Fortrea (FTRE) 2026 年第三季法說會：利潤率擴大，調升財測指引

重點提要

• 第三季營收為 6.915 億美元，年減 1.4%，但季增 2.0%。在手訂單轉換率較第二季改善 30 個基點至 8.9%。
• 調整後 EBITDA 年增 14.4% 至 5,800 萬美元；調整後 EBITDA 利潤率擴增 120 個基點至 8.4%，受惠於產品組合、成本管理與效率提升措施。
• 淨新簽訂單總額為 7.73 億美元，單季及過去 12 個月的訂單出貨比均為 1.12 倍。
• Fortrea 上修了 2026 年展望的中位數並收窄預測區間。目前預計營收為 26.65 億至 26.90 億美元，調整後 EBITDA 為 2.10 億至 2.18 億美元。
• 單季自由現金流達到 5,250 萬美元， 淨應收帳款週轉天數（DSO）從去年同期的 33 天改善至 15 天。過去 12 個月淨槓桿率下降 1.4 倍至 3.9 倍。
• 該公司完成了對 Worldwide Clinical Trials 早期服務（Early Phase Services）業務的收購，使 Fortrea 在美國和英國的臨床藥理學網絡擴展至超過 570 張床位，並增加了生物分析與安全性實驗室能力。

核心財務業績

2026 年前九個月，調整後 EBITDA 利潤率年增 160 個基點至 8.2%。營運現金流從負 1,560 萬美元改善至 7,270 萬美元，而自由現金流達到 4,740 萬美元 相比去年同期為負 3,330 萬美元。

業務與營運表現

管理層表示，生物科技和生物製藥領域的需求狀況均在改善。Fortrea 在 2026 年錄得生物科技新簽訂單近雙位數成長，同時生物製藥的提案需求（RFP）活動近期有所增加。公司還表示，其商業案件管道呈現季增與年增。

中國仍是目標成長市場。Fortrea 正積極爭取在中國進行臨床試驗的跨國贊助商，以及尋求在美國和歐洲開發專案的中國生物科技公司之業務。管理層表示，這兩類客戶群體的案件管道與新簽訂單在 2026 年期間保持良好。

收購早期服務（Early Phase Services）業務新增了聖安東尼奧擁有 200 張床位的設施及奧斯汀的生物分析實驗室。加上 Fortrea 的達拉斯據點，該交易打造了擁有 300 張床位的德州網絡。管理層表示，新增的能力應能支援更大規模的生物等效性及高容量研究，同時將部分先前委外測試收回自營。

Fortrea 還在臨床試驗工作流程中部署其 FIT 技術平台。其 CRA 行動應用程式已在 49 個以上的國家推出，初步數據顯示監測效率有所提升。管理層表示，超過 95% 的員工目前每週工作皆整合了 AI，公司正將重點轉向可衡量的工作流程與生產力提升。

客戶集中度有所下降。Fortrea 前十大客戶佔單季營收的 53.5%，低於去年同期的 60.0%。其最大客戶佔營收的 17.6%。

管理層財務指引

Fortrea 收窄並上修了 2026 全年指引的中位數：

管理層繼續預期第四季與全年的自由現金流均為正值。

對於第四季，由於工作天數少於第三季，公司預期營收將較上一季略有微調。較高額的 IT 營運投資也將影響該季獲利狀況，不過管理層指出工作天數與生產力效應是更主要的影響因素。

Fortrea 未提供 2027 年指引。管理層表示，未來成長將取決於能否將穩定的新簽訂單轉化為服務費營收。在營收成長、有利產品組合、產能利用率、技術驅動的效率提升及營運槓桿帶動下，公司目標長遠達到 15% 左右的調整後 EBITDA 利潤率。

風險與關注領域

• Fortrea 進行了 5.58 億美元的累計在手訂單調整，將列報的在手訂單降至管理層認為更能代表剩餘合約營收的水平。該項調整包含了停滯的研究專案以及預計不再執行的工作。
• 管理層表示，在手訂單調整並不影響已列報的財務業績、營收規劃或近中期的營收模型。然而在某些情況下，在手訂單涵蓋期長達 10 年以上，對長期的訂單轉化帶來不確定性。
• 本季訂單取消與負面合約變更數量略有上升，但管理層認為仍在正常範圍內。
• 在考慮現有的利率避險後，約有 40% 的總負債為浮動利率。基準利率上升導致利息費用較上一季增加。
• 外匯因素使今年以來調整後 EBITDA 利潤率減少了 60 個基點。
• 員工薪酬投資抵銷了部分利潤率成長，而第四季 IT 營運費用將較上一季增加。

分析師問答亮點

在手訂單品質：管理層表示，這筆 5.58 億美元的調整是在進行全公司投資組合審查後進行的，旨在讓在手訂單更能反映預期的剩餘合約營收。調整內容涵蓋進展緩慢的停滯研究情況，以及預計不再執行的服務。

早期服務整合：Fortrea 正將收購的業務整合至其現有的臨床藥理學銷售管道中。管理層表示，收購完成後不久便獲得了該生物分析實驗室的首筆訂單，但未提供單季簽單目標。

利潤率擴增：管理層重申，達到 15% 左右的調整後 EBITDA 利潤率仍是其長期目標。管理層指出，儘管直接費用營收成長微乎其微且薪酬投資龐大，直接費用利潤率仍擴增了超過 200 個基點。

大型藥廠需求：Fortrea 表示，公司已受邀參與過去無法接觸到的外包與供應商更新流程。最近獲得的一個流程預計將於 2028 年開始帶來訂單。

臨床藥理學銷售週期：管理層表示，臨床藥理學的銷售週期通常介於六週至五或六個月之間。相比全球臨床開發計畫，這類研究通常啟動較快且能更迅速轉換為營收。

電話會議完整逐字稿

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完整財報電話會議逐字稿

管理層陳述

Operator

Thank you for standing by, and welcome to Fortrea's Third Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to hand the call over to Tracy Krumme, Senior Vice President of Investor Relations.

Tracy Krumme

Thank you. Good morning, everyone, and welcome to Fortrea's Third Quarter 2026 Earnings Conference Call. With me today on the call are Anshul Thakral, Chief Executive Officer; and Jason Knoblauch, Chief Financial Officer. Before we begin, please note this call is being webcast. There is an accompanying slide presentation which can be found on the Investor Relations section of our website, fortrea.com.

During this call, we'll make certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to significant risks and uncertainties and that could cause actual results to differ materially from our current expectations. We strongly encourage you to review the reports filed with the SEC regarding these risks and uncertainties, and particularly those that are described in the cautionary statement concerning forward-looking statements and risk factors in our press release and presentation, which are posted on our website. Please note that any forward-looking statements represent our views as of today, October 29, 2026, and that we assume no obligation to update the forward-looking statements even if estimates change. During this call, we will also be referring to certain non-GAAP financial measures. These non-GAAP measures are not superior to nor a replacement for the comparable GAAP measures, but we believe these measures provide investors with a more complete understanding of results. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures, is available in the earnings press release and the presentation slides that are provided in connection with today's call.

Lastly, I would also like to note that Anshul, Jason and I will be participating in the Jefferies Global Healthcare Conference in London on November 17. A live webcast and replay of our fireside chat will be available on the Investor Relations section of our website. Investors interested in meeting with us at the conference should contact their Jefferies representative or reach out to me directly.

With that, I'd like to turn the call over to Anshul Chief Executive Officer.

Anshul Thakral

Thank you, Tracy. Good morning, everyone, and thank you for joining us to discuss our third quarter 2026 results. Before we start, I'd like to formally introduce our Chief Financial Officer, Jason Knoblauch, who many of you have already met. Jason has quickly made a strong contribution to Fortrea, and I'm confident his leadership and experience will help shape our journey in the near and longer term.

Turning to our performance. We are pleased to report another quarter of progress on our return to growth strategy, which is focused on revenue growth and margin expansion. Our third quarter results reflect continued execution across our three pillars: commercial excellence, operational excellence and financial excellence. They also reflect an important evolution for Fortrea as we focus on the next chapter of our journey, translating improved demand, stronger execution and disciplined investment into sustainable, profitable growth.

For the third quarter, we delivered revenue of $691.5 million, adjusted EBITDA of $58 million and net business awards of $773 million, resulting in a book-to-bill ratio of 1.12x and a trailing 12-month book-to-bill ratio of 1.12x. We delivered a strong third quarter, reflecting continued progress against our strategic priorities with continued execution against those priorities we raised the midpoint of our full year revenue and adjusted EBITDA guidance while narrowing both ranges.

We also recently completed our acquisition of the Early Phase Services business for worldwide clinical trials, expanding our clinical pharmacology capacity, bringing our total beds across the U.S. and U.K. to more than 570 and adding dedicated bioanalytical and safety lab capabilities. This strategic investment strengthens our early clinical development platform enhances our ability to deliver integrated solutions to customers and supports our long-term growth strategy. Our progress this quarter reflects the work we've done to expand our commercial pipeline strength in operational execution and improved financial performance.

Our focus is clear: expand our opportunity set execute with greater consistency and build a model that creates meaningful operating leverage as growth returns. I will now walk through our progress against each of these three pillars of excellence. Let's start with commercial excellence. Our progress is becoming more repeatable and process driven. Over the past year, we've enhanced our commercial capabilities by focusing on talent, analytical tools and integrated account management. Our tailored and flexible offerings resonate with customers.

Forte can operate across multiple service models which is an advantage as sponsors want providers capable of combining FSO, FSP and point solutions rather than forcing customers into a single operating model. Our ability to be agile in providing tailored solutions means we can be a strong partner to innovative large pharma and smaller biotech companies. I remain pleased with the balanced mix of business that we are winning across therapeutic areas, customer type and geography.

Our strategy remains grounded in the 3Rs: reach, relevance and repeat. Reach means increasing the aperture of our customer relationships and opportunities. Relevance means bringing differentiated scientific regulatory, therapeutic and operational expertise into the process earlier. Repeat means earning follow-on work by delivering consistently and creating a better client experience. We're seeing progress across each dimension. We're expanding our reach and generating more demand with the value of our pipeline increasing both sequentially and year-over-year. The breadth of activity is important.

It shows that Fortrea is competing at a stronger position across a broader customer set. China is another important area of opportunity. China continues to be a meaningful source of innovation within the global drug development ecosystem. We're seeing Chinese biotech companies and global sponsors that are partnering with Chinese innovators seek experienced partners to advance differentiated assets into global development.

We appointed a new leader in China over the summer with a mandate to leverage our strong position and drive growth with both China headquartered biotechs and multinationals. Stepping back, I would characterize our commercial position this way. The market is becoming more supportive, but our progress is not simply a function of market recovery. It reflects deliberate changes to our go-to-market model, a sharper focus of where Fortrea can differentiate and greater coordination across our teams. Now we still have work to do, but the quality and the breadth of our pipeline gives us confidence that we're building a stronger foundation for growth.

Our second pillar is operational excellence. In the services business, as I have said before, consistency is paramount. Clients judge us not only by our ideas or scale, but really by our ability to execute. We remain focused on improving delivery across the areas that matter most, project management, site activation, enrollment, quality and predictability, just to mention a few. These represent the daily discipline required to turn backlog into revenue, protect margins and earn repeat business. Clinical pharmacology continues to be an important example of differentiated execution for Fortrea.

Our business benefits from strong scientific capabilities, an integrated global network and demand for studies that typically convert to revenue more quickly than later-stage programs. We remain focused on building on our leadership position through targeted investments. We recently closed on our acquisition of the Early Phase Services business from worldwide clinical trials. This transaction is strategically important and signifies our growing confidence as we invest opportunistically for growth.

Last week, I had a chance to visit our new sites in San Antonio and Austin, Texas, and welcome our new colleagues. The feedback from clients has been very positive in terms of the added capacity and added capabilities. Our bioanalytical laboratory in Austin allows us to perform testing in-house rather than relying on third parties. Our clients have been asking for this capability as part of our solutions, and now we can deliver it for them. This in-house capability also gives us greater control over execution and allows us to convert certain pass-through activity into service fee revenue. Our new 200-bed San Antonio facility that includes a safety laboratory combined with our Dallas unit creates a 300-bed Texas network and expands our ability to conduct larger bioequivalence and high-capacity studies.

Across the global network, the transaction means that Fortrea now has more than 570 beds, adding to the scale and speed of our integrated early phase offering. Technology is another important enabler of operational excellence. We launched [Fortrean] Intelligent Technology or FIT earlier this year. It combines our data foundation and accelerate platform with analytics, machine learning, risk intelligence and AI embedding intelligence into workflows our colleagues used to deliver clinical trials. We're delighted to be shortlisted for best use of AI in clinical development and trial innovation in The Script Awards 2026.

Our approach is pragmatic, outcomes focused and responsible, and we continue to make good progress in its adoption. We are developing FIT intentionally module by module, workflow by workflow, persona by persona. Our CRA mobile app is now deployed across more than 49 countries and early data points indicate that it's delivering greater monitoring efficiency, creating capacity for higher-value quality-focused site management. These tools do not replace accountability or judgment. They help our people prepare more effectively identify risks earlier and work with greater consistency.

As I have said before, our goal in AI is not automation for the sake of automation. It is to create a force multiplier for our people and our clients. Automation can improve efficiency judgment improves outcomes. Our strategy brings the two together with appropriate human leadership in a highly regulated environment. That is also the purpose of a unique internal program that we call Felix. We launched Felix over the summer, connecting AI literacy, practical adoption and measurable value.

Felix combines self-paced learning in structure-led sessions and role-specific support. Employees can earn belts at different levels that equip them to use AI responsibly and confidently based on their goal. It's making an immediate impact. For example, more than 95% of our colleagues have integrated AI into their weekly redeems. We're confident that we're creating a strong platform of AI literacy and adoption at scale. We're now turning our focus to value realization, embedding AI into priority workflows and managing outcomes through consistent KPI cadence.

At the same time that we're enabling our employees, we also have taken the approach of having our employees enable Fortrea's growth through innovation. This year, we staged three grassroot innovation actons. These events were held across different regions. Together, these enterprise-led and colleague-led initiatives strengthen how we deliver today while building capabilities that can improve predictability and client experience over time.

Now let me turn to our third pillar financial excellence. Jason will discuss this quarter's financial performance, cash flow, balance sheet and outlook in greater detail, including the adjustment we made to our reported backlog. We believe this was an appropriate step and Jason will provide additional context shortly. We continue to operate the business with financial rigor. The major actions to better align our cost structure with the scale of the business are largely complete. While we will continue to identify opportunities to operate more efficiently our focus is increasingly on transforming how we work as a global team to drive sustainable growth and margin expansion.

Looking ahead, we expect margin expansion to be increasingly driven by revenue growth, favorable business mix, improved utilization and operating leverage. Mix matters. Our objective is not to grow at any cost. It is profitable growth, built on work where Fortrea can deliver differentiated value. Our infrastructure is positioned to support additional growth without requiring nonbillable costs to increase at the same rate. As we have discussed, low single-digit service fee revenue growth should begin to produce incremental drop-through.

As growth moves towards the mid-single digits, operating leverage should become even more apparent. That is central to our objective of reaching mid-teens adjusted EBITDA margins. Our continued progress and disciplined execution are reflected in our updated full year outlook. We narrowed our full year revenue and adjusted EBITDA guidance ranges and raised the midpoint of both. We continue to manage costs carefully while investing with discipline to support growth and margin expansion. We also remain focused on the balance sheet and capital allocation, and we continue to expect positive free cash flow in the fourth quarter and for the full year.

Our capital allocation priorities remain focused on investing for organic growth, improving productivity and continuing to delever while pursuing targeted opportunities that strengthen capabilities and meet disciplined return thresholds. As we look ahead, I want to leave you with three key points. First, our commercial opportunity set continues to expand. The market environment is improving. Our pipeline is broader and stronger than it has ever been and our go-to-market investments are opening doors across large pharma, biotech, China to global innovators and new to Fortrea clients. We're now competing from a stronger position.

Second, operational execution is strengthening the foundation for profitable growth. We remain focused on quality predictability and client delivery while investing selectively in clinical pharmacology, fit, AI literacy and colleague-led innovation. These capabilities are intended to help our teams work with greater speed, consistency and insight.

Third, financial discipline remains central to our strategy. With the major cost actions largely complete, our focus is increasingly on converting stronger demand and bookings into service fee revenue growth improving mix and utilization and capturing the operating leverage embedded in our model. Most importantly, none of this progress would be possible without our colleagues around the world. As we prepare for what's ahead, we're committed to humans in the lead, experience, agility and dedication of our people are the foundation of our client and site relationships. Of our quality and of our ability to innovate. We are asking a great deal of the organization as we return to growth. And our team continue to respond with commitment, accountability and energy.

Jason, I'll turn the call over to you to discuss our third quarter financial results in more detail.

Jason Knoblauch

Thank you, Anshul, and thank you to everyone for joining us today. Before turning to the results, I'd like to say how pleased I am to have joined the Fortrea team. I've been particularly encouraged by the focus I see on the customer experience and continuous improvement and I intend to do my part to foster successful outcomes on our strategic imperatives. Now let's turn to the financials. The third quarter was another solid quarter, demonstrating continued progress on our strategy.

Before getting into the details, I'd like to briefly highlight our progress against financial excellence, the third pillar of our growth strategy. First, we achieved a book-to-bill ratio of 1.12x in the quarter, compared with 1.06x in the second quarter of 2026 and 1.13x in the third quarter of 2025. This third quarter performance sustained a trailing 12-month ratio of 1.12x.

Second, we continue to drive improvements in adjusted EBITDA, reflecting the benefits of portfolio mix as well as continued progression of our cost optimization and efficiency initiatives. These outcomes are a nice reflection of the commitment and performance exemplified by our talented workforce, one in which we have been making increased compensation investments this year. Now I'll cover the financial results in more detail.

Third quarter revenue was $691.5 million, 1.4% lower than the prior year quarter and 2.0% higher sequentially. This compares with revenue of $701.3 million in the third quarter of 2025 and $678.2 million in the second quarter of 2026. Our third quarter revenue represented backlog conversion of 8.9%, representing a 30 basis point acceleration versus the second quarter of 2026, driven primarily by conversion in the FSO part of our portfolio as well as in FSP contracts. The year-over-year decrease in revenue during the quarter was driven primarily by a slower conversion rate within the pass-through element of backlog.

On a GAAP basis, direct costs in the quarter decreased 4.6% year-over-year and increased 2.4% sequentially. Both periods were largely impacted by fluctuations in pass-through expenses. SG&A in the quarter decreased 2.8% year-over-year and increased 1.7% sequentially. The year-over-year change was driven primarily by continued management of our operating expenses, the nonrecurrence of certain credit loss provisions in the prior year and a decrease in one-time spin-related costs.

Adjusted EBITDA for the quarter was $58.0 million compared with $50.7 million in the third quarter of 2025 and $58.7 million in the second quarter of 2026. This represented an increase of 14.4% year-over-year and a decrease of 1.2% sequentially. Adjusted EBITDA margin was 8.4%. And compared with 7.2% in the third quarter of 2025 and approximately 8.7% in the second quarter of 2026, representing a 120 basis point increase year-over-year and a 30 basis point decrease sequentially. The year-over-year margin expansion was fueled by continued improvement in the mix of our portfolio as well as good performance on our cost management and efficiency initiatives, which combined were more than 300 basis points of impact.

These gains were partially offset by increases in compensation investments in our workforce, including incentive compensation funding. For the 9 months ended September 30, 2026, adjusted EBITDA margin was 8.2% as compared to 6.6% for the 9 months ended September 30, 2025. This 160 basis point expansion versus prior year was enabled by improvement stemming from the impact of changes in the mix of our portfolio as well as good performance on our cost management and efficiency initiatives. This was partially offset by increases in compensation investments in our workforce, including incentive compensation funding as well as 60 basis points of foreign currency headwind.

Interest expense for the quarter was $20.2 million compared with $22.6 million in the third quarter of 2025 and $19.3 million in the second quarter of 2026. The year-over-year reduction is due to pay downs of borrowings on our senior secured notes and revolver during the second half of 2025. Compared to the second quarter of this year, the increase in interest is due to higher benchmark interest rates on our variable rate debt, which is about 40% of our total gross debt when considering interest hedges in place.

Turning to our tax rate. During the third quarter, we recognized income tax benefit of $4.2 million, resulting in an effective tax rate of 16.7%. Our quarterly result was impacted by the timing of certain elements of our tax provision. Moving to net income and adjusted net income. In the third quarter of 2026, net income was $0.6 million compared with a net loss of $15.9 million in the third quarter of 2025 and a net loss of $13.2 million in the second quarter of 2026. Adjusted net income for the quarter was $27.9 million compared with $11.7 million in the third quarter of 2025 and $22.7 million in the second quarter of 2026.

Adjusted basic and diluted earnings per share were $0.29 and $0.28, respectively, compared with $0.13 and $0.12 in the prior year quarter and $0.24 and $0.23 and in the second quarter of 2026. In terms of customer concentration, our top 10 customers represented 53.5% of revenue in the quarter. Compared with 60.0% in the third quarter of 2025 and 55.4% in the second quarter of 2026. Our largest customer accounted for 17.6% of third quarter revenue. compared with 19.8% in the prior year quarter and 16.8% in the second quarter of 2026.

Backlog, which includes both direct fee value as well as pass-through fee value was $7.3 billion at the end of the quarter compared with $7.8 billion at the end of the second quarter of 2026 and $7.6 billion at the end of the third quarter of 2025. We Cancellations during the period were within normal bounds albeit slightly elevated. In addition to the cancellations and contract amendments that occurred during the quarter, we also recorded a cumulative adjustment to backlog of $558 million. This adjustment reduced the value of backlog such that our resulting balance is a more appropriate estimation of remaining revenue expectations for the contracts in our portfolio. This adjustment was not part of reported net book-to-bill. Additionally, it does not have an impact on reported financial results or revenue planning.

It is simply an accumulation of ordinary course changes that can and do occur in the scope needed to fulfill our customer contracts, and it is inclusive of trials that can slowly become inactive. I'd like to now turn to our cash flow performance. We generated $60.8 million of operating cash flow and $52.5 million of free cash flow in the quarter, representing improvement versus the second quarter which had $28.9 million operating cash flow and $19.9 million free cash flow. The sequential improvement in cash flow was primarily driven by net DSO, which I will discuss shortly. For the 9 months ended September 30, 2026. Operating cash flow was a positive $72.7 million compared with a negative $15.6 million in the prior year period.

Free cash flow for the first 9 months of 2026 was a positive $47.4 million compared with a negative $33.3 million for the first 9 months of 2025. The Key contributors to the improved cash flow performance includes growth in adjusted EBITDA, improved net working capital, reduced cash interest and fewer onetime costs. Net DSO was 15 days as of September 30, 2026 compared with 33 days as of September 30, 2025 and 20 days as of June 30, 2026. This represents an 18-day improvement year-over-year and a 5-day improvement sequentially, primarily reflecting continued execution in our order-to-cash process.

We ended the quarter with no borrowings outstanding on the revolver, consistent with the preceding four quarters. Combined with cash and cash equivalents, our available liquidity was approximately $668 million at quarter end. Our gross debt balance at the end of the third quarter was $1.066 billion, and our net debt was $845.7 million, which results in net leverage of 3.9x. Over the last 12 months, we have improved net leverage by 1.4 turns due to a combination of EBITDA growth, debt paydown and cash accumulation. The October 19 closing of the acquisition of the Early Phase Services division of worldwide clinical trials will only slightly impact our liquidity and net leverage. With the latter impacted about 0.25 turn of leverage. We expect to maintain ample liquidity and flexibility under our financial covenants for the foreseeable future.

Our capital allocation continues to be oriented towards investing for organic growth and productivity, maintaining optionality in our capital structure and steady deleveraging. Now moving to full year guidance. As Anshul discussed, we raised the midpoint of our full year 2026 revenue and adjusted EBITDA guidance while narrowing both ranges. We now expect full year revenue of $2.665 billion to $2.690 billion and adjusted EBITDA of $210 million to $218 million.

In closing, our third quarter and year-to-date results reflected good improvement in our business performance and progress against our three pillars of excellence. But our performance was by no means a reflection of our fullest potential. As we look ahead, we are encouraged by both external demand signals and internal capability to drive profitable growth and margin expansion. We continue to expect that margin expansion to come from favorable business mix, improved utilization, technology fuel efficiencies and operating leverage as we grow service fee revenue. We are going to continue to build and iterate towards those outcomes, and I look forward to continuing the conversation with many of you in the months and quarters ahead.

We'll now open the call for Q&A. Operator, you can now open the lines, please.

Operator

Before we proceed to Q&A, the company would like to remind listeners that non-GAAP measures are not a substitute for comparable GAAP measures. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures can be found in the earnings release, current presentation and Q2 2026 and Q3 2025 presentations on the Fortrea Investor website.

[Operator Instructions] Our first question comes from the line of Elizabeth Anderson of Evercore ISI.

分析師問答

Elizabeth Anderson

Congrats on a nice quarter. I wanted to ask maybe a 2-parter. One, the EBITDA guide for the fourth quarter maybe came in a little bit below what we were expecting given the ramp. Can you talk about the factors that might be impacting the 4Q guidance? And then secondarily, on the worldwide acquisition, can you talk about how does that work with the TSA? Like obviously, I'm sure those those facilities are mostly full now? Or when do you start selling in, you're supporting those clients. If you could just help us talk through those dynamics conceptually, that would be helpful.

Jason Knoblauch

Okay. Great. Thanks for the question, Elizabeth, Jason here. So in terms of the Q4 guide, a couple of variables at play. We do expect a little bit of a sequential slowdown in revenue, and that's really just a function of the number of working days that are in Q4 versus Q3. Q3 was a nice quarter in terms of available capacity at working days to generate revenue with that revenue, a number of working days also just comes a little bit of enhanced leverage in the profile. And so that's really kind of a primary item that's driving our guide for. We do have a little bit of a step up sequentially in some of the IT OpEx investment that we're making, but that's a secondary factor to the sequential revenue dynamic and the resulting impact on productivity.

And then in terms of your question on the TSA, we do have an arrangement in place that canvasses a number of different support functions and areas across HR, IT, finance, et cetera. I think your question was also starting to touch on just sort of the commercial apparatus. And so just to recall, we already today have been working -- pre-acquisition, we've been working a bit with that business as they've been able to help augment some of the patient needs. -- in our portfolio and CPS. But the commercial conversion is starting. It's just 1 of those areas that's going to take a little bit of time to play out.

Operator

Our next question comes from the line of Eric Coldwell of Baird.

Eric Coldwell

I wanted to hit on the backlog adjustments. -- it felt like this number was a bit more than you were indicating in the past. I think you've thrown around low single digit to mid-single-digit impact on previous backlog. Maybe it was a touch higher than I felt like it might be. It also seemed like it was perhaps a bit broader in scope. And that could just be the language that you used to define it versus a recent peer adjustment. But -- it does seem like it's more than just an active trial. So I'm hoping to get a little more color on the adjustments and then perhaps what portion was solely in active trials. And if there was stuff beyond that, what exactly it was.

And sorry for the 3 parter on 1 topic, but you're wording on no impact on revenue in the near term. I felt like it left open some potential that this actually would temper your perhaps intermediate or longer-term revenue thoughts -- so yes, 3 topics on the backlog.

Jason Knoblauch

Yes. Thanks, Eric. So look, our work only completed on the assessment in Q3. So the team has been working to assess -- the contract positions, the backlog positions across our portfolio, FSO, MSP, CPS, Ultimately, the goal of the exercise is to ensure that we come out of it with a backlog value that is more appropriately represented of the remaining life revenue on the contracts that we have in the portfolio. It is a mix of both in active study dynamics as well as what we internally will call not to deliver dynamics within parts of the portfolio as well.

And that's just a natural byproduct of the ebbs and flows that happen in clinical development. the inactive study, those -- the way those often start to develop is slowly, right? So a study might go on pause or the sponsor might be thinking about reprioritization of their investment allocation and so on and so forth. And there's often not a bright line in terms of whether it's canceled or not. And so you have a number of situations that have some ambiguity around them. And ultimately, what we're doing through this adjustment is getting our backlog to a point that better reflects the rest of life revenue, which is what it's intended to be.

In terms of near-term versus longer-term impact, this does not impact any of the variables that have been going into our revenue recognition. It doesn't impact any of the variables that have been feeding into our near and medium-term revenue modeling in these studies in this business, this backlog is representative of many, many years revenue value. The bleed-off goes out 10-plus years at the bottom end of the spectrum. And so that's why, ultimately, we've characterized it the way that we have.

Operator

Our next question comes from the line of Luke Sergott of Barclays.

Luke Sergott

I just want to talk about the gross margin improvements that you guys saw. If you back out the pass-through had a pretty sizable step-up there year-over-year and even quarter-over-quarter. So there's a lot of moving parts here, I guess, as you're thinking about mix from customers and FSP versus FSO.

So kind of walk through what were the changes? Are we starting to see some improvements on the initiatives that you guys enacted over the last couple of years? And then lastly, the second part is unrelated, but on the burn rate, if you adjust for the $600 million out of the backlog, the 4Q guide implies a modest step down in burn rate.

Should we be thinking about that roughly about 8.5% burn rate is like a good jump-off point to think about what '27 could look like.

Jason Knoblauch

Yes. Okay. Jason, again, I appreciate the question. So yes, look, we feel good about the progress we've been making in all parts of our P&L and the margins. So I think your question was primarily focused on gross margin. One of the nice features playing out in our results already, and we expect it to continue to take a more pronounced effect as this portfolio mix conversion that Anshul and team have been talking about. So we are seeing, as the revenue and the backlog and the contracts within it all start to convert to nature that are higher economics for us, if you will. That's been a part of the apparatus of driving some of the gross margin improvement year-over-year.

But also our operations team has been really driving a number of efficiencies in terms of how we convert that backlog and that revenue to our gross profit margins. And I think we've characterized within all that. That's all happening against the backdrop of a bit -- not inconsequential headwind associated with some of the investments and they're good investments that we're making in the compensation of our workforce that's on the order of magnitude of a couple of hundred basis points. So I feel good about the progress we're making. I feel good about the continued progress that we expect that we'll be making over the horizon as well.

And then in terms of the Q4 burn rate, yes, I think that's about right in terms of the percentage conversion assumption for -- it goes back to that working days dynamic that I mentioned. But we have been seeing some nice step-up in that conversion rate. And so putting aside some of the period-to-period fluctuations that can happen in terms of the days of capacity, I think we're on the right track and trajectory there.

Operator

Our next question comes from the line of David Windley of Jefferies.

Unknown Analyst

It's Cassidy on David. So could you just provide a little bit of context on the demand that you're seeing, firstly, by customer cohort and then business segment, Phase 1 versus Phase II. -- and FSP versus FFO.

Anshul Thakral

Sure. Cassdey, I'll take that. I appreciate it. Look, I think as we've seen as other peers have reported out and other elements of the pharma services sector reported out, I think we are starting to get into the middle of this market recovery. I'm starting to get optimistic about where the market is headed and the overall recovery and the growth at which pharma services is starting to grow again. I think that's now starting to become a clear signal across not just CROs but across the the sector. So that is good.

As I've said in the past, and our numbers show the same thing. -- biotech recovery came faster. We saw a good growth here this year in biotech, almost if I look at our bookings, we saw almost double-digit growth in biotech bookings here in 2026. -- biopharma recoveries comment quickly on the heels of that. If I look at our RFPs going forward for the next quarter or -- we're seeing a lot more coming in from biopharma than we were historically. So it's playing out as we had talked about as we predicted biotech recovery came faster.

Biopharma recovery was a little bit slow. But now we're square in the middle of the recovery market where both biotech and biopharma sectors are generating RFP flow and pipeline flow for us that we're excited about.

Operator

Our next question comes from the line of Jailendra Singh of Truth Securities.

Jailendra Singh

I want to ask about the large pharma partnership. Are you seeing any meaningful changes in wallet share there or sourcing behavior of your largest pharma customers heading into next year? Some of the CROs have talked about scale becoming a bigger factor in winning work with these sponsors. Just curious what your observations have been? And is this consistent with what you are seeing?

Anshul Thakral

Jailendra, I appreciate you asking that question. So I think there's a couple of points I would make. One is, as I just said, to Cassity, we're seeing an inflow of RFPs now coming in from biopharma, not just our existing customers. But as I mentioned last quarter, we've been invited into processes for various refreshes, new RFP models, new outsourcing models, et cetera, that we hadn't been invited to in the past. In fact, recently, we've actually won 1 of those, and we're excited about that. That should start converting into awards in 2028.

Your question around the scale matter in biopharma, I would argue that's not a new trend scale has always mattered in biopharma. And I think biopharma companies continue to see viable players in that market to be the top 6 CROs, us included, the ones with established global footprint and global scale. So that's always mattered. It continues to matter. And I'm excited about the existing new processes that we are engaged in now.

Jailendra Singh

A quick follow-up on worldwide clinical trials acquisition, the early phase services. With this deal, how is your approach changing on going after CPS work? I understand it increases that capacity, you can go up to more work. But does this deal also make you more price competitive? Does it get in front of your sponsor? Is it more about going deeper with current sponsor partners? And how quickly can we start seeing that in bookings numbers?

Anshul Thakral

Well, I think, look, it adds new capabilities, as I have suggested, 1 of the things our sponsors have been asking for. And 1 thing I would tell you, Jailendra, I appreciate the question. What led to us doing this acquisition is really our clients and our sponsors asking for a certain set of capabilities. They love working with Fortrea, -- and the 2 big are by our own bioanalytical lab, so that we can have an integrated approach between bioanalytical labs, safety labs and the CRUs, which we now can an expanded network, especially in Texas, now within a few hour drive, we've got a 300-bed network. Which allows you to do larger cohort bioequivalent studies at an economics that makes a lot more sense.

So this is really about adding capabilities, not just capacity. And those 2 new capabilities open up a little bit of the TAM for us in this sector. As far as bookings conversion, look, -- we closed the deal last week, we got our first award yesterday for Bioanalytical lab services that is a Fortrea client. And so I think the bookings conversion will come. I'm not going to tell you which quarter, I think the sales team is out working it since we closed the deal last week, and I look forward to some early results here.

Operator

Our next question comes from the line of Kevin Caliendo of UBS.

Unknown Analyst

Appreciate it. I wanted to follow up on Jailendra's question a little bit. In terms of worldwide. Is this -- I understand strategically the step. Is this the last step for you, Anshul, when you think about where you want this company to be in a couple of years. What's the additional capabilities that you're getting from this now understand the impact that it has and the capabilities I'm guessing this isn't all the capabilities that you want to have. And if you think about where you want portray to be in 3 years or 5 years, what else do you want to add to the suite? What else your customers want you to do? Maybe that's a better way to ask it.

Anshul Thakral

Well, I've been here about 15 months. So it'd be hard if this was my last step. Kevin, I appreciate you initiating coverage and welcome back to the sector. No, I'd say this is our first step in a long journey. -- long journey in establishing marching towards our goals by establishing Fortrea, as a CRO of choice when it comes to evidence generation. The theme by which we're going to pursue growth is evidence generation.

We want to be able to support our sponsors big, medium, small across the spectrum of evidence generation, everything from first in human to post-approval services. That's our goal. And there's areas in which we'll continue to look for opportunities to fill capability gaps both through organic investments, some of which we're making now and some of which show up in our numbers. as well as inorganic acquisitions, such as this one. But I would say, Kevin, I appreciate the question, is the first step in the long journey.

Operator

Our next question comes from the line of Justin Bowers of Deutsche Bank.

Justin Bowers

So just going to stick with the M&A there in the prepared remarks in the deck, you talk about that asset being EBITDA profitable in 2027. So -- just would like to understand the course of action to get there and what initiatives to drive EBITDA profitability.

Jason Knoblauch

Yes. Jason here. So thanks for the question, Justin. So we our team already been working to integrate it. Primary focus out of the gate has been on the commercial apparatus around it. And so the exercise that's happening by day, by week, at the moment is our very large pipeline of CPS opportunity work through the sales cycle. It's getting this business embedded into that pipeline and the conversion of the opportunities and really starting to fill up their funnel. And a lot of that work would have come through our † numbers anyway, and this is just kind of now repiping some of it into the direct fee profit generating part of our P&L and CPS.

Justin Bowers

And then somewhat related, but also somewhat separate. Could you talk a little bit about the CPS sales cycle, the lead times and how that business is booked and what investors should do to take that into consideration when comparing like book-to-bill to you versus peers that don't have as much exposure to that business.

Anshul Thakral

Yes. Look, I think that's a good -- great question. Sales cycles and CPS tend to be shorter. -- studies tend to be shorter and faster burning we can have a client, especially some of our big pharma partners who have now run dozens of studies with us in any given year, make decisions, and we could be starting a study up in a matter of 2 months. We can have sales cycles last anywhere from 6 weeks to 5 or 6 months depending on the size of the company and whether it's big, medium, small, how well funded it is, et cetera. but the sales cycles tend to be faster in CPS than they do in the global clinical development. tend to burn faster than they do in global clinical development.

Operator

Our next question comes from the line of Charles Rhyee of Cowen.

Charles Rhyee

Maybe just sticking on the financials and think as we think about next year, obviously, a lot of great improvements over the last 1.5 years plus Anshul, since you've been here. Just trying to understand because I believe in the past, and obviously, this predates you, Jason, but the discussion of where at the current scale, we can see margins getting to. And I think, Angel, you guys had talked about with the current structure getting to sort of a mid-teens is a very reasonable area to get to.

Obviously, we're 8.5% right now just -- and that's -- we've had what looks like we're on track for mid-teens EBITDA growth. Any reason why this kind of progression, given sort of the demand environment we've been in and the progress you made that we could not see something similar as we're trying to get back to let's call it, a target margin range of mid-teens. Anything that would hamper that? Or is that a fair way to think of the current trajectory?

Anshul Thakral

Look, I appreciate the question, Charles. I think as you've said, getting back to what I would consider a competitor level profitability margins, defined as competitors of size, scale and breadth of services that we have, getting into that mid-teens margin remains our true north. It drives a large part of our strategy. The strategy at Fortrea's growth and margin expansion. And currently, we see a clear path. It's not easy. You got to work at it. You got to work month by month, day by day, quarter by quarter, but that's the path we're on.

As the market environment continues to get favorable that's a positive as the market environment gets favorable, bookings remain consistent those consistent bookings continue to translate into revenue growth. And that revenue growth continues to drop closer to the bottom line, as we've talked about in the past. So from everything I've said to you the last quarter and the quarter before that, -- that remains our true North. That's what we're marching down. And I think this quarter is a demonstration of evidence along that journey. And I think it was 1 of your colleagues who picked this up and asked the question earlier around gross margins.

I think gross margins when you back out pass-throughs, that's really what tells you the health of the business and the progress that we're making against that True North.

Jason Knoblauch

Yes. And I can maybe -- I'll add some additional context of that. So if you just look at our year-to-date September performance I think you've seen a † margin expansion of 160 basis points, as Anshul just alluded to, kind of go up the chain a bit in the … margin performance we had north of 200 basis points of expansion, and that's more than 200 basis points of expansion that occurred with negligible direct fee revenue growth, we've now, in the last 2 quarters, started to reach a different plateau on that.

So we feel good about how that's going to continue to build. And that's more than 200 basis points of direct fee margin that has happened despite some of that compensation investment that we made, which is on a 605 basis is in and around 200 basis points as well. So the kind of the portfolio mix is playing out. the efficiencies of the business are playing out. And as I mentioned in my opening remarks, we've got a number of different avenues that we're going to continue to bring to life next year and beyond.

Charles Rhyee

Great. And if I could just quick follow a follow-up. I think in the comments when you talked about sort of cancellations in the quarter, forgive me if I missed it, but you kind of mentioned about contract amendments. Can you talk about what that generally entails and and kind of -- and how typical is that as well?

Jason Knoblauch

Yes. Well, so kind of it's really just to up together both the concept of cancellations and negative contract amendments, right, versus the positive ones. We -- the quarter was slightly elevated in terms of what we actually -- what actually came through and consummated in the quarter, and that was part of our book-to-bill. -- but it wasn't materially elevated. So definitely within 1 standard deviation.

Operator

Our next question comes from the line of Albert Hu of Citi.

Albert Hu

So maybe on the book-to-bill, it seems like the trailing 12 months currently 1.12x, how do you guys see this playing into growth for next year? I think Street has you guys at the high end of low single digits right now. Do you guys see this as doable? Is there anything that makes this assumption unreasonable? I appreciate the color. I have a follow-up.

Jason Knoblauch

Yes, I'll start and Anshul add to it a supplement -- so look, we're not giving any guide on 2027 at this particular juncture. We've got a heavy set of commercial efforts happening now and over the next few months to get our Q4 contracts and book solidified. -- feel good about, as we've alluded to, feel good about where the pipeline is at. I feel good about the opportunity that we've got for Q4, but we ultimately need to get that in print. And and then we'll be working through some of our revenue expectations and guidance thereafter.

Albert Hu

Okay. Perfect. And maybe on China, I mean some of our conversations have been related to the Coins Act proposal recently on restricting investments in Chinese biotech it doesn't seem like that has affected China for you guys in terms of your conversations -- maybe if you can break down for us more on what you've seen in China in the quarter. I know you called out tech being strong. So maybe additional color there will be helpful. And then any conversations you guys are having potentially with this contact proposition. I appreciate the color.

Anshul Thakral

Sure. Look, as you know, 1 of our colleagues, [Sandy Kennedy], is in a leadership position at Acro, which allows us to really work with that group and keep on top of the various things happening in D.C. Look, between -- I'm not going to comment on the politics geopolitics here, but from everything we can see the concept of service providers is not impacted. And if we look at our China business, we look at where we are getting the biggest amount of growth and we happen to be an at-scale player which not everybody is an at-scale player in China.

We happen to have that history in being an at-scale player is 2 places. Multinational companies continue to invest in clinical trials in China using Fortrea as 1 of their CROs to provide those services. and also for Chinese biotech companies who are looking to go global and run clinical trials of innovative medicines from China in the U.S. and Europe and Fortrea, happens to be 1 of the preferred players that those companies go to. And that trend for both in terms of pipeline, and bookings has been positive here over 2026 for us, and it continues to be a healthy tailwind for us.

Operator

[Operator Instructions] Our next question comes from the line of Anne Hynes of Mizuho Securities.

Ann Hynes

I know you're not giving 2027 guidance today, but is there any kind of high-level headwinds or tailwinds that you want to highlight for us?

Anshul Thakral

As Jason said, we're not giving 2027 guidance. I think what we've talked about in the past, what I think for the entire sector, this is just a Fortrea comment, as the sector continues to be square in the middle of recovery, -- and as bookings continue to come in and be consistent, not just elevated but consistent which is really important, which is something we drive for to make sure we've got consistent growth quarter-over-quarter. That's what will yield how 2027 plays out.

Operator

Our final question comes from the line of Jared Haase of William Blair.

Jared Haase

I want to go back to the prepared remarks, you talked about some of the areas where you're focusing on improving service delivery and sort of this mindset of operating excellence. I just wanted to clarify, when you talk about some of these areas like project management, enrollment, et cetera, how much of execution there is a technology innovation story. And you talked a little bit about sort of the CRA mobile app as an example. So how much of that is tech versus kind of restructuring, how you manage your teams, maybe doing more oversight and training, things like that, more people management, I guess, in a sense, to drive that execution.

Anshul Thakral

Sure. Jared, it's a bit of both. At the very beginning, let's -- when I say beginning, I say beginning of my tenure, let's go back 15 months, it was probably more the former and now it's starting to shift to a more balance of the 2 levers that you talked about. It's about making sure we're really seen as a professional services organization, a professional services organization that is responsible for project delivery, not just task delivery.

And what that yields is not just better economics and how we prosecute the backlog, but it actually yields happier customers, better throughput, better output. -- on-time delivery and higher levels of repeat business reputation in the marketplace, which helps our commercial apparatus. The technology piece is now starting to come into bear as it comes more online is actually starting to get additional process improvements and efficiency through these organizations that I mentioned through technology, but it's a bit of both.

Operator

I would now like to turn the conference back to Anshul Thakral for closing remarks. Sir?

Anshul Thakral

Thank you, everyone, for your continued engagement. As we close, I want to reinforce that our third quarter performance reflects continued progress against our strategy. We're expanding our commercial opportunity set, as I've said, we're strengthening operational execution, and we're maintaining financial discipline as we position the company for more profitable growth. The demand environment, as we've spoken about today is clearly improving, our commercial model changes are gaining traction, and our infrastructure can support meaningful operating leverage as service fee revenue returns to growth.

While there is still work to do, we are confident in the strategy. We're encouraged by the progress, and we're converting this momentum into sustainable growth, margin expansion and ultimately, that leads to longer-term shareholder value creation. So thank you for joining us today.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.