What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-08 compared with 2024-08-12 · 69 added, 68 removed, 156 unchanged (47% of the section changed)

1 unchanged sentence

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”.

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 included in our Annual Report on Form 10-K (the “Form 10-K”) 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 included in our Annual Report on Form 10-K for the year ended December 31, 2023 (the “Form 10-K”) and our unaudited condensed consolidated and combined financial statements and corresponding notes in Item 1.

“Financial Statements.” Unless otherwise noted, the following information and discussion relates to our continuing operations.

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our identification of existing material weaknesses in our internal control over financial reporting;

the impact of the rebranding of the Company;

the impact of our rebranding;

our ability to successfully implement our business strategies and execute our long-term value creation strategy;

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any further deterioration in the macroeconomic environment, which could lead to defaults or cancellations by our customers;

the risk that our backlog and net new business may not grow to the extent we anticipate or 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;

the risk that our backlog and net new business may not grow to the extent we anticipate 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 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;

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

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 realize the full purchase price and benefits of the disposition of the 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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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 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.

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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 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.

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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 June 30, 2024.

We adjust backlog for foreign currency fluctuations and exclude from backlog amounts that have been recognized as revenue in our statements of operations.

Our backlog was $7.6 billion as of September 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 and Six Months Ended June 30, 2024 compared with Three and Six Months Ended June 30, 2023

Three and Nine Months Ended September 30, 2024 compared with Three and Nine Months Ended September 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 June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2024 2023 Change

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$ 674.9 $ 713.8 (5.4) % $ 1,999.4 $ 2,132.8 (6.3) %

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’s revenues for the three months ended September 30, 2024 were $674.9, a decrease of 5.4% from revenues of $713.8 in the corresponding period in 2023.

The change in revenues was due to a decrease in organic revenues of 5.7%, partially offset by favorable foreign currency translation of 0.2%.

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

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.

The 5.7% decrease in organic revenues was primarily driven by decreased pass through costs and lower service revenues resulting from the quantity and burn rate of new business wins pre-Spin, along with the mix of later stage and longer duration studies in our portfolio.

The Company’s revenues for the nine months ended September 30, 2024 were $1,999.4, a decrease of 6.3% from revenues of $2,132.8 in the corresponding period in 2023.

The change in revenues was due to a decrease in organic revenues.

The 6.3% decrease in organic revenues was primarily driven by lower service revenues resulting from the quantity and burn rate of new business wins pre-Spin, the mix of later stage and longer duration studies and decreased pass through costs.

Direct Costs, Exclusive of Depreciation and Amortization

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

Three Months Ended September 30, Nine Months Ended September 30,

2024 2023 Change

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78.0 % 79.0 % 80.3 % 78.5 %

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.

Direct costs decreased 6.6% during the three months ended September 30, 2024 as compared with the corresponding period in 2023.

Direct costs decreased as a percentage of revenues to 78.0% during the three months ended September 30, 2024 as compared to 79.0% in the corresponding period in 2023.

The decrease in direct costs was primarily due to lower headcount as well as lower pass through costs, partially offset by an increase in stock compensation and professional fees.

Direct costs decreased 4.1% during the nine months ended September 30, 2024 as compared with the corresponding period in 2023.

Direct costs increased as a percentage of revenues to 80.3% during the nine months ended September 30, 2024 as compared to 78.5% in the corresponding period in 2023.

The decrease in direct costs was primarily due to lower headcount as well as lower pass through costs, partially offset by an increase in stock compensation and professional fees.

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

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

Three Months Ended September 30, Nine Months Ended September 30,

2024 2023 Change

3 unchanged sentences

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 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.

Selling, general and administrative expenses increased by 27.6% during the three months ended September 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.

Selling, general and administrative expenses increased by 28.4% during the nine months ended September 30, 2024 as compared with the corresponding period in 2023.

Depreciation Expense

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

Three Months Ended September 30, Nine Months Ended September 30,

2024 2023 Change

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$ 6.0 $ 7.6 (21.1) % $ 18.9 $ 21.5 (12.1) %

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.

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

Amortization Expense

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

Three Months Ended September 30, Nine Months Ended September 30,

2024 2023 Change

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$ 15.2 $ 15.2 — % $ 45.6 $ 45.6 — %

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.

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

Restructuring and Other Charges

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

Three Months Ended September 30, Nine Months Ended September 30,

2024 2023 Change

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$ 8.8 $ 10.1 (12.9) % $ 22.5 $ 14.3 57.3 %

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.

During the three and nine months ended September 30, 2024, the Company recorded net restructuring charges of $8.8 and $22.5, 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 and facilities for cost improvements and to meet customer requirements.

During the three and nine months ended September 30, 2023, the Company recorded net restructuring charges of $10.1 and $14.3, respectively.

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

Interest Expense

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

Three Months Ended September 30, Nine Months Ended September 30,

2024 2023 Change

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$ 22.4 $ 34.6 (35.3) % $ 101.9 $ 35.2 189.5 %

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.

The decrease in interest expense for the three months ended September 30, 2024, as compared with the corresponding period in 2023, is primarily due to the pay down of $70.2 on term loan A and $412.5 on term loan B in the six months ended June 30, 2024.

The increase in interest expense for the nine months ended September 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 June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2024 2023 Change

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$ (0.2) $ (1.2) (83.3) % $ (7.0) $ (1.2) 483.3 %

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.

The foreign exchange loss for the three and nine months ended September 30, 2024 compared to the foreign exchange gain (loss) for three and nine months ended September 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,

Three Months Ended September 30, Nine Months Ended September 30,

2024 2023 Change 2024 2023 Change

Other, net $ 4.8 $ 3.6 33.3 % $ 15.1 $ 4.6 228.3 %

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.

The increase in Other, net for the three and nine months ended September 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 June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 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 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.

Income tax (benefit) expense

$ (17.3) $ (5.8) $ (2.5) $ 7.3

Income tax (benefit) expense as a % of income (loss) before tax

48.3 % 26.5 % 1.2 % 30.2 %

For the three months ended September 30, 2024, the Company's effective tax rate was 48.3% compared to the 2023 tax rate of 26.5%.

For the nine months ended September 30, 2024, the Company's effective tax rate was 1.2% compared to the 2023 tax rate of 30.2%.

The fluctuations in the quarter-to-date and year-to-date periods were primarily due to valuation allowance, employee benefits, and a foreign rate differential impact.

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.

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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.

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.

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 our condensed consolidated and combined financial statements.

During the nine months ended September 30, 2024, we paid down $70.2, on term loan A and $412.5, on term loan B, respectively.

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.

conveys receivable balances to a wholly-owned, bankruptcy-remote special purpose entity, which in turn, may sell receivables to a third-party financial institution in exchange for cash.

As of September 30, 2024, we had 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 six months ended June 30, 2024 and 2023

Cash Flows for the nine months ended September 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:

Six Months Ended June 30,

Nine Months Ended September 30,

Net cash provided by operating activities $ 245.7 $ 150.0

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Cash and Cash Equivalents

Cash and cash equivalents at June 30, 2024 and 2023 totaled $126.2 and $108.9, respectively.

Cash and cash equivalents at September 30, 2024 and 2023 totaled $105.3 and $103.8, 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, 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.

During the nine months ended September 30, 2024, the Company’s operations provided $245.7 of cash as compared to $150.0 of cash provided by operations during the nine months ended September 30, 2023.

The increase of $95.7 for the nine months ended September 30, 2024 was primarily due to cash from accounts receivable, including the sale of receivables under the Receivables Facility, offset by higher use of cash for interest and income taxes and the decrease in net income.

Cash Flows from Investing Activities

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.

Net cash provided by investing activities for the nine months ended September 30, 2024 was $248.1 as compared to net cash used for investing activities of $22.8 for the nine months ended September 30, 2023.

The $270.9 increase in net cash provided by investing activities for the nine months ended September 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 $28.7 and $30.9 for the nine months ended September 30, 2024 and 2023, respectively.

Capital expenditures in 2024 were 1.4% 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, 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.

Net cash used for financing activities for the nine months ended September 30, 2024 was $496.7 compared to cash used for financing activities of $133.1 for the nine months ended September 30, 2023.

Cash used for financing activities for the nine months ended September 30, 2024 was related to principal payments on the term loan A and term loan B.

Off-Balance Sheet Arrangements

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We apply these accounting policies in a consistent manner.

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

Significant accounting policies are summarized in Note 2 - Summary of Significant Accounting Policies 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