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OFFON

QUEST DIAGNOSTICS INCORPORATED

(DGX)
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Quest Diagnostics Incorporated : INC Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

07/23/2021 | 04:06pm EDT

Our Company

Diagnostic Information Services


  Quest Diagnostics empowers people to take action to improve health outcomes.
We use our extensive database of clinical lab results to derive diagnostic
insights that reveal new avenues to identify and treat disease, inspire healthy
behaviors and improve healthcare management. Our diagnostic information services
business ("DIS") provides information and insights based on an industry-leading
menu of routine, non-routine and advanced clinical testing and anatomic
pathology testing, and other diagnostic information services. We provide
services to a broad range of customers, including patients, clinicians,
hospitals, independent delivery networks ("IDNs"), health plans, employers,
accountable care organizations ("ACOs"), and direct contract entities ("DCEs").
We offer the broadest access in the United States to diagnostic information
services through our nationwide network of laboratories, patient service centers
and phlebotomists in physician offices and our connectivity resources, including
call centers and mobile paramedics, nurses and other health and wellness
professionals. We are the world's leading provider of diagnostic information
services. We provide interpretive consultation with one of the largest medical
and scientific staffs in the industry. Our DIS business makes up greater than
95% of our consolidated net revenues.

We assess our revenue performance for the DIS business based upon, among other factors, volume (measured by test requisitions) and revenue per requisition.

Each 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, 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

  In our Diagnostic Solutions ("DS") businesses, which represent the balance of
our consolidated net revenues, we offer a variety of solutions for life insurers
and healthcare organizations and clinicians. We are the leading provider of risk
assessment services for the life insurance industry. In addition, we offer
healthcare organizations and clinicians robust information technology solutions.

Second Quarter Highlights

                                                                             Three Months Ended June 30,
                                                                  2021                                        2020
                                                                   

(dollars in millions, except per share data)


Net revenues                                                     $2,550                                      $1,827
DIS revenues                                                     $2,474                                      $1,764
Revenue per requisition change                                   (3.6)%                                       15.3%
Requisition volume change                                         45.2%                                      (17.7)%
Organic requisition volume change                                 40.1%                                      (18.2)%
DS revenues                                                        $76                                         $63
Net income attributable to Quest Diagnostics                      $631                                        $185
Diluted earnings per share                                        $4.96                                       $1.36
Net cash provided by operating activities                         $460                                        $355


For further discussion of the year-over-year changes for the three months ended June 30, 2021 compared to the three months ended June 30, 2020, see Results of Operations below.

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Impact of COVID - 19


  As a novel strain of coronavirus (COVID-19) continues to impact the economy of
the United States and other countries around the world, we are committed to
being a part of the coordinated public and private sector response to this
unprecedented challenge. We have made substantial investments to expand the
amount of COVID-19 testing available to the country and are currently capable of
performing approximately 300,000 COVID-19 molecular diagnostic tests per day to
aid in the diagnosis of COVID-19 and approximately 350,000 COVID-19 antibody
tests per day to aid in the detection of immune response. We have been
effectively managing challenges in the global supply chain; and, at this point,
we have sufficient supplies to conduct our business.

During 2020 and the first half of 2021, our testing volume and revenues were materially impacted by the COVID-19 pandemic.


  During January and February 2020, we experienced growth in DIS revenues and
volume compared to the prior year period. However, in March 2020, we experienced
a material decline in testing volume due to the COVID-19 pandemic. During May
and June 2020, we began to experience a recovery in base testing volume (which
excludes COVID-19 testing), which continued in the second half of 2020 and the
first half of 2021 driven by people returning to the healthcare system as well
as contributions from new Professional Laboratory Services offerings. For the
first and second quarters of 2021, our base testing volume, excluding volume
associated with recent acquisitions, was 2.8% below and 1.9% above our
historical first and second quarter of 2019 levels, respectively. Recent
agreements associated with our Professional Laboratory Services offerings
contributed 5.2% and 5.8% volume growth compared to 2019 for the first and
second quarters of 2021, respectively. Unless there is a change in the severity
of the COVID-19 pandemic, we believe that there will be a continued return to
healthcare throughout 2021 with, in some cases, patients pursuing care delayed
during the COVID-19 pandemic.

  The decrease in base testing volume was driven by federal, state and local
governmental policies and initiatives designed to reduce the transmission of
COVID-19, a significant reduction in physician office visits, the cancellation
of elective medical procedures, customers closing or severely curtailing their
operations (voluntarily or in response to government orders), and the adoption
of work-from-home policies, all of which have had, and may continue to have, an
impact on our operating results, financial position and cash flows.

  Beginning during the second quarter of 2020, we experienced growing demand for
COVID-19 testing services and we expanded our capacity throughout 2020 in order
to satisfy the demand, which has had a significant impact on our testing
volumes. Since the fourth quarter of 2020, demand for COVID-19 testing has
decreased reflecting an industry-wide trend. Compared to the fourth quarter of
2020, our net revenues associated with COVID-19 testing in the first and second
quarters of 2021 declined by 27.9% and 55.7%, respectively. Given the
significant progress of vaccinations in the U.S., we continue to expect a
decline in demand for COVID-19 molecular testing in the second half of 2021.

  Additionally, our revenue per requisition has been positively impacted by
COVID-19 molecular testing. In April 2020 the Centers for Medicare and Medicaid
Services ("CMS") announced that it would increase the reimbursement for certain
COVID-19 molecular tests making use of high-throughput technologies developed by
the private sector that allow for increased testing capacity, faster results,
and more effective means of combating the spread of the virus to $100 per test,
effective April 14, 2020. Beginning January 1, 2021, Medicare changed the base
reimbursement rate for COVID-19 diagnostic tests run on high-throughput
technologies to $75 per test with an additional payment of $25 per test if the
laboratory (1) completes the test in two calendar days or less and (2) completes
the majority of its COVID-19 tests that use high throughput technology in two
calendar days or less for all of its patients in the previous month. Certain
healthcare insurers have now moved to a similar reimbursement model for COVID-19
molecular tests.


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  We believe the COVID-19 pandemic's impact on our consolidated results of
operations, financial position and cash flows will be primarily driven by: the
severity and duration of the COVID-19 pandemic; healthcare insurer, government,
and client payer reimbursement rates for COVID-19 molecular testing; the
COVID-19 pandemic's impact on the U.S. healthcare system and the U.S. economy;
and the timing, scope and effectiveness of federal, state and local governmental
responses to the COVID-19 pandemic, including the impact of vaccination efforts.
We may also be impacted by changes in the severity of the COVID-19 pandemic at
different times in the various cities and regions where we operate and offer
services. Even as the COVID-19 pandemic continues to moderate and the business
and social distancing restrictions continue to ease, we may continue to
experience similar effects to our businesses, consolidated results of
operations, financial position and cash flows. In the longer term, given the
many challenges that hospitals will face, we may have more opportunities to
partner with hospitals to help achieve their laboratory strategies, and the
COVID-19 pandemic may also be a further catalyst for consolidation in the
laboratory testing industry.

Acquisition of the Outreach Laboratory Services Business of Mercy Health

On June 1, 2021, we completed the acquisition of the outreach laboratory services business of Mercy Health, which serves providers and patients in Arkansas, Kansas, Missouri and Oklahoma, in an all-cash transaction for $225 million. The acquired business is included in our DIS business.

For further details, see Note 4 to the interim unaudited consolidated financial statements.

Sale of Ownership Interest in Q2 Solutions® ("Q2 Solutions") to IQVIA Holdings, Inc. ("IQVIA")


  On April 1, 2021, we sold our 40% ownership interest in Q2 Solutions, our
clinical trials central laboratory services joint venture, to IQVIA, our joint
venture partner, for $760 million in an all-cash transaction. The sales price is
subject to customary post-closing adjustments. Prior to the transaction, we
accounted for our minority interest as an equity method investment. As a result
of the transaction, during the three months ended June 30, 2021, we recorded a
$314 million pre-tax gain in other income (expense), net in the consolidated
statement of operations based on the difference between the net sales proceeds
and the carrying value of the investment, including $20 million of cumulative
translation losses which were previously recorded in accumulated other
comprehensive loss. During the three months ended June 30, 2021, we also
recorded $55 million of income tax expense related to the gain, consisting of
$127 million of current income tax expense, partially offset by $72 million of
deferred income tax benefit.

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

For further details, see Note 5 to the interim unaudited consolidated financial statements.

Accelerated Share Repurchase Agreements ("ASRs")


  In April 2021, we entered into ASRs with several financial institutions to
repurchase $1.5 billion of our common stock as part of our share repurchase
program. Each of the ASRs was structured to permit us to purchase shares
immediately with the final purchase price of those shares determined by the
volume-weighted average price of our common stock during the repurchase period,
less a fixed discount. For the second quarter of 2021, we paid $1.5 billion to
the financial institutions and received 9.1 million shares of our common stock,
at an initial price of $132.27 per share for a value of $1.2 billion, which
represents 80% of the total value of shares to be repurchased under the ASRs.

For further details regarding the ASRs and our repurchases of our common stock, see Note 9 to the interim unaudited consolidated financial statements.

Medicare Sequestration


  In April 2021, the suspension of Medicare sequestration, which has resulted in
a small benefit to us in the form of higher reimbursement rates for diagnostic
testing services performed on behalf of Medicare beneficiaries, was extended
through the end of 2021.


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Invigorate Program

  We are engaged in a multi-year program called Invigorate, which is designed to
reduce our cost structure and improve our performance. We currently aim annually
to deliver savings of approximately 3% of our costs.

  Invigorate has consisted of several flagship programs, with structured plans
in each, to drive savings and improve performance across the customer value
chain. These flagship programs include: organization excellence; information
technology excellence; procurement excellence; field and customer service
excellence; lab excellence; and revenue services excellence. In addition to
these programs, we have identified key themes to change how we operate including
reducing denials and patient price concessions; further digitizing our business;
standardization and automation; and optimization initiatives in our lab network
and patient service center network. We believe that our efforts to standardize
our information technology systems, equipment and data also foster our efforts
to strengthen our foundation for growth and support the value creation
initiatives of our clinical franchises by enhancing our operational flexibility,
empowering and enhancing the customer experience, facilitating the delivery of
actionable insights and bolstering our large data platform.

  For the six months ended June 30, 2021, we incurred $34 million of pre-tax
charges under our Invigorate program primarily consisting of systems conversion
and integration costs, all of which result in cash expenditures. Additional
restructuring charges may be incurred in future periods as we identify
additional opportunities to achieve further cost savings.

Critical Accounting Policies

There have been no significant changes to our critical accounting policies from those disclosed in our 2020 Annual Report on Form 10-K.

Impact of New Accounting Standards

The adoption of new accounting standards, if any, is discussed in Note 2 to the interim unaudited consolidated financial statements.

The impact of recent accounting pronouncements not yet effective on our consolidated financial statements is also discussed in Note 2 to the interim unaudited consolidated financial statements.

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Results of Operations

  The following tables set forth certain results of operations data for the
periods presented:
                                              Three Months Ended June 30,                                                   Six Months Ended June 30,
                             2021               2020            $ Change            % Change              2021              2020           $ Change            % Change
                                                                          (dollars in millions, except per share amounts)
Net revenues:
DIS business            $    2,474           $ 1,764          $     710                  40.2  %       $  5,117          $ 3,508          $  1,609                  45.9  %
DS businesses                   76                63                 13                  19.6               153              141                12                   8.3
Total net revenues      $    2,550           $ 1,827          $     723                  39.5  %       $  5,270          $ 3,649          $  1,621                  44.4  %

Operating costs and
expenses and other
operating income:
Cost of services        $    1,565           $ 1,221          $     344                  28.2  %       $  3,191          $ 2,491          $    700                  28.1  %
Selling, general and
administrative                 429               360                 69                  18.9               836              707               129                  18.0
Amortization of
intangible assets               25                25                  -                  (0.6)               52               50                 2                   3.8

Other operating income,
net                             (2)              (62)                60                       NM             (2)             (57)               55                       NM
Total operating costs
and expenses, net       $    2,017           $ 1,544          $     473                  30.6  %       $  4,077          $ 3,191          $    886                  27.7  %

Operating income        $      533           $   283          $     250                  88.4  %       $  1,193          $   458          $    735                 160.5  %

Other income (expense):
Interest expense, net   $      (38)          $   (41)         $       3                  (6.7) %       $    (76)         $   (82)         $      6                  (7.4) %
Other income (expense),
net                            322                13                309                       NM            326               (3)              329                       NM
Total non-operating
income (expense), net   $      284           $   (28)         $     312                       NM       $    250          $   (85)         $    335                       NM

Income tax expense      $     (177)          $   (66)         $    (111)                171.2  %       $   (330)         $   (92)         $   (238)                263.1  %

Effective income tax
rate                          21.6   %          25.5  %                                                    22.9  %          24.4  %

Equity in earnings of
equity method
investees, net of taxes $       10           $     4          $       6                 178.4  %       $     27          $    18          $      9                  56.2  %

Net income attributable
to Quest Diagnostics    $      631           $   185          $     446                 240.5  %       $  1,100          $   284          $    816                 287.0  %

Diluted earnings per
common share
attributable to Quest
Diagnostics' common
stockholders            $     4.96           $  1.36          $    3.60                 264.2  %       $   8.38          $  2.09          $   6.29                 300.7  %

NM - Not Meaningful






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

                                                        Three Months Ended June 30,                  Six Months Ended June 30,
                                                        2021                  2020                  2021                  2020
Net revenues:
DIS business                                               97.0  %               96.5  %               97.1  %               96.1  %
DS businesses                                               3.0                   3.5                   2.9                   3.9
Total net revenues                                        100.0  %              100.0  %              100.0  %              100.0  %

Operating costs and expenses and other operating
income:
Cost of services                                           61.4  %               66.8  %               60.6  %               68.3  %
Selling, general and administrative                        16.8                  19.7                  15.8                  19.4
Amortization of intangible assets                           1.0                   1.4                   1.0                   1.4

Other operating income, net                                (0.1)                 (3.4)                    -                  (1.6)
Total operating costs and expenses, net                    79.1  %               84.5  %               77.4  %               87.5  %

Operating income                                           20.9  %               15.5  %               22.6  %               12.5  %



  Operating Results

Results for the three months ended June 30, 2021 were affected by certain items that on a net basis increased diluted earnings per share by $1.78 as follows:


•a pre-tax gain recorded in other income (expense), net of $314 million, or
$2.04 per diluted share, on the sale of our 40% ownership interest in Q2
Solutions; and
•excess tax benefits associated with stock-based compensation arrangements of $5
million, or $0.04 per diluted share, recorded in income tax expense; partially
offset by
•pre-tax amortization expense of $25 million in amortization of intangible
assets or $0.15 per diluted share;
•pre-tax charges of $21 million ($12 million in cost of services and $9 million
in selling, general and administrative expenses), or $0.12 per diluted share,
primarily associated with workforce reductions, systems conversions and
integration incurred in connection with further restructuring and integrating
our business; and
•pre-tax charges of $5 million, or $0.03 per diluted share, 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, recorded in selling, general and
administrative expenses.

Results for the six months ended June 30, 2021 were affected by certain items that on a net basis increased diluted earnings per share by $1.42 as follows:


•a pre-tax gain recorded in other income (expense), net of $314 million, or
$1.98 per diluted share, on the sale of our 40% ownership interest in Q2
Solutions; and
•excess tax benefits associated with stock-based compensation arrangements of $9
million, or $0.07 per diluted share, recorded in income tax expense; partially
offset by
•pre-tax amortization expense of $54 million ($52 million in amortization of
intangible assets and $2 million in equity in earnings of equity method
investees, net of taxes) or $0.31 per diluted share;
•pre-tax charges of $38 million ($19 million in cost of services and $19 million
in selling, general and administrative expenses), or $0.22 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 $13 million, or $0.07 per diluted share, including $5
million associated with donations, contributions and other financial support
through Quest for Health Equity recorded in selling, general and administrative
expenses, and a pre-tax non-cash impairment to the carrying value of an equity
method investment, recorded in equity in earnings of equity method investees,
net of taxes of $8 million; and

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•pre-tax charges of $4 million in cost of services, or $0.03 per diluted share,
representing the impact of certain items resulting from the COVID-19 pandemic
including incremental costs incurred to protect the health and safety of our
employees and customers.

For both the three and six months ended June 30, 2021, diluted earnings per share benefited from the impact of the ASRs on our weighted average shares outstanding as compared to the prior year periods.

Results for the three months ended June 30, 2020 were affected by certain items that on a net basis reduced diluted earnings per share by $0.06 as follows:


•pre-tax amortization expense of $28 million ($25 million in amortization of
intangible assets and $3 million in equity in earnings of equity method
investees, net of taxes) or $0.16 per diluted share; and
•pre-tax charges of $9 million ($3 million in cost of services and $6 million in
selling, general and administrative expenses), or $0.06 per diluted share,
representing costs primarily associated with systems conversions and integration
incurred in connection with further restructuring and integrating our business;
partially offset by
•a pre-tax net gain of $26 million (a $62 million gain in other operating
income, net and a $3 million gain in equity in earnings of equity method
investees, net of taxes, partially offset by $34 million of charges in cost of
services and $5 million of charges in selling, general and administrative
expenses), or $0.13 per diluted share, representing the impact of certain items
resulting from the COVID-19 pandemic including $65 million of income recognized
attributable to the receipt of the initial tranche of funds from the government
that were appropriated to healthcare providers under the Coronavirus Aid,
Relief, and Economic Security Act ("CARES Act"), partially offset by expense
associated with a payment to eligible employees to help offset expenses they
incurred as a result of COVID-19, certain asset impairment charges, and
incremental costs incurred primarily to protect the health and safety of our
employees and customers; and
•excess tax benefits associated with stock-based compensation arrangements of $4
million, or $0.03 per diluted share, recorded in income tax expense.

Results for the six months ended June 30, 2020 were affected by certain items that on a net basis reduced diluted earnings per share by $0.27 as follows:


•pre-tax amortization expense of $56 million ($50 million in amortization of
intangible assets and $6 million in equity in earnings of equity method
investees, net of taxes) or $0.31 per diluted share; and
•pre-tax charges of $25 million ($10 million in cost of services and $15 million
in selling, general and administrative expenses), or $0.15 per diluted share,
primarily associated with systems conversions and integration incurred in
connection with further restructuring and integrating our business; partially
offset by
•a pre-tax net gain of $17 million (a $57 million gain in other operating
income, net and a $3 million gain in equity in earnings of equity method
investees, net of taxes, partially offset by $35 million of charges in cost of
services, and $8 million of charges in selling, general and administrative
expenses), or $0.10 per diluted share, representing the impact of certain items
resulting from the COVID-19 pandemic including $65 million of income recognized
attributable to the receipt of the initial tranche of funds from the government
that were appropriated to healthcare providers under the CARES Act, partially
offset by expense associated with a payment to eligible employees to help offset
expenses they incurred as a result of COVID-19, certain asset impairment
charges, and incremental costs incurred primarily to protect the health and
safety of our employees and customers; and
•excess tax benefits associated with stock-based compensation arrangements of
$12 million, or $0.09 per diluted share, recorded in income tax expense.

For both the three and six months ended June 30, 2020, results include
$65 million of income recognized attributable to the receipt of the initial
tranche of funds from the government that were appropriated to healthcare
providers under the CARES Act. During the three months ended September 30, 2020,
we reversed the $65 million of income and the funds were returned during the
three months ended December 31, 2020.

Net Revenues

Net revenues for the three months ended June 30, 2021 increased by 39.5% compared to the prior year period.

DIS revenues for the three months ended June 30, 2021 increased by 40.2% compared to the prior year period. For the three months ended June 30, 2021:

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•Organic revenue and acquisitions contributed approximately 37.6% and 2.6%,
respectively, to DIS revenue growth compared to the prior year period. Organic
revenue growth was driven by growth in the base business, partially offset by a
decrease in COVID-19 antibody testing.
•Revenues in the base business (including the impact of recent acquisitions)
increased by 66.1% compared to the prior year period, which was negatively
impacted as a result of the COVID-19 pandemic. Compared to historical levels in
the second quarter of 2019, revenues in the base business, excluding revenue
associated with recent acquisitions, increased by 1.4%. Recent agreements
associated with our Professional Laboratory Services offerings contributed 2.1%
revenue growth compared to 2019.
•DIS volume increased by 45.2% with organic volume and acquisitions contributing
approximately 40.1% and 5.1%, respectively. Organic volume growth was driven by
growth in the base business, partially offset by a decrease in volume associated
with COVID-19 antibody testing.
•Testing volume in the base business (including the impact of recent
acquisitions) continued to recover and was up 60.7% compared to the prior year
period, which was negatively impacted as a result of the COVID-19 pandemic.
Compared to historical levels in the second quarter of 2019, testing volume in
the base business, excluding volume associated with recent acquisitions,
increased 1.9%. Recent agreements associated with our Professional Laboratory
Services offerings contributed 5.8% volume growth compared to 2019.
•Revenue per requisition decreased by 3.6% compared to the prior year period
primarily due to growth in our Professional Laboratory Services engagements,
which carry a lower revenue per requisition than the average for the remainder
of the DIS business, and due to the impact of recent acquisitions.

Net revenues for the six months ended June 30, 2021 increased by 44.4% compared to the prior year period.

DIS revenues for the six months ended June 30, 2021 increased by 45.9% compared to the prior year period. For the six months ended June 30, 2021:


•Organic revenue and acquisitions contributed approximately 43.0% and 2.9%,
respectively, to DIS revenue growth compared to the prior year period. Organic
revenue growth was driven by growth in the base business and demand for COVID-19
molecular testing.
•Revenues in the base business (including the impact of recent acquisitions)
increased by 30.2% compared to the prior year period, which was negatively
impacted as a result of the COVID-19 pandemic. Compared to historical levels in
the first half of 2019, revenues in the base business, excluding revenue
associated with recent acquisitions, decreased by 0.7%. Recent agreements
associated with our Professional Laboratory Services offerings contributed 2.3%
revenue growth compared to 2019.
•DIS volume increased by 34.7% with organic volume and acquisitions contributing
approximately 30.0% and 4.7%, respectively. Organic volume growth was driven by
growth in the base business and, to a lesser extent, demand for COVID-19
molecular testing.
•Testing volume in the base business (including the impact of recent
acquisitions) continued to recover and was up 28.0% compared to the prior year
period, which was negatively impacted as a result of the COVID-19 pandemic.
Compared to historical levels in the first half of 2019, testing volume in the
base business, excluding volume associated with recent acquisitions, decreased
by 0.4%. Recent agreements associated with our Professional Laboratory Services
offerings contributed 5.5% volume growth compared to 2019.
•Revenue per requisition increased by 8.1% compared to the prior year period
driven in large part by COVID-19 molecular testing, partially offset by growth
in our Professional Laboratory Services engagements, which carry a lower revenue
per requisition than the average for the remainder of the DIS business.

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.


  For the three months ended June 30, 2021, cost of services increased by $344
million compared to the prior year period. The increase was primarily driven by
higher variable expenses related to increased testing volumes and, to a lesser
extent, additional operating costs associated with our acquisitions, partially
offset by higher incremental costs incurred in the prior year period related to
the COVID-19 pandemic including expense associated with a payment to eligible
employees to help offset expenses they incurred as a result of COVID-19.


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  For the six months ended June 30, 2021, cost of services increased by $700
million compared to the prior year period. The increase was primarily driven by
higher variable expenses related to increased testing volumes as well as test
mix and a higher supply cost associated with COVID-19 testing, and, to a lesser
extent, additional operating costs associated with our acquisitions.

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

SG&A consist 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 increased by $69 million for the three months ended June 30, 2021,
compared to the prior year period, primarily driven by higher variable expenses
to support our increase in testing volumes as well as higher performance-based
compensation.

SG&A increased by $129 million for the six months ended June 30, 2021, compared to the prior year period, primarily driven by higher variable expenses to support our increase in testing volumes, higher performance-based compensation, and higher costs associated with changes in the value of our deferred compensation obligations.


  The change in the value of our deferred compensation obligations is largely
offset by gains or losses due to the 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 17 to the audited
consolidated financial statements in our 2020 Annual Report on Form 10-K.

Amortization Expense

For the six months ended June 30, 2021, amortization expense increased by $2 million compared to the prior year period as a result of recent acquisitions.

Other Operating Income, Net

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


  For both the three and six months ended June 30, 2020, other operating income,
net primarily represents $65 million of income recognized attributable to the
receipt of the initial tranche of funds from the government that were
appropriated to healthcare providers under the CARES Act. During the three
months ended September 30, 2020, we reversed the $65 million of income and the
funds were returned during the three months ended December 31, 2020.

Interest Expense, Net

Interest expense, net decreased for the three months ended June 30, 2021 compared to the prior year period, primarily due to lower average outstanding indebtedness.


  Interest expense, net decreased for the six months ended June 30, 2021
compared to the prior year period, primarily driven by lower interest rates due
to recent refinancing transactions, including the termination of our interest
rate swap agreements in April 2020, which resulted in a deferred gain that is
being amortized as a reduction of interest expense, net over the remaining term
of the associated debt, combined with lower average outstanding indebtedness.

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 three months ended June 30, 2021, other income (expense), net
increased by $309 million compared to the prior year period primarily due to a
$314 million pre-tax gain on the sale of our 40% ownership interest in Q2
Solutions, our clinical trials central laboratory services joint venture, to
IQVIA, our joint venture partner, partially offset by changes in the value of
investments associated with our deferred compensation plans.


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  For the six months ended June 30, 2021, other income (expense), net increased
by $329 million compared to the prior year period primarily due to the pre-tax
gain on the sale of our 40% ownership interest in Q2 Solutions and, to a lesser
extent, changes in the value of investments associated with our deferred
compensation plans.

Income Tax Expense


  Income tax expense for the three months ended June 30, 2021 and 2020 was $177
million and $66 million, respectively. The increase in income tax expense for
the three months ended June 30, 2021 compared to the prior year period was
primarily driven by an increase in income before income taxes and equity in
earnings of equity method investees.

  For the three months ended June 30, 2021 and 2020, the effective income tax
rate was 21.6% and 25.5%, respectively. For the three months ended June 30,
2021, the effective income tax rate benefited from a lower effective income tax
rate, 17.6%, on the gain on the sale of our 40% ownership interest in Q2
Solutions. In addition, the effective income tax rate benefited from $5 million
and $4 million of excess tax benefits associated with stock-based compensation
arrangements for the three months ended June 30, 2021 and 2020, respectively.

  Income tax expense for the six months ended June 30, 2021 and 2020 was $330
million and $92 million, respectively. The increase in income tax expense for
the six months ended June 30, 2021 compared to the prior year period was
primarily driven by an increase in income before income taxes and equity in
earnings of equity method investees.

  For the six months ended June 30, 2021 and 2020, the effective income tax rate
was 22.9% and 24.4%, respectively. For the six months ended June 30, 2021, the
effective income tax rate benefited from a lower effective income tax rate,
17.6%, on the gain on the sale of our 40% ownership interest in Q2 Solutions. In
addition, the effective income tax rate benefited from $9 million and $12
million of excess tax benefits associated with stock-based compensation
arrangements for the six months ended June 30, 2021 and 2020, respectively.

Equity in Earnings of Equity Method Investees, Net of Taxes


  Equity in earnings of equity method investees, net of taxes increased for the
three months ended June 30, 2021 by $6 million compared to the prior year period
primarily due to recovery in the base business (which excludes COVID-19 testing)
of the investees, which was negatively impacted in 2020 as a result of the
COVID-19 pandemic.

  Equity in earnings of equity method investees, net of taxes increased for the
six months ended June 30, 2021 by $9 million compared to the prior year period
primarily due to the demand for COVID-19 testing services, partially offset by
an $8 million non-cash impairment to the carrying value of an equity method
investment.

© Edgar Online, source Glimpses

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