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Item 7. Management’s Discussion and Analysis

2025-03-03 compared with 2024-03-13 · 144 added, 138 removed, 186 unchanged (60% 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”.

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 consolidated and combined financial statements and corresponding notes and other financial information included elsewhere in this Annual Report on Form 10-K.

Prior to the spin-off (the “Spin” or “the Separation”), Fortrea existed and functioned as part of Labcorp Holdings Inc., 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 consolidated and combined financial statements and corresponding notes and other financial information included elsewhere in this Annual Report on Form 10-K.

This discussion contains forward-looking statements that are based upon current expectations and are subject to uncertainty and changes in circumstances.

Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in Part I.

“Risk Factors.” Actual results may differ materially from these expectations.

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Company Overview

Fortrea, 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.

Fortrea, a Delaware corporation incorporated on January 31, 2023, is a leading global contract research organization (“CRO”) providing biopharmaceutical product and medical device development 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 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 the Spin from Labcorp.

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.

We leverage our global scale, scientific and therapeutic expertise, 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 18,000 employees conducts operations in about 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.

Our team of approximately 15,500 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.

Additionally, we utilize enabling technologies to optimize processes and evolve with a dynamic marketplace.

Industry Outlook

For information about the industry outlook and markets that we operate in, refer to Part I, Item I, “Market Opportunity”.

For information about the industry outlook and markets that we operate in, refer to Part I, Item I.

“Market Opportunity”.

Separation from Labcorp

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Subsequent Event

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

(“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 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.

Credit Agreement Amendment

On February 28, 2025, the Company entered into an amendment (the “Second Credit Amendment”) to modify a financial covenant to provide the Company with additional flexibility under the Company’s credit agreement dated as of June 30, 2023 and as amended on May 3, 2024 (the “Existing Credit Agreement”), by and among the Company, certain subsidiaries of the Company and Goldman Sachs Bank USA (as administrative agent and collateral agent), governing the Company’s existing senior credit facility.

The Second Credit Amendment increased the Company’s maximum quarterly Total Leverage Ratio (as defined in the Existing Credit Agreement) from 5.30:1.00 to 6.00:1.00 for the fiscal quarters ending on September 30, 2025 through June 30, 2026, decreasing to 5.75:1.00 for the fiscal quarter ending on September 30, 2026, further decreasing to 5.50:1.00 for the fiscal quarter ending on December 31, 2026, and reverting to 5.30:1.00 thereafter.

In consideration of this adjustment, the Company paid a fee to consenting lenders and has agreed during the covenant adjustment period to certain additional limitations with respect to investments, restricted payments and liens.

Incremental Independent Public Company Expenses

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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 transition services agreements.

For a period following the Separation, however, some of these functions have been 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.

Backlog and Net New Business

Sale of Assets Relating to the Enabling Services Segment

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.

and its subsidiaries and Endpoint Clinical, Inc.

and its subsidiaries.

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.

Estimated proceeds of $285.2, resulted in a loss on disposal of $19.6, subject to further adjustment based on customary purchase price adjustments.

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 consolidated balance sheet as of December 31, 2023.

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

Our backlog consists of anticipated future revenue from business awards that either have not started, or that are in process and have not been completed.

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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.

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 $7.7 billion as of December 31, 2024.

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The following Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to help you understand our results of operations for the years ended December 31, 2024, 2023 and 2022.

Results of Operations for the years ended December 31, 2023, 2022 and 2021

Results of Continuing Operations for the years ended December 31, 2024, 2023 and 2022

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

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2024 2023 2022 2024/2023 change 2023/2022 change

Clinical Services

$ 2,839.5 $ 2,825.4 $ 2,763.5 0.5 % 2.2 %

Enabling Services 269.5 270.7 294.0 (0.4) % (7.9) %

$ 3,109.0 $ 3,096.1 $ 3,057.5 0.4 % 1.3 %

Revenues $ 2,696.4 $ 2,842.5 $ 2,837.0 (5.1) % 0.2 %

The Company’s revenues for the year ended December 31, 2024, were $2,696.4, a decrease of 5.1% over revenues of $2,842.5 in the corresponding period in 2023.

The change in revenues was due to a decrease in organic revenues of 5.2%, partially offset by favorable foreign currency translation of 0.1%.

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

The 5.2% decrease in organic revenues was driven by decreased pass through costs and lower service revenues resulting from the lower quantity of new business wins prior to the Spin, along with the slower backlog burn rate and the mix of mature and longer duration studies in our portfolio.

The decrease was partially offset by an increase in revenue from clinical pharmacology services.

The Company’s revenues for the year ended December 31, 2023, were $2,842.5, an increase of 0.2% over revenues of $2,837.0 in the corresponding period in 2022.

The increase in revenues was due to organic growth of 0.1% and favorable foreign currency translation of 0.1%.

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

The 0.3% increase in organic revenues was primarily driven by an increase in pass through revenues offset by lower service revenues driven by the mix and quantity of new business wins during the year prior to the Spin and by the impact of a prior year FSP cancellation.

The Clinical Services segment’s revenues for the year ended December 31, 2023 were $2,839.5, an increase of 0.5% compared to revenues of $2,825.4 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 by the mix and quantity of new business wins during the year prior to the Spin and by the impact of a prior year FSP cancellation.

The Enabling Services segment’s revenues for the year ended December 31, 2023 were $269.5, a decrease of 0.4% compared to revenues of $270.7 in the corresponding period in 2022.

The change in revenues was due to lower call center volume offset by strong enhancement revenue on existing projects.

The Company’s revenues for the year ended December 31, 2022, were $3,096.1, an increase of 1.3% over revenues of $3,057.5 in the corresponding period in 2021.

The increase in revenues was due to organic growth of 3.9% and unfavorable foreign currency translation of 2.6%.

The 3.9% increase in organic revenues was primarily driven by strong net new business awards in 2021 for the Clinical Services segment offset by lower call center volume within the Enabling Services segment.

The Clinical Services segment’s revenues for the year ended December 31, 2022 were $2,825.4, an increase of 2.2% compared to revenues of $2,763.5 in the corresponding period in 2021.

The increase in revenues was driven by an increase in net new business awards and an increase in pass through revenues offset by lower service revenues resulting from the impact of a FSP cancellation.

The Enabling Services segment’s revenues for the year ended December 31, 2022 were $270.7, a decrease of 7.9% compared to revenues of $294.0 in the corresponding period in 2021.

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

The increase in organic revenues was primarily driven by an increase in pass through costs offset by the mix and quantity of new business wins prior to the Spin and by the impact of a prior year FSP cancellation.

Direct Costs, Exclusive of Depreciation and Amortization

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80.2 % 79.2 % 74.5 %

Direct costs consist primarily of payroll and related benefits for project-related employees, pass through costs, transition services agreement direct costs, information technology costs, and other direct costs.

Direct costs consist primarily of payroll and related benefits for project-related employees, reimbursable expenses (pass through costs), transition services agreement costs, information technology costs, and other direct costs.

Direct costs decreased 4.0% in 2024 as compared with 2023 and increased as a percentage of revenues to 80.2% in 2024 as compared to 79.2% in 2023.

The decrease in direct costs was primarily due to lower pass through costs as well as cost efficiencies gained from restructuring actions, which has better aligned our resource levels and geographic footprint with project requirements.

These declines were partially offset by an increase in stock compensation and professional fees.

Direct costs increased 6.6% in 2023 as compared with 2022 and increased as a percentage of revenues to 79.2% in 2023 as compared to 74.5% in 2022.

The increase in direct costs 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.

Direct costs decreased 0.2% in 2022 as compared with 2021 and decreased as a percentage of revenues to 79.0% in 2022 as compared to 80.2% in 2021.

This decrease in direct costs was primarily due to a decrease in incentive-based compensation expense based on company performance.

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

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$ 560.7 $ 448.1 $ 416.1 25.1 % 7.7 %

SG&A as a % of revenues

10.8 % 9.0 % 9.9 %

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 consist primarily of administrative payroll and related benefit charges, transition services agreement costs, information technology costs, other facility charges, advertising and promotional expenses, and administrative travel.

Selling, general and administrative expenses increased 25.1% in 2024 compared to 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 7.7% in 2023 compared to 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.

Selling, general and administrative expenses decreased 7.7% in 2022 compared to 2021.

The decrease in selling, general and administrative expenses was primarily due to a decrease in incentive-based compensation expense based on company performance.

Goodwill and Other Asset Impairments

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$ 24.5 $ 28.6 $ 23.0 (14.3 %) 24.3 %

The increase in depreciation expense for 2023, as compared to 2022, was due to the increase of property, plant and equipment, primarily IT assets, as part of the Spin.

The increase in depreciation expense for 2022, as compared to 2021, was primarily due to purchases of property, plant and equipment.

The decrease in depreciation expense for 2024, as compared to 2023, was due to a decrease in depreciable property, plant and equipment, primarily IT assets.

The increase in depreciation expense for 2023, as compared to 2022, was primarily due to the increase in of property, plant and equipment, primarily IT assets, as part of the Spin.

Amortization Expense

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$ 60.8 $ 60.7 $ 62.5 0.2 % (2.9 %)

The increase in amortization of intangibles and other assets in 2024, as compared to 2023, was not significant.

The decrease in amortization of intangibles and other assets in 2023, as compared to 2022, is primarily the result of the impairment of technology assets that occurred in the fourth quarter of 2022.

The decrease in amortization of intangibles and other assets in 2022, as compared to 2021, is primarily the result of a $67.3 decrease in amortization expense related to trade names.

The trade names were fully amortized during 2021 as a result of the Company’s rebranding initiative.

Accelerated amortization of $57.6 was recognized for the year ended December 31, 2021.

Restructuring and Other Charges

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During the years ended December 31, 2024, 2023 and 2022, the Company recorded net restructuring charges of $50.1, $21.2, and $25.9, respectively, which are reflected within Restructuring and other charges in the 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.

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

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

In addition, in the fourth quarter of 2024, the Company approved a restructuring plan to streamline its operations and eliminate redundant positions.

The Company recorded a restructuring charge of $21.3 related to this 2024 plan, which relate primarily to severance benefits and are accounted for under ASC 712, Compensation - Nonretirement Postemployment Benefits .

Actions under these restructuring plans are expected to continue through 2025.

Interest Expense

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2024 2023 2022 2024/2023 change 2023/2022 change

Interest expense $ 69.8 $ 0.2 $ 0.2 34,800.0 % — %

The increase in interest expense for year ended December 31, 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.

Interest expense $ 123.8 $ 69.7 $ 0.2 77.6 % nm 1

The increase in interest expense for year ended December 31, 2024, as compared with the corresponding period in 2023, is primarily due to the higher overall debt balance, 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, including the pay down of $70.2 on term loan A and $412.5 on term loan B.

The increase in interest expense for year ended December 31, 2023, as compared with the corresponding period in 2022, is primarily due to the incurrence of indebtedness in June 2023, consisting of borrowings under the senior secured term loan facilities and the senior secured notes.

Foreign Exchange Gain (Loss)

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2024 2023 2022 2024/2023 change 2023/2022 change

Foreign exchange gain (loss) $ 0.9 $ (0.9) $ 20.2 200.0 % 104.5 %

The change in foreign exchange gain (loss) for the year ended December 31, 2023, as compared to the year ended December 31, 2022, was primarily due to $3.6 in hedging gains from the Company’s hedging program offset by the relative weakening of the US Dollar against most major foreign currencies resulting in $0.5 in foreign exchange losses and by $2.2 of allocated hedging losses from the Former Parent hedging program for 2023.

The change in foreign exchange gain (loss) for the year ended December 31, 2022, as compared to the year ended December 31, 2021, was primarily due to the relative strengthening of the US Dollar against most major foreign currencies resulting in $5.9 in foreign exchange gains offset by $6.8 in allocated hedging losses from the Former Parent hedging program for 2022.

For the year ended December 31, 2021, foreign exchange gains were $26.1 offset by $5.9 of allocated hedging losses from the Former Parent hedging program.

Income Tax Expense

Foreign exchange gain (loss) $ (10.6) $ 0.3 $ (2.0) nm 115.0%

The change in foreign exchange gain (loss) for the year ended December 31, 2024, as compared to the year ended December 31, 2023, changed primarily due to the relative weakening of the U.S.

Dollar against the British Pound and the Euro.

The change in foreign exchange gain (loss) for the year ended December 31, 2023, as compared to the year ended December 31, 2022, was primarily due to the relative strengthening of the U.S.

Dollar against the British Pound and the Euro, and the allocation of hedging losses from the Former Parent hedging program for 2023.

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Years Ended December 31,

2024 2023 2022 2024/2023 change 2023/2022 change

$ 21.3 $ 6.9 $ 2.1 208.7 % 228.6 %

The increase in other, net for the year ended December 31, 2024, as compared to year ended December 31, 2023, is primarily related to the recognition of a contingent consideration payment on a sale of a facility to a third party and income related to services provided under Transition Services Agreements.

The increase in other, net for the year ended December 31, 2023, as compared to year ended December 31, 2022, is primarily related to a gain on sale of assets sold in 2023.

Income Tax Expense

Income tax expense as a % of income before tax 406.3 % 18.6 % 28.2 %

Years Ended December 31,

2024 2023 2022

Income tax (benefit) expense $ (3.5) $ 1.2 $ 41.1

Income tax (benefit) expense as a % of income before tax 1.3 % (3.8 %) 22.0 %

For the year ended December 31, 2024, the Company’s effective tax rate was 1.3% compared to (3.8)% for the year ended December 31, 2023.

The effective tax rate for the year ended December 31, 2023 was higher than the Company’s statutory tax rate primarily due to U.S.

tax on foreign income inclusions, the base erosion and anti-abuse tax (“BEAT”) and non-deductible compensation expenses, partially offset by the U.S.

The effective tax rate for the year ended December 31, 2024 was lower than the Company’s statutory tax rate primarily due to an increase in the valuation allowance, non-deductible employee benefits, foreign earnings taxed at rates higher than the U.S.

statutory rate and U.S.

tax on foreign income inclusions, partially offset by the U.S.

R&D credit and certain state tax benefits.

The effective tax rate for the twelve months ended December 31, 2022 was lower than the Company’s statutory tax rate primarily due to U.S.

taxes on foreign earnings and domestic tax credits, partially offset by state taxes and additional tax deductions.

The effective tax rate for the year ended December 31, 2023 was lower than the Company’s statutory tax rate primarily due to foreign earnings taxed at rates higher than the U.S.

statutory rate, U.S.

tax on foreign income inclusions, the base erosion and anti-abuse tax (“BEAT”) and non-deductible employee benefits, partially offset by the U.S.

R&D credit and certain state tax benefits.

For the year ended December 31, 2023, the Company's effective tax rate was (3.8)% compared to 22.0% for the year ended December 31, 2022.

This fluctuation was primarily related to changes in tax rates during 2021, the geographic mix of earnings and the additional R&D tax credits realized during 2022.

Operating Results by Segment

Years Ended December 31,

2023 2022 2021 2023/2022 change 2022/2021 change

Clinical Services operating income $ 243.0 $ 413.4 $ 339.5 (41.2 %) 21.8 %

Enabling Services operating income 11.4 24.4 39.0 (53.3) % (37.4) %

Segment operating income 254.4 437.8 378.5 (41.9 %) 15.7 %

Clinical Services operating income was $243.0 for the year ended December 31, 2023, a decrease of 41.2% over operating income of $413.4 for the year ended December 31, 2022.

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

Enabling Services operating income was $11.4 for the year ended December 31, 2023, a decrease of 53.3% from operating income of $24.4 for the year ended December 31, 2022.

The decrease was primarily driven by investments related to servicing a recent award along with lower call center volume.

Clinical Services operating income was $413.4 for the year ended December 31, 2022, an increase of 21.8% over operating income of $339.5 for the year ended December 31, 2021.

The increase in operating income was primarily due to revenue growth of 2.2% and the decrease in incentive-based compensation expense and continued efforts to optimize the operating model.

Enabling Services operating income was $24.4 for the year ended December 31, 2022, a decrease of 37.4% from operating income of $39.0 for the year ended December 31, 2021.

The decrease was primarily due to a decrease in revenue of 7.9% and the loss of operating leverage on the lower revenue base.

The effective tax rate for the year ended December 31, 2022 was higher than the Company’s statutory tax rate primarily due to foreign earnings taxed at rates higher than the U.S.

statutory rate, U.S.

taxes on foreign income inclusions and state taxes, partially offset by benefits for permanently non-deductible items, employee benefits, the U.S.

R&D credit and certain state benefits.

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 will continue to monitor this development and its potential impact on our future tax rate.

In 2024, we have calculated and accrued an additional top-up tax under the Pillar Two Framework in certain jurisdictions where the effective tax rate fell below the minimum threshold of 15%.

This amount was not significant to the total 2024 income tax provision for the Company.

Liquidity, Capital Resources and Financial Position

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 10, Debt to the consolidated and combined financial statements.

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.

As of December 31, 2023, the Company had no outstanding factored customer receivables.

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 11, “Debt” to our consolidated and combined financial statements.

During the year ended December 31, 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, which in turn, may sell receivables to a third-party financial institution in exchange for cash.

We have sold $300.0 of receivables with net proceeds of $297.9 under the Receivables Facility.

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, but not limited to, 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 Year Ended December 31, 2023, 2022 and 2021

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 complementary businesses or other significant assets, or for other strategic opportunities, or general corporate purposes.

Cash Flows for the Year’s Ended December 31, 2024, 2023 and 2022

The cash flows related to discontinued operations have not been segregated and are included in the 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:

For the Year ended December 31,

Years ended December 31,

2024 2023 2022

Net cash provided by operating activities $ 262.8 $ 168.4 $ 82.7

Net cash used for investing activities (31.8) (54.0) (26.2)

Net cash provided by (used for) investing activities 251.6 (31.8) (54.0)

Net cash used for financing activities (497.8) (140.8) (6.3)

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Cash Flows from Operating Activities

During the year ended December 31, 2023, the Company's operations provided $167.4 of cash as compared to $87.5 in 2022.

Net cash provided by operating activities increased by $79.9 for the year ended December 31, 2023 as compared to the year ended December 31, 2022.

Cash flows from operating activities benefited from moderation in growth of unbilled services and deferred revenue, along with lower cash used for accrued expenses, including lower incentive payouts earlier in the year, partially offset by a decrease in net income.

During the year ended December 31, 2022, the Company's operations provided $87.5 of cash as compared to $169.8 in 2021.

Net cash provided by operating activities decreased by $82.3 for the year ended December 31, 2022 as compared to the year ended December 31, 2021.

Cash flows from operating activities benefited from higher net income due to the growth of the business offset by a decrease in amortization of trade name intangibles, decreases in the accrued expenses and other due primarily to the decrease in incentive compensation accruals from lower business performance.

During the year ended December 31, 2024, the Company's operations provided $262.8 of cash as compared to $168.4 in 2023, an increase of $94.4.

This increase in cash flows from operating activities was primarily due to cash from accounts receivable, including the sale of receivables under the Receivables Facility, offset by the decrease in net income and higher use of cash for prepaid expenses.

During the year ended December 31, 2023, the Company's operations provided $168.4 of cash as compared to $82.7 in 2022, an increase of $85.7.

Cash flows from operating activities benefited from moderation in growth of unbilled services and deferred revenue, along with lower cash used for accrued expenses, including lower incentive compensation payments, partially offset by a decrease in net income.

Cash Flows from Investing Activities

Net cash used for investing activities for the year ended December 31, 2023 was $31.8 as compared to net cash used for investing activities of $54.0 for the year ended December 31, 2022.

The $22.2 decrease in net cash used for investing activities for the year ended December 31, 2023, was primarily due to a year over year decrease in capital expenditures.

Net cash provided by investing activities for the year ended December 31, 2024 was $251.6 as compared to net cash used for investing activities of $(31.8) for the year ended December 31, 2023.

The $283.4 increase in net cash provided by (used for) investing activities for the year ended December 31, 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 $25.5 and $40.3 for the years ended December 31, 2024 and 2023, respectively.

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Net cash used for investing activities for the year ended December 31, 2023 was $(31.8) as compared to net cash used for investing activities of $(54.0) for the year ended December 31, 2022.

The $27.8 increase in net cash used for investing activities for the year ended December 31, 2021 was primarily due to a year over year increase in capital expenditures.

The $22.2 decrease in net cash used for investing activities was primarily due to a year over year decrease in capital expenditures.

Capital expenditures were $40.3 and $54.4 for the years ended December 31, 2023 and 2022, respectively.

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Net cash used for financing activities for the year ended December 31, 2024 was $497.8 compared to cash used for financing activities of $140.8 for the year ended December 31, 2023.

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 in connection with the Spin.

Information regarding the net transfer is provided in Note 2, “Summary of Significant Accounting Policies ” and Note 18, “Related Party Transactions ” to the audited consolidated and combined financial statements.

Cash used for financing activities for December 31, 2024 was primarily related to principal payments on the term loan A and term loan B.

Net cash used for financing activities for the year ended December 31, 2023 was $140.8 compared to cash used for financing activities of $6.3 for the year ended December 31, 2022.

The cash used for financing activities primarily related to the net transfers to Former Parent.

Financing activities for year ended December 31, 2023 included proceeds from term loans and senior note offerings which were more than offset by the net transfers to Former Parent in connection with the Spin.

Information regarding the net transfer is provided in Note 2, “Summary of Significant Accounting Policies ” and Note 19, “Transactions with Former Parent ” to the audited consolidated and combined financial statements.

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.

Material Cash Requirements

In the normal course of business, we enter into contracts and commitments that oblige us to make payments in the future.

Information regarding such obligations is provided in Note 7, “Leases”, Note 10, “Debt”, Note 13, “Income Taxes” and Note 17, “Pension and Postretirement Plans” to the audited consolidated and combined financial statements.

Critical Accounting Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods.

While the Company believes these estimates are reasonable and consistent, they are by their very nature estimates of amounts that will depend on future events.

Accordingly, actual results could differ from these estimates.

The Company does not have any off-balance sheet financing other than short term 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 U.S.

We apply these accounting policies in a consistent manner.

The Company’s critical accounting policies arise in conjunction with revenue recognition, business combinations, income taxes, and goodwill and indefinite-lived assets.

The application of these accounting policies requires 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.

These estimates, assumptions and judgments are based on historical experience, current trends and other factors believed to be reasonable under the circumstances.

Management evaluates these estimates and assumptions on an ongoing basis.

If actual results ultimately differ from previous estimates, the revisions are included in results of operations when the actual amounts become known.

Revenue Recognition

The Company provides comprehensive phase I through phase IV services to global pharmaceutical, biotechnology, and medical device companies worldwide.

The Company provides comprehensive phase I through phase IV clinical development services to global pharmaceutical, biotechnology, and medical device companies worldwide.

A majority of the Company’s revenues are earned under contracts that are long term in nature, ranging in duration from a few months to many years.

The majority of the Company's contracts contain a single performance obligation, as the Company provides a significant service of integrating all obligations in the contract and the obligations are highly interdependent and interrelated with one another.

For contracts that include multiple performance obligations, the Company allocates the contract value to the goods and services based on a customer price list, if available.

If a price list is not available, the Company will estimate the transaction price using either market prices or an “expected cost plus margin” approach.

For contracts that include multiple performance obligations, the Company allocates the contract value to the goods and services proportionately based on the determined stand-alone selling price.

The Company uses an observable price, typically a price list.

If a price list is not available, the Company will estimate the stand-alone price using either market prices or an “expected cost plus margin” approach.

The total contract value is estimated at the beginning of the contract, and is equal to the amount expected to be billed to the customer.

Other payments and billing adjustments may also factor into the calculation of total contract value, such as the reimbursement of out-of-pocket costs and volume-based rebates.

These contracts generally take the form of

fixed-price, fee-for-service or software-as-a-service arrangements subject to pricing adjustments based on changes in scope.

These contracts generally take the form of fixed-price, fee-for-service or software-as-a-service arrangements subject to pricing adjustments based on changes in scope.

Fixed-price contracts are typically recognized as revenue over time based on a proportional-performance basis, using either input or output methods that are specific to the service provided.

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These estimates are reviewed periodically and any adjustments are recognized on a cumulative catch-up basis in the period they become known.

During the year ended December 31, 2023, reductions of approximately $60.1 in the Company’s revenues related to performance obligations partially satisfied in previous periods.

During the years ended December 31, 2022 and 2021, revenue of $72.3 and $80.3, respectively, was recognized from performance obligations that were partially satisfied in a previous period.

During the years ended December 31, 2024 and 2023, reductions of approximately $61 and $60, respectively, in revenue related to performance obligations partially satisfied in previous periods.

During the year ended December 31, 2022, revenue of approximately $72 was recognized from performance obligations that were partially satisfied in a previous period.

Substantially all of these adjustments were associated with changes in scope or price for full service clinical studies.

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federal, state, and foreign income tax returns of Labcorp, where eligible.

For periods after the Spin, the Company will be filing income tax returns as a separate company.

The income tax provisions, and related deferred tax assets and liabilities reflected in our consolidated and combined financial statements have been calculated based on the go-forward status of the Company as separate from Labcorp.

For the periods after Spin, the Company files income tax returns as a separate company.

The income tax provisions, and related deferred tax assets and liabilities reflected in our financial statements represent the Company as separate from Labcorp.

The Company accounts for income taxes utilizing the asset and liability method.

Under this method, the Company has recognized $3.2 of deferred tax assets and $148.8 of liabilities as of December 31, 2023, for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for tax loss carryforwards.

Under this method, deferred income taxes represent the expected future tax consequences of temporary differences between the financial statements carrying amount and the respective tax basis of assets and liabilities.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

Tax effects are released from Accumulated Other Comprehensive Income using either the specific identification approach or the portfolio approach based on the nature of the underlying item.

To the extent deferred taxes are recorded to accumulated other comprehensive income, we record the tax effect of any release of deferred taxes using either the specific identification approach or the portfolio approach based on the nature of the underlying item.

We elected to not consider the estimated impact of potential future Corporate Alternative Minimum Tax liabilities for purposes of assessing valuation allowances on the Company’s deferred tax balances.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The Company does not recognize a tax benefit, unless the Company concludes that it is more likely than not that the benefit will be sustained on audit by the taxing authority based solely on the technical merits of the associated tax position.

The effect on deferred tax assets and liabilities of an enacted change in tax rates is recognized in income in the period that includes the enactment date.

The Company does not recognize a tax benefit for any uncertain tax positions, unless the Company concludes that it is more likely than not that the benefit will be sustained on audit by the taxing authority based solely on the technical merits of the associated tax position.

If the recognition threshold is met, the Company recognizes a tax benefit measured at the largest amount of the tax benefit that the Company believes is greater than 50% likely to be realized.

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and various foreign jurisdictions.

The Company is not currently subject to U.S.

federal income tax audits by the Internal Revenue Service (“IRS”) as it has not filed a U.S.

federal income tax return yet.

The Company is not currently under tax examination by the Internal Revenue Service (“IRS”) as a separate taxpayer.

We are no longer subject to U.S.

state income tax audits prior to 2018.

There are no ongoing foreign income tax audits.

While we believe we have adequately provided for all tax positions, amounts assessed by taxing authorities could be greater than what we have accrued for in our financial statements.

There are ongoing foreign income tax audits in various jurisdictions ranging from 2018 - 2022.

While we believe we have adequately accrued for all tax positions, amounts assessed by taxing authorities could be greater than what we have recorded in our financial statements.

Accordingly, additional income tax provisions on federal, state and foreign income tax-related matters could be recorded in the future as revised estimates are made or the underlying matters are settled or otherwise resolved.

Since the timing of resolution of income tax audits are uncertain, it is difficult to predict with certainty the range of reasonably possible significant increases or decreases in the liability related to uncertain tax positions that may occur within the next twelve months.

We have designated the undistributed earnings of our foreign subsidiaries as indefinitely reinvested with exception to certain withholding taxes accrued that are associated with potential maturity of intercompany notes related to the Separation.

Our foreign earnings are computed under U.S.

federal tax earnings and profits (“E&P”) principles.

The determination of the amount of such unrecognized deferred tax liability is not practicable.

We will continue to evaluate our assertion with respect to being permanently reinvested on our earnings of foreign subsidiaries, taking into consideration all enacted tax laws and other relevant facts.

With limited exception, the Company has considered the earnings of its foreign subsidiaries prior to 2024 to be indefinitely invested outside the United States on the basis of limited foreign cash reserves and plans for the reinvestment of those subsidiary earnings.

Our foreign undistributed earnings are computed under the U.S.

federal tax earning and profits (“E&P”) principles.

The determination of the amount of deferred tax liability that would be recorded for these earnings if they were not indefinitely reinvested is not practicable at this time.

In 2024, management has recorded a deferred tax liability related to applicable foreign withholding taxes on approximately $95.3 of undistributed 2024 U.S.

GAAP earnings of its foreign subsidiaries as these earnings will not be indefinitely reinvested outside the United States.

The Company has recorded $1,710.4 and $1,739.4 of goodwill as of December 31, 2024 and 2023, respectively.

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If the Company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then the Company performs the quantitative goodwill impairment test.

The Company may also choose to bypass the qualitative assessment for any reporting unit in its goodwill assessment and proceed directly to performing the quantitative

The Company may also choose to bypass the qualitative assessment for any reporting unit in its goodwill assessment and proceed directly to performing the quantitative assessment.

The Company recognizes an impairment charge for the amount by which the reporting unit's carrying amount exceeds its fair value.

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Management believes that the assumptions used for its impairment tests are representative of those that would be used by market participants performing similar valuations of the reporting units.

Management performed its annual goodwill impairment testing as of the beginning of the fourth quarter of 2023.

Based upon the results of the qualitative and quantitative assessments, the Company concluded that the fair values of each of its reporting units, as of October 1, 2023, were greater than the carrying values.

Management performed its annual goodwill impairment testing as of October 1, 2024.

The Company elected to perform a quantitative assessment on its two reporting units, Clinical Development and Clinical Pharmacology.

Based upon the results of the quantitative assessment, the Company concluded that the fair values of each of its reporting units were greater than the carrying values.

For the Clinical Development reporting unit, the fair value of the business exceeded the book value by approximately 10%.

For the Clinical Pharmacology reporting unit, the fair value of the business substantially exceeded the book value.

Although the Company believes that the current assumptions and estimates used in its goodwill analysis are reasonable, supportable, and appropriate, continued efforts to maintain or improve the performance of these businesses could be impacted by unfavorable or unforeseen changes which could impact the existing assumptions used in the impairment analysis.

Various factors could reasonably be expected to unfavorably impact existing assumptions:

primarily delays in new customer bookings and the related delay in revenue from new customers, increases in customer termination activity or increases in operating costs.

Accordingly, there can be no assurance

that the estimates and assumptions made for the purposes of the goodwill impairment and intangible asset analysis will prove to be accurate predictions of future performance.

primarily delays or lower demand resulting in lower contract bookings and the related delay or reduction in revenue, increases in customer termination activity or increases in operating costs.

Accordingly, there can be no assurance that the estimates and assumptions made for the purposes of the goodwill impairment and intangible asset analysis will prove to be accurate predictions of future performance.

The Company will continue to monitor the financial performance of and assumptions for its reporting units.

A significant increase in the discount rate, decrease in the revenue and terminal growth rates, decreased operating margin or substantial reductions in end markets and volume assumptions could have a negative impact on the estimated fair value of the reporting units.

A future impairment charge for goodwill or intangible assets could have a material effect on the Company’s consolidated financial position and results of operations.

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-K

Item 7. Management’s Discussion and Analysis