Dan Haemmerle - Executive Director, Investor Relations Stephen Rusckowski - President and Chief Executive Officer Mark Guinan - Senior Vice President and Chief Financial Officer.

Ricky Goldwasser - Morgan Stanley Glen Santangelo - Credit Suisse Michael Cherny - ISI Group David Clair - Piper Jaffray Bryan Brokmeier - Maxim Group Darren Lehrich - Deutsche Bank Isaac Ro - Goldman Sachs Amanda Murphy - William Blair & Company Robert Willoughby – Bank of America Merrill Lynch A.J. Rice – UBS Securities Gary Taylor – Citigroup.

Thank you for standing by. Welcome to the Quest Diagnostics’ Third Quarter 2014 Conference Call. At the request of the Company, this call is being recorded. The entire contents of this call, including the presentation and question-and-answer-session that will follow are copyrighted property of Quest Diagnostics with all rights reserved.

Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Quest Diagnostics is strictly prohibited. Now I would like to introduce Dan Haemmerle, Executive Director of Investor Relations for Quest Diagnostics. Go ahead, please..

Thank you and good morning. I’m here with Steve Rusckowski, our President and Chief Executive Officer; and Mark Guinan, our Chief Financial Officer. During this call, we may make forward-looking statements and also discuss non-GAAP measures. Actual results may differ materially from those projected.

Risks and uncertainties that may affect Quest Diagnostics' future results include but are not limited to, those described in Quest Diagnostics' 2013 Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.

A copy of our earnings press release is available and the text of our prepared remarks will be available later today, in the Investor Relations 'quarterly updates' section of our Web site at www.questdiagnostics.com. A PowerPoint presentation and spreadsheet with our results and supplemental analysis are also available on the Web site.

Now, here is Steve Rusckowski..

Thanks, Dan, and thanks everyone for joining us today. This morning I will provide you with highlights of the quarter. We will share industry trends and also review progress we are making against our five-point strategy. Then Mark will provide more detail on the results and take you through guidance.

During the third quarter we delivered against our expectations. Continued to make progress against our strategy and reported top and bottom line growth. In the quarter, revenues grew 6.5% to $1.9 billion. Adjusted EPS increased 8% to $1.10 and cash from operations was strong at $271 million.

What I would like to do is start with some brief comments on industry trends. We have said, diagnostic information is a powerful lever for transforming healthcare and we are determined to be paid appropriate for the value we provide.

In this respect our trade association has been getting the message out about the value of diagnostic information to healthcare. We are making progress as an industry but the reimbursement dynamics continue to evolve and there is much more to do.

To give you an example, in July, Tricare announced it had committed to restoring payment for 40 molecular codes that had previously been denied in some cases. During the third quarter, we saw progress of payment on codes that previously had been denied. This is a nice sign of progress we are making as an industry.

Also in April, Congress passed the so called Doc Fix legislation that delayed adjustments to the Clinical Lab Fee Schedule until 2017. We have been working with our industry trade association to participate in a rule making process.

This will define new rates based on a market weighted median of commercial rates from a broad range of labs which include both large and small independent labs as well as hospital outreach labs. We remain hopeful that this will produce a representative view of market‐based pricing.

Being appropriately reimbursed for the value we provide is critical to our success and we compete on a compelling value proposition, not solely on price. Also, we continue to work closely with our trade association on another important issue. And that is to oppose the FDA’s proposal to regulate laboratory developed tests, referred to as LDTs.

We strongly believe that unnecessary and duplicative regulation could delay patient access to life saving treatments and compromise America’s leadership in diagnostic discovery.

Regarding the Affordable Care Act, while it’s still early, we continued to see modest shifts from uninsured patient volumes in the third quarter to government and other payers. Regarding the market dynamics, we saw additional signs of improvement in healthcare utilization during the quarter.

And then finally, we will provide you an update on our views on the market and the competitive landscape at our Investor Day in New York City on November 5th. Now let’s look at the progress we’re making executing our five point strategy. Our top priority is restoring growth and we again made solid progress in the quarter.

The investments we’ve made and efforts to improve our sales effectiveness are yielding positive results. We saw continued improvement in sequential trends in revenues, organic volume and organic price. If we exclude business we walked away from, organic revenues would be favorable.

Revenues showed strong growth in several product categories driven by our clinical franchises, which included prescription drug monitoring, health and wellness, and infectious disease. Last quarter we told you about the partnership with Memorial Sloan Kettering Cancer Center.

Our plans were to provide annotated reports on solid tumor analysis based on a panel of 34 clinically actionable gene mutations. We launched those expanded OncoVantage panels during the third quarter. Solid tumor cancers account for about 90% of all cancers diagnosed in the United States every year.

Also, as promised, we began to offer our customers national access to Sequenom’s non‐invasive prenatal test. And we continue to build our professional lab services business and finalized yet another agreement with a medium sized community hospital on the East Coast.

We are making good progress advancing conversations from our pipeline into proposals and new business. These are all great examples of how we are empowering better health with diagnostic insights to make this a better world. We are also making progress on other key areas of our strategy.

We made a number of advances in our effort to improve our customer experience by driving operational excellence. We opened our lab of the future in Marlborough, Massachusetts, which will use advanced automation technology to improve the quality and efficiency of diagnostic testing for the New England market.

The Invigorate program remains on track to deliver the expected cost savings this year. As you know, the company shared an initial target of $500 million in July of 2011. Since then, we have increased that target to $600 million.

Delivered the original target a year earlier, and now expect to exceed the new run rate target by delivering $700 million in run rate savings as we exit 2014. Over the past year, we have been advising you that we will update our future plans for Invigorate at Investor Day.

We intend to deliver on that commitment and we will provide you with additional details on our plans to deliver total run rate savings in excess of $1 billion. In addition, we made progress integrating recent acquisitions.

We told you that Solstas and Summit were expected to be dilutive for the first half of 2014 but accretive in the back half as we work through our integration plans. We are pleased with the progress we have made realizing the expected synergies.

I’m happy to report that these acquisitions as well as Steward and ConVerge, were all accretive on an adjusted basis during the quarter. The third element of our strategy is to simplify the organization to enable our top priorities of growth and operational excellence.

Our simplify strategy extends well beyond our organizational redesign to also include improving our organizational capabilities, culture and processes. We continue to strengthen the management team and build a high performance culture. And we have also continued to strengthen our board. Recently, the board elected Dr.

Jeffrey Leiden as our newest Director. He currently serves as Chairman, CEO and President of Vertex Pharmaceuticals. Jeff is the third new board member added this year with significant CEO experience. Coupling this with his deep management, scientific and clinical background in healthcare, this will strengthen and complement our board’s capabilities.

Finally, we continue to deliver disciplined capital deployment and refocus on our core diagnostic information services business. We generated $271 million in cash from operations during the quarter.

We utilized that strong cash flow performance to return value to our shareholders through dividends and stock buyback program and to repay debt associated with the Solstas transaction. As you can see, we continued to make progress executing our five point strategy.

Now, Mark will provide an overview of our third quarter financial performance and update you on our latest guidance details.

Mark?.

Thanks, Steve. Starting with revenues. Consolidated revenues of $1.9 billion were 6.5% ahead of the prior year. Excluding acquisitions and the divestiture of the Enterix business last year, our underlying consolidated revenues were essentially flat to the prior year, reflecting another sequential step forward in our path to restoring growth.

Our diagnostic information services revenues, which account for over 90% of total revenues, grew by 7.1% compared to the prior year. Revenue per requisition in Q3 was 60 basis points lower than the prior year.

Excluding the effect of acquisitions, revenue per requisition was slightly favorable versus the prior year, and improved sequentially from the second quarter of 2014. Compared to a year ago, price pressure continued to moderate and we benefited from favorable test mix. Volume for the quarter was 7.8% favorable to the prior year.

Recent acquisitions added approximately 8% to volumes. Last quarter, I shared that we had made prudent decisions regarding pricing and in some cases decided to walk away from existing business.

Excluding the impact on revenue from these decisions, our underlying volumes were favorable to the prior year by approximately 1.5% and represents another quarter of sequential improvement in year-over-year volume growth.

Q3 revenues in our diagnostic solutions businesses which include risk assessment, clinical trials testing, healthcare IT and our remaining products businesses, were lower by about 70 basis points compared to the prior year. The divestiture of Enterix reduced revenues for our diagnostic solutions businesses by nearly 2%.

Excluding this impact, our diagnostic solutions businesses grew by approximately 1% compared to the third quarter of a year ago.

Adjusted operating income at 16% of revenues was about 50 basis points below the prior year, with the decrease due principally to the increased funding of management compensation compared to a year ago and the initial lower margin profile on our recent acquisitions.

Earlier this year we shared with you that we expected the Summit and Solstas acquisitions to be dilutive in the first half of the year and accretive in the back half of the year. I am happy to report that these acquisitions were accretive in the third quarter on an adjusted basis as we made nice progress on those integration plans.

In addition to delivering on our integration plans, we continued to make progress on our Invigorate program. We continue to expect to achieve approximately $200 million in realized savings during 2014 and approach approximately $700 million in run rate savings as we exit the year, with a longer term goal of greater than $1 billion over time.

As I shared last quarter, we will provide additional details at our Investor Day in November. Adjusted EPS of $1.10 was 7.8% better than a year ago.

As a result of the company’s ongoing efforts to restore growth, drive operational excellence and simplify the organization, reported operating income was reduced by $48 million, principally related to restructuring and integration costs. This reduced reported operating income as a percentage of revenues by 2.6% and reported EPS by $0.22.

Last year’s third quarter reported operating income from continuing operations included the gain on the sale of Ibrutinib royalty rights, the loss on sale of the Enterix business and restructuring and integration costs. These items resulted in a net benefit to reported operating income of $395 million or $1.64 per diluted share.

Bad debt expense as a percentage of revenues was 4%, essentially unchanged from the prior quarter and an increase of 40 basis points from the prior year. Our DSOs were 46 days, a 1 day improvement from last quarter. Cash from operations was $271 million in the quarter compared to $186 million in the prior year.

Capital expenditures were $102 million in the quarter compared to $51 million a year ago. During the quarter we repurchased $25 million of our common shares at an average price of $62.03.

We plan to meet our capital deployment commitments for the year by returning the majority of our free cash flow to shareholders through a combination of dividends and share repurchases. We also made progress against our debt repayment commitment by reducing our debt by approximately $90 million in the quarter. Turning to guidance.

We now expect full year 2014 results from continuing operations, before special items, as follows. Revenues to grow approximately 3.5% compared to a year ago versus 2.5% to 3.5% previously. Adjusted diluted earnings per share to be between $4.03 and $4.07 compared to previous guidance of $4.00 and $4.10.

Cash provided by operations to approximate $900 million and capital expenditures to approximate $300 million. Now I’ll turn it back to Steve..

Thanks, Mark. Mark, if I recall correctly, about a year ago you joined Quest. And actually a year ago on this call you shared several priorities. And those priorities included improving our predictability and supporting the business to achieve our five point strategy.

Just as we are making progress on our five point strategy, we are also making progress on our commitment to improve our guidance and deliver on our commitments. Well, to summarize. We delivered a second solid quarter of top line growth as we continue to build momentum.

We made good progress executing our strategy and our Invigorate program remains firmly on track. As a result, we delivered 8% earnings per share growth and we are on track to meet our commitments for 2014.

And then finally, I would like to share, I look forward to seeing many of you at our upcoming Investor Day where we will provide some longer term perspective and deeper updates on our strategic plan. Now, we would be happy to take your questions.

Operator?.

(Operator Instructions) And our first question comes from Ricky Goldwasser. Sir, your line is open..

First, a quick question on the volume number. Mark, you talked about 1.5% organic volume figure for the quarter which I think is the best number that you have done for a very long time.

So can you just share with us, where are the volumes coming from? Are you seeing it from exchange population, Medicaid population, or are you starting to see improvement in core business utilization? And also just kind of the margins that are associated with the new business..

Thanks for the question Ricky. Couple of things. First off, organic volume was pretty flat year-over-year. What I talked about is, there were a couple of specific accounts that we had made a decision based on pricing to walk away from, earlier in the year. And what I said is, if you exclude those then that volume would have been up 1.5%.

But nonetheless, I think the important message is that organic volume trends continue to improve. And when we started in the beginning of 2013, minus 200 basis points, since then we have crossed the threshold to less than 100 basis points of decline. And now essentially organic volume has been flat in the most recent quarters.

So there is an improving trend. Where is that coming from? I think it's somewhat across the board by payer type. We did say there was some reduction in the uninsured. We had continued to see some modest growth in Medicaid. However, it's really in some of the growth past our franchises that we have talked about before.

So PDM continues to be an area of strength. Hepatitis C continues to be an area of strength. Obviously, we have launched our BRCA offering which is growing. So it's no single payer. I couldn’t certainly attribute it specifically to anything in the Affordable Care Act. Although, certainly it seems like it’s directionally positive.

So that’s what I would say is, it's continued growth in the areas that have been growing and just utilization picking up a little bit and then I think just our business gaining strength..

Okay. And just kind of like, one follow-up there. Obviously, I think last quarter you said that the impact on volume, once you normalize from the businesses you exit was about 1%. It seems like it is 1.5% now.

So is this a function of you exiting additional accounts, or is this just kind of like an impact of a full quarter of the same existing business that you have exited last quarter?.

It's the same account. It's not additional accounts. So it's really just the impact in this quarter was a little larger than the impact in the previous quarter, given the timing..

What you see though as you said it, is as we’ve said consistently, we are going to move step-by-step improving our underlying business. And you see some underlying improvement in the third quarter versus Q2. So we feel good about that..

Thank you. And our next question comes from Glen Santangelo. Sir, your line is open..

Steve, just wanted to follow up with you on some of the pricing comments that you made. It seems like the company also experienced a sequential improvement in organic pricing trends.

And so I am wondering if you could just maybe give us a little bit more color and clarity around what you are seeing in terms of Medicaid pricing? Any big commercial contracts coming up or what's really driven that slightly better organic pricing number?.

Yes, sure. Thanks, Glen. If you go back to 2012, we have been consistently talking about this.

We provided guidance that over a three-year period we expected real price, and when we say real price it’s really freezing other variables and just looking at unit price changes with contracts and Medicare, Medicaid reimbursement, would be reduced by 1% to 2%. It was higher in 2013.

And then what we also said is, we believe it's going to be lower this year into 2015. And we actually believe we are on track to achieve that guidance we provided. In that respect, we are seeing lower year-on-year comparisons on pricing, sequential year-on-year comparisons in price. Contractually, we have the visibility of this.

We don’t have any major renewals coming forward. We already shared with you the effect of the Clinical Lab Fee Schedule on our price this year, which was about 1.75% this year. And then also what we see overall if you look at revenue per req, is a mix in our business.

So when you go through that mix in our business which is different than what we talk about with price, this quarter and even compared to Q2 we saw a richer mix which generated revenue per req which was favorable. So, Mark, I don’t know if you would like to add to any of that..

Yes. I think Steve covered it. We said in the first quarter price was down about 100 basis points and second quarter about 80 basis points, and this quarter was down about 30.

I think it's a combination of the timing of contracts being more disciplined but also, quite frankly, putting more rigor into our pricing efforts across the organization on things such as client bill negotiations and things like that.

So I think as an organization we have really instilled a greater discipline around price and obviously we are also benefitting from the timing of contracts that we didn’t benefit from in 2013.

And then to Steve's mention of revenue per req, when you exclude the impact of acquisition mix as I said, revenue per req was actually up and so it was some slight price decline offset by some favorable tests and payer mix..

And maybe if I could just follow up with one sort of longer-term question on pricing. Obviously, a lot of questions around 2017 and the potential changes to the Clinical Lab Fee Schedule. And I think, Steve, you commented on some of the lobbying efforts that are going on.

Could you maybe give us some of your initial reactions with maybe how you see market pricing being defined by the regulations and who is included and who is excluded in that sort of market price? And are you sort of happy with the direction that’s heading as obviously it's going to have some impact on your business and I am just curious if there is any comments to kind of make, initial comments to make at this point.

Thank you..

Glen, I appreciate that. Well, as I said, we are working hard as a trade association. We are all working on this because it's very important. First of all, we are working with CMS on the rule making process to make sure we get it right.

And as a matter of fact a couple of weeks ago we were visiting CMS and we were talking through how they will gather the data. You cannot get a full view of the market without all the competitors in the market. And as I said in my introductory comments, that includes large independent labs like ourselves, smaller independents and hospital outreach.

We have been consistent on that and we are trying to work through just how we will collect the data from all those three pieces to get a real representative view on the market.

As you know, there is wide variation in pricing and actually we provided in the market from the trade association, a quick snapshot on what we believe the true market-based pricing would be by certain codes we did a sample on.

And we look at that actually, the CMS prices are not widely out of line from the median that we had sought on the market in that survey. So we will continue to work through the rule making process. They will gather the data in 2016. And Glen, until you gather the data you do not know what the results are.

But if we have a thorough process, a good process and we really gather the data to really get a market-based price, we believe that the outcome will be the outcome but it's not nearly as bad as what some people have intended.

But we have got some work in front of us to keep on working on this to get it right in the process and gather the data correctly and correctly represent that in the Clinical Lab Fee Schedule..

Thank you. And our next question comes from Mike Cherny. Sir, your line is open..

So I want to delve a little bit more into some of the commentary you had around the business that you walked away from. As you think about, I think you did this on pretty much contract by contract basis, but what are some of the metrics specifically? I assume it's not just price or just margin.

I mean how much of it is impacted by the return you got from the businesses. Maybe walk through some of the financial metrics that will cause you to say that this contract or this business is no longer for us..

Let me start and then I'm going to turn it to Mark. First of all, we're trying to build value as you would expect we would. And in building value we're trying to make sure that we drive earnings per share growth which you saw this quarter. And in that regard there is lots of levers and one of which is price.

And in our portfolio of our clients and our customers, and we have a wide range of customers and clients. And so what we have done in executing our plans is to take a careful look at all the business we do and to make sure we keep on getting as much value out of those accounts as possible.

So some of this I would describe it as hygiene to keep on working through our portfolio of businesses and some of the actions we have taken have helped us improve our margins and you see that reflected in this quarter's results.

But, Mark, why don't you add to that, specifically what have we adjusted for to get to 1.5% growth, when we adjust for these decisions we have made..

Yes, I think even Michael was asking also about the decision criteria.

So, yes, obviously the margin is a significant driver in the decision which of course is the outcome of price, with some variables depending on where the geographic location for that business is and therefore what are the other costs associated with it, such as logistics and so on and so forth.

What does the book of business look like in terms of the test mix and the payer mix. So there is a number of things that go into it. Pricing is the biggest driver in that margin decision but there are some cost variables as well that we look at.

I think the importance here in why we decided to share it was we wanted to send the message that not all volume is value creating volume and we are focused on value creating volume. And there is also some competitors in the marketplace that compete on price, that is not us.

And to the extent that we find ourselves in situations where the price is not rational, we are going to walk away and we are going to stick with our strategy. So that's really why we decided to share this.

It's not as much about in some way modeling a organic volume and suggesting it's different than what the actual results are, but helping people understand that volume alone is not going to give you margin and growth, your bottom line and your cash flow, but it's got to be value creating volume..

Thanks. And then just one quick question or quick thought on some of these hospital outsource arrangements. So obviously a new opportunity for you. Can you talk about how some of those conversations evolve? You talked about the midsized hospital on the East Coast.

What led them to decide to work with you and then over time what type of capacity you have to add on incremental types of these contracts?.

Yes. It comes to us in a lot of different ways, Mike. First of all, we have a sales force that's selling to about 50% of the hospitals. So we have good presence in all the hospital systems throughout the United States with our sales force. Second is, we have very good executive access.

And when we talk about this as part of our strategy, we have garnered a lot of interest from hospital executives. And quite often myself and a few of the leaders on this business are spending time discussing with hospital CEOs and typically there CFO, what their lab strategy is. And like so much in healthcare, you see one then you see one.

And so we sit down and we have a conversation about our lab strategy and we talk about the whole range of possibilities of different working relationships, where we can do reference work, we could buy your outreach business, we can form a joint venture. We can run your hospital laboratory, which we call laboratory management.

And we eventually end up with a place that is tailored to what they are trying to achieve in their system. And so the contracts and engagements we have announced, all are very different, all are quite different.

And I could tell you that some are small community hospitals and some discussions that we are having are large, very large integrated delivery systems that are substantially re-engineering what they are doing in healthcare. And as part of that they are thinking about where they put their resources and what's the best approach to laboratory services.

And in that respect we are generally thought of as a trusted partner and we could help them with that. So that’s the way we approach it..

And I just want to add, Mike, just to be clear. When you ask about capacity, certainly a lot of these deals come with reference work. So we may have been doing the reference work or we may be getting the reference work. But in many cases we are actually managing their work for us. So it's not additional strain on our lab capacity.

It's actually our capabilities to help them run their lab better together with our procurement leverage, is really where the value creation comes from. So it's not bringing all their in-house testing into the walls of our laboratory. It's actually running their lab for them with their people..

No, that’s very helpful..

Just to add to that. When we have a large hospital laboratory management deal, what we arrive at is an opportunity for them to save somewhere in the neighborhood of 10% to 15% on their hospital based laboratory cost.

And one potential strategy we deploy to get there is we take a portion of their menu and we actually move it to our geographic laboratory in the system. The more high volume oriented portion of their menu where we could still respond in an adequate way to meet the requirements of running their hospital.

And so it's good for us because as you know most of our laboratories are really in full force starting at midnight to 8 o'clock in the morning. And so during the day we actually have a lot of capacity idle and so it's an opportunity for us to use that capacity to help with this portion of our business..

Thank you. And our next question comes from David Clair. Sir, your line is open..

I guess the first one from me, just wondering, you spoke about the FDA regulation of LDTs.

So just curious, what your exposure there is and what do you think the cost would be to push these through for approval?.

Well, first of all as you all know, we are already regulated. So we already meet the requirements of CLIA. So we have already have oversight. And so the question that we all have as an industry is, why do we need more and some portion of this would be redundant with what we are already meeting.

And so there is a concern about how these two (indiscernible) as we go forward. And frankly the proposal in the language has been silent on that topic. Second is, in essence, what the language would say is that LDTs are devices, medical devices.

And when you meet the regs of medical devices, there are substantial changes in getting regulatory approval for new products and also having a quality system that meet those regs. We haven't provided the size of that for labs like ourselves but it's not insignificant. And there's two parts again.

There is one getting a new product to the marketplace and new solution to the marketplace and then second is, running your operation on a day to day basis. Our concern, particularly when new innovation comes to the marketplace is, what it would take for us to bring new innovation.

Particularly in the case where some laboratory developed tests may require a PMA for approval and that’s a lengthy drawn up process.

Where today we believe we can with good data, support that our LDTs we introduce to the marketplace are safe and efficacious and therefore do not require what a device manufacture would need, and that’s our position on it. So we haven't sized it. We haven't provided it. But it is substantial.

There is concern about the redundancy that we would have in this industry. And what we would like to do is to understand what we can do to bring these points forward as a trade association and we are doing that..

Okay. Thanks for that. And then I was just hoping that we could get a quick update on some of the women's health products.

So specifically, Pap volumes, BRCAvantage and IPT?.

Sure. Mark mentioned where we are getting some of our growth. Well, BRCA continues to grow. We are seeing nice sequential pickup in our offering in the marketplace. As you know, that’s a big market and a market that’s still growing and we are starting to gain some share. So we feel good about progress made there.

In non-invasive prenatal testing, we talked about our introduction of Sequenom's solution in the marketplace. We are seeing nice growth in that market.

And as far as Pap is concerned, we continue to see the slowdown of volumes quarter on quarter until we get to some normal steady state of volumes given the new clinical guidelines that are out there in the marketplace. So we still haven't quite bottomed out there yet..

Thank you. And our next question comes from Bryan Brokmeier. Sir, your line is open..

Steve, you said that you saw a richer mix of business.

Was any of that mix onetime in nature? Was it a trend of higher priced tests that you expect to continue? I assme the BRCA test is one positive factor there that should continue but are there others?.

Yes. So if you look at some of the growth we talked about, most of the products we are introducing in our clinical franchise is our new solutions that have higher prices. And so therefore if you look at the mix going forward, you should see some effect for that on a continual basis. So that’s some of it.

Second is, we did say that the acquisitions that we brought into the sector are revenue per req, and if you adjust for that we actually saw the improvement year-on-year. But there is nothing here that was one big one off if you will, if that’s what you are asking, that won't continue going forward.

Mark, you will like to add to that?.

Yes. Just to add to that. Steve talked about the fact that we had actually Tricare payments. But as we have said before, and I will confirm, it's not material. So it's good to see that. That’s a positive sign. But that was not an extraordinary catch up. It's not significant in terms of our overall revenue but still nice to see. So absolutely not.

This is really where the business is trending. There is nothing unusual and actually we would expect to see more growth in those higher value hence higher priced areas and favorable mix going forward. The one exception is, we've talked about our laboratory professional services does have a lower revenue per req.

So obviously depending on the timing of some of those deals, that could have a mix impact that goes the other direction. But as we have also stated that despite the lower margins, those are very attractive from a return on invested capital perspective. So still very value creating..

Okay.

And the unprofitable business that you walked away from, were these contracts that you had to terminate, were you able to renegotiate terms and similar agreements that you ended up not terminating? And are there more of these that you may walk away from in the current quarter or in the 2015?.

Yes. What I would say is, as Steve mentioned, we did some hygiene work. So we looked across our portfolio and we looked at some specific books of business that we didn’t think were creating acceptable value. We engaged with those parties around some pricing discussions, weren't able to come to a reasonable outcome in our onion.

And that was kind of a discrete exercise which I would call a portfolio rationalization. As we go forward, we are going to have the same discipline in any new offerings, any renegotiations etc. etc.

So there always could be, for the same reason, account that we walk away from because we say, hey, given your pricing position and the competitive price environment, this just doesn't make sense for us. However, I don't want anyone to think that there is going to be regular rhythm of exiting accounts.

This was really kind of a refresh of our portfolio and that’s we have taken the time to talk about it..

Thank you. And our next question comes from Darren Lehrich. Sir, your line is open..

So I just wanted to come back to the margin topic. It sounds like you clearly exited some unprofitable business that accelerated in the third quarter. And then Mark you are describing a little bit of a pick up from Tricare and I think you said in your prepared remarks that the deals were accretive in the second half versus dilutive.

So when we look at margins down year-over-year and sort of a stable pricing environment and some of the things you are describing.

What are some of the other factors at play with margin? Is it the mix of your hospital management business? Maybe just help us think about the margin decline year-over-year despite, I guess, some of the things you have described in the exited businesses which were a drag..

So obviously, Darren, margin is our total enterprise and when you look at despite the fact that the acquisitions were accretive, they are not yet to the margins of the ongoing organic business. So from a mix perspective year-over-year since we didn’t have those books of business, there is some negative mix impact.

We also reference the fact that, we have talked several times about the fact that management incentive comp would be a headwind this year because last year we didn’t pay out anywhere near the target and we are still accruing and hoping and expecting to pay out more to that target. So that’s a headwind as well. And then we have talked about inflation.

But with the $200 million we are getting from Invigorate, largely those two things, the inflation and the management comp, should be offset. So really what you are looking at here largely is a combination of the mix impact of the new book of business we have and then bad debt was up 40 basis points year-over-year.

And I would really say, those are really the contributors to that decline. So we feel good about the margin going forward, the margin profile.

Certainly also as you mentioned, some of these laboratory professional services which were really just starting to ramp up, initially just like an acquisition those margins are now or they are going to be in the long run because there is things to do to get those operationally to their long term margin.

So it's a lot of different pieces but we feel good about generally where our margin is heading..

Okay. No, that's helpful.

And then just remind us, again the management incentive comp, the year-over-year impact on margin from that?.

We haven't quantified it. But typically we said, hey, and previously if we get about $200 million of Invigorate savings, when you add merit inflation and I guess SWB inflation and the management comp, we had a big chunk of that was going to be taken up for both of those items. So it's not insignificant..

Okay. And then my follow-up here is just, as it relates to like your pathology. You mentioned some modest success with Tricare. We have been hearing that still a lot of the State Medicaid programs are challenging in terms of getting paid for molecular pathology.

So how much is still out there in terms of what was denied and can you just give us a brief update on how you are seeing the progress with some of the state programs..

Dan, why don't you take that one?.

Yes, Darren, we have said in the past the total molecular coding impact for us when you look at the umbrella of tests we're looking at, represented about 5% of consolidated revenues. That puts an umbrella over the entire amount.

When you look at this and that 5% across all payers, okay, commercial payers, government payers, etc., we continue to work through this with all the payers, commercial payers as well as government. And on the Medicaid program, that's state by state and its code by code.

So we are engaging in different discussions in different states and a different levels of success. We spoke to one state last year that had overturned their position and started to reimburse on a particular code late in last year. So there was a positive sign there. Other states have been more challenged to move the bar with that.

But it's something we continue to work on and we look at. The state we reference last year, we look at the Tricare scenario here that we talked about earlier today, is two good proof points and we will continue to work the issue one payer at a time..

Thank you. And the next question comes from Isaac Ro. Sir, your line is open..

Just wanted to a question about fourth quarter seasonality. You know we have seen an uptick in healthcare utilization across the board, I think in the fourth quarter for the last few years. And I'm wondering if your guidance for the rest of the year assumes that that trend will continue or perhaps increase this fourth quarter..

Mark, why don't you take a [shot at] (ph) seasonality we see in Q4 typically?.

Yes. Obviously, when we model any given quarter, we model the year, we take into account historical performance. So any sort of seasonality we may or may not have seen would be one of the basis for our forecast. So I don't think we are expecting any significant deviation from our quarterly pattern.

So really what's driving Q4 is where we see the business trending, both in terms of some of the growth areas, some of the areas that may be a little drag like Paps. And then things like potential for laboratory professional service in fields and so on and so forth.

So we are expecting a, I think as we get into this time of year, a average weather month. So we certainly have built in, based on history, some sort of weather impact. But nothing extraordinarily good or nothing extraordinarily bad at this point..

If I could just scratch you a little bit there. I mean what is different this year then of course the enrollment for ACA and all that is changing. Deductibles and cost burdens and so forth. So there is plenty of reason to think that people might be deferring utilization till the end of the year and all that.

So I am just curious, as you think about forecasting, that was a meaningful change to your process?.

That certainly, I think could be within the trends we have already seen from the third quarter, some of that. Maybe more pronounced in Q4, given, hey, I got a procedure better I do it in December than January. Is it material enough at this point? Is it materially different enough from what it has been historically? Don’t know.

We have not certainly built anything that’s a major shift change. So, yes, I think that dynamic has always existed with people that have high deductible plans and certainly the trend has been more and more private plans as well have a high deductible feature.

So we have not assumed any major impact from the Affordable Care Act that will kind of skew fourth quarter. And if it's upside, we will be pleasantly pleased as much as anybody else..

Thank you. And our next question comes from Amanda Murphy. Ma'am, your line is open..

I just had a follow-up on the PMA discussion.

So in terms of the inclusion or exclusion of hospitals, do you have a sense of how CMS is looking at some of the new bundling legislation that they have proposed for 2015 as part of [hops] (ph)? Does that meaningfully impact who from a hospital perspective may or may not be included in who is providing data for the 2017 pricing?.

Yes. It's a good question, Amanda. Bundled payments in hospital in-patient obviously is a cost for hospitals and therefore when you think about their revenues, as a matter of fact if you look at the language that was in the bill, it says the majority of their Medicare revenues are from the Clinical Lab Fee Schedule.

And if you are running a hospital outreach, that’s the majority of your lab revenues to Medicare therefore they should be included. So the bundle side and the in-patient DRG side of hospital in-patient laboratories is part of the cost of doing business of running that hospital.

And really what we are looking at is that outreach portion of that should be included because that is the market as we all know..

And is that still roughly about a third of the hospital market. I think that’s what the data suggested historically in terms of just outreach..

It depends on what -- but if you look at the market, it's roughly about 40% of the total market, this hospital outreach..

Okay..

The total market. And the rest is independent laboratories, big and small..

Got it. And then on the molecular, the Tricare and the low Pap pricing situation.

I don’t know if I am -- maybe this is a bit of wishful thinking, but have you guys got any sense of whether you might get anything from a retroactive perspective at this point?.

Mark, you want to take that?.

Yes. I don’t. I think we have been pretty consistent and we don’t expect any major windfalls from retroactive reimbursement. So even on Tricare, we mentioned that we were getting paid for a portion of Tricare all along for the active military personal. Many of these were covered. It was really for the retirees of the family members.

So it's not as if we are getting paid nothing. And so once in a while you may get a windfall, like in 2013 we mentioned there was one state that started reimbursing for cystic fibrosis and it went retroactively back to the beginning of the year.

But still you are talking about small millions not anything in the tens of millions or anything that would be materially significant..

Thank you. And our next question comes from Robert Willoughby. Sir, your line is open..

Hey, Steve or Mark, just two quick ones. Can you comment at all on the Solstas revenue retention rate and possibly could you size the fuel opportunity year-over-year.

What kind of benefit might you see there?.

Yes. So first of all, we are pleased with the integration of Solstas, we said that in our introductory comments. We are working nicely through our integration work which we feel good about. As we mentioned, many of these acquisitions we justify the business case based upon cost synergies. And we are integrating Solstas nicely into our operation.

We feel good about that. As we make the transition, we have integrated two separate sales forces into one. We feel good that that has happened in an orderly way and in general we are tracking to what our business plan was for that business so far. And as we said, it's accretive along with other acquisitions this quarter. So we feel good about that.

And also in the back half we expect that to continue.

So, Mark, anything you would like to add?.

No. I mean as Steve mentioned, we are tracking pretty much on our business case.

And as we have shared in the past when we model these kind of acquisitions for conservatism, we do build in some level of attrition in each of these deals because despite of our best efforts to not lose any of those accounts, history has demonstrated that there are various reasons why you will get some attrition.

So I would say, right now Bob, like Steve shared, we are pretty much on track to our business case..

Okay.

And the fuel?.

You mean fuel for growth in 2015?.

No, I am sorry. Just gasoline prices being down, it's not a huge opportunity, but....

Yes. I mean certainly that’s better news than we would have thought six month ago or so. So, yes, we are still in the process, Bob, and obviously I am not going to talk about any guidance or anything else for 2015. We are still in the process of putting up plans together for 2015.

But certainly that’s a good tailwind at least for now since we have a large fleet and certainly that should be helpful..

We are talking pennies though not dimes, correct?.

Yes. Yes..

Thank you. And our next question comes from A.J. Rice. Sir, your line is open..

First, just maybe quick, to ask you about your thoughts with respect to share repurchases. Obviously, last year was a year where you took in a lot of proceeds from asset sales and licensing agreements and this year has been one more characterized by acquisitions.

Within the context of that, do you have any sort of way to articulate your view on -- update your view on share repurchase and how they fall out in the capital deployment mix?.

Yes. Well, look, capital deployment commitment is the same. That is to return the majority of our free cash flow to our shareholders. We have been standing by that. And that will continue. You saw our purchases this quarter, Mark will give you an update on what we have done year-to-date.

Also as you know, we feel like share repurchases were heavier in 2012 and 2013 and the acquisitions were heavier in '13. If you look at the two together, it's pretty consistent, pretty good weight based upon the two little heavier acquisitions where we took out the debt.

But we stand behind our commitment of returning the majority of our free cash flow and we are tracking well against that and we saw a good cash flow this quarter to support that.

So Mark?.

A.J., for this year, I talked about the need to delever, post the Solstas acquisition. As we mentioned, we paid down $90 million in the most recent quarter. So we do have a commitment to get down closer to the 2.5 rate from a spike of up to 3. We were at it post Summit acquisition. So we have been making it a priority to pay down debt.

In terms of what we are going to be doing going forward at the investor day, I am going to talk a little bit about the philosophy and some potential outcomes in terms of paying down further debt or getting to that leverage ratio. And then obviously when we give guidance for 2015, I will get specifically around what our intents would be and....

Okay. And I guess at this point in the call, I'll take the bait and ask you the obligatory question about Theranos.

Is there any update that you are seeing in their posture in the marketplace that you would want to share? And I know you've said from time to time you would be open to talking to them if they had any interest in talking to you about what they have and how you might work to collaborate.

Any update in any of those areas?.

No, A.J. No new news on what they are doing in the marketplace. Essentially they are running some pilots in a couple of locations. As a laboratory, again, what they have presented in the past to the market is some disruptive approach to some routinely provided diagnostics.

If in fact they have a disruptive technology, we are all for it, listening about that. And one would hope that a company that had something like that would like to talk to one of the largest providers of diagnostic informational services. But no news to share on that other than what you have probably heard and we have said so far..

Thank you. And our last question comes from Gary Taylor. Sir, your line is open..

Most of my questions' answered, so I'll do just one quick one here and let you go. I wanted to talk about restructuring charges for a second and $48 million this quarter over $100 million year-to-date. I guess, presumably the fourth quarter has some assumption about $20 million-$30 million perhaps of excluded charges.

I just wanted to understand, what's the glide path over the next couple years as your cost saving programs mature and come to fruition? Are we still looking at hundreds of millions of dollars of one timers to get to that or is there glide path for that diminishes maybe more quickly than that?.

Yes. So, Gary, I appreciate the question. Really not in a position to comment on the future at this moment. At the investor day we are going to talk about the next stage for Invigorate. And as part of that, we will lay out not just the benefits but also the required investment, both capital and expense.

I do want to mention that the adjustments this quarter were not all restructuring. Certainly there was a significant integration and you could imagine with an acquisition the size of Solstas, as we have mentioned it typically takes 18 months to complete that integration.

And you might imagine that the first six to nine months is where you have a significant amount of those integration onetime expenses. We did just open up our lab in Marlborough, Massachusetts and with that we are moving out of some other facilities. We did have some one timers there to get into that new facility.

And then finally we did have some legal expenses, onetime legal expenses and those adjustments as well. So they are not all restructuring per say. I want to be clear. And there is not -- certainly you should not look at this quarter as kind of being a consistent representation of the kind of expenses that we will be adjusting out going forward.

It really depends on all those different factors and what's going on in the business..

Any other questions? Okay, if not, as I said in my introductory comments, we had our second solid quarter of top line growth and we continue to build momentum. We are doing a good job executing against our strategy and we look forward to seeing many of you on our Investor Day on November 5th in New York City. So thank you all and talk to you soon..

Thank you for participating in the Quest Diagnostics third quarter 2014 conference call. A transcript of prepared remarks on this call will be posted later today on Quest Diagnostics' Web site at www.questdiagnostics.com.

A replay of the call may be accessed online at www.questdiagnostics.com/investor or by phone at (888) 566-0486 for domestic callers or (203) 369-3611 for international callers. Telephone replays will be available from 10:30 A.M. Eastern time today until midnight Eastern time on November 23, 2014. Thank you and goodbye..