Fortrea Holdings Inc. 10-Q

Item 1. Financial Statements (unaudited) FORTREA HOLDINGS INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in millions) (unaudited) March 31, 2025 December 31, 2024 ASSETS Current assets: Cash and cash equivalents $ 101.6 $ 118.5 Accounts receivable and unbilled services, net 729.0 659.5 Prepaid expenses and other 139.7 170.2 Total current assets 970.3 948.2 Property, plant and equipment, net 150.2 156.3 Goodwill, net 1,242.5 1,710.4 Intangible assets, net 651.3 655.7 Deferred income taxes 5.4 5.2 Other assets, net 101.4 103.4 Total assets $ 3,121.1 $ 3,579.2 LIABILITIES AND EQUITY Current liabilities: Accounts payable $ 110.2 $ 138.2 Accrued expenses and other current liabilities 347.2 369.8 Unearned revenue 364.4 353.3 Current portion of long-term debt 163.8 74.8 Short-term operating lease liabilities 13.5 13.4 Total current liabilities 999.1 949.5 Long-term debt, less current portion 1,049.9 1,049.7 Operating lease liabilities 59.1 60.6 Deferred income taxes and other tax liabilities 117.9 121.7 Other liabilities 36.3 35.3 Total liabilities 2,262.3 2,216.8 Commitments and contingent liabilities (Note 9) Equity Common stock, 90.5 and 89.7 shares outstanding at March 31, 2025 and December 31, 2024, respectively 0.1 0.1 Additional paid-in capital 2,056.8 2,042.2 Accumulated deficit ( 959.9 ) ( 397.0 ) Accumulated other comprehensive loss ( 238.2 ) ( 282.9 ) Total equity 858.8 1,362.4 Total liabilities and equity $ 3,121.1 $ 3,579.2 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 2 FORTREA HOLDINGS INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in millions, except per share data) (unaudited) Three Months Ended March 31, 2025 2024 Revenues $ 651.3 $ 662.1 Costs and expenses: Direct costs, exclusive of depreciation and amortization 534.8 554.2 Selling, general and administrative expenses, exclusive of depreciation and amortization 121.8 120.1 Depreciation and amortization 19.5 21.9 Goodwill and other asset impairments 488.8 — Restructuring and other charges 6.5 3.3 Total costs and expenses 1,171.4 699.5 Operating loss ( 520.1 ) ( 37.4 ) Other income (expense): Interest expense ( 22.3 ) ( 34.3 ) Foreign exchange loss ( 5.6 ) ( 5.3 ) Other, net — 1.3 Loss from continuing operations before income taxes ( 548.0 ) ( 75.7 ) Income tax expense 14.9 4.1 Loss from continuing operations ( 562.9 ) ( 79.8 ) Loss from discontinued operations, net of tax — ( 21.2 ) Net loss $ ( 562.9 ) $ ( 101.0 ) Earnings (loss) per common share Basic and diluted earnings (loss) per share from continuing operations $ ( 6.25 ) $ ( 0.89 ) Basic and diluted earnings (loss) per share from discontinued operations — ( 0.24 ) Basic and diluted earnings (loss) per share $ ( 6.25 ) $ ( 1.13 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 FORTREA HOLDINGS INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (in millions, except per share data) (unaudited) Three Months Ended March 31, 2025 2024 Net loss $ ( 562.9 ) $ ( 101.0 ) Foreign currency translation adjustments 45.2 ( 27.7 ) Unrealized gain (loss) on derivative instruments ( 0.7 ) 2.1 Other comprehensive income (loss) before tax 44.5 ( 25.6 ) Benefit (provision) for income tax related to items of comprehensive income 0.2 ( 0.5 ) Other comprehensive income (loss), net of tax 44.7 ( 26.1 ) Comprehensive loss $ ( 518.2 ) $ ( 127.1 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 FORTREA HOLDINGS INC. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (in millions) (unaudited) Common Stock Shares Amounts Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total Equity Balance at December 31, 2024 89.7 $ 0.1 $ 2,042.2 $ ( 397.0 ) $ ( 282.9 ) $ 1,362.4 Net loss — — — ( 562.9 ) — ( 562.9 ) Other comprehensive income, net of tax — — — — 44.7 44.7 Stock compensation — — 14.6 — — 14.6 Issuance of common stock under employee stock plan 0.8 — — — — — Balance at March 31, 2025 90.5 $ 0.1 $ 2,056.8 $ ( 959.9 ) $ ( 238.2 ) $ 858.8 Common Stock Shares Amounts Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total Equity Balance at December 31, 2023 88.8 $ 0.1 $ 1,998.0 $ ( 68.5 ) $ ( 215.5 ) $ 1,714.1 Net loss — — — ( 101.0 ) — ( 101.0 ) Other comprehensive loss, net of tax — — — — ( 26.1 ) ( 26.1 ) Stock compensation — — 15.1 — — 15.1 Issuance of common stock 0.6 — — — — — Net share settlement tax payments from issuance of stock to employees — — ( 10.4 ) — — ( 10.4 ) Other — — 0.2 — — 0.2 Balance at March 31, 2024 89.4 $ 0.1 $ 2,002.9 $ ( 169.5 ) $ ( 241.6 ) $ 1,591.9 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 FORTREA HOLDINGS INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions) (unaudited) Three Months Ended March 31, 2025 2024 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ ( 562.9 ) $ ( 101.0 ) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization 19.5 23.5 Stock compensation 14.6 15.1 Credit loss expense 4.5 5.8 Operating lease right-of-use asset expense 3.0 6.2 Operating lease right-of-use asset impairment 3.2 — Goodwill and other asset impairments 488.8 24.0 Deferred income taxes ( 6.6 ) 4.2 Other, net 0.3 ( 12.1 ) Changes in assets and liabilities: (Increase) decrease in accounts receivable and unbilled services, net ( 70.5 ) 34.7 Decrease (increase) in prepaid expenses and other 17.6 ( 25.5 ) Decrease in accounts payable ( 28.4 ) ( 0.9 ) Increase in deferred revenue 10.4 26.4 Decrease in accrued expenses and other ( 17.7 ) ( 26.0 ) Net cash used for operating activities ( 124.2 ) ( 25.6 ) CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures ( 2.9 ) ( 9.3 ) Proceeds from sale of business, net 19.0 — Proceeds from sale of assets — 0.1 Net cash provided by (used for) investing activities 16.1 ( 9.2 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from revolving credit facilities 166.5 271.0 Payments on revolving credit facilities ( 77.5 ) ( 242.0 ) Debt issuance costs ( 0.6 ) — Principal payments of long-term debt — ( 7.7 ) Net cash provided by financing activities 88.4 21.3 Effect of exchange rate changes on cash and cash equivalents 2.8 ( 2.3 ) Net change in cash and cash equivalents ( 16.9 ) ( 15.8 ) Cash and cash equivalents at beginning of period 118.5 108.6 Cash and cash equivalents at end of period $ 101.6 $ 92.8 The cash flows related to discontinued operations have not been segregated and are included in the condensed consolidated statements of cash flows. The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6 INDEX FORTREA HOLDINGS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars and shares in millions, except per share data) 1. BASIS OF FINANCIAL STATEMENT PRESENTATION Description of Business Fortrea Holdings Inc. (“Fortrea” or the “Company”), a Delaware corporation incorporated on January 31, 2023, is a leading global contract research organization (“CRO”) providing biopharmaceutical product and medical device development solutions to pharmaceutical, biotechnology and medical device customers. The Company offers customers highly flexible delivery models that include Full Service, Functional Service Provider, and Hybrid Service structures. The Company has a rich history of providing clinical development services for more than 30 years across more than 20 therapeutic areas. The Company leverages its global scale, clinical data insights, scientific and therapeutic expertise, 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 its customers. With what the Company believes is a distinctive market offering, Fortrea meets growing global demand for clinical development services. The Company has established access to all key markets worldwide through a strategic footprint of primary office locations in five countries (the United States, the United Kingdom, China, India and Singapore) with field operations in other jurisdictions worldwide. Reportable Segment The Company manages its business in one reportable segment, Clinical Services, that provides development and consulting services across the clinical pharmacology and clinical development spectrum. On March 9, 2024, the Company, together with its wholly-owned subsidiary, Fortrea Inc., entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Endeavor Buyer LLC, an affiliate of Arsenal Capital Partners, to sell the operations of Fortrea Patient Access Inc. and its subsidiaries and Endpoint Clinical, Inc. and its subsidiaries; which are all collectively referred to as the Enabling Services Segment. The Transaction closed during the second quarter of 2024. Refer to Note 2, “Discontinued Operations” for further discussion . For all periods presented, the Company's consolidated revenues from continuing operations were generated from the Clinical Services segment, which provides phase I-IV clinical trials, including clinical pharmacology and comprehensive clinical development capabilities. The Company’s chief operating decision maker allocates resources and assesses performance for the Clinical Services segment. For further financial information about the segment, see Note 14, “Business Segment Information”. Discontinued Operations In accordance with the definition of discontinued operations, the Company's decision to sell the assets relating to the Enabling Services Segment represented a strategic shift that had a major effect on the Company's results of operations for the periods presented. The operations of the Enabling Services Segment have been classified as income (loss) from discontinued operations on the condensed consolidated statements of operations for all periods presented. Unless otherwise noted, discussion within these notes to the condensed consolidated financial statements relates to the Company’s continuing operations. Unaudited Interim Financial Information 7 INDEX FORTREA HOLDINGS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars and shares in millions, except per share data) The Company’s unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments necessary for a fair statement of results of operations, cash flows, and financial position have been made. Except as otherwise disclosed, all such adjustments are of a normal recurring nature. Interim results are not necessarily indicative of results for a full year. As such, the information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited consolidated and combined financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2024. Concentration of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, accounts receivable and unbilled services. The Company maintains cash and cash equivalents with various major financial institutions. These financial institutions are generally highly rated and geographically dispersed. The Company evaluates the relative credit standing of these financial institutions and has not sustained credit losses from instruments held at financial institutions. Substantially all of the Company’s accounts receivable and unbilled services are with companies in the pharmaceutical, biotechnology and medical device industries. As of March 31, 2025, two pharmaceutical customers accounted for 14.3 % and 10.1 % of the Company's combined gross accounts receivable and unbilled services. As of December 31, 2024, two pharmaceutical companies accounted for approximately 22.2 % and 13.8 % of the Company's combined gross accounts receivable and unbilled services. Additionally, for the three months ended March 31, 2025, one customer accounted for approximately 15.4 % of revenues. For the three months ended March 31, 2024, two customers accounted for 14.0 % and 13.0 % of revenues. Concentrations of credit risk are mitigated due to the number of the Company’s customers as well as their dispersion across many different geographic regions. Additionally, the Company applies assumptions and judgments, including historical collection experience and reasonable and supportable forecasts, for assessing collectability and determining allowances for doubtful accounts. Recently Issued and Adopted Accounting Standards In December 2023, the FASB issued guidance to require qualitative and quantitative updates to the rate reconciliation and income taxes paid disclosures, among others, in order to enhance the transparency of income tax disclosures, including consistent categories and greater disaggregation of information in the rate reconciliation and income taxes paid by jurisdiction. This guidance is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The amendments should be applied prospectively; however, retrospective application is also permitted. The Company is currently evaluating the impact this guidance will have on its financial statement disclosures. In November 2024, the FASB issued ASU 2024-03, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40), Disaggregation of Income Statement Expenses. The new guidance requires disclosure of certain costs and expenses in the notes to the financial statements. This guidance is effective for fiscal years beginning after December 15, 2026 and interim reporting periods beginning after December 15, 2027. Early adoption is permitted. The disclosures required under the guidance can be applied either prospectively to financial statements issued for reporting periods after the effective date or retrospectively to any or all periods presented in the financial statements. The Company is currently evaluating the impact this guidance will have on its financial statement disclosures. 8 INDEX FORTREA HOLDINGS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars and shares in millions, except per share data) 2. DISCONTINUED OPERATIONS On March 9, 2024, the Company entered into the Purchase Agreement with Endeavor Buyer LLC, an affiliate of Arsenal Capital Partners, pursuant to which Fortrea Inc. agreed to sell, and to cause its affiliates to sell, net assets relating to its Enabling Services Segment (the “Transaction”), specifically its Patient Access and Endpoint businesses, 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. The Transaction closed during the second quarter of 2024. The first milestone payment in the amount of $ 20.0 was received in the first quarter of 2025. Financial Information of Discontinued Operations The following table summarizes the significant line items included in income (loss) from discontinued operations, net of income tax in the condensed consolidated statements of operations for the three months ended March 31, 2024: Three Months Ended March 31, 2024 Revenues $ 65.7 Costs and expenses: Direct costs, exclusive of depreciation and amortization 41.4 Selling, general and administrative expenses, exclusive of depreciation and amortization 15.6 Depreciation and amortization 1.6 Long-lived and goodwill asset impairments 24.0 Restructuring and other charges 0.5 Total costs and expenses 83.1 Loss from discontinued operations before income taxes ( 17.4 ) Income tax expense 3.8 Loss from discontinued operations, net of tax $ ( 21.2 ) In the first quarter of 2024, as a result of the negotiated sale price of the Patient Access and Endpoint businesses, the Company evaluated the Enabling Services Segment for impairment and determined that it was more likely than not that the carrying value of the assets exceeded its fair value. Accordingly, an impairment analysis was performed, which resulted in a goodwill impairment charge of $ 24.0 . The cash flows related to discontinued operations have not been segregated and are included in the condensed consolidated statements of cash flows. The following table summarizes depreciation and amortization, capital expenditures and the significant cash flow and noncash items from discontinued operations for the three months ended March 31, 2024: Three Months Ended March 31, 2024 Depreciation and amortization $ 1.6 Goodwill impairment 24.0 Capital expenditures 3.7 There were no significant operating or investing noncash items related to discontinued operations for the three months ended March 31, 2024. 9 INDEX FORTREA HOLDINGS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars and shares in millions, except per share data) 3. REVENUES The Company’s revenues by geography for the three months ended March 31, 2025 and 2024 are as follows: Three Months Ended March 31, 2025 Three Months Ended March 31, 2024 North America Europe Other Total North America Europe Other Total Revenues $ 309.5 $ 200.3 $ 141.5 $ 651.3 $ 305.9 $ 208.3 $ 147.9 $ 662.1 Revenue from the United States comprises substantially all revenue in North America. Contract Costs The following table provides information about contract asset balances: March 31, 2025 December 31, 2024 Sales commission assets $ 20.0 $ 22.1 Deferred contract costs 0.9 1.1 Total $ 20.9 $ 23.2 Amortization related to sales commission assets for the three months ended March 31, 2025 and 2024 was $ 3.1 and $ 2.6 , respectively. Amortization related to deferred contract costs for the three months ended March 31, 2025 and 2024 was $ 0.2 and $ 0.4 , respectively. Th e Company applies the practical expedient to not recognize the effect of financing in its contracts with customers when the difference in timing of payment and performance is one year or less. Accounts Receivable, Unbilled Services and Unearned Revenue The following table provides information about accounts receivable, unbilled services and unearned revenue from contracts with customers: March 31, 2025 December 31, 2024 Accounts receivable $ 191.2 $ 156.5 Unbilled services 580.6 542.3 Less: allowance for credit losses ( 42.8 ) ( 39.3 ) Total $ 729.0 $ 659.5 Unearned revenue $ 364.4 $ 353.3 Revenue recognized during the period that was included in the unearned revenue balance at the beginning of the period was $ 88.7 and $ 92.4 for the three months ended March 31, 2025 and 2024, respectively. Additionally, as of the quarter ended March 31, 2025, the Company had sold $ 300.0 of receivables as described in the Receivables Securitization Program section below. Credit Loss Rollforward The Company estimates future expected losses on accounts receivable and unbilled services over the remaining collection period of the instrument. 10 INDEX FORTREA HOLDINGS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars and shares in millions, except per share data) The rollforward for the allowance for credit losses for the three months ended March 31, 2025 is as follows: Allowance for credit losses as of December 31, 2024 $ 39.3 Credit loss expense 4.5 Write-offs ( 1.0 ) Allowance for credit losses as of March 31, 2025 $ 42.8 Performance Obligations Under Long-Term Contracts As of March 31, 2025, approximately $ 4,492.5 of revenues are expected to be recognized from remaining performance obligations. The Company expects to recognize approximately 28 % of the existing performance obligations as of March 31, 2025 as revenue over the next 12 months and the remaining balance thereafter. The Company’s long-term contracts generally range from one to eight years . During the three months ended March 31, 2025, there were reductions of approximately $ 16 in revenue related to performance obligations partially satisfied in previous periods. Of this reduction, the majority of the change was associated with changes in scope or price and a smaller portion related to changes in estimated effort to complete customer contract obligations. The change in estimate resulted in an estimated reduction to revenue of $ 3 , and an increase in loss from continuing operations of $ 2 and in loss per share of $ 0.03 . During the three months ended March 31, 2024, there were reductions of approximately $ 34 in revenue related to performance obligations partially satisfied in previous periods. Of this reduction, approximately half was associated with changes in scope or price, and approximately half was related to changes in estimated effort to complete customer contract obligations. The change in estimate resulted in an estimated reduction to revenue of $ 17 , and an increase in loss from continuing operations of $ 16 and in loss per share of $ 0.18 . Receivables Securitization Program On May 6, 2024, the Company 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”), who in turn, may sell receivables to a third-party financial institution in exchange for cash. The facility is without recourse to the Company or any subsidiaries of the Company, other than with respect to limited indemnity obligations of Fortrea Inc., in respect to the character of the receivables sold and as to the performance of its duties as servicer and a limited performance guaranty by the Company. All unsold accounts receivable held by the SPE are pledged as collateral to secure the collectability of the sold receivables. The Receivables Facility is scheduled to terminate on May 6, 2027, unless terminated earlier pursuant to its terms. As of March 31, 2025, the Company had sold $ 300.0 of receivables, which were derecognized from the Company’s consolidated balance sheet as described in the Accounts Receivable, Unbilled Services and Unearned Revenue section above. Total costs associated with the sale were $ 4.4 for the three months ended March 31, 2025 and are included within selling, general and administrative costs in the condensed consolidated statement of operations for the three months ended March 31, 2025. 4. RESTRUCTURING AND OTHER CHARGES In the fourth quarter of 2024, the Company approved a restructuring plan to streamline its operations and eliminate redundant positions. This plan, which relates primarily to severance benefits, was accounted for under ASC 712, Compensation - Nonretirement Postemployment Benefits . Action under this restructuring plan is expected to continue through 2025. The following represents the Company’s restructuring accrual activities for the periods indicated: 11 INDEX FORTREA HOLDINGS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars and shares in millions, except per share data) Severance and Other Employee Costs Facility Costs Total Balance as of December 31, 2024 $ 23.1 $ 0.6 $ 23.7 Restructuring charges 1.2 0.6 1.8 Cash payments and other adjustments ( 10.2 ) ( 0.6 ) ( 10.8 ) Balance as of March 31, 2025 $ 14.1 $ 0.6 $ 14.7 Severance and Other Employee Costs Facility Costs Total Balance as of December 31, 2023 $ 1.1 $ 3.2 $ 4.3 Restructuring charges 4.1 — 4.1 Reduction of prior restructuring accruals — ( 2.9 ) ( 2.9 ) Cash payments and other adjustments ( 2.3 ) — ( 2.3 ) Balance as of March 31, 2024 $ 2.9 $ 0.3 $ 3.2 The restructuring liabilities are current as of March 31, 2025 and December 31, 2024 and are included in accrued expenses and other current liabilities in the condensed consolidated balance sheets. 5. EARNINGS (LOSS) PER SHARE Basic earnings per share is computed by dividing net earnings attributable to the Company by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing net earnings including the impact of dilutive adjustments by the weighted average number of common shares outstanding plus potentially dilutive shares, as if they had been issued at the earlier of the date of issuance or the beginning of the period presented. Potentially dilutive common shares result primarily from the Company’s outstanding stock options, restricted stock awards, restricted stock units (“RSUs”), and performance share awards. The following represents the computation of basic and diluted earnings (loss) per share from continuing operations per share. Three Months Ended March 31, 2025 2024 Earnings Shares Per Share Amount Earnings Shares Per Share Amount Basic and diluted earnings (loss) from continuing operations per share: Net earnings (loss) $ ( 562.9 ) 90.1 $ ( 6.25 ) $ ( 79.8 ) 89.2 $ ( 0.89 ) The following represents the computation of basic and diluted earnings (loss) per share from discontinued operations per share. Three Months Ended March 31, 2025 2024 Earnings Shares Per Share Amount Earnings Shares Per Share Amount Basic and diluted earnings (loss) from discontinued operations per share: Net earnings (loss) $ — — $ — $ ( 21.2 ) 89.2 $ ( 0.24 ) 12 INDEX FORTREA HOLDINGS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars and shares in millions, except per share data) Diluted earnings per share represent the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. These potential shares include dilutive stock options and unissued restricted stock awards. Potential common shares are also considered antidilutive in the event of a net loss from operations. There were no dilutive common shares for any period presented as the inclusion would be antidilutive. The following table summarizes the potential common shares not included in the computation of diluted earnings per share because their impact would have been antidilutive: Three Months Ended March 31, 2025 2024 Employee stock options and awards 2.5 1.2 Antidilutive employee stock options and awards excluded based on reporting a net loss for the period 1.1 1.2 6. GOODWILL The Company's policy is to assess goodwill for impairment annually as of October 1, with more frequent assessments if events or changes in circumstances indicate the carrying amount may not be recoverable. Based on the annual test performed on October 1, 2024, it was previously determined that the fair values of the Company’s reporting units were greater than the carrying values, resulting in no impairment. For the Clinical Development reporting unit, the fair value of the business exceeded the book value by approximately 10 % as of October 1, 2024. During the three months ended March 31, 2025, due to a sustained decline in the Company’s share price and uncertainties in global macroeconomic conditions, the Company determined that an indicator of impairment existed. As a result, the Company performed an interim impairment test. For the goodwill impairment test as of March 31, 2025, the fair values of the Clinical Development and Clinical Pharmacology reporting units were computed using both income-based and market-based valuation methods. The income-based approach is based on the reporting unit's forecasted future cash flows that are discounted to the present value using the reporting unit's weighted average cost of capital. For the market-based approach, the Company utilizes a number of factors such as publicly available information regarding the market capitalization of the Company as well as operating results, business plans, market multiples, and present value techniques. Based upon the range of estimated values developed from the income and market-based methods, the Company determines the estimated fair value for the reporting unit. The income-based fair value methodology requires management's assumptions and judgments regarding economic conditions in the markets in which the Company operates and conditions in the capital markets, many of which are outside of management's control. At the reporting unit level, fair value estimation requires management's assumptions and judgments regarding the effects of overall economic conditions on the specific reporting unit, along with assessment of the reporting unit's strategies and forecasts of future cash flows. Forecasts of individual reporting unit cash flows involve management's estimates and assumptions regarding: • Annual cash flows, on a debt-free basis, arising from future revenues and profitability, changes in working capital, capital spending and income taxes for at least a five-year forecast period. • A terminal growth rate for years beyond the forecast period. The terminal growth rate is selected based on consideration of growth rates used in the forecast period, historical performance of the reporting unit and economic conditions. 13 INDEX FORTREA HOLDINGS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars and shares in millions, except per share data) • A discount rate that reflects the risks inherent in realizing the forecasted cash flows. A discount rate considers the risk-free rate of return on long-term treasury securities, the risk premium associated with investing in equity securities of comparable companies, the beta obtained from the comparable companies and the cost of debt for investment grade issuers. In addition, the discount rate may consider any Company-specific risk in achieving the prospective financial information. Under the market-based fair value methodology, judgment is required in evaluating market multiples and recent transactions. 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. Based upon the results of the qualitative and quantitative assessments as of March 31, 2025, the Company concluded that the fair value of the Clinical Development reporting unit was less than its carrying value and recorded a goodwill impairment of $ 488.8 . The changes in the carrying amount of goodwill for the three months ended March 31, 2025 and 2024 are as follows: March 31, 2025 March 31, 2024 Balance as of December 31 $ 1,710.4 $ 1,739.4 Impairment ( 488.8 ) — Foreign currency impact and other adjustments to goodwill 20.9 ( 11.8 ) Balance as of March 31 $ 1,242.5 $ 1,727.6 7. DEBT The current portion of long-term debt consisted of the following: March 31, 2025 December 31, 2024 Current portion of 7.5 % senior notes due 2030 $ 76.0 $ 76.0 Senior secured revolving credit facility 89.0 — Debt issuance discount and fees ( 1.2 ) ( 1.2 ) Total short-term borrowings and current portion of long-term debt $ 163.8 $ 74.8 Long-term debt consisted of the following: March 31, 2025 December 31, 2024 7.5 % senior notes due 2030 $ 494.0 $ 494.0 Senior secured term loan A due 2028 417.3 417.3 Senior secured term loan B due 2030 154.7 154.7 Debt issuance discount and fees ( 16.1 ) ( 16.3 ) Total long-term debt $ 1,049.9 $ 1,049.7 Senior Notes On June 27, 2023, the Company issued $ 570.0 aggregate principal amount of 7.50 % senior notes due 2030 (the “Notes”). Interest on these notes is payable semi-annually on January 1 and July 1 of each year. Net proceeds from the offering of the Notes were $ 560.2 after deducting expenses of the offering. 14 INDEX FORTREA HOLDINGS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars and shares in millions, except per share data) The bond indenture for the Notes contains an asset sale covenant that effectively requires the Company to utilize a prorated portion of the Net Cash Proceeds from an Asset Sale, each as defined in the indenture, to retire Notes. Absent an amendment to the indenture or other transaction related to these Notes, Fortrea currently expects that the sale of net assets relating to its Enabling Services Segment will require the Company to offer to repurchase, purchase on the open market or redeem approximately $ 76.0 of the Notes by the fourth quarter of 2025, which has been classified as current portion of long-term debt in the consolidated balance sheet as of March 31, 2025. Credit Facilities On June 30, 2023, Fortrea entered into a credit agreement (as amended, the “Credit Agreement”) providing for (i) a senior secured revolving credit facility in the principal amount of up to $ 450.0 ; (ii) a five-year $ 500.0 first lien senior secured term A loan facility; and (iii) a seven-year $ 570.0 first lien senior secured term B loan facility. The initial revolving facility includes a $ 75.0 swingline sub-facility and a $ 75.0 letter of credit sub-facility. The Company drew on the term loan A and term loan B on June 30, 2023. The net proceeds received for the term A and term B loans were $ 491.8 and $ 552.9 , respectively after deducting underwriting discounts and other expenses. The term A and term B loans will mature on June 30, 2028 and June 30, 2030, respectively. The term loans accrue interest at a per annum rate equal to the sum of, at the option of the Company, a Base Rate or a Term SOFR Rate and the Applicable Margin as defined by the Credit Agreement. As of March 31, 2025, the effective interest rate on the term loan A and term loan B was 6.57 % and 8.07 %, respectively. The revolving credit facility is permitted, subject to certain covenant restrictions, to be used for general corporate purposes, including working capital and capital expenditures. There was $ 89.0 outstanding on the Company’s current revolving credit facility and $ 361.0 was available for borrowing as of March 31, 2025. No balances were outstanding as of December 31, 2024. As of March 31, 2025, the effective interest rate on the revolving credit facility was 7.28 %. There is a commitment fee associated with the revolving credit facility of 0.35 % (per annum and paid quarterly) and an annual $ 0.1 agency fee (paid in quarterly installments). The credit facility matures on June 30, 2028. There were no outstanding letters of credit under the Credit Agreement as of March 31, 2025. Under the Credit Agreement, the Company is subject to negative covenants limiting subsidiary indebtedness and certain other covenants typical for similarly rated borrowers, and the Company is required to maintain certain net leverage and interest coverage ratios. The Company is permitted to make adjustments, such as excluding certain costs, from the calculation of leverage and interest coverage ratios for compliance purposes. On February 28, 2025, the Company entered into an amendment to modify certain financial covenants for additional flexibility under the Credit Agreement. The Company was in compliance with all covenants in the Credit Agreement at March 31, 2025 and believes it will be in compliance with all covenants for a period of at least 12 months from the date these financial statements are issued. 8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Summary of Derivative Instruments The Company addresses its exposure to market risks, principally the market risk associated with changes in interest rates and foreign currency exchange rates, through a program of risk management that includes, from time to time, the use of derivative instruments such as foreign currency forward contracts and interest rate swap agreements. The Company does not hold or issue derivative instruments for trading purposes. The derivative instrument contracts are with major investment grade financial institutions and the Company does not anticipate any material non-performance by any of the counterparties. The Company does not believe that its exposure to market risk is material to the Company’s financial position or results of operations. 15 INDEX FORTREA HOLDINGS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars and shares in millions, except per share data) The fair value of the Company’s interest rate swaps and foreign currency forward contracts are determined based on observable market inputs (Level 2). The table below presents the fair value of the Company’s derivatives on a gross basis and the balance sheet classification of those instruments: March 31, 2025 December 31, 2024 Balance Sheet Classification Asset Liability Asset Liability Derivatives designated as hedging instruments: Interest rate swaps Accrued expenses and other $ — $ ( 0.4 ) $ 0.1 $ ( 0.2 ) Other liabilities — ( 0.8 ) — ( 0.4 ) Derivatives not designated as hedging instruments: Foreign currency forward contracts Prepaid expenses and other $ 0.1 $ — $ — $ — Other current liabilities — ( 0.9 ) — ( 1.2 ) The notional amounts of the Company’s interest rate swaps and foreign currency forward contracts were $ 150.0 and $ 256.5 as of March 31, 2025 and $ 150.0 and $ 468.6 as of December 31, 2024, respectively. The following table presents the pre-tax effects of cash flow hedges included in the Company’s condensed consolidated statements of comprehensive loss: Pre-Tax Gain (Loss) Included in Other Comprehensive Income Three Months Ended March 31, 2025 2024 Interest rate swaps $ ( 0.7 ) $ 2.5 The following table presents amounts reclassified out of accumulated other comprehensive loss and recognized in the condensed consolidated statements of operations: Amounts Reclassified from Other Comprehensive Loss into Earnings Three Months Ended March 31, Statement of Operations Classification 2025 2024 Interest rate swaps Interest expense $ — $ ( 0.4 ) The estimated amount of pre-tax net losses included in other comprehensive loss that is expected to be reclassified into earnings over the twelve months following March 31, 2025, is $ 0.4 . Refer to Note 10, “Preferred Stock and Common Shareholders' Equity” for the impact of the Company’s derivative instruments included in accumulated other comprehensive loss. The following table presents a summary of the loss for derivative contracts not designated as hedges included in the Company’s condensed consolidated statements of operations: Gain (Loss) on Derivatives Recognized in Earnings Three Months Ended March 31, Statement of Operations Classification 2025 2024 Foreign currency forward contracts Foreign exchange gain (loss) $ 0.4 $ ( 0.8 ) 16 INDEX FORTREA HOLDINGS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars and shares in millions, except per share data) 9. COMMITMENTS AND CONTINGENT LIABILITIES The Company is involved from time to time in various claims and legal actions arising in the ordinary course of business. These matters may include commercial and contract disputes, employee-related matters, and professional liability claims. In accordance with FASB ASC 450, Contingencies , the Company establishes reserves for claims and legal actions when those matters present loss contingencies that are both probable and estimable. When loss contingencies are not both probable and estimable, the Company does not establish reserves. The outcomes of such proceedings are inherently unpredictable and subject to significant uncertainties. When the Company determines that it has a meritorious defense to any claims asserted, the Company defends itself vigorously; however the Company also considers and enters into discussions regarding settlement of disputes, and may enter into settlement agreements, if in management’s judgment, it is in the best interest of the Company to do so. For the three months ended March 31, 2025, the Company recorded legal expenses of $ 1.9 related to legal matters initiated prior to the spin. The Company does not believe that any liabilities resulting from claims and legal actions will have a material effect on its financial condition, results of operations or cash flows. It was previously disclosed that there was an issue in a customer’s trial caused by a third-party vendor not affiliated with the Company. As part of working with this customer, the Company made concessions and provide discounts and other consideration to the customer in the amount of $ 12.5 as part of a multi-party solution to facilitate the ongoing trials, of which $ 1.7 was recorded as a reduction of revenue for the three months ended March 31, 2024. There were no related reductions of revenue during the three months ended March 31, 2025, as the agreed-upon amount had been satisfied. The Company believes that it is in compliance in all material respects with all statutes, regulations, and other requirements applicable to its drug development support services. The drug development industry is, however, subject to extensive regulation, and the courts have not interpreted many of the applicable statutes and regulations. Therefore, the applicable statutes and regulations could be interpreted or applied by a prosecutorial, regulatory, or judicial authority in a manner that would adversely affect the Company. Potential sanctions for violation of these statutes and regulations include significant civil and criminal penalties, fines, the loss of various licenses, certificates and authorizations, and/or additional liabilities from third-party claims. Fortrea obtains insurance coverage for certain catastrophic exposures as well as those risks required to be insured by law or contract. The Company is covered by those policies but is responsible for the uninsured portion of losses related primarily to general, professional and vehicle liability, certain medical costs and workers’ compensation. The self-insured retentions are on a per-occurrence basis without any aggregate annual limit. Provisions for losses expected under these programs are recorded based upon the Company’s estimates of the aggregated liability of claims incurred. 17 INDEX FORTREA HOLDINGS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars and shares in millions, except per share data) 10. PREFERRED STOCK AND COMMON SHAREHOLDERS’ EQUITY The Company is authorized to issue up to 265.0 shares of common stock, par value $ 0.001 per share. The Company is authorized to issue up to 30.0 shares of preferred stock, par value $ 0.001 per share. There were no preferred shares outstanding as of March 31, 2025 and December 31, 2024. Accumulated Other Comprehensive Loss The components of accumulated other comprehensive loss are as follows: Foreign Currency Translation Adjustments Net Benefit Plan Adjustments Unrealized Gain (Loss) on Derivative Instruments Accumulated Other Comprehensive Loss Balance at December 31, 2024 $ ( 276.0 ) $ ( 6.5 ) $ ( 0.4 ) $ ( 282.9 ) Current quarter foreign exchange adjustments 45.2 — — 45.2 Unrealized loss on derivative instruments — — ( 0.7 ) ( 0.7 ) Amounts reclassified from accumulated other comprehensive loss — — — — Tax effect of adjustments — — 0.2 0.2 Balance at March 31, 2025 $ ( 230.8 ) $ ( 6.5 ) $ ( 0.9 ) $ ( 238.2 ) Foreign Currency Translation Adjustments Net Benefit Plan Adjustments Unrealized Gain (Loss) on Derivative Instruments Accumulated Other Comprehensive Loss Balance at December 31, 2023 $ ( 206.7 ) $ ( 7.4 ) $ ( 1.4 ) $ ( 215.5 ) Current quarter foreign exchange adjustments ( 27.7 ) — — ( 27.7 ) Unrealized gain on derivative instruments — — 2.5 2.5 Amounts reclassified from accumulated other comprehensive loss — — ( 0.4 ) ( 0.4 ) Tax effect of adjustments — — ( 0.5 ) ( 0.5 ) Balance at March 31, 2024 $ ( 234.4 ) $ ( 7.4 ) $ 0.2 $ ( 241.6 ) 11. INCOME TAXES For the three months ended March 31, 2025 and 2024, the Company recognized income tax expenses of $ 14.9 and $ 4.1 , respectively, which resulted in effective tax rates of ( 2.7 )% and ( 5.4 )%, respectively. The effective tax rate for the three months ended March 31, 2025 was lower than the Company’s statutory tax rate primarily due to impairment of goodwill that has no tax benefit, an increase in valuation allowance, BEAT, non-deductible compensation expenses and withholding taxes for 2025 non-U.S. earnings that are not permanently reinvested. The effective tax rate for the three months ended March 31, 2024 was lower than the Company’s statutory tax rate primarily due to a change in valuation allowance, the geographic mix of earnings, and non-deductible compensation expenses. 12. STOCK COMPENSATION PLANS The Company granted 5.6 and 0.5 of restricted stock units and performance share awards, respectively, during the three months ended March 31, 2025 with weighted average grant date fair values of $ 10.65 and $ 8.13 per share. Total stock-based compensation expense and the associated income tax benefits recognized by the Company in the condensed consolidated statements of operations were as follows: 18 INDEX FORTREA HOLDINGS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars and shares in millions, except per share data) Three Months Ended March 31, 2025 2024 Direct costs $ 11.6 $ 9.0 Selling, general and administrative expenses 3.0 4.5 Total stock compensation expense $ 14.6 $ 13.5 Income tax benefits $ 2.3 $ 2.0 13. SUPPLEMENTAL CASH FLOW INFORMATION Three Months Ended March 31, 2025 2024 Supplemental schedule of cash flow information: Cash paid during period for: Interest $ 34.2 $ 44.6 Income taxes, net of refunds 5.4 5.4 Disclosure of non-cash investing activities: Change in accrued property, plant and equipment — ( 0.5 ) 14. BUSINESS SEGMENT INFORMATION The following table is a summary of segment information for the three months ended March 31, 2025 and 2024. The segment information is based upon the way the management of the Company organizes segments within an enterprise for making operating decisions and assessing performance. Financial information is reported on the basis that it is used internally by the chief operating decision maker (“CODM”) for evaluating segment performance and deciding how to allocate resources to segments. The Fortrea Chief Executive Officer has been identified as the CODM. The CODM allocates resources and assesses performance based on the underlying businesses which determines the Company's operating segments. When determining the reportable segments, the Company aggregated operating segments based on their similar economic and operating characteristics. Subsequent to the sale of the Enabling Services Segment in 2024, the Company reports its business in one reportable segment: Clinical Services, which provides phase I-IV clinical trials, including clinical pharmacology and comprehensive clinical development capabilities. The measure of segment profit or loss that the CODM uses to evaluates performance and allocate resources is segment operating income. The CODM uses segment operating income to monitor budget versus actual results and to make decisions about resources to be allocated to the segment and assess its performance. In accordance with ASU 2023-07, Improvements to Reportable Segment Disclosures , significant expenses included within segment operating income have been assessed and disclosed in the table below. Corporate costs not included in the segment operating income measure provided to the CODM are included within “Corporate costs not included in segment operating income.” Segment asset information is not presented because it is not used by the CODM at the segment level. 19 INDEX FORTREA HOLDINGS INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars and shares in millions, except per share data) Segment operating income for the three months ended March 31, 2025 and 2024 is reconciled to income (loss) from continuing operations before income taxes as follows: Three Months Ended March 31, 2025 2024 Revenues $ 651.3 $ 662.1 Less: Pass through costs 239.9 235.2 Direct costs 294.1 318.4 Selling, general and administrative expenses 104.8 102.4 Depreciation 5.0 6.6 Segment operating income 7.5 ( 0.5 ) Corporate costs not included in segment operating income 17.8 18.3 Amortization 14.5 15.3 Goodwill and other asset impairments 488.8 — Restructuring and other charges 6.5 3.3 Operating loss ( 520.1 ) ( 37.4 ) Interest expense ( 22.3 ) ( 34.3 ) Foreign exchange loss ( 5.6 ) ( 5.3 ) Other, net — 1.3 Loss from continuing operations before income taxes $ ( 548.0 ) $ ( 75.7 )