growth and the nature of the diagnostic information services business in the United States and on our business. These trends present both opportunities and risks.

    Healthcare market participants, including health plans and governments, are focusing on controlling costs, including potentially by reducing reimbursement for healthcare services, changing reimbursement for healthcare services (including but not limited to a shift from fee-for-service to capitation), changing medical coverage policies (e.g., healthcare benefits design), denying coverage for services, requiring preauthorization of laboratory testing, requiring co-pays, introducing laboratory spend management utilities and payment and patient care innovations such as ACOs and patient-centered medical homes. In recent years, there has been an ongoing trend of rising patient responsibility which has resulted in an increase in our reserves for patient price concessions. As health plans and government programs require greater levels of patient cost-sharing, our patient price concessions may continue to be negatively impacted and adversely impact our results of operations. There could be a shift to capitation arrangements where we agree to a predetermined monthly reimbursement rate for each member enrolled in a restricted plan, generally regardless of the number or cost of services provided by us. In both 2023 and 2022, we derived approximately 3% of our consolidated net revenues from capitated payment arrangements. In 2023 and 2022, we derived approximately 9% and 8%, respectively, of our testing volume from capitated payment arrangements.

    Historically, the Medicare Clinical Laboratory Fee Schedule ("CLFS") and the Medicare Physician Fee Schedule established under Part B of the Medicare program have been subject to change, including each year. Pursuant to the Protecting Access to Medicare Act ("PAMA"), reimbursement rates for clinical laboratory testing were reduced from 2018 - 2020. PAMA calls for further revision of the CLFS for years after 2020, based on future surveys of market rates; reimbursement reduction from 2025 - 2027 is capped by PAMA at 15% annually. PAMA's next data collection and reporting period have been delayed, most recently by federal legislation adopted in 2023, which further delayed the reimbursement rate reductions and reporting requirements until January 1, 2025.

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    The diagnostic information services industry remains fragmented, is highly competitive and is subject to new competition. Consolidation in the healthcare industry has continued at a rapid pace, including among our customer base. Certain of our customers are seeking to diversify their service offerings and to partner with other providers to offer value-based care alternatives. Consolidation is increasing pricing transparency, and may encourage internalization of clinical testing.

    Recent and potentially on-going inflationary pressures have resulted in increases in the cost of our operations, including the costs of testing equipment, supplies and other goods and services we purchase from manufacturers, suppliers and others. Inflationary pressures, along with the competition for labor, have also resulted in a rise of our labor costs, which include the costs of compensation, benefits and recruiting and training new hires. Our Invigorate program is designed to, among other things, partially offset these impacts.

    For additional information on our key trends, which present both opportunities and risks, see "Item 1. Business: The Clinical Testing Industry."

Critical Accounting Policies

    The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions and select accounting policies that affect our reported financial results and the disclosure of contingent assets and liabilities.

    Our revenues are primarily comprised of a high volume of relatively low-dollar transactions, and about one-half of our total costs and expenses consist of employee compensation and benefits. Due to the nature of our business, several of our accounting policies involve significant estimates and judgments:

•revenues and accounts receivable associated with DIS;

•reserves for general and professional liability claims;

•reserves for other legal proceedings; and

•accounting for and recoverability of goodwill.

    Revenues and accounts receivable associated with DIS

    The process for estimating revenues and the ultimate collection of receivables associated with our DIS business involves significant assumptions and judgments. We recognize revenues primarily upon completion of the testing process (when results are reported) or when services have been rendered. We estimate the amount of consideration we expect to be entitled to receive from payer customer groups in exchange for providing services using the portfolio approach. These estimates include the impact of contractual allowances (including payer denials), and patient price concessions, as discussed below. The portfolios determined using the portfolio approach consist of the following payer customers:

•Healthcare Insurers/Health Plans

•Government Payers

•Client Payers

•Patients

    We have a standardized approach to estimate the amount of consideration that we expect to be entitled to, including the impact of contractual allowances (including payer denials), and patient price concessions. Historical collection and payer reimbursement experience (along with the period of time that the receivables have been outstanding) is an integral part of the estimation process related to revenues and receivables. Adjustments to our estimated contractual allowances and implicit patient price concessions are recorded in the current period as changes in estimates. Further adjustments to the allowances, based on actual receipts, may be recorded upon settlement.

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    We regularly assess the state of our billing operations in order to identify issues which may impact the collectability of receivables or revenue estimates. We believe that the collectability of our receivables is directly linked to the quality of our billing processes, most notably those related to obtaining the correct information in order to bill effectively for the services we provide. As such, we strive to implement “best practices” and endeavor to increase the use of electronic ordering to reduce the number of requisitions that we receive from healthcare providers with missing or incorrect billing information. We believe that our collection and revenue estimation processes, along with our close monitoring of our billing operations, help to reduce the risk associated with material adjustments to reserve estimates. However, changes to our estimate of the impact of contractual allowances (including payer denials) and patient price concessions could have a material impact on our results of operations and financial condition in the period that the estimates are adjusted.

    The following table shows the approximate percentage of our total requisition volume and net revenues associated with our DIS business during 2023 applicable to each payer customer group:

[[GREPCENT_TABLE]]
[["","% of","","% of"],["","Total DIS","","Consolidated"],["","Volume","","Net Revenues"],["Healthcare insurers","47%","","40%"],["Government payers","10","","11"],["Client payers","42","","34"],["Patients *","1","","12"],["Total DIS","100%","","97%"]]
[[/GREPCENT_TABLE]]

*Patients revenue includes coinsurance and deductible responsibilities; but volume associated with such revenue is reported under Healthcare insurers.

    The following table shows net accounts receivable as of December 31, 2023 applicable to each payer customer group:    

[[GREPCENT_TABLE]]
[["","% of"],["","Consolidated"],["","Net Accounts"],["","Receivable"],["Healthcare insurers","24%"],["Government payers","7"],["Client payers","45"],["Patients (including coinsurance and deductible responsibilities)","20"],["Total DIS","96%"]]
[[/GREPCENT_TABLE]]

    Healthcare insurers/ Health Plans

    Reimbursements from healthcare insurers are based on fee-for-service schedules and on capitated payment rates. Under fee-for-service arrangements, healthcare insurers are billed at our list price. Net revenues recognized consist of amounts billed net of contractual allowances for differences between amounts billed and the estimated consideration we expect to receive from such payers, which considers historical denial and collection experience and the terms of our contractual arrangements.

    Substantially all of the accounts receivable due from healthcare insurers represent amounts billed under fee-for-service arrangements. Collection of our net revenues from healthcare insurers is normally a function of providing complete and correct billing information to the healthcare insurers within the various filing deadlines and generally occurs within 30 to 60 days of billing. Provided we have billed healthcare insurers accurately with complete information prior to the established filing deadline, there has historically been little to no credit risk. If there has been a delay in billing, we determine if the amounts in question will likely go past the filing deadline, and if so, we will reserve accordingly for the billing.

    Under capitated arrangements with healthcare insurers, we recognize revenue based on a predetermined monthly reimbursement rate for each member of an insurer's health plan regardless of the number or cost of services provided by us. Under capitated payment arrangements, the healthcare insurers typically reimburse us in the same month services are performed, essentially giving rise to no outstanding accounts receivable at the end of a reporting period. If any capitated

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payments are not received on a timely basis, we determine the cause and make a separate determination as to whether or not the collection of the amount from the healthcare insurer is at risk and, if so, would reserve accordingly.

    Government payers

    Reimbursements from government payers are based on fee-for-service schedules set by governmental authorities, including traditional Medicare and Medicaid. Net revenues recognized consist of amounts billed net of contractual allowances for differences between amounts billed and the estimated consideration we expect to receive from such payers, which considers historical denial and collection experience.

    Collection of our net revenues from government payers is normally a function of providing the complete and correct billing information within the various filing deadlines. Collection generally occurs within 30 days of billing. Provided we have billed government payers accurately with complete information prior to the established filing deadline, there has historically been little to no credit risk. If there has been a delay in billing, we determine if the amounts in question will likely go past the filing deadline, and, if so, we will reserve for the billing accordingly.

    Client payers

    Client payers include physicians, hospitals, employers, emerging retail healthcare providers, pharmaceutical companies and other commercial clinical laboratories and institutions for which services are performed on a wholesale basis, and are billed based on a negotiated fee schedule. Credit risk and ability to pay are more of a consideration for these payers than healthcare insurers and government payers. Collection of consideration we expect to receive generally occurs within 60 to 90 days of billing.

    We principally estimate the allowance for credit losses for client payers based on historical collection experience, the current credit worthiness of the customers, current economic conditions, expectations of future economic conditions and the period of time that the receivables have been outstanding. To the extent that any individual client payers are identified that have deteriorated in credit quality, we establish allowances based on the individual risk characteristics of such customers.

    Patients

    Uninsured patients are billed based on established patient fee schedules or fees negotiated with physicians on behalf of their patients. Insured patients (includes coinsurance and deductible responsibilities) are billed based on fees negotiated with healthcare insurers. Collection of billings from patients is subject to credit risk and ability of the patients to pay. Net revenues consist of amounts billed net of discounts provided to uninsured patients in accordance with our policies and implicit price concessions. Implicit price concessions represent differences between amounts billed and the estimated consideration we expect to receive from patients, which considers historical collection experience (along with the period of time that the receivables have been outstanding) and other factors including current market conditions. Patient billings are generally fully reserved for when the related service reaches 210 days outstanding. Balances are automatically written off when they are sent to collection agencies. Allowances are further adjusted for estimated recoveries of amounts sent to collection agencies based on historical collection experience, which is regularly monitored. Collection of consideration we expect to receive generally occurs within 30 to 60 days of billing.

    Reserves for general and professional liability claims

    As a general matter, providers of diagnostic information services may be subject to lawsuits alleging negligence or other similar claims. These suits could involve claims for substantial damages. Any professional liability litigation could also have an adverse impact on our client base and reputation. We maintain various liability insurance coverages for claims that could result from providing, or failing to provide, clinical testing services, including inaccurate testing results, and other exposures. Our insurance coverage limits our maximum exposure on individual claims; however, we are essentially self-insured for a significant portion of these claims. While the basis for claims reserves is actuarially determined losses based upon our historical and projected loss experience, the process of analyzing, assessing and establishing reserve estimates relative to these types of claims involves a high degree of judgment. Although we believe that our present reserves and insurance coverage are sufficient to cover currently estimated exposures, it is possible that we may incur liabilities in excess of our recorded reserves or insurance coverage. Changes in the facts and circumstances associated with claims could have a material impact on our results of operations (principally costs of services), cash flows and financial condition in the period that reserve estimates are adjusted or paid. See Note 19 to the audited consolidated financial statements for a discussion of our reserves for general and professional liability claims.

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    Reserves for other legal proceedings

    Our businesses are subject to or impacted by extensive and frequently changing laws and regulations, including inspections and audits by governmental agencies, in the United States (at both the federal and state levels) and the other jurisdictions in which we conduct business. Although we believe that we are in compliance, in all material respects, with applicable laws and regulations, there can be no assurance that a regulatory agency would not reach a different conclusion. Any noncompliance by us with applicable laws and regulations could have a material adverse effect on our results of operations. In addition, these laws and regulations may be interpreted or applied by a prosecutorial, regulatory or judicial authority in a manner that could require us to make changes in our operations, including our pricing and/or billing practices. In addition, certain federal and state statutes, including the qui tam provisions of federal and state false claims acts, allow private individuals to bring lawsuits against healthcare companies on behalf of government or private payers alleging inappropriate billing practices. We are aware of certain pending lawsuits including class action lawsuits, and have received subpoenas related to billing practices. See Note 19 to the audited consolidated financial statements for a discussion of the various legal proceedings that we are involved in.

    The process of analyzing, assessing and establishing reserve estimates relative to legal proceedings involves a high degree of judgment. Management has established reserves for legal proceedings in accordance with generally accepted accounting principles in the United States. Changes in facts and circumstances related to such proceedings could lead to significant adjustments to reserve estimates for such matters and could have a material impact on our results of operations, cash flows and financial condition in the period that reserve estimates are adjusted or paid.

    Accounting for and recoverability of goodwill

    We do not amortize goodwill, but evaluate the recoverability and measure the potential impairment of our goodwill annually, or more frequently, in the case of other events that indicate a potential impairment. We identified the following reporting units for goodwill impairment testing in 2023:

•DIS business;

•Risk assessment services business, which is part of our DS businesses

    The DIS reporting unit components have been aggregated into a single reporting unit because they have similar economic characteristics, including similarities in financial performance, nature of products or services, nature of production processes and types of customers.

    On a quarterly basis, we perform a review of our business to determine if events or changes in circumstances have occurred which could have a material adverse effect on our fair value and our goodwill. If such events or changes in circumstances were deemed to have occurred, we would perform an impairment test of goodwill and record any noted impairment loss.

    The annual impairment test for goodwill includes an option to perform a qualitative assessment of whether it is more likely than not that a reporting unit's fair value is less than its carrying value; the qualitative analysis may be performed prior to, or as an alternative to, performing a quantitative goodwill impairment test. In evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying value, we assess relevant events and circumstances, such as: (a) macroeconomic conditions; (b) industry and market considerations; (c) cost factors; (d) overall financial performance; (e) other relevant entity-specific events; (f) events affecting a reporting unit; and (g) a sustained decrease in share price. If, after assessing the totality of events or circumstances, we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then we are required to perform the quantitative goodwill impairment test. Otherwise, no further analysis is required. Additionally, our policy is to update the fair value calculation of our reporting units and perform the quantitative goodwill impairment test on a periodic basis.

    The quantitative impairment test involves the comparison of the fair value of the reporting unit to its carrying value. If the carrying value is greater than our estimate of fair value, an impairment loss will be recognized in the amount of the excess. We calculate the fair value of each reporting unit using either (i) a discounted cash flows analysis that converts future cash flow amounts into a single discounted present value amount or (ii) a market approach. We assess the valuation methodology based upon the relevance and availability of the data at the time we perform the valuation. The discounted cash flows analysis includes several unobservable inputs related to our own assumptions. The assumptions and estimates used in the discounted cash flows model are based upon the best available information in the circumstances and include a forecast of expected future

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cash flows, long-term growth rates, discount rates that are commensurate with economic risks, assumed income tax rates and estimates of capital expenditures and working capital. The fair values of the reporting units could be different if, for example, forecasted revenue growth rates, economic conditions, government regulations or actions by payers to control utilization of or reimbursement for healthcare services, turn out to be different than our assumptions or estimates. Changes in the assumed discount rates due to changes in interest rates could also affect the estimated fair values of the reporting units. We use a discount rate that considers a weighted average cost of capital plus an appropriate risk premium based upon the reporting unit being valued. Our analysis also considers publicly available information regarding our market capitalization, as well as (i) the financial projections and future prospects of our business, including its growth opportunities and likely operational improvements, and (ii) comparable sales prices, if available. We believe our estimation methods are reasonable and reflect common valuation practices.

    We perform our annual impairment test during the fourth quarter of the fiscal year. For the year ended December 31, 2023, in accordance with our policy to perform the quantitative test on a periodic basis, we updated the fair value calculation of our reporting units, performed the quantitative impairment test and concluded that goodwill was not impaired. As a sensitivity, if the estimated fair value of each of our reporting units decreased by 10%, we still would have concluded that the goodwill for the reporting unit was not impaired.

Results of Operations

    For a comparison of results of operations for the year ended December 31, 2022 compared to December 31, 2021, along with the results of operations for the year ended December 31, 2021, see "Item 7 - Management's Discussion and Analysis of Financial Condition and Result of Operations" of our Annual Report on Form 10-K for the year ended December 31, 2022. See "Available Information."

    Basis of Presentation

    Our DIS business currently represents our one reportable business segment. The DIS business for the years ended December 31, 2023 and 2022 accounted for greater than 95% of our consolidated net revenues. Our other operating segments consist of our DS businesses. For further details regarding our business segment information, see Note 20 to the audited consolidated financial statements.

    Results of Operations    

    The following table sets forth certain results of operations data for the periods presented:    

[[GREPCENT_TABLE]]
[["","2023","","2022","","","","$ Change","","","","% Change"],["","(dollars in millions, except per share data)"],["Net revenues:"],["DIS business","$","8,976","","","$","9,609","","","","","$","(633)","","","","","(6.6)","%"],["DS businesses","276","","","274","","","","","2","","","","","0.7"],["Total net revenues","$","9,252","","","$","9,883","","","","","$","(631)","","","","","(6.4)","%"],["Operating costs and expenses and other operating income:"],["Cost of services","$","6,199","","","$","6,450","","","","","$","(251)","","","","","(3.9)","%"],["Selling, general and administrative","1,642","","","1,874","","","","","(232)","","","","","(12.4)"],["Amortization of intangible assets","108","","","120","","","","","(12)","","","","","(9.8)"],["Other operating expense, net","41","","","11","","","","","30","","","","","NM"],["Total operating costs and expenses, net","$","7,990","","","$","8,455","","","","","$","(465)","","","","","(5.5)","%"],["Operating income","$","1,262","","","$","1,428","","","","","$","(166)","","","","","(11.6)","%"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["Other income (expense):"],["Interest expense, net","$","(152)","","","$","(138)","","","","","$","(14)","","","","","9.6","%"],["Other income (expense), net","20","","","(55)","","","","","75","","","","","NM"],["Total non-operating (expense) income, net","$","(132)","","","$","(193)","","","","","$","61","","","","","NM"],["Income tax expense","$","(248)","","","$","(264)","","","","","$","16","","","","","(5.9)","%"],["Effective income tax rate","22.0","%","","21.4","%"],["Equity in earnings of equity method investees, net of taxes","$","26","","","$","44","","","","","$","(18)","","","","","(39.9)","%"],["Net income attributable to Quest Diagnostics","$","854","","","$","946","","","","","$","(92)","","","","","(9.7)","%"],["Diluted earnings per share attributable to Quest Diagnostics\u2019 common stockholders","$","7.49","","","$","7.97","","","","","$","(0.48)","","","","","(6.0)","%"]]
[[/GREPCENT_TABLE]]

NM - Not Meaningful

    The following table sets forth certain results of operations data as a percentage of net revenues for the periods presented:

[[GREPCENT_TABLE]]
[["","2023","","2022"],["Net revenues:"],["DIS business","97.0","%","","97.2","%"],["DS businesses","3.0","","","2.8"],["Total net revenues","100.0","%","","100.0","%"],["Operating costs and expenses and other operating income:"],["Cost of services","67.0","%","","65.3","%"],["Selling, general and administrative","17.7","","","19.0"],["Amortization of intangible assets","1.2","","","1.1"],["Other operating expense (income), net","0.5","","","0.1"],["Total operating costs and expenses, net","86.4","%","","85.5","%"],["Operating income","13.6","%","","14.5","%"]]
[[/GREPCENT_TABLE]]

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    Operating Results

    Results for the year ended December 31, 2023 were affected by certain items that on a net basis decreased diluted earnings per share by $1.22 as follows:

•pre-tax amortization expense of $108 million recorded in amortization of intangible assets or $0.70 per diluted share;

•pre-tax charges of $44 million ($5 million in selling, general and administrative expenses and $39 million in other operating expense (income), net), or $0.31 per diluted share, primarily representing a $29 million impairment charge on certain long-lived assets related to the shutdown of a business and, to a lesser extent, an $11 million loss associated with the increase in the fair value of the contingent consideration accrual associated with previous acquisitions;

•pre-tax charges of $43 million ($16 million recorded in cost of services and $27 million recorded in selling, general and administrative expenses), or $0.29 per diluted share, primarily associated with workforce reductions and integration costs incurred in connection with further restructuring and integrating our business; and

•pre-tax charges of $3 million in equity in earnings of equity method investees, net of tax, or $0.02 per diluted share, representing net losses associated with changes in the carrying value of our strategic investments; partially offset by

•excess tax benefits associated with stock-based compensation arrangements of $11 million, or $0.10 per diluted share, recorded in income tax expense.

    For the year ended December 31, 2023, the year-over-year change in diluted weighted average common shares outstanding was principally driven by share repurchases, which positively benefited the year-over-year comparison of diluted earnings per share.

    Results for the year ended December 31, 2022 were affected by certain items that on a net basis decreased diluted earnings per share by $1.98 as follows:

•pre-tax amortization expense of $120 million recorded in amortization of intangible assets or $0.74 per diluted share;

•pre-tax charges of $93 million recorded in selling, general and administrative expenses, or $0.59 per diluted share, representing costs associated with donations, contributions and other financial support through Quest for Health Equity (our initiative with the Quest Diagnostics Foundation to reduce health disparities in underserved communities);

•pre-tax charges of $88 million ($32 million recorded in cost of services and $56 million recorded in selling, general and administrative expenses), or $0.56 per diluted share, primarily associated with workforce reductions, systems conversions and integration incurred in connection with further restructuring and integrating our business;

•pre-tax charges of $42 million ($30 million recorded in other income (expense), net, and $12 million recorded in equity in earnings of equity method investees, net of tax), or $0.26 per diluted share, representing net losses associated with changes in the carrying value of our strategic investments; and

•net pre-tax charges of $13 million ($2 million recorded in cost of services and $11 million recorded in other operating expense (income), net), or $0.09 per diluted share, primarily representing a $14 million impairment charge on certain property, plant and equipment and a $5 million loss associated with the increase in the fair value of the contingent consideration accrual associated with previous acquisitions, partially offset by a $10 million gain from a payroll tax credit under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") associated with the retention of employees; partially offset by

•an income tax benefit of $18 million, recorded in income tax expense, or $0.14 per diluted share, due to a cumulative adjustment to state deferred tax liabilities related to depreciation expense; and

•excess tax benefits associated with stock-based compensation arrangements of $14 million, or $0.12 per diluted share, recorded in income tax expense.

    Net Revenues

    Net revenues for the year ended December 31, 2023 decreased by 6.4% compared to the prior year.

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    DIS revenues for the year ended December 31, 2023 decreased by 6.6% compared to the prior year. For the year ended December 31, 2023:

•The decrease in revenue compared to the prior year was driven by a decrease in COVID-19 testing, partially offset by growth in the base business and, to a lesser extent, the impact of recent acquisitions. For the year ended December 31, 2023, recent acquisitions contributed approximately 0.5% to DIS revenues.

•DIS volume decreased by 0.6% compared to the prior year driven by a decrease in COVID-19 testing, substantially offset by growth in the base business and the impact of recent acquisitions, which contributed approximately 0.4% to DIS volume.

•Revenue per requisition decreased by 5.9% compared to the prior year driven by the decrease in COVID-19 molecular testing.

•DIS revenues in the base business (including the impact of recent acquisitions) increased by 7.3% compared to the prior year.

•Testing volume in the base business (including the impact of recent acquisitions) was up 6.5% compared to the prior year.

•Revenue per requisition in the base business increased by 1.1% compared to the prior year principally due to an increase in the number of tests per requisition, business mix, and an increase in unit price, partially offset by growth in our Professional Laboratory Services engagements (which carry a lower revenue per requisition than the remainder of DIS).

    DS revenues for the year ended December 31, 2023 increased by 0.7% compared to the prior year primarily due to higher revenues associated with our risk assessment services offered to the life insurance industry.

    Cost of Services

    Cost of services consists principally of costs for obtaining, transporting and testing specimens as well as facility costs used for the delivery of our services.

    Cost of services decreased by $251 million for the year ended December 31, 2023 compared to the prior year. The decrease was primarily driven by lower collection and supplies expenses associated with reduced COVID-19 testing volumes and, to a lesser extent, lower performance-based compensation, partially offset by wage and benefits increases.

    Selling, General and Administrative Expenses ("SG&A")

    SG&A consists principally of the costs associated with our sales and marketing efforts, billing operations, credit loss expense and general management and administrative support, as well as administrative facility costs.

    SG&A decreased by $232 million for the year ended December 31, 2023, compared to the prior year, primarily driven by lower contributions and other financial support through Quest for Health Equity, lower compensation costs (including a reduction in headcount and performance-based compensation, partially offset by wage increases) and lower marketing expenses, partially offset by $45 million of higher costs associated with changes in the value of our deferred compensation obligations.

    The changes in the value of our deferred compensation obligations is largely offset by changes in the value of the associated investments, which are recorded in other income (expense), net. For further details regarding our deferred compensation plans, see Note 18 to the audited consolidated financial statements.

    Amortization of Intangible Assets

    For the year ended December 31, 2023, amortization expense was $12 million lower than the prior year primarily due to the prior year including an adjustment to the useful life of a customer-related intangible asset.

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    Other Operating Expense, Net

    Other operating expense, net includes miscellaneous income and expense items and other charges related to operating activities.

    For the year ended December 31, 2023, other operating expense, net principally includes a $29 million impairment charge on certain long-lived assets related to the shutdown of a business and, to a lesser extent, an $11 million loss associated with the increase in the fair value of the contingent consideration accrual associated with previous acquisitions.

    For the year ended December 31, 2022, other operating expense, net includes a $14 million impairment charge on certain property, plant and equipment and a $5 million loss associated with the increase in the fair value of the contingent consideration accrual associated with previous acquisitions, partially offset by a $10 million gain from a payroll tax credit under the CARES Act associated with the retention of employees.

    Interest Expense, Net

    Interest expense, net increased by $14 million for the year ended December 31, 2023 compared to the prior year, primarily due to increased borrowings associated with the issuance of the 2033 Senior Notes (see "2023 Highlights" above) and our secured receivables credit facility.

    Other Income (Expense), Net

    Other income (expense), 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 year ended December 31, 2023, other income (expense), net included $20 million of gains associated with investments in our deferred compensation plans.

    For the year ended December 31, 2022, other income (expense), net included $30 million of losses associated with changes in the carrying value of our strategic investments and $25 million of losses associated with investments in our deferred compensation plans.

    Income Tax Expense

    Income tax expense for the years ended December 31, 2023 and 2022 was $248 million and $264 million, respectively. The decrease in income tax expense compared to the prior year was primarily driven by a decrease in income before income taxes and equity in earnings of equity method investees.

    The effective income tax rate for the years ended December 31, 2023 and 2022 was 22.0% and 21.4%, respectively. The year ended December 31, 2022 includes an $18 million income tax benefit due to a cumulative adjustment to state deferred tax liabilities related to depreciation expense, which impacted the effective income tax rate by 1.5%. In addition, the effective income tax rates benefited from $11 million and $14 million of excess tax benefits associated with stock-based compensation arrangements for the years ended December 31, 2023 and 2022, respectively.

    Equity in Earnings of Equity Method Investees, Net of Taxes

    For the year ended December 31, 2023, there was a $18 million decrease in equity in earnings of equity method investees, net of taxes, compared to the prior year primarily due to lower demand for COVID-19 testing services at our diagnostic information services joint venture.

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