Fortrea Holdings Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; unaudited. Fortrea is a global contract research organization providing clinical development services. Unless noted, operating results below are from continuing operations and compared with restated and reclassified Q1 2023 figures.
Key financial results
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Revenue | $662.1 million | $693.9 million |
| Operating income (loss) | $(37.4) million | $14.1 million |
| Operating margin | (5.6)% | 2.0% |
| Continuing-operations net income (loss) | $(79.8) million | $8.0 million |
| Net income (loss), including discontinued operations | $(101.0) million | $12.5 million |
| Diluted EPS | $(1.13) | $0.14 |
| Cash flow from operating activities | $(25.6) million | $(2.0) million |
Direct costs were $554.2 million, or 83.7% of revenue, versus $541.5 million, or 78.0%, a year earlier. SG&A was $120.1 million, up 2.8%. The filing attributes the higher direct-cost ratio principally to pass-through costs, which are offset by customer revenue. Interest expense was $34.3 million, compared with $0.1 million of interest income in Q1 2023, primarily reflecting debt incurred at the 2023 spin-off.
Cash and cash equivalents were $92.8 million at March 31, down from $108.6 million at December 31, 2023. Capital expenditures were $9.3 million, and investing cash outflow was $9.2 million. Financing cash inflow was $21.3 million, including revolving-facility proceeds and repayments. Cash-flow figures include discontinued operations and are not separately presented for those businesses.
Financial position and liquidity
- Total assets were $4.24 billion and total liabilities were $2.65 billion at March 31, 2024.
- Debt carrying value was approximately $1.61 billion: $55.0 million current and $1.56 billion long-term. The $450 million revolving facility had $29.0 million outstanding. Effective rates were 7.58% on term A, 9.08% on term B, and 9.75% on the revolver; senior notes carry a 7.50% coupon.
- Current assets were $1.20 billion and current liabilities $818.3 million. Management said cash, operating cash flows and credit facilities were expected to cover planned needs for at least 12 months.
- Backlog was $7.4 billion. Separately, remaining long-term performance obligations were approximately $4.302 billion; the company expects about 30% to be recognized over the next 12 months. Backlog is not a guaranteed revenue measure and contracts may be canceled or changed.
Changes, outlook and material items
- Revenue declined 4.6% year over year; organic revenue decreased 4.7%, partly offset by 0.1% favorable currency translation. Management cited lower service revenue associated with the quantity and burn rate of pre-spin business wins and unfavorable mix, partly offset by higher pass-through revenue. Regional revenue was $305.9 million North America, $208.3 million Europe, and $147.9 million other regions.
- Q1 included a $17 million estimated revenue reduction from changes in contract-effort estimates, reducing continuing-operations income by an estimated $16 million, or $0.18 per share. Total reductions related to previously partially satisfied performance obligations were approximately $34 million, including scope/price changes.
- On March 9, Fortrea agreed to sell its Patient Access and Endpoint businesses for $345 million, subject to customary adjustments: $295 million at closing and $50 million upon specified transition milestones. The transaction was targeted to close in Q2 2024, subject to conditions and approvals. The businesses are classified as discontinued operations. Their Q1 revenue was $65.7 million and their net loss was $21.2 million, including a $24 million goodwill impairment related to the sale valuation.
- Restructuring and other charges were $3.3 million, versus $0.6 million; restructuring actions to reduce overcapacity and align resources are expected to continue through 2024. No specific full-year revenue or earnings guidance is provided in the filing.
- After quarter-end, Fortrea entered a three-year, $300 million receivables securitization facility. A May 3 credit amendment relaxed leverage and interest-coverage covenants temporarily, imposed certain restrictions, and requires divestiture proceeds to repay senior debt. The company reported covenant compliance at March 31.
- Management identified material weaknesses in internal controls over financial reporting due to insufficient resources; disclosure controls were deemed ineffective at quarter-end. A remediation plan is underway. The filing also reports corrections to prior-period financial statements, which management concluded were not material to those previously issued statements.
- Other risks include customer concentration (two customers represented 14% and 13% of Q1 revenue), contract cancellations or delays, execution of the divestiture and collection of its milestone payment, foreign exchange exposure, and variable-rate debt. A 1% rate increase would raise annualized interest expense by an estimated $10.8 million before swaps.
- Fortrea recorded $1.7 million of revenue reduction in Q1 toward estimated $12.5 million in customer concessions related to dosing-sequence errors by a third-party vendor. The company said ordinary-course legal matters were not expected to have a material effect.
Investor verification priorities
- Track continuing-operations revenue, contract wins and burn rates, margin recovery, and the effect of pass-through costs and contract-estimate revisions.
- Verify closing of the Patient Access and Endpoint sale, final purchase-price adjustments, receipt of the $50 million milestone payment, and application of proceeds to debt repayment.
- Monitor covenant headroom under the amended terms, debt paydown, variable interest costs, and liquidity as operating cash flow remains negative.
- Assess progress and testing of internal-control remediation, including whether further accounting corrections or restatements arise.
- Compare backlog and remaining performance obligations with realized revenue, cancellations, customer concentration, and collection trends.