Jacobs Solutions Inc (J) — Q3 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 for information about our forward-looking statements, non-GAAP financial measures, and operating measures. 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 third 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.

Thanks, Bert. Good day, everyone, and thank you for joining us to discuss our third quarter 2025 business performance. We delivered very strong results for Q3, meeting or exceeding our expectations across all key metrics. First, adjusted EPS grew 25% to $1.62, supported by 7% net revenue growth and meaningful year-over-year margin expansion. Second, PA Consulting capitalized on strong demand, delivering double-digit revenue and operating profit growth. And third, backlog grew 14% to nearly $23 billion, setting a new record. Overall, we are very pleased with our third quarter results, which enabled us to raise our FY '25 adjusted EPS guidance for the second time this year. We continue to monitor macro conditions, and right now, we feel good about our operating environment. We are seeing secular growth drivers in Life Sciences, Semiconductor, Data Center, Energy & Power, and Water sectors that have resulted in continued upward trends in spending across our business. We continue to manage well through an uncertain economic backdrop and expect to build on our strong Q3 performance in Q4. Turning to Slide 4 and focusing on our results. Adjusted net revenue growth of 7% in Q3, combined with strong year-over-year margin expansion helped drive a more than 13% increase in adjusted EBITDA to $314 million. Excluding the mark-to-market impact from our investment in momentum stock, which we now have fully exited and other items, Q3 adjusted EPS was $1.62, a robust 25% increase compared to the previous year. The small difference between this and our GAAP EPS of $1.56 underscores what we view as improving earnings quality. Turning to bookings. Our trailing 12-month book-to-bill was 1.2x, with gross revenue in backlog of 14% year-over-year in Q3. Gross profit in backlog was also up 14% year-over-year, reflecting another strong quarter of sales. Our backlog growth and bookings momentum remained positive, positioning us well in the fourth quarter and into fiscal 2026. Turning to Slide 5. I'd like to highlight a few notable Infrastructure & Advanced Facilities project awards from Q3. These wins highlight the power of our strategy to redefine the asset life cycle as we prioritize expanding our addressable markets with core clients. We continue to see strong global demand in Water & Environmental, particularly in the Water sector, which remains one of the most resilient and high-growth areas of our portfolio. Our full life cycle delivery model and deep domain expertise are helping our clients address aging infrastructure, water scarcity, and regulatory challenges worldwide. This quarter in the Water sector, we secured additional scope for the Little Miami Wastewater Treatment Facility with the Metropolitan Sewer District of Greater Cincinnati. This critical modernization effort will support region-wide biosolids reuse for 3 wastewater treatment plants, providing a renewable energy source to operate a 70-year-old facility. Construction for the program is expected to be completed in late 2028. We continue to deliver solid growth in Life Sciences and Advanced Manufacturing end market with Data Centers becoming the fastest-growing submarket. At Jacobs, we have leveraged Digital Twin technologies for more than a decade to transform how critical infrastructure is designed, built, and operated, most notably in the water and transportation markets. Today, we're applying that expertise to AI data centers, expanding beyond traditional design into intelligent integrated solutions. In a new partnership with NVIDIA, we're advancing the Omniverse Blueprint to create Digital Twins of AI factories, enabling high fidelity simulations that optimize power, cooling, and network systems. Accordingly, we see the potential for this Digital Twin to serve as the reference framework for NVIDIA customers globally. In addition to our key win with NVIDIA, we're also engaged by a confidential client during Q3 to provide engineering, procurement, and construction management services for the transformation of a legacy manufacturing facility in the Southeastern United States into a cutting-edge, high-performance data center. We captured meaningful scope on this program by leveraging our cross-sector capabilities, and we are seeing more and more opportunities like this in the market. We are also seeing solid demand across the critical infrastructure end market with all verticals performing well in Q3. Clients are prioritizing modernization, resilience, and smart technologies as they advance the next generation of transportation systems, airports, buildings, and energy infrastructure. We're helping them achieve these goals through integrated solutions that prioritize efficient capital investment. In Q3, we secured a landmark digital transformation engagement with our long-term client, Dallas Fort Worth International Airport in partnership with PA Consulting. Leveraging our expertise in both artificial intelligence and airport infrastructure, we are helping DFW accelerate innovation and enhance operational efficiency. Our #1 E&R ranking in airport design paired with our leading digital portfolio positions us well for global demand as air travel increases and airport investment needs rise. Additionally, our Energy & Power team secured one of the company's largest wins in Australia year-to-date as the integrated delivery partner for the Marinus Link project. This 345-kilometer electricity and data interconnector between Tasmania and Victoria will provide 1,500 megawatts of capacity, enough to power 1.5 million homes playing a critical role in strengthening the reliability of Australia's East Coast electricity grid. This win highlights how we leverage global expertise in capital project execution and utility infrastructure to help clients meet their energy and sustainability goals. In summary, these awards reflect our focus on execution in high-growth markets and our ability to deliver leading digitally enabled solutions to our clients. Now I'll turn the call over to Venk to review our financial results in further detail.

Thank you, Bob, and good day, everyone. Let me begin by summarizing a few of the financial highlights on Slide #6, followed by additional context on our quarterly performance. In the third quarter, gross revenue increased 5% year-over-year and adjusted net revenue, which excludes pass-through revenue, grew by 7%. Q3 adjusted EBITDA was $314 million, growing more than 13% year-over-year. Our adjusted EBITDA margin during Q3 came in strong at 14.1%, which is an increase of 80 basis points versus the same quarter last year. As a result, adjusted EPS closed at $1.62, a 25% increase year-over-year. Our disciplined cost management contributed to a new record for margins, and we're well positioned to build on this momentum in Q4 and in fiscal year '26. Also, as Bob touched on, consolidated backlog was up 14% year-over-year to a record $22.7 billion, including our trailing 12-month book-to-bill at 1.2x. Gross profit in backlog also increased 14% year-over-year during Q3, a strong indicator of our positioning as we head into next year. Regarding our performance by end market in Infrastructure & Advanced facilities, let's now turn to Slide #7. Demand for services in the Water & Environmental end market remains favorable across all major geographies with very strong top line performance in the Water sector during Q3. Total adjusted net revenue growth for Water & Environmental rose more than 5% in Q3, and we expect growth to remain in a similar range in Q4, aided by continued demand strength in Water. In our Life Sciences & Advanced Manufacturing end market, adjusted net revenue also grew approximately 5% in Q3. We've seen notable growth in the Data Center submarket that has complemented continued strong performance in the Life Sciences sector. As we move into Q4, we expect growth to increase relative to our Q3 results. In Critical Infrastructure, adjusted net revenue increased over 6% year-on-year. Within this end market, Energy & Power remains our fastest-growing sector, but improvement in Transportation sector growth, particularly in Europe, helped drive better year-on-year performance versus Q2. Encouragingly, growth in the cities and places vertical is also moving in the right direction on the back of Middle East strength. Looking ahead, we expect Critical Infrastructure growth to moderate slightly in Q4 but remain healthy. Now moving on to Slide #8, I will provide a brief overview of our segment financials. In Q3, Infrastructure & Advanced Facilities operating profit increased over 13% year-on-year with a modest tailwind from FX. PA Consulting built on strong second quarter improvement and delivered a notable uptick in revenue growth to 15% during the third quarter. This resulted in operating profit increasing 15% year-over-year in total and 9% in constant currency on a 22% operating margin. PA Consulting's momentum in the U.S. and across the private sector was augmented by improving public sector spending in the U.K. We continue to see favorable trends in PA's backlog and pipeline, which have both increased double digits year-on-year. We believe growth in these metrics is a positive leading indicator of future results. Now moving on to Slide #9. We provide an overview of cash generation and our balance sheet. Overall, our balance sheet remains in excellent shape exiting Q3, inclusive of record capital returns through the first 3 quarters of fiscal year '25. Focusing on the quarter, Q3 free cash flow was $271 million, which was in line with our expectation for free cash generation to inflect in the second half of the year as earnings increased and working capital improved. During the quarter, we repurchased $101 million in shares, bringing our fiscal year-to-date repurchases to a record $653 million. Additionally, early in Q3, we received $70 million in favorable working capital adjustments from the CMS transaction and finalized ownership previously further reduced our quarterly cash dividend. We also distributed the Amentum shares released from escrow to our shareholders on a pro rata basis. This represented approximately $159 million in incremental capital returns to shareholders based on the Amentum share price when declared. Our balance sheet strength supports continued investment in the business, along with continued 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 material increase in share repurchase activity this year. We continue to view our shares as an attractive investment and have remained consistent buyers as a result. In total, we returned $927 million to shareholders through repurchases and dividends over the past 3 quarters alone. Summing this all up, we ended the quarter at the low end of our 1.0x to 1.5x net leverage target, and we're on track to return well more than 100% of adjusted free cash flow in fiscal year '25. This puts us in a strong financial position as we close out the year. Finally, please turn to Slide #10. As we enter Q4, we are updating our outlook for fiscal year '25. We now expect adjusted net revenue to grow approximately 5.5% year-over-year, adjusted EBITDA margin to be approximately 13.9%, and an adjusted EPS range of $6 to $6.10, and we continue to expect reported free cash flow conversion to be more than 100%. As it relates to the fourth quarter, the midpoint of our guidance implies sequential improvement in net revenue, adjusted EBITDA margin, and adjusted EPS. In summary, strong Q3 performance, combined with our forecast for Q4, support our decision to raise the midpoint of our full year adjusted earnings outlook. Now looking ahead to fiscal year '26, we feel good about our positioning. Since we're still in the planning phase, we'll provide a more detailed update on our expectations for fiscal year '26 next quarter. What we can share now is that we expect revenue growth to be ahead of fiscal year '25 with continued margin improvement as our gross margin initiatives begin to phase in. Altogether, this should result in solid adjusted EPS growth next year. In summary, we expect to finish the fiscal year on a strong note and plan to build on this performance in fiscal year '26. With that, I'll turn the call back over to Bob.

Thank you, Venk. With FY '25 nearly complete, we are preparing for continued success in FY '26, aided by our record backlog and strong pipeline. We've navigated our first few quarters following the CMS and Divergent Solutions separations very well and are just beginning to unlock the full potential of our business. As global secular trends take hold in our strategy to redefine the asset life cycle gains momentum, we see significant opportunity ahead. Operator, we will now turn the call over for questions.

So the first one, I would say on the Data Center submarket growth that you guys talked about. Can you maybe expand on that? Are you seeing bigger scopes being designed to Jacobs? And what type of work does it involve? Is it related to Power Engineering or Water or just Data Center design?

Yes, Sangita, thank you for your question. It's a combination of several factors. Currently, if you examine the three distinct areas of Data Centers—hyperscalers, colos, and the trend toward vertical integration among various sectors—we're observing significant opportunities arising from this. The number of inquiries and engagements we've received has increased markedly and is currently at its highest this quarter. Additionally, the scope of our work has expanded. Previously, we mainly focused on the design of both the gray and white spaces within data centers. Now, our scope has broadened to include Power and Water requirements, which are substantial for AI Data Centers. In terms of our delivery model, we have traditionally operated as engineers; however, as I mentioned earlier, we are now extending our services to include full program and project delivery. I would also like to highlight that our partnership with NVIDIA is particularly transformative, as it will serve as the reference design and established plan that NVIDIA will provide to its customers using their chips. We've already started receiving inquiries from those customers directed towards Jacobs, which is exciting for us.

Great. That's helpful. And then maybe on the backlog growth in the quarter, can you talk about the makeup of that backlog and the pace of burn you expect on it? Is it more faster book and burn work or longer duration projects, just as we start thinking about FY '26 top line?

Certainly, I'll begin and then Venk may want to elaborate. The backlog is increasing significantly in the Advanced Facilities and Water sectors, likely at a quicker pace compared to others. These two sectors typically feature larger and longer duration projects. When I say longer duration, I mean these are fast-moving projects that still extend over several quarters. We have been incorporating these projects into our backlog. The other sectors do have a good backlog, but they usually involve burn profiles that span around four to six years, especially in transportation and certain consultancy work in Defense & Security and Public Administration. Venk, would you like to add anything?

Yes. No, you had it, Bob. I'd say, in addition to what Bob said, pretty good balance of new wins across a multitude of end markets. From a burn profile, Sangita, to answer your question specifically on burn, as you know, the Life Sciences & Advanced Manufacturing tends to have a faster burn, and we're seeing some good improvement in that business as well. As a matter of fact, for our upcoming Q4, we have guided for that business to grow pretty strongly. And so we're seeing that momentum continue into fiscal year '26 as well. But I would say it's a pretty broad-based mix across the various end markets, with Water and Critical Infrastructure being a slightly slower burn, but gives us a lot of visibility well beyond fiscal '26. And then if I could add one more thing to what Bob said on the Data Center point, we have more than 150 engagements today on Data Center, and that pipeline is growing quite nicely for us.

Great. I wanted to ask, Bob, about the puts and takes associated with the One Big Beautiful Bill here. Obviously, there's a lot of new policy that we've got some certainty on from the federal government here. Certainly, you'll talk about the increase of the Department of Defense. But there's also some impact or some secondary impacts to the state and local governments, whereby you're seeing cuts to Medicaid and maybe some education programs in there. So I was hoping, since you didn't comment in the script on how this could affect the business, I thought I'd give you a forum right here to talk about the puts and takes surrounding that. And if you're seeing anything back in terms of commentary from your customers at this point?

Yes. Let me first discuss the stability factors. You mentioned that it's providing more stability for state and local governments, particularly in Transportation and a bit more security around Water. However, I would highlight that the two biggest factors are related to the Department of Defense and DoD Infrastructure, influenced by the OBBBA bill and the current defense spending in Europe as a percentage of GDP. The second important factor is the FAA, which is currently in a development stage but is expected to progress quickly, with the bill providing some support for it as well. Additionally, I would like to mention the reshoring activity. With 40% of our business from the private sector, we are already witnessing this trend even before the bill's implementation, which adds further support. Overall, we view this as a net positive. On the downside, I am uncertain about how state and local governments will manage the changes brought about by the reduction in Medicaid. Currently, our clients are not expressing concerns about this. I believe the ongoing trends and demands will continue to take precedence.

Got it. And then maybe for my follow-up, Venk, this one is for you. I just thought maybe given that you've progressed now with the separation and some of the changes that go along with that for the organization, I just want to give you an opportunity to update us on where you are seeing the onetime costs associated with the split? I think you talked about as you get kind of later into this year that you'll be progressing past those. But can you give us for '25, the updated budget or reiterate the budget for what those costs are going to be for this year and how you're thinking about '26 in terms of onetime costs, if at all?

Yes, Andy, thanks for the question. So as you rightly pointed out, with the separation mostly behind us, we are seeing a pretty significant reduction in our onetime restructuring costs. We've guided to, I think, $75 million to $95 million. We're well on track with that. And just for reference, that was almost 3x that number in the prior fiscal year, so a dramatic decrease in onetime restructuring costs. And this particular quarter, as you've seen, this is probably one of the cleanest quarters we've had in terms of the difference between the GAAP and the non-GAAP. And looking ahead to fiscal '26, we expect this restructuring to come down even more dramatically. And we'll obviously provide you more detailed guidance in our next quarter earnings call as we talk about fiscal '26 in totality.

Bob or Venk, I think you said that you expect FY '26 growth to be ahead of FY '25 growth. I think it's a pretty big statement as we sit here in August. So maybe just the confidence around that. Is it coming from this Advanced Facilities area in particular? Just more color around where it's coming from.

Sure. I'll begin by discussing the end market perspective, and then Venk can share how these opportunities are reflected in our current backlog. From an end market viewpoint, I would highlight three main areas. The first is Life Sciences, the second is Data Centers, which involve smaller bookings that are executed quickly. As I mentioned in response to Sangita's question, our scope is expanding within these opportunities. The third area is Water. This has been a topic we've discussed for four consecutive quarters regarding our backlog growth. This reflects our confidence heading into fiscal year 2026 as project cycles are now entering a significant phase. Venk, would you like to add anything?

No, I think you covered it, Bob. Life Sciences, not only are we seeing some good momentum in the coming quarter, but we see a good strong pipeline. Water, as Bob mentioned, the last 3 or 4 quarters, we've talked about really multifaceted wins across not only various aspects of the water cycle, but also in terms of the multitude of years that we have visibility. And we're seeing a lot of those projects coming into fruition in Q4 and in fiscal '26 and beyond.

Very helpful. And then, Rob or Venk, you mentioned improvement in Critical Infrastructure in Europe and I think cities and places in the Middle East, which I think have been kind of watch items for you guys over the last couple of quarters. So maybe you can talk about what you're seeing there, whether it's Continental Europe or the U.K. and the Middle East and how you think about those areas going into '26?

Sure, absolutely. In Critical Infrastructure, what we're seeing in Europe is a bit of a rebound, which we had anticipated. It may have occurred a couple of quarters later than we expected. However, as the U.K. budget has stabilized, we have noticed this reflected in PA performance as well. The transportation component, including national highways and high-speed rail, has seen budgets firming up, and we are benefiting from this. The transportation spending is notably strong in the U.K., and we are also experiencing positive trends in Ireland and the Nordics. In the Middle East, our key areas, such as cities and major programs, are showing strong double-digit growth. We expect to make some announcements in the coming weeks, and this growth is particularly notable as we approach significant time-based events like the Expo and the World Cup, along with other major happenings in the region. Overall, we are experiencing nice growth in both of these areas.

Great. I just wanted to get a bit more perspective on sort of some of the evolution that we've seen over the recent quarters. As you look ahead, it sounds like a positive outlook to 2026. In that commentary that you provided, is there a view that some of this IIJA funding also accelerates in there? It sounds like it all needs to be more or less allocated by next year. But just wondering how the flow of funds from that bill has been contributing? And do you expect sort of an uptick? Or how do you expect that to evolve over the next sort of 12 to 24 months?

Yes, Sabahat, I'd characterize my answer as balanced, right? I think that if you look at our portfolio, the dependence on a strong stream of funds coming through IIJA, especially in the fact that it's been longer than what was originally anticipated. The balance in our portfolio has allowed us to weather the ebbs and flows of IIJA spend. Now we don't believe that it's all going to get allocated in the next year because it was 2 years late. So, we think that we're only a little over 1/3 spent through that bill. So, there are discussions about what's the follow-on. So we see that continuing to flow while the diversity in our portfolio allows us to continue to grow, and that's the profile of the backlog that we've seen. So kind of that first half, second half of our growth projections in '25 is representative of that. And then the second half kind of flowing into next year with what is in backlog. So this isn't speculative on what's coming, but rather what's in backlog is where we're getting that confidence.

Great. And then maybe if we could dig a little bit into the PA Consulting side. The top line is trending well. I think the operating profit, at least on a run rate basis, is trending quite a bit above where sort of the last 3 years have been. So maybe if you can just talk about the sustainability of the progress in this business. A bit more color on sort of the underlying drivers here? And how is that expected to trend into 2026?

Yes. So on PA, yes, the top line, we talked about it last quarter, it's inflected to a robust number this quarter and visibility for that to continue, really driven by stability in the U.K. government and an inflection point in what we're seeing as a transformational spend in Defense & Security and the public sector in the U.K. as well as the U.K. MoD or Ministry of Defense leadership position that they're taking in Continental Europe. The origins of PA actually come from the U.K. government post World War II. That's the genesis of PA and being kind of the strategic consultant as well as the delivery of programs within the U.K. government. So if you look at that growth, it is backed by a 16% backlog growth this quarter as well, and the profile of that is really coming from that public sector backed by what we're seeing in Life Sciences and Energy & Utilities in not just Europe; those last 2 also are driving double-digit growth in the U.S., too. So overall, we see kind of a nice trajectory for PA.

Bob, how would you assess the benefits of your focus, as you talked about in February on the total life cycle on projects and opportunities impacting your accelerated backlog, your bookings? We saw solid bookings growth and your potential enhanced operating margins? And amongst those several markets that you've called out may be impacted by the life cycle focus, which ones might be your best, let's say, next shot to focus on growth in business?

So the short answer, Mike, would be that life cycle focus, especially getting involved early on with PA in the business advisory and capital planning component of that cycle with our customers is in real-time, and it's working. These Life Sciences, Water, Data Center jobs that we were talking about, we were involved with our clients at that early business planning, business advisory stage. And it's equating and actualizing into our clients going with us for the entire life cycle. So I'd say, to answer the second part of your question, it is having a strong effect, and I think we're only in the first year of our strategy. We're going to see that continue to evolve over the next few years into Energy & Power, Transportation, and other sectors of our business as well.

Yes. Mike, thanks for the question. So as you rightly pointed out, good improvement in margins. And as we guided to for the full year, on track to deliver a 13.9% EBITDA margin for the full year, which, by the way, represents a 110 basis point year-on-year increase. And as we stated not only at Investor Day, but in subsequent earnings calls, the vast majority of those margin enhancements have come through what we call self-help and making sure that we are disciplined in our cost initiatives and so forth. Where we see substantial further progress in our margins is on the gross margin front through 3 facets that we talked about in terms of mix, commercial models, and use of our global delivery and so forth. Made really good progress on global delivery and mix. And I think we're still in the early stages of realizing substantial improvements in gross margins across those other vectors that I mentioned. And that's what gives us confidence that our margin profile should improve in a meaningful way in the coming years, and we'll quantify the exact impact of that margin improvement in fiscal '26 coming up.

This is someone filling in for Chad. Have you noticed any changes in customer activity in the design business related to the update in bonus depreciation, especially for the Advanced Manufacturing segment?

Yes, I'll take that. So, in terms of bonus depreciation, obviously, that's one of the benefits of the OBBBA deal. And we will see some tangible improvement in that in fiscal '26. I think it's too early to quantify it. We are going through that analysis. And when it comes into effect, we think it will have a big positive impact, both in terms of cash taxes as well as in terms of bonus depreciation. So we'll quantify that for our fiscal '26 guide. But as it stands now, no impact in the current quarter.

Just a follow-up on the PA Consulting question. The revenue growth was impressive in the quarter. Does the backlog growth you've seen over the past few quarters, in addition to the pipeline growth, support continued double-digit growth? And then on the margins, the margins have been pretty steady even as growth has accelerated. Are there investments you're making or kind of costs you're incurring that's holding back the margins? And I guess, where is the utilization rate maybe year-over-year relative to Q2?

So maybe I'll break those down into 3, the top line, margins, and utilization; utilization actually driving margins. Yes, on the top line, I'd say we continue to guide to that high single digits. Keep in mind the double-digit growth; there were some tailwinds with regards to FX on that. But we're feeling confident about the performance from an organic standpoint in constant currency. So that's strong. On the margins and the utilization, they're tied together. Utilization has come back, which is strong. We're getting to the point where we are now hiring in specific areas, specifically in Defense & Security, Public Sector, Life Sciences, and Energy & Utilities. And so we do have an opportunity for increased margin. That's going to take some time. We have the highest margins in the sector from the peer comp standpoint within the consulting world. And so greater efficiencies on some of the things that Venk talked about with regards to internal efficiencies driven by AI enablement as well as some of the combined offers. The previous question from Mike Dudas around the asset life cycle. When we're going to market together, and we've seen this, and we highlighted a couple in the earnings presentation, these are solutions and outcome-based type of commercial models that we're driving with our customers. The size of those transactions are small. But over time, when we have continued successes, we're going to see that grow.

Yes. Thank you. We're excited about going forward, and we really look forward to next quarter as well as FY '26, really, really good momentum in the business, and we've demonstrated that over the course of this quarter. Thank you, everyone, for joining our earnings call, and we look forward to engaging with many of you over the coming days and coming weeks. Have a great rest of your day.