Fortrea Holdings Inc (FTRE), a provider of contract research services to the biopharma and medical device industries, hasn’t accurately accounted for its expenses since becoming a standalone company and may not be able to do so in the immediate future.

The warning comes after SG&A expense ballooned 28% in the first half of 2024 and an admission Fortrea’s financials were not accurate from the moment the company was spun out from Labcorp June 30, 2023.

Fortrea acknowledged expense allocations assigned by Labcorp may not reflect the expenses Fortrea would have incurred as an independent company. The latest quarterly filing also included new language that added the allocated expenses:

“...may not be representative of future expenses that may be incurred.”

Nine months after the spin and two months after filing its annual report, Fortrea revealed it would not file its first quarter 2024 report on time.

Initially, the company seemed to blame a double spin— needing more time to complete the discontinued operations accounting for the separation of businesses that were “highly integrated” within the company “ which was itself spun out” recently.

The late notice filing also revealed Fortrea would restate its financials— which included periods prior to the June 2023 spin off— after determining its initial financial statements as a standalone company required what the company characterized as “immaterial adjustments”.

The adjustments reveal Fortrea:

—Overstated revenue $3.6 million, or 2.3% for the six months ended June 30, 2023
—Overstated operating income $2.9 million, or 5% for the six months ended June 30, 2023

The above do not include larger adjustments related to the discontinued operations associated with the aforementioned double spin, or asset sale in Q124.

The result was Fortrea violating— or anticipating it may soon violate— key debt covenants.

One month after the asset sale, Fortrea convinced lenders to be more lenient—modifying “certain financial covenants for additional flexibility” under its credit agreement.

Separately, Fortrea also recorded revenue reductions in multiple periods since becoming a standalone company.

Specifically, Fortrea acknowledged it is subsidizing a customer’s trial following an issue between the customer and a third-party vendor. To keep the trial going, Fortrea made concessions and discounts totaling $12.5 million:

“...as part of a multi-party solution to facilitate the ongoing trials, of which $0.4 and $2.1 was recorded as a reduction of revenue during the three and six months ended June 30, 2024, respectively, and $8.7 was recorded as a reduction in revenue in the fourth quarter of 2023.”