Fortrea (FTRE) - 2025 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) This section presents the unaudited condensed consolidated financial statements for Fortrea Holdings Inc for the periods ended June 30, 2025 Condensed Consolidated Balance Sheets The balance sheet shows a significant decrease in total assets and equity, primarily driven by a large reduction in goodwill Condensed Consolidated Balance Sheet Highlights (in millions) | Account | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Total Assets | $2,835.1 | $3,579.2 | | Goodwill, net | $965.2 | $1,710.4 | | Total current assets | $960.0 | $948.2 | | Total Liabilities | $2,245.9 | $2,216.8 | | Long-term debt, less current portion | $1,100.9 | $1,049.7 | | Total Equity | $589.2 | $1,362.4 | | Accumulated deficit | $(1,334.8) | $(397.0) | Condensed Consolidated Statements of Operations Revenues increased slightly, but a substantial goodwill impairment charge drove a significant net loss for the first half of 2025 Statement of Operations Summary (in millions) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $710.3 | $662.4 | $1,361.6 | $1,324.5 | | Goodwill and other asset impairments | $309.1 | $— | $797.9 | $— | | Operating loss | $(330.3) | $(50.9) | $(850.4) | $(88.3) | | Net loss | $(374.9) | $(138.4) | $(937.8) | $(239.4) | | Basic and diluted EPS | $(4.14) | $(1.55) | $(10.37) | $(2.69) | Condensed Consolidated Statements of Cash Flows The company experienced a significant negative shift in operating cash flow, moving from a source of cash to a use of cash year-over-year Cash Flow Summary (in millions) | Cash Flow Activity | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--- | :--- | :--- | | Net cash (used for) provided by operating activities | $(102.4) | $248.1 | | Net cash provided by investing activities | $8.6 | $256.2 | | Net cash provided by (used for) financing activities | $49.4 | $(482.7) | | Net change in cash and cash equivalents | $(37.3) | $17.6 | Notes to Unaudited Condensed Consolidated Financial Statements Key disclosures include the sale of a business segment, a significant goodwill impairment, debt structure details, and a new stockholder rights plan - The company operates as a single reportable segment, Clinical Services, after selling its Enabling Services Segment in Q2 2024, with results now classified as discontinued operations[20][21][23] - The company recorded goodwill impairment charges of $797.9 million for the first six months of 2025, triggered by sustained declines in its share price and macroeconomic uncertainties[53][54][57] - On June 11, 2025, the company adopted a limited duration stockholder rights plan (a "poison pill") that is triggered if a person or group acquires 10% or more of outstanding common shares[76][78][79] - The company entered into a three-year, $300.0 million accounts receivable securitization program on May 6, 2024, and had sold $300.0 million of receivables under this facility as of June 30, 2025[43][44] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 revenue growth, the severe impact of goodwill impairment on profitability, and changes in liquidity and capital resources Results of Continuing Operations Q2 2025 revenues grew 7.2%, but a $309.1 million goodwill impairment led to a significant operating loss for the quarter Revenue Growth (Q2 2025 vs Q2 2024) | Metric | Q2 2025 | Q2 2024 | Change | | :--- | :--- | :--- | :--- | | Revenues | $710.3M | $662.4M | +7.2% | - Revenue growth was primarily driven by a 6.6% increase in organic revenues, mainly from the clinical pharmacology business, while clinical development revenue was relatively flat[103] - Direct costs as a percentage of revenue increased from 79.3% to 81.2% in Q2 2025, primarily due to higher pass-through costs and stock compensation[105][106] - The company recorded goodwill impairment charges of $309.1 million for Q2 2025 and $797.9 million for the six months ended June 30, 2025, specific to the Clinical Development reporting unit[113] Liquidity, Capital Resources and Financial Position Operating cash flow turned negative in H1 2025, with the company utilizing credit and receivables securitization facilities for liquidity Cash Flow Summary (Six Months Ended June 30) | Metric (in millions) | 2025 | 2024 | | :--- | :--- | :--- | | Net cash from operating activities | $(102.4) | $248.1 | | Net cash from investing activities | $8.6 | $256.2 | | Net cash from financing activities | $49.4 | $(482.7) | - The company entered into a three-year $300.0 million accounts receivable securitization program in May 2024 and had sold $300.0 million of receivables as of June 30, 2025[122] - As of June 30, 2025, the company had $50.0 million outstanding on its revolving credit facility, with $400.0 million available for borrowing[121] Critical Accounting Policies and Estimates - Goodwill Declining share price and macroeconomic factors triggered interim goodwill impairment tests, resulting in significant charges in Q1 and Q2 2025 - Sustained declines in share price and macroeconomic uncertainties were identified as impairment indicators, triggering interim goodwill impairment tests in Q1 and Q2 2025[134] - Quantitative assessments led to goodwill impairment charges of $488.8 million as of March 31, 2025, and $309.1 million as of June 30, 2025, for the Clinical Development reporting unit[135] - Management warns that further sustained declines in share price or other impairment indicators could result in additional impairment charges in future periods[138] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from foreign currency exchange rates and interest rates on its variable-rate debt - A hypothetical 10% change in average foreign exchange rates would have impacted operating loss by approximately $0.8 million for the six months ended June 30, 2025[141] - The company has $622.0 million in outstanding variable-rate debt as of June 30, 2025; a hypothetical 1% increase in interest rates would increase annual interest expense by $6.2 million[144] Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal controls during the quarter - The CEO and CFO concluded that as of June 30, 2025, the company's disclosure controls and procedures were effective[146] - There were no changes in internal control over financial reporting during the quarter ended June 30, 2025, that materially affected, or are reasonably likely to materially affect, internal controls[147] PART II. OTHER INFORMATION Legal Proceedings The company is facing a shareholder class action lawsuit alleging securities law violations, which it intends to defend vigorously - A shareholder class action complaint, Lucas Deslande v. Fortrea Holdings Inc., et al., was filed on June 2, 2025, in the U.S. District Court for the Southern District of New York[70] - The lawsuit alleges omissions and misrepresentations to investors; the company is currently unable to estimate the possible loss or range of loss[70] Risk Factors Updated risk factors include potential impacts from trade policies and the anti-takeover effects of the new stockholder rights plan - The company identifies risks from changes in U.S. and foreign government policies, including tariffs, sanctions, and trade restrictions, which could increase costs and disrupt supply chains[151][152] - The stockholder rights plan adopted in June 2025 is identified as a risk factor that could make a takeover more difficult and potentially reduce the market value of the common stock[155][156] Other Information This section details the employment inducement awards granted to the incoming CEO and notes no new Rule 10b5-1 plans by insiders - The company granted inducement awards to incoming CEO Anshul Thakral, consisting of 1,250,000 restricted stock units (RSUs) and 1,250,000 performance share units (PSUs)[158] Exhibits This section lists all exhibits filed with the Form 10-Q, including agreements, compensation plans, and required certifications