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Item 2. Management’s Discussion and Analysis

2023-11-13 compared with 2023-08-14 · 119 added, 161 removed, 121 unchanged (70% of the section changed)

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The following discussion and analysis is intended to provide a summary of significant factors relevant to the financial performance and condition of Fortrea Holdings Inc., which we refer to in this discussion and analysis as “Fortrea,” the “Company,” “our” and “we”.

Fortrea has historically existed and functioned as part of Laboratory Corporation of America Holdings, which we refer to in this discussion and analysis as “Labcorp” or “Former 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 and our unaudited condensed consolidated and combined financial statements and corresponding notes in Item 1.

Prior to the spin-off (the “Spin” or “the Separation”), Fortrea existed and functioned as part of Laboratory Corporation of America Holdings, which we refer to in this discussion and analysis as “Labcorp” or “Former 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 and our unaudited condensed consolidated and combined financial statements and corresponding notes in Item 1.

“Financial Statements.”

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Factors that could cause actual results to differ from those reflected in forward-looking statements relating to our operations and business include, among other things:

the risk that we may not realize some or all of the benefits expected to result from the Spin, or if such benefits are delayed;

the risk that we may not realize some or all of the benefits expected to result from the Spin, or that such benefits are delayed;

risks and consequences that are a result of the Spin;

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our dependence on third parties generally to provide services critical to our businesses throughout the transition period and beyond;

the establishment of our accounting, enterprise resource planning, and other management systems post the transition period could cost more or take longer than anticipated;

the risk that establishment of our accounting, enterprise resource planning, and other management systems post the transition period could cost more or take longer than anticipated;

the impact of the rebranding of the Company;

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the risk that our backlog and net new business may not rebound after the Spin to the extent or over the time period we anticipate, that such measures may not be indicative of our future revenues and that we might not realize all of the anticipated future revenue reflected in our backlog;

our ability to generate sufficient net new business awards, or if net new business awards are delayed, terminated, reduced in scope, or fail to go to contract;

our ability to generate sufficient net new business awards, or the risk that net new business awards are delayed, terminated, reduced in scope, or fail to go to contract;

the risk that we may underprice our contracts, overrun our cost estimates, or fail to receive approval for, or experience delays in documentation of change orders;

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Company Overview

Fortrea is a leading global contract research organization (“CRO”) providing clinical development and patient access solutions to pharmaceutical, biotechnology and medical device customers.

We offer 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 more than 20 therapeutic areas.

Fortrea Holdings Inc.

("Fortrea" or the “Company”), a Delaware corporation incorporated on January 31, 2023, is a leading global contract research organization (“CRO”) providing biopharmaceutical product and medical device development services, patient access solutions and other enabling services to pharmaceutical, biotechnology and medical device customers.

The Company offers customers highly flexible delivery models that include Full Service, Functional Service Provider (“FSP”), and Hybrid Service structures.

We have a rich history of providing clinical development services for over 30 years across more than 20 therapeutic areas, first as Covance and later as Labcorp Drug Development.

On June 30, 2023, we completed a spin-off (the “Spin” or the “Separation”) from Laboratory Corporation of America Holdings (“Labcorp” or “Former Parent”).

We leverage our global scale, clinical data insights, technology innovation, industry network and decades of experience as a standalone company and as a business unit prior to the Spin to deliver tailored solutions to our customers.

With what we believe is a distinctive market offering, Fortrea meets growing global demand for clinical development services.

Our team of approximately 19,000 employees conducts operations in more than 90 countries and delivers comprehensive phase I – IV clinical trial management, clinical pharmacology, differentiated technology enabled trial solutions and post-approval services for our customers.

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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.

We manage our business in two reportable segments - Clinical Services and Enabling Services.

The Clinical Services segment comprises services across the clinical pharmacology and clinical development spectrum.

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Separation from Labcorp

On June 30, 2023, Labcorp completed the Spin of Fortrea through a pro-rata distribution of one share of Fortrea common stock for every share of Labcorp common stock held at the close of business on the record date of June 20, 2023.

On June 30, 2023, we completed the Spin from Labcorp through a pro-rata distribution of one share of Fortrea common stock for every share of Labcorp common stock held at the close of business on the record date of June 20, 2023.

Fortrea began to trade as a separate public company (NASDAQ:

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Incremental Independent Public Company Expenses

The condensed consolidated and combined statements of operations include costs for certain centralized functions and programs provided and administered by Labcorp that were allocated to Fortrea in the periods presented prior to the Separation.

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.

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.

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 a period following the Separation, however, some of these functions will be provided by Labcorp under transition services agreements.

The actual costs of services represented by these allocations may vary significantly from the amounts allocated to the Company in the accompanying financial statements.

The actual costs of services represented by these allocations may vary significantly from the amounts allocated to us in the accompanying financial statements.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2023 compared with Three Months Ended June 30, 2022

Three Months Ended September 30, 2023 compared with Three Months Ended September 30, 2022 and Nine Months Ended September 30, 2023 compared with Nine Months Ended September 30, 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 June 30,

Three Months Ended September 30, Nine Months Ended

September 30,

2023 2022 Change

Clinical Services

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$ 776.4 $ 762.3 1.8 % $ 2,333.6 $ 2,334.4 — %

The Company’s revenues for the three months ended June 30, 2023 were $793.0, essentially flat over revenues of $793.1 in the corresponding period in 2022.

The change in revenues was due to an increase in organic revenues of 0.1% and unfavorable foreign currency translation of 0.1%.

The Company defines organic growth or decline as the increase or decrease in revenues excluding the year over year impact of acquisitions, divestitures and currency.

The 0.1% increase in organic revenues was primarily driven by an increase in pass through revenues offset by lower service revenues driven by the impact of a prior year FSP cancellation, a customer concession and the mix and quantity of recent new business wins.

The Clinical Services segment’s revenues for the three months ended June 30, 2023 were $726.1, an increase of 0.4% compared to revenues of $723.3 in the corresponding period in 2022.

The increase in revenues was driven by an increase in pass through revenues offset by lower service revenues driven by the impact of a prior year FSP cancellation, a customer concession and the mix and quantity of recent new business wins.

The Enabling Services segment’s revenues for the three months ended June 30, 2023 were $66.9, a decrease of (4.2)% compared to revenues of $69.8 in the corresponding period in 2022.

The decrease in revenues was due to customer cancellations.

The Company’s revenues for the three months ended September 30, 2023 were $776.4, an increase of 1.8% over revenues of $762.3 in the corresponding period in 2022.

The change in revenues was due to an increase in organic revenues of 1.0% and favorable foreign currency translation of 0.8%.

The Company defines organic growth as the change in revenues excluding the year over year impact of acquisitions, divestitures and currency.

The 1.0% increase in organic revenues was primarily driven by an increase in pass through revenues offset by lower service revenues resulting from the mix and quantity of recent new business wins and the impact of a prior year FSP cancellation.

The Clinical Services segment’s revenues for the three months ended September 30, 2023 were $711.7, an increase of 2.1% compared to revenues of $697.2 in the corresponding period in 2022.

The increase in revenues was driven by an increase in pass through revenues offset by lower service revenues resulting from the mix and quantity of recent new business wins and the impact of a prior year FSP cancellation.

The Enabling Services segment’s revenues for the three months ended September 30, 2023 were $64.7, a decrease of 0.6% compared to revenues of $65.1 in the corresponding period in 2022.

The decrease in revenues was due to lower call center volume.

The Company’s revenues for the nine months ended September 30, 2023, were $2,333.6, essentially flat over revenues of $2,334.4 in th e corresponding period in 2022.

The change in revenues was due to an increase in organic revenues of 0.2% offset by unfavorable foreign currency translation of 0.2%.

The 0.2% in crease in organic revenues was primarily driven by an increase in pass through revenues offset by lower service revenues driven by the impact of a prior year FSP cancellation, a customer concession and the mix and quantity of recent new business wins.

The Clinical Services segment’s revenues for the nine months ended September 30, 2023 were $2,129.8, an increase of 0.1% compared to revenues of $2,127.6 in the corresponding period in 2022.

The increase in revenues was driven by an increase in pass through revenues offset by lower service revenues resulting from the impact of a prior year FSP cancellation, a customer concession and the mix and quantity of recent new business wins.

The Enabling Services segment’s revenues for the nine months ended September 30, 2023 were $203.8, a decrease of 1.5% compared to revenues of $206.8 in the corresponding period in 2022.

The decrease in revenues was due to customer cancellations and lower call center volume.

Direct Costs, Exclusive of Depreciation and Amortization

Three Months Ended June 30,

Three Months Ended September 30, Nine Months Ended

September 30,

2023 2022 Change

$ 647.3 $ 594.8 8.8 % $ 1,932.9 $ 1,847.6 4.6 %

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83.4 % 78.0 % 82.8 % 79.1 %

Direct costs increased 5.7% during the three months ended June 30, 2023 as compared with the corresponding period in 2022.

Direct costs increased as a percentage of revenues to 81.9% during the three months ended June 30, 2023 as compared to 77.5% in the corresponding period in 2022.

This increase in direct costs was primarily due to higher pass through costs partially offset by a decrease in personnel costs.

Direct costs increased 8.8% during the three months ended September 30, 2023 as compared with the corresponding period in 2022.

Direct costs increased as a percentage of revenues to 83.4% during the three months ended September 30, 2023 as compared to 78.0% in the corresponding period in 2022.

Direct costs increased 4.6% during the nine months ended September 30, 2023 as compared with the corresponding period in 2022.

Direct costs increased as a percentage of revenues to 82.8% during the nine months ended September 30, 2023 as compared to 79.1% in the corresponding period in 2022.The increase in direct costs in both periods was primarily due to higher pass through costs, transition services agreement costs and personnel costs partially offset by the removal of Former Parent corporate allocations and carve-out adjustments Fortrea received prior to the Spin.

Pass through costs are paid by the customer resulting in revenue fully offset by these direct costs.

Selling, General and Administrative Expenses, Exclusive of Depreciation and Amortization

Three Months Ended June 30,

Three Months Ended September 30, Nine Months Ended

September 30,

2023 2022 Change

Selling, general and administrative expenses

$ 78.9 $ 70.7 11.6 % $ 237.7 $ 216.5 9.8 %

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 increased by 13.5% during the three months

ended June 30, 2023 as compared with the corresponding period in 2022.

The increase in selling, general and administrative expenses was primarily due to an increase in indirect labor, credit loss provisions and an adjustment of $5.4 additional one-time costs from Former Parent.

Selling, general and administrative expenses consist primarily of administrative payroll and related benefits, advertising and promotional expenses, credit loss provision, professional fees, administrative travel, facility charges and certain IT costs, and other administrative expenses.

Selling, general and administrative expenses increased by 11.6% during the three months ended September 30, 2023 as compared with the corresponding period in 2022.

The increase was primarily due to an increase in personnel costs, transition service agreement costs, credit loss provisions, and professional fees partially offset by elimination of prior year Former Parent corporate allocations and carve-out adjustments Fortrea received prior to the Spin.

Selling, general and administrative expenses increased 9.8% during the nine months ended September 30, 2023 as compared with the corresponding period in 2022.

The change in selling, general and administrative expenses was primarily due to an increase in personnel costs, credit loss provisions, transition service agreement costs and professional fees partially offset by elimination of prior year Former Parent corporate allocations and carve-out adjustments Fortrea received prior to the Spin.

Depreciation Expense

Three Months Ended June 30,

Three Months Ended September 30, Nine Months Ended

September 30,

2023 2022 Change

Depreciation expense

$ 8.6 $ 6.5 32.3 % $ 24.6 $ 20.0 23.0 %

The increase in depreciation expense for the three months ended June 30, 2023 as compared to the three months ended June 30, 2022, was due to the increase of property, plant and equipment as compared to the prior year.

The increase in depreciation expense for the three months and nine months ended September 30, 2023 as compared to the corresponding periods in 2022 was due to the increase of property, plant and equipment, primarily IT assets, when they were separated between Fortrea and the Former Parent at Spin.

Amortization Expense

Three Months Ended June 30,

Three Months Ended September 30, Nine Months Ended

September 30,

2023 2022 Change

Amortization of intangibles and other assets

$ 16.0 $ 16.2 (1.2) % $ 47.9 $ 49.7 (3.6) %

T he decrease in amortization of intangibles and other assets during the three months ended June 30, 2023, as compared to the corresponding period in 2022, was not significant.

Restructuring and Other Charges

Three Months Ended June 30,

2023 2022 Change

T he decrease in amortization of intangibles and other assets during the three months ended September 30, 2023, as compared to the corresponding period in 2022, was not significant.

The decrease in amortization of intangibles and other assets during the nine months ended September 30, 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

$ 3.9 $ 13.0 (70.0) %

During the three months ended June 30, 2023, the Company recorded net restructuring charges of $3.9, which is reflected within restructuring and other charges in the condensed consolidated and combined statements of operations.

The charges comprised of $2.2 in severance and other personnel costs and $1.7 in lease and other facility-related costs associated with general cost improvement and headcount reduction initiatives at various locations around the world.

During the three months ended June 30, 2022, the Company recorded net restructuring charges of $13.0, which is reflected within Restructuring and other charges in the condensed consolidated and combined statements of operations.

The charges comprised of $10.5 in severance and other personnel costs and $2.5 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 June 30,

2023 2022 Change

Foreign exchange gain (loss)

$ 5.4 $ 12.0 (55.0) %

The change in foreign exchange gain (loss) for the three months ended June 30, 2023, as compared to the three months ended June 30, 2022, was primarily due to the relative strengthening of the U.S.

Dollar against the British Pound resulting in $8.6 in foreign exchange gains offset by $3.2 of allocated hedging losses from the Labcorp hedging program for 2023.

For the three months ended June 30, 2022, foreign exchange gains were $18.9 offset by $6.9 of allocated hedging losses from the Labcorp hedging program.

Income Tax Expense

Three Months Ended June 30,

Income tax expense $ 10.6 $ 17.2

Income tax expense as a % of income before tax 27.2 % 20.6 %

For the three months ended June 30, 2023, the Company's effective tax rate was 27.2% compared to the 2022 tax rate of 20.6%.

This fluctuation was primarily due to earnings mix.

Operating Results by Segment

Three Months Ended June 30,

2023 2022 Change

Clinical Services operating income

$ 74.1 $ 116.0 (36.1) %

Enabling Services operating income

1.2 10.9 (89.0) %

Segment operating income

$ 75.3 $ 126.9 (40.7) %

Clinical Services operating income was $74.1 for the three months ended June 30, 2023, a decrease of 36.1% from operating income of $116.0 in the corresponding period of 2022.

The decrease in operating income was primarily due to lower service revenues driven by the impact of a prior year FSP cancellation, a customer concession, the mix and quantity of recent new business wins and an increased provision for credit losses.

This was partially offset by decreased personnel costs.

Enabling Services operating income was $1.2 for the three months ended June 30, 2023, a decrease of 89.0% from operating income of $10.9 in the corresponding period of 2022.

The decrease was driven by lower revenues combined with investments in resources related to servicing a recent new award.

Six Months Ended June 30, 2023 compared with six months ended June 30, 2022

The following tables present the financial measures that management considers to be the most significant indicators of the Company's performance.

Six Months Ended June 30,

2023 2022 Change

Clinical Services

$ 1,418.1 $ 1,430.4 (0.9) %

Enabling Services

139.1 141.7 (1.8) %

$ 1,557.2 $ 1,572.1 (0.9) %

The Company’s revenues for the six months ended June 30, 2023, were $1,557.2, a decrease of 0.9% over revenues of $1,572.1 in the corresponding period in 2022.

The decrease in revenues was due to a decline in organic revenues of 0.2% and unfavorable foreign currency translation of 0.7%.

The Company defines organic growth or decline as the increase or decrease in revenues excluding the year over year impact of acquisitions, divestitures and currency.

The 0.2% decrease in organic revenues was primarily driven by an increase in pass through revenues offset by lower service revenues driven by the impact of a prior year FSP cancellation, a customer concession and the mix and quantity of recent new business wins.

The Clinical Services segment’s revenues for the six months ended June 30, 2023 were $1,418.1, a decrease of 0.9% compared to revenues of $1,430.4 in the corresponding period in 2022.

The decrease in revenues was driven by an increase in pass through revenues offset by lower service revenues driven by the impact of a prior year FSP cancellation, a customer concession and the mix and quantity of recent new business wins.

The Enabling Services segment’s revenues for the six months ended June 30, 2023 were $139.1, a decrease of 1.8% compared to revenues of $141.7 in the corresponding period in 2022.

The decrease in revenues was due to customer cancellations.

Direct Costs, Exclusive of Depreciation and Amortization

Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended

September 30,

2023 2022 Change

$ 1,285.6 $ 1,252.8 2.6 %

Direct costs as a % of revenues

82.6 % 79.7 %

Direct costs increased 2.6% during the six months ended June 30, 2023 as compared with the corresponding period in 2022.

Direct costs increased as a percentage of revenues to 82.6% during the six months ended June 30, 2023 as compared to 79.7% in the corresponding period in 2022.

This increase in direct costs was primarily due to higher pass through costs partially offset by a decrease in personnel costs.

Selling, General and Administrative Expenses, Exclusive of Depreciation and Amortization

Six Months Ended June 30,

2023 2022 Change

Selling, general and administrative expenses

Restructuring and other charges

$ 11.6 $ 5.2 123.1 % $ 16.7 $ 27.8 (39.9) %

Selling, general and administrative expenses increased 8.9% during the six months ended June 30, 2023 as compared with the corresponding period in 2022.

The change in selling, general and administrative expenses was primarily due to an increase in indirect labor and credit loss provisions.

Depreciation Expense

Six Months Ended June 30,

2023 2022 Change

Depreciation expense $ 16.0 $ 13.5 18.5 %

The increase in depreciation expense for the six months ended June 30, 2023, as compared to the six months ended June 30, 2022, was primarily due to the increase of property, plant and equipment as part of the Spin.

Amortization Expense

Six Months Ended June 30,

During the three and nine months ended September 30, 2023, the Company recorded net restructuring charges of $11.6 and $16.7, respectively, which is reflected within restructuring and other charges in the condensed consolidated and combined statements of operations.

These charges are associated with Company actions to reduce overcapacity, align resources, and restructure certain operations and included eliminating redundant positions and aligning resources for cost improvement and to meet customer requirements.

During the three and nine months ended September 30, 2022, the Company recorded net restructuring charges of $5.2 and $27.8, respectively.

These costs were associated with general cost improvement and headcount reduction initiatives at various locations around the world.

Interest Expense

Three Months Ended September 30, Nine Months Ended

September 30,

2023 2022 Change

Amortization of intangibles and other assets

$ 31.9 $ 33.5 (4.8) %

The decrease in amortization of intangibles and other assets during the six months ended June 30, 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

Six Months Ended June 30,

2023 2022 Change

Restructuring and other charges

Interest expense

$ (34.6) $ — 100 % $ (35.3) $ — 100 %

During the six months ended June 30, 2023, the Company recorded net restructuring charges of $5.1, which is reflected within restructuring and other charges in the condensed consolidated and combined statements of operations.

The charges comprised of $3.0 in severance and other personnel costs and $2.1 in lease and other

facility-related costs associated with general cost improvement and headcount reduction initiatives at various locations around the world.

During the six months ended June 30, 2022, the Company recorded net restructuring charges of $22.6, which is reflected within restructuring and other charges in the condensed consolidated and combined statements of operations.

The charges comprised of $13.1 in severance and other personnel costs and $9.5 in lease and other facility-related costs associated with general cost improvement and headcount reduction initiatives at various locations around the world.

The increase in interest expense for the three and nine months ended September 30, 2023, as compared with the corresponding period in 2022, is primarily due to the incurrence of indebtedness, consisting of borrowings under senior secured term loan facilities and senior secured notes.

Foreign Exchange Gain (Loss)

Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended

September 30,

2023 2022 Change

Foreign exchange gain (loss)

$ (0.9) $ 4.8 (118.8) % $ (1.0) $ 21.1 (104.7) %

The change in foreign exchange gain (loss) for the six months ended June 30, 2023, as compared to the six months ended June 30, 2022, was primarily due to the relative strengthening of the U.S.

Dollar against most major foreign currencies resulting in $2.1 in foreign exchange gains offset by $2.2 of allocated hedging losses from the Labcorp hedging program for 2023.

For the six months ended June 30, 2022, foreign exchange gains of $24.2 were offset by $7.9 of allocated hedging losses from the Labcorp hedging program.

Income Tax Expense

Six Months Ended June 30,

The change in foreign exchange gain (loss) for the three months ended September 30, 2023, as compared to the three months ended September 30, 2022, was primarily due to the relative weakening of the U.S.

Dollar against the British Pound and the Euro resulting in $3.1 in foreign exchange losses offset by $2.2 of hedging gains from the Company’s hedging program for 2023.

For the three months ended September 30, 2022, foreign exchange gains were $10.1 offset by $5.3 of hedging losses from the Former Parent hedging program.

The change in foreign exchange gain (loss) for the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022, was primarily due to the relative weakening of the U.S.

Dollar against most major foreign currencies resulting in $1.1 in foreign exchange losses and $2.1 of allocated hedging losses from the Former Parent hedging program offset by $2.2 of hedged gains from the Company’s hedging program for 2023.

For the nine months ended September 30, 2022, foreign exchange gains of $34.2 were offset by $13.1 of allocated hedging losses from the Former Parent hedging program.

Income Tax Expense

Three Months Ended September 30, Nine Months Ended

September 30,

2023 2022 2023 2022

Income tax expense $ (4.8) $ 13.6 $ 9.5 $ 35.8

Income tax expense as a % of income before tax 26.8 % 18.3 % 22.6 % 18.3 %

23.8 % 18.3 %

For the six months ended June 30, 2023, the Company's effective tax rate was 23.8% compared to the 2022 tax rate of 18.3%.

This change was primarily due to earnings mix.

For the three months ended September 30, 2023, the Company's effective tax rate was 26.8% compared to the 2022 tax rate of 18.3%.

For the nine months ended September 30, 2023, the Company's effective tax rate was 22.6% compared to the 2022 tax rate of 18.3%.

The fluctuations in the quarter-to-date and year-to-date periods were primarily due to earnings mix and application of available tax credits in various jurisdictions.

Operating Results by Segment

Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended

September 30,

2023 2022 Change

Clinical Services operating income

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$ 62.2 $ 114.2 (45.5) % $ 198.4 $ 321.1 (38.2) %

Clinical Services operating income was $132.5 for the six months ended June 30, 2023, a decrease of 30.7% from operating income of $191.3 in the corresponding period of 2022.

Clinical Services operating income was $59.9 for the three months ended September 30, 2023, a decrease of 44.8% from operating income of $108.5 in the corresponding period of 2022.

The decrease in operating income was primarily due to lower service revenues driven by the mix and quantity of recent new business wins and the impact of a prior year FSP cancellation.

Enabling Services operating income was $2.3 for the three months ended September 30, 2023, a decrease of 59.6% from operating income of $5.7 in the corresponding period of 2022.

The decrease was driven by lower revenues combined with investments in resources related to servicing a recent new award.

Clinical Services operating income was $192.4 for the nine months ended September 30, 2023, a decrease of 35.8% from operating income of $299.8 in the corresponding period of 2022.

The decrease in operating income was primarily due to lower service revenues driven by the impact of a prior year FSP cancellation, a customer

concession, the mix and quantity of recent new business wins and an increased provision for credit losses.

This was partially offset by decreased personnel costs.

Enabling Services operating income was $3.7 for the six months ended June 30, 2023 a decrease of 76.3% from operating income of $15.6 in the corresponding period of 2022.

Enabling Services operating income was $6.0 for the nine months ended September 30, 2023 a decrease of 71.8% from operating income of $21.3 in the corresponding period of 2022.

The decrease was driven by lower revenues combined with investments in resources related to servicing a recent new award.

Liquidity, Capital Resources and Financial Position

Historically, our business has generated positive cash flows from operations, and a significant majority of such cash flows was transferred to Labcorp.

We participated in Labcorp’s cash pooling arrangements to manage liquidity and fund operations, the effect of which is presented as Former Parent investment in our condensed consolidated and combined financial statements included elsewhere in this Form 10-Q.

After the Spin, the Company has ceased participation in Labcorp’s cash pooling arrangements and our cash and cash equivalents are held and used solely for our own operations.

Our capital structure, long-term commitments, and sources of liquidity changed significantly from our historical practices.

The Company manages cash flow to fund and invest in operational growth, capital expenditures, and credit facility repayments.

In connection with the Spin, we have incurred indebtedness in an aggregate principal amount of $1,640.0, which consists of borrowings under senior secured term loan facilities and senior secured notes.

We have also entered into a senior secured revolving credit facility, which consists of a five-year facility in the principal amount of up to $450.0 as further discussed in Note 5 (Debt).

We have also entered into a senior secured revolving credit facility, which consists of a five-year facility in the principal amount of up to $450.0 as further discussed in Note 6, Debt to the condensed consolidated and combined financial statements above.

We have also entered into an accounts receivable purchase program (“ARPP”), which establishes a receivables factoring facility that permits the Company to sell up to $80.0 in customer receivables to a financial institution based on the availability of certain eligible receivables and the satisfaction of certain conditions.

On June 28, 2023, Labcorp sold $17.5 of the Company’s receivables for $17.3 in cash proceeds.

We have applied proceeds from these debt and other financing transactions to make a $1,595.0 cash distribution to Labcorp as consideration for the assets that have been contributed to us in connection with the Spin.

After giving effect to such payment and approximately $35.0 of associated fees and expenses incurred in connection with the entry into the above, we started operating as an independent company with a cash balance of $114.3.

We believe our existing cash and cash flows generated from operations as well as funds available under the facilities we entered into in connection with the Spin will be sufficient to cover the needs of our current and planned operations for at least the next 12 months in addition to the one-time cash flow impacts from the Spin.

From time to time, we intend to evaluate strategic opportunities, including potential acquisitions, joint ventures or investments in complementary businesses.

We may also access capital markets through the issuance of debt or equity, which we may use in connection with the acquisition of complementary businesses or other significant assets or for other strategic opportunities or general corporate purposes.

Cash Flows for the six months ended June 30, 2023 and 2022

As of September 30, 2023, the Company had no outstanding factored customer receivables.

We believe our existing cash and cash flows generated from operations, plus existing credit facilities, will be sufficient to cover the needs of our current and planned operations for at least the next 12 months.

From time to time, we routinely evaluate strategic opportunities, including potential acquisitions, joint ventures or investments in complementary businesses.

We may also access capital markets through the issuance of debt or equity, which we may use in connection with the acquisition of complimentary businesses or other significant assets, or for other strategic opportunities, or general corporate purposes.

Cash Flows for the nine months ended September 30, 2023 and 2022

In summary the Company's cash flows were as follows:

Six Months Ended June 30,

Nine Months Ended September 30,

Net cash provided by (used for) operating activities

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Net cash (used for) provided by financing activities

(134.4) (0.4)

Effect of exchange rate on changes in cash and cash equivalents

Net change in cash and cash equivalents

$ (4.5) $ 12.9

Cash and Cash Equivalents

Cash and cash equivalents at June 30, 2023 and 2022 totaled $114.3 and $95.5, respectively.

Cash and cash equivalents at September 30, 2023 and 2022 totaled $107.5 and $107.5, respectively.

Cash and cash equivalents consist of highly liquid instruments, such as commercial paper, time deposits and other money market instruments, which have maturities when purchased of three months or less.

Cash Flows from Operating Activities

During the six months ended June 30, 2023, the Company's operations provided $154.2 of cash as compared to $(21.7) of cash during the six months ended June 30, 2022.

Net cash provided by operating activities increased by $175.9 for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022.

Cash flows from operating activities benefited from higher collections of accounts receivable and cash used for accrued expenses offset by a decrease in net income.

During the nine months ended September 30, 2023, the Company's operations provided $155.0 of cash as compared to $59.2 of cash during the nine months ended September 30, 2022.

Net cash provided by operating activities increased by $95.8 for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022.

Cash flows from operating activities benefited from an improvement in unbilled services and deferred revenue and lower cash used for accrued expenses partially offset by a decrease in net income.

Cash Flows from Investing Activities

Net cash used for investing activities for the six months ended June 30, 2023 was $(25.5) as compared to net cash used for investing activities of $(18.7) for the six months ended June 30, 2022.

The $(6.8) increase in net cash

used for investing activities for the six months ended June 30, 2023, was primarily due to a year over year increase in capital expenditures.

Capital expenditures were $25.8 and $19.0 for the six months ended June 30, 2023 and 2022, respectively.

Net cash used for investing activities for the nine months ended September 30, 2023 was $22.8 as compared to net cash used for investing activities of $35.6 for the nine months ended September 30, 2022.

The $12.8 decrease in net cash used for investing activities for the nine months ended September 30, 2023, was primarily due to a year over year decrease in capital expenditures.

Capital expenditures were $30.9 and $36.0 for the nine months ended September 30, 2023 and 2022, respectively.

Capital expenditures in 2023 were 1.3% of revenues, primarily in connection with projects to support growth in the Company's core businesses.

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Cash Flows from Financing Activities

Net cash used for financing activities for the six months ended June 30, 2023 was $(126.7) compared to cash provided by financing activities of $46.1 for the six months ended June 30, 2022.

Cash provided by financing activities related to proceeds from term loans and senior note offerings offset by the net transfers to Former Parent.

Net cash used for financing activities for the nine months ended September 30, 2023 was $134.4 compared to cash used by financing activities of $0.4 for the nine months ended September 30, 2022.

Cash provided by financing activities related to proceeds from term loans and senior note offerings was offset primarily by the net transfers to Former Parent.

Off-Balance Sheet Arrangements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis