EX-99.1 2 exhibit991-10x12ba.htm EX-99.1 Document

Exhibit 99.1
labcorplogo.jpg
358 South Main Street
Burlington, North Carolina 27215
United States
Adam Schechter
Chairman, President and Chief Executive Officer
                , 2023
Dear Fellow Labcorp Stockholder:
We are pleased to inform you that the board of directors of Laboratory Corporation of America® Holdings (“Labcorp”) has approved the spinoff to stockholders of our Clinical Development and Commercialization Services business. The Clinical Development and Commercialization Services business will be transferred to Fortrea Holdings Inc. (“Fortrea”), a newly incorporated Delaware corporation, and its shares will be distributed to Labcorp stockholders on  June 30, 2023 as a pro rata distribution intended to be tax-free to our stockholders for U.S. federal income tax purposes, except to the extent of any cash received in lieu of fractional shares.
Fortrea will be a leading global contract research organization providing comprehensive phase I through IV biopharmaceutical product and medical device services, patient access solutions and other enabling services to pharmaceutical, biotechnology and medical device organizations. Its common stock will be listed on The Nasdaq Stock Market LLC under the symbol “FTRE.”
As a Labcorp stockholder, you will receive one share of Fortrea common stock for every share of Labcorp common stock you hold as of the record date.
Stockholder approval of the distribution is not required, nor are you required to take any action to receive your Fortrea common shares.
Following completion of the spinoff, Labcorp common shares will continue to trade on the New York Stock Exchange under the symbol “LH” and Labcorp will remain a global leader advancing healthcare through science, innovation and technology with deep scientific expertise, vast health data and insights, and an extensive, advanced global laboratory network.
We invite you to learn more about Fortrea and the spinoff by reviewing the enclosed information statement, which contains important information about Fortrea, including financial information.
Thank you for your continued support of Labcorp and your future support of Fortrea.

Sincerely,
Adam Schechter
Chairman, President and Chief Executive Officer
Laboratory Corporation of America® Holdings
Enclosure


fortrea_logoxxgreen-black.jpg
8 Moore Drive
Durham, NC 27709
United States
Thomas Pike
Chairman and Chief Executive Officer
                , 2023
Dear Future Fortrea Stockholder:
I am excited to welcome you as a future stockholder of Fortrea Holdings Inc. (“Fortrea”). Fortrea will hold Labcorp’s Clinical Development and Commercialization Services business, and will be a leading global contract research organization providing phase I through IV biopharmaceutical product and medical device services, patient access solutions and other enabling services to global pharmaceutical, biotechnology and medical device organizations.
Following the spinoff, Fortrea will be positioned to:
•capitalize on growth opportunities across phases I through IV clinical trials and extend its leadership in oncology, cell and gene therapy, rare disease, and other emerging therapeutic areas;
•increase agility with large pharmaceutical and biotechnology clients, ranging from industry leaders to emerging organizations, to better serve customers and advance life-saving therapies;
•utilize access to Labcorp’s vast health and clinical data set through an arrangement which will enable it to provide enhanced trial execution and a differentiated value proposition;
•continue to invest in capabilities, technologies, diverse talent and innovation to enhance trial execution and better serve all of its customers; and
•implement a capital structure that is tailored to support its growth strategy and enhance stakeholder value.
Fortrea’s common stock will be listed on The Nasdaq Stock Market LLC under the symbol “FTRE.”
We look forward to our future as an independent, publicly traded company and to your support as a stockholder of Fortrea.
Sincerely,
Thomas Pike
Chairman and Chief Executive Officer
Fortrea Holdings Inc.
Enclosure


Information contained herein is subject to completion or amendment. A Registration Statement on Form 10 relating to these securities has been filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended.
Subject to Completion, dated June 8, 2023
INFORMATION STATEMENT
Fortrea Holdings Inc.
Shares of Common Stock
Laboratory Corporation of America® Holdings (“Labcorp”) is sending this information statement to its stockholders in connection with the pro rata distribution of all the outstanding shares of Fortrea Holdings Inc.’s (“Fortrea”) common stock to holders of Labcorp’s common stock. As of the date of this information statement, Labcorp wholly owns Fortrea.
On July 28, 2022, Labcorp announced a plan to pursue a separation of its Clinical Development and Commercialization Services business from Labcorp through a spinoff (the “spinoff”). Holders of Labcorp’s common stock will be entitled to receive one share of Fortrea common stock for every share of Labcorp common stock owned as of 5:00 p.m., Burlington, North Carolina time, on the record date, June 20, 2023. The distribution date for the spinoff will be June 30, 2023 (the “distribution date”). After the spinoff, Fortrea will be an independent, publicly traded company. The spinoff is intended to be tax-free to Labcorp and its stockholders for U.S. federal income tax purposes, except, in the case of stockholders, to the extent of any cash received in lieu of fractional shares.
You will not be required to pay anything for the Fortrea common stock that will be distributed to you or to surrender or exchange your Labcorp common stock to receive Fortrea common stock in the spinoff. The spinoff will not affect the number of shares of Labcorp common stock that you hold. Immediately following the spinoff, your proportionate interest in Fortrea will be identical to your proportionate interest in Labcorp (as adjusted for any fractional shares). Fortrea common stock will be issued in book-entry form only, which means that no physical stock certificates will be issued. No approval by Labcorp stockholders of the spinoff is required or is being sought. You are not being asked for a proxy and you are requested not to send a proxy.
As discussed under “The Spinoff—Trading of Labcorp Common Stock After the Record Date and On or Prior to the Distribution,” if you sell your Labcorp common stock in the “regular way” market after the record date and before or on the distribution date, you will be selling your right to receive Fortrea common stock in connection with the spinoff. You are encouraged to consult with your financial advisor regarding the specific implications of selling your Labcorp common stock before or on the distribution date.
There is no current trading market for Fortrea common stock. However, we expect that a limited market, commonly known as a “when-issued” trading market, for Fortrea common stock will begin on or about June 16, 2023, and we expect that “regular way” trading of Fortrea common stock will begin the first day of trading after the distribution date. We have applied to list Fortrea common stock on The Nasdaq Stock Market LLC (“NASDAQ”) under the symbol “FTRE.” The spinoff is contingent upon the acceptance of the Fortrea common stock for listing on a national securities exchange approved by Labcorp, such as NASDAQ, subject to official notice of issuance.
In reviewing this information statement, you should carefully consider the matters described under the caption “Risk Factors ” beginning on page 26 of this information statement.
Neither the Securities and Exchange Commission (the “SEC”) nor any state securities commission has approved or disapproved these securities or determined if this information statement is truthful or complete. Any representation to the contrary is a criminal offense.
This information statement does not constitute an offer to sell or the solicitation of an offer to buy any securities.
Labcorp first mailed this information statement to its stockholders on or about                 , 2023.
The date of this information statement is              , 2023.


Table of Contents
Page
-i-

Presentation of Information
Unless we otherwise state or the context otherwise indicates, all references in this information statement to “Fortrea,” “us,” “our,” or “we” mean Fortrea Holdings Inc. and its subsidiaries, and all references to “Labcorp” mean Laboratory Corporation of America® Holdings and its subsidiaries, other than, for all periods following the spinoff, Fortrea. When referenced individually, the Clinical Development and Commercialization Services business will refer to the business pre-spinoff, and Fortrea will refer to the business post-spinoff, unless the context otherwise specifies.
The term “GAAP” refers to generally accepted accounting principles in the United States of America (the “U.S.”).
The transaction in which Fortrea will be separated from Labcorp and become an independent, publicly traded company is referred to in this information statement as the “spinoff” and the “separation.” The pro rata distribution of Fortrea common stock to stockholders of Labcorp to affect to the spinoff is referred to in this information statement as the “distribution.”
This information statement is being sent solely to provide information to Labcorp stockholders who will receive Fortrea common stock in connection with the spinoff. It is not provided as an inducement or encouragement to buy or sell any securities. You should not assume that the information contained in this information statement is accurate as of any date other than the date set forth on the cover. Changes to the information contained in this information statement may occur after that date, and we undertake no obligation to update the information contained in this information statement, unless we are so required by applicable securities laws.
Trademarks and Copyrights
We use various trademarks, service marks, trade names, and brand names, such as Fortrea, endpoint, FSPx, and Xcellerate, that we deem particularly important to the advertising activities and operation of our business, and some of these marks are registered or pending registration in the U.S. and, in some cases, other jurisdictions. This information statement may also refer to the brand names, trademarks, or service marks of other companies. All logos, trademarks, service marks, trade names, brand names, and copyrights cited in this information statement are the property of their respective holders. For convenience, we may not include the SM, ®, ™ or © symbols, but such omission is not meant to indicate that we would not protect our intellectual property rights to the fullest extent allowed by law.
Market and Industry Data
This information statement includes estimates regarding market and industry data and forecasts, which are based on publicly available information, industry publications and surveys, reports from government agencies, reports by market research firms, and our own estimates based on our management's knowledge of, and experience in, the markets in which we compete. This information cannot always be verified with complete certainty due to the limits on the availability and reliability of raw data, the voluntary nature of the data gathering process, and other limitations and uncertainties inherent in surveys of market size. Furthermore, all of this information involves a variety of assumptions, limitations, and methodologies and is inherently subject to uncertainties, and therefore you are cautioned not to give undue weight to these estimates.
-ii-
QUESTIONS AND ANSWERS ABOUT THE SPINOFF
Q:What is the spinoff?
 
A:The spinoff is the method by which Fortrea will separate from Labcorp. To complete the spinoff, Labcorp will distribute, pro rata and as a dividend to its stockholders, all of the shares of Fortrea common stock that it owns. Following the spinoff, we will be an independent, publicly traded company, and Labcorp will not retain any ownership interest in us. You do not have to pay any consideration or give up any portion of your Labcorp common stock to receive our common stock in the spinoff.
 
Q:What is the expected date for the completion of the spinoff?
A:
The completion and timing of the spinoff are dependent on a number of conditions, but if the conditions are timely met, we expect the spinoff to be completed on June 30, 2023. See “The Spinoff—Spinoff Conditions and Termination.”
Q:What are the reasons for the spinoff?
A:Labcorp’s Clinical Development and Commercialization Services business operates largely autonomously, although it and Labcorp have benefited by sharing executive management and some overhead costs. Among other benefits, the spinoff is expected to provide each of Labcorp and Fortrea with strengthened strategic flexibility and operational focus to pursue specific market opportunities and better meet customer needs, focused capital structures and capital allocation strategies to drive innovation and growth, a more targeted investment opportunity for different investor bases, the ability to align its particular incentive compensation with its financial performance, and an improved ability to use its equity as consideration for beneficial acquisitions. Labcorp expects that the spinoff will result in enhanced long-term performance of the businesses held by both Labcorp and Fortrea. For more information, see “The Spinoff—Reasons for the Spinoff.”
Q:What is the Company?
A:The Company is a Delaware corporation that was formed on January 31, 2023 for the purpose of holding the Fortrea businesses following the spinoff. Prior to the transfer by Labcorp of these businesses, which will occur in connection with the spinoff, we will have had no operations other than those incidental to our formation or undertaken in preparation for the spinoff.
Q:Who will manage Fortrea after the separation?
A:We will benefit from an experienced leadership team after the separation. Thomas Pike, who served as President and Chief Executive Officer of the Drug Development, Clinical Development and Commercialization Services business unit of Labcorp since January 2023, will serve as our Chief Executive Officer bringing his 30+ years of industry experience to the job. Jill McConnell, the Chief Financial Officer of the Drug Development, Clinical Development and Commercialization Services business unit of Labcorp, will be appointed as our Chief Financial Officer in connection with the spinoff. Additionally, Mark Morais, President of Clinical Development and Commercial Solutions, within Labcorp Drug Development, and Chief Operating Officer and President of Labcorp Clinical Development, will serve as our Chief Operating Officer and President, Clinical Services.

Mr. Pike will serve as Chairman of our board of directors. We will also benefit from the knowledge, experience, and skills of our full board of directors and officers. For more information regarding our management team and our board of directors following the separation, see “Management.”
Q:What is being distributed in the spinoff?
A:
Labcorp will distribute one share of Fortrea common stock for every share of Labcorp common stock outstanding as of the record date for the spinoff. The number of Labcorp shares you own and your proportionate interest in Labcorp will not change as a result of the spinoff. Immediately following the spinoff, your proportionate interest in Fortrea will be identical to your proportionate interest in Labcorp (as adjusted for any fractional shares).
1
Q:What is the record date for the spinoff, and when will the spinoff occur?
A:
The record date is June 20, 2023, and ownership is determined as of 5:00 p.m., Burlington, North Carolina time, on that date. Fortrea common stock will be distributed on the distribution date, June 30, 2023.
Q:Can Labcorp decide to cancel the spinoff even if all the conditions have been met?
A:Yes. The spinoff is subject to the satisfaction or waiver by Labcorp, at the direction of its board of directors, of certain conditions, including, among others, approval of the Labcorp board of directors, declaration of the effectiveness of our registration statement on Form 10 of which this information statement is a part, and receipt of (i) a private letter ruling from the U.S. Internal Revenue Service (the “IRS”) regarding certain U.S. federal income tax matters relating to the spinoff and certain related transactions (which Labcorp has received) and (ii) an opinion of tax counsel regarding the qualification of the spinoff and certain related transactions as generally tax-free, for U.S. federal income tax purposes, under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended (the “Code”). See “The Spinoff—Spinoff Conditions and Termination.” Even if all the conditions are met, Labcorp has the right not to complete the spinoff if, at any time prior to the distribution, the board of directors of Labcorp determines, in its sole and absolute discretion, that the spinoff is not in the best interests of Labcorp or its stockholders, that a sale or other alternative is in the best interests of Labcorp or its stockholders, or that market conditions or other circumstances are such that it is not advisable to separate the Fortrea business from Labcorp at that time. In the event Labcorp, at the direction of its board of directors, amends, modifies, or abandons the spinoff, Labcorp will notify its stockholders in a manner reasonably calculated to inform them of such modifications or abandonment with a press release, Current Report on Form 8-K, or other similar means.
Q:Can Labcorp waive conditions and still proceed with the spinoff?
Yes. Labcorp may waive conditions to the spinoff in its sole discretion and proceed with the spinoff even if such conditions have not been met. If the spinoff is completed and the Labcorp board of directors waived any such condition, such waiver could have a material adverse effect on (i) Fortrea’s and Labcorp’s respective business, financial condition or results of operations, (ii) the trading price of Fortrea’s common stock, (iii) the ability of stockholders to sell their Fortrea shares after the distribution, including, without limitation, as a result of (a) illiquid trading if Fortrea common stock is not accepted for listing or (b) litigation relating to any injunctions sought to prevent the consummation of the spinoff or (iv) the tax consequences of the spinoff. In the event Labcorp, at the direction of its board of directors, waives a material condition or amends or modifies the spinoff or the ancillary agreements entered into thereto, Labcorp will evaluate the applicable facts and circumstances at that time and make such additional disclosure and take such other actions as Labcorp determines to be necessary and appropriate in accordance with applicable law.
Q:As a holder of Labcorp common stock as of the record date, what do I have to do to participate in the spinoff?
A:
You are not required to take any action to participate in the spinoff, although you are urged to read this entire document carefully. You will receive one share of Fortrea common stock for every share of Labcorp common stock held as of the record date and retained through the distribution date. You may also participate in the spinoff if you purchase Labcorp common stock in the “regular way” market after the record date and retain your Labcorp common stock through the distribution date. See “The Spinoff—Trading of Labcorp Common Stock After the Record Date and On or Prior to the Distribution.”
2
Q:If I sell my shares of Labcorp common stock before or on the distribution date, will I still be entitled to receive shares of Fortrea common stock in the spinoff?
A:
If you own shares of Labcorp common stock on the record date and hold such shares through the distribution date, you will receive one share of Fortrea common stock for every share of Labcorp common stock held as of the record date and retained through the distribution date. However, if you sell shares of Labcorp common stock after the record date and before or on the distribution date, you will also be selling your right to receive shares of Fortrea common stock in connection with the spinoff. See “The Spinoff—Trading of Labcorp Common Stock After the Record Date and On or Prior to the Distribution.” You are encouraged to consult with your financial advisor regarding the specific implications of selling your Labcorp common stock before or on the distribution date.
Q:How will fractional shares be treated in the spinoff?
A:Any fractional shares of common stock otherwise issuable to you will be sold on your behalf, and you will receive a cash payment with respect to that fractional share. For an explanation of how the cash payments for fractional shares will be determined, see “The Spinoff—Treatment of Fractional Shares.”
Q:Will the spinoff affect the trading price of my Labcorp common stock?
A:Yes, the trading price of Labcorp common stock immediately following the spinoff is expected to be lower than immediately prior to the spinoff because the trading price of Labcorp’s common stock will no longer reflect the value of Fortrea and Labcorp. However, we cannot provide you with any guarantees as to the prices at which the Labcorp common stock or Fortrea common stock will trade following the spinoff.
Q:Will my Labcorp common stock continue to trade on a stock market?
A:Yes, Labcorp common stock will continue to be listed on NYSE under the symbol “LH.”
Q:What are the U.S. federal income tax consequences to me of the distribution of shares of Fortrea common stock pursuant to the spinoff?
A:Labcorp has received a private letter ruling (the “IRS Ruling”) from the IRS on certain issues relevant to
the qualification of the spinoff and certain related transactions as tax-free under Sections
368(a)(1)(D) and 355 of the Code, based on certain facts and representations set forth in such request.
The IRS Ruling does not address all of the requirements for tax-free treatment of the spinoff, and the
spinoff is conditioned upon, among other things, Labcorp’s receipt of an opinion of tax counsel regarding the qualification of the spinoff and certain related transactions as generally tax-free, for U.S. federal income tax purposes, under Sections 355 and 368(a)(1)(D) of the Code. Assuming that the spinoff so qualifies, for U.S. federal income tax purposes, you will not recognize any gain or loss, and no amount will be included in your income in connection with the spinoff, except to the extent of any cash received in lieu of fractional shares. See “The Spinoff—Material U.S. Federal Income Tax Consequences of the Spinoff.” You should consult your tax advisor as to the particular consequences of the spinoff and related transactions to you, including the applicability and effect of any U.S. federal, state and local tax laws, as well as any foreign tax laws.
3
Q:When will I receive my shares of Fortrea common stock? Will I receive a stock certificate for my shares of Fortrea common stock distributed as a result of the spinoff?
A:Registered holders of Labcorp common stock who are entitled to participate in the spinoff will receive a book-entry account statement reflecting their ownership of Fortrea common stock, which means that no physical stock certificates will be issued. For additional information, registered stockholders in the U.S., Canada, or Puerto Rico should contact Labcorp’s transfer agent, American Stock Transfer & Trust Company, at (800) 937-5449 or through email at help@astfinancial.com. Stockholders located outside the U.S., Canada, and Puerto Rico may call +1 (718) 921-8137. If you would like to receive physical certificates evidencing your shares of Fortrea common stock, please contact Fortrea’s transfer agent. See “The Spinoff—When and How You Will Receive Fortrea Shares.”
Q:What if I hold my shares of common stock through a broker, bank, or other nominee?
A:Labcorp stockholders who hold their shares of common stock through a broker, bank, or other nominee will have their brokerage account credited with shares of Fortrea common stock. For additional information, those stockholders should contact their broker, bank, or other nominee directly.
Q:What if I have stock certificates reflecting my shares of Labcorp common stock? Should I send them to the transfer agent or to Labcorp?
A:You should not send your stock certificates to the transfer agent or to Labcorp. You should retain your Labcorp stock certificates.
Q:Will Fortrea incur any debt or enter into any financing arrangements prior to or at the time of the spinoff?
A:
In connection with the spinoff, we expect to incur indebtedness in an aggregate principal amount of approximately $1,640 million, which we expect to consist of borrowings under senior secured term loan facilities and senior secured notes. We also expect to enter into a $450 million senior secured revolving credit facility, which we do not expect to borrow under prior to the spinoff, and an accounts receivable purchase program (“ARPP”), which we also do not expect to take advantage of, other than in a testing capacity, prior to the spinoff. The ARPP establishes a receivables purchase facility that provides for up to approximately $80 million in funding based on the availability of certain eligible receivables and the satisfaction of certain conditions.

We expect to use the proceeds from these debt and other financing transactions to make an expected $1,605 million cash distribution to Labcorp as partial consideration for the assets that will be contributed to us in connection with the spinoff. After giving effect to such payment and approximately $35 million of associated fees and expenses incurred in connection with the entry into the above, we expect to begin operations as an independent company with a cash balance of approximately $120 million. The cash benefit to Labcorp of the dividend offset by the operating cash at spin is expected to be $1,485 million.

Our capital structure, including the terms and conditions thereof, remains under review and will be finalized prior to the spinoff. Once finalized, disclosure regarding our capital structure will be provided in a current report on Form 8-K prior to the consummation of the spinoff. See “Capitalization,” “Unaudited Pro Forma Combined Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity, Capital Resources and Financial Position” and “Description of Certain Indebtedness and Other Financing.” For more information about risks related to our capital structure see “Risk Factors—We may not be able to access the capital and credit markets on terms that are favorable to us, or at all” and “Risk Factors—The terms and conditions of our expected new senior secured term loan facilities, senior secured revolving credit facility, the indenture governing our senior secured notes and the agreement governing the ARPP have not been finalized.”
Q:Are there risks to owning common stock of Fortrea?
A:Yes. Ownership of Fortrea common stock is subject to both general and specific risks relating to Fortrea’s business, the industry in which it operates, its ongoing contractual relationships with Labcorp, and its status as a separate, publicly traded company. Ownership of Fortrea common stock is also subject to risks relating to the spinoff. See “Risk Factors.”
4
Q:What will govern my rights as a Fortrea stockholder?
A:
Your rights as a Fortrea stockholder will be governed by Delaware law, as well as our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws. Below please find a table that outlines the specific material differences between the rights of the holders of Labcorp’s common stock and Fortrea’s common stock at the time of the distribution:

screenshot2023-05x13064333.jpg

Other than the material differences outlined above, at the time of the distribution, we expect that there will be no other material differences between the rights of the holders of Labcorp’s common stock and the holders of Fortrea’s common stock. For additional details regarding the Fortrea stock and Fortrea stockholder rights, including the fact that rights denoted with a “*” will expire at the annual meeting of stockholders to be held in 2028, see “Description of Capital Stock.”
Q:Does Fortrea intend to pay cash dividends?
A:We do not currently expect to declare or pay dividends on our common stock for the foreseeable future. Instead, we intend to retain earnings for use in the operation and expansion of our business. Any future payment of dividends will be at the discretion of our board of directors and will depend upon various factors then existing, including earnings, financial condition, results of operations, capital requirements, level of indebtedness, contractual restrictions with respect to payment of dividends, restrictions imposed by applicable law, general business conditions, and other factors that our board of directors may deem relevant. See “Dividend Policy.”
Q:Will Fortrea common stock trade on a stock market?
A:Yes. Currently, there is no public market for our common stock. We have applied to list our common stock on NASDAQ under the symbol “FTRE.” We cannot predict the trading price for our common stock when such trading begins.
5
Q:What will happen to Labcorp stock options, restricted stock, performance stock unit awards, restricted stock units, and deferred stock unit awards?
A:Generally, outstanding Labcorp equity awards held by employees of Fortrea will be converted into Fortrea equity awards, and outstanding Labcorp equity awards held by employees of Labcorp will remain Labcorp equity awards. As of the distribution date, (i) the exercise price and number of options subject to each outstanding Labcorp stock option award will be adjusted in a manner intended to provide the same value from immediately before the spinoff to immediately after the spinoff, (ii) each restricted stock unit award that is held immediately prior to the spinoff by any employee of Fortrea will be converted into a respective restricted stock unit award denominated in shares of our common stock; and (iii) each outstanding performance share award that is held immediately prior to the spinoff by any employee of Fortrea will be treated as follows: (a) performance share awards for the 2021 to 2023 performance period will be converted into time-based restricted stock units denominated in shares of our common stock based on achievement of performance goals as determined by the Compensation and Human Capital Committee (the “Labcorp Compensation Committee”) of Labcorp’s board of directors immediately prior to the spinoff; (b) performance share awards for the 2022 to 2024 performance period will be converted into awards denominated in shares of our common stock, with 50% of the target number being converted into time-based restricted stock units based on achievement of performance goals as determined by the Labcorp Compensation Committee immediately prior to the spinoff and the remaining 50% of the target number being converted into performance shares of Fortrea subject to the achievement of performance criteria established by the Labcorp Compensation Committee, and subject to further review and modification by Fortrea in its discretion; and (c) performance share awards for the 2023 to 2025 performance period shall be converted into performance shares of Fortrea subject to the achievement of performance criteria established by the Labcorp Compensation Committee, and subject to further review and modification by Fortrea in its discretion. Each of our converted awards will generally be subject to the same terms, vesting conditions and other restrictions that applied to the original Labcorp award immediately before the spinoff except that performance-vesting conditions applicable to performance share awards will be adjusted as described in the preceding sentence. For further information regarding the treatment of equity awards in the spinoff, see “The Spinoff—Stock-Based Plans—Treatment of Equity-Based Compensation.”
Q:What will the relationship between Labcorp and Fortrea be following the spinoff?
A:In connection with the spinoff, we and Labcorp will enter into a separation and distribution agreement that will contain key provisions relating to the separation of our business from Labcorp, the transfer of Labcorp’s Clinical Development and Commercialization Services business to us, and the distribution of our common stock. In addition, we and Labcorp will enter into several agreements to govern our relationship following the distribution, including a tax matters agreement, an employee matters agreement, a transition services agreement, lease agreements and other agreements governing ongoing commercial relationships. See “Relationship with Labcorp After the Spinoff—Agreements Between Labcorp and Us.”
Q:Will I have appraisal rights in connection with the spinoff?
A:No. Holders of Labcorp common stock are not entitled to appraisal rights in connection with the spinoff.
Q:Who is the transfer agent for your shares of common stock?
A:American Stock Transfer & Trust Company.
Q:Who is the distribution agent for the spinoff?
A:American Stock Transfer & Trust Company.
6
Q:Whom can I contact for more information?
A:If you have questions relating to the mechanics of the distribution of Fortrea common stock, you should contact the distribution agent:
By Mail, Overnight Courier or Hand-Delivery to:
American Stock Transfer & Trust Company
Shareholder Services
6201 Fifteenth Avenue
Brooklyn, NY 11219
By Phone or Email:
Telephone: (800) 937-5449
Outside the U.S., Canada and Puerto Rico: +1 (718) 921-8137
Email: help@astfinancial.com
Before the spinoff, if you have questions relating to the spinoff, you should contact Labcorp at:
Laboratory Corporation of America Holdings
358 South Main Street
Burlington, North Carolina 27215
Attention: Chas Cook, VP Investor Relations
Telephone: +1 (336) 436-5076
After the spinoff, if you have questions relating to Fortrea, you should contact Fortrea at:
Fortrea Holdings Inc.
8 Moore Drive
Durham, NC 27709
Attention: Hima Inguva, SVP of Investor Relations, Corporate Development and Competitive Intelligence
Telephone: +1 (877) 495-0816
7
SUMMARY
The following is a summary of some of the information contained in this information statement. It does not contain all the details concerning Fortrea or the spinoff, including information that may be important to you. We urge you to read this entire document carefully, including “Risk Factors” and “Unaudited Pro Forma Combined Financial Information” and the combined financial statements and the notes to those financial statements included elsewhere in this information statement.
Except as otherwise indicated or unless the context otherwise requires, the information included in this information statement assumes the completion of the separation of Fortrea from Labcorp and the related distribution of our common stock.
Our Business
We are a leading global contract research organization (“CRO”) providing comprehensive phase I through IV biopharmaceutical product and medical device services, patient access solutions and other enabling services. For over 30 years, we have provided our global pharmaceutical, biotechnology, and medical device customers with clinical pharmacology, clinical development, and other service capabilities. In addition, we offer our customers highly flexible delivery models that include Full Service, Functional Service Provider (“FSP”), and Hybrid structures. We believe we are well positioned to leverage our global scale, access to clinical data-driven insights, industry network, and decades of experience to bring customers tailored solutions. Fortrea intends to capitalize on the global demand for clinical development services across a diverse set of therapeutic areas.
Our team of approximately 21,000 staff (including temporary staff and contractors, as well as more than 2,600 global, cross-functional clinical research associates) conducts operations in 90 countries and delivers a broad range of clinical development solutions and other services for our customers. Our services streamline the biopharmaceutical product and medical device development process. Additionally, we successfully utilize enabling technologies to optimize processes and evolve with a dynamic marketplace.
Figure 1: Fortrea’s clinical experience over the past five years
picture1.jpg
Over the last five years, we have completed approximately 5,400 studies utilizing approximately 83,500 sites spanning 929,100 participants. These studies encompass more than 20 therapeutic areas and every phase of clinical trials. As the volume of clinical development spend outsourced to CROs continues to grow, we are bringing together global scale, deep scientific expertise, and a comprehensive suite of solutions to better serve our customers.
In sum, Fortrea combines decades of domain expertise with the nimbleness required to meet market demand for adaptable engagements with large and small customers. We intend to differentiate this pairing of technical expertise
8
with innovative solutions that provide access to unique clinical data assets. Our relationship with Labcorp and other leading third parties provides Fortrea with actionable and data-driven insights that accelerate investigator and patient recruitment. Further, this key differentiator positions Fortrea to enhance clinical trial diversity while streamlining protocol development processes. We seek to apply creativity and experience to every challenge, and our core competencies create efficiencies to deliver life-changing solutions faster.
Services
Our expertise in the biopharmaceutical product and medical device development process has driven us to design service offerings to better meet the needs of customers. We have a robust customer base across pharmaceutical, biotechnology, and medical device organizations. We manage our business in two reporting segments — Clinical Services and Enabling Services. Our Clinical Services segment, which accounted for 91% of revenues and 94% of operating income in 2022, brings solutions to market which include clinical pharmacology and comprehensive clinical development capabilities. Our Enabling Services segment, which accounted for 9% of revenues and 6% of operating income in 2022, provides patient access and technology solutions which can be deployed across any of our global solutions depending on the scope of our customers’ needs. This comprehensive platform provides our customers with efficient processes across delivery models.
Clinical Services Segment:
•Clinical Pharmacology. Our capabilities and solutions support early-phase studies in normal healthy volunteers, special populations, and patient populations across a spectrum of diseases. We deliver critical services to our customers including first-in-human trials (“FIH”), single ascending dose escalation studies (“SAD”), multiple ascending dose escalation studies (“MAD”), radiolabeled human absorption, metabolism, and excretion pharmacokinetics studies (“AME”), drug-drug interaction (“DDI”), hepatic and renal impairment, food effect, QTc interval, and other study types. In addition, we conduct phase Ib hybrid studies that move from normal healthy volunteers into patient populations, providing early insights into pharmacodynamics and signals of therapeutic effectiveness. We have developed a multi-national infrastructure of phase I facilities in both the U.S. and the United Kingdom (“U.K.”). This infrastructure is part of an integrated platform designed to enable consistent execution of complex early-phase clinical trials. This includes project management, comprehensive monitoring, pharmacokinetic analysis, and biometrics. Over the past five years, we have conducted more than 600 clinical pharmacology studies.
•Clinical Development. We are a leading full-service provider of phase I through IV clinical studies with a flexible approach to serving our customers. Clinical Development is Fortrea’s largest offering in terms of annual revenue contribution, and has been for the last five years. Services include, but are not limited to, regulatory affairs, protocol design, operational planning, study and site start-up, patient recruitment, project management, comprehensive monitoring, data management and biostatistics, pharmacovigilance, medical writing, and mobile clinical services. Our service offerings are supported by technological innovations such as digital and decentralized clinical trial (“DCT”) capabilities. We focus on rapidly expanding research areas such as oncology, rare diseases, and cell and gene therapies. Additionally, we have deep scientific expertise in a broad spectrum of therapeutic areas and diseases, such as cardiovascular, renal, central nervous system (“CNS”) and neurodegenerative, autoimmune, metabolic, infectious disease, dermatology, ophthalmology, immunology, inflammation, respiratory, nephrology, rheumatology, women’s health, and nonalcoholic steatohepatitis (“NASH”), among others. Over the past five years, we have conducted approximately 4,800 phase I through IV clinical trial projects. Clinical development is enhanced by our pharmacology learnings, which we apply to future clinical programs. We also have a significant medical device and diagnostics offering, and have conducted over 700 clinical trials in this area. We believe Fortrea is poised to capture additional market share in the large and expanding development market. .    
    We offer our customers a tailored approach to clinical trial solutions through the use of three delivery models: Full Service, FSP, and Hybrid.
◦Full Service. Integrates multiple disciplines from our service offering to comprehensively support our customers in their development programs across key geographies. Our service offering
9
integrates protocol design and operational planning, site start-up and patient recruitment, project and program management, comprehensive site monitoring, centralized monitoring and medical data review, clinical and biometrics services, medical writing, and mobile clinical services. Our project-centric approach utilizes dynamic team resourcing with agile role-based structures. This approach allows for more adaptability to trial types with customer-tailored designs. Our Full Service delivery model has a global reach with over 10,000 staff in over 60 countries, including a strong position in the Asia-Pacific market.
◦Functional Service Provider. Offers customers experienced personnel to perform targeted activities throughout their development programs. This approach reduces our customers’ need to recruit and train dedicated internal resources which saves on cost and time and enables flexibility. Our service offering delivers comprehensive, strategic solutions designed to adapt to the level of customer control and infrastructure. Our FSP team can provide dedicated offerings in clinical operations, clinical data management, biostatistics, statistical programming, pharmacovigilance, mobile clinical services, and medical writing, among other customized solutions. Additionally, our Functional Service Provider delivery model has a global infrastructure, with in-country, regional, on, near and off-shore models and over 6,000 global staff.
◦Hybrid. Provides the project-centric approach of a Full Service model while integrating FSP models, to varying degrees on large portfolios with therapeutic similarities, to drive efficiencies and enhance sponsor control for clinical development. Our ability to tailor our services to customer needs demonstrates the flexibility we can offer customers across the industry value chain. Fortrea offers this flexibility at a global scale and we expect to position our team as a partner of choice for customers that require a tailored approach
•Consulting Services. We provide consulting services that include product development strategy, protocol development, regulatory advisory, patient access guidance, and medical affairs advisory. This solution supports critical decision points in the lifecycle of our customers’ products. Further, this spinoff gives Fortrea ample opportunity to expand customer relationships that bolt on additional services in our portfolio.
Enabling Services Segment:
•Patient Access. Fortrea has established a comprehensive portfolio of services to optimize patient support, adherence, and product access. We provide solutions for co-pay, reimbursement and affordability assistance, real-time analytics and market access consulting. Our team operates on behalf of biopharmaceutical product and medical device manufacturers by employing highly trained agents within contact centers and field-based teams. Our field reimbursement specialists enable healthcare practitioners in the United States to navigate product access for their patients. Our nurse-educator staffed call centers provide customized patient support programs designed to address barriers to product use and adherence. We have our non-commercial specialty pharmacy solution providing cold chain storage and specialty prescription dispensing on behalf of biopharmaceutical customers. Our priority is to help patients gain access to treatments on behalf of our customers.
•Technology Solutions. We provide our customers access to products that support critical decision points in the lifecycle of their assets. Endpoint Clinical (“Endpoint”) provides comprehensive randomization and trial supply management (“RTSM”) technology solutions. Our Interactive Response Technology (“IRT”) and clinical supplies management solution, streamlines complex randomization and trial supply methods, refines and improves drug supply management, and simplifies site, study and subject administration. Our flexible RTSM technology enables customers to manage a broad range of standard and complex randomization methods, supporting complex trial designs. We believe these products optimize the supply chain and minimize operational costs, while supporting timely and accurate patient dosing. We have invested in direct-to-patient technology that provides comprehensive DCT capabilities supporting electronic solutions and telemedicine to augment trial experiences by decreasing the burden of participation for patients. We also offer a suite of technology and data to deliver insights that enable development and oversight in the effort to maximize trial outcomes. These tools include modules focused on study design
10
optimization; extensive risk, issue, and quality management; centralized data and medical review; diversity and inclusion study insights; clinical monitoring and study oversight.
Industry
CROs provide services to assist in phase I through phase IV clinical trials and commercialization to accelerate the development and reach of safe, effective medical therapies and devices. Developing new biopharmaceutical products and medical devices for the treatment of human disease is a complex, costly, and lengthy process. Prior to commercialization, a biopharmaceutical product or medical device must undergo extensive pre-clinical and clinical testing as well as regulatory review to demonstrate an acceptable benefit-risk profile by regulatory authorities. As a result, bringing a new biopharmaceutical product or medical device to market can take up to 12 years and costs $2.5 billion or more on average.1
The biopharmaceutical product development process consists of three stages: pre-clinical, clinical, and commercialization. The pre-clinical process is the stage of research that begins prior to clinical studies and collects data on the feasibility, efficacy, and safety of drugs through experiments outside of the human body. The clinical stage is the most time-consuming and expensive part of the drug development process. During this stage, the product candidate undergoes a series of tests on humans. In phase I, small groups of study volunteers are exposed to ascending doses of the experimental product in order to assess safety and to determine the distribution of the drug and maximally tolerated dose. Preliminary assessment of the relationships between dosage, safety, and effectiveness follow in phase II before expanding to larger trials, phase III, to formally test effectiveness and safety in the target population. Phase IV, or post-approval trials, involves monitoring or verifying the risks and benefits of a drug product.
The clinical development market is a large, attractive and growing market. Clinical development spend by the pharmaceutical and biotechnology industry was estimated at $100 billion in 20222. Of this, we estimate the current addressable market for Fortrea to be $35 billion. Over the next several years, pharmaceutical and biotechnology companies are projected to increase research and development (“R&D”) investment, grow their pipelines, and outsource more programs to CROs. We believe these underlying market trends represent a significant opportunity for us.
In addition to the growth in R&D expenses, an increase in outsourcing has also supported the growth of the CRO sector. Global pharmaceutical and biotechnology companies are a major driver of this growth as they continue to outsource a significant amount of the biopharmaceutical product development process as they seek therapeutic diversity for their pipelines, target diverse global populations, and require deep scientific research. We believe there are three key trends affecting our end markets and believe that such trends will continue creating an increased demand for our services:
•Increasing Pharmaceutical and Biotechnology R&D Spend. Growing R&D investment will help propel the CRO market as new indications are discovered, resulting in a greater demand for clinical trials. Over the past decade, we have seen the biopharma industry leverage science, technology, and artificial intelligence (“AI”) to advance the level of understanding of the pathogenesis of human disease, and to identify new therapeutic targets and treatments. Despite a relative downturn in 2022 compared to 2020 and 2021, over the medium to longer term we expect the biotechnology funding to be strong.
•Elevated Outsourcing Levels. As large biopharmaceutical companies seek to reduce the cost and time to develop biopharmaceutical products, they have increasingly relied on CROs for services to preserve flexibility and reduce costs associated with clinical trials and improve time to market. According to multiple industry investment sources, the CRO market is expected to grow more slowly for the next two years, at approximately 3-5%, returning to a growth rate of 6-9% in the longer term. The growth is driven by low single-digit percentile growth from large pharmaceutical companies, double-digit percentile growth from smaller biotechnology companies, and a continued drive for more outsourcing generally.
1 Geoffrey Levitt testimony before Senate Judiciary Committee July 31, 2021.
2 Simoens S and Huys I (2021) R&D Costs of New Medicines: A Landscape Analysis: Front. Med. 8:760762. doi: 10.3389/fmed.2021.760762 and 2022 Pharma R&D Spend. Evaluate Ltd.
11
•Expanding Scope of Capabilities. CROs have successfully expanded the scope of services they are able to offer pharmaceutical, biotechnology, and medical device companies, increasing the addressable market that they serve. Examples include the expansion of DCT services, global logistics, and management of highly complex biologics, and cell and gene therapy trials. The need for biopharmaceutical companies to expand the commercial potential of their products internationally has been a catalyst for the increasingly global nature of clinical trials. CROs that can capitalize on extensive datasets to inform decisions and increase efficiency in international clinical trials have benefited from these changing dynamics. As R&D pipelines continue to prioritize biologics and advanced therapies, such as cell and gene therapies, additional complex clinical trial capabilities will also be required from CROs. We are built to handle this increased complexity and global demand that underpin these industry tailwinds.
Despite the large, attractive and growing market that Fortrea operates in, our business is subject to a number of risks inherent to our industry, including our customers’ ability to access sufficient funding to complete clinical trials, our ability to generate net new business awards or our new business awards being delayed, terminated, reduced in scope, or failing to go to contract, and our ability to contract with suitable investigators and recruit and enroll patients for clinical trials, among others. Any number of these factors could impact our business, and there is no guarantee that our historical performance will be predictive of future operational and financial performance. For a description of the challenges we face and the risks and limitations that could harm our prospects, see “Cautionary Statement Concerning Forward-Looking Statements,” “—Summary of Risk Factors” and “Risk Factors” included elsewhere in this information statement.
Competitive Strengths
We believe we are strategically positioned to serve the pharmaceutical, biotechnology, and medical device industries. Our credibility and reputation in the market is a direct result of our multi-decade track record of operational execution, and effective flexible solutions. Our competitive strengths include:
Extensive History as a Market Leader Across Clinical Development
We have over 30 years of experience providing clinical development services to the pharmaceutical, biotechnology, and medical device industries. We have conducted approximately 4,800 trials across all phases of clinical development in over 90 countries in the last five years. We have an extensive history as a leading organization with a differentiated service offering. We believe that our commitment to continuous services and technology innovations combined with Fortrea’s customizable approach and experience across more than 20 therapeutic areas will enable us to continue to differentiate ourselves from peers in the CRO industry. 
Large and Diversified Customer Base
We have a balanced and diverse customer mix serving large and mid-tier pharmaceutical, biotechnology, and medical device organizations. As of the fiscal year ended 2022, no single customer represented more than 10% of our revenue. We seek to be the partner of choice for both leading pharmaceuticals customers and innovative biotechnology companies. In 2022, 54% of our revenue came from leading pharmaceutical customers. We believe our customer base positions us at the forefront of innovation in healthcare and allows us to help our customers efficiently bring the best therapeutic solutions to patients.
Global and Stable Customer Relationships
Our scale and expertise are key competitive advantages that make us a multi-dimensional partner for our customers. Our top 20 customers have consistently represented approximately 60% of total revenue for 2022, 2021, and 2020. Additionally, most of our customers use us for more than one service. On average, our customers leverage three or more of our services. We believe that our global capabilities and expertise are considered a differentiator by our top customers. With a portfolio of projects that extend over multiple years, our longer-term contract durations give us confidence and visibility into our future revenues.
A selection of our customers can be found below:
12
image.jpg
Access to Actionable Clinical Data and Insights
Access to data is foundational to any CRO and we believe our arrangement with Labcorp and other continuing strategic engagements will be differentiated by the quality of insights our data can provide. We intend to continue to prioritize actionable data as we further scale our data repositories. We believe that we have the opportunity to optimize the clinical development process through accelerating the recruitment, increasing the diversity and improving the retention of patients.
Through our unique relationship with Labcorp, we (i) have access to, in our opinion, one of the largest sets of global clinical trial data, which enables us to progress clinical trials forward more efficiently and (ii) are able to leverage Labcorp’s world-class diagnostics network that performs over 600 million tests per year. Those test results help researchers, medical professionals, and patients make important health decisions and provide insights that help identify individuals who might benefit from enrolling in specific drug trials. Our initial two-year access to extensive health and clinical data provides strategic flexibility and operational direction to efficiently meet our customers’ needs.
Expertise Across Rapidly Expanding Therapeutic Areas
We believe that our focus and expertise across rapidly growing scientific areas provide us with advantages over our competitors. Fortrea’s expertise spans oncology, CNS and neurodegenerative disease, cardiovascular, renal, NASH, rare disease, cell and gene therapy, and many more. These scientific areas represent the majority of the industry’s drug development pipelines.
Oncology makes up a large portion of our business and continues to grow. Through 2021, we have completed over 1,200 oncology clinical trials and serviced over 210,000 patients in nine primary indications. Oncology new business awards grew 65% in 2022, year-over-year. In 2022, 46% of our therapeutic based revenue related to Oncology studies. In addition to Fortrea’s success in oncology, science, innovation, and technology, we plan to leverage our capabilities to successfully capture additional market share across high-growth therapeutic areas such as CNS and neurodegenerative disease, cell and gene therapy, cardiovascular, renal, NASH, rare disease, and more.
Growth Strategy
Our growth strategy aligns with both our management team’s key focus areas and our customers’ priorities. As a public company, Fortrea plans to:
Increase Effectiveness Through Site Support Strategies and Services
Investigator sites have traditionally been a challenging part of the predictability and speed associated with clinical research. Recently with COVID-19, global political challenges, and the proliferation of technology choices, site productivity and effectiveness, as well as investigator participation, are major challenges to the industry. More positively, many sites and technology start-ups are innovating around data, electronic medical records, and technology. Further, there are also site management organizations emerging that have adopted the concept of using participants’ homes and “third places” in studies to improve the patient experience.
Fortrea will leverage a combination of technologies, data, and services to better understand the augmented services that sites need to select trials, identify and enroll patients, and conduct and close out studies. These include the administrative and clinical support, tools, data and analysis to enable sites to be more productive, helping overcome challenges with disparate technologies, complex protocols and resource constraints at sites. Fortrea also plans to establish relationships with key innovators. Existing expertise and tools will be consolidated, and further investment in key areas will take place.
13
Improve Data Driven Site Selection and Patient Centric Recruitment Strategies
We have developed a unique approach of establishing high-value site relationships to support scientific engagement and reduce the time and cost for our customers to develop products. The third-party clinical sites we work with include healthcare systems, dedicated research networks, large group practices, consortiums, and governmental coordinating bodies that represent multiple research partners around the globe. We leverage data-driven approaches to target sites that align with our business needs. These target sites focus on accelerating patient recruitment, efficiently executing trials, and enhancing our site experience while demonstrating partner superiority in speed, recruitment, and quality.
We are committed to increasing the diversity of patient populations within clinical trials and we have developed a holistic strategy that is focused on partnering with customers, sites, investigators, and communities to address this commitment. Through these collaborations and by utilizing innovative solutions to support the diversity plans expected by global regulatory authorities, we will further strengthen our reputation as a strategic partner of choice.
Pursue “Ideal Scale” to Support the Research Requirements of Our Customers
The landscape for clinical trials is evolving, both with changes to global business practices, and the commercialization strategies of our clients. While the number of novel therapies is increasing, the markets willingness to approve, pay for and distribute therapies is changing. At the same time, global geographic realities have impacted the locations where clinical trials can be conducted. In certain countries, such as the U.S., the need for inclusion of underrepresented minorities and other related goals have become paramount. Today, we have relationships in over 90 countries including all of the major pharmaceutical and biotechnology markets. Notably, Fortrea’s approximately 19,000 employees are strategically balanced throughout the world. This is evidenced by our employee breakdown by region, which is as follows: 36% in the Americas, 25% in EMEA, and 39% in Asia-Pacific. At our size, we believe we are more efficient in decision making to positively impact processes and technologies. We will continue to strategically invest in new markets that synergize with our customers’ needs, and the demand of the global clinical trial landscape.
Align with Innovators Through Selective Investment in Technology for Speed and Simplification
The last decade has seen a substantial improvement in technology supporting clinical research, as well as an increase in both access to and analysis of relevant data. The past decade has seen the wider availability of electronic medical record data, use of natural language processing for handwritten notes, and the integration of genetic, pathology and other data into key decision processes. Fortrea has invested in technology and utilized in-house and Labcorp data to be more effective in the conduct of trials, related services and certain commercial areas. Our executive team maintains relationships with top technology and data vendors in the industry and will use its “ideal scale” to help bring innovations to sites and sponsors. At the same time, we will continue to invest in selective technologies to improve process cycle time and simplify the increasingly complex protocols for both sites and our employees.
Over the last five years, we have significantly invested in our platform to advance all facets of our clinical development services, key technologies, and data utilization to better serve our customers. These investments include artificial intelligence and machine learning, full service and programmatic development models, data visualization, a full suite of biometric services and clinical data management globally across all phases and delivery models, and DCT capabilities, among others. Looking ahead, we will continue to invest in our capabilities, therapeutic expertise, and ability to generate insights through data and analytics. Our goal is to reduce cost and increase efficiency of clinical trial execution to enhance the quality of our offerings for our customers. We will support our customers in the development of innovative, life-changing biopharmaceutical products, and medical devices while remaining a global leader in clinical trial design and execution.
Become the Partner of Choice for Sponsor Companies and Service Providers
The challenges of clinical research are too complex to be solved by a single company. CROs now have therapeutic and logistical expertise at scale, as do some but not all pharmaceutical, biotechnology, and medical device companies. Increased and early sharing of development and pipeline goals, protocols and issues by all parties
14
combined with strong relationship and program management increase efficiency and promote the adoption of innovative delivery models. Further, our service provider relationships support customers through custom capabilities to bring new products to market with a focus on speed and cost efficiency. Pharmaceutical, biotechnology, and medical device companies seek CRO providers that focus on their core competencies to complement their entire molecule development strategy. For example, we have formed a two-year strategic relationship with Labcorp to develop opportunities where a joint offering of services could be presented to pharmaceutical, biotechnology and medical device customers. These combined solutions utilize services that include de-identified patient and site performance data, patient recruitment and engagement offerings, and central laboratory and bioanalysis services.
Create an Inclusive Culture of Careers with Meaning as a Competitive Advantage
CROs as well as pharmaceutical, biotechnology and medical device sponsors and investigator sites have been impacted by turnover in rapidly growing markets. Recently, this has been compounded by the increased turnover in global employment markets, remote hiring and work, and shortages in related professions such as nursing and computer science. We have a five-part strategy to improve the attractiveness of working at our organization for a longer duration or a career. The focus areas are: Meaningful Work; 360 Degree Relationships; Quality Interactions; Career Mobility; and Respect for the Individual. In a program such as this, execution is paramount. We have an execution program we believe will deliver results, inclusive of global, early talent development academies and diversity focused and career development employee resource groups. This will be supported by investments in process and technology that benefit both our workforce and customers.
Expand Expertise in Existing and Novel Therapeutic Areas
We believe that our therapeutic expertise across all clinical phases of drug development is critical to the proper design and management of clinical trials. Our expertise helps us deliver enhanced value to our customers through a reduction in the cost and time to bring drugs and devices to market. We have significant expertise in several of the rapidly-growing scientific areas including oncology, CNS and neurodegenerative disease, cardiovascular, renal, NASH, rare disease, cell and gene therapy, and several emerging therapeutic areas. The oncology market remains an area of unmet medical need that receives significant investment in R&D. As part of our mission to drive value for customers, we will continue to try to capitalize on the expansion of opportunities in such key areas as oncology, CNS and neurodegenerative, NASH, and autoimmune. While Fortrea has significant expertise and experience in these scientific areas, we are confident that there is ample opportunity for future growth.
Enhance Agile Approach and Project Centric Service Offering
Our agile approach to serving our customers is a distinct advantage for us when we go to market. We believe that our flexible approach has been a key element of our ability to win new customers and retain existing customers across all of our business segments. Fortrea’s model is informed by continuous external stakeholder market research. Our analysis highlighted that customers are seeking a partnership rooted in trust and transparency demonstrating the agility and flexibility to meet their individual needs while delivering speed to market and creative solutions. We expect biotechnology companies to increasingly choose CROs that provide highly flexible offerings to meet the changing drug development landscape. In addition, large pharmaceutical companies continue to look for adaptable solutions to conform to customized partner-driven approaches. As the demand for novel solutions increases, we expect that our existing flexible approach to serving our customers will enable us to further grow as an organization.
Build on Strengths in Clinical Pharmacology
We are a market leader in clinical pharmacology studies, including highly specialized human AME studies. We are committed to growing our clinical pharmacology business through the expansion of our existing clinics and through our new state-of-the-art facility in Leeds, U.K. We have integrated technology and artificial intelligence successfully within our clinic scheduling process to optimize the utilization of bed-space and have implemented bedside data capture technology. We are also focused on optimizing delivery in more complex hybrid study designs that include both healthy volunteers and patients through the utilization of our own clinics in combination with an expanded global site network.
15
Competition
Our operations in the drug development services industry involve high levels of competition, consisting of hundreds of small, limited-scope service providers and a smaller number of large full-service drug development companies. While the industry has seen an increasing level of consolidation over the past several years, primarily driven by the larger full-service providers, it remains highly fragmented.
Our main competition consists of these small and large CROs, as well as in-house departments of pharmaceutical, biotechnology, and medical device companies and, to a lesser extent, select universities and teaching hospitals and site management organizations. Our services have periodically experienced heightened competition, including competition among CROs for both customers and potential acquisitions. We believe that our significant therapeutic expertise, global reach, integrated model, customer service strategies, access to data, and operational strengths differentiate us from our competitors across all of our segments.
Our major competitors include IQVIA, ICON, Parexel, PPD, a subsidiary of Thermo Fisher Scientific Inc., Medpace Holdings, and Syneos Health. We believe our success with customers has been rooted in transparent partnerships that offer agile solutions and support speed to market. We believe we are positioned to be more flexible and customer focused than our larger competition while offering the global scale that our smaller competition lacks.
Backlog and Net New Business
Our backlog represents anticipated revenue for work not yet completed or performed under executed contracts and other forms of written confirmation, where there is sufficient or reasonable certainty about the customer’s ability and intent to fund and commence the services within twelve months. We adjust backlog for foreign currency fluctuations and exclude from backlog revenue that has been recognized as revenue in our statements of operations. Our backlog was $8.6 billion, $8.1 billion, and $8.9 billion at December 31, 2022 and 2021 and March 31, 2023, respectively.
We add net new business to backlog based on the aforementioned criteria. Additionally, each period we evaluate previously awarded projects to adjust for modifications, cancellations, foreign currency fluctuations, and other items. Net new business varies from period to period depending on numerous factors, including customer award volume, sales performance, and overall health of the biopharmaceutical industry, among others. While customers with whom we have had long-standing relationships have continued to award new orders to us, we have experienced some fluctuations in our net new business award levels over the last few quarters driven, we believe, by recent macroeconomic factors affecting the industry and customer hesitation ahead of the spinoff. Some clients have indicated that they are waiting until after the spinoff is complete to award new business. Our net new business awards were $3.7 billion, $3.4 billion and $3.7 billion for the years ended December 31, 2022, 2021 and 2020, respectively, and $3.8 billion and $3.4 billion for the trailing twelve months ended March 31, 2023 and 2022, respectively.
We do not believe that, as a sole measure, our backlog and net new business are consistent indicators of future revenue because they have been, and likely will continue to be, affected by a number of factors, including the variable size and duration of projects, many of which are performed over several years, and changes to the scope of work during the course of projects. Additionally, projects may be canceled or delayed by the customer or regulatory authorities. We generally do not have a contractual right to the full amount of the contract award reflected in our backlog. If a customer cancels a contract, we generally will be reimbursed for the costs we have incurred. For more information about risks related to our backlog see “Risk Factors—Risks Relating to Our Business—Our backlog might not be indicative of our future revenues, and we might not realize all of the anticipated future revenue reflected in our backlog.”
Sales, Customer Service, and Marketing
Our global sales and customer service organization provides dedicated customer coverage across pharmaceutical, biotechnology, and medical devices industries. This includes a range of solutions such as, but not limited to, clinical trials, biomarkers, technology services, and other services. Our total staff base of approximately 21,000 includes a highly focused, experienced, and trained team of professional business development and customer
16
facing representatives and support staff working on securing, servicing, and expanding business from both new and existing customers.
Our approach to sales and marketing involves the collaboration of scientific, operational, and technical staff with our business development, customer facing project personnel, and senior leadership teams. We embed our scientific team and project personnel from the beginning of the sales process when we first engage potential customers. They remain embedded across the lifecycle of the sale and throughout the life of the project, program or partnership. This strategy allows us to consult collaboratively with our customers throughout the lifecycle of our engagement.
Our marketing efforts support the activities of our business development and customer facing staff. Our global marketing initiatives include integrated, digitally enabled, omni-channel campaigns and communication programs designed to help customers research our services, understand our differentiation, and learn more about our capabilities. We provide our perspective on current industry challenges and developments to create an ongoing dialogue with our current and prospective customers and to promote our scientific expertise, differentiated service offerings, quality, and technology.
Corporate Information
Fortrea was incorporated in Delaware on January 31, 2023. The current address of Fortrea’s principal executive offices is 8 Moore Drive, Durham, North Carolina 27709. Fortrea can be contacted by calling (877) 495-0816. Fortrea maintains an internet site at www.fortrea.com. Fortrea’s website and the information contained therein or connected thereto are not incorporated into this information statement or the registration statement of which this information statement forms a part, or in any other filings with, or any information furnished or submitted to, the SEC.
Reason for Furnishing this Information Statement
This information statement is being furnished solely to provide information to Labcorp stockholders who will receive Fortrea common stock in the spinoff. It is not to be construed as an inducement or encouragement to buy or sell any of our securities. We believe that the information contained in this information statement is accurate as of the date set forth on the cover. Changes may occur after that date and neither we nor Labcorp undertake any obligation to update the information, except to the extent so required by applicable securities laws.
Summary of Risk Factors
An investment in us is subject to a number of risks, including risks related to the spinoff, our business and the industry in which we operate, laws and regulations, technology and cybersecurity, the securities market and our common stock. Set forth below is a summary of some, but not all, of these risks. Please see “Risk Factors” for a more detailed description of these and other risks.
Risks Relating to the Spinoff
•We may not realize the potential benefits from the spinoff.
•We have no history operating as an independent public company. We will incur additional expenses to create or supplement the corporate infrastructure necessary to operate as an independent public company and we will experience increased ongoing costs in connection with being an independent public company.
•Our historical combined and pro forma financial information are not necessarily indicative of our future financial condition, results of operations, or cash flows nor do they reflect what our financial condition, results of operations, or cash flows would have been as an independent public company during the periods presented.
•If the spinoff and certain related transactions fail to qualify under Sections 355 and 368(a)(1)(D) of the Code, Labcorp and its stockholders could incur significant tax liabilities, and we could be required to
17
indemnify Labcorp for taxes that could be material pursuant to indemnification obligations under the tax matters agreement.
•We might not be able to engage in certain transactions and equity issuances following the spinoff.
Risks Relating to Our Business
•If we do not generate a large number of net new business awards, or if net new business awards are delayed, terminated, reduced in scope, or fail to go to contract, our business, financial condition, results of operations, or cash flows may be materially adversely affected.
•If we are unable to contract with suitable investigators and recruit and enroll patients for clinical trials, our business might suffer.
•The COVID-19 pandemic and associated economic repercussions have adversely impacted our business and results of operations, and are expected to continue to do so.
•Our customer or therapeutic area concentration may have a material adverse effect on our business, financial condition, results of operations or cash flows.
•Increased competition, including price competition, could have a material adverse effect on our revenues and profitability.
•We depend on third parties to provide services critical to our business, and depend on them to comply with applicable laws and regulations.
•We depend on access to data and an inability to access the necessary data from Labcorp or others on commercially reasonable terms or at all could adversely affect our business.
Risks Relating to Regulatory and Compliance Matters
•Failure to comply with the regulations of pharmaceutical and medical device regulatory agencies, such as the U.S. Food and Drug Administration (the “FDA”), the Medicines and Healthcare Products Regulatory Agency (the “MHRA”) in the U.K., the European Medicines Agency (the “EMA”), the National Medical Products Administration (the “NMPA”) in China, and the Pharmaceuticals and Medical Devices Agency (the “PMDA”) in Japan, could result in sanctions and/or remedies against us and have a material adverse effect on us.
•Failure to comply with national, state, local or international environmental, health and safety laws and regulations, could result in fines and penalties and loss of licensure, and have a material adverse effect upon our business.
•Changes in government regulation or in practices relating to the pharmaceutical, biotechnology, or medical device industries could decrease the need for certain services that we provide.
•Failure to comply with federal, state, and foreign laws and regulations, including healthcare fraud and abuse laws and regulations, anti-corruption laws and regulations, trade sanction laws and regulations, and privacy and security laws and regulations, could result in substantial penalties and our business, financial condition, results of operations, cash flows, and prospects could be adversely affected.
Risks Relating to Technology and Cybersecurity
•Failure to maintain the security of customer-related information or compliance with security requirements could damage our reputation with customers, cause us to incur substantial additional costs and become subject to litigation and enforcement actions.
18
Risks Relating to Legal Matters
•Failure to comply with the contractual requirements of our agreements with customers or third party service providers could result in claims and/or remedies against us and have a material adverse effect on us and our reputation could be harmed.
•Contract research services in the drug development industry create liability risks.
Risks Relating to Financial Matters
•We bear financial risk for contracts that, including for reasons beyond our control, may be underpriced, subject to cost overruns, delayed, or terminated or reduced in scope.
•A significant increase in our days sales outstanding could have an adverse effect on our business, including our cash flow, by increasing our bad debt or decreasing our cash flow.
•Our revenues depend on the pharmaceutical, biotechnology and medical device industries.
•Our future debt and debt covenant requirements may limit cash flow available to invest in the ongoing needs of our business.
Risks Relating to General Matters
•General or macro-economic factors in the U.S. and globally may have a material adverse effect upon us, and a significant deterioration in the economy could negatively impact our services, cash collections, profitability, and the availability and cost of credit.
Risks Relating to Ownership of Our Common Stock
•Because there has not been any public market for our common stock, the market price and trading volume of our common stock may be volatile and you may not be able to resell your shares at or above the initial market price of our common stock following the spinoff.
Summary of the Spinoff
The following is a brief summary of the terms of the spinoff. Please see “The Spinoff” for a more detailed description of the matters described below.
Distributing company
Labcorp, which wholly owns Fortrea. After the distribution, Labcorp will not retain any shares of Fortrea’s common stock.
Distributed companyFortrea, which is currently wholly owned by Labcorp. After the distribution, Fortrea will be an independent, publicly traded company.
Shares to be distributed
Approximately 88.6 million shares of Fortrea common stock distributed on a pro rata basis. Our common stock to be distributed will constitute all of our outstanding common stock immediately after the spinoff.
Distribution ratio
Each holder of Labcorp common stock will receive one share of Fortrea common stock for every share of Labcorp common stock owned by such holder on the record date.
19
Fractional sharesThe transfer agent identified below will aggregate fractional shares into whole shares and sell them on behalf of stockholders in the open market, when, how, and through which broker-dealers as determined in its sole discretion without any influence by Labcorp or us, at prevailing market prices and distribute the proceeds pro rata to each Labcorp stockholder who would otherwise have been entitled to receive a fractional share in the spinoff. You will not be entitled to any interest on the amount of payment made to you in lieu of a fractional share. The transfer agent is not an affiliate of Labcorp or us. See “The Spinoff—Treatment of Fractional Shares.”
Distribution proceduresOn or about the distribution date, the distribution agent identified below will distribute our common stock by crediting those shares to book-entry accounts established by the transfer agent for persons who were stockholders of Labcorp as of 5:00 p.m., Burlington, North Carolina, on the record date. You will not be required to make any payment or surrender or exchange your Labcorp common stock or take any other action to receive our common stock. However, as discussed below, if you sell Labcorp common stock in the “regular way” market between the record date and the distribution date, you will be selling your right to receive the associated Fortrea common stock in the distribution. Registered stockholders will receive additional information from the transfer agent shortly after the distribution date. Beneficial stockholders will receive information from their brokerage firms.
Distribution agent, transfer agent and registrar for our common stockAmerican Stock Transfer & Trust Company
Record date
5:00 p.m., Burlington, North Carolina time, on June 20, 2023
Distribution dateJune 30, 2023
Trading after the record date and on or prior to the distribution dateIt is anticipated that, beginning shortly before the record date and continuing up to and through the distribution date, Labcorp common stock will trade in two markets on NYSE, a “regular way” market and an “ex-distribution” market. Investors will be able to purchase Labcorp common stock without the right to receive shares of Fortrea common stock in the ex-distribution market for Labcorp common stock. Any holder of Labcorp common stock who sells Labcorp common stock in the “regular way” market after the record date and on or prior to the distribution date will be selling the right to receive shares of Fortrea common stock in the spinoff. You are encouraged to consult with your financial advisor regarding the specific implications of selling Labcorp common stock before or on the distribution date.
Assets and liabilities transferred to the distributed companyBefore the distribution date, we and Labcorp will enter into a separation and distribution agreement that will contain key provisions relating to the separation of our business from Labcorp, the transfer of Labcorp’s Clinical Development and Commercialization Services business to us, and the distribution of our common stock. The separation and distribution agreement will identify the assets to be transferred, liabilities to be assumed, and contracts to be assigned to us by Labcorp in the spinoff and describe when and how these transfers, assumptions and assignments will occur. See “Relationship with Labcorp After the Spinoff—Agreements Between Labcorp and Us—Separation and Distribution Agreement.”
20
Relationship with Labcorp after the spinoffBefore the distribution date, we and Labcorp will enter into several agreements to govern our relationship following the distribution, including a tax matters agreement, an employee matters agreement, a transition services agreement, lease agreements and other agreements governing ongoing commercial relationships. See “Relationship with Labcorp After the Spinoff—Agreements Between Labcorp and Us.”
IndemnitiesThe separation and distribution agreement to be entered into in connection with the spinoff will provide for cross-indemnification between Labcorp and us. Please see “Relationship with Labcorp After the Spinoff—Agreements Between Labcorp and Us—Separation and Distribution Agreement.” In addition, we will indemnify Labcorp under the tax matters agreement that we will enter into in connection with the spinoff for certain tax matters, including for actions taken by us that cause the spinoff to become taxable to Labcorp. Please see “The Spinoff—Material U.S. Federal Income Tax Consequences of the Spinoff” and “Relationship with Labcorp After the Spinoff—Agreements Between Labcorp and Us—Tax Matters Agreement.”
Material U.S. federal income tax consequencesLabcorp has received an IRS Ruling on certain issues relevant to the qualification of the spinoff and certain related transactions as tax-free under Sections 368(a)(1)(D) and 355 of the Code, based on certain facts and representations set forth in such request. The IRS Ruling does not address all of the requirements for tax-free treatment of the spinoff, and the spinoff is conditioned upon, among other things, Labcorp’s receipt of an opinion of tax counsel regarding the qualification of the spinoff and certain related transactions as generally tax-free, for U.S. federal income tax purposes, under Sections 355 and 368(a)(1)(D) of the Code. Assuming that the spinoff so qualifies, Labcorp stockholders generally should not be required, for U.S. federal income tax purposes, to recognize any gain or loss or to include any amount in their income upon their receipt of our common stock in the spinoff (other than with respect to cash received in lieu of fractional shares).You should review the section entitled “The Spinoff—Material U.S. Federal Income Tax Consequences of the Spinoff” for a discussion of the material U.S. federal income tax consequences of the spinoff.
Conditions to the spinoff
We expect that the spinoff will be completed on June 30, 2023, provided that the Labcorp board of directors, in its sole and absolute discretion, has either (i) determined that the conditions set forth under the caption “The Spinoff—Spinoff Conditions and Termination” have been satisfied or (ii) waived any such condition. If the spinoff is completed and the Labcorp board of directors waived any such condition, such waiver could have a material adverse effect on (i) Fortrea’s and Labcorp’s respective business, financial condition or results of operations, (ii) the trading price of Fortrea’s common stock, (iii) the ability of stockholders to sell their Fortrea shares after the distribution, including, without limitation, as a result of (a) illiquid trading if Fortrea common stock is not accepted for listing or (b) litigation relating to any injunctions sought to prevent the consummation of the spinoff or (iv) the tax consequences of the spinoff. In the event Labcorp, at the direction of its board of directors, waives a material condition or amends or modifies the spinoff or the ancillary agreements entered into thereto, Labcorp will evaluate the applicable facts and circumstances at that time and make such additional disclosure and take such other actions as Labcorp determines to be necessary and appropriate in accordance with applicable law.
21
Reasons for the spinoffLabcorp’s Clinical Development and Commercialization Services business operates largely autonomously, although it and Labcorp have benefited by sharing executive management and some overhead costs. Among other benefits, the spinoff is expected to provide each of Labcorp and Fortrea with strengthened strategic flexibility and operational focus to pursue specific market opportunities and better meet customer needs, focused capital structures and capital allocation strategies to drive innovation and growth, a more targeted investment opportunity for different investor bases, the ability to align its particular incentive compensation with its financial performance, and an improved ability to use its equity as consideration for beneficial acquisitions. Labcorp expects that the spinoff will result in enhanced long-term performance of the businesses held by both Labcorp and Fortrea. For more information, see “The Spinoff—Reasons for the Spinoff.”
Stock exchange listing
Currently there is no public market for our common stock. We have applied for listing of our common stock on NASDAQ under the symbol “FTRE.” We anticipate that trading will commence on a “when-issued” basis approximately two trading days before the record date. When-issued trading refers to a transaction made conditionally because the security has been authorized but not yet issued. Generally, common stock may trade on NASDAQ on a when-issued basis after they have been authorized but not yet formally issued, which is often initiated by NASDAQ prior to the record date relating to the issuance of such common stock. When-issued transactions are settled after our shares of common stock have been issued to Labcorp stockholders. On the first trading day following the distribution date, when-issued trading will end and regular way trading will begin. “Regular way” trading refers to trading after a security has been issued. We cannot predict the trading price for our shares of common stock following the spinoff. In addition, following the spinoff, Labcorp common stock will remain outstanding and will continue to trade on NYSE under the symbol “LH.”
Dividend policy
We do not anticipate paying any dividends on our common stock in the foreseeable future, and we intend to retain earnings for use in the operation and expansion of our business. The declaration and payment of dividends, if any, will be subject to our board of directors’ discretion, and will depend on various factors. See “Dividend Policy.”
Risk factorsOwnership of Fortrea common stock is subject to both general and specific risks relating to Fortrea’s business, the industry in which it operates, its ongoing contractual relationships with Labcorp, and its status as a separate, publicly traded company. Ownership of Fortrea common stock is also subject to risks relating to the spinoff. These risks are described in the “Risk Factors” section of this information statement. You are encouraged to read that section carefully.
22
Summary Historical and Unaudited Pro Forma Combined Financial Information
The following table summarizes our historical and pro forma combined financial information as of and for the periods and dates indicated.
The summary historical and unaudited pro forma combined financial data shown below should be read in conjunction with the sections herein entitled “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Unaudited Pro Forma Combined Financial Information,” and “Certain Relationships and Related Party Transactions” as well as our audited combined financial statements and the corresponding notes included elsewhere in this information statement.
The combined statements of operations include all revenues and costs directly attributable to our business. The combined statements of operations also include costs for certain centralized functions and programs provided and administered by Labcorp that are allocated to us. These centralized functions and programs include, but are not limited to legal, tax, treasury, risk management, sales expenses, information technology (“IT”), human resources, finance, supply chain, executive leadership, and stock-based compensation. These expenses were allocated to us based on direct usage when identifiable or, when not directly identifiable, on the basis of proportional net revenues or headcount or other reasonable driver, as applicable. We consider the basis on which the expenses have been allocated to reasonably reflect the utilization of services provided to, or the benefit received by, us during the periods presented. However, the allocations may not reflect the expenses we would have incurred as an independent company for the periods presented. Actual costs that may have been incurred if we had been a standalone company would depend on a number of factors, including the organizational structure, whether functions were outsourced or performed by employees, and strategic decisions made in areas such as IT and infrastructure.
For factors that could cause actual results to differ materially from those presented in the summary historical and pro forma combined financial information, see “Cautionary Statement Concerning Forward-Looking Statements” and “Risk Factors” included elsewhere in this information statement.
We derived the summary historical combined financial information for each of the fiscal years in the three-year period ended December 31, 2022 from our audited combined financial statements, and for each of the three months ended March 31, 2023 and 2022 and as of March 31, 2023 from our unaudited combined financial statements, which are included elsewhere in this information statement.
23
The summary unaudited pro forma combined financial information for the three months ended and as of March 31, 2023, and the year ended December 31, 2022, has been derived from our unaudited pro forma combined financial information, which are included elsewhere in this information statement.
Pro FormaHistorical
Three Months Ended March 31, 2023Year Ended December 31, 2022Three Months Ended
March 31,		Years Ended December 31,
2023(a)
2022(a)
2022 (a)
2021 (a)
2020 (a)(b)
Revenues$764.2 $3,096.1 $764.2 $779.0 $3,096.1 $3,057.5 $2,580.3 
Costs and expenses:
Direct costs, exclusive of depreciation and amortization (including purchases from related parties of $87.1, $70.1 and $54.7 during the years ended December 31, 2022, 2021 and 2020 and $21.7 and $20.2 during the three months ended March 31, 2023 and 2022, respectively.)
639.7 2,474.4 636.2 638.1 2,447.4 2,453.1 2,091.2 
Selling, general and administrative expenses, exclusive of depreciation and amortization79.6 299.9 78.0 75.0 279.8 303.1 267.6 
Depreciation and amortization24.0 96.3 22.8 23.6 92.7 166.3 119.0 
Goodwill and other asset impairments— 9.8 — — 9.8 — 405.7 
Restructuring and other charges1.2 30.5 1.2 9.6 30.5 20.7 11.0 
Total costs and expenses744.5 2,910.9 738.2 746.3 2,860.2 2,943.2 2,894.5 
Operating income (loss)19.7 185.2 26.0 32.7 235.9 114.3 (314.2)
Other income (expense):
Interest expense(32.7)(132.4)
Foreign exchange gain (loss)(5.5)(0.9)(5.5)4.3 (0.9)20.2 (18.8)
Other, net1.3 7.0 0.6 0.5 2.0 1.9 0.8 
Income (loss) before income taxes(17.2)58.9 21.1 37.5 237.0 136.4 (332.2)
Provision for income taxes(5.6)0.5 3.7 5.0 44.1 38.4 27.0 
Net income (loss)$(11.6)$58.4 $17.4 $32.5 $192.9 $98.0 $(359.2)
Earnings per share of common stock
Basic$(0.1)$0.6 
Diluted$(0.1)$0.6 
24
Historical
Three Months Ended
March 31,		Years Ended December 31,
2023 (a)
2022 (a)
2022 (a)
2021 (a)
2020 (a)(b)
Cash flow data:
Net cash provided by (used in):
Operating activities$3.4 $(60.6)$87.5 $169.8 $200.9 
Investing activities(16.2)(11.1)(54.0)(26.2)(161.2)
Financing activities19.9 82.4 (8.7)(128.5)(33.1)
Capital expenditures(16.2)(11.4)(54.4)(26.5)(24.0)
Other financial data:
Trailing twelve months net new business (c)
$3,811.4 $3,410.9 $3,727.2 $3,389.7 $3,661.4 
Backlog (at end of period) (c)
8,899.2 8,219.7 8,620.8 8,092.5 7,858.3 
Trailing twelve months book-to-bill(c)
1.3 x1.2 x1.2 x1.1 x1.4 x
Adjusted EBITDA (d)
$57.1 $74.8 $405.1 $349.8 $253.8 
Adjusted net income (d)
40.3 54.2 302.2 254.2 178.8 
Pro FormaHistorical
March 31,As of March 31As of December 31,
2023
2023 (a)
2022 (a)
2021 (a)
Balance sheet data:
Cash and cash equivalents$120.0 $120.2 $112.0 $94.6 
Property, plant and equipment, net174.3 180.4 164.9 162.6 
Working capital587.0 547.9 290.8 
Total assets4,306.5 4,307.3 4,287.9 4,368.7 
Total liabilities2,501.0 901.8 945.3 1,108.1 
Total equity1,805.5 3,405.5 3,342.6 3,260.6 
Pro forma net debt (d)
1,520.0 
Pro forma net debt leverage ratio (d)
3.9x
__________________
(a)Our combined balance sheet and statement of operations do not include an allocation of third-party debt or interest expense from Labcorp because we were not the legal obligor of the debt and because Labcorp’s debt financing is not directly attributable to our business. However, in connection with the spinoff, we expect to incur debt and such indebtedness would cause us to record additional interest expense in future periods. See “Description of Certain Indebtedness and Other Financing.”
(b)We acquired SnapIoT, Inc. on October 1, 2020 and GlobalCare Clinical Trials, LLC on July 15, 2020. The financial results of these entities have been included as of and since the dates of each acquisition.
(c)Net new business represent new contract awards, net of modifications, cancellations, foreign currency fluctuations and other adjustments. Backlog for all periods represents anticipated revenue for work not yet completed or performed (i) under signed contracts, letters of intent and, in some cases, orders that are supported by other forms of written communication and (ii) where there is sufficient or reasonable certainty about the customer’s ability and intent to fund and commence the services within twelve months. Book-to-bill is calculated using Revenues and Net new Business for the trailing twelve months.
(d)Adjusted EBITDA, Adjusted net income, Pro forma net debt and Pro forma net debt leverage ratio are non-GAAP financial measures. We believe these adjusted measures are useful to investors as a supplement to, but not as a substitute for, GAAP measures, in evaluating our operational performance and cash-flow. For additional information about these non-GAAP measures, including a reconciliation of each of these non-GAAP measures to its most directly comparable financial measure calculated in accordance with U.S. GAAP, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Information.”
25
RISK FACTORS
The following are certain risk factors that could affect our business, financial condition, results of operations, and cash flows. The risks that are highlighted below are not the only risks that we face. You should carefully consider each of the following risks and all of the other information contained in this information statement. Some of these risks relate principally to our spinoff from Labcorp, while others relate principally to our business and the industry in which we operate or to the securities markets generally and ownership of our common stock. If any of the following risks actually occur, our business, financial condition, results of operations, or cash flows could be negatively affected.
Risks Relating to the Spinoff
We may not realize the potential benefits from the spinoff.
We may not realize the potential benefits that we expect from our spinoff from Labcorp. We have described those anticipated benefits elsewhere in this information statement. See “The Spinoff—Reasons for the Spinoff.” In addition, as described elsewhere in this information statement, we will incur additional costs related to our separation from Labcorp. We also expect to incur additional ongoing costs related to operating as an independent public company and replacing the services previously provided by Labcorp. The costs associated with performing or outsourcing these functions may exceed our expectations. A significant increase in the costs of performing or outsourcing these functions could materially and adversely affect our business, financial condition, results of operations, and cash flows.
We have no history operating as an independent public company. We will incur additional expenses to create or supplement the corporate infrastructure necessary to operate as an independent public company and we will experience increased ongoing costs in connection with being an independent public company.
Our business has historically used Labcorp's corporate infrastructure and services to support our business functions. A portion of the expenses related to establishing and maintaining this infrastructure has been charged to us on a cost-allocation basis. Except as described under the caption “Relationship with Labcorp After the Spinoff,” after the distribution date we will no longer have access to Labcorp's infrastructure or services and we will need to establish or supplement our own. We may experience increased pricing in our supplier relationships for similar services due to lower volume requirements when we separate from Labcorp. The operational, financial, information system, and logistical separation from Labcorp is complex and involves numerous systems and jurisdictions. Following the spinoff, Labcorp will continue to provide some services to us on a transitional basis pursuant to a transition services agreement. For more information regarding the transition services agreement, see “Relationship with Labcorp After the Spinoff—Agreements Between Labcorp and Us—Transition Services Agreement.” However, we cannot assure you that all such functions will be successfully executed by Labcorp during the transition period. Also, we will have to expend significant efforts and costs (including potentially materially in excess of those estimated in the transition services agreement) to (i) replace or otherwise upgrade our systems, including our IT and enterprise resource planning systems, (ii) implement additional financial, IT, and management controls, (iii) implement reporting systems and procedures, (iv) hire additional management, IT, accounting, finance, legal, human resources, and other administrative staff and third-party service providers, (v) establish employee benefit programs, (vi) create a board of directors and corporate governance programs, (vii) carry out audit, tax and legal functions, and (vii) establish banking and credit facility arrangements. Any interruption in these services could have a material adverse effect on our business, financial condition, results of operations, and cash flows. In addition, at the end of this transition period, to the extent we are unable to perform particular functions ourselves, we will need to hire third parties to perform these functions on our behalf.
Our historical combined and pro forma financial information are not necessarily indicative of our future financial condition, results of operations, or cash flows nor do they reflect what our financial condition, results of operations, or cash flows would have been as an independent public company during the periods presented.
The historical combined financial information we have included in this information statement does not necessarily reflect what our financial condition, results of operations, or cash flows would have been as an
26
independent public company during the periods presented and is not necessarily indicative of our future financial condition, future results of operations, or future cash flows. This is primarily a result of the following factors:
•our historical combined financial results reflect allocations of expenses for services historically provided by Labcorp, and may not fully reflect the increased costs associated with being an independent public company, including significant changes that will occur in our cost structure, management, financing arrangements, and business operations as a result of our spinoff from Labcorp;
•our working capital and capital expenditure requirements historically have been satisfied as part of Labcorp's corporate-wide capital access, capital allocation, and cash management programs; our debt structure and cost of debt and other capital may be significantly different from that reflected in our historical combined financial statements; and
•the historical combined financial information may not fully reflect the effects of certain liabilities that will be incurred or assumed by us and may not fully reflect the effects of the assets that will be transferred to, and liabilities that will be assumed by Labcorp.
The pro forma adjustments are based on available information and assumptions that we believe are reasonable; however, our assumptions may prove not to be accurate. In addition, our unaudited pro forma combined financial information may not give effect to various ongoing additional costs that we may incur in connection with being an independent public company. Accordingly, our unaudited pro forma combined financial information does not reflect what our financial condition, results of operations, or cash flows would have been as an independent public company and are not necessarily indicative of our future financial condition, future results of operations, or future cash flows. Please refer to “Management's Discussion and Analysis of Financial Condition and Results of Operations” and “Unaudited Pro Forma Combined Financial Information” and our combined financial statements and corresponding notes included elsewhere in this information statement.
As an independent, publicly traded company, we may not enjoy the same benefits that we did as a part of Labcorp.
There is a risk that, by separating from Labcorp, we may become more susceptible to market fluctuations and other adverse events than we would have been if we were still a part of the current Labcorp organizational structure. Also, as a part of Labcorp, we have been able to enjoy certain benefits, including access to Labcorp’s data, corporate infrastructure, client relationships, purchasing power and cost of capital, among other benefits. As an independent, publicly traded company, we will not have the same benefits. Additionally, as part of Labcorp, we have been able to leverage Labcorp’s reputation and historical performance to help build our business, attract and retain talent, and recognize operational synergies, which, as an independent, publicly traded company, we will not be able to leverage.
If the spinoff and certain related transactions fail to qualify under Sections 355 and 368(a)(1)(D) of the Code, Labcorp and its stockholders could incur significant tax liabilities, and we could be required to indemnify Labcorp for taxes that could be material pursuant to indemnification obligations under the tax matters agreement.
Labcorp has received an IRS Ruling on certain issues relevant to the qualification of the spinoff and certain related transactions as tax-free under Sections 368(a)(1)(D) and 355 of the Code, based on certain facts and representations. The IRS Ruling does not address all of the requirements for tax-free treatment of the spinoff, and the spinoff is conditioned upon, among other things, Labcorp’s receipt of an opinion of tax counsel regarding the qualification of the spinoff and certain related transactions as generally tax-free, for U.S. federal income tax purposes, under Sections 355 and 368(a)(1)(D) of the Code. The IRS Ruling was, and the opinion will be, based on, among other things, certain factual assumptions, representations and undertakings from Labcorp and us, including those regarding the past and future conduct of the companies’ respective businesses and other matters. If any of these factual assumptions, representations, or undertakings are incorrect or not satisfied, Labcorp may not be able to rely on the IRS Ruling or tax opinion, and Labcorp and its stockholders could be subject to significant U.S. federal income tax liabilities. In addition, the opinion received will not be binding on the IRS or the courts and is expected to rely on the IRS Ruling with respect to the matters in such ruling.
27
Notwithstanding any private letter ruling or opinion of tax counsel, the IRS could determine on audit that the spinoff does not so qualify if it determines that any of these factual assumptions, representations or undertakings are not correct or have been violated or that the spinoff should be taxable for other reasons, including as a result of a significant change in stock or asset ownership after the spinoff. If the spinoff is ultimately determined not to so qualify, the spinoff could be treated as a taxable disposition of shares of stock by Labcorp and as a taxable dividend or capital gain to Labcorp’s stockholders for U.S. federal income tax purposes. In such case, Labcorp and its stockholders that are subject to U.S. federal income tax could incur significant U.S. federal income tax liabilities. See “The Spinoff—Material U.S. Federal Income Tax Consequences of the Spinoff.” Under the tax matters agreement that we intend to enter into with Labcorp, we could have an indemnification obligation to Labcorp with respect to taxes incurred by Labcorp that arise as a result of actions or omissions by us that prevent the spinoff, together with certain related transactions, from qualifying as tax-free under Sections 355 and 368(a)(1)(D) of the Code.
We might not be able to engage in certain transactions and equity issuances following the spinoff.
Our ability to engage in certain transactions could be limited or restricted after the spinoff in order to preserve, for U.S. federal income tax purposes, the qualification of the spinoff and certain related transactions under Sections 355 and 368(a)(1)(D) of the Code. Even if these transactions otherwise qualify for tax-free treatment to Labcorp’s stockholders under Section 355 of the Code, they may result in corporate-level taxable gain to Labcorp if there is a 50% or greater change in ownership, by vote or value, of shares of our stock, Labcorp’s stock or the stock of a successor of either occurring as part of a plan or series of related transactions that includes the spinoff. Any acquisitions or issuances of our stock or Labcorp’s stock within two years of the spinoff are generally presumed to be part of such a plan, although it may be possible to rebut that presumption. See “The Spinoff—Material U.S. Federal Income Tax Consequences of the Spinoff.”
Under the tax matters agreement that we intend to enter into with Labcorp, we will be required to comply with the representations and undertakings made in the IRS Ruling that Labcorp has received and in materials submitted to the IRS in connection therewith and to the tax advisors in connection with the opinions Labcorp expects to receive regarding the intended tax treatment of the spinoff and certain related transactions. The tax matters agreement will also restrict our ability to take or fail to take any action if such action or failure to act could adversely affect the intended tax treatment. In particular, except in specific circumstances, in the two years following the spinoff, we will be restricted from, among other things, (i) entering into any transaction pursuant to which all or a portion of our equity would be acquired, whether by merger or otherwise, and (ii) ceasing to actively conduct certain businesses or activities. These restrictions may limit our ability to pursue certain transactions that we may believe to be in the best interests of our stockholders or that might increase the value of our businesses. See “Relationship with Labcorp After the Spinoff—Agreements Between Labcorp and Us—Tax Matters Agreement.”
We will be subject to continuing contingent liabilities following the spinoff, including potential indemnification liabilities to Labcorp, and these liabilities could materially and adversely affect our business, financial condition, results of operations, and cash flows.
After the spinoff, there will be several significant areas where the liabilities of Labcorp may become our obligations. We will enter into a separation and distribution agreement with Labcorp that will provide for, among other things, the principal corporate transactions required to effect the spinoff, certain conditions to the spinoff, and provisions governing the relationship between us and Labcorp with respect to and resulting from the spinoff. For a description of the separation and distribution agreement, see “Relationship with Labcorp After the Spinoff—Agreements Between Labcorp and Us—Separation and Distribution Agreement.” Among other things, the separation and distribution agreement provides for indemnification obligations designed to make us financially responsible for substantially all liabilities that may exist relating to our business, whether incurred prior to or after the spinoff, and whether known or unknown at the time of the spinoff, as well as those obligations of Labcorp assumed by us pursuant to the separation and distribution agreement. If we are required to indemnify Labcorp under the circumstances set forth in the separation and distribution agreement, or meaningful unknown liabilities surface, we may be subject to substantial liabilities.
28
In addition, provisions of law may impose certain of Labcorp’s liabilities on us after the spinoff. For example, under the Code and the related rules and regulations, each corporation that was a member of the Labcorp consolidated U.S. federal income tax group during a taxable period or portion of a taxable period ending on or before the effective date of the spinoff is severally liable for the U.S. federal income tax liability of the Labcorp consolidated U.S. federal income tax group for that taxable period. Consequently, if Labcorp is unable to pay the consolidated U.S. federal income tax liability for a pre-spinoff period, we could be required to pay the amount of such tax, which could be substantial and in excess of the amount allocated to us under the tax matters agreement. Similar rules may apply for state, local, and non-U.S. tax purposes. Other provisions of law establish similar liability for other matters, including U.S. federal laws governing tax-qualified pension plans, as well as other contingent liabilities.
In connection with the spinoff, Labcorp will indemnify us for certain liabilities. However, there can be no assurance that the indemnity will be sufficient to insure us against the full amount of such liabilities, or that Labcorp's ability to satisfy its indemnification obligations will not be impaired in the future.
Pursuant to the separation and distribution agreement, Labcorp will agree to indemnify us for certain liabilities. However, third parties could seek to hold us responsible for any of the liabilities that Labcorp has agreed to retain, and there can be no assurance that the indemnity from Labcorp will be sufficient to protect us against the full amount of such liabilities, or that Labcorp will be able to fully satisfy its indemnification obligations. Moreover, even if we ultimately succeed in recovering from Labcorp any amounts for which we are held liable, we may be temporarily required to bear these losses ourselves. If Labcorp is unable to satisfy its indemnification obligations, the underlying liabilities could have a material adverse effect on our business, financial condition, results of operations, and cash flows.
After the spinoff, Labcorp's insurers may deny coverage to us for liabilities associated with occurrences prior to the spinoff. Even if we ultimately succeed in recovering from such insurance providers, we may be required to temporarily bear such loss of coverage.
The terms of the distribution and the agreements we will enter into with Labcorp in connection with the spinoff were determined solely by Labcorp.
The agreements that we will enter into with Labcorp in connection with the spinoff were prepared in the context of the spinoff while our business was still operated by and part of Labcorp, and the terms were determined by Labcorp as our sole owner. Because these agreements were negotiated in the context of a parent-subsidiary relationship prior to the spinoff where actual or perceived conflicts of interest may have been present, the terms of these agreements may be more or less favorable to us than those that would have resulted from arm's-length negotiations between unaffiliated third parties. See “Relationship with Labcorp After the Spinoff—Agreements Between Labcorp and Us.”
Our accounting, enterprise resource planning, and other management systems and resources may not be adequately prepared to meet the financial reporting and other requirements to which we will be subject following the spinoff. If we are unable to achieve and maintain effective internal controls, our business, financial condition, results of operations, and cash flows could be materially adversely affected.
Our financial results are currently included within the consolidated results of Labcorp, and we believe that our reporting and control systems are appropriate for a subsidiary of a public company. However, until the spinoff, we will not have been directly subject to the reporting and other requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As a result of the spinoff, we will be directly subject to reporting and other obligations under the Exchange Act, including the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). These reporting and other obligations will place significant demands on our management and administrative and operational resources, including our accounting and IT resources. To comply with these requirements, we anticipate that we will need to (i) replace or otherwise upgrade our systems, including our IT and enterprise resource planning systems, (ii) implement additional financial, IT, and management controls, (iii) implement reporting systems and procedures, and (iv) hire additional management, IT, accounting, finance, legal, human resources, and other administrative staff and third-party service providers. If we are unable to do so in
29
a timely and effective fashion, our ability to comply with our financial reporting requirements and other rules that apply to reporting companies under the Exchange Act could be impaired. Any failure to achieve and maintain effective internal controls could have a material adverse effect on our business, financial condition, results of operations, and cash flows.
Labcorp, at the direction of its board of directors, may abandon the spinoff at any time, and Labcorp, at the direction of its board of directors, may determine to amend or modify any and all terms of the spinoff related agreements at any time prior to the distribution date.
No assurance can be given that the spinoff will occur or, if it occurs, that it will occur on the terms described in this information statement. In addition to the conditions to the spinoff described herein (certain of which may be waived by Labcorp, at the direction of its board of directors in its sole discretion), Labcorp, at the direction of its board of directors, may abandon the spinoff at any time before the distribution date for any reason or for no reason. In addition, Labcorp, at the direction of its board of directors, may amend or modify any and all terms of the spinoff and the related transactions and agreements at any time prior to the distribution date. If the spinoff is completed and the Labcorp board of directors waived any such condition, such waiver could have a material adverse effect on (i) Fortrea’s and Labcorp’s respective business, financial condition or results of operations, (ii) the trading price of Fortrea’s common stock, (iii) the ability of stockholders to sell their Fortrea shares after the distribution, including, without limitation, as a result of (a) illiquid trading if Fortrea common stock is not accepted for listing or (b) litigation relating to any injunctions sought to prevent the consummation of the spinoff or (iv) the tax consequences of the spinoff. In the event Labcorp, at the direction of its board of directors, waives a material condition or amends or modifies the spinoff or the ancillary agreements entered into thereto, Labcorp will evaluate the applicable facts and circumstances at that time and make such additional disclosure and take such other actions as Labcorp determines to be necessary and appropriate in accordance with applicable law.
The transfer to us of certain contracts, permits and other assets and rights may require the consents, approvals of, or provide other rights to, third parties and governmental authorities. If such consents or approvals are not obtained, we may not be entitled to the full benefit of such contracts, permits and other assets and rights, which could increase our expenses or otherwise harm our business and financial performance.
The separation and distribution agreement will provide that certain contracts, permits and other assets and rights are to be transferred from Labcorp or its subsidiaries to us or our subsidiaries in connection with the separation. The transfer of certain of these contracts, permits and other assets and rights may require consents or approvals of third parties or governmental authorities or provide other rights to third parties. In addition, in some circumstances, we and Labcorp are joint beneficiaries of contracts, and we and Labcorp may need the consents of third parties in order to split or separate the existing contracts or the relevant portion of the existing contracts to us or Labcorp.
Some parties may use consent requirements or other rights to seek to terminate contracts or obtain more favorable contractual terms from us, which, for example, could take the form of price increases or shortened payment terms from suppliers or price reductions or extended payment terms from customers. This could require us to expend additional resources in order to obtain the services or assets previously provided under the contract, or require us to seek arrangements with new third parties or obtain letters of credit or other forms of credit support. If we are unable to obtain required consents or approvals, we may be unable to obtain the benefits, permits, assets and contractual commitments that are intended to be allocated to us as part of our separation from Labcorp, and we may be required to seek alternative arrangements to obtain services and assets that may be more costly and/or of lower quality. The termination or modification of these contracts or permits or the failure to timely complete the transfer or separation of these contracts or permits could negatively affect our business, financial condition, results of operations and cash flows.
After the distribution, certain members of management, directors, and stockholders will hold stock in both Labcorp and us, and as a result may face actual, perceived, or potential conflicts of interest.
After the distribution, certain members of management and directors of each of Labcorp and us will own both Labcorp common stock and our common stock. See “Security Ownership of Certain Beneficial Owners and Management.” This ownership overlap could create, or appear to create, potential conflicts of interest when our
30
management and directors and Labcorp's management and directors face decisions that could have different implications for us and Labcorp. For example, potential conflicts of interest could arise in connection with the resolution of any dispute between Labcorp and us regarding the terms of the agreements governing the distribution and our relationship with Labcorp thereafter. Potential conflicts of interest may also arise out of any commercial arrangements that we or Labcorp may enter into in the future.
Our rebranding will involve substantial costs and may not be favorably received by customers, sites, suppliers, employees and candidates, or investors.
Prior to the spinoff, we have conducted our business under Labcorp and its associated brands, including Labcorp Drug Development and Covance. In connection with the spinoff, we will conduct our business under Fortrea Holdings Inc., a new name, and certain associated brands, also with new names. Our rebranding is in process and will be an ongoing initiative. We may not improve upon the brand recognition associated with Labcorp and its historical or associated brands with customers, sites, suppliers, employees and candidates. In addition, the rebranding will involve significant costs and require the dedication of significant time and effort by management and other personnel.
We cannot predict the impact of this rebranding on our business. However, if we fail to establish, maintain and/or enhance brand recognition associated with the “Fortrea” name, it may affect our relations investigator sites or customers, which may adversely affect our ability to generate revenues and could impede our business. Additionally, the costs and the dedication of time and effort associated with the rebranding may negatively impact our profitability.
Risks Relating to Our Business
If we do not generate a large number of net new business awards, or if net new business awards are delayed, terminated, reduced in scope, or fail to go to contract, our business, financial condition, results of operations, or cash flows may be materially adversely affected.
Our business is dependent on our ability to generate net new business from new and existing customers and maintain existing customer contracts. Our inability to generate net new business on a timely basis and subsequently enter into contracts for such awards could have a material adverse effect on our business, financial condition, results of operations or cash flows.
Our customer contracts may be delayed or terminated by our customers without significant notice periods. The time between when a project is awarded and when it goes to contract is typically several months, and prior to a net order going to contract, our customer can cancel the award without notice. Once an award goes to contract, the majority of our customers can terminate the contract without cause with a notice period that generally ranges from 30 to 90 days. Our contracts may be delayed or terminated by our customers or reduced in scope for a variety of reasons beyond our control, including, but not limited to:
•decisions to forego or terminate a particular trial;
•budgetary limits or changing priorities;
•actions by regulatory authorities;
•production problems resulting in shortages of the candidate drug being tested;
•failure of products being tested to satisfy safety requirements or efficacy criteria;
•unexpected or undesired clinical results for products;
•insufficient patient enrollment in a trial;
•insufficient principal investigator recruitment;
31
•the customers’ decision to terminate or scale back the development or commercialization of a product or to end a particular project;
•shift of business to a competitor or internal resources;
•product withdrawal following market launch; or
•customers’ hesitation or delays in orders pending completion of the spinoff.
Furthermore, many of our functional service provider and consulting services are tied to a customer’s annual budgets or ad hoc service requests, which can lead to seasonal variability in revenue and less predictability in future revenues. In addition, many of these service contracts provide our customers with the opportunity to internalize the resources provided under the contract and terminate all or a portion of the services we provide under the contract. Our customers may also decide to shift their business to a competitor. Each of these factors results in less visibility to future revenues and may result in high volatility in future revenues.
Contract terminations, delays and modifications are a regular part of our business. For example, our full-service projects have been, and may continue to be, negatively impacted by project delays, which impact near term revenue disproportionately. In addition, project delays, downsizings and cancellations, particularly with our functional service provider delivery models, have impacted our results in the past and might impact them in the future. The loss, reduction in scope or delay of a large project or of multiple projects could have a material adverse effect on our business, results of operations, and financial condition. In addition, we might not realize the full benefits of our backlog.
In the event of termination, our contracts often provide for fees for winding down the project, which include both fees incurred and actual and non-cancellable expenditures and may include a fee to cover a percentage of the remaining professional fees on the project. These fees might not be sufficient for us to maintain our margins, and termination may result in lower resource utilization rates and therefore lower operating margins. In addition, cancellation of a contract or project for the reasons noted above may result in the unwillingness or inability of our customer to satisfy its existing obligations to us such as payments of accounts receivable, which may in turn result in a material impact to our results of operations and cash flow. Historically, cancellations and delays have negatively impacted our operating results, and they might impact them in the future. In addition, we might not realize the full benefits of our backlog if our customers cancel, delay, or reduce their commitments to us, which may occur if, among other things, a customer decides to shift its business to a competitor or revoke our status as a preferred provider. Thus, the loss or delay of a large business award or the loss or delay of multiple awards could adversely affect our revenues and profitability. Additionally, a change in the timing of a net new business award could affect the period over which we recognize revenue and reduce our revenue in any one quarter.
If we are unable to contract with suitable investigators and recruit and enroll patients for clinical trials, our business might suffer.
The recruitment of physicians, also referred to as investigators, and patients for clinical trials is essential to our business. Investigators are typically located at hospitals, clinics, or other sites and supervise the administration of the investigational drug or device to patients during the course of a clinical trial. Because the successful conduct of a clinical trial at a particular site is often dependent upon the integrity, experience, and capabilities of the investigators conducting the trial, recruiting qualified investigators is critical.
Patients generally include people from the communities in which the clinical trials are conducted. Several of our competitors have purchased site networks or site management organizations as a strategy for priority access to a specific site, which could put us at a competitive disadvantage. Our clinical development business could be adversely affected if we are unable to contract with suitable and willing investigators or recruit and enroll patients for clinical trials on a consistent basis. The expanding global nature of clinical trials increases the risk associated with attracting suitable investigators and patients, especially if these trials are conducted in regions where our resources or experience may be more limited. For example, if we are unable to engage investigators to conduct clinical trials as planned or enroll sufficient patients in clinical trials, we might need to expend additional funds to obtain access to more investigators and patients than planned or else be compelled to delay or modify the clinical
32
trial plans, which may result in additional costs to us or cancellation of the clinical trial by our customer. If realized, these risks may also inhibit our ability to attract new business, particularly in certain regions.
The COVID-19 pandemic and associated economic repercussions have adversely impacted our business and results of operations, and are expected to continue to do so.
The ongoing COVID-19 pandemic and associated economic repercussions have significantly impacted, and are expected to continue to impact, our business and our operations. With the spread of COVID-19 variants, the ongoing impacts of the COVID-19 pandemic could continue to adversely impact our business and results of operations in a number of ways, including, but not limited to:
•delays or difficulties in commencing new and operating ongoing clinical trials, including intermittent challenges accessing investigative sites, delays in enrolling patients, delays in obtaining approvals from regulatory authorities, and difficulty obtaining necessary pharmaceutical and other products and supplies;
•restrictions on the ability of our field teams to visit healthcare providers and difficulty securing appropriate personal protective equipment and COVID-19 testing and other tools required for client-facing engagements and visits to sites/healthcare providers;
•diversion of healthcare resources away from the conduct of clinical trials, including the diversion of hospitals serving as our clinical trial sites and hospital staff supporting the conduct of our clinical trials, as well as the reduction of our customers’ operating budgets;
•interruption of key clinical trial activities, such as clinical trial site data monitoring, due to social distancing requirements, COVID-19 quarantine and isolation protocols or interruption of clinical trial subject visits and study procedures, which may impact the collection and integrity of study data and ability to measure clinical trial endpoints;
•business disruptions at our customers;
•limitations on our employee resources, including because of COVID-19 quarantine and isolation protocols, sickness of employees or their families or the desire of employees to avoid contact with large groups of people;
•continued disruptions to our supply chain;
•diversion of management resources to focus on mitigating the impacts of the COVID-19 pandemic;
•increased cybersecurity risks due to the number of employees that are working remotely in regions impacted by stay-at-home orders, increased levels of remote access creating additional opportunities for cybercriminals to exploit vulnerabilities and employees that may be more susceptible to phishing and social engineering attempts;
•increased cyber-attacks, such as phishing attacks by threat actors using the attention placed on the pandemic as a method for targeting our personnel; and
•strained technological resources due to the number of remote users.
These and other impacts of the COVID-19 pandemic could also have the effect of heightening many of the other factors described in these “Risk Factors” and other parts of this information statement. The ultimate impact depends on the severity and duration of the COVID-19 pandemic, including the emergence and spread of COVID-19 variants, the continued availability and effectiveness of vaccines and treatments, and actions taken by governmental authorities and other third parties in response to the pandemic, each of which is uncertain, rapidly changing and difficult to predict. Any of these disruptions could adversely impact our business and results of operations.
33
Our international operations could subject us to additional risks and expenses that could adversely impact our business or results of operations.
Our international operations expose us to risks from potential failure to comply with foreign laws and regulations that differ from those under which we operate in the U.S. In addition, we may be adversely affected by other risks of expanded operations in foreign countries, including, but not limited to, compliance with export controls and trade regulations; changes in tax policies or other foreign laws; compliance with foreign labor and employee relations laws and regulations; restrictions on currency repatriation; judicial systems that less strictly enforce contractual rights; countries that do not have clear or well-established laws and regulations concerning issues relating to drug development services; countries that provide less protection for intellectual property rights; and procedures and actions affecting approval, production, pricing, reimbursement and marketing of products and services. Further, international operations could subject us to additional expenses that we may not fully anticipate, including those related to enhanced time and resources necessary to comply with foreign laws and regulations, difficulty in collecting accounts receivable and longer collection periods, and difficulties and costs of staffing and managing foreign operations. In some countries, our success will depend in part on our ability to form relationships with local partners. Our inability to identify appropriate partners or reach mutually satisfactory arrangements could adversely affect the business and operations.
Our embedded and functional outsourcing services could subject us to employment liability, which may cause adverse effects on our business.
With our embedded and functional outsourcing services, we place employees at the physical workplaces of our customers. The risks of this activity include claims of errors and omissions, misuse or misappropriation of client proprietary information, theft of client property, and torts or other claims under employment liability, co-employment liability, or joint employment liability, as well as claims of misclassification or noncompliance with various employment and staffing laws and regulations. We have policies and guidelines in place to reduce our exposure to such risks, but if we fail to follow these policies and guidelines we may suffer reputational damage, loss of customer relationships and business, monetary damages, fines, and other governmental actions.
Our customer or therapeutic area concentration may have a material adverse effect on our business, financial condition, results of operations or cash flows.
If any large customer decreases or terminates its relationship with us, our business, financial condition, results of operations or cash flows could be materially adversely affected. For the year ended December 31, 2022, our top ten customers based on revenue accounted for approximately 45% of our consolidated revenue and our top ten customers based on backlog accounted for approximately 50% of our total backlog. No single customer accounted for greater than 10% of our total consolidated revenue for the years ended December 31, 2022. It is possible that an even greater portion of our revenues will be attributable to a smaller number of customers in the future, including as a result of our entering into strategic provider relationships with customers. Also, consolidation in our potential customer base results in increased competition for important market segments and fewer available customer accounts.
Additionally, conducting multiple clinical trials and providing other development or post-approval services for different customers in a single therapeutic class involving drugs with the same or similar chemical action may adversely affect our business if some or all of the trials or services are canceled because of new scientific information or regulatory judgments that affect the drugs as a class. Further, concentration in a particular therapeutic class could cause trials we are conducting for our customers to compete with one another for limited resources (e.g., patients, academic interest, funding), which could impact the successful completion or timely of these studies, and therefore our business.
Our customers may experience insufficient funding to complete a clinical trial.
Clinical trials can cost hundreds of millions of dollars. There is a risk that we may initiate a clinical trial for a customer, and then the customer becomes unwilling or unable to fund our services or the completion of the clinical trial as a whole. In such a situation, it may be necessary for us to complete or wind down the clinical trial at our own expense due to regulatory or ethical obligations. In these circumstances, we may incur substantial costs and
34
expend resources without compensation from our customer due to their lack of funds, bankruptcy or other negative financial circumstances.
Our backlog might not be indicative of our future revenues, and we might not realize all of the anticipated future revenue reflected in our backlog.
Our backlog consists of anticipated revenue awarded from contract and pre-contract commitments that are supported by written communications. Once work begins on a project, revenue is recognized over the duration of the project, provided the award has gone to contract. Projects may be canceled or delayed by the customer or delayed by regulatory authorities for reasons beyond our control. To the extent projects are delayed, the timing of our revenue could be adversely affected. In addition, if a customer terminates a contract, we typically would be entitled to receive payment for all services performed up to the termination date and subsequent customer authorized services related to terminating the canceled project. Typically, however, we have no contractual right to the full amount of the future revenue reflected in our backlog in the event of a contract termination or subsequent changes in scope that reduce the value of the contract. The duration of the projects included in our backlog, and the related revenue recognition, typically range from a few months to several years. Our backlog might not be indicative of our future revenues, and we might not realize all the anticipated future revenue reflected in that backlog. A number of factors may affect the backlog, including:
•the size, complexity, and duration of projects or strategic relationships;
•the cancellation or delay of projects;
•the failure of one or more business awards to go to contract; and
•changes in the scope of work during the course of projects.
The rate at which our backlog converts to revenue may vary over time. The revenue recognition on larger, more global projects could be slower than on smaller, more regional projects for a variety of reasons, including, but not limited to, an extended period of negotiation between the time the project is awarded to us and the actual execution of the contract, as well as an increased time frame for obtaining the necessary regulatory approvals.
Our backlog as of March 31, 2023 was $8.9 billion. Although an increase in backlog will generally result in an increase in revenues over time, an increase in backlog at a particular point in time does not necessarily correspond directly to an increase in revenues during any particular period, or at all. The extent to which contracts in backlog will result in revenue depends on many factors, including, but not limited to, delivery against project schedules, scope changes, contract terminations and the nature, duration, and complexity of the contracts, and can vary significantly over time.
Increased competition, including price competition, could have a material adverse effect on our revenues and profitability.
We operate in a highly competitive industry. Competitors in CRO industry range from hundreds of smaller CROs to a limited number of large CROs with global capabilities. Our main competition consists of these small and large CROs, as well as in-house departments of pharmaceutical, biotechnology and medical device companies and, to a lesser extent, select universities and teaching hospitals. Our services have from time to time experienced periods of increased price competition that had an adverse effect on our revenues and profitability. There is competition among CROs for both customers and potential acquisition candidates. Additionally, few barriers to entering the CRO industry further increases possible new competition. These competitive pressures may affect the attractiveness or profitability of our services, and could adversely affect our financial results.
An inability to attract and retain experienced and qualified personnel, including key management personnel and increased personnel costs, could adversely affect our business. 
The loss of key management personnel or the inability to attract and retain experienced and qualified employees and increased costs related to such personnel and employees could adversely affect the business. There is significant competition for qualified personnel in the CRO industry. In the future, if competition for the services of these
35
professionals increases and, correspondingly, the cost of these professionals increases, we may not be able to continue to attract and retain individuals in our markets. Changes in key management, or the ability to attract and retain qualified personnel, as a result of increased competition for talent, wage growth, or other market factors (including costs) could lead to strategic and operational challenges and uncertainties, distractions of management from other key initiatives, and inefficiencies and increased costs, any of which could adversely affect our business, financial condition, results of operations, and cash flows.
We depend on third parties to provide services critical to our business, and depend on them to comply with applicable laws and regulations.
We depend on third parties to provide services critical to our business, including, but not limited to, investigators and clinical trial sites, IT services, laboratory services, third-party transportation and travel providers, freight forwarders and customs brokers, drug depots and distribution centers, suppliers or contract manufacturers of drugs for patients participating in clinical trials, and providers of licensing agreements, maintenance contracts, or other services. In addition, we also rely on third-party CROs and other contract clinical personnel for clinical services either in regions where we have limited resources, or in cases where demand cannot be met by our internal staff. In some circumstances, our customers require that we take on responsibility for the performance of these third parties as part of our overall service delivery. The failure of any of these third parties to adequately provide us timely critical support services in accordance with applicable laws and regulations could have a material adverse effect on our business, results of operations and reputation.
If we are unable to effectively manage our growth strategy, our business could be adversely affected.
To manage our growth, we must continue to attract and retain top personnel and invest in our operating systems. We believe that maintaining and enhancing both personnel and our systems at reasonable cost are instrumental to our continued growth and success. We cannot assure you that we will be able to enhance our current technology or obtain new technology that will enable our systems to keep pace with industry developments and the sophisticated needs of our customers. The nature and pace of our growth introduces risks associated with quality control and customer dissatisfaction due to delays in performance or other problems. In addition, non-U.S. operations involve the additional risks of assimilating differences in non-U.S. business practices, hiring and retaining personnel and overcoming language barriers. Failure to manage our growth effectively could adversely affect our business.
Our relationships with existing or potential customers who are in competition with each other may adversely impact the extent to which those customers use our services.
The biopharmaceutical industry is highly competitive, and we regularly provide services to customers that are developing competing drugs. Given the adverse competitive interests, customers may discourage us from providing services to a competing customer or potential customer or limit the scope to which competitors can use our services. The loss of, or reduction in, services that we can provide to existing or potential customers may have a material adverse effect on our business, operations, or financial condition.
Our business is dependent upon access to data and an inability to access the necessary data from Labcorp or others on commercially reasonable terms or at all could adversely affect our business.
Access to data is foundational to any CRO and through our unique relationship with Labcorp, as set forth in the Patient and Site Data Agreement, we have access to large datasets relevant to clinical trials. However, the Patient and Site Data Agreement, which has an initial two-year term, may be terminated in certain situations and ultimately will expire. An inability to purchase or access the necessary data (from Labcorp pursuant to the Patient and Site Data Agreement or from other third parties) now, or in the future, on commercially reasonable terms or at all, could have a material adverse effect on our business, financial condition and results of operations.
36
Risks Relating to Regulatory and Compliance Matters
Failure to comply with the regulations of pharmaceutical and medical device regulatory agencies, such as the FDA, the MHRA in the U.K., the EMA, the NMPA in China, and the PMDA in Japan, could result in sanctions and/or remedies against us and have a material adverse effect on us.
The operation of our clinical trials must conform to good clinical practice (“GCP”), as applicable, as well as all other applicable standards and regulations. If we do not comply, we could potentially be subject to civil, criminal or administrative sanctions and/or remedies, including suspension of our ability to conduct preclinical and clinical studies, and to import or export to or from certain countries, which could have a material adverse effect upon us.
Additionally, certain of our services and activities must conform to current good manufacturing practice (“cGMP”). Failure to maintain compliance with GCP or cGMP regulations and other applicable requirements of various regulatory agencies could result in warning or untitled letters, fines, unanticipated compliance expenditures, suspension of manufacturing, and civil, criminal or administrative sanctions and/or remedies against us, including suspension of our operations, which could have a material adverse effect upon us.
Failure to comply with national, state, local or international environmental, health and safety laws and regulations, could result in fines and penalties and loss of licensure, and have a material adverse effect upon our business. 
We are subject to laws and regulations relating to the protection of the environment and human health and safety, including laws and regulations relating to the handling, transportation and disposal of medical specimens, infectious and hazardous waste and radioactive materials, as well as regulations relating to the safety and health of employees. Failure to comply with these laws and regulations could subject us to denial of the right to conduct business, fines, criminal penalties and/or other enforcement actions that could have a material adverse effect on our business. In addition, compliance with future legislation could impose additional requirements on us that may be costly.
Changes in government regulation or in practices relating to the pharmaceutical, biotechnology, or medical device industries could decrease the need for certain services that we provide.
We assist pharmaceutical, biotechnology and medical device companies in navigating the regulatory approval process. Changes in regulations such as a relaxation in regulatory requirements or the introduction of simplified approval procedures, or an increase in regulatory requirements that we have difficulty satisfying or that make our services less competitive, could eliminate or substantially reduce the demand for our services. Also, if government efforts to contain drug and medical product and device costs impact profits from such items, or if health insurers were to change their practices with respect to reimbursement for those items, some of our customers may spend less, or reduce their growth in spending on R&D. In the U.S., for example, the recently enacted Inflation Reduction Act includes provisions authorizing government negotiated pricing for certain drugs and other price restrictions that may have the effect of reducing pharmaceutical and biotechnology manufacturer revenue and investments in the development of new drugs.
In addition, implementation of healthcare reform legislation that adds costs could limit the profits that can be made from the development of new drugs and medical products and devices. This could adversely affect R&D expenditures by such companies, which could in turn decrease the business opportunities available to us both in the U.S. and other countries. New laws or regulations may create a risk of liability, increase our costs or limit our service offerings.
Failure to comply with privacy and security laws and regulations could result in fines, penalties and damage to our reputation with customers and have a material adverse effect upon our business.
If we do not comply with existing or new laws and regulations related to protecting the privacy and security of personal or health information, we could be subject to monetary fines, civil penalties or criminal sanctions. In the U.S., we may obtain health information from third parties (e.g., healthcare providers who sponsor trials) that are subject to privacy and security requirements under the Health Insurance Portability and Accountability Act of 1996,
37
the Health Information Technology for Economic and Clinical Health Act, and their implementing regulations, (collectively, “HIPAA”). Although we are not directly subject to HIPAA, we could be subject to criminal penalties if we knowingly obtain, use, or disclose individually identifiable health information maintained by a HIPAA covered entity in a manner that is not authorized or permitted by HIPAA. HIPAA generally requires that healthcare providers and other covered entities obtain written authorizations from patients prior to disclosing protected health information of the patient (unless an exception to the authorization requirement applies). If authorization is required and the patient fails to execute an authorization or the authorization fails to contain all required provisions, then we may not be allowed access to and use of the patient’s information and our research support efforts could be impaired or delayed. Furthermore, use and disclosure of protected health information that is provided to us pursuant to a valid patient authorization is subject to the limits set forth in the authorization. Moreover, patients about whom we or our partners obtain information, as well as third parties who share this information with us, may have contractual rights that limit our ability to use and disclose the information. In addition, HIPAA does not replace federal, state, international or other laws to which we may be subject that may grant individuals even greater privacy protections. Federal and state laws that protect the privacy and security of patient information may be subject to enforcement and interpretations by various governmental authorities and courts, resulting in complex compliance issues. For example, we could incur damages under state laws, including pursuant to an action brought by a private party for the wrongful use or disclosure of health information or other personal information.
We also are subject to the California Consumer Privacy Act (“CCPA”), which became effective as of January 2020, and creates individual privacy rights for California consumers and increases the privacy and security obligations of entities handling certain personal information. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. Further, the California Privacy Rights Act (“CPRA”) recently passed in California. The CPRA will impose additional data protection obligations on covered businesses, including additional consumer rights processes, limitations on data uses, new audit requirements for higher risk data, and opt outs for certain uses of sensitive data. It will also create a new California data protection agency authorized to issue substantive regulations and could result in increased privacy and information security enforcement. The majority of the provisions have gone into effect on January 1, 2023, and additional compliance investment and potential business process changes may still be required. Similar laws have passed in Virginia, Colorado, Connecticut, and Utah, and have been proposed in other states and at the federal level, reflecting a trend toward more stringent privacy legislation in the U.S. The enactment of such laws could have potentially conflicting requirements that would make compliance challenging. In the event that we are subject to or affected by the CCPA, the CPRA, or other domestic privacy and data protection laws, any liability from failure to comply with the requirements of these laws could adversely affect our financial condition.
We may also be required to comply with the data privacy and security laws of other countries in which we operate or with which we transfer and receive data. For example, in the European Economic Area, we are subject to the EU General Data Protection Regulation, and in the U.K., we are subject to the U.K. data protection regime consisting primarily of the U.K. General Data Protection Regulation, or U.K. GDPR, and the U.K. Data Protection Act 2018, (collectively, the “GDPR”), which include a range of compliance obligations for subject companies and imposes penalties for noncompliance of up to the greater of €20 million or 4% of worldwide revenue. We have established processes and frameworks to manage compliance with the GDPR. Potential fines and penalties in the event of a violation of the GDPR could have a material adverse effect on our business and operations. In addition, similar data protection regulations addressing access, use, disclosure and transfer of personal data have been enacted or updated in regions where we do business, including in Asia, Latin America, and Europe. We expect to make changes to our business practices and to incur additional costs associated with compliance with these evolving and complex regulations.
In addition to data protection laws and regulations, government agencies are considering (or are adopting) other laws, regulations and guidelines that impact the processing of personal information. For example, the evolving landscape surrounding the use of AI and online advertising may lead to additional compliance costs and could increase our overall risk.
38
Failure to comply with federal, state, and foreign laws and regulations, including healthcare fraud and abuse laws, anti-corruption laws and regulations, trade sanction laws and regulations, and privacy and security laws and regulations, could result in substantial penalties and our business, financial condition, results of operations, cash flows, and prospects could be adversely affected.
Even though we do not and will not order healthcare services or bill directly to Medicare, Medicaid, or other third-party payers, certain federal, state, and foreign healthcare laws and regulations pertaining to healthcare fraud and abuse, including anti-kickback and anti-inducement laws related to the furnishing of healthcare items and services, are and will be applicable to our business. Such laws also include “sunshine act” legislation in various jurisdictions that require us to track and report on payments and other transfers of value to certain healthcare professionals, providers and institutions. Because of the breadth of these laws and the narrowness of available statutory and regulatory exceptions, it is possible that some of our business activities could be subject to challenge under one or more of such laws. If we or our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, imprisonment of employees or others acting on our behalf, and the curtailment or restructuring of our operations, any of which could materially adversely affect our ability to operate our business, our financial results, and our reputation.
International operations may increase our exposure to liabilities under the anti-corruption laws.
Anti-corruption laws in the countries where we conduct business, including the U.S. Foreign Corrupt Practices Act (“FCPA”), U.K. Bribery Act 2010 (the “Bribery Act”), and similar laws in other jurisdictions, prohibit companies and their intermediaries from engaging in bribery including improperly offering, promising, paying or authorizing the giving of anything of value to individuals or entities for the purpose of corruptly obtaining or retaining business. We operate in some parts of the world where corruption may be common and where anti-corruption laws may conflict to some degree with local customs and practices. We will establish, prior to the spinoff, and maintain an anti-corruption program including policies, procedures, training and safeguards in the engagement and management of third parties acting on our behalf. Despite these safeguards, we cannot guarantee protection from corrupt acts committed by employees or third parties associated with us. Violations or allegations of violations of anti-corruption laws could have a significant adverse effect on our business or results of operations.
Risks Relating to Technology and Cybersecurity
Failure to maintain the security of customer-related information or compliance with security requirements could damage our reputation with customers, cause us to incur substantial additional costs and become subject to litigation and enforcement actions.
We receive and store certain personal, and financial information about our customers. In addition, we depend upon the secure transmission of confidential information over public networks, including information permitting cashless payments. We also work with third-party service providers and vendors that provide technology systems and services that are used in connection with the receipt, storage, and transmission of customer personal, and financial information. A compromise in our security systems, or those of our third-party service providers and vendors, that results in customer personal information being obtained by unauthorized persons, or our or a third party's failure to comply with security requirements for financial transactions could adversely affect our reputation with our customers and others, as well as our results of operations, financial condition and liquidity. Such a compromise could also result in litigation against us and the imposition of fines and penalties.
Failure in our IT systems, including hardware and software failures, delays in the operation of computer and communications systems, and the failure to implement new systems or system enhancements may harm us.
Our operations and success depend on the efficient and uninterrupted operation of our IT systems. Despite network security measures and other precautions we have taken, our IT systems are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptions. In addition, we may experience system failures or interruptions as a result of integrating the IT systems of any recent acquisitions. Sustained system failures or interruption of our systems in one or more of our operations could disrupt our ability to perform operations. A failure of the network or data-gathering procedures could impede the processing of data, delivery of databases and
39
services and day-to-day management of the business and could result in the corruption or loss of data. While certain operations have appropriate disaster recovery plans in place, there currently are not redundant facilities everywhere in the world to provide IT capacity in the event of a system failure. Despite any precautions we may take, damage from fire, floods, hurricanes, geopolitical events, governmental action, power loss, telecommunications failures, computer viruses, break-ins, cybersecurity breaches and similar events at our various computer facilities could result in interruptions in the flow of data to the servers and from the servers to customers. In addition, any failure by the computer environment to provide required data communications capacity could result in interruptions in service. In the event of a delay in the delivery of data, we could be required to transfer data collection operations to an alternative provider of server-hosting services. Such a transfer could result in delays in the ability to deliver products and services to customers. Additionally, significant delays in the planned delivery of system enhancements, or improvements and inadequate performance of the systems once they are completed could damage our reputation. Failure of our IT systems could adversely affect our business, profitability and financial condition.
Security breaches and unauthorized access to our or our customers’ data could harm our reputation and adversely affect our business.
We have experienced and expect to continue to experience attempts by computer programmers and threat actors to attack and penetrate our layered security controls. We have also experienced and expect to continue to experience similar attempts to attack and penetrate the systems of third-party suppliers and vendors to whom we have provided data. While these attempts have not resulted in any material breaches of the data of our customers, such attempts, if successful, could result in the misappropriation or compromise of personal information or proprietary or confidential information stored within our systems or within the systems of third parties, create system disruptions or cause shutdowns. External actors are developing and deploying viruses, worms and other malicious software programs that attack our systems, the systems of third-parties, or otherwise exploit any security vulnerabilities. Outside parties may also attempt to fraudulently induce our staff to take actions, including the release of confidential or sensitive information or to make fraudulent payments through illegal electronic spamming, phishing, spear phishing, or other tactics. We have information security procedures and other safeguards in place, which we update in response to threat information from public and private sector sources and public announcements of attempted or successful breaches at other companies. However, because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate all of these techniques or to implement adequate preventive measures. In addition, as cyber threats continue to evolve, we may be required to expend additional resources to continue to enhance our information security measures or to investigate and remediate any information security vulnerabilities. Our remediation efforts may not be successful and could result in interruptions, delays or cessation of service. This could also impact the cost and availability of cyber insurance to us. Breaches of our or third parties' security measures and the unauthorized dissemination of personal, proprietary or confidential information about us or our customers or other third parties could expose customers’ private information. Such breaches could expose customers to the risk of financial harm or identity theft or expose us or other third parties to a risk of loss or misuse of this information, result in litigation and potential liability for us, damage our brand and reputation or otherwise harm our business. Any of these disruptions or breaches of security could have a material adverse effect on our business, regulatory compliance, financial condition and results of operations.
We use internally developed and licensed technology systems to manage various aspects of clinical trials and failures of these systems, including errors in design, programming or validation, could adversely affect our business.
We develop, maintain and license software as a service and application solutions alongside licensed technology systems to implement and manage various aspects of clinical trials. These systems are used in clinical trial randomization, investigational product supply management, DCT execution and other clinical trial functions. These systems often involve integrations with third party systems. Incorrect design, programming or validation of these systems could lead to substantial data integrity or patient safety issues potentially resulting in the invalidation of the clinical trial, claims against us and could otherwise adversely affect our financial results.
40
Failure to keep pace with rapid technological changes could make our services less competitive or obsolete.
The biopharmaceutical industry generally, and drug development services industry more specifically, is subject to increasingly rapid technological changes. Our customers, competitors and other businesses might acquire or develop technologies or services that are more effective or commercially attractive than our current or future technologies or services or that render our technologies or services less competitive or potentially obsolete. If competitors acquire or introduce superior technologies or services and we cannot procure or develop these technologies or services or enhance ours in a timely manner to remain competitive, our competitive position, and in turn our business, results of operations, financial condition and/or cash flows may be materially adversely affected.
Risks Relating to Legal Matters
Failure to comply with the contractual requirements of our agreements with customers or third party service providers could result in claims and/or remedies against us and have a material adverse effect on us and our reputation could be harmed.
Our contracts with our pharmaceutical and medical device customers span a wide range of clinical trial services and solutions. These services are complex and often involve the integration of third parties. Our customer contracts contain numerous requirements and obligate us to perform our services in accordance with applicable laws and regulations, standard operating procedures, and key performance indicators in certain situations. Our agreements with third party service providers establish responsibilities for performance as their customer, including payment, confidentiality, and intellectual property provisions. If we fail to perform according to these requirements of customers or third party service providers, it could harm our reputation, cause the termination of existing contracts, and impair our ability to win or secure future contracts. Customers or third party service providers may also bring claims for damages or seek other remedies as a result of our noncompliance. Due to the overall cost of clinical trials, our noncompliance with contractual obligations could result in substantial monetary claims. Any of these actions could have a material adverse effect on our business, regulatory compliance, financial condition and results of operations, and future prospects.
Contract research services in the drug development industry create liability risks.
In contracting to work on drug development trials and studies, we face a range of potential liabilities, including:
•Errors or omissions that create harm to clinical trial participants during a trial or to consumers of a drug after the trial is completed and regulatory approval of the drug has been granted;
•General risks associated with clinical pharmacology facilities and mobile clinical services, including negative consequences from specimen collection and processing, the administration of drugs to clinical trial participants, or the professional malpractice of clinical pharmacology physicians, clinical pharmacology staff or mobile clinical services staff; and
•Errors and omissions during a trial or study that may undermine the usefulness of a trial or study, or data from the trial or study or that may delay the entry of a drug to the market.
We contract with investigators to conduct, and in our clinical research units we directly conduct, the clinical trials to test new drugs on clinical trial participants. These tests can create a risk of liability for personal injury or death to clinical trial participants resulting from negative reactions to the drugs administered or from professional malpractice by third party investigators or our staff conducting the clinical trials.
We assume representative roles, including, but not limited to, European Union Legal Representative for Clinical Trials, U.K. Legal Representative for Clinical Trials, local clinical trial sponsor, and Qualified Person for Pharmacovigilance, in connection with the clinical trials we manage and these roles may create direct risks relating to patient claims, customer claims, or regulatory authority action.
While we endeavor to include in our contracts provisions entitling us to be indemnified and entitling us to a limitation of liability, these provisions are not always successfully obtained and, even if obtained, do not uniformly
41
protect us against liability arising from certain of our own actions. We could be materially and adversely affected if we were required to pay damages or bear the costs of defending any claim that is not covered by a contractual indemnification provision, or in the event that a party which must indemnify us does not fulfill its indemnification obligations, or in the event that we are not successful in limiting our liability or in the event that the damages and costs exceed our insurance coverage. We may also be required to agree to contract provisions with clinical trial sites or its customers related to the conduct of clinical trials, and we could be materially and adversely affected if we were required to indemnify a site or customer against claims pursuant to such contract terms. There can be no assurance that we will be able to maintain sufficient insurance coverage on acceptable terms.
Adverse results in material litigation matters could have a material adverse effect upon our business.
We may become subject in the ordinary course of business to material legal actions related to, among other things, commercial and contract disputes, data and privacy issues, professional liability, employee-related matters, and intellectual property disputes. Legal actions could result in substantial monetary damages as well as damage to our reputation with customers, which could have a material adverse effect upon our business.
The failure to successfully obtain, maintain and enforce intellectual property rights and defend against challenges to our intellectual property rights could adversely affect us.
Many of our services, products and processes rely on intellectual property, including patents, copyrights, trademarks and trade secrets. In some cases, that intellectual property is owned by another party and licensed to us, sometimes exclusively. The value of our intellectual property relies in part on our ability to maintain our proprietary rights to such intellectual property. If we are unable to obtain or maintain the proprietary rights to our intellectual property, if we are unable to prevent attempted infringement against our intellectual property, or if we are unable to defend against claims that we are infringing on another party’s intellectual property, we could be adversely affected. These adverse effects could include us having to abandon, alter and/or delay the deployment of products, services or processes that rely on such intellectual property; having to procure and pay for licenses from the holders of intellectual property rights that we seek to use; and having to pay damages, fines, court costs, and attorney's fees in connection with intellectual property litigation.
Changes in our tax rates, the adoption of new U.S. or international tax legislation, or exposure to additional tax liabilities may adversely impact our financial results.
We are subject to taxes in the U.S. and foreign jurisdictions. Our provision for income taxes is based on a jurisdictional mix of earnings, statutory tax rates and enacted tax rules, including transfer pricing. Due to economic and political conditions, tax rates in various jurisdictions may be subject to significant change. As a result, our future effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation. These changes may adversely impact our effective tax rate and harm our financial position and results of operations.
We are subject to examination by the IRS and other domestic and foreign tax authorities and government bodies. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our income tax and other tax reserves. If our reserves are not sufficient to cover these contingencies, such inadequacy could materially adversely affect our business, prospects, financial condition, operating results, and cash flows.
Additionally, the Organization for Economic Cooperation and Development has issued certain guidelines regarding base erosion and profit shifting. As these guidelines continue to be formally adopted by separate taxing jurisdictions, they may have an impact on our tax rate and the way in which we operate.

42
Risks Relating to Financial Matters
We bear financial risk for contracts that, including for reasons beyond our control, may be underpriced, subject to cost overruns, delayed, or terminated or reduced in scope.
We have many contracts that provide for services on a fixed-price or fee-for-service with a cap basis and they may be terminated or reduced in scope either immediately or upon notice. Cancellations may occur for a variety of reasons, including:
•failure of products to satisfy safety requirements;
•unexpected or undesired results of the products;
•insufficient clinical trial subject enrollment;
•insufficient investigator recruitment;
•a customer's decision to terminate the development of a product or to end a particular study; and
•our failure to perform our duties properly under the contract.
We bear the financial risk if these contracts are underpriced or if contract costs exceed estimates. Such underpricing or significant cost overruns could have an adverse effect on our business, results of operations, financial condition and cash flows. Although our contracts often entitle us to receive the costs of winding down the terminated projects, as well as all fees earned up to the time of termination, the loss, reduction in scope or delay of a large contract or the loss, delay or conclusion of multiple contracts could materially adversely affect us.
A significant increase in our days sales outstanding could have an adverse effect on our business, including our cash flow, by increasing our bad debt or decreasing our cash flow.
A significant increase in our days sales outstanding level from delays in billing or collection could have an adverse effect on our business, including potentially increasing our bad debt rate and decreasing our cash flows.
Our revenues depend on the pharmaceutical, biotechnology and medical device industries.
Our revenues depend greatly on the expenditures made by the pharmaceutical, biotechnology and medical device industries in R&D. In some instances, these companies are reliant on their ability to raise capital in order to fund their R&D projects. These companies are also reliant on reimbursement for their products from government programs and commercial payers. Accordingly, economic factors and industry trends affecting our customers in these industries may also affect us. If these companies were to reduce the number of R&D projects they conduct or outsource, whether through the inability to raise capital, reductions in reimbursement from governmental programs or commercial payers, industry trends, economic conditions or otherwise, we could be materially adversely affected.
Foreign currency fluctuations could have an adverse effect on our business and our planned use of financial instruments to limit our exposure to currency fluctuations could expose us to risks and financial losses that may adversely affect our financial condition, liquidity and results of operations.
We have business and operations outside the U.S., and derive a significant portion of our revenues from international operations. Since our combined financial statements are denominated in U.S. dollars, fluctuations in exchange rates from period to period will have an impact on reported results. In addition, we may incur costs in one currency related to our services or products for which we are paid in a different currency. To reduce our exposure to currency exchange fluctuations, we may from time to time enter into for these or other purposes, financial swaps, or hedging arrangements, with various financial counterparties. In addition to any risks related to the counterparties, there can be no assurances that our hedging activity will be effective in insulating us from the risks associated with the underlying transactions, that we would not have been better off without entering into these hedges, or that we will not have to pay additional amounts upon settlement. As a result, factors associated with international operations,
43
including changes in foreign currency exchange rates and our hedging activities, could significantly affect our results of operations, financial condition and cash flows.
Our quarterly operating results may vary.
Our operating results may vary significantly from quarter to quarter and are influenced by a variety of factors, such as:
•changes in the general global economy;
•exchange rate fluctuations;
•the commencement, completion, delay or cancellation of large projects or contracts or groups of projects;
•the progress of ongoing projects;
•timing of contract amendments for changes in scope that could affect the value of a contract and potentially impact the amount of net new business and revenue from quarter to quarter;
•the timing of and charges associated with completed acquisitions or other events; and
•changes in the utilization mix of our services.
We believe that operating results for any particular quarter are not necessarily a meaningful indication of future results. While fluctuations in our quarterly operating results could negatively or positively affect the market price of our common stock, these fluctuations may not be related to our future overall operating performance.
Our future debt and debt covenant requirements may limit cash flow available to invest in the ongoing needs of our business.
In connection with the spinoff, we expect to incur indebtedness in an aggregate principal amount of approximately $1,640 million, which we expect to consist of borrowings under senior secured term loan facilities and senior secured notes. We also expect to enter into a $450 million senior secured revolving credit facility, which we do not expect to borrow under prior to the spinoff and an accounts receivable purchase program (“ARPP”) which we also do not expect to take advantage of, other than in a testing capacity, prior to the spinoff. The ARPP establishes a receivables purchase facility that provides for up to approximately $80 million in funding based on the availability of certain eligible receivables and the satisfaction of certain conditions.
Our level of debt could have important consequences. For example, it could:
•make it more difficult for us to make payments on our debt;
•require us to dedicate a substantial portion of our cash flow from operations to the payment of debt service, reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions, and other general corporate purposes;
•increase our vulnerability to adverse economic or industry conditions;
•limit our ability to access debt markets and obtain additional financing in the future to enable us to react to changes in our business; or
•place us at a competitive disadvantage compared to businesses in our industry that have less debt.
We expect to use the proceeds from these debt and other financing transactions to make an expected $1,605 million cash distribution to Labcorp as partial consideration for the assets that will be contributed to us in connection with the spinoff. As a result of the debt we expect to incur in connection with the spinoff, the amount of leverage in our business may increase over the next twelve months, and could increase further to the extent that we incur additional debt in the future. This will increase the riskiness of our business and of an investment in our common stock.
44
Any failure to meet required payments on our debt, or failure to comply with any covenants in the instruments governing our debt, could result in an event of default under the terms of those instruments and a downgrade to our credit ratings. A downgrade in our credit ratings would increase our borrowing costs. In the event of a default, the holders of our debt could elect to declare all the amounts outstanding under such instruments to be due and payable. Any default under the agreements governing our debt and the remedies sought by the holders of such debt could render us unable to pay principal and interest on our debt.
We may not be able to access the capital and credit markets on terms that are favorable to us, or at all.
The capital and credit markets may experience extreme volatility or disruptions that may lead to uncertainty and liquidity issues for both borrowers and investors, including in anticipation of the Federal Open Market Committee’s mid-June meeting. As noted above, we expect to access the capital markets in connection with the spinoff to incur indebtedness in an aggregate principal amount of up to approximately (i) $1,640 million, which we expect to consist of borrowings under senior secured term loan facilities and senior secured notes, (ii) $450 million under a senior secured revolving credit facility, which we do not expect to borrow under prior to the spinoff, and (iii) $80 million pursuant to an ARPP. In the event of adverse capital and credit market conditions, we may be unable to obtain capital market financing on favorable terms, or at all, and changes in credit ratings issued by nationally recognized credit-rating agencies could adversely affect our ability to obtain capital market financing and the cost of such financing. Any of these risks could have a material adverse effect on our business, results of operations, financial condition and cash flows and could delay the spinoff.
The terms and conditions of our expected new senior secured term loan facilities, senior secured revolving credit facility, the indenture governing our senior secured notes and the agreement governing the ARPP have not been finalized.
The terms and conditions of our expected new senior secured term loan facilities, senior secured revolving credit facility, the indenture governing our senior secured notes and the agreement governing the ARPP have not been finalized. The completion of the credit agreements governing these facilities, the indenture governing our senior secured notes and the agreement governing the ARPP are subject to market conditions and there can be no assurance as to whether or when the agreements governing these expected indebtedness may be completed, if at all. Any inability to procure this indebtedness or delay in procuring this indebtedness could have a material adverse effect on our business, results of operations, financial condition and cash flows and could delay the spinoff.
We depend on a variety of U.S. and international financial institutions to provide us with banking services. The default or failure of one or more of the financial institutions that we rely on may adversely affect our business and financial condition.
We maintain the majority of our cash and cash equivalents in accounts with major U.S. and international financial institutions, and our deposits at certain of these institutions exceed insured limits. Market conditions can impact the viability of these institutions. In the event of failure of any of the financial institutions where we maintain our cash and cash equivalents, there can be no assurance that we would be able to access uninsured funds in a timely manner or at all. Additionally, bank payment processes could become unavailable which could temporarily impact our ability to conduct business with suppliers and pay our employees on a timely basis. Any inability to access or delay in accessing these funds could adversely affect our business and financial condition.
Risks Relating to General Matters
General or macro-economic factors in the U.S. and globally may have a material adverse effect upon us, and a significant deterioration in the economy could negatively impact our services, cash collections, profitability and the availability and cost of credit.
Our operations are dependent upon ongoing demand for our services by pharmaceutical, biotechnology and medical device companies and others. A significant downturn in the economy could negatively impact the demand for our services, as well as the ability of customers to pay for services rendered. In addition, uncertainty in the credit markets could reduce the availability of credit and impact our ability to meet our financing needs in the future.
45
Unfavorable labor environments, work stoppages, works council negotiations, or failure to comply with labor or employment laws could adversely affect our operations and have a material adverse effect on our business.
We are subject to employment and labor laws and unionization activity in the U.S. Similar employment and labor obligations exist across other countries in which we conduct business, including appropriate engagement with unions, works councils, and other employee representative bodies. Disputes with regard to the terms of labor agreements or obligations for consultation, potential inability to negotiate acceptable contracts with these unions, unionization activity, or a failure to comply with labor or employment laws could result in, among other things, labor unrest, strikes, work stoppages, slowdowns by the affected workers, fines and penalties. If any of these events were to occur, or other employees were to become unionized, we could experience a significant disruption of our operations or higher ongoing labor costs, either of which could have a material adverse effect on our business. Additionally, future labor agreements, or renegotiation of labor agreements or provisions of labor agreements, or changes in labor or employment laws, could compromise our service reliability and significantly increase our costs, which could have a material adverse effect on our business. Also, we may incur substantial additional costs and become subject to litigation and enforcement actions if we fail to comply with legal requirements affecting our workforce and labor practices, including laws and regulations related to wage and hour practices, Office of Federal Contract Compliance Programs compliance, and unlawful workplace harassment and discrimination.
Failure to establish and maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could materially and adversely affect us.
As a public company, we will become subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and will be required to prepare our financial statements according to the rules and regulations required by the SEC. In addition, the Exchange Act requires that we file annual, quarterly, and current reports. Our failure to prepare and disclose this information in a timely manner or to otherwise comply with applicable law could subject us to penalties under federal securities laws, expose us to lawsuits, and restrict our ability to access financing. In addition, the Sarbanes-Oxley Act requires that, among other things, we establish and maintain effective internal controls and procedures for financial reporting and disclosure purposes. Beginning with our second required Annual Report on Form 10-K, we intend to comply with the applicable sections of Section 404 of the Sarbanes-Oxley Act, which will require annual management assessments of the effectiveness of our internal control over financial reporting and a report by our independent registered public accounting firm on the effectiveness of internal control over financial reporting. Internal control over financial reporting is complex and may be revised over time to adapt to changes in our business, or changes in applicable accounting rules. We cannot assure you that our internal control over financial reporting will be effective in the future or that a material weakness will not be discovered with respect to a prior period for which we had previously believed that internal controls were effective. If we are not able to maintain or document effective internal control over financial reporting, our independent registered public accounting firm will not be able to certify as to the effectiveness of our internal control over financial reporting. While we have been adhering to these laws and regulations as a business unit of Labcorp, after the distribution we will need to demonstrate our ability to manage our compliance with these corporate governance laws and regulations as an independent, public company.
Matters affecting our internal controls may cause us to be unable to report our financial information on a timely basis, or may cause us to restate previously issued financial information, and thereby subject us to adverse regulatory consequences, including sanctions or investigations by the SEC, or violations of applicable stock exchange listing rules. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. Confidence in the reliability of our financial statements is also likely to suffer if we or our independent registered public accounting firm reports a material weakness in our internal control over financial reporting. This could have a material and adverse effect on us by, for example, leading to a decline in our share price and impairing our ability to raise additional capital.
46
Operations may be disrupted and adversely impacted by the effects of adverse weather, other natural disasters, geopolitical events, public health crises, and other events outside of our control.
Natural disasters, such as adverse weather, fires, and earthquakes; power shortages and outages; geopolitical events, such as terrorism, war, political instability, political unrest, including the current situation with Ukraine and Russia, or other conflicts; criminal activities; public health crises, such as COVID-19 and disease epidemics and pandemics; and other disruptions or events outside of our control or the escalation or expansion of any of the same, could delay or disrupt our ability to conduct clinical trials or other business, endanger our personnel, or cause other project delays or loss of clinical trial materials or results. Long-term disruptions in the infrastructure and operations caused by such events (particularly involving locations in which we have operations), could harm our operating results.
A failure to identify and successfully close and integrate strategic acquisition targets could have a material adverse effect on our business objectives and its revenues and profitability.
Part of our strategy involves deploying capital in investments that enhance our business, which includes pursuing strategic acquisitions to strengthen our scientific capabilities and enhance therapeutic expertise, enhance global drug development capabilities, and increase presence in key geographic areas. However, we cannot assure you that we will be able to identify acquisition targets that are attractive to us or that will have a meaningful impact on our operating results. Furthermore, the successful closing and integration of a strategic acquisition entails numerous risks, including, among others:
•failure to obtain regulatory clearance, including due to antitrust concerns;
•loss of key customers or employees;
•difficulty in consolidating redundant facilities and infrastructure and in standardizing information and other systems;
•unidentified regulatory problems;
•failure to maintain the quality of services that such companies have historically provided;
•unanticipated costs and other liabilities;
•potential liabilities related to litigation including the acquired companies;
•potential periodic impairment of goodwill and intangible assets acquired;
•coordination of geographically separated facilities and workforces; and
•the potential disruption of the ongoing business and diversion of management's resources.
We cannot assure you that current or future acquisitions, if any, or any related integration efforts will be successful, or that our business will not be adversely affected by any future acquisitions, including with respect to revenues and profitability. Even if we are able to successfully integrate the operations of businesses that we may acquire in the future, we may not be able to realize the benefits that we expect from such acquisitions.
Damage or disruption to our facilities could adversely affect our business.
Many of our facilities could be difficult to replace in a short period of time. Any event that causes a disruption of the operation of these facilities might impact our ability to provide services to customers and, therefore, could have a material adverse effect on our financial condition, results of operations, and cash flows.
47
Our increasing focus on environmental, social, governance, and other sustainability matters could increase our costs, and inaction could harm our reputation and adversely impact our financial results.
There has been increasing public focus by investors, customers, environmental and social activists, the media and governmental and nongovernmental organizations on a variety of environmental, social, governance, and other sustainability matters. As an organization, we understand the importance of our role in lessening our environmental footprint and supporting positive social impact. In light of the importance of this to our culture, as well as internal and external stakeholders, if we are not effective in addressing environmental, social, governance, and other sustainability matters affecting our business, or setting and meeting relevant sustainability goals, our reputation and financial results may suffer. We may experience increased costs in order to execute upon our sustainability goals and measure achievement of those goals, which could have an adverse impact on our business and financial condition.
In addition, this emphasis on environmental, social, governance, and other sustainability matters has resulted and may result in the adoption of new laws and regulations, including new reporting requirements. Compliance with future legislation could impose additional requirements on us that may be costly. If we fail to comply with new and existing laws, regulations, or reporting requirements, our reputation and business could be adversely impacted.
Risks Relating to Ownership of Our Common Stock
There can be no assurance that our common stock will be approved for listing on NASDAQ or, if approved, that we will be able to comply with the continued listing standards of NASDAQ.
There is no current trading market for our common stock. We have applied to list our common stock on NASDAQ under the symbol “FTRE.” The spinoff is contingent upon the acceptance of our common stock for listing on a national securities exchange approved by Labcorp, such as NASDAQ, subject to official notice of issuance. Our NASDAQ application has not yet been approved.
If our common stock is not approved for listing on a national securities exchange approved by Labcorp, such as NASDAQ, or, after the spinoff, any such exchange, such as NASDAQ, delists our common stock from trading on its exchange for failure to meet the listing standards, we and our stockholders could face significant material adverse consequences including:
•an inability to complete the spinoff;
•a limited availability of market quotations for our common stock;
•reduced liquidity for our common stock;
•a determination that our common stock is a “penny stock” which will require brokers trading in our common stock to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our common stock;
•a limited amount of news and analyst coverage; and
•a decreased ability to issue additional securities or obtain additional financing in the future.
Because there has not been any public market for our common stock, the market price and trading volume of our common stock may be volatile and you may not be able to resell your shares at or above the initial market price of our common stock following the spinoff.
Prior to the spinoff, there will have been no trading market for our common stock. We cannot assure you that an active trading market will develop or be sustained for our common stock after the spinoff, nor can we predict the price at which our common stock will trade after the spinoff. The market price of our common stock could fluctuate significantly due to a number of factors, many of which are beyond our control, including:
•fluctuations in our quarterly or annual earnings results or those of other companies in our industry;
48
•failures of our results of operations to meet the estimates of securities analysts or the expectations of our stockholders, or changes by securities analysts in their estimates of our future earnings;
•announcements by us or our customers, suppliers, or competitors;
•changes in laws or regulations which adversely affect our industry or us;
•general economic, industry, and stock market conditions;
•future sales of our common stock by our stockholders;
•future issuances of our common stock by us;
•our ability or willingness to pay dividends in the future; and
•the other factors described in these “Risk Factors” and other parts of this information statement.
A large number of shares of our common stock are or will be eligible for future sale, which may cause the market price for our common stock to decline.
Upon completion of the spinoff, virtually all of our shares will be freely tradable without restriction or registration under the Securities Act of 1933, as amended (the “Securities Act”). We are unable to predict whether large amounts of our common stock will be sold in the open market following the spinoff. We are also unable to predict whether a sufficient number of buyers would be in the market at that time. Certain Labcorp stockholders may be required to sell the shares of Fortrea common stock that they receive in the spinoff. For example, index funds currently holding Labcorp common stock may be required to sell the Fortrea common stock they receive in the spinoff. In addition, it is possible that other Labcorp stockholders will sell the shares of Fortrea common stock they receive in the spinoff for various reasons. For example, such stockholders may not believe that our business profile, capital structure, or level of market capitalization as an independent company fits their investment objectives. We can provide no assurance that there will be sufficient new buying interest to offset the potential sale of Fortrea common stock. Accordingly, our common stock could experience a high level of volatility immediately following the spinoff and, as a result, the price of our common stock could be adversely affected.
Anti-takeover provisions in our charter documents and Delaware law could discourage, delay, or prevent a change in control over us and may affect the trading price of our common stock.
Our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws (as defined in “Description of Capital Stock”) will include a number of provisions that may discourage, delay, or prevent a change in our management or control over us that stockholders may consider favorable. For example, our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws will:
•authorize the issuance of “blank check” preferred stock that could be issued by our board of directors to thwart a takeover attempt;
•until the annual meeting of stockholders to be held in 2028, provide for the division of our board of directors into three classes serving staggered three-year terms, with one class being elected each year, which may tend to discourage a third party from making a tender offer or otherwise attempting to obtain control of us because it generally makes it more difficult for stockholders to replace a majority of our board of directors;
•not permit cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;
•provide that vacancies on our board of directors, including newly-created directorships, may be filled only by a majority vote of directors then in office;
•prohibit stockholders from nominating director candidates for inclusion in proxy material;
49
•prohibit stockholders from calling special meetings of stockholders;
•prohibit stockholder action by written consent, thereby requiring all actions to be taken at a meeting of the stockholders;
•establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings; and
•until the annual meeting of stockholders to be held in 2028, require the approval of holders of at least seventy-five percent (75%) of the outstanding shares of our common stock, voting together as a single class, to amend certain provisions of our Amended and Restated Bylaws and certain provisions of our Amended and Restated Certificate of Incorporation.
These provisions may prevent our stockholders from receiving the benefit from any premium to the market price of our common stock offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if the provisions are viewed as discouraging takeover attempts in the future.
Our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws may also make it difficult for stockholders to replace or remove our management. These provisions may facilitate management entrenchment that may delay, deter, render more difficult, or prevent a change in our control, which may not be in the best interests of our stockholders.
Your percentage of ownership of us may be diluted in the future.
In the future, your percentage ownership of us may be diluted because of equity issuances for acquisitions, capital market transactions or otherwise, including any equity awards that we will grant to our directors, officers and employees. Our employees will have stock-based awards that correspond to shares of Fortrea common stock after the distribution as a result of conversion of their Labcorp stock-based awards. Such awards will have a dilutive effect on our earnings per share (“EPS”), which could adversely affect the market price of Fortrea common stock. From time to time, we will issue additional stock-based awards to our employees under our employee benefits plans.
We may not determine to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.
We do not currently expect to declare or pay dividends on our common stock for the foreseeable future. In the absence of a dividend, the success of an investment in shares of our common stock would depend upon any future appreciation in their value. There is no guarantee that shares of our common stock will appreciate in value.
If securities or industry analysts do not publish research or publish unfavorable research about our business, our stock price and trading volume could decline.
The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If there is no coverage of us by securities or industry analysts, the trading price for our common stock would be negatively impacted. In the event we obtain securities or industry analyst coverage, if one or more of these analysts downgrades our stock or publishes unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our common stock could decrease, which could cause our common stock price or trading volume to decline.
50
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This information statement and other materials we and Labcorp have filed or will file with the SEC include or will include forward-looking statements. Some of the forward-looking statements can be identified by the use of terms such as “believes,” “expects,” “may,” “will,” “should,” “could,” “seeks,” “intends,” “plans,” “estimates,” “anticipates,” or other comparable terms. These forward-looking statements include all matters that are not related to present facts or current conditions or that are not historical facts. They appear in a number of places throughout this information statement and include statements regarding our intentions, beliefs, or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects and growth strategies, and the industries in which we operate and include, without limitation, statements relating to our future performance.
Forward-looking statements are subject to known and unknown risks and uncertainties, many of which are beyond our control. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and industry development may differ materially from those made in or suggested by the forward-looking statements contained in this information statement. In addition, even if our results of operations, financial condition and liquidity, and industry development are consistent with the forward-looking statements contained in this information statement, those results or developments may not be indicative of results or developments in subsequent periods. A number of important factors could cause actual results to differ materially from those contained in or implied by the forward-looking statements, including the risks and uncertainties discussed in “Risk Factors.” Factors that could cause actual results to differ from those reflected in forward-looking statements relating to our operations and business include:
•if we do not realize some or all of the benefits expected to result from the spinoff, or if such benefits are delayed;
•our ongoing businesses may be adversely affected and subject to certain risks and consequences as a result of pursuing the spinoff;
•our ability to successfully complete the spinoff on a tax-free basis, within the expected time frame or at all;
•Labcorp’s ability to change the terms of the spinoff and the relation transactions and agreements, prior to completion of the spinoff, in ways that may be unfavorable to us;
•our accounting, enterprise resource planning, and other management systems and resources may not be adequately prepared to meet the financial reporting and other requirements to which we will be subject following the spinoff;
•after the distribution, certain members of management, directors, and stockholders will hold stock in both Labcorp and us, and as a result may face actual, perceived, or potential conflicts of interest;
•certain contracts that will need to be assigned from Labcorp or its affiliates to us in connection with the separation require the consent of the counterparty to such an assignment, and failure to obtain these consents could increase our expenses or otherwise reduce our profitability;
•the impact of the rebranding of our business;
•our ability to successfully implement our business strategies and execute our long-term value creation strategy;
•risks and expenses associated with our international operations and currency fluctuations;
•our customer or therapeutic area concentrations;
•our ability to generate a large number of net new business awards, or if net new business awards are delayed, terminated, reduced in scope, or fail to go to contract;
51
•customers may have insufficient funding to complete a clinical trial and pay our outstanding accounts receivable and unbilled services causing increased days sales outstanding or invoice write-offs;
•our backlog might not be indicative of our future revenues, and we might not realize all of the anticipated future revenue reflected in our backlog;
•our ability to attract suitable principal investigators and recruit and enroll patients for clinical trials;
•our ability to attract and retain experienced and qualified personnel, including key management personnel;
•our dependence on third parties to provide services critical to our business and comply with applicable laws and regulations;
•our ability to effectively manage our growth strategy;
•our relationships with existing or potential customers who are in competition with each other;
•our access to data;
•our ability to comply with the evolving government and industry regulation and practices;
•our ability to comply with national, state, local or international environmental, health and safety laws and regulations;
•failure to comply with privacy and security, anti-corruption and trade sanction laws and regulations;
•our ability to comply with federal, state, and foreign healthcare laws;
•failures in our IT systems or delays or failures in the development and implementation of updates or enhancements to those systems;
•hardware and software failures, delays in the operation of computer and communications systems, failure to implement new systems or system enhancements to existing systems, and cybersecurity breaches;
•failure to maintain the security of customer-related information or compliance with security requirements, and unauthorized access to our or our customers’ data;
•failures of our internally developed and licensed technology systems to manage various aspects of clinical trials, including errors in design, programming, or validation;
•our ability to keep pace with rapid technological changes could make our services less competitive or obsolete;
•our ability to comply with the contractual requirements of our agreements with customers or third party service providers;
•liability arising from errors or omissions in the performance of contract research services or other contractual arrangements;
•the outcome of any legal or regulatory proceedings to which Fortrea is, or may become, a party;
•failure to obtain, maintain, and enforce intellectual property rights for protection of Fortrea’s licensed products and services and defend against challenges to those rights;
•changes in tax laws and regulations or changes in their interpretation;
•if we underprice our contracts, overrun our cost estimates, or fail to receive approval for, or experience delays in documentation of change orders;
52
•limitations and restrictions in the agreements to be entered into governing our indebtedness;
•our ability to maintain our anticipated credit rating and to access debt markets;
•business interruption, receivables impairment, delays in cash collection impacting days sales outstanding, supply chain disruptions, increases in operating costs, or other impacts on the business due to natural disasters, including adverse weather, fires and earthquakes; power shortages and outages; geopolitical events, such as terrorism, war, political instability, political unrest, including the ongoing conflict between Russia and Ukraine, or other conflicts; criminal activities; public health crises, such as COVID-19 and disease epidemics and pandemics; increased costs, and other adverse effects on Fortrea’s operations due to work stoppages, general labor unrest or failure to comply with labor or employment laws; and other disruptions or events outside of our control;
•our increasing focus on environmental, social, governance, and other sustainability matters; and
•other factors described in this information statement and from time to time in documents that we file with the SEC.
All forward-looking statements are made only as of the date of this information statement and we do not undertake any obligation, other than as may be required by law, to update or revise any forward-looking statements to reflect future events or developments. Comparisons of results for current and any prior periods are not intended to express any future trends, or indications of future performance, unless expressed as such, and should only be viewed as historical data.
53
THE SPINOFF
Reasons for the Spinoff
On July 28, 2022, Labcorp announced its intention to separate its Clinical Development and Commercialization Services business into an independent, publicly traded company. The separation will be effected through a pro rata distribution of our common stock to Labcorp's stockholders. The transaction is subject to certain customary conditions, including, among others, the conditions described below under “—Spinoff Conditions and Termination.”
Fortrea is currently a wholly owned business unit of Labcorp. Labcorp will complete the internal restructuring, which will result in Fortrea becoming the parent company of the Labcorp operations comprising, and the entities that will conduct, the Clinical Development and Commercialization Services business.
Based on our combined statements of operations and comprehensive income included elsewhere in this information statement: for the quarter ended March 31, 2023 and fiscal years ended December 31, 2022 and December 31, 2021, Fortrea’s Revenue as a percent of Labcorp's Revenue was 20%, 21% and 19.0%, respectively. Based on our condensed combined balance sheet as of March 31, 2023 included elsewhere in this information statement, total assets and total liabilities attributable to Fortrea as a percent of Labcorp’s total assets and total liabilities was 21% and 9%, respectively.
Labcorp’s Clinical Development and Commercialization Services business operates largely autonomously, although it and Labcorp have benefited by sharing executive management and some overhead costs. The spinoff will permit each of Labcorp and Fortrea to focus exclusively on its business and enable investors to obtain and, if they so choose, retain direct exposure to each separate business. Among other benefits, the spinoff is expected to provide each of Labcorp and Fortrea with:
•strengthened strategic flexibility and operational focus to pursue specific market opportunities and better meet customer needs;
•focused capital structures and capital allocation strategies to drive innovation and growth;
•a more targeted investment opportunity for different investor bases;
•the ability to align its particular incentive compensation with its financial performance;
•an improved ability to use its equity as consideration for beneficial acquisitions; and
•enhanced long-term performance of the businesses held by Labcorp and Fortrea.
We expect that we will continue to be a leading global provider of CRO services to both large and emerging pharmaceutical, biotechnology, and medical device organizations. In addition, following the spinoff, we will be positioned to:
•leverage service offerings to expand in existing markets and enter new markets;
•expand leading expertise in existing and novel scientific areas;
•increase our agile approach to project centric service offering;
•utilize global site relationships and patient centric recruitment strategies;
•build on strengths in clinical pharmacology; and
•invest in further innovation.
There necessarily can be no assurance that the expected benefits of the separation will be realized. See “Risk Factors—Risks Relating to the Spinoff.”
54
Results of the Spinoff
After the spinoff, we will be an independent, publicly traded company. Immediately after the distribution date, we expect that approximately 88.6 million shares of our common stock will be issued and outstanding, based on the distribution of one share of our common stock for every share of Labcorp common stock outstanding and the anticipated number of shares of Labcorp common stock outstanding as of the record date. The actual number of shares of our common stock to be distributed will be determined based on the number of shares of Labcorp common stock outstanding as of the record date.
We and Labcorp will be parties to several agreements that will govern the spinoff and our future relationship. For a more detailed description of these agreements, please see “Relationship with Labcorp After the Spinoff—Agreements Between Labcorp and Us.”
You will not be required to make any payment for the shares of Fortrea common stock you receive, nor will you be required to surrender or exchange your shares of Labcorp common stock or take any other action in order to receive the Fortrea common stock to which you are entitled. The spinoff will not affect the number of outstanding shares of Labcorp common stock or any rights of Labcorp stockholders, although it is expected to affect the market value of the outstanding shares of Labcorp common stock.
Manner of Effecting the Spinoff
The general terms and conditions relating to the spinoff will be set forth in a separation and distribution agreement between Labcorp and us. For a description of the terms of that agreement, see “Relationship with Labcorp After the Spinoff—Agreements Between Labcorp and Us—Separation and Distribution Agreement.” Under the separation and distribution agreement, the spinoff will occur on the distribution date. As a result of the spinoff, each holder of Labcorp common stock will be entitled to receive one share of our common stock for every share of Labcorp common stock owned by such holder as of 5:00 p.m., Burlington, North Carolina time, on the record date. As discussed under “—Trading of Labcorp Common Stock After the Record Date and On or Prior to the Distribution,” if a holder of record of Labcorp common stock sells those shares in the “regular way” market after the record date and before or on the distribution date, that stockholder will be selling the right to receive our common stock in the distribution. The distribution will be made in book-entry form. For registered Labcorp stockholders, our transfer agent will credit their shares of Fortrea common stock to book-entry accounts established to hold their Fortrea common stock. Book-entry refers to a method of recording stock ownership in our records in which no physical certificates are issued. For stockholders who own Labcorp common stock through a bank or brokerage firm, their Fortrea common stock will be credited to their accounts by the bank or broker. See “—When and How You Will Receive Fortrea Shares” below. Each Fortrea share of common stock that is distributed will be validly issued, fully paid, and nonassessable.
Holders of Fortrea common stock will not be entitled to preemptive rights. See “Description of Capital Stock.” Following the spinoff, stockholders whose shares are held in book-entry form may request the transfer of their Fortrea common stock to a brokerage or other account at any time, without charge.
When and How You Will Receive Fortrea Shares
On the distribution date, Labcorp will release its Fortrea common stock for distribution by American Stock Transfer & Trust Company, the distribution agent. The distribution agent will cause the shares of Fortrea common stock to which you are entitled to be registered in your name or in the “street name” of your bank or brokerage firm.
“Street Name” Holders. Many Labcorp stockholders have Labcorp common stock held in an account with a bank or brokerage firm. If this applies to you, that bank or brokerage firm is the registered holder that holds the shares on your behalf. For stockholders who hold their Labcorp common stock in an account with a bank or brokerage firm, shares of our common stock being distributed will be registered in the “street name” of your bank or broker, who in turn will electronically credit your account with the shares that you are entitled to receive in the distribution. We anticipate that banks and brokers will generally credit their customers' accounts with shares of our common stock on or shortly after the distribution date. We encourage you to contact your bank or broker if you have any questions regarding the mechanics of having your shares credited to your account.
55
Registered Holders. If you are the registered holder of Labcorp common stock and hold your Labcorp common stock either in physical form or in book-entry form, the Fortrea common stock distributed to you will be registered in your name and you will become the holder of record of that number of shares of our common stock. Our distribution agent will send you a statement reflecting your ownership of our common stock.
Direct Registration System. As part of the spinoff, we will be adopting a direct registration system for book-entry share registration and transfer of our common stock. Our common stock to be distributed in the spinoff will be distributed as uncertificated shares registered in book-entry form through the direct registration system. No certificates representing your shares will be mailed to you in connection with the spinoff. Under the direct registration system, instead of receiving stock certificates, you will receive a statement reflecting your ownership interest in our shares. If at any time you want to receive a physical certificate evidencing your shares, you may do so by contacting our transfer agent and registrar. Contact information for our transfer agent and registrar is provided under “Description of Capital Stock—Transfer Agent, Distribution Agent, and Registrar.” The distribution agent will begin mailing book-entry account statements reflecting your ownership of shares promptly after the distribution date. You can obtain more information regarding the direct registration system by contacting our transfer agent and registrar.
Treatment of Fractional Shares
The transfer agent will aggregate all fractional shares and sell them on behalf of those holders who otherwise would be entitled to receive a fractional share. The transfer agent will determine, in its sole discretion, when, how, and through which broker-dealers such sales will be made without any influence by Labcorp or us. We anticipate that these sales will occur as soon as practicable after the distribution date. Those holders will then receive a cash payment in an amount equal to their pro rata share of the total net proceeds of those sales.
It is expected that all fractional shares held in street name will be aggregated and sold by brokers or other nominees according to their standard procedures. You should contact your broker or other nominee for additional details.
Neither Labcorp, nor we, nor the transfer agent will guarantee any minimum sale price for any fractional shares. Neither we nor Labcorp will pay any interest on the proceeds from the sale of fractional shares. The receipt of cash in lieu of fractional shares will generally be taxable to the recipient stockholders for U.S. federal income tax purposes. See “—Material U.S. Federal Income Tax Consequences of the Spinoff.”
Transferability of Shares You Receive
Our common stock distributed to Labcorp stockholders will be freely transferable, except for shares received by persons who may be deemed to be our “affiliates” under the Securities Act. Persons who may be deemed to be our affiliates after the spinoff generally include individuals or entities that control, are controlled by, or are under common control with us, and include our directors and certain of our officers. Our affiliates will be permitted to sell their Fortrea common stock only pursuant to an effective registration statement under the Securities Act or an exemption from the registration requirements of the Securities Act, such as the exemption afforded by Rule 144.
Under Rule 144, an affiliate may not sell within any three-month period shares of Fortrea common stock in excess of the greater of:
•1% of the then outstanding number of shares of Fortrea common stock; and
•the average reported weekly trading volume of shares of Fortrea common stock on NASDAQ during the four calendar weeks preceding the filing of a notice with the SEC on Form 144 with respect to such sale or, if no such notice is required, certain other applicable dates.
Sales under Rule 144 are also subject to certain provisions regarding the manner of sale, notice requirements, the availability of current public information about us, and holding periods.
56
Stock-Based Plans
Treatment of Equity-Based Compensation
With respect to Labcorp equity incentive awards held by Fortrea employees that are outstanding on the distribution date and for which the underlying security is shares of Labcorp’s common stock, it is currently anticipated that each outstanding Labcorp stock option, restricted stock unit and performance share award will be equitably adjusted or converted into an award with respect to Fortrea common stock and Fortrea will bear the compensation costs related to each award, as applicable. In each case, the award will be equitably adjusted or converted in a manner intended to preserve the aggregate intrinsic value of the original Labcorp equity award, and will be subject to substantially the same terms and conditions after the spinoff as the terms and conditions applicable to the original Labcorp award prior to the distribution date, except:
•with respect to each adjusted or converted stock option award, the per-share exercise price for each Labcorp stock option will be adjusted in a manner intended to preserve, in the aggregate, the same intrinsic value that the original Labcorp stock option award had immediately prior to the distribution date (subject to rounding);
•with respect to each adjusted or converted award covering Fortrea common shares, the number of underlying shares subject to such award will be determined based on application of the ratio of Labcorp’s pre-spinoff stock price to our post-spinoff share price to the number of Labcorp common shares subject to the original Labcorp award prior to the distribution date; and
•each outstanding performance share award that is held immediately prior to the spinoff by any employee of Fortrea will be treated as follows: (a) performance share awards for the 2021 to 2023 performance period will be converted into time-based restricted stock units denominated in shares of our common stock based on achievement of performance goals as determined by the Labcorp Compensation Committee immediately prior to the spinoff; (b) performance share awards for the 2022 to 2024 performance period will be converted into awards denominated in shares of our common stock, with 50% of the target number being converted into time-based restricted stock units based on achievement of performance goals as determined by the Labcorp Compensation Committee immediately prior to the spinoff and the remaining 50% of the target number being converted into performance shares of Fortrea subject to the achievement of performance criteria established by the Labcorp Compensation Committee, and subject to further review and modification by Fortrea in its discretion; and (c) performance share awards for the 2023 to 2025 performance period shall be converted into performance shares of the Labcorp Compensation Committee, and subject to further review and modification by Fortrea subject to the achievement of performance criteria established by Fortrea in its discretion.
Material U.S. Federal Income Tax Consequences of the Spinoff
The following is a discussion of the material U.S. federal income tax consequences of the distribution of Fortrea common stock to U.S. Holders (as defined below) of Labcorp common stock. This discussion is based on the Code, applicable U.S. Treasury Department (“Treasury”) regulations, administrative authorities and court decisions, all as in effect as of the date of this information statement, any of which may change, possibly with retroactive effect. For purposes of this discussion, a “U.S. Holder” is a beneficial owner of Labcorp common stock that is for U.S. federal income tax purposes:
•a citizen or resident of the U.S.;
•a corporation, or other entity taxable as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the U.S., any state therein or the District of Columbia;
•a trust (1) that is subject to the primary supervision of a court within the U.S. and all the substantial decisions of which are controlled by one or more U.S. persons or (2) that has a valid election in effect under applicable Treasury regulations to be treated as a U.S. person; or
57
•an estate, the income of which is subject to U.S. federal income taxation regardless of its source.
This discussion addresses only the consequences of the spinoff to U.S. Holders that hold Labcorp common stock as a capital asset within the meaning of Section 1221 of the Code (generally, property held for investment). It does not address all aspects of U.S. federal income taxation that may be important to a U.S. Holder in light of that stockholder's particular circumstances or to a U.S. Holder subject to special rules, including, without limitation:
•banks, trusts, financial institutions, underwriters, or insurance companies;
•traders in securities who elect to apply a mark-to-market method of accounting;
•real estate investment trusts, regulated investment companies, or grantor trusts;
•corporations that accumulate earnings to avoid U.S. federal income tax;
•cooperatives;
•tax-exempt organizations, qualified retirement plans, individual retirement accounts, or other tax-deferred accounts;
•U.S. expatriates or former long-term residents of the U.S.;
•partnerships or other pass-through entities or investors in such entities;
•brokers, dealers or traders in securities, commodities, or currencies;
•U.S. persons whose “functional currency” is not the U.S. dollar;
•U.S. Holders that own shares through non-U.S. brokers or other non-U.S. intermediaries;
•persons subject to special tax accounting rules under Section 451(b) of the Code;
•“qualified foreign pension funds” as defined in Section 897(l)(2) of the Code and entities all of the interests of which are held by qualified foreign pension funds;
•persons holding Labcorp common stock as intermediaries, agents or nominees;
•persons who received Labcorp shares through the issuance of restricted stock under an equity incentive plan or through the exercise of options or similar derivative securities or through a tax-qualified retirement plan or otherwise as compensation;
•persons who own (directly or through attribution) 5% or more (by vote or value) of the outstanding Labcorp shares, or, after the spinoff, the outstanding Fortrea ordinary shares; or
•holders of Labcorp shares, or, after the spinoff, Fortrea ordinary shares, as a position in a “straddle” as part of a “synthetic security” or “hedge” as part of a “conversion transaction” or other integrated investment or risk reduction transaction.
If a partnership, or any entity treated as a partnership for U.S. federal income tax purposes, holds Labcorp common stock, the tax treatment of a partner in such partnership generally will depend on the status of the partners and the activities of the partnership. A partner in a partnership holding Labcorp common stock should consult his, her, or its tax advisor.
This discussion of material U.S. federal income tax consequences is not a complete analysis or description of all potential U.S. federal income tax consequences of the spinoff. This discussion does not address tax consequences that may vary with, or are contingent on, individual circumstances. It also does not address any tax consequences arising under the Medicare tax on net investment income or the Foreign Account Tax Compliance Act (including the Treasury regulations promulgated thereunder and intergovernmental agreements entered into pursuant thereto or in connection therewith). In addition, it does not address any U.S. federal, estate, gift, or other non-income tax or any
58
non-U.S. state or local tax consequences of the spinoff. Accordingly, each holder of Labcorp common stock should consult his, her, or its tax advisor to determine the particular U.S. federal, state, or local or non-U.S. income or other tax consequences of the spinoff to such holder.
Tax Ruling and Tax Opinion
Labcorp has received an IRS Ruling on certain issues relevant to the qualification of the spinoff and certain related transactions as tax-free under Sections 368(a)(1)(D) and 355 of the Code, based on certain facts and representations. The IRS Ruling does not address all of the requirements for tax-free treatment of the spinoff, and the spinoff is conditioned upon, among other things, Labcorp’s receipt of an opinion of tax counsel regarding the qualification of the spinoff and certain related transactions as generally tax-free, for U.S. federal income tax purposes, under Sections 355 and 368(a)(1)(D) of the Code (the “Tax Opinion”). The IRS Ruling was, and the opinion will be, based on, among other things, certain factual assumptions, representations and undertakings from LabCorp and from us, including regarding the past and future conduct of the companies’ respective businesses and other matters. If any of these factual assumptions, representations, or undertakings are incorrect or not satisfied, LabCorp may not be able to rely on the IRS Ruling or on the Tax Opinion. In addition, the Tax Opinion will not be binding on the IRS or the courts and is expected to rely on the IRS Ruling with respect to the matters in such ruling.
If any conditions in the IRS Ruling or the Tax Opinion were not observed, or if the spinoff were otherwise determined not to qualify for the tax-free treatment described herein, then Labcorp and its stockholders could suffer adverse tax consequences and, under certain circumstances, we could have an indemnification obligation to Labcorp with respect to some or all of the resulting tax under the tax matters agreement we intend to enter into with Labcorp, as described in “Relationship with Labcorp After the Spinoff—Agreements Between Labcorp and Us—Tax Matters Agreement.”
The Spinoff
Assuming that the distribution of all of the shares of Fortrea common stock owned by Labcorp to the stockholders of Labcorp, together with certain related transactions, qualifies as a tax-free distribution within the meaning of Section 355 of the Code, in general, for U.S. federal income tax purposes:
•no gain or loss will be recognized by, and no amount will be included in the income of, U.S. Holders of Labcorp common stock upon the receipt of our common stock;
•the aggregate tax basis of the shares of our common stock distributed in the spinoff to a U.S. Holder of Labcorp common stock will be determined by allocating the aggregate tax basis such U.S. Holder has in the shares of Labcorp common stock immediately before such spinoff between such Labcorp common stock and our common stock in proportion to the relative fair market value of each immediately following the spinoff;
•the holding period of any shares of our common stock received by a U.S. Holder of Labcorp common stock in the spinoff will include the holding period of the shares of Labcorp common stock with respect to which the distribution is made; and
•a U.S. Holder of Labcorp common stock that receives cash in lieu of a fractional share of our common stock, if any, will generally recognize capital gain or loss, measured by the difference between the cash received for such fractional share and the U.S. Holder's tax basis in that fractional share, determined as described above, and such gain or loss will be long-term capital gain or loss if the U.S. Holder's holding period for such fractional share is more than one year as of the closing date of the spinoff.
In general, if the spinoff does not qualify as a tax-free distribution within the meaning of Section 355 of the Code, the spinoff will be treated as a taxable distribution to holders of Labcorp common stock in an amount equal to the fair market value of our common stock received. Specifically, the full amount of the distribution generally would be treated first as a taxable dividend to the extent of the U.S. Holder’s pro rata share of Labcorp's current and accumulated earnings and profits, then as a non-taxable return of capital to the extent of the U.S. Holder’s basis in the Labcorp stock, and finally as capital gain from the sale or exchange of Labcorp stock with respect to any
59
remaining amount. In addition, if the spinoff does not qualify as a tax-free distribution within the meaning of Section 355 of the Code, Labcorp may recognize taxable gain, which could result in significant tax liability to Labcorp.
Even if the spinoff were otherwise to qualify as a tax-free distribution within the meaning of Sections 355 of the Code, the spinoff will be taxable to Labcorp under Section 355(e) of the Code if 50% or more of either the total voting power or the total fair market value of the stock of Labcorp or our common stock is acquired as part of a plan or series of related transactions that includes the spinoff. If Section 355(e) applies as a result of such an acquisition, Labcorp would recognize taxable gain as described above, but the spinoff would generally remain tax-free to you. Under some circumstances, we could have an indemnification obligation to Labcorp with respect to some or all of the resulting tax under the tax matters agreement we intend to enter into with Labcorp, as described in “Relationship with Labcorp After the Spinoff—Agreements Between Labcorp and Us—Tax Matters Agreement.” The resulting tax could also have a material adverse effect on Labcorp or us, as the case may be.
The foregoing discussion is a summary of material U.S. federal income tax consequences of the spinoff under current law and is for general information only. All holders should consult their tax advisors as to the particular tax consequences of the spinoff to them, including the application and effect of U.S. federal, state, local and foreign tax laws.
Information Reporting and Backup Withholding
Treasury regulations generally require holders who own at least five percent of the total outstanding stock of Labcorp (by vote or value) and who receive our common stock pursuant to the spinoff to attach to their U.S. federal income tax return for the year in which the spinoff occurs a detailed statement setting forth certain information relating to the spinoff. Labcorp and/or we will provide the appropriate information to each holder upon request, and each such holder is required to retain permanent records of this information. In addition, payments of cash to a U.S. Holder of Labcorp common stock in lieu of fractional shares of our common stock in the spinoff may be subject to information reporting, unless the U.S. Holder provides the withholding agent with proof of an applicable exemption. Such payments that are subject to information reporting may also be subject to backup withholding, unless such U.S. Holder provides the withholding agent with a correct taxpayer identification number and otherwise complies with the requirements of the backup withholding rules. Backup withholding does not constitute an additional tax, and any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against a U.S. Holder’s U.S. federal income tax liability, provided the required information is timely furnished to the IRS.
Market for Our Common Stock
There is currently no public market for our common stock. We have applied to list our common stock on NASDAQ under the symbol “FTRE.” We anticipate that trading of our common stock will commence on a “when-issued basis” approximately two trading days before the record date. When-issued trading refers to a sale or purchase made conditionally because the security has been authorized but not yet issued. Generally, shares of common stock may trade on NASDAQ on a when-issued basis after they have been authorized but not yet formally issued, which is often initiated by NASDAQ prior to the record date relating to the issuance of such common stock. When-issued transactions are settled after shares of our common stock have been issued to Labcorp stockholders. On the first trading day following the distribution date, when-issued trading with respect to our common stock will end and regular way trading will begin. Regular way trading refers to trading after a security has been issued. We cannot predict what the trading price for our common stock will be before or after the distribution date. See “Risk Factors—Risks Relating to Ownership of Our Common Stock.” In addition, we cannot predict any change that may occur in the trading price of Labcorp's common stock, which will continue to trade on NYSE under the symbol “LH,” as a result of the spinoff.
Trading of Labcorp Common Stock After the Record Date and On or Prior to the Distribution
Beginning on or shortly before the record date and through the distribution date, we anticipate that there will be two concurrent markets in which to trade shares of Labcorp common stock: a regular way market and an ex-distribution market. Shares of Labcorp common stock that trade in the regular way market will trade with an entitlement to our common stock distributed in connection with the spinoff. Shares that trade in the ex-distribution market will trade without an entitlement to our common stock distributed in connection with the spinoff. Therefore,
60
if you owned Labcorp common stock at 5:00 p.m., Burlington, North Carolina time, on the record date and sell those shares in the regular way market on or prior to the distribution date, you also will be selling your right to receive our common stock that would have been distributed to you in connection with the spinoff. If you sell those shares of Labcorp common stock in the ex-distribution market on or prior to the distribution date, you will still receive shares of our common stock that were to be distributed to you in connection with the spinoff as a result of your ownership of the Labcorp common stock on the record date. You are encouraged to consult with your financial advisor regarding the financial implications of selling your shares of Labcorp common stock before or on the distribution date.
Spinoff Conditions and Termination
We expect that the spinoff will be completed on June 30, 2023, provided that, among other things:
•the transactions as contemplated by the separation and distribution agreement will have been completed;
•the Labcorp board of directors will, in its sole and absolute discretion, have authorized and approved the separation and the distribution and will not have withdrawn that authorization and approval;
•the Labcorp board of directors will have declared the distribution of all of our outstanding shares of common stock to Labcorp stockholders;
•Labcorp and we will have executed and delivered the separation and distribution agreement, employee matters agreement, transition services agreement, tax matters agreement, and all other ancillary agreements related to the spinoff;
•the SEC shall have declared effective our registration statement on Form 10, of which this information statement is a part, under the Exchange Act, with no stop order in effect with respect to the Form 10, and this information statement shall have been sent to Labcorp stockholders;
•no order, injunction, or decree that would prevent the consummation of the distribution will be threatened, pending or issued (and still in effect) by any governmental entity of competent jurisdiction, no other legal restraint or prohibition preventing the consummation of the distribution will be in effect, and no other event outside the control of Labcorp will have occurred or failed to occur that prevents the consummation of the distribution;
•our common stock shall have been accepted for listing on a national securities exchange approved by Labcorp, subject to official notice of issuance;
•Labcorp will have received an opinion of counsel, satisfactory to Labcorp, regarding the qualification of the spinoff and certain related transactions as generally tax-free, for U.S. federal income tax purposes, under Sections 355 and 368(a)(1)(D) of the Code; and
•prior to the spinoff, our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws, each in substantially the form filed as an exhibit to our registration statement on Form 10, of which this information statement is a part, will be in effect.
Labcorp may waive one or more of these conditions, at the direction of its board of directors in its sole and absolute discretion, and the determination by the Labcorp board of directors regarding the satisfaction of these conditions will be conclusive. If the spinoff is completed and the Labcorp board of directors waived any such condition, such waiver could have a material adverse effect on (i) Fortrea’s and Labcorp’s respective business, financial condition or results of operations, (ii) the trading price of Fortrea’s common stock, (iii) the ability of stockholders to sell their Fortrea shares after the distribution, including, without limitation, as a result of (a) illiquid trading if Fortrea common stock is not accepted for listing or (b) litigation relating to any injunctions sought to prevent the consummation of the spinoff or (iv) the tax consequences of the spinoff.
The fulfillment of these conditions will not create any obligation on Labcorp’s part to effect the distribution, and Labcorp has reserved the right to amend, modify, or abandon any and all terms of the distribution and the related
61
transactions at any time prior to the distribution date, at the direction of its board of directors. Labcorp does not intend to notify its stockholders of any modifications to the terms or the conditions to the separation that, in the judgment of its board of directors, are not material. To the extent that the Labcorp board of directors determines that any such modifications materially change the terms and conditions of the spinoff or the ancillary agreements entered into thereto, Labcorp will evaluate the applicable facts and circumstances at that time and make such additional disclosure and take such other actions as Labcorp determines to be necessary and appropriate in accordance with applicable law.
Financing Arrangements Related to the Spinoff
In connection with the spinoff, we expect to incur indebtedness in an aggregate principal amount of approximately $1,640 million, which we expect to consist of borrowings under senior secured term loan facilities and senior secured notes. Based on the trailing twelve months of adjusted EBITDA at March 31, 2023, the pro forma net debt leverage ratio would be 3.9x. Though we expect that the net debt leverage ratio may increase over the next twelve months before decreasing, we expect to target a net debt leverage ratio of approximately 2.5x - 3.0x over the subsequent period. This expectation is subject to significant economic, competitive, industry and other uncertainties, and may not be achieved in full, at all or within projected timeframes. Furthermore, our target may change in the future, and such change may be material. We also expect to enter into a $450 million senior secured revolving credit facility, which we do not expect to borrow under prior to the spinoff, and an accounts receivable purchase program (“ARPP”), which we also do not expect to take advantage of, other than in a testing capacity, prior to the spinoff. The ARPP establishes a receivables purchase facility that provides for up to approximately $80 million in funding based on the availability of certain eligible receivables and the satisfaction of certain conditions.
We expect to use the proceeds from these debt and other financing transactions to make an expected $1,605 million cash distribution to Labcorp as partial consideration for the assets that will be contributed to us in connection with the spinoff. After giving effect to such payment and approximately $35 million of associated fees and expenses incurred in connection with the entry into the above, we expect to begin operations as an independent company with a cash balance of approximately $120 million. The cash benefit to Labcorp of the dividend offset by the operating cash at spin is expected to be $1,485 million.
Adjusted EBITDA and the leverage ratio are non-GAAP financial measures. For additional information about these non-GAAP measures, including a reconciliation of each of these non-GAAP measures to their most directly comparable financial measure calculated in accordance with U.S. GAAP, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Information.”
Our capital, including the terms and conditions thereof, structure remains under review and will be finalized prior to the spinoff. Once finalized, disclosure regarding our capital structure will be provided in a current report on Form 8-K prior to the consummation of the spinoff. See “Capitalization,” “Unaudited Pro Forma Combined Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity, Capital Resources and Financial Position” and “Description of Certain Indebtedness and Other Financing.” For more information about risks related to our capital structure see “Risk Factors—We may not be able to access the capital and credit markets on terms that are favorable to us, or at all” and “Risk Factors—The terms and conditions of our expected new senior secured term loan facilities, senior secured revolving credit facility, the indenture governing our senior secured notes and the agreement governing the ARPP have not been finalized.”
62
CAPITALIZATION
The following table sets forth our cash and cash equivalents and capitalization as of March 31, 2023 on a historical and pro forma basis to give effect to the Separation and other matters, as discussed in “The Spinoff.”
The pro forma adjustments are based upon available information and assumptions that management believes are reasonable; however, such adjustments are subject to change based on the finalization of the terms of the separation and the agreements which define our relationship with Labcorp after the completion of the separation. In addition, such adjustments are estimates and may not prove to be accurate.
You should read the information in the following table together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Unaudited Pro Forma Combined Financial Information,” and our unaudited condensed combined financial information and the notes thereto included elsewhere in this information statement.
We are providing the capitalization table for information purposes only. The capitalization table below may not reflect the capitalization or financial condition that would have resulted had we been operating as an independent, publicly-traded company on March 31, 2023 and is not necessarily indicative of our future capitalization or financial condition.
As of March 31, 2023
(Unaudited)
(In Millions)HistoricalPro Forma
Cash and cash equivalents (1)
$120.2 $120.0 
Indebtedness:
Total debt (2)
— 1,610.5 
Total indebtedness $— $1,610.5 
Equity:
Common stock - $0.001 par value (265 million shares authorized and 88.6 million shares issued and outstanding, pro forma) (3)
$— $0.1 
Additional paid-in capital— 2,062.5 
Net parent investment (4)
3,662.6 
Accumulated other comprehensive income (loss)
(257.1)(257.1)
Total equity
$3,405.5 $1,805.5 
Total capitalization
$3,405.5 $3,416 
__________________
(1)Reflects an expected cash amount of $120 million at separation following receipt of debt proceeds and the cash distribution to Labcorp.
(2)In connection with the spinoff, we expect to incur indebtedness in an aggregate principal amount of approximately $1,640 million, which we expect to consist of borrowings under senior secured term loan facilities and senior secured notes. Our capital structure, including the terms and conditions thereof, remains under review and will be finalize prior to the spinoff; see “Description of Certain Indebtedness and Other Financing.” We expect to use the proceeds from these debt and other financing transactions to make an expected $1,605 million cash distribution to Labcorp as partial consideration for the assets that will be contributed to us in connection with the spinoff. After giving effect to such payment and approximately $35 million of associated fees and expenses incurred in connection with the entry into the above, we expect to begin operations as an independent company with a cash balance of approximately $120 million.
(3)We have estimated the number of outstanding shares of our common stock based on the number of shares of Labcorp common stock outstanding as of May 3, 2023 and a distribution ratio of  one share of our common stock for every share of Labcorp common stock. The actual number of shares issued will not be known until the record date for the distribution.
(4)At separation, Labcorp’s net parent investment in us will be eliminated to reflect the distribution of our common stock to Labcorp’s stockholders.
63
DIVIDEND POLICY
We do not currently expect to declare or pay dividends on our common stock for the foreseeable future. Instead, we intend to retain earnings for use in the operation and expansion of our business. Any future payment of dividends will be at the discretion of our board of directors and will depend upon various factors then existing, including earnings, financial condition, results of operations, capital requirements, level of indebtedness, contractual restrictions with respect to payment of dividends, restrictions imposed by applicable law, general business conditions, and other factors that our board of directors may deem relevant.
64
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
(in Millions)
The following unaudited pro forma combined financial information consists of an unaudited pro forma combined balance sheet as of March 31, 2023 and the unaudited pro forma combined statements of operations for the three months ended March 31, 2023 and the year ended December 31, 2022.
The unaudited pro forma combined financial information reflects adjustments to our historical unaudited combined balance sheet as of March 31, 2023, our historical unaudited combined statement of operations for the three months ended March 31, 2023, and our historical audited combined statement of operations for the year ended December 31, 2022.
The unaudited pro forma combined balance sheet gives effect to the spinoff and related transactions, described below, as if they occurred as of March 31, 2023, our latest balance sheet date. The unaudited pro forma combined statements of operations give effect to the spinoff and related transactions as if they had occurred on January 1, 2022, the beginning of our most recently completed fiscal year.
The unaudited pro forma combined financial information has been prepared to reflect transaction accounting and autonomous entity adjustments to present the financial condition and results of operations as if we were a separate standalone entity. In addition, we have provided a presentation of management adjustments that management believes are necessary to enhance an understanding of the pro forma effects of the transaction. The unaudited pro forma combined financial information has been adjusted to give effect to the following (collectively, the “Pro Forma Transactions”):
•the contribution of assets and liabilities that comprise our business by Labcorp pursuant to the spinoff and separation and distribution agreement;
•the expected transfer to us, prior to or concurrent with the spinoff of various Labcorp assets and liabilities not included in our historical combined statements of financial position;
•the anticipated post-spinoff capital structure, including (i) the issuance of approximately 88.6 million shares of our common stock to holders of Labcorp common stock in connection with the spinoff and (ii) the expected incurrence of approximately $1,640 million of senior secured indebtedness at an estimated weighted-average interest rate of 7.8%, additional details on debt issuance can be found in note (a);
•the impact of the tax matters agreement to be entered into with Labcorp in connection with the spinoff;
•the impact of the transition services agreement and other commercial agreements to be entered into with Labcorp in connection with the spinoff (see “Certain Relationships and Related Person Transactions”);
•transaction and incremental income and costs expected to be incurred as an autonomous entity and specifically related to the spinoff;
•other adjustments described in the notes to the unaudited pro forma combined financial information; and
•management adjustments which consist of reasonably estimated transaction effects expected to occur.
The unaudited pro forma combined financial information was prepared in accordance with Article 11 of Regulation S-X. In May 2020, the SEC adopted Release No. 33-10786 “Amendments to Financial Disclosures about Acquired and Disposed Businesses” (the “Final Rule”). The Final Rule became effective on January 1, 2021 and the unaudited pro forma combined financial information herein is presented in accordance therewith. The unaudited pro forma combined financial information is presented for informational purposes only and does not purport to represent what our financial position and results of operations actually would have been had the Pro Forma Transactions occurred on the dates indicated, or to project our financial performance for any future period. The unaudited pro forma combined financial information is based on information and assumptions, which are described in the accompanying notes.
65
Our historical combined financial statements, which were the basis for the unaudited pro forma combined financial information, were prepared on a carve-out basis as we did not operate as a standalone entity for the periods presented. Accordingly, such financial information reflects an allocation of certain corporate costs, such as tax, treasury, executive leadership, finance, accounting, legal, human resources, sales expenses and the related benefit costs associated with such functions, such as stock-based compensation, that are either specifically identifiable or clearly applicable to Clinical Development and Commercialization Services Business (“CDCS”).
The unaudited pro forma combined financial information has been prepared to include transaction accounting (including the impact of changes to our legal entity structure in anticipation of the spinoff), autonomous entity and management adjustments to reflect the financial condition and results of operations as if we were a standalone entity. Transaction accounting adjustments have been presented to show the impact and associated cost as a result of the legal separation from Labcorp, including the incurrence of indebtedness, transfer of additional pension and employee benefit assets and liabilities, and the tax matters agreement. Autonomous entity adjustments have been presented to show the impact of items such as the transition services agreement, lease arrangements with third parties and Labcorp, and incremental costs expected to be incurred as an autonomous entity. In addition, we have provided a presentation of management adjustments that management believes are necessary to enhance an understanding of the pro forma effects of the transaction. Actual future costs incurred may differ from these estimates.
The unaudited pro forma combined financial information reported below should be read in conjunction with the sections herein entitled “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Certain Relationships and Related Person Transactions” as well as the audited combined financial statements, unaudited combined financial statements and the corresponding notes included elsewhere in this information statement. For factors that could cause actual results to differ materially from those presented in the unaudited pro forma condensed combined financial information, see “Cautionary Statement Concerning Forward-Looking Statements” and “Risk Factors” included elsewhere in this information statement.
66
Unaudited Pro Forma Combined Balance Sheet
As of March 31, 2023
(In Millions)
HistoricalTransaction Accounting AdjustmentsAutonomous Entity AdjustmentsPro Forma
ASSETS
Current assets:
Cash and cash equivalents$120.2 $(0.2)(a)$— $120.0 
Accounts receivable and unbilled services, net996.6 — — 996.6 
Prepaid expenses and other126.0 — — 126.0 
Total current assets1,242.8 (0.2)— 1,242.6 
Property, plant and equipment, net180.4 7.8 (d)(13.9)(i)174.3 
Goodwill, net2,009.8 — — 2,009.8 
Intangible assets, net812.3 — — 812.3 
Deferred income taxes1.2 — — 1.2 
Other assets, net60.8 5.5 (a)— 66.3 
Total assets$4,307.3 $13.1 $(13.9)$4,306.5 
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable$102.6 $— $— $102.6 
Accrued expenses and other current liabilities271.1 2.2 (c)— 273.3 
Unearned revenue258.0 — — 258.0 
Short-term operating lease liabilities23.9 — (1.3)(i)22.6 
Total current liabilities655.6 2.2 (1.3)656.5 
Long-term debt— 1,610.5 (a)— 1,610.5 
Operating lease liabilities43.3 — (13.0)(i)30.3 
Deferred income taxes and other tax liabilities180.6 0.8 (d)— 181.4 
Other liabilities22.3 — — 22.3 
Total liabilities$901.8 $1,613.5 $(14.3)$2,501.0 
Equity:
Net parent investment$3,662.6 $(3,663.0)(a), (e)$0.4 $— 
Common stock par value— 0.1 (e)— 0.1 
Additional paid-in capital— 2,062.5 (e)— 2,062.5 
Accumulated other comprehensive loss(257.1)— — (257.1)
Total equity3,405.5 (1,600.4)0.4 1,805.5 
Total liabilities and equity$4,307.3 $13.1 $(13.9)$4,306.5 
See accompanying notes to the unaudited pro forma combined financial information.
67
Unaudited Pro Forma Combined Statement of Operations
For the Three Months Ended March 31, 2023
(In Millions, Except Per Share Data)
HistoricalTransaction Accounting AdjustmentsAutonomous Entity AdjustmentsPro Forma
Revenues$764.2 $— $— $764.2 
Costs and expenses:
Direct costs, exclusive of depreciation and amortization636.2 3.5 (b)— 639.7 
Selling, general and administrative expenses, exclusive of depreciation and amortization78.0 1.6 (b)— 79.6 
Depreciation and amortization22.8 1.2 (d)— 24.0 
Restructuring and other charges1.2 — — 1.2 
Total costs and expenses738.2 6.3 — 744.5 
Operating income (loss)26.0 (6.3)— 19.7 
Other income (expense):
Interest expense— (32.7)(a)— (32.7)
Foreign exchange gain (loss)(5.5)— — (5.5)
Other, net0.6 — 0.7 (g)1.3 
Income (loss) before income taxes21.1 (39.0)0.7 (17.2)
Provision for income taxes3.7 (9.5)(f)0.2 (h)(5.6)
Net income (loss)$17.4 $(29.5)$0.5 $(11.6)
Pro Forma loss per share of common stock
Basic(j)$(0.13)
Diluted(k)$(0.13)
Weighted average number of common shares outstanding
Basic(j)88.4 
Diluted(k)88.4 
See accompanying notes to the unaudited pro forma combined financial information.
68
Unaudited Pro Forma Combined Statement of Operations
For the Year Ended December 31, 2022
(In Millions, Except Per Share Data)
HistoricalTransaction Accounting AdjustmentsAutonomous Entity AdjustmentsPro Forma
Revenues$3,096.1 $— $— $3,096.1 
Costs and expenses:
Direct costs, exclusive of depreciation and amortization2,447.4 26.6 (b)0.4 (g)2,474.4 
Selling, general and administrative expenses, exclusive of depreciation and amortization279.8 19.7 (b)0.4 (g)299.9 
Depreciation and amortization92.7 3.6 (d)— 96.3 
Goodwill and other asset impairments9.8 — — 9.8 
Restructuring and other charges30.5 — — 30.5 
Total costs and expenses2,860.2 49.9 0.8 2,910.9 
Operating income (loss)235.9 (49.9)(0.8)185.2 
Other income (expense):
Interest expense— (132.4)(a)— (132.4)
Foreign exchange gain (loss)(0.9)— — (0.9)
Other, net2.0 — 5.0 (g)7.0 
Income (loss) before income taxes237.0 (182.3)4.2 58.9 
Provision for income taxes44.1 (44.6)(f)1.0 (h)0.5 
Net income (loss)$192.9 $(137.7)$3.2 $58.4 
Pro Forma earnings per share of common stock
Basic(j)$0.64 
Diluted(k)$0.64 
Weighted average number of common shares outstanding
Basic(j)91.1 
Diluted(k)91.1 
See accompanying notes to the unaudited pro forma combined financial information.
69
Notes to the Unaudited Pro Forma Combined Financial Information
(In millions unless stated otherwise)
The unaudited pro forma combined balance sheet as of March 31, 2023 and the unaudited pro forma combined statement of operations for the three months ended March 31, 2023 and the unaudited pro forma combined statement of operations for the year ended December 31, 2022 include the following adjustments:
Transaction Accounting Adjustments
(a)This adjustment reflects the incurrence of indebtedness of approximately $1,640.0 in connection with the spinoff, which we expect to consist of borrowings under senior secured term loan facilities and senior secured notes, both to be incurred prior to or concurrently with the spinoff. The debt maturities range from five years to seven years with an estimated weighted average interest rate of approximately 7.8% at issuance. Total deferred debt issuance costs associated with such indebtedness are estimated at $29.5, which will be amortized to Interest expense over the terms of the respective instruments and are reflected as a reduction to Long-term debt. We will use substantially all of the proceeds from the issuances and borrowings described above to make a cash distribution to Labcorp as partial consideration for the assets that will be contributed to us in connection with the spinoff. The remaining proceeds are expected to be held by us in Cash, cash equivalents. We expect to begin operations as an independent company with a cash balance of approximately $120.0. The terms of this indebtedness have not been finalized, and the pro forma adjustments may change accordingly.
We also intend to enter into a senior secured revolving credit facility, providing for up to $450.0 of borrowings. The pro forma financial information does not give effect to any borrowings under the senior secured revolving credit facility because no amount is expected to be incurred in connection with the spinoff. The associated issuance costs of $5.5 are recorded in Other assets, net and amortized to Interest expense over the term of the credit facility.
We also expect to enter into an accounts receivable purchase program (“ARPP”) that establishes a receivables purchase facility providing for up to approximately $80.0 in funding based on the availability of certain eligible receivables and the satisfaction of certain conditions. The pro forma financial information does not give effect to the ARPP because no amount is expected to be incurred in connection with the spinoff.
For the three months ended March 31, 2023For the year ended December 31, 2022
Interest expense on debt31.3 126.8 
Amortization of debt issuance costs1.4 5.6 
Total pro forma adjustment to interest expense32.7 132.4 
Tax effect of the pro forma adjustment to interest expense8 32.4 
A 1/8th of a percentage point change in the estimated weighted average interest rate on debt would change the estimated interest expense by approximately $0.5 and $2.0 for the three months ended March 31, 2023 and for the year ended December 31, 2022, respectively.
(b)Reflects estimates for additional charges we expect to incur within one year and one quarter of the spinoff. These charges primarily relate to legal, audit and advisory fees, system implementation costs, business separation costs and other costs. These adjustments include estimated non-recurring expenses for the three months ended March 31, 2023 and December 31, 2022 of $3.5 and $26.6 recorded in Direct costs and $1.6 and $19.7 recorded in Selling, general and administrative expenses with total tax effect of $1.2 and $11.3 recorded in Provision for income taxes, respectively. Actual charges that will be incurred could be different from these estimates and would depend on several factors, including the economic environment and strategic decisions made following the spinoff.
(c)Reflects additional employee-related obligations expected to be transferred from Labcorp to Fortrea prior to the spinoff. These liabilities were excluded from the historical combined balance sheet as the related employees were not fully dedicated to Fortrea.
70
(d)Reflects the impact of property, plant and equipment that will be transferred from Labcorp to us in connection with the spinoff and related deferred tax liability impact and depreciation expense. This adjustment is primarily driven by the IT assets that will be transferred to Fortrea.
(e)Reflects the reclassification of Labcorp’s net investment in our Company, as well as the issuance of shares of our common stock with a par value of $0.001 per share pursuant to the Separation and Distribution Agreement. We have assumed the number of outstanding shares of our common stock based on shares of Labcorp common stock outstanding as of May 3, 2023, on the basis of one share of our common stock distributed for every share of Labcorp common stock. The actual number of shares issued will not be known until the record date for the distribution.
(f)Reflects the tax effects of the transaction accounting adjustments at the applicable statutory income tax rates.
Autonomous Entity Adjustments
(g)Reflects the effects of agreements we and Labcorp will enter into in connection with the spinoff. Included in the pro forma combined statement of operations for the three months ended March 31, 2023 and for the year ended December 31, 2022 are incremental costs recorded as adjustments to Direct costs of $0.0 and $0.4, and Selling, general, and administrative expenses of $0.0 and $0.4 and incremental income recorded as an adjustment to Other, net of $0.7 and $5.0, respectively.
(h)Reflects the tax effects of the autonomous entity adjustments at the applicable statutory income tax rates.
(i)Reflects the net impact of lease arrangements with third parties and sublease arrangements with Labcorp for facilities that have been entered into or will be entered into prior to the spinoff. These adjustments remove the net impact of the operating right-of-use assets and related operating lease liabilities based on the estimated present value of the lease payments over the lease term.
Pro Forma Earnings Per Share
(j)The weighted average number of shares used to compute pro forma basic EPS for the three months ended March 31, 2023 and the year ended December 31, 2022 is 88.4 million and 91.1 million, respectively, on the basis of one share of our common stock for every share of Labcorp common stock held as of the close of business on the record date.
(k)The weighted average number of shares used to compute pro forma diluted EPS is based on the number of basic shares of our common stock as described in Note (j) above. The actual dilutive effect following the completion of the spinoff will depend on various factors, including employees who may change employment between Fortrea and Labcorp and the impact of equity-based compensation arrangements. We cannot fully estimate the dilutive effects at this time.
Management Adjustments
We have elected to present management adjustments to the pro forma financial information and included all adjustments necessary for a fair statement of such information. Following the spinoff, we expect to incur incremental costs as a standalone public company related to certain expenses previously allocated from Labcorp. Our historical combined financial statements include allocations for certain costs of support functions that are provided on a centralized or geographic basis by Labcorp and its affiliates, which include legal, tax, treasury, sales expenses, IT, human resources, accounting shared services, supply chain, insurance, executive leadership, finance, and the related benefit costs associated with such functions, such as stock-based compensation. We received the benefit of economies of scale as a business within Labcorp’s overall centralized model; however, in establishing these independent support functions, the expenses will be higher than the prior shared allocation. As a standalone public company, we expect to incur certain costs in addition to those incurred pursuant to the transition services agreement as described in note (j). We will also incur new costs relating to our public reporting and compliance obligations as a standalone public company.
These incremental costs are based on our expected organization chart and expected cost structure as a standalone company, adjusted for the allocated costs recorded within our historical combined financial statements, which vary by year. In order to determine synergies and dis-synergies, we prepared a detailed
71
assessment of the resources and associated costs required as a baseline to stand up the CDCS business as a standalone company. With respect to expected headcount increases, internal resources were matched to job roles to meet the required baseline. In addition to internal resources, third-party support costs in each function were considered, which included business support functions and corporate overhead charges previously shared with Labcorp. This process was used by all functions resulting in incremental costs when compared to the cost allocations from Labcorp included in our historical combined financial statements.
Any shortfall of required resource needs will be filled through external hiring or will be supported by Labcorp through a new transition services agreement. From a timeframe standpoint, these incremental costs will begin to materialize on the date of this information statement. Management believes the resource transfers and costs which were used as the basis for the management adjustments below are reasonable and representative of the baseline to stand up the CDCS business as a standalone company. Both the resource and vendor cost baseline would be impacted by additional costs and investments that we may incur as we pursue our growth strategies. In addition, other adverse effects and limitations, including those discussed in the section of this information statement entitled “Risk Factors,” may impact actual costs incurred.
Primarily as a result of the above items, the management adjustments presented below, which are incremental to the autonomous entity pro forma adjustments, show additional incremental expenses compared to the allocated expenses from Labcorp included in our historical combined statements of operations, related to dis-synergies partially offset by synergies resulting from the contemplated organizational structure, which the management anticipates realizing prior to or within 18 months of the spinoff. Management believes the presentation of these adjustments is necessary to enhance an understanding of the pro forma effects of the transaction. The pro forma financial information below reflects all adjustments that are, in the opinion of management, necessary to provide a fair statement of the pro forma financial information, aligned with the assessment described above. If we decide to increase or reduce resources or invest more heavily in certain areas in the future, that will be part of our future decisions and has not been included in the management adjustments below. The tax effect has been determined by applying the applicable statutory tax rates to the aforementioned adjustments for the periods presented. These management adjustments include forward-looking statements, see “Cautionary Statement Concerning Forward-Looking Statements” included elsewhere in this information statement.
Three months ended March 31, 2023
In millions except per share amounts
Pro forma net income (loss)
Pro forma as shown above$(11.6)
Management adjustments
Synergies (1)
8.2 
Dis-synergies
Operational dis-synergies(2)
(6.0)
Incremental stock compensation(3)
(5.8)
TSA inefficiencies (4)
(2.1)
Total Management adjustments$(5.7)
Tax effect of Management adjustments1.4 
Pro forma net loss after Management adjustments$(15.9)
Weighted average number of basic and diluted common shares outstanding88.4 
Pro forma basic and diluted loss per share$(0.18)
72
Year ended December 31, 2022
In millions except per share amounts
Pro forma net income
Pro forma as shown above$58.4 
Management adjustments
Synergies (1)
15.0 
Dis-synergies
Operational dis-synergies(2)
(8.2)
Incremental stock compensation(3)
(24.6)
TSA inefficiencies (4)
(15.0)
Total Management adjustments$(32.8)
Tax effect of Management adjustments8.0 
Pro forma net income after Management adjustments$33.6 
Weighted average number of basic and diluted common shares outstanding91.1 
Pro forma basic and diluted earnings per share$0.37 
__________________
(1)The synergies represent lower expected cost in certain areas such as, HR support and procurement services and technology, than the amounts historically allocated from Labcorp to the CDCS business and included in our historical financial results and non-GAAP information. This adjustment reflects management’s estimate of the future effect of the spin on our standalone operating costs.
(2)The operational dis-synergies represent cost in certain areas such as marketing, management, and public company related finance services that the company expects to exceed the amount of CDCS business cost previously allocated from Labcorp and included in our historical financial results and non-GAAP information. This adjustment reflects management’s estimate of the future effect of the spin on our standalone operating costs.
(3)CDCS is expected to incur additional stock compensation expense related to the incremental personnel and adjustments to compensation levels to reflect the responsibilities of employees in a standalone entity.
(4)TSA inefficiencies reflect the impact of the incremental costs of obtaining services under the transition services agreement compared to the estimated cost of performing those functions internally. It is anticipated that the TSA arrangements will be phased out over a 24 month period as CDCS develops the necessary infrastructure and capabilities to perform these functions internally.
73
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (in Millions)
The following discussion and analysis is intended to provide a summary of significant factors relevant to the financial performance and condition of the Clinical Development and Commercialization Services business, which we refer to in this discussion and analysis as the “Company,” “our” and “we,” of Laboratory Corporation of America Holdings, which we refer to in this discussion and analysis as “Labcorp” or “Parent.” The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited combined financial statements and corresponding notes, unaudited condensed combined financial statement and corresponding notes and the unaudited pro forma condensed combined financial information and corresponding notes and other financial information included elsewhere in this information statement. This discussion contains forward-looking statements that are based upon current expectations and are subject to uncertainty and changes in circumstances. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed below and elsewhere in this information statement, particularly in “Risk Factors.” Actual results may differ materially from these expectations. See “Cautionary Statement Concerning Forward-Looking Statements.”
Company Overview
We are a leading global CRO providing comprehensive phase I through IV biopharmaceutical product and medical device services, patient access solutions and other enabling services. For over 30 years, we have provided our global pharmaceutical, biotechnology, and medical device customers with clinical pharmacology, clinical development, and other clinical capabilities. In addition, we offer our customers highly flexible delivery models that include Full Service, FSP, and Hybrid structures. We believe we are well positioned to leverage our global scale, access to clinical data-driven insights, industry network, and decades of experience to bring customers tailored solutions. Fortrea intends to capitalize on the global demand for clinical development services across a diverse set of therapeutic areas.
Our team of approximately 21,000 staff (including temporary staff and contractors, as well as more than 2,600 global, cross-functional clinical research associates) conducts operations in 90 countries and delivers a broad range of clinical development solutions and other services for our customers. Our services streamline the biopharmaceutical product and medical device development process. Additionally, we successfully utilize enabling technologies to optimize processes and evolve with a dynamic marketplace.
The Company manages its business in two reportable segments - Clinical Services and Enabling Services. The Clinical Services segment, provides services across the clinical pharmacology and clinical development spectrum. The Enabling Services segment provides patient access and technology solutions to customers.
Separation from Labcorp
On July 28, 2022, Labcorp announced a plan to pursue a separation of us from Labcorp through a spinoff. After the spinoff, we will be an independent, publicly traded company. The spinoff is intended to be tax-free to Labcorp and its stockholders for U.S. federal income tax purposes, except, in the case of stockholders, to the extent of any cash received in lieu of fractional shares.
The spinoff will be subject to a number of conditions, some of which are more fully described above under “The Spinoff—Spinoff Conditions and Termination.”
Incremental Independent Public Company Expenses
The combined statements of operations include costs for certain centralized functions and programs provided and administered by Labcorp that are allocated to the Company. These centralized functions and programs include, but are not limited to legal, tax, treasury, risk management, sales expenses, IT, human resources, finance, supply chain, executive leadership, and stock-based compensation.
74
These expenses were allocated to the Company based on direct usage when identifiable or, when not directly identifiable, on the basis of proportional net revenues or headcount or other reasonable driver, as applicable. The Company considers the basis on which the expenses have been allocated to reasonably reflect the utilization of services provided to, or the benefit received by, the Company during the periods presented. However, the allocations may not reflect the expenses the Company would have incurred as an independent company for the periods presented. Actual costs that may have been incurred if the Company had been a standalone company would depend on a number of factors, including the organizational structure, whether functions were outsourced or performed by employees, and strategic decisions made in areas such as IT and infrastructure. For a period following the spinoff, however, some of these functions will continue to be provided by Labcorp under a planned transition services agreement.
The actual costs of services represented by these allocations may vary significantly from the amounts allocated to the Company in the accompanying financial statements.
Ukraine/Russia Conflict
As a result of the ongoing conflict between Russia and Ukraine, we determined that all receivables from companies located in Russia and all long-lived assets related to our Russia and Ukraine operations were impaired. Furthermore, we incurred additional costs in an effort to support our employees impacted by the conflict.
Seasonality
Our business is seasonal. Revenue tends to be lowest in the first half, and especially the first quarter, of each year. Because of this seasonality, our results of operations for the first half of the year, and the first quarter, in particular, may not be indicative of the results of operations that may be achieved for subsequent quarters or the full year. We believe that first quarter 2023 revenue and margins were especially impacted by (i) a large FSP contract loss (as discussed further below); (ii) the provision for credit losses on certain biotech receivables; (iii) slower backlog conversion rates impacted by (a) continued staffing challenges, including increased times to fill recruitment in certain therapeutic areas (primarily respiratory) and select geographies and (b) customer hesitation ahead of our spinoff and (iv) recent macroeconomic factors affecting the industry, in addition to the seasonal nature of our business.
Backlog and Net New Business
Our backlog represents anticipated revenue for work not yet completed or performed under executed contracts and other forms of written confirmation, where there is sufficient or reasonable certainty about the customer’s ability and intent to fund and commence the services within twelve months. We adjust backlog for foreign currency fluctuations and exclude from backlog revenue that has been recognized as revenue in our statements of operations. Our backlog was $8.6 billion, $8.1 billion and $8.9 billion at December 31, 2022, and 2021 and March 31, 2023, respectively.
We add net new business to backlog based on the aforementioned criteria. Additionally, each period we evaluate previously awarded projects to adjust for modifications, cancellations, foreign currency fluctuations, and other items. Net new business varies from period to period depending on numerous factors, including customer award volume, sales performance, and overall health of the biopharmaceutical industry, among others. While customers with whom we have had long-standing relationships have continued to award new orders to us, we have experienced some fluctuations in our net new business award levels over the last few quarters driven, we believe, by recent macroeconomic factors affecting the industry and customer hesitation ahead of the spinoff. Some clients have indicated that they are waiting until after the spinoff is complete to award new business. Our net new business awards were $3.7 billion, $3.4 billion and $3.7 billion for the years ended December 31, 2022, 2021 and 2020, respectively and $3.8 billion and $3.4 billion for the trailing twelve months ended March 31, 2023 and 2022, respectively.
We do not believe that, as a sole measure, our backlog and net new business are consistent indicators of future revenue because they have been, and likely will continue to be, affected by a number of factors, including the variable size and duration of projects, many of which are performed over several years, and changes to the scope of
75
work during the course of projects. Additionally, projects may be canceled or delayed by the customer or regulatory authorities. We generally do not have a contractual right to the full amount of the contract award reflected in our backlog. If a customer cancels a contract, we generally will be reimbursed for the costs we have incurred. For more information about risks related to our backlog see “Risk Factors—Risks Relating to Our Business—Our backlog might not be indicative of our future revenues, and we might not realize all of the anticipated future revenue reflected in our backlog.”
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to help you understand our results of operations for the years ended December 31, 2022, 2021 and 2020, and for the three months ended March 31, 2023 and 2022 as well as our financial condition as of December 31, 2022, 2021 and 2020 and as of March 31, 2023 and 2022.
Results of Operations for the three months ended March 31, 2023 and 2022
The following tables present the financial measures that management considers to be the most significant indicators of the Company's performance.
Three months ended March 31, 2023 and 2022
Revenues
Three Months Ended March 31,
2023
2022
Change
Clinical Services
$692.1 $707.2 (2.1)%
Enabling Services
72.171.80.4 %
Total
$764.2 $779.0 (1.9)%
The Company’s revenues for the three months ended March 31, 2023, were $764.2, a decrease of 1.9% over revenues of $779.0 in the corresponding period in 2022. The decrease in revenues was due to a decline in organic revenue of 0.6% and unfavorable foreign currency translation of 1.3%. The Company defines organic growth or decline as the increase or decrease in revenue excluding the year over year impact of acquisitions, divestitures, and currency. The 0.6% decrease in organic revenues was primarily driven by the impact of an FSP cancellation causing a 3.2% decline in revenue along with a slower backlog conversion rate in part due to lingering post-pandemic staffing challenges at investigator sites.
Direct Costs, Exclusive of Depreciation and Amortization
Three Months Ended March 31,
2023
2022
Change
Direct costs
$636.2 $638.1 (0.3)%
Direct costs as a % of revenues
83.3 %81.9 %
Direct costs decreased 0.3% during the three months ended March 31, 2023 as compared with the corresponding period in 2022. Direct costs increased as a percentage of revenues to 83.3% during the three months ended March 31, 2023 as compared to 81.9% in the corresponding period in 2022. This decrease in direct costs was primarily due to a decrease in personnel costs.
Selling, General and Administrative Expenses, Exclusive of Depreciation and Amortization
Three Months Ended March 31,
2023
2022
Change
Selling, general and administrative expenses
$78.0 $75.0 4.0 %
SG&A as a % of revenues
10.2 %9.6 %
Selling, general and administrative expenses consist primarily of administrative payroll and related benefit charges, advertising and promotional expenses, administrative travel, an allocation of facility charges and IT costs,
76
and corporate allocations. Selling, general and administrative expenses increased 4.0% during the three months ended March 31,2023 as compared with the corresponding period in 2022. The increase in selling, general and administrative expenses was primarily due to an $8.9 provision for credit losses on certain biotech receivables.
Depreciation Expense
Three Months Ended March 31,
2023
2022
Change
Depreciation expense
$6.9 $6.7 3.0 %
The increase in depreciation expense for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022, was primarily due to purchases of property, plant and equipment.
Amortization Expense
Three Months Ended March 31,
2023
2022
Change
Amortization of intangibles and other assets
$15.9 $16.9 (5.9)%
The decrease in amortization of intangibles and other assets during the three months ended March 31, 2023, as compared to the corresponding period in 2022, is primarily the result of the impairment of technology assets that occurred in the fourth quarter of 2022.
Restructuring and Other Charges
Three Months Ended March 31,
2023
2022
Change
Restructuring and other charges
$1.2 $9.6 (87.5)%
During three months ended March 31, 2023, the Company recorded net restructuring charges of $1.2, which is reflected within Restructuring and other charges in the combined statements of operations. The charges were comprised of $0.7 in severance and other personnel costs and $0.5 in lease and other facility-related costs associated with general cost improvement and headcount reduction initiatives at various locations around the world.
During three months ended March 31, 2022, the Company recorded net restructuring charges of $9.6, which is reflected within Restructuring and other charges in the Combined Statements of Operations. The charges were comprised of $2.6 in severance and other personnel costs and $7 in lease and other facility-related costs associated with general cost improvement and headcount reduction initiatives at various locations around the world.
Foreign Exchange Gain (Loss)
Three Months Ended March 31,
2023
2022
Change
Foreign exchange gain (loss)
$(5.5)$4.3 227.9 %
The change in Foreign exchange gain (loss) for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022, was primarily due to the relative strengthening of the US Dollar against most major foreign currencies resulting in $6.5 in foreign exchange losses offset by $1.0 of allocated hedging gains from the Labcorp hedging program for 2023. For the three months ended March 31, 2022, foreign exchange gains were $5.3 offset by $1.0 of allocated hedging losses from the Labcorp hedging program.
77
Income Tax Expense
Three Months Ended March 31,
20232022
Income tax expense$3.70$5.00
Income tax expense as a % of income before tax17.5%13.3%
For the three months ended March 31, 2023, the Company's effective tax rate was 17.5% compared to the 2022 tax rate of 13.3%. This fluctuation was primarily related to the stock compensation windfall benefit realized during 2022.
Operating Results by Segment
Three Months Ended March 31,
2023
2022
Change
Clinical Services operating income
$58.5 $75.3 (22.3)%
Enabling Services operating income
2.4 4.7 (48.9)%
Segment operating income
60.9 80.0 (23.9)%
Corporate costs not allocated to segments
(17.8)(20.8)(14.4)%
Amortization
(15.9)(16.9)(5.9)%
Goodwill and other asset impairments
— — — %
Restructuring and other charges
(1.2)(9.6)(87.5)%
Total operating income (loss)
$26.0 $32.7 20.5 %
Clinical Services operating income was $58.5 for the three months ended March 31, 2023, a decrease of (22.3)% from operating income of $75.3 in the corresponding period of 2022. The decrease in operating income was primarily due to the loss of an FSP contract and an $8.9 provision for credit losses on certain biotech receivables.
Enabling Services operating income was $2.4 for the three months ended March 31, 2023, a decrease of (48.9)% from operating income of $4.7 in the corresponding period of 2022. The decrease was primarily due to investments in resources related to servicing a recent new award.
The Corporate costs not allocated to segments include stock-based compensation, acquisition related costs, spin costs, COVID-19 costs, Ukraine/Russia conflict costs, retention bonuses, costs of centralized functions that are allocated from Labcorp, and other charges not deemed to relate to segment performance. Through the spinoff date, the combined statements of operations will include costs for certain centralized functions and programs provided and administered by Labcorp that are allocated to the Company. These centralized functions and programs include, but are not limited to legal, tax, treasury, risk management, sales and marketing expenses, information technology, human resources, finance, supply chain, and executive leadership. Corporate costs not allocated to segments were $17.8 for the three months ended March 31, 2023, an increase of (14.4)% over corporate expenses of $20.8 in the corresponding period of 2022. The increase in corporate expenses in 2023 is primarily due to the increase in costs allocated from Labcorp.
78
Results of Operations for the years ended December 31, 2022, 2021 and 2020
The following tables present the financial measures that management considers to be the most significant indicators of the Company's performance.
Revenues
Years Ended December 31,
2022202120202022/2021 change2021/2020 change
Clinical Services
$2,825.4 $2,763.5 $2,291.2 2.2 %20.6 %
Enabling Services270.7 294.0 289.1 (7.9)%1.7 %
Total
$3,096.1 $3,057.5 $2,580.3 1.3 %18.5 %
The Company’s revenues for the year ended December 31, 2022, were $3,096.1, an increase of 1.3% over revenues of $3,057.5 in the corresponding period in 2021. The increase in revenues was due to organic growth of 3.9% offset by unfavorable foreign currency translation of (2.6)%. The Company defines organic growth as the increase in revenue excluding the year over year impact of acquisitions, divestitures, and currency. The 3.9% increase in organic revenues was primarily driven by strong net new business awards in 2021 for the Clinical Services segment offset by backlog reductions within the Enabling Services segment.
The Company’s revenues for the year ended December 31, 2021, were $3,057.5, an increase of 18.5% over revenues of $2,580.3 in the corresponding period in 2020. The increase in revenues was due to organic growth of 16.1%, the benefit of acquisitions of 1.1%, and favorable foreign currency translation of 1.3%. The 16.1% increase in organic revenues was primarily driven by strong net new business in 2020 in both of our segments.
Direct Costs, Exclusive of Depreciation and Amortization
Years Ended December 31,
2022202120202022/2021 change2021/2020 change
Direct costs
$2,447.4 $2,453.1 $2,091.2 (0.2)%17.3 %
Direct costs as a % of revenues
79.0 %80.2 %81.0 %
Direct costs decreased 0.2% in 2022 as compared with 2021 and decreased as a percentage of revenues to 79.0% in 2022 as compared to 80.2% in 2021. This decrease in direct costs was primarily due to a decrease in incentive-based compensation expense based on company performance.
Direct costs increased 17.3% in 2021 as compared with 2020 and decreased as a percentage of revenues to 80.2% in 2021 as compared to 81.0% in 2020. This increase in direct costs was primarily due to higher labor expense and higher project related reimbursable out-of-pocket costs from higher revenues.
Selling, General and Administrative Expenses, Exclusive of Depreciation and Amortization
Years Ended December 31,
2022202120202022/2021 change2021/2020 change
Selling, general and administrative expenses
$279.8 $303.1 $267.6 (7.7)%13.3 %
SG&A as a % of revenues
9.0 %9.9 %10.4 %
79
Selling, general and administrative expenses consist primarily of administrative payroll and related benefit charges, advertising and promotional expenses, administrative travel, an allocation of facility charges and IT costs, and corporate allocations.
Selling, general and administrative expenses decreased 7.7% in 2022 compared to 2021. The decrease in selling, general and administrative expenses was primarily due to a decrease in incentive-based compensation expense based on company performance.
Selling, general and administrative expenses increased 13.3% in 2021 compared to 2020. The increase in selling, general and administrative expenses was primarily due to the increase in personnel and related costs due to revenue growth.
Goodwill and Other Asset Impairments
Years Ended December 31,
2022202120202022/2021 change2021/2020 change
Goodwill and other asset impairments$9.8 $— $405.7 — %(100.0)%
During 2022, the Company recorded intangible asset impairment charges of $9.8. The Company concluded that the fair value was less than carrying value for one of its acquired technology related assets and recorded an asset impairment.
During 2020, the Company recorded goodwill asset impairment charges of $405.7. The Company concluded that the fair value was less than carrying value for one of its reporting units and recorded goodwill and other asset impairments.
Depreciation Expense
Years Ended December 31,
2022202120202022/2021 change2021/2020 change
Depreciation expense
$27.0 $26.3 $23.0 2.7 %14.3 %
The increase in depreciation expense for 2022, as compared to 2021, and for 2021, as compared to 2020, was primarily due to purchases of property, plant and equipment.
Amortization Expense
Years Ended December 31,
2022202120202022/2021 change2021/2020 change
Amortization of intangibles and other assets
$65.7 $140.0 $96.0 (53.1)%45.8 %
The decrease in amortization of intangibles and other assets in 2022, as compared to 2021, is primarily the result of a $67.3 decrease in amortization expense related to trade names. The trade names were fully amortized during 2021 as a result of the Company’s rebranding initiative.
The increase in amortization of intangibles and other assets in 2021, as compared to 2020, primarily reflects the $43.2 impact of the accelerated amortization on trade names related to the Company’s rebranding initiative. Accelerated amortization of $57.6 and $14.4 was recognized for the years ended December 31, 2021 and 2020, respectively.
80
Restructuring and Other Charges
Years Ended December 31,