What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-12 compared with 2024-05-24 · 89 added, 64 removed, 135 unchanged (53% of the section changed)

7 unchanged sentences

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 Form 10-Q 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.

They appear in a number of places throughout this Form 10-Q 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.

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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;

our ability to complete the divestiture of the Endpoint and Patient Access businesses on time or at all and our ability to realize the full purchase price and benefits of the transaction;

our ability to realize the full purchase price and benefits of the disposition of our Endpoint and Patient Access businesses;

and other factors described in the Form 10-K and from time to time in documents that we file with the SEC.

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

Our team of approximately 16,000 employees from continuing operations conducts operations in approximately 90 countries and delivers comprehensive phase I – IV clinical trial management, clinical pharmacology and consulting services for our customers.

Our team of approximately 16,000 employees conducts operations in approximately 100 countries and delivers comprehensive phase I – IV clinical trial management, clinical pharmacology and consulting services for our customers.

Our offering is scaled to deliver focused and agile solutions to customers globally, streamlining the biopharmaceutical product and medical device development process.

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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 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.

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 another 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.

However, the allocations may not reflect the expenses we would have incurred as an independent company for the periods presented and may not be representative of future expenses that may be incurred.

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 the Transition Services Agreements.

For a period following the Separation, however, some of these functions are provided by Labcorp under the Transition Services Agreement.

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

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On March 9, 2024, the Company, together with its wholly-owned subsidiary, Fortrea Inc.

(the “Seller”), entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Endeavor Buyer LLC, an affiliate of Arsenal Capital Partners, pursuant to which the Seller has agreed to sell, and to cause its affiliates to sell, certain assets relating to its Enabling Services Segment (the “Transaction”), including the sale of equity interests of Fortrea Patient Access Inc.

(the “Seller”), entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Endeavor Buyer LLC, an affiliate of Arsenal

Capital Partners, pursuant to which the Seller agreed to sell, and to cause its affiliates to sell, certain assets relating to its Enabling Services Segment (the “Transaction”), including the sale of equity interests of Fortrea Patient Access Inc.

and its subsidiaries and Endpoint Clinical, Inc.

and its subsidiaries.

The purchase price for the Transaction is $345.0, subject to customary purchase price adjustments, with $295.0 to be paid at closing and $50.0 to be paid upon achievement of certain transition-related milestones.

The Transaction is targeted to close in the second quarter of 2024, subject to customary closing conditions and government approvals, as well as the parties entering into certain services and operating agreements.

The final adjusted purchase price for the Transaction was $340.0, subject to customary purchase price adjustments, with $295.0 paid at closing and $45.0 to be paid upon achievement of certain transition-related milestones, which includes certain services provided through a Transition Services Agreement.

The Transaction closed during the second quarter of 2024.

The decision to sell such assets relating to the Enabling Services Segment represented a strategic shift that had a significant effect on the Company's results and operations and assets and liabilities for the periods presented.

As a result, the Company has classified the assets related to the Enabling Services segment as assets from discontinued operations and liabilities from discontinued operations on the condensed consolidated and combined balance sheets as of March 31, 2024 and December 31, 2023.

The operations of the Enabling Services segment have been classified as income from discontinued operations on the condensed consolidated and combined statements of operations for all periods presented.

As a result, the Company has classified the assets related to the Enabling Services Segment as assets from discontinued operations and liabilities from discontinued operations on the condensed consolidated balance sheets as of June 30, 2024 and December 31, 2023.

The operations of the Enabling Services Segment have been classified as income or loss from discontinued operations on the condensed consolidated and combined statements of operations for all periods presented.

Backlog and Net New Business

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The average duration of our contracts will fluctuate from period to period based on the contracts comprising our backlog at any given time.

The majority of our contracts contain early termination provisions that

typically require notice periods ranging from 30 to 90 days.

The majority of our contracts contain early termination provisions that typically require notice periods ranging from 30 to 90 days.

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 $7.4 billion as of March 31, 2024.

Our backlog was $7.4 billion as of June 30, 2024.

We do not believe that, as a sole measure, our backlog is a consistent indicator of future revenue because it has 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.

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RESULTS OF CONTINUING OPERATIONS

Three Months Ended March 31, 2024 compared with Three Months Ended March 31, 2023

Three and Six Months Ended June 30, 2024 compared with Three and Six Months Ended June 30, 2023

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,

Three Months Ended June 30, Six Months Ended June 30,

2024 2023 Change

$ 662.4 $ 725.1 (8.6) % $ 1,324.5 $ 1,419.0 (6.7) %

The Company’s revenues for the three months ended March 31, 2024 were $662.1, a decrease of 4.6% from revenues of $693.9 in the corresponding period in 2023.

The change in revenues was due to a decrease in organic revenues of 4.7% offset by a favorable foreign currency translation of 0.1%.

The Company’s revenues for the three months ended June 30, 2024 were $662.4, a decrease of 8.6% from revenues of $725.1 in the corresponding period in 2023.

The change in revenues was due to a decrease in organic revenues of 8.3% and unfavorable foreign currency translation of 0.3%.

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

The 4.7% decrease in organic revenues was primarily driven by lower service revenues resulting from the quantity and burn rate of new business wins pre-Spin, and the challenges of mix, partially offset by increased pass through revenues.

The 8.3% decrease in organic revenues was primarily driven by decreased pass through revenues and lower service revenues resulting from the quantity and burn rate of new business wins pre-Spin, and the challenges of mix.

The Company’s revenues for the six months ended June 30, 2024 were $1,324.5, a decrease of 6.7% from revenues of $1,419.0 in the corresponding period in 2023.

The change in revenues was due to a decrease in organic revenues of 6.6% and unfavorable foreign currency translation of 0.1%.

The 6.6% decrease in organic revenues was primarily driven by lower service revenues resulting from the quantity and burn rate of new business wins pre-Spin, and the challenges of mix and decreased pass through revenues.

Direct Costs, Exclusive of Depreciation and Amortization

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2024 2023 Change

$ 525.3 $ 568.7 (7.6) % $ 1,079.5 $ 1,110.2 (2.8) %

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79.3 % 78.4 % 81.5 % 78.2 %

Direct costs increased 2.3% during the three months ended March 31, 2024 as compared with the corresponding period in 2023.

Direct costs increased as a percentage of revenues to 83.7% during the three months ended March 31, 2024 as compared to 78.0% in the corresponding period in 2023.

The increase in direct costs was primarily due to higher pass through costs.

Direct costs decreased 7.6% during the three months ended June 30, 2024 as compared with the corresponding period in 2023.

Direct costs increased as a percentage of revenues to 79.3% during the three months ended June 30, 2024 as compared to 78.4% in the corresponding period in 2023.

The decrease in direct costs was primarily due to lower pass through costs.

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

Direct costs decreased 2.8% during the six months ended June 30, 2024 as compared with the corresponding period in 2023.

Direct costs increased as a percentage of revenues to 81.5% during the six months ended June 30, 2024 as compared to 78.2% in the corresponding period in 2023.

The decrease in direct costs was primarily due to lower pass through costs.

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

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2024 2023 Change

Selling, general and administrative expenses

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Selling, general and administrative expenses consist primarily of administrative payroll and related benefit charges, information technology costs, other facility charges, advertising and promotional expenses, administrative travel and credit loss provisions.

Selling, general and administrative expenses increased by 2.8% during the three months ended March 31, 2024 as compared with the corresponding period in 2023.

The increase was primarily due

to an increase in personnel costs as a stand-alone company, transition service agreement costs, and professional fees, partially offset by the removal of Former Parent corporate allocations and decreased credit loss provisions.

Selling, general and administrative expenses increased by 59.7% during the three months ended June 30, 2024 as compared with the corresponding period in 2023.

The increase was primarily due to incremental costs incurred to exit the Transition Services Agreement with Labcorp.

Selling, general and administrative expenses increased by 28.8% during the six months ended June 30, 2024 as compared with the corresponding period in 2023.

The increase was primarily due to an increase in professional fees and other costs to support the exit of the Transition Services Agreement with Labcorp, and personnel and information technology costs as a stand-alone company, partially offset by the removal of Former Parent corporate allocations.

Depreciation Expense

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2024 2023 Change

Depreciation expense

$ 6.3 $ 8.0 (21.3) % $ 12.9 $ 13.9 (7.2) %

The increase in depreciation expense for the three months ended March 31, 2024, as compared to the corresponding periods in 2023, was due to the increase of property, plant and equipment, primarily IT assets, as part of the Spin.

The decrease in depreciation expense for the three and six months ended June 30, 2024, as compared to the corresponding periods in 2023, was due to the decrease in depreciable property, plant and equipment, primarily IT assets.

Amortization Expense

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2024 2023 Change

Amortization of intangibles and other assets

$ 15.1 $ 15.4 (1.9) % $ 30.4 $ 30.4 — %

T he increase in amortization of intangibles and other assets during the three months ended March 31, 2024, as compared to the corresponding period in 2023 , was not significant.

T he change in amortization of intangibles and other assets during the three and six months ended June 30, 2024 , as compared to the corresponding period in 2023 , was not significant.

Restructuring and Other Charges

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2024 2023 Change

Restructuring and other charges

$ 10.4 $ 3.6 188.9 % $ 13.7 $ 4.2 226.2 %

During the three months ended March 31, 2024, the Company recorded net restructuring charges of $3.3, which are 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 include eliminating redundant positions and aligning resources for cost improvement and to meet customer requirements.

During the three months ended March 31, 2023, the Company recorded net restructuring charges of $0.6.

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

During the three and six months ended June 30, 2024, the Company recorded net restructuring charges of $10.4 and $13.7, respectively, which are reflected within restructuring and other charges in the condensed consolidated and combined statements of operations.

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

During the three and six months ended June 30, 2023, the Company recorded net restructuring charges of $3.6 and $4.2, respectively.

These costs were associated with general cost improvements, eliminating redundant positions and aligning resources for cost improvements and to meet our customer requirements.

Interest Expense

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2024 2023 Change

Interest expense

$ 45.2 $ 0.7 6,357.1 % $ 79.5 $ 0.6 13,150.0 %

The increase in interest expense for the three months ended March 31, 2024, as compared with the corresponding period in 2023, is primarily due to the incurrence of indebtedness, consisting of borrowings under senior secured term loan facilities and senior secured notes.

The increase in interest expense for the three and six months ended June 30, 2024, as compared with the corresponding period in 2023, is primarily due to the incurrence of indebtedness, consisting of borrowings under senior secured term loan facilities and senior secured notes, and the write-off of $ 12.2 of debt issuance costs associated with the pay down of debt in the quarter ended June 30, 2024.

Foreign Exchange Gain (Loss)

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2024 2023 Change

Foreign exchange gain (loss)

$ (1.5) $ 5.2 (128.8) % $ (6.8) $ — (100.0) %

The foreign exchange loss for the three months ended March 31, 2024 and 2023 was primarily due to the relative weakening of the U.S.

The foreign exchange loss for the three and six months ended June 30, 2024 compared to the foreign exchange gain (loss) for three and six months ended June 30, 2023 changed primarily due to the relative weakening of the U.S.

Dollar against the British Pound and the Euro.

Three Months Ended June 30, Six Months Ended June 30,

2024 2023 Change 2024 2023 Change

Other, net $ 9.0 $ 0.5 1,700.0 % $ 10.3 $ 1.0 930.0 %

The increase in Other, net for the three and six months ended June 30, 2024, as compared with the corresponding periods in 2023, is primarily related to the recognition of a contingent consideration payment on a sale of a facility to a third party that is no longer in use by the Company and income related to services provided under Transition Services Agreements.

Income Tax Expense

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2024 2023 2024 2023

Income tax expense $ 10.7 $ 11.6 $ 14.8 $ 13.1

Income tax expense as a % of income before tax (12.1) % 31.7 % (9.0) % 28.4 %

For the three months ended March 31, 2024, the Company's effective tax rate was 5.4% compared to the 2023 tax rate of 15.8%.

The fluctuations in the quarter-to-date period were primarily due to a change in valuation allowance, the geographic mix of earnings and non-deductible compensation expenses.

The Organization for Economic Cooperation and Development (“OECD”) has introduced new global minimum tax regulations, known as Pillar Two, that began to come into effect on January 1, 2024.

For the three months ended June 30, 2024, the Company's effective tax rate was (12.1)% compared to the 2023 tax rate of 31.7%.

The fluctuations in the quarter-to-date period were primarily due to a change in valuation allowance, earnings mix, and non-deductible compensation expenses.

For the six months ended June 30, 2024, the Company's effective tax rate was (9.0)% compared to the 2023 tax rate of 28.4%.

The fluctuations in the year-to-date period were primarily due to a change in valuation allowance, earnings mix, and non-deductible compensation expenses.

The Organization for Economic Cooperation and Development has introduced new global minimum tax regulations, known as Pillar Two, that came into effect beginning on January 1, 2024.

We are monitoring this development and evaluating its potential impact on our tax rate and eligibility to qualify for the safe harbor provisions.

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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.

In connection with the Spin, we 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 7 - Debt to our condensed consolidated and combined financial statements above.

We previously entered into an accounts receivable purchase program (“ARPP”), which established 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.

As of March 31, 2024, the Company had no outstanding factored customer receivables, and the ARPP was terminated in May 2024.

During the three and six months ended June 30, 2024, we paid down $64.0 and $70.2, respectively, on term loan A and $411.0 and $412.5, respectively, on term loan B.

On May 6, 2024, we entered into a three-year $300.0 accounts receivable securitization program (the “Receivables Facility”).

Under this program, Fortrea Inc.

conveys receivable balances to a wholly-owned,

bankruptcy-remote special purpose entity (“SPE”), which in turn, may sell receivables to a third-party financial institution in exchange for cash.

As of June 30, 2024, we sold $300.0 of receivables with net proceeds of $297.9.

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.

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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 three months ended March 31, 2024 and 2023

Cash Flows for the six months ended June 30, 2024 and 2023

The cash flows related to discontinued operations have not been segregated and are included in the condensed consolidated and combined statements of cash flows and the discussion of the cash flow activity.

In summary, the Company’s cash flows were as follows:

Three Months Ended March 31,

Net cash used for operating activities $ (25.6) $ (2.0)

Net cash used for investing activities (9.2) (16.2)

Net cash provided by financing activities 21.3 24.5

Six Months Ended June 30,

Net cash provided by operating activities $ 248.1 $ 148.1

Net cash provided by (used for) investing activities 256.2 (25.5)

Net cash used for financing activities (482.7) (125.4)

Effect of exchange rate changes on cash and cash equivalents (4.0) 1.3

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Cash and Cash Equivalents

Cash and cash equivalents at March 31, 2024 and 2023 totaled $92.8 and $118.2, respectively.

Cash and cash equivalents at June 30, 2024 and 2023 totaled $126.2 and $108.9, 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 three months ended March 31, 2024, the Company's operations used $25.6 of cash as compared to $2.0 of cash used for operations during the three months ended March 31, 2023.

The decrease of $23.6 for the three months ended March 31, 2024 was due to a decrease in net income offset by an improvement in unbilled services and deferred revenue and lower cash used for accrued expenses.

During the six months ended June 30, 2024, the Company’s operations provided $248.1 of cash as compared to $148.1 of cash provided by operations during the six months ended June 30, 2023.

The increase of $100.0 from the six months ended June 30, 2024 was primarily due to the sale of receivables under the Receivables Facility off-set by a decrease in net income.

Cash Flows from Investing Activities

Net cash used for investing activities for the three months ended March 31, 2024 was $9.2 as compared to net cash used for investing activities of $16.2 for the three months ended March 31, 2023.

The $7.0 decrease in net cash used for investing activities for the three months ended March 31, 2024, was primarily due to a year over year decrease in capital expenditures.

Capital expenditures were $9.3 and $16.2 for the three months ended March 31, 2024 and 2023, respectively.

Net cash provided by investing activities for the six months ended June 30, 2024 was $256.2 as compared to net cash used for investing activities of $25.5 for the six months ended June 30, 2023.

The $281.7 increase in net cash provided by investing activities for the six months ended June 30, 2024 was primarily due to $276.6 of net proceeds from the sale of the Enabling Services Segment and a year over year decrease in capital expenditures.

Capital expenditures were $20.5 and $25.8 for the six months ended June 30, 2024 and 2023, respectively.

Capital expenditures in 2024 were 1.5% 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 provided by financing activities for the three months ended March 31, 2024 was $21.3 compared to cash provided by financing activities of $24.5 for the three months ended March 31, 2023.

Cash provided by financing activities was related to net proceeds from the revolving credit facility offset by principal payments on the term loan A and term loan B.

Net cash used for financing activities for the six months ended June 30, 2024 was $482.7 compared to cash used for financing activities of $125.4 for the six months ended June 30, 2023.

Cash used for financing activities for the six months ended June 30, 2024 was related to principal payments on the term loan A and term loan B and payments on the revolving credit facility.

Off-Balance Sheet Arrangements

The Company does not have transactions or relationships with “special purpose” entities, and the Company does not have any off-balance sheet financing other than normal operating leases and letters of credit.

The Company does not have any off-balance sheet financing other than normal operating leases and letters of credit.

Critical Accounting Policies and Estimates

We have chosen accounting policies that management believes are appropriate to accurately and fairly report our operating results and financial position in conformity with accounting principles generally accepted in the United States of America (“U.S.

We have chosen accounting policies that management believes are appropriate to accurately and fairly report our operating results and financial position in conformity with U.S.

We apply these accounting policies in a consistent manner.

Significant accounting policies are summarized in Note 2 to the combined financial statements included in the Annual Report on Form 10-K.

Significant accounting policies are summarized in Note 2 to the consolidated and combined financial statements included in the Annual Report on Form 10-K.

The application of these accounting policies require that we make estimates and assumptions about future events and apply judgments that affect the reported amounts of assets, liabilities, revenues, expenses, contingent assets and liabilities, and related disclosures.

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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