UNITED STATES
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SECURITIES AND EXCHANGE COMMISSION
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WASHINGTON, DC 20549
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Large accelerated filer
x
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Accelerated filer
o
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Non-accelerated filer
o
(Do not check if a smaller reporting company)
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Smaller reporting company
o
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Emerging growth company
o
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Page
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Item 1. Financial Statements
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Index to unaudited consolidated financial statements filed as part of this report:
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Three Months Ended March 31,
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2018
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2017
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Net revenues
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$
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1,884
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$
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1,817
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Operating costs and expenses and other operating income:
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Cost of services
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1,226
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1,165
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Selling, general and administrative
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363
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355
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Amortization of intangible assets
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22
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17
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Other operating expense, net
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1
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1
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Total operating costs and expenses, net
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1,612
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1,538
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Operating income
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272
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279
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Other income (expense):
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Interest expense, net
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(41
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)
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(36
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)
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Other (expense) income, net
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(2
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)
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3
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Total non-operating expenses, net
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(43
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)
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(33
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)
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Income before income taxes and equity in earnings of equity method investees
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229
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246
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Income tax expense
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(52
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)
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(78
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)
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Equity in earnings of equity method investees, net of taxes
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12
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7
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Net income
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189
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175
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Less: Net income attributable to noncontrolling interests
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12
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11
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Net income attributable to Quest Diagnostics
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$
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177
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$
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164
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Earnings per share attributable to Quest Diagnostics’ common stockholders:
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Basic
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$
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1.30
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$
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1.19
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Diluted
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$
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1.27
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$
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1.16
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Weighted average common shares outstanding:
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Basic
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136
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137
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Diluted
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139
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141
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Dividends per common share
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$
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0.50
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$
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0.45
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Three Months Ended March 31,
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2018
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2017
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Net income
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$
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189
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$
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175
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Other comprehensive income (loss):
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Currency translation
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6
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4
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Net deferred loss on cash flow hedges, net of taxes
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1
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—
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Other comprehensive income
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7
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4
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Comprehensive income
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196
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179
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Less: Comprehensive income attributable to noncontrolling interests
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12
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11
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Comprehensive income attributable to Quest Diagnostics
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$
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184
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$
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168
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March 31,
2018 |
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December 31,
2017 |
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Assets
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Current assets:
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Cash and cash equivalents
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$
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124
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$
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137
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Accounts receivable, net of allowance for doubtful accounts of $6 and $8 as of March 31, 2018 and December 31, 2017, respectively
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1,026
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924
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Inventories
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94
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95
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Prepaid expenses and other current assets
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127
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150
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Total current assets
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1,371
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1,306
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Property, plant and equipment, net
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1,156
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1,145
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Goodwill
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6,392
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6,335
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Intangible assets, net
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1,174
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1,119
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Investment in equity method investees
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474
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462
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Other assets
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128
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136
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Total assets
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$
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10,695
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$
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10,503
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Liabilities and Stockholders’ Equity
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Current liabilities:
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Accounts payable and accrued expenses
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$
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976
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$
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1,021
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Current portion of long-term debt
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141
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36
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Total current liabilities
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1,117
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1,057
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Long-term debt
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3,718
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3,748
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Other liabilities
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717
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663
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Commitments and contingencies
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Redeemable noncontrolling interest
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77
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80
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Stockholders’ equity:
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Quest Diagnostics stockholders’ equity:
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Common stock, par value $0.01 per share; 600 shares authorized as of both March 31, 2018 and December 31, 2017; 217 and 216 shares issued as of March 31, 2018 and December 31, 2017, respectively
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2
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2
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Additional paid-in capital
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2,616
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2,612
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Retained earnings
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7,249
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7,138
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Accumulated other comprehensive loss
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(41
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)
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(48
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)
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Treasury stock, at cost; 81 shares as of both March 31, 2018 and December 31, 2017
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(4,796
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)
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(4,783
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)
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Total Quest Diagnostics stockholders’ equity
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5,030
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4,921
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Noncontrolling interests
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36
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34
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Total stockholders’ equity
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5,066
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4,955
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Total liabilities and stockholders’ equity
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$
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10,695
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$
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10,503
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Three Months Ended March 31,
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2018
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2017
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Cash flows from operating activities:
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Net income
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$
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189
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$
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175
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Adjustments to reconcile net income to net cash provided by operating activities:
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Depreciation and amortization
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74
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62
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Provision for doubtful accounts
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3
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2
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Deferred income tax provision
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24
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11
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Stock-based compensation expense
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19
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17
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Other, net
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(1
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)
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1
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Changes in operating assets and liabilities:
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Accounts receivable
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(97
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)
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(35
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)
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Accounts payable and accrued expenses
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(68
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)
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(95
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)
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Income taxes payable
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5
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63
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Other assets and liabilities, net
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32
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(5
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)
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Net cash provided by operating activities
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180
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196
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Cash flows from investing activities:
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Business acquisitions, net of cash acquired
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(130
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)
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(1
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)
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Capital expenditures
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(73
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)
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(42
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)
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Increase in investments and other assets
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(1
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)
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(4
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)
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Net cash used in investing activities
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(204
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)
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(47
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)
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Cash flows from financing activities:
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Proceeds from borrowings
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935
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—
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Repayments of debt
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(832
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)
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|
(2
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)
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Purchases of treasury stock
|
(50
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)
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|
(150
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)
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Exercise of stock options
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34
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46
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Employee payroll tax withholdings on stock issued under stock-based compensation plans
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(20
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)
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(22
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)
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Dividends paid
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(61
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)
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|
(62
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)
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Distributions to noncontrolling interests
|
(15
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)
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|
(9
|
)
|
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Sale of noncontrolling interest in subsidiaries
|
2
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—
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Other financing activities, net
|
18
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33
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Net cash provided by (used in) financing activities
|
11
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(166
|
)
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Net change in cash and cash equivalents and restricted cash
|
(13
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)
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|
(17
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)
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Cash and cash equivalents and restricted cash, beginning of period
|
137
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|
|
384
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|
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Cash and cash equivalents and restricted cash, end of period
|
$
|
124
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$
|
367
|
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Cash and cash equivalents
|
$
|
124
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|
|
$
|
367
|
|
Restricted cash
|
—
|
|
|
—
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Cash and cash equivalents and restricted cash, end of period
|
$
|
124
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|
|
$
|
367
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Quest Diagnostics Stockholders’ Equity
|
|
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Shares of
Common Stock Outstanding |
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Common
Stock
|
|
Additional
Paid-In
Capital
|
|
Retained
Earnings
|
|
Accumulated
Other
Compre-
hensive Loss
|
|
Treasury
Stock, at
Cost
|
|
Non-
controlling
Interests
|
|
Total
Stock-
holders’
Equity
|
|
|
Redeemable Non-controlling Interest
|
|||||||||||||||||
Balance, December 31, 2017
|
135
|
|
|
$
|
2
|
|
|
$
|
2,612
|
|
|
$
|
7,138
|
|
|
$
|
(48
|
)
|
|
$
|
(4,783
|
)
|
|
$
|
34
|
|
|
$
|
4,955
|
|
|
|
$
|
80
|
|
Net income
|
|
|
|
|
|
|
|
|
|
177
|
|
|
|
|
|
|
|
|
11
|
|
|
188
|
|
|
|
1
|
|
||||||||
Other comprehensive income, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
7
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|
|
|
|
|
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|
7
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|||||||||
Dividends declared
|
|
|
|
|
|
|
|
|
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
|
(66
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)
|
|
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|
|||||||||
Distributions to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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(11
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)
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|
(11
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)
|
|
|
(4
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)
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||||||||
Issuance of common stock under benefit plans
|
—
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|
|
—
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|
4
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|
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|
|
4
|
|
|
|
|
|
8
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|
|
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|
|||||||||
Stock-based compensation expense
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
19
|
|
|
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|
|||||||||
Exercise of stock options
|
1
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
34
|
|
|
|
|
|||||||||
Shares to cover employee payroll tax withholdings on stock issued under stock-based compensation plans
|
—
|
|
|
—
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20
|
)
|
|
|
|
|||||||||
Purchases of treasury stock
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50
|
)
|
|
|
|
|
(50
|
)
|
|
|
|
|||||||||
Sale of noncontrolling interest in subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
2
|
|
|
|
|
|
||||||||
Balance, March 31, 2018
|
136
|
|
|
$
|
2
|
|
|
$
|
2,616
|
|
|
$
|
7,249
|
|
|
$
|
(41
|
)
|
|
$
|
(4,796
|
)
|
|
$
|
36
|
|
|
$
|
5,066
|
|
|
|
$
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Balance, December 31, 2016
|
137
|
|
|
$
|
2
|
|
|
$
|
2,545
|
|
|
$
|
6,613
|
|
|
$
|
(72
|
)
|
|
$
|
(4,460
|
)
|
|
$
|
32
|
|
|
$
|
4,660
|
|
|
|
$
|
77
|
|
Net income
|
|
|
|
|
|
|
|
|
|
164
|
|
|
|
|
|
|
|
|
10
|
|
|
174
|
|
|
|
1
|
|
||||||||
Other comprehensive income, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|||||||||
Dividends declared
|
|
|
|
|
|
|
|
|
|
(62
|
)
|
|
|
|
|
|
|
|
|
|
|
(62
|
)
|
|
|
|
|||||||||
Distributions to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9
|
)
|
|
(9
|
)
|
|
|
|
|
||||||||
Issuance of common stock under benefit plans
|
1
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
5
|
|
|
|
|
|||||||||
Stock-based compensation expense
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
17
|
|
|
|
|
|||||||||
Exercise of stock options
|
1
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
45
|
|
|
|
|
|
46
|
|
|
|
|
|||||||||
Shares to cover employee payroll tax withholdings on stock issued under stock-based compensation plans
|
|
|
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22
|
)
|
|
|
|
|||||||||
Purchases of treasury stock
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(150
|
)
|
|
|
|
|
(150
|
)
|
|
|
|
|||||||||
Balance, March 31, 2017
|
137
|
|
|
$
|
2
|
|
|
$
|
2,542
|
|
|
$
|
6,715
|
|
|
$
|
(68
|
)
|
|
$
|
(4,561
|
)
|
|
$
|
33
|
|
|
$
|
4,663
|
|
|
|
$
|
78
|
|
|
As Previously Reported
|
|
Adjustment for New Accounting Standard on Revenue Recognition
|
|
As Restated
|
||||||
Three Months Ended March 31, 2017
|
|
|
|
|
|
||||||
|
|
|
|
|
|
||||||
Consolidated Statement of Operations:
|
|
|
|
|
|
||||||
Net revenues
|
$
|
1,899
|
|
|
$
|
(82
|
)
|
|
$
|
1,817
|
|
Selling, general and administrative expenses
|
$
|
437
|
|
|
$
|
(82
|
)
|
|
$
|
355
|
|
Net income attributable to Quest Diagnostics
|
$
|
164
|
|
|
$
|
—
|
|
|
$
|
164
|
|
|
|
|
|
|
|
||||||
Consolidated Statements of Cash Flows:
|
|
|
|
|
|
||||||
Provision for doubtful accounts
|
$
|
84
|
|
|
$
|
(82
|
)
|
|
$
|
2
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
||||||
Accounts receivable
|
$
|
(117
|
)
|
|
$
|
82
|
|
|
$
|
(35
|
)
|
|
|
|
|
|
|
||||||
Balance, December 31, 2017
|
|
|
|
|
|
||||||
|
|
|
|
|
|
||||||
Consolidated Balance Sheets:
|
|
|
|
|
|
||||||
Accounts receivable
|
$
|
1,193
|
|
|
$
|
(261
|
)
|
|
$
|
932
|
|
Allowance for doubtful accounts
|
$
|
269
|
|
|
$
|
(261
|
)
|
|
$
|
8
|
|
Accounts receivable, net of allowance for doubtful accounts
|
$
|
924
|
|
|
$
|
—
|
|
|
$
|
924
|
|
•
|
Amounts generally described as restricted cash and restricted cash equivalents are now presented with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. As a result of adoption, there was no impact to cash flows from operating, investing or financing activities for the three months ended March 31, 2018 and no impact to cash flows from operating or financing activities for the three months ended March 31, 2017.
$25 million
of escrow proceeds associated with the disposition of the Focus Diagnostics products business in May 2016, which was previously reported as a cash inflow from investing activities for the three months ended
March 31, 2017
, is no longer presented within the net change in cash and cash equivalents and restricted cash as it is included in the beginning-of-period balance of restricted cash. Refer to Note 6 to the consolidated financial statements contained in the Company’s
2017
Annual Report on Form 10-K for more information regarding the disposition of the Focus Diagnostics products business.
|
•
|
The classification of how certain cash receipts and payments are presented within the statement of cash flows has been clarified. As a result, cash payments for debt retirement costs are now presented as a financing cash outflow in the consolidated statement of cash flows. There were no debt retirement costs for the three months ended March 31, 2018 and 2017.
|
|
Three Months Ended March 31,
|
||||
|
2018
|
|
2017
|
||
Healthcare insurers:
|
|
|
|
||
Fee-for-service
|
34
|
%
|
|
33
|
%
|
Capitated
|
4
|
|
|
4
|
|
Total healthcare insurers
|
38
|
|
|
37
|
|
Government payers
|
16
|
|
|
17
|
|
Client payers
|
30
|
|
|
30
|
|
Patient
|
12
|
|
|
11
|
|
Total DIS
|
96
|
|
|
95
|
|
DS
|
4
|
|
|
5
|
|
Net revenues
|
100
|
%
|
|
100
|
%
|
|
Three Months Ended March 31,
|
||||||
|
2018
|
|
2017
|
||||
Amounts attributable to Quest Diagnostics’ common stockholders:
|
|
|
|
|
|
||
Net income attributable to Quest Diagnostics
|
$
|
177
|
|
|
$
|
164
|
|
Less: Earnings allocated to participating securities
|
1
|
|
|
1
|
|
||
Earnings available to Quest Diagnostics’ common stockholders – basic and diluted
|
$
|
176
|
|
|
$
|
163
|
|
|
|
|
|
||||
Weighted average common shares outstanding – basic
|
136
|
|
|
137
|
|
||
Effect of dilutive securities:
|
|
|
|
|
|
||
Stock options and performance share units
|
3
|
|
|
4
|
|
||
Weighted average common shares outstanding – diluted
|
139
|
|
|
141
|
|
||
|
|
|
|
||||
Earnings per share attributable to Quest Diagnostics’ common stockholders:
|
|
|
|
|
|
||
Basic
|
$
|
1.30
|
|
|
$
|
1.19
|
|
|
|
|
|
||||
Diluted
|
$
|
1.27
|
|
|
$
|
1.16
|
|
|
Three Months Ended March 31,
|
||||
|
2018
|
|
2017
|
||
Stock options
|
2
|
|
|
1
|
|
|
Three Months Ended March 31,
|
||||||
|
2018
|
|
2017
|
||||
Employee separation costs
|
$
|
11
|
|
|
$
|
3
|
|
Facility-related costs
|
1
|
|
|
—
|
|
||
Total restructuring charges
|
$
|
12
|
|
|
$
|
3
|
|
|
|
|
Basis of Fair Value Measurements
|
||||||||||||
|
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets /
Liabilities
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
||||||||
March 31, 2018
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
||||||||
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
||||
Trading securities
|
$
|
57
|
|
|
$
|
57
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Cash surrender value of life insurance policies
|
36
|
|
|
—
|
|
|
36
|
|
|
—
|
|
||||
Equity securities
|
2
|
|
|
2
|
|
|
—
|
|
|
—
|
|
||||
Total
|
$
|
95
|
|
|
$
|
59
|
|
|
$
|
36
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
||||||||
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest rate swaps
|
$
|
114
|
|
|
$
|
—
|
|
|
$
|
114
|
|
|
$
|
—
|
|
Deferred compensation liabilities
|
102
|
|
|
—
|
|
|
102
|
|
|
$
|
—
|
|
|||
Contingent consideration
|
20
|
|
|
—
|
|
|
—
|
|
|
20
|
|
||||
Total
|
$
|
236
|
|
|
$
|
—
|
|
|
$
|
216
|
|
|
$
|
20
|
|
|
|
|
Basis of Fair Value Measurements
|
||||||||||||
December 31, 2017
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
||||||||
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
||||
Trading securities
|
$
|
58
|
|
|
$
|
58
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Cash surrender value of life insurance policies
|
37
|
|
|
—
|
|
|
37
|
|
|
—
|
|
||||
Equity securities
|
2
|
|
|
2
|
|
|
—
|
|
|
—
|
|
||||
Total
|
$
|
97
|
|
|
$
|
60
|
|
|
$
|
37
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
||||||||
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
||||
Deferred compensation liabilities
|
$
|
103
|
|
|
$
|
—
|
|
|
$
|
103
|
|
|
$
|
—
|
|
Interest rate swaps
|
89
|
|
|
—
|
|
|
89
|
|
|
—
|
|
||||
Contingent consideration
|
7
|
|
|
—
|
|
|
—
|
|
|
7
|
|
||||
Total
|
$
|
199
|
|
|
$
|
—
|
|
|
$
|
192
|
|
|
$
|
7
|
|
|
Contingent Consideration
|
||
|
|
||
Balance, December 31, 2017
|
$
|
7
|
|
Purchases, additions and issuances
|
12
|
|
|
Settlements
|
—
|
|
|
Total gains/losses - realized/unrealized:
|
|
||
Included in earnings
|
1
|
|
|
Balance, March 31, 2018
|
$
|
20
|
|
|
March 31,
2018 |
|
December 31,
2017 |
||||
Balance, beginning of period
|
$
|
6,335
|
|
|
$
|
6,000
|
|
Goodwill acquired during the period
|
57
|
|
|
335
|
|
||
Balance, end of period
|
$
|
6,392
|
|
|
$
|
6,335
|
|
|
Weighted
Average
Amortization
Period
(in years)
|
|
March 31, 2018
|
|
December 31, 2017
|
||||||||||||||||||||
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
|
|||||||||||||
Amortizing intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Customer-related
|
18
|
|
$
|
1,284
|
|
|
$
|
(422
|
)
|
|
$
|
862
|
|
|
$
|
1,210
|
|
|
$
|
(404
|
)
|
|
$
|
806
|
|
Non-compete agreements
|
7
|
|
7
|
|
|
(5
|
)
|
|
2
|
|
|
7
|
|
|
(5
|
)
|
|
2
|
|
||||||
Technology
|
17
|
|
96
|
|
|
(46
|
)
|
|
50
|
|
|
95
|
|
|
(45
|
)
|
|
50
|
|
||||||
Other
|
9
|
|
107
|
|
|
(83
|
)
|
|
24
|
|
|
105
|
|
|
(80
|
)
|
|
25
|
|
||||||
Total
|
17
|
|
1,494
|
|
|
(556
|
)
|
|
938
|
|
|
1,417
|
|
|
(534
|
)
|
|
883
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Trade names
|
|
|
235
|
|
|
—
|
|
|
235
|
|
|
235
|
|
|
—
|
|
|
235
|
|
||||||
Other
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
—
|
|
|
1
|
|
||||||
Total intangible assets
|
|
|
$
|
1,730
|
|
|
$
|
(556
|
)
|
|
$
|
1,174
|
|
|
$
|
1,653
|
|
|
$
|
(534
|
)
|
|
$
|
1,119
|
|
|
|
Notional Amount
|
||||||
Debt Instrument
|
|
March 31, 2018
|
|
December 31, 2017
|
||||
|
|
|
|
|
||||
4.25% Senior Notes due April 2024
|
|
$
|
250
|
|
|
$
|
250
|
|
3.50% Senior Notes due March 2025
|
|
600
|
|
|
600
|
|
||
3.45% Senior Notes due June 2026
|
|
350
|
|
|
350
|
|
||
|
|
$
|
1,200
|
|
|
$
|
1,200
|
|
|
|
|
Carrying Amount of Hedged Long-Term Debt
|
|
Hedge Accounting Basis Adjustment (a)
|
|
Carrying Amount of Hedged Long-Term Debt
|
|
Hedge Accounting Basis Adjustment (a)
|
||||||||
Balance Sheet Classification
|
|
March 31, 2018
|
|
March 31, 2018
|
|
December 31, 2017
|
|
December 31, 2017
|
|||||||||
Long-term debt
|
|
$
|
1,106
|
|
|
$
|
(62
|
)
|
|
$
|
1,132
|
|
|
$
|
(33
|
)
|
|
|
|
Three Months Ended March 31,
|
||||||
|
|
|
2018
|
|
2017
|
||||
|
|
Other (expense) income, net
|
|
Other (expense) income, net
|
|||||
Total for line item in which the effects of fair value hedges are recorded
|
|
$
|
(2
|
)
|
|
$
|
3
|
|
|
|
|
|
|
|
|||||
Gain (loss) on fair value hedging relationships:
|
|
|
|
|
|||||
Hedged items (Long-term debt)
|
|
$
|
25
|
|
|
$
|
—
|
|
|
Derivatives designated as hedging instruments
|
|
$
|
(25
|
)
|
|
$
|
—
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
||||||||
Derivatives Designated as Hedging Instruments
|
|
Balance Sheet
Classification
|
|
Fair Value
|
|
Balance Sheet
Classification
|
|
Fair Value
|
||||
Interest rate swaps
|
|
Other liabilities
|
|
$
|
114
|
|
|
Other liabilities
|
|
$
|
89
|
|
•
|
Foreign currency translation adjustments;
|
•
|
Net deferred loss on cash flow hedges, which represents deferred losses, net of tax on interest rate related derivative financial instruments designated as cash flow hedges, net of amounts reclassified to interest expense (see Note
10
).
|
|
Three Months Ended March 31,
|
||||||
|
2018
|
|
2017
|
||||
Depreciation expense
|
$
|
52
|
|
|
$
|
45
|
|
Amortization expense
|
22
|
|
|
17
|
|
||
Depreciation and amortization expense
|
$
|
74
|
|
|
$
|
62
|
|
|
|
|
|
||||
Interest expense
|
$
|
(41
|
)
|
|
$
|
(37
|
)
|
Interest income
|
—
|
|
|
1
|
|
||
Interest expense, net
|
$
|
(41
|
)
|
|
$
|
(36
|
)
|
|
|
|
|
||||
Interest paid
|
$
|
49
|
|
|
$
|
46
|
|
Income taxes paid
|
$
|
2
|
|
|
$
|
8
|
|
|
|
|
|
||||
Accounts payable associated with capital expenditures
|
$
|
16
|
|
|
$
|
12
|
|
Dividends payable
|
$
|
66
|
|
|
$
|
62
|
|
|
|
|
|
||||
Businesses acquired:
|
|
|
|
|
|
||
Fair value of assets acquired
|
$
|
148
|
|
|
$
|
1
|
|
Fair value of liabilities assumed
|
(1
|
)
|
|
—
|
|
||
Fair value of net assets acquired
|
147
|
|
|
1
|
|
||
Merger consideration paid (payable), net
|
(12
|
)
|
|
—
|
|
||
Cash paid for business acquisitions
|
135
|
|
|
1
|
|
||
Less: Cash acquired
|
5
|
|
|
—
|
|
||
Business acquisitions, net of cash acquired
|
$
|
130
|
|
|
$
|
1
|
|
|
Three Months Ended March 31,
|
||||||
|
2018
|
|
2017
|
||||
Net revenues:
|
|
|
|
|
|
||
DIS business
|
$
|
1,803
|
|
|
$
|
1,730
|
|
All other operating segments
|
81
|
|
|
87
|
|
||
Total net revenues
|
$
|
1,884
|
|
|
$
|
1,817
|
|
|
|
|
|
||||
Operating earnings (loss):
|
|
|
|
|
|
||
DIS business
|
$
|
308
|
|
|
$
|
306
|
|
All other operating segments
|
11
|
|
|
13
|
|
||
General corporate activities
|
(47
|
)
|
|
(40
|
)
|
||
Total operating income
|
272
|
|
|
279
|
|
||
Non-operating expenses, net
|
(43
|
)
|
|
(33
|
)
|
||
Income before income taxes and equity in earnings of equity method investees
|
229
|
|
|
246
|
|
||
Income tax expense
|
(52
|
)
|
|
(78
|
)
|
||
Equity in earnings of equity method investees, net of taxes
|
12
|
|
|
7
|
|
||
Net income
|
189
|
|
|
175
|
|
||
Less: Net income attributable to noncontrolling interests
|
12
|
|
|
11
|
|
||
Net income attributable to Quest Diagnostics
|
$
|
177
|
|
|
$
|
164
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
•
|
Our total net revenues of
$1.9 billion
were
3.7%
above the prior year period. We estimate that weather negatively impacted revenue growth by
0.6%
.
|
•
|
In our DIS business:
|
◦
|
Revenues of
$1.8 billion
increased by
4.1%
compared to the prior year period. We estimate that reduced reimbursement due to the Protecting Access to Medicare Act ("PAMA") negatively impacted DIS revenue growth by 0.5%.
|
◦
|
Volume, measured by the number of requisitions, increased
2.2%
compared to the prior year period.
|
◦
|
Revenue per requisition increased by
1.6%
compared to the prior year period.
|
•
|
DS revenues of
$81 million
were
5.3%
below the prior year period primarily associated with our risk assessment services.
|
•
|
Operating income was
$272 million
in
2018
, a decrease of
$7 million
compared to the prior year period primarily due to higher restructuring costs associated with workforce reductions and the impact of weather.
|
•
|
Net income attributable to Quest Diagnostics' stockholders was
$177 million
, or
$1.27
per diluted share, in
2018
, compared to
$164 million
, or
$1.16
per diluted share, in the prior year period. For the three months ended March 31, 2018, net income attributable to Quest Diagnostics and diluted EPS benefited from the lower corporate income tax rate as a result of the Tax Cuts and Jobs Act ("TCJA").
|
•
|
Net cash provided by operating activities was
$180 million
in
2018
, compared to
$196 million
in the prior year period. The
$16 million
decrease in net cash provided by operating activities was primarily a result of timing of movements in our working capital accounts.
|
|
Three Months Ended March 31,
|
|||||||||||||
|
2018
|
|
2017
|
|
Increase
(Decrease) |
|
% Increase
(Decrease) |
|||||||
|
(dollars in millions, except per share amounts)
|
|||||||||||||
Net revenues:
|
|
|
|
|
|
|
|
|||||||
DIS business
|
$
|
1,803
|
|
|
$
|
1,730
|
|
|
$
|
73
|
|
|
4.1
|
%
|
DS businesses
|
81
|
|
|
87
|
|
|
(6
|
)
|
|
(5.3
|
)
|
|||
Total net revenues
|
$
|
1,884
|
|
|
$
|
1,817
|
|
|
$
|
67
|
|
|
3.7
|
%
|
|
|
|
|
|
|
|
|
|||||||
Operating costs and expenses and other operating income:
|
|
|
|
|
|
|
|
|
|
|||||
Cost of services
|
$
|
1,226
|
|
|
$
|
1,165
|
|
|
$
|
61
|
|
|
5.2
|
%
|
Selling, general and administrative
|
363
|
|
|
355
|
|
|
8
|
|
|
2.2
|
|
|||
Amortization of intangible assets
|
22
|
|
|
17
|
|
|
5
|
|
|
NM
|
|
|||
Other operating expense, net
|
1
|
|
|
1
|
|
|
—
|
|
|
NM
|
|
|||
Total operating costs and expenses, net
|
$
|
1,612
|
|
|
$
|
1,538
|
|
|
$
|
74
|
|
|
4.8
|
%
|
|
|
|
|
|
|
|
|
|||||||
Operating income
|
$
|
272
|
|
|
$
|
279
|
|
|
$
|
(7
|
)
|
|
(2.5
|
)%
|
|
|
|
|
|
|
|
|
|||||||
Other income (expense):
|
|
|
|
|
|
|
|
|||||||
Interest expense, net
|
$
|
(41
|
)
|
|
$
|
(36
|
)
|
|
$
|
5
|
|
|
12.7
|
%
|
Other (expense) income, net
|
(2
|
)
|
|
3
|
|
|
5
|
|
|
NM
|
|
|||
Total non-operating expenses, net
|
$
|
(43
|
)
|
|
$
|
(33
|
)
|
|
$
|
10
|
|
|
31.3
|
%
|
|
|
|
|
|
|
|
|
|||||||
Income tax expense
|
$
|
(52
|
)
|
|
$
|
(78
|
)
|
|
$
|
(26
|
)
|
|
(34.3
|
)%
|
Effective income tax rate
|
22.5
|
%
|
|
31.8
|
%
|
|
(930) bps
|
|
|
NM
|
|
|||
|
|
|
|
|
|
|
|
|||||||
Equity in earnings of equity method investees, net of taxes
|
$
|
12
|
|
|
$
|
7
|
|
|
$
|
5
|
|
|
68.9
|
%
|
|
|
|
|
|
|
|
|
|||||||
Net income attributable to Quest Diagnostics
|
$
|
177
|
|
|
$
|
164
|
|
|
$
|
13
|
|
|
8.2
|
%
|
|
|
|
|
|
|
|
|
|||||||
Diluted earnings per common share attributable to Quest Diagnostics’ common stockholders
|
$
|
1.27
|
|
|
$
|
1.16
|
|
|
$
|
0.11
|
|
|
9.5
|
%
|
|
|
|
|
|
|
|
|
|||||||
NM - Not Meaningful
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
||||
|
2018
|
|
2017
|
||
Net revenues:
|
|
|
|
||
DIS business
|
95.7
|
%
|
|
95.3
|
%
|
DS businesses
|
4.3
|
|
|
4.7
|
|
Total net revenues
|
100.0
|
%
|
|
100.0
|
%
|
|
|
|
|
||
Operating costs and expenses and other operating income:
|
|
|
|
|
|
Cost of services
|
65.1
|
%
|
|
64.1
|
%
|
Selling, general and administrative
|
19.2
|
|
|
19.5
|
|
Amortization of intangible assets
|
1.1
|
|
|
0.9
|
|
Other operating expense, net
|
0.1
|
|
|
0.1
|
|
Total operating costs and expenses, net
|
85.5
|
%
|
|
84.6
|
%
|
|
|
|
|
||
Operating income
|
14.5
|
%
|
|
15.4
|
%
|
|
|
|
|
||
Bad debt expense
|
0.2
|
%
|
|
0.1
|
%
|
•
|
pre-tax charges of $31 million ($12 million in cost of services, $18 million in selling, general and administrative expenses, and $1 million in other operating expense, net), or $0.17 per diluted share, primarily associated with workforce reductions, systems conversions and integration incurred in connection with further restructuring and integrating our business; partially offset by
|
•
|
excess tax benefits associated with stock-based compensation arrangements of $8 million, or $0.06 per diluted share, recorded in income tax expense.
|
•
|
pre-tax charges of $18 million ($10 million in cost of services and $8 million in selling, general and administrative expenses), or $0.08 per diluted share, primarily associated with systems conversions and integration incurred in connection with further restructuring and integrating our business; partially offset by
|
•
|
excess tax benefits associated with stock-based compensation arrangements of $16 million, or $0.11 per diluted share, recorded in income tax expense.
|
|
Three Months Ended March 31,
|
|
Increase
(Decrease) |
||||||||
|
2018
|
|
2017
|
|
|||||||
|
(dollars in millions)
|
|
|
||||||||
Net cash provided by operating activities
|
$
|
180
|
|
|
$
|
196
|
|
|
$
|
(16
|
)
|
Net cash used in investing activities
|
(204
|
)
|
|
(47
|
)
|
|
(157
|
)
|
|||
Net cash provided by (used in) financing activities
|
11
|
|
|
(166
|
)
|
|
177
|
|
|||
Net change in cash and cash equivalents and restricted cash
|
$
|
(13
|
)
|
|
$
|
(17
|
)
|
|
$
|
4
|
|
•
|
a $129 million increase in net cash paid for business acquisitions, principally a result of the acquisition of MedXM, and
|
•
|
a $31 million increase in capital expenditures.
|
•
|
$103 million in net borrowings in 2018, compared to $2 million in net repayments in 2017;
|
•
|
a
$100 million
decrease in repurchases of our common stock (see "
Share Repurchases
" for further details) in 2018; partially offset by
|
•
|
a $16 million decrease in bank overdrafts, which are generally settled in cash the following business day; and
|
•
|
a $12 million decrease in proceeds from the exercise of stock options, which was a result of a decrease in the volume of stock options exercised over the past year.
|
|
|
Payments due by period
|
||||||||||||||||||
Contractual Obligations
|
|
Total
|
|
Remainder of 2018
|
|
1-3 years
|
|
3-5 years
|
|
After 5 years
|
||||||||||
|
|
(dollars in millions)
|
||||||||||||||||||
Outstanding debt
|
|
$
|
3,911
|
|
|
$
|
135
|
|
|
$
|
1,100
|
|
|
$
|
550
|
|
|
$
|
2,126
|
|
Capital lease obligations
|
|
41
|
|
|
4
|
|
|
7
|
|
|
6
|
|
|
24
|
|
|||||
Interest payments on outstanding debt
|
|
1,586
|
|
|
164
|
|
|
302
|
|
|
211
|
|
|
909
|
|
|||||
Operating leases
|
|
665
|
|
|
145
|
|
|
263
|
|
|
129
|
|
|
128
|
|
|||||
Purchase obligations
|
|
1,862
|
|
|
217
|
|
|
488
|
|
|
421
|
|
|
736
|
|
|||||
Merger consideration obligations
|
|
20
|
|
|
8
|
|
|
12
|
|
|
—
|
|
|
—
|
|
|||||
Total contractual obligations
|
|
$
|
8,085
|
|
|
$
|
673
|
|
|
$
|
2,172
|
|
|
$
|
1,317
|
|
|
$
|
3,923
|
|
ISSUER PURCHASES OF EQUITY SECURITIES
|
||||||||||||||
Period
|
|
Total Number of
Shares
Purchased
|
|
Average Price
Paid per Share
|
|
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
|
|
Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the Plans
or Programs
(in thousands)
|
||||||
January 1, 2018 – January 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Share Repurchase Program (A)
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
917,117
|
|
Employee Transactions (B)
|
|
4,337
|
|
|
$
|
99.51
|
|
|
N/A
|
|
|
N/A
|
|
|
February 1, 2018 – February 28, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|||
Share Repurchase Program (A)
|
|
219,622
|
|
|
$
|
102.42
|
|
|
219,622
|
|
|
$
|
894,624
|
|
Employee Transactions (B)
|
|
93,681
|
|
|
$
|
101.77
|
|
|
N/A
|
|
|
N/A
|
|
|
March 1, 2018 – March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Share Repurchase Program (A)
|
|
264,344
|
|
|
$
|
104.04
|
|
|
264,344
|
|
|
$
|
867,121
|
|
Employee Transactions (B)
|
|
97,553
|
|
|
$
|
101.06
|
|
|
N/A
|
|
|
N/A
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Share Repurchase Program (A)
|
|
483,966
|
|
|
$
|
103.30
|
|
|
483,966
|
|
|
$
|
867,121
|
|
Employee Transactions (B)
|
|
195,571
|
|
|
$
|
101.36
|
|
|
N/A
|
|
|
N/A
|
|
(A)
|
Since the share repurchase program’s inception in May 2003, our Board of Directors has authorized $8 billion of share repurchases of our common stock through
March 31, 2018
. The share repurchase authorization has no set expiration or termination date.
|
(B)
|
Includes: (1) shares delivered or attested to in satisfaction of the exercise price and/or tax withholding obligations by holders of stock options (granted under the Company’s Amended and Restated Employee Long-Term Incentive Plan and its Amended and Restated Non-Employee Director Long-Term Incentive Plan) who exercised options; and (2) shares withheld (under the terms of grants under the Amended and Restated Employee Long-Term Incentive Plan) to offset tax withholding obligations that occur upon the delivery of common shares underlying restricted stock units and performance share units.
|
Item 6.
|
Exhibits
|
10.1
|
|
|
|
31.1
|
|
|
|
31.2
|
|
|
|
32.1
|
|
|
|
32.2
|
|
|
|
101.INS
|
dgx-20180331.xml
|
|
|
101.SCH
|
dgx-20180331.xsd
|
|
|
101.CAL
|
dgx-20180331_cal.xml
|
|
|
101.DEF
|
dgx-20180331_def.xml
|
|
|
101.LAB
|
dgx-20180331_lab.xml
|
|
|
101.PRE
|
dgx-20180331_pre.xml
|
|
|
|
|
By
|
/s/ Stephen H. Rusckowski
|
|
Stephen H. Rusckowski
|
|
Chairman, President and
|
|
Chief Executive Officer
|
|
|
|
|
By
|
/s/ Mark J. Guinan
|
|
Mark J. Guinan
|
|
Executive Vice President and
|
|
Chief Financial Officer
|
Annual Compounded Revenue Growth*
|
“Earnings Multiple”* multiplied by 50% of Target Performance Shares = Earned Performance Shares
|
Greater Than or Equal to %
Equal to %
|
2 x 50% x Target Performance Shares
1 x 50% x Target Performance Shares
|
Equal to %
|
0.75 x 50% x Target Performance Shares
|
Equal to %
|
0.25 x 50% x Target Performance Shares
|
Less Than %
|
0 x 50% a Target Performance Shares
|
Average ROIC*
|
“Earnings Multiple”* multiplied by 50% of Target Performance Shares = Earned Performance Shares
|
Greater Than or Equal to %
|
2 x 50% x Target Performance Shares
|
Equal to %
|
1 x 50% x Target Performance Shares
|
Equal to %
|
0.5 x 50% x Target Performance Shares
|
Less Than %
|
0 x 50% x Target Performance Shares
|
Option Vesting Dates
|
|
Vesting Percent
|
|
Cumulative
|
First anniversary of Grant Date
|
|
33.3%
|
|
33.3%
|
Second anniversary of Grant Date
|
|
33.3%
|
|
66.6%
|
Third anniversary of Grant Date
|
|
33.4%
|
|
100%
|
RSU Vesting Dates
|
|
Vesting Percent
|
|
Cumulative
|
First anniversary of Grant Date
|
|
25%
|
|
25%
|
Second anniversary of Grant Date
|
|
25%
|
|
50%
|
Third anniversary of Grant Date
|
|
50%
|
|
100%
|
1.
|
I have reviewed this quarterly report on Form 10-Q of Quest Diagnostics Incorporated;
|
2.
|
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
3.
|
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
|
4.
|
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
a.
|
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
b.
|
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
c.
|
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
|
d.
|
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
|
5.
|
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
|
a.
|
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
|
b.
|
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
By
|
/s/ Stephen H. Rusckowski
|
|
|
|
Stephen H. Rusckowski
|
|
Chairman, President and
|
|
Chief Executive Officer
|
1.
|
I have reviewed this quarterly report on Form 10-Q of Quest Diagnostics Incorporated;
|
2.
|
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
3.
|
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
|
4.
|
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
a.
|
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
b.
|
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
c.
|
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
|
d.
|
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
|
5.
|
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
|
a.
|
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
|
b.
|
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
By
|
/s/ Mark J. Guinan
|
|
|
|
Mark J. Guinan
|
|
Executive Vice President and
|
|
Chief Financial Officer
|
Dated:
|
April 20, 2018
|
|
/s/ Stephen H. Rusckowski
|
|
|
|
|
|
|
|
|
|
Stephen H. Rusckowski
|
|
|
|
|
Chairman, President and
|
|
|
|
|
Chief Executive Officer
|
|
Dated:
|
April 20, 2018
|
|
/s/ Mark J. Guinan
|
|
|
|
|
|
|
|
|
|
Mark J. Guinan
|
|
|
|
|
Executive Vice President and
|
|
|
|
|
Chief Financial Officer
|
|