Jacobs Solutions Inc (J) — Q2 2025 Earnings Call Transcript

Thank you, Krista, and good morning, everyone. Our earnings announcement and 10-Q were filed this morning, and we have posted a slide presentation on our website, which we'll reference during the call. I would like to refer you to Slide 2 of the presentation material for information about our forward-looking statements, non-GAAP financial measures, and operating metrics. Now let’s turn to the agenda on Slide 3. Speaking on today's call will be Jacobs' Chair and CEO, Bob Pragada; and CFO, Venk Nathamuni. Bob will begin by providing comments on the business as well as highlights from our second quarter results and a recap of notable awards. Venk will then provide a detailed review of our financial performance, including commentary on end-market trends, cash flows, and balance sheet data. Finally, Bob will provide closing remarks, and then we'll open up the call for questions. With that, I'll turn it over to our Chair and CEO, Bob Pragada.

Good day, everyone, and thank you for joining us to discuss our second quarter 2025 business performance. I'm pleased to begin today's call by highlighting several key milestones we achieved in the separation of our former CMS and C&I businesses during March and April. This includes completing the planned equity for debt exchange and finalizing the remaining post-closing adjustments. These actions enabled us to exit our retained stake, reduce outstanding indebtedness, and on May 30, we will make a final distribution of Amentum shares to our shareholders. While we will continue to provide transition services to Amentum for the next few months, we view the primary aspects of the transaction as now complete. We delivered strong operating performance during Q2, and I'd like to highlight a few key points. First, our adjusted EPS grew over 22% to $1.43, supported by solid year-over-year margin expansion. Second, PA Consulting's revenue growth inflected positively, reaching mid-single digits and driving double-digit operating profit growth. And third, our backlog grew 20% to more than $22 billion, a new record. Overall, we are very pleased with our Q2 results. A good start to the first half paired with strong bookings momentum enables us to reaffirm our full-year guidance metrics. As noted in our earnings press release, we recorded a reserve during the quarter as a result of a legal matter involving a consolidated JV in which we have a 50% interest. The impact on adjusted net revenue and adjusted operating profit was meaningful. The associated project falls within our water and environmental end market in INAS, and has been ongoing since 2016, but is now over 97% complete. The fact that we were able to absorb this impact in Q2, while growing adjusted EBITDA, adjusted EBITDA margin, and particularly adjusted EPS by 22% year-over-year is a testament to our strong operating performance and capital return strategy. Before I get into more details on the quarter, I'd like to briefly touch on the current geopolitical backdrop. Overall, our business remains well positioned, with infrastructure and consulting services in high demand and opportunities to capitalize on secular growth trends in front of us. The impact related to the rollout of the Department of Government Efficiency, or DOGE, has so far been minimal, and we continue to anticipate growth opportunities with the US Department of Defense. As a reminder, approximately 9% of our total revenue comes from US federal infrastructure and related services, most of which are tied to DoD engagement. Regarding tariffs, we remain focused on supporting our clients as they assess potential supply chain challenges. Our client-centric model, built on redefining the asset life cycle, will create opportunity to add value as our clients navigate this period of uncertainty. Turning to Slide 4 and focusing on our results. Adjusted net revenue rose over 3% in Q2. Revenue growth during Q2 was adversely impacted by the JV matter I noted earlier, as well as foreign exchange. On a constant currency basis alone, we would have grown 80 basis points faster or approximately 4% year-on-year. Adjusted EBITDA for Q2 was $287 million, representing an 8% year-on-year increase. We are seeing very good traction on adjusted EBITDA margin improvement with solid underlying business performance. Excluding the mark-to-market impact from our investment in Amentum stock and other items, Q2 adjusted EPS was $1.43, a robust 22% increase compared to the previous year. Our trailing 12-month book-to-bill was 1.3 times, with consolidated backlog up 20% year-over-year in Q2. Gross profit in backlog increased 15% year-over-year, reflecting another strong quarter for bookings. Our backlog growth and bookings momentum remained positive, and we are currently forecasting sequential growth in our second half results, which Venk will walk through in more detail shortly. Turning to Slide 5. I'd like to highlight a few notable I&A project awards from Q2. As we discussed at our Investor Day in February, the core pillar of our strategy is to redefine the asset life cycle for our clients. Today and going forward, we'll highlight how our awards align with our 5-year strategy. In Water and Environmental, we continue to see strong underlying revenue growth, especially in Water, where global demand remains high, among the highest in our portfolio. Our differentiation in Water stems from our full life cycle coverage and proprietary technology suite. In Q2, we secured an OT cybersecurity contract with Hampton Roads Sanitation District, one of the largest in the US water sector. This project provides end-to-end cybersecurity for wastewater treatment operations, serving 1.9 million people in Southeast Virginia. Another key area of focus for our water clients is emerging contaminants. PFAS and other contaminants present major challenges, and we are at the forefront of providing early-stage solutions for our clients. In Q2, we were selected by the city of Boynton Beach, Florida to design upgrades at two water treatment plants to remove PFAS from groundwater. Beyond addressing emerging contaminants regulations, these upgrades will modernize aging infrastructure and meet the region's growing demand for clean drinking water. In Life Sciences and Advanced Manufacturing, we continue to deliver strong results. Life sciences and data centers were the primary drivers of end market revenue growth, both seeing double-digit increases during the quarter. Life Sciences growth is being driven by broad-based investment, including a new engineering procurement and program management work for Merck's $1 billion oncology product facility in Delaware. The facility will have the capability to manufacture drugs like KEYTRUDA, and we expect to see backlog spend continue through the facility's estimated completion in 2028. Focusing on data centers, where we offer holistic cross-sector solutions that span advanced facilities, energy and power, water, environmental, and digital, we were selected by PsiQuantum as the owner engineer for one of the world's first utility-scale quantum computing facilities in Brisbane, Australia. Backed by our number one ENR ranking in data centers, we're proud to help bring this next-generation computing capability to life and see a great opportunity to expand our global data center footprint in the coming quarters. Turning to Critical Infrastructure, rising global travel demand, transportation modernization, and energy security requirements are reshaping client priorities. We see global aviation investment as a durable growth driver for our Transportation segment, and one where we can leverage our core competencies in consulting and program management. Notably, in Q2, we were selected as the owner engineer for Denver International Airport's continued expansion of its transportation system. This is a prime example of Jacobs helping cities prepare for future growth with smarter, more connected infrastructure. In summary, our significant awards this quarter reinforce our alignment to high-growth markets. We remain focused on delivering sustainable, profitable growth by providing differentiated, digitally-enabled solutions to the world's most complex challenges. Now I'll turn the call over to Venk to review our financial results in further detail.

Thank you, Bob, and good morning, everybody. Let me begin by summarizing a few of the financial highlights on Slide number 6, followed by additional context on our quarterly performance. Second quarter gross revenue grew 2% year-over-year, and adjusted net revenue, which excludes pass-through revenues, grew by 3%. As Bob noted, we experienced a foreign exchange headwind in the second quarter and also absorbed the impact of the previously noted legal reserve in connection with a matter involving a consolidated 50-50 joint venture. Due to the consolidation of the joint venture, the full amount of the reserve was taken against revenue, and as a result, impacted operating profit. However, the JV partner's allocable portion is included in non-controlling interest. Therefore, the impact on EBITDA and EPS is half of the impact on revenue. Q2 adjusted EBITDA was $287 million, growing more than 8% year-over-year. Our adjusted EBITDA margin during Q2 came in strong at 13.4%, which is an increase of 62 basis points versus the same quarter last year. We were able to offset the anticipated impact in Q2 from holiday timing, as well as the impact of the JV matter through some strong performance on gross margin and discipline on G&A costs. As a result, in the second quarter, adjusted EPS rose to $1.43, a 22% increase year-over-year. Please note, GAAP EPS was impacted by a $109 million pre-tax loss associated with the mark-to-market adjustment of our investment in Amentum. This had no impact on adjusted EPS. Finally, consolidated backlog was up 20% year-over-year to a record $22.2 billion. Our trailing 12-month book-to-bill of 1.3 times remains very healthy. Gross profit in backlog increased 15% year-over-year during Q2, a strong indicator of our positioning over the coming quarters and years. Now regarding our performance by end markets in Infrastructure and Advanced Facilities, let's turn to Slide number 7. Demand for services in the Water and Environmental end market remains strong across all major geographies, with particularly good underlying performance in Water during Q2. Not only was core performance positive, but we also continue to grow our revenue in backlog, and our pipeline in Water is growing by double digits. Total adjusted net revenue growth for Water and Environmental was 2% in Q2, which includes the adverse impact from the previously mentioned JV matter. As we shift into the second half of the year, we expect net revenue growth to improve to the mid- to high single-digit range. In our Life Sciences and Advanced Manufacturing end market, adjusted net revenue grew approximately 6% in Q2. Facing better than our guidance, we expect revenue growth to be similar to Q1. We continue to see favorable demand in both the Life Sciences and data center markets, and we expect to see improvement in semiconductors in the coming quarters. Overall, we anticipate Life Sciences and Advanced Manufacturing growth will remain healthy in the second half of the year. In Critical Infrastructure, adjusted net revenue increased over 2% year-on-year. Within this end market, energy and power is our fastest-growing vertical, a trend we expect to continue. On the transportation side, we saw solid growth aided by the Middle East. Mid-single-digit revenue growth collectively in these two verticals was partially offset by flatter growth in CDs and places due to specific timing-related items. Looking ahead, we like our positioning in Critical Infrastructure and anticipate sequential revenue growth from Q2 to Q3. Now moving on to Slide number 8. I'll provide a brief overview of our segment financials. In Q2, Infrastructure and Advanced Facilities operating profit was approximately flat in total and on a constant currency basis versus last year. As we noted earlier, Q2 operating profit was impacted by the reserve taken in connection with the JV matter. As we had guided, PA Consulting delivered a meaningful return to revenue growth this quarter along with strong bottom line execution. This resulted in operating profit increasing 12% year-over-year in total and on a constant currency basis, with a strong 22% margin performance. PA Consulting's momentum in Energy & Utilities and Life Sciences has been augmented by improving public sector spending in the UK. We continue to see favorable trends in PA's backlog and pipeline, both of which serve as positive leading indicators. Moving on to Slide number 9. We provide an overview of cash generation and our balance sheet. Overall, our balance sheet remains in excellent shape exiting Q2. We returned a record amount of capital back to shareholders during the second quarter, with very little effect on our net leverage ratio. As we look ahead to the second half of the year, we're forecasting strong free cash flow generation. Focusing on the quarter, during Q2, free cash flow was negative $114 million, which was in line with our expectations and our prior guidance. This reflects a few seasonal cash timing events consistent with patterns we've seen in prior years. During the quarter, we repurchased $351 million in shares, which is a quarterly record for Jacobs. We also finalized an equity for debt transaction using our retained stake in Amentum, which reduced our outstanding debt by $312 million. Summing this all up, we ended the quarter right at the midpoint of our 1.0 to 1.5 times net leverage target. Subsequent to Q2, we received $70 million in favorable working capital adjustments and finalized ownership and shares of Amentum that were previously held in escrow. We used the cash received from the working capital adjustment to further reduce our debt during Q3. In addition, following recent Board approval, we will distribute the Amentum shares released from escrow to our shareholders on a prorated basis at the end of this month. Based on yesterday's closing price, this represents approximately $159 million in incremental capital returns to shareholders. Our balance sheet strengths supports continued investment in the business, along with returns to shareholders via share repurchases and long-term dividend growth. Our commitment to return capital to shareholders is evidenced by our $0.32 per share dividend, representing 10% year-over-year growth, as well as our meaningful increase in share repurchase activity in the first half of the year. In total, we returned $628 million to shareholders through repurchases and dividends over the past two quarters alone. This puts us on track to potentially return more than 100% of adjusted free cash flow in fiscal year 2025, excluding the distribution of Amentum shares. While we plan to remain consistent buyers of our own shares, we also continue to evaluate increasing our investment in PA Consulting. Finally, please turn to slide number 10. We are pleased to reaffirm our fiscal 2025 outlook for adjusted net revenue to grow mid-to high single digits year-over-year; adjusted EBITDA margin to range from 13.8% to 14%; reported free cash flow conversion to be more than 100%; and adjusted EPS of $5.85 to $6.20. Now to assist with your modeling, let me highlight a few items related to the remainder of fiscal year 2025. We continue to anticipate revenue will rise sequentially through year-end, with Q3 net revenue expected to grow 5% to 7% year-on-year based on our current view of global market conditions. Notably, a significant portion of our expected revenues in the second half of the year will come from our backlog. On margins, we expect to approach a 14% adjusted EBITDA margin in Q3, and we remain well positioned to meet our full-year guidance range of 13.8% to 14%. We will control discretionary spending in response to market conditions. Overall, we feel positive about our adjusted EPS trajectory. In summary, we continue to expect sequential improvement in net revenue and operating profit as we progress through the second half of the fiscal year. We're very pleased with our margin performance and strong trailing 12-month bookings, both of which set us up for profitable growth in the quarters and years ahead. With that, I'll turn the call back over to Bob.

Thank you, Venk. In closing, with a solid first half of FY 2025 behind us, we see a good setup in the second half of the year, aided by continued booking strength and margin momentum. With our sharpened portfolio aligned to critical global mega trends and our five-year strategy driving focus and discipline, we are confident in our ability to deliver sustainable, profitable growth over the long term. Operator, we will now open the call for questions.

Hey. Good morning everyone.

Good morning, Andy.

Bob and Venk, so backlog, impressive up 20% year-over-year, but as you know, adjusted net revenue growth was up three. Maybe you can quantify the reserve for us in revenue? And I know you have longer duration projects in backlog, but are you seeing more careful spending with customers? And then, sort of the visibility to get to 5% to 7% growth in Q3, do you need to see an acceleration in customer spending to get there in Q3?

So Andy, maybe I'll answer the second half of your question and then on the legal reserve, I'll turn it over to Venk. On the second half of your question, we were very clear that in the second half, we actually have predominance of that in backlog today and have a level of confidence in how that backlog is going to burn over the course of the next two quarters and beyond. So our confidence level is strong on that front. As far as customer decisions with the macro backdrop right now, the procurement cycle is extending a bit, sure. But we’re not seeing broad cancellations or delays in execution. It's probably more on the front-end of the procurement cycle. So Venk, with that, maybe the legal reserve?

Yeah. Thank you, Andy. So clearly, we absorbed the impact of the legal reserve. But to quantify it, given that it's a legal matter and it's an ongoing JV matter, we want to be cognizant of all the implications there. But suffice it to say that this included as part of our Non-Controllable Interest accounting or NCI accounting, and it's a consolidated JV. I will clarify that it's 50-50. As we use NCI accounting, which we are fully disclosed in our Q and in our footnotes, it's easy for you to figure out what those numbers are. All I can say is that this is something that we feel we're appropriately reserved for. And this is something, obviously, there was a headwind in our current quarter, but we absorbed it and came out with the results that we did.

That's helpful. And maybe you guys can talk about what you're seeing by region? You mentioned PA picked up, backlog there is actually pretty strong. So maybe just PA and then the overall U.K. business, is it still a little bit more choppy? Middle East, is it hanging in there? What are you assuming for foreign exchange, given the recent weakness of the U.S. dollar?

Sure. Maybe I'll cover kind of the regions and then Venk, can talk about foreign exchange. PA had a really good quarter inflecting the growth in Energy & Utilities and Health & Life Sciences in Europe. PA is really starting to see some nice tailwinds there. And PA's U.S. business is now up nearly 15% year-on-year. So the continued growth in the U.S. backlog is growing at solid double digits. But one of the areas that probably from a rate of growth with PA is picking up, and this is kind of goes, Andy, to your second point with regards to the U.K. and I'll kind of go into Jacobs broader enterprise as well, is defense and security. PA is one of the leaders in defense and security, advising both MOD as well as other EU countries. And that has seen a significant uptick in the quarter and in backlog. So for the balance of the year, we see a good trajectory there with PA. With the Jacobs business, Transportation and Water continued to be strong for us in the U.K., mid-single digits with regards to those areas. Some of the buildings work or what we call cities and places, has a longer procurement cycle, but overall, we're not seeing any kind of major headwinds in Europe and more specifically in the U.K. If anything, I'd probably characterize it as a bit of a rebound. Middle East is strong. We continue to grow at double digits in the Middle East. Again, we have been very selective on the programs that we are involved with. We're now involved with some time-based programs that have end dates to them with world events happening and tourists coming into the Middle East. Overall, we're positive on the Middle East and being very sensitive to any type of macro oscillations there. Venk, do you want to talk about foreign exchange?

Yes. Thanks, Bob. So as we noted in the prepared remarks, foreign exchange was clearly a headwind for us in Q2. I think we said, our revenue would have been 80 basis points higher if it were not for the foreign exchange impact. Now fortunately, as we look ahead into Q3, if foreign exchange rates were to remain where they are today, that will be a recent tailwind. Hard to quantify it, but certainly, if things persist as they are so far, it will be a positive for us in Q3.

I appreciate the color there.

Yes. Great. Thanks for taking my questions. I guess on free cash flow, maybe for Venk. Obviously, the first half of the year is always slower than the second half of the year, but I was just hoping you could kind of help us understand how you get to the 100% greater than 100% conversion this year in terms of the quarterly cadence? Do you expect here the fiscal third quarter to start chipping away and get you back to where you need to be to hit that level? Or do you feel like it's going to be very fourth quarter loaded?

Thank you for your question. You're correct that Q2 is typically a slower quarter for cash collections, often influenced by payments like 401(k) contributions and cash taxes. Looking ahead to Q3 and Q4, we have a positive outlook on our cash flow. We anticipate a significant increase in Q3, so it won't be solely reliant on Q4. We're confident about our performance by the end of Q3, which reinforces our belief that our free cash flow for the entire year will exceed 100%.

Got it. And then maybe, Bob, for you with my follow-up, I wanted to ask about your profit margins and heard the approaching 14% adjusted EBITDA guidance here for the third quarter. Maybe if you could just talk about the organization right now and discuss where your utilizations rate stand this year as compared to last year and other progress on any other initiatives that you have in the organization to improve your efficiencies, and where those programs and processes stand? Thank you.

Sure. So maybe I'd characterize it in two parts, Andy. We did start off the year, I'd call it kind of early January. And I think we telegraphed a little bit in the last earnings call, where utilization was down a bit where we had that kind of shifting of the holiday season spilling over into Q2. Since January, our utilization has picked up. And I'd say it's on par from where we were in not just last year, but previous years. Going into the second half, what we're seeing is, if you remember back in Q3 and Q4 of last year, we had some lumpy wins. That's a good thing. In Q3 and Q4, those early phases of those major programs, those are now inflecting into kind of the detailed design and the production engineering component of those jobs. So we're seeing utilization just in the early part of Q3 pick up to exceed where we were in previous quarters. So that's how we're seeing the utilization profile. PA utilization is definitely better than it was last year, and that is a testament to all the initiatives that the team has been working on over the course of the last six-plus quarters. From an initiative standpoint, we are seeing some really, really nice growth in our digital business. So if you look at just as we measure it as a P&L and then we measure our digital platforms, how they're catalyzing the balance of our business. Just as an individual business, that business has grown double digits on the bottom-line from an OP standpoint. So I think the digital enablement is really working on that horizontal that we talked about at the Investor Day, and all of those are coming through in real time.

If I could add to that, Andy, our margin performance has reached 13.4% this quarter, and we expect to approach 14% in Q3. This improvement is driven by several factors, as we discussed on Investor Day, including utilization and mix enhancements, as well as increased global delivery. Many of these initiatives are still in the initial stages of implementation. Additionally, considering the operating leverage we've talked about, we believe these factors position us well to reach nearly 14% in Q3 and maintain a full-year target in the range of 13.8% to 14%.

Thank you.

Thanks. Good morning. Just wanted to follow-up about the JV project here. And I know it's a sensitive topic, so I'm not sure how much more you can say. But it sounds like it's almost complete. Just curious how this ruling is reflective or not on the productivity and performance of the project? And just anything we should be aware of for the remaining kind of handful of percent that needs to get done here?

Yes, I can't necessarily go into that level of detail, Steve. But I would say that we were appropriately reserved. And the remaining items on the program are well within reach. So we're not overly concerned there. As far as any detail on the content of what is bad, I can't disclose. But what we will say, though, is that we are working hard with our partner in order to close it out and don't have a high level of concern there. I will say this, though, Steve, is that this is not indicative of any kind of shift in our risk profile. We still have a low risk profile. And if you kind of track us over the course of the last 10-plus years, these are events that are very infrequent if you count them on one finger. So that's kind of how we look at it.

Okay. That's helpful. And you were talking before with any capital about some of the procurement delays. I mean we're hearing broadly about just rising costs of construction in recent weeks and it's not surprising in light of steel and tariffs, et cetera. I'm curious what you're hearing from your customers specifically about higher construction costs. Does that drive any sort of value engineering opportunity for you? Does it sort of lengthen the planning period since you said it's sort of like kind of front end of the cycle? Just sort of wondering what the balance of puts and takes are for Jacobs on sort of a higher construction cost landscape?

Yes. So maybe I'll start-off by saying the projects that we're involved with that have a sizable fuel component, these are jobs that are less, if any, discretionary based and more based on business transformation. So if you think about the private sector life sciences, data centers, these are investments that the clients are going forward and making. And then in water, these water jobs are long held on the books and have to deal with clean drinking water, as well as the effects of climate and other impacts of natural disasters have had. So these are jobs that are going forward. As far as the delays that we're seeing on those, that's an opportunity for the client to step back. You appropriately said, Steve, look at some value engineering opportunities. But what this is really opening up is supply chain scenario planning. We have been working with our clients on global supply chain networks. PA has got a really nice platform there with regards to supply chain consulting, and helping our clients look for alternate avenues in the event these tariffs occur. So that has created a bit of some consulting and advisory work for us to be in the middle of this.

Terrific. Thank you very much.

Great. Thanks and good morning. Just, I guess, sounds like there's some headline volatility during the quarter, but net-net, the backlog turned out well. I'm just curious, was that enough of a macro shock for some of your larger government customers that you deal with to start to think about maybe some level of stimulus spending through the back half of this year, like we maybe saw post the COVID shock? Or is it just too early in the timeline or the macro situation for those type of discussions? Thanks.

I may not be able to precisely quantify the size of it, but you are correct. Some of the initial pauses, particularly with our Department of Defense clients, were due to uncertainty. However, we are beginning to see those projects re-emerge in the second half. As I mentioned in past quarters, these projects were not canceled but rather delayed, and those that received approval and funding are now coming back. Regarding state and local business, this has not ceased, both domestically and internationally. The situation seems to primarily affect federal and DoD infrastructure.

Okay. Great. As we reflect on some of the focus areas or end markets discussed during your Investor Day, particularly around semiconductor and health care, I'm curious if you've noticed any conversations about reshoring projects or initial discussions related to manufacturing or other end markets you operate in. Are any of those early discussions taking place? Thanks.

They are. They are. So maybe I'll hone in on two end markets, Life Sciences and our semi focus. These are clients that are looking at global supply chains and have had on their capital road map, projects that are in multiple locations, predominantly the US and Europe. So right now, we're seeing the pull and push on either geography and that's leaning towards the US, which kind of plays right into our sweet spot. Semi is the same way. So some of the high bandwidth manufacturers, as well as even some of the larger players are starting to point those jobs into the US. I would say that it's early, though. It's early days, which actually still benefits Jacobs because we're on the early front-end planning, site selection of these programs. So discussions are in real time. And the great thing about the Jacobs platform is that we're there in any form. And if it goes into one geography over the other, our global delivery model allows us to continue to use that talent across multiple geographies, whichever way it goes, but definitely a lot of scenario planning happening in real time.

Thanks very much.

Good morning, Bert, Bob, Venk. Maybe you could share some further thoughts you called out in your prepared remarks, fast-growing water and fast-growing energy power. Any interesting dynamics around that, especially with energy power tied towards some of your larger SAM customers?

The grid modernization and electrification efforts have been ongoing, particularly in the US due to the growing data center market, and we are also seeing similar trends in Europe connected to energy security issues, as well as in Southeast Asia, Australia, and New Zealand. Although this sector is currently a smaller segment, it is rapidly expanding at strong double-digit rates. We anticipate continued growth in this area, largely driven by data centers. Regarding water, there is a consistent demand globally, with various programs underway in places like the UK and some larger frameworks emerging. We have publicly shared updates on projects in Central Utah and West Basin in Southern California, which have been in development for nearly a decade and are now starting to yield results. This is leading to double-digit pipeline growth in multiple regions and robust year-on-year P&L performance. We expect water to increasingly contribute to our overall portfolio, which currently makes up about 25%. This share is set to grow further.

Thank you, Bob. And my follow-up is maybe share some thoughts on your comments about PA and increasing your investment. What's the genesis of that? And how has that evolved over the last couple of years?

Yes. Maybe I'll start off and then Venk, you can talk about some of the mechanics. So when we went into the PA investment back 4 years ago, we had kind of the private equity-style approach where a partner invested model, as well as ourselves with a liquidity event that would occur after year 4 and before year 5. So this is all public information as well. And so now we're looking at this as a great opportunity to increase our investment in PA and continue to build on what a lot of hard work and equity has gone into the partnership and taking it to the next phase, really great time. PA is coming off some real strong backlog growth of reemergence in the U.K. as well as the Europe business. And together, just what we talked about at Investor Day, that strong consulting and advisory business driving the redefining of the asset life cycle is a great opportunity for us looking forward. So, more to follow on that.

Yes. Mike, I want to expand on what Bob mentioned. Clearly, our partnership is deepening and strengthening in many ways, reflected in our results. We feel optimistic about the outlook for the rest of the year, especially for Q3 and beyond. With that said, we have a solid balance sheet and substantial cash generation ahead. We are committed to returning cash to shareholders and are actively considering an increased stake in PA. We will update you at the appropriate time.

Thanks, gentlemen.

Thank you.

Thanks, Mike.

Hey, good morning guys. I wanted to go back to the prepared remarks when you talked about gross profit and backlog up 15%. I was hoping you could break down the drivers, self-help versus mix, just a relative portion. And when do we see this inflection? Is it more of a 2025 event? Or is this more of an opportunity for 2026?

Yes, Chad, thanks for the question. So I'd say, obviously, we will continue to see good growth in our gross profit and backlog. To the extent that we are showing revenue growth for the full year, we do see a lot of opportunity for us to expand on that growth in the coming quarters and years. From a profitability standpoint, you can tell that the profitability has been steadily up and to the right, and we expect that to continue in Q3 and Q4 as Bob just said. For the full year at the midpoint of our guidance range, we'll be at a 13.9% EBITDA margin. And so a lot of factors associated with it. It's just the quality of our engagement. We talked about at Investor Day, our commercial models, and global delivery models and so forth. So, a multitude of ways for us to increase gross profit over time, and that will translate into EBITDA margin as well as free cash flow in the coming quarters.

Great. And then just in terms of your second half revenue guide, can you walk through the moving parts within the subsegments of IA&F just to get there?

Yes. Why don't I kick it off, Chad, then Venk can follow-up? I'd say that I'd point to five main drivers of the second half revenue growth. And these are, like I spoke about earlier, are coming off of some of these awards that have been public, but some of them we can’t disclose. But starting off with Life Sciences, some large wins. We disclosed the Fuji win and talked about the Merck win. Those are now coming into play along with continued growth within GLP-1. These, again, were jobs that have gone into our backlog over the last few quarters. Water has been uniform, and that is now coming into the second half of the year. AMP 8 has been well discussed, as well as Jackson, Mississippi, and this West Basin win driving those. And so these are just some reference points to highlight the growth. Semiconductor, that high-bandwidth memory work that we're doing in the international work, that's now coming into play. So you can see this theme of energy and power and data centers also adding to that, giving us some real strong wins. And those are more steady growth for us. We have been steadily kind of mid-single digits growing in transportation, not just in the U.S. but also in Southeast Asia, and specifically ANZ and in Europe. So those have all been off the backs of aviation, but some really strong highway and rail work too.

Yes. And just to add to what Bob said, when you look at it across these different end markets that Bob highlighted and the specific wins, we've been talking about some of these bookings wins in the last several quarters. A lot of them are coming to fruition. We started some of them happening in Q2, but you're seeing an acceleration of that in Q3 and Q4, that's what gives us visibility into the 5% to 7% sequential growth in Q3, driven by the specific market opportunities as well as wins that we have demonstrated over the last several quarters.

Great. Thanks, guys.

Thank you.

Hey. Thank you for taking my question. Most of them have been answered, so I'm just going to follow up on details on a couple. One is on margins. I understand you gave us a second half outlook, but I just want to make sure I understand which segment we should expect to inflect more strongly in the third quarter since PA Consulting seems to be growing at that 22% range anyway. Should we expect more of an inflection in Infrastructure and Advanced Facilities?

Yes, you're exactly right, Sangita. I think I&AF is where we see the biggest margin improvement opportunity. It's a combination of not only the mix and GID and other things we talked about in the past, but we are also seeing some good growth in some of these businesses that span the entirety of the life cycle. We certainly also want to point out that we did absorb the full effect of the JV matter in the quarter. Therefore, we feel pretty good about where our margins can be in Q3 and Q4, giving us good visibility to get to the 13.8% to 14% margins.

Got it. Thanks. That was helpful. Regarding the backlog, you mentioned in the last couple of quarters that your backlog has a longer duration, leading to stronger backlog growth compared to revenue growth. Should we expect that to be the case this quarter as well, and is this perhaps a strategic choice on your part to focus on larger, longer-duration projects?

When you say this quarter, Sangita, you're talking about Q2?

F2Q, yes.

Yes, Q2. As far as a strategic decision to go after the larger programs, that's always been a part of our pedigree for several years. So we're working with our clients and our clients' capital portfolio. There are larger jobs at times in their capital portfolio. There are smaller jobs. If you look at the 25,000-plus engagements, projects, programs that we have with our clients around the world, there will be a spread to the size of the jobs. I think the key point is that we're not chasing jobs. We're in the middle of our clients' capital budgets, and those have a spread and a profile to them.

And Sangita, if I can add to it. I would say it's more of a portfolio approach, right? Depending on the end market, depending on how complete the asset life cycle is covered by a particular project, we kind of pick and choose. Having said that, we certainly want to have a nice balance between things that are faster burning such that it has an immediate impact and things that are longer term in nature because that has a lot of visibility as well. It's kind of a balanced approach. And on top of it, clearly, from a margin expansion standpoint, we certainly want to drive value for the value that we provide to clients.

Great. Appreciate the answers. Thank you.

Yes.

Hi, good morning. I have two quick follow-up questions. First, regarding PA Consulting, it seems to be progressing sooner than expected. Bob, how are you evaluating the size of PA Consulting as we look toward 2026? What is your interest in pursuing broader M&A alongside PA Consulting? Secondly, Venk, concerning the guidance, given our position and the earnings from the first half of the year, it appears that reaching the high end or anything above the midpoint may be more difficult. Is that your perspective? Should we view the low to mid-end of the guidance as more realistic for EPS?

Sure. So regarding the PA timing, it's right on schedule, as intended. We wanted to ensure that the partnership's collaboration on various opportunities has truly materialized. A lot of hard work from both parties has contributed to this progress, and we will share more updates soon. At this moment, there’s nothing further to report. We strongly believe, in conjunction with PA, that our portfolio is in good shape. Our focus remains on our clients, our operations, and our commitment to returning capital to shareholders. This is the course we are currently pursuing.

Yes. And Jamie, if I take the second part of your question was just on the guidance. So clearly, we've given guidance for Q3, which is based on everything that you heard Bob and I talk about in terms of our end market exposure and so forth. We feel comfortable with the 5% to 7% growth rate. The more important part is on the margin expansion front. So we feel really good about the 13.8% to 14% margin. So when you take all of that into account from the standpoint of our EPS, we feel pretty good about getting there, just driven by not only the revenue growth but also the margin expansion and EPS. We are cognizant of what's happening in the macro. So we continue to watch it, and we will take appropriate actions. But suffice it to say that where we stand right now with the business key metrics that we're watching, we feel comfortable with the 5% to 7% sequential growth rate.

Thank you.

Yes. Hi. Good morning everyone.

Hi. Good morning, Jerry.

Hi. As we look at the performance geographically, you folks had outstanding growth in the Middle East and India, nearly half of your dollar growth in the quarter. Can you just talk about how much runway you have to grow in those regions? And separately, U.S. has been roughly flattish just given the projects that you folks spoke about. Can you just put a finer point on whether you expect your top line growth to accelerate in the U.S. as you laid out the framework over the balance of the year?

Sure. Let me address the first part regarding India and the Middle East. Our growth potential in the Middle East and India is not limited by resources. With our global delivery model, when we operate in the Middle East on larger programs, we often have significant representation from various nations on-site, which reflects our commitment to an inclusive culture at Jacobs. The involvement of diverse talent from around the globe in the Middle East continues to support our growth. Conversely, in India, our local talent is increasingly capable of contributing to not only the technology manufacturing sector in India but also supporting global initiatives. Both regions are strong areas for growth, significantly influencing our overall development. As for the US, while you may be viewing it from a gross number perspective, our net service revenue is currently growing across our different sectors. We can discuss this in more detail later, but the growth in the US remains a vital aspect of our business.

Super. And then just to put a finer point on the project selection part of the conversation, the write-down in water and environmental. Can you just talk about, for you folks, obviously unusual relative to history, are there any other projects that are of similar vintage or similar risk within the portfolio or any projects where you're monitoring risk factors given the write-down?

Yes. Jerry, our project risk doctrine, with strong governance over that, remains strong across the entire portfolio. Hence, these are not events that happen, not even routine but even in a decade. I think that this project selection, we've been involved with this job well, I said since 2016, the early conceptualization of these programs are even beyond that. It's something that we've worked with the client for a long time, and it's one that has had a tremendous impact on the community. So selection, I'm not questioning that at all, as well as the tools and the risk mitigation that we utilize across our portfolio remain very strong. These are situations that happen. And again, we're appropriately reserved and feel strongly about the entirety of the portfolio.

Everyone, thank you for joining our earnings call. We look forward to engaging with many of you over the coming days and weeks and look forward to a strong second half. Thank you, everyone.