Jacobs Solutions - Q1 2026

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome you to the Jacobs Solutions Fiscal First Quarter 2026 Earnings Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question at that time, simply press star, followed by the number one on your telephone keypad. And if you'd like to withdraw that question again, press star one. Thank you. I would now like to turn the call over to Bert Subin, Vice President, Investor Relations. Bert, you may begin.

Bert Subin (SVP of Investor Relations)

Thank you, Krista, and welcome everyone. Following market close, we issued our earnings announcement, filed our Form 10-Q, 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 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 first 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 flow, 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.

Bob Pragada (Chair and CEO)

Good afternoon, everyone, and thank you for joining us to discuss our first quarter 2026 business performance. We delivered very strong results for Q1, exceeding our expectations across all key metrics and made incremental progress toward achieving our FY 2029 targets. I'll quickly highlight a few key takeaways. First, adjusted EPS grew 15% to $1.53, supported by robust 8% net revenue growth and solid underlying margin performance. Second, our backlog grew 21% to over $26 billion, setting a new record, with our trailing 12-month book-to-bill rising to 1.4x. And third, we announced an agreement with the shareholders of PA Consulting to acquire the remaining stake in the company. We see PA's core competencies in digital consulting, innovation, and AI advisory as a force multiplier for Jacobs and a key accelerant in our strategy to redefine the asset life cycle.

In summary, we are exiting Q1 with momentum, and this strong start to the year gives us confidence to increase our FY 2026 outlook for net revenue, adjusted EPS, and free cash flow margin, which Venk will go through in detail shortly. Turning to Slide 4, we provide a detailed overview of our quarterly results. We are very pleased with Q1 results as a strong operating performance, paired with our lower share count, drove the fourth straight quarter of double-digit growth in adjusted EPS. During Q1, we also reported a substantial increase in our quarterly book-to-bill to 2.0x, positioning us well for the rest of FY 2026 and beyond. Turning to Slide 5, I'd like to highlight a few notable I&AF project awards for the first quarter.

Q1 included several marquee wins that reflect the breadth of our capabilities and the strength of our demand across our end markets. Starting with water and environmental, we were selected to lead the engineering design for the Bolivar Roads Gate System along the Texas Gulf Coast. Spanning the narrow strait connecting the Gulf to Galveston Bay, this project is expected to be among the largest storm surge barriers in the world. Once completed, it will help protect more than 6 million people while safeguarding businesses and maintaining operations along the Houston Ship Channel, a critical energy corridor. This major program underscores our leadership in delivering complex and high-impact water infrastructure focused on long-term resilience. In life sciences and advanced manufacturing, we were selected to provide engineering, procurement, and program management services for Hut 8's River Bend Data Center in Louisiana, a flagship AI high-performance computing project.

The facility is poised to be one of the largest of its kind in North America. The region's power-dense utility infrastructure enables the speed, reliability, and flexibility required for next-generation AI workloads. This project demonstrates how we're leveraging our deep domain expertise in data centers, power, water, and digital twin technology to deliver increasingly complex facilities. In critical infrastructure, we continue to secure high-value, mission-critical programs that underscore the strength of our combined Jacobs and PA Consulting capabilities. Notably, in the U.K., the UK Health Security Agency selected PA, supported by Jacobs, to act as delivery partner in its Trust Program, an initiative focused on strengthening resilience and safeguarding critical health data and infrastructure. Through advisory, technical, and delivery support, we'll help the agency meet data security and cyber requirements, ensuring the systems that underpin public health and emergency response remain resilient and secure.

This award reflects the growing demand for our integrated consulting and delivery approach and reinforces our role in supporting some of the U.K. government's most critical priorities. Also, within critical infrastructure, we were selected to lead program and construction management services for the $1.6 billion modernization of Cleveland Hopkins International Airport. The program will modernize aging infrastructure and improve accessibility and passenger flow at Ohio's busiest airport. Jacobs is ranked as Engineering News-Record's number one firm in aviation, a sector where we continue to see significant growth in demand for terminal upgrades, master planning for new builds, digital implementation, and AI advisory. In summary, we are deepening our relationship with key clients, which is driving multifaceted, multi-year program wins, as demonstrated by our significant backlog growth in the quarter. Now I'll turn the call over to Venk to review our financial results in further detail.

Venkatesh Nathamuni (CFO)

Thank you, Bob, and good afternoon, everyone. I'd like to echo Bob's earlier comments on our announcement to acquire the remaining stake in PA Consulting. Our partnership over the last five years has truly differentiated our approach to our clients' business, and we look forward to accelerating the integration of our combined offering. A year ago, at our Investor Day, we talked about the power of focus, and increasing our ownership in PA Consulting to 100% will support our goal to simplify our structure, execute on our strategy, and produce predictable, high-quality earnings over the long term. Now, please turn to slide number 6, where I'll walk through our results for Q1. In the first quarter, gross revenue increased 12% year-over-year, and adjusted net revenue, which excludes pass-through revenue, grew by more than 8%.

Q1 adjusted EBITDA was $303 million, growing more than 7%, with our margin coming in about 13.4%. Recall that last year, during Q1, we absorbed less PTO than anticipated, resulting in a margin tailwind that did not recur this year. Overall, adjusted EPS rose 15% year-over-year, a great start to fiscal year 2026. Consolidated backlog was up 21% year-over-year to a record $26.3 billion, with our trailing 12-month book-to-bill rising to 1.4x. Book-to-bill was particularly strong in Q1, driven in part by several large awards in the life sciences and advanced manufacturing end market. We expect these awards to contribute positively to net revenue growth through fiscal year 2026 and beyond, but do note that they carry higher than normal pass-through revenue.

Importantly, gross profit in backlog, which would not be impacted by this pass-through dynamic, increased 15% year-over-year during Q1, highlighting the underlying strength of our sales performance. Regarding our performance by end market and infrastructure and advanced facilities, let's now turn to slide number 7. At a high level, all of our end markets performed well during the quarter, with strong revenue growth in life sciences and advanced manufacturing and critical infrastructure within I&AF, as well as PA Consulting. As a result, we finished above the high end of our Q1 forecast for enterprise net revenue growth. Focusing in on life sciences and advanced manufacturing, net revenue grew 10% in Q1, a nice improvement from Q4 as programs in our advanced manufacturing vertical ramp up.

As we have noted in past quarters, strong award activity in both the data center and semiconductor sectors is now helping drive higher growth. Additionally, we continue to see favorable trends in life sciences, and this combination positions us well for the remainder of the year. Our current expectation is that growth in this end market will lead I&AF in fiscal year 2026 as programs ramp up during the second half of the year. Shifting now to critical infrastructure, net revenue increased 8% over Q1 2025. Critical infrastructure is performing well across the board, with robust growth in transportation, particularly in rail and aviation, driving strong overall growth for the end market. Net revenue growth in our water and environmental end market increased sequentially to 4%, driven by high single-digit growth in water and a modest easing of headwinds in environmental.

We forecast year-on-year performance for environmental will improve as we move into the second half of the fiscal year. In summary, we performed well across our end markets during Q1, and we believe we are positioned nicely for the remainder of fiscal year 2026 and beyond. Now, moving on to slide number 8, I'll provide a brief overview of our segment financials. In Q1, I&AF operating profit increased modestly year-on-year with similar constant currency performance. PA Consulting operating profit increased 27% on 16% revenue growth and a strong operating margin of 24%. On a constant currency basis, operating profit grew 22%. PA continues to benefit from rising demand for digital consulting and advisory services in the public, national security, and energy sectors.

As we look ahead, we expect PA's revenue growth to remain solid, with fiscal year 2026 tracking in the high single-digit range year-on-year. Moving on to Slide 9, we provide an overview of cash generation and our balance sheet. For Q1, free cash flow came in at $365 million, supported by solid working capital performance, as well as a favorable cash timing item at the end of the quarter that will reverse in Q2. Excluding this timing item, underlying free cash flow performance was still very strong and gives us confidence to raise our full year free cash flow outlook, which I'll discuss shortly. Focusing in on capital returns, we increased our share repurchase quantum during Q1 to take advantage of the dislocation in our shares in the second half of the quarter.

As a result, we're starting the year well on our way to returning at least 60% of our free cash flow to shareholders. Additionally, we announced last week that we will be raising our quarterly dividend from $0.32 to $0.36 a share, a 12.5% increase. We have now more than doubled our quarterly dividend per share since 2019. Additionally, our net leverage ratio currently stands just below 0.8x on LTM adjusted EBITDA, which is well below our 1.0x-1.5x target range. Our balance sheet strength has enabled us to increase share repurchases, raise our quarterly dividend, and enter into an agreement to purchase the remaining stake in PA Consulting.

The acquisition of the remaining stake in PA will raise our net leverage to slightly above the high end of our 1.0x-1.5x target range upon closing, but we expect to return to the target range within a year. Finally, please turn to slide number 10 for our updated fiscal year 2026 outlook. We're increasing our forecast for adjusted net revenue growth, adjusted EPS growth, and free cash flow margin relative to our guidance from last quarter. We're increasing our fiscal year 2026 net revenue range to 6.5%-10% year-over-year, adjusted EPS range to $6.95-$7.30, and free cash flow margin range to 7%-8.5%.

Our expectation remains unchanged for an adjusted EBITDA margin range of 14.4%-14.7%. Notably, our outlook for fiscal year 2026 implies over 16% year-on-year growth in adjusted EPS at the midpoint. We provide relevant assumptions on the right side of the page to help with your modeling. Please note that our guidance does not reflect the announced acquisition of the remaining stake in PA Consulting, and we plan to update our outlook once the deal closes, likely with our Q2 results in May. Based on current assumptions, we expect the acquisition to be accretive to adjusted EPS in the first 12 months following closing. We anticipate the $16 million-$20 million in projected cost synergies will begin to phase in during fiscal year 2026, with revenue synergies providing incremental upside.

As it pertains to Q2, we expect our adjusted EBITDA margin to be in the range of 13.8%-14%, with year-over-year net revenue growth of approximately 6.5%. In summary, we're off to a great start in fiscal year 2026 and remain focused on strong execution, profitable growth, and continued capital returns. With that, I'll turn the call back over to Bob.

Bob Pragada (Chair and CEO)

Thank you, Venk. In closing, we're tracking very well to the start of the new fiscal year. We performed ahead of our expectations in Q1, enabling us to increase our full year outlook across three key metrics after just one quarter. Our strong execution, secular growth tailwinds, and the announced acquisition of the remaining stake in PA Consulting, position us extremely well to deliver on our FY 2029 targets. Operator, we will now open the call for questions.

Operator (participant)

Thank you. If you would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. And if you'd like to withdraw that question again, press star one. We also ask that you limit yourself to one question and one follow-up. For any additional questions, please requeue. And your first question comes from the line of Sabahat Khan with RBC Capital Markets. Please go ahead.

Sabahat Khan (Analyst)

Okay, great. Thanks, and good afternoon. Maybe just the higher level question on sort of the outlook here. Obviously, this last calendar quarter to end the year had some concerns about a government shutdown. Doesn't seem to have flown into your numbers. Similarly, obviously, some puts and takes on the macro. If you can just walk us through kind of what's reflected in your guidance, what it would take to get to sort of closer to that higher end of the top-line guide versus the lower end, and how you have sort of baked in some of the potential green shoots and potential sort of government-related considerations into this updated guidance, just to start off? Thanks.

Bob Pragada (Chair and CEO)

Yeah, sure, Sabahat, just on your first one, with regards to kind of how we position ourselves within that revenue range that we talked about, I'd say that it would be the burn profile of the backlog. We had some really nice wins within our life sciences and advanced manufacturing group, driven by data centers and in chip manufacturing. Those tend to have pretty high velocity to them, and so, you know, if those continue to go at the pace that they are, that would be a driver. And we're also seeing a nice tick up across the international business. We had a international business that grew over 9% this year, and that was pretty broad-based in Europe, Middle East, as well as in APAC.

And so I think that balance of our business, and, you know, not feeling the effects of the government shutdown has given us confidence in the range that we put out there. But again, it'd be the velocity of that private sector work that would get us to the higher range.

Sabahat Khan (Analyst)

... Great. And then just for my follow-up, I think, as Venk's comment around the environmental services side of the business doing better in H2. You know, that was a business that investors had some questions about last year, just given some of the evolutions and sort of the backdrop. Nice to hear that's trending in the right direction. Can you maybe just talk about, is it a specific end market that's driving that? Is it just maybe some, you know, catch-up in that work? Just kinda bigger picture demand drivers of the environmental services business, because it's been a bit of a focus for investors. Thanks, and I'll pass the line.

Bob Pragada (Chair and CEO)

Yeah. Yep, Sab, I kinda would segregate it into three buckets of how, you know, it affected us over the course of calendar 2025, and now we're starting to see a bit of an inflection point in our pipeline. That's why we're pointed to the second half as a recovery. You know, the government component of that for us is very centric towards the US Department of Defense. And now we're starting to see some larger programs, specifically for the Navy and the Army Corps of Engineers, come through with some optimism on where we're positioned, long time clients of ours. And so that's kind of one piece. The second piece. That, and that was, had some of the indirect effects of DOGE, if you think back to 2025.

So now we're seeing that flow through. The second is around this transfer around the disaster relief work from the federal government to state and local. That has taken a longer time to settle down. And so as that continues to play out, we're starting to see some early indications of that in our pipeline. And then the third is, and this we have seen a pickup in this component, is the private sector. And this is kind of the diversity of how we apply our environmental practitioners across our private sector in whether it be industrial or in life sciences and advanced manufacturing. Those jobs have started to pick up. Now, they're smaller in scale, so they're not having an effect right now.

But as that continues to grow, and we're seeing again in our pipeline, and that pipeline is up double digits. So that's where we're kind of pointing to the second half.

Operator (participant)

Your next question comes from the line of Michael Dudas with Vertical Research Partners. Please go ahead.

Michael Dudas (Analyst)

Good afternoon, gentlemen.

Bob Pragada (Chair and CEO)

Mike, good afternoon.

Michael Dudas (Analyst)

Bob, very impressive, certainly on the book-to-bill. Sure. Seems like the projects are-

Operator (participant)

Pardon the interruption. Michael, we are having a hard time hearing you.

Michael Dudas (Analyst)

Can you hear me now?

Bob Pragada (Chair and CEO)

Yep, got you now, Mike.

Michael Dudas (Analyst)

Okay. Thank you very much. So, my bad. Bob, on, you know, very impressive on the book-to-bill backlog growth in Q1. Maybe you could share on the... It looks like the projects are getting larger, a little longer for gestation, but much more complex, and how that plays towards what your current pipeline looks, maybe that two-year pipeline outlook, and the ability to gain more, I guess, life cycle revenues or business out of the bidding that you're working on with the negotiation with these larger projects, with the clients that are - certainly we've been reading about in the press, that seem to be accelerating their cap spend in your, especially in your important private sector markets.

Bob Pragada (Chair and CEO)

Yeah, that, thanks, Mike. You know, I'd say maybe one comment on the overall portfolio, and then I'll talk specifically about what we're seeing in the private sector accelerate at a faster pace. Overall, this was always in our strategy. We talked about it, you know, we talked about it at Investor Day with regards to redefining the asset life cycle and continuing to work across that. That is happening on a broad base. I'd say that gestation period of the work, probably it's going faster within water, a little longer in transportation and in energy and power, but we're moving at pace.

Private sector is happening in real time, and a lot of it is for just the demand cycle that's happening in those end markets, whether it be data centers, chip manufacturing, and life sciences. So for, for us, that business is in growth mode. We are seeing the pipeline grow at some significant rates. I'd say that two-year pipeline that you're referencing, one year it's greater than 50%, if I were to have a composite rate. And as you get past past that period, private sector, we don't really get past 18 months with any kind of high level of certainty in pipeline, but that 12-18 months, definitely greater than 50% on a composite rate.

Michael Dudas (Analyst)

I appreciate that. Excellent, Bob. And my follow-up for Venk, you know, with the very strong Q1 start on cash flow and the dynamics throughout the year, so given the financing that you're participating on PA and such, the 60% free cash off the company is still targeted towards, again, the share repurchase on a more reasonable basis. You feel still comfortably to delever and add opportunistically when the market requires, on your capital allocation in this year?

Venkatesh Nathamuni (CFO)

Yeah, Mike, thanks for that question. And as you pointed out, you know, pretty strong start to the year in terms of free cash flow generation, and we feel pretty good about, you know, where, where we end the year, which is why we raised the guidance. So as it relates to, you know, our current position as, you know, in terms of repurchases, obviously, we increased our repurchases in Q1 to take advantage of the market dislocation, as I mentioned in the script. But we also increased our dividends, so we feel very good about our commitment to returning 60% plus of free cash flow to shareholders.

At the same time, with a solid balance sheet and the good cash flow that we're generating, we also want to, you know, quickly delever from the 1x-1.5x range. When we do the PA financing, we'll have good line of sight to be able to get to that range within the first four quarters. So a solid cash position to start with, really good cash flow, and, you know, we have enough firepower to allocate our capital between repurchases as well as debt paid out.

Bob Pragada (Chair and CEO)

Thanks, gentlemen.

Venkatesh Nathamuni (CFO)

Thank you.

Operator (participant)

Your next question comes from the line of Sangita Jain with KeyBanc Capital Markets. Please go ahead.

Sangita Jain (Analyst)

Great. Thank you. Good afternoon. Thanks for taking my questions. If I can follow up on the cash flow question, Venk, you said it, the cash flow in the quarter was quite high, but some of it may reverse in the second quarter. Could you elaborate on what that reversal relates to? And also, I was under the impression there was gonna be some cash tax payments that you would have to take care of in the first half. Has the timing of that changed?

Venkatesh Nathamuni (CFO)

Yeah. Sangita, yeah, thanks for the question. So, as you pointed out, in a really good cash flow in the first fiscal quarter. I would say the vast majority of that strong cash flow was driven by really fantastic working capital performance across the entirety of our customer base. So that was number one. We also had a one-time, you know, impact from a customer in the data center space, you know, where we collect the revenue and the cash during a particular quarter, and then we pay the subcontractor in subsequent quarters. So that's what's going to drive the free cash flow performance in Q2. But we have very good visibility that, you know, in the first half, we'll still be free cash flow positive.

And the tax payment, as you mentioned, is gonna be a Q2 phenomenon, so that'll impact Q2. But when you look at first half and first couple of quarters in aggregate, we feel pretty good about our free cash flow being positive for the first six months of the year, and obviously, continued strength in Q3 and Q4, such that we're able to get to the 7%-8.5%.

Sangita Jain (Analyst)

Got it. Thank you. Appreciate that.

Venkatesh Nathamuni (CFO)

Okay.

Sangita Jain (Analyst)

And then, as a follow-up, can I ask about the Sizewell C contract that you press released a while back in the U.K.? And if you can elaborate on the size of that and if there is further scope or if there's a chance that the scope on that may increase over time.

Bob Pragada (Chair and CEO)

It could. Just to clarify on that, Sangita, we're performing the enabling works and the program management around the enabling works, and so that has continued through 2024 - actually, it started even before 2025, 2024, 2025, and will continue into 2026. There is opportunity for continued scope growth on that, and our relationship there with Sizewell C is strong, so we would anticipate so.

Sangita Jain (Analyst)

Got it. Thank you so much.

Operator (participant)

Your next question comes from the line of Steven Fisher with UBS. Please go ahead.

Steven Fisher (Analyst)

Well, thanks. Good afternoon. Just in light of the backlog growth, obviously, we know from some of the press releases, descriptions of what your scope is on some of these projects, but just curious what some of the pass-through things are that are going through there. And maybe if you can give us maybe a sense of maybe looking at the profit increase in backlog might be more representative. I know you said 15% year-over-year. Curious if you can give us some measure of that sequentially.

Bob Pragada (Chair and CEO)

Yeah, let me I'll go back to the sequential gross profit in backlog. But, I'd say that, Steve, the majority of the pass-through is related to, as you know, in a data center, a tremendous amount of electrical equipment and equipment purchase that will be... And it was announced on who's gonna be providing that equipment in modular form. So, the interconnects and how that equipment is arriving to site in modular form would all be around the envelope of a pass-through. We would do the design, and not just that, but also the balance of plant to house, as well as the interconnections of all the utilities.

The trade contractors also end up making, that pass-through, too, and, and traditionally, we put a fee on, on both of those. On the gross profit sequential growth, say it's high single digits sequentially, quarter-to-quarter. Year-on-year, that 15% number is a strong number.

Steven Fisher (Analyst)

Okay, very helpful, Bob. And then just obviously, you know, last quarter, the last few months, there's been lots of discussions and follow-ups about AI, and I'm just curious if there's been any change to either what you've observed in your own business, anything that has developed or your own thinking, or message that you'd like to give on sort of the AI outlook and impact for the industry and the company.

Bob Pragada (Chair and CEO)

Yeah, absolutely, Steve. Nothing has changed. We felt strongly about AI before the November event that happened, and we feel equally and more strong about AI moving forward. Kinda the main things we've been talking about, not just in Q1, I'm sorry, for the Q4 call, in Q1, and that we've been talking about since, you know, 2019, we are getting great data advantage in what we do. Our data sets and our information are continued to be strong, strong platforms for us to use as for insights, as well as build the models that we're building for our clients. It is helping, when I say it, digital enablement and AI, with the scarcity of resources that we are continuing to face.

We are growing headcount while we're using digital enablement to continue to grow at the same time as that scarcity.... And I'd say the biggest piece has really been around, you know, what's happening in the AI ecosystem, from chip manufacturing to power and water requirements, all the way to the data center. You know, we're playing across that continuum and seeing that, well, we've seen it in the numbers, right? So kind of the ultimate test of the power of AI is coming through in our bottom line results.

Steven Fisher (Analyst)

Terrific. Thanks, Bob.

Operator (participant)

Your next question comes from the line of Adam Bubes with Goldman Sachs. Please go ahead.

Adam Bubes (Analyst)

Hi, good afternoon. Maybe just one follow-up on the AI point. So you, you've been talking about AI machine learning for a couple of years now, and so just wondering if you could expand on to what extent AI machine learning is impacting projects and productivity today, and just how those conversations with clients have gone in terms of your ability to capture value from, either improved productivity or high grading your offerings?

Bob Pragada (Chair and CEO)

Yeah. So a couple of things. One, as far as how we're talking to our clients about it and how we are driving it as a value differentiator for our clients, if you think about the speed right now that we are going at, especially not just in the private sector, but also in the water market, as well, and transportation, the schedules and the delivery model for these can't be done without the use of the AI platforms. And when I say AI, machine learning, the automation of tasks that we put into play. So it is driving backlog growth through differentiation in our award rates and in the bookings.

The other is that in the field, we're using some strong predictive analytics. It's a platform called Acuity in order to really get out in front of field-level issues that are coming up in real time. And that's been a real game changer for us. We've got Acuity deployed across all of our end markets in the field program management work that we do. And then the last thing, and we've talked about this several times, but we're seeing more. You know, we use Replica as our digital twinning.

But now, digital twinning, not just in the water sector, but now in the manufacturing sector and the data center sector, is allowing for us to get to the data insights and the simulation technologies, well, with the simulation technologies in a much faster rate in order to solve for some really, really complex issues that we're solving for, for our clients. So overall, it's, it's coming through. We've got a whole slew and suite of platforms that we're using.

Adam Bubes (Analyst)

Then, a really strong PA Consulting margin performance, I think 24% this quarter. Any outsized benefit to call out there, or what's the right way to think about sustainability of those margins in the balance of the year?

Venkatesh Nathamuni (CFO)

Yeah, Adam, great question. So I would say, yeah, as you point out, really strong performance. Most of it is driven by the fact that, you know, there's a solid top-line beat, and we had some operating leverage there as well. What we have stated all along is that we want to balance, you know, really high single-digit growth for PA with margins that are, as you know, already, you know, industry best. So a 22% margin is kind of the way we think about the long-term model there, and we want to make sure that we have a good balance between high revenue growth and high industry-leading margins. So, so the way to model the PA margins going forward is about 22%, but, clearly, we had a really strong performance there in the just concluded quarter.

Adam Bubes (Analyst)

Great. Thanks so much.

Venkatesh Nathamuni (CFO)

Welcome.

Operator (participant)

Your next question comes from the line of Jamie Cook with Truist Securities. Please go ahead.

Jamie Cook (Analyst)

Hi. Congratulations on a nice quarter. I guess, sorry, Bob, another question on AI. Just as you sit here today and think about AI and the opportunity for Jacobs, both on the, you know, revenue on the margin side, how do you balance the two? Do you know what I mean? I mean, over time, you—if you had to pick one versus the other, do you think there's an opportunity to grow the top line at a quicker rate, and perhaps operating profit more so versus the margin, just sort of how you're thinking about that balance, as AI impacts your business model? I guess it's my first—

Bob Pragada (Chair and CEO)

Yeah

Jamie Cook (Analyst)

... question, and then I'll ask another one after that.

Bob Pragada (Chair and CEO)

Okay, great. Jamie, if the world was plentiful with qualified resources for all the work that's out there, from, you know, filling the denominator of the TAMs that we play in, I think that, you know, we would probably be making choices between between top line and bottom line. We're not. We are in a resource-constrained market that AI is enabling us to grow the top line while we're operating with, you know, in a resource-constrained environment and driving efficiencies in type of solution that we're delivering to our clients. So not a choice as well as not a pivot. We feel like we're well positioned to do both.

Jamie Cook (Analyst)

Okay, thank you. And then I guess, Venk, just on the margin performance in I&AF in the back half of the year, obviously, we're expecting some margin improvement to achieve, you know, besides PA Consulting, strong margins to help get to your full year adjusted EBITDA margin forecast. Just what, what's driving that? Is it more mix? Is it self-help? Just trying to understand what's driving the margin improvement in I&AF in the back half of the year. Thank you.

Venkatesh Nathamuni (CFO)

Yeah, Jamie, thanks for your question, and thanks for your comments as well about the quarter. I'd say, you know, lots of really positive trends for us from a margin perspective. You know, obviously, Q1, you know, we came in at 13.4%, and Q2, we're guiding for a 50 basis point sequential improvement. And then we see a linear progression in Q3 and Q4. So a few things, you know, that drive that margin expansion for us. Number one, you know, continued operating leverage. So we're going to maintain the discipline in terms of ensuring that our OpEx grows at a slower pace than revenue growth.

And then, you know, clearly from the standpoint of some of the gross margin drivers that we talked about at Investor Day, with the way we expect our global delivery to step up, which is already happening, and we see more of that coming in Q2, Q3, and Q4. And then also on the commercial model side, right? So to the extent that we are engaging more with some of the life sciences and advanced manufacturing clients, that also helps, you know, from the standpoint of driving those commercial models. So I would say it's not one thing. It's a combination of several things that we talked about at Investor Day. More of that coming to fruition in Q3... in Q2, Q3, and Q4, and we feel really good about our margin performance for the full year.

Obviously, you know, just for context, in fiscal 2025, we grew our margins by 110 basis points, and we're guiding for a range of 50-80 basis points increase in fiscal 2026.

Bob Pragada (Chair and CEO)

Maybe one add to that is that in the second half is really where we're starting to see the advanced facilities or some of these bookings that we have from a mix perspective have kind of contribution to that linear progression in our margins and confidence.

Operator (participant)

Thank you. That's very helpful. Your next question comes from the line of Andy Wittmann with Baird. Please go ahead.

Andrew Wittmann (Analyst)

Oh, great. Thanks for taking my questions, guys. I wanted to ask about this very good backlog. Very exciting. Obviously, we had some of these really marquee projects. Bob, I thought maybe given that there's a little bit more mix here to some of this EPCM scope, I'd want to ask about how you're managing the risk criteria here. Are these contracts? Are you basically able to offload any risk to the subcontractors that you are managing on this, or do you bear any? I'm just wondering, because obviously, some of these projects are pretty significant and, you know, % changes on large numbers could actually kind of matter in the future. So, maybe I'll let you address that, please.

Bob Pragada (Chair and CEO)

Yeah, absolutely. So our risk profile, Andy, has not changed. And, and so the same EPCM delivery model that we, you know, that we've been very focused in on for the balance of 20 years in, in life sciences, we do a lot in the water sector as well. Those, those are the same risk profiles we're taking now, and as you know, we've been pretty consistent on how we, how we flow those to our, to our, our supply chain. So the awards that we're getting right now, we have not inflected to a different risk profile. We're utilizing the same risk profile we have for the balance of the 20 years in those sectors.

Andrew Wittmann (Analyst)

Okay, great. And then I just wanted to get a clarification on PA and the capital deployment that went along with that as well. You know, it's obviously a large capital deployment. When I was looking at the press release, the EBITDA increase that you're getting from PA is because PA is already consolidated. The EBITDA that you're picking up is really only the reduction of the non-controlling interest. Obviously, non-controlling interest is after tax. You'd have to gross that $52.3 million up to a larger number. But even when you do that, against the $1.6 billion capital outlay, the math that I get here for the multiple is substantially larger than the 13x.

And so I know there's some kind of different accounting, GAAP accounting, that's maybe around this, and I just thought for the benefit of everybody, you could address how that works and why it works out that way, please.

Venkatesh Nathamuni (CFO)

Yeah. And, Andy, thanks for the question, and I know that we, you know, obviously, you mentioned that in your report as well. So at a high level, as you rightly pointed out, there's a slight difference between, you know, the accounting and economic ownership. So just for everybody's benefit here, you know, the economic ownership was 65%, and the accounting ownership was 70%. But there's obviously some dilution from what we call C Shares, which are basically shares that the employees own. So, to make a long story short, it, you know, that's the delta. But in terms of the absolute valuation, as we mentioned in the press release, you know, it's a 13x multiple on EBITDA, and then if you take into account the synergies, it's a 12.3 multiple.

So we feel really good about the valuation for this and the value creation. But, you know, happy to take additional questions, and maybe, Bob, you can add to it as well.

Bob Pragada (Chair and CEO)

Happy to. Yeah, sure. Yeah. And the, you know, but what is actually what's happening here is, when you take the accounting ownership, which was 70%, and you reduce it by the employee benefit trust, we get down to a 60% ownership, and so we acquired 40% of the stake, which we highlighted. On the NCI, what we did is we reduced EBITDA by an after-tax number, and so it reduced EBITDA by a smaller amount. So essentially, you know, we'll be adding back that NCI component to our EBITDA going forward. I think the important takeaway that we think highlighted in those prepared remarks is, you know, we expect this to be accretive to earnings, and we see a lot of opportunity from both the revenue and cost synergy with the collab with the combination of PA and Jacobs.

So, we can take some of the more specifics offline, you know, when we talk later on.

Andrew Wittmann (Analyst)

Okay. Thanks for clarifying that, guys.

Bob Pragada (Chair and CEO)

Yep.

Operator (participant)

Your next question comes from the line of Chad Dillard with Bernstein. Please go ahead.

Chad Dillard (Analyst)

Hey, good evening, guys. So I want to spend some time on the project pipeline. I think you talked about it being up double digits. Could you break that down by the core end markets? And then if you can comment about, you know, fixed versus reimbursable. And then finally, just on the global delivery model, how much of that is deployed using that method, versus, you know, what's in your revenue today?

Venkatesh Nathamuni (CFO)

Yeah, maybe I, maybe I'll simplify it, Chad. If you look at our three main verticals-

... Water and environmental up, the pipeline is up, and when I say double digits, pretty much double digits that are 25% and above. In life sciences and advanced manufacturing, double-digit pipeline growth, those are 50% and up. And in our transportation—in our critical infrastructure, we're talking kinda high single digits and low double digits in pipeline growth. That's not exclusively focused on the US, that's a global number. And so, you know, the pipeline is strong, and that's a 12- to 18-month pipeline that we look at, that, you know, then there's win rates and everything else. But the markets that we're serving are in a really strong state right now.

Chad Dillard (Analyst)

Gotcha. That's, that's helpful. And then just maybe circling back on the AI topic. So how are you communicating to your customers the value creation from deploying AI, like, in a particular project? Are you having explicit conversations about sharing that? Maybe just, like, talk about, you know, if you can even give, like, a particular example, that'd be very helpful.

Bob Pragada (Chair and CEO)

Yep. Well, like, in order to do that, our clients' issues right now, we're not solving for issues that were around or even contemplated five years ago, 10 years ago, 20 years ago. And so how we're articulating this to our clients is not in the form of bots or agents or, people being replaced with, with AI figures. How we're discussing it is the use of data to get greater data insights, to solve for complex issues and deliver outcomes at a faster, and more predictable rate. That's how we're describing it to our clients. And our clients are co-creating with us, in the platforms that we develop, kind of part one. The second, where we go to market, is around AI advisory.

But we have whether it be in the aviation space or it be in the transportation space, we've got, you know, a lot of our clients that want to understand how AI can enable their business even more. And so now with PA, we've now doubled the size of our AI, not just on the development side, but also AI consultancy component as well. And this is an AI consultancy just driving business transformation. This is AI consultancy on how they can effectively serve their client base even greater. So we've, you know, the investment thesis around increasing our investment in PA, coupled with how PA is growing in that space across all the end markets, and then us going to market together is really creating an exciting story going forward.

Chad Dillard (Analyst)

Great. Thanks, Bob.

Operator (participant)

Your next question comes from the line of Andy Kaplowitz with Citigroup. Please go ahead.

Andy Kaplowitz (Analyst)

Hey, good afternoon, everyone.

Bob Pragada (Chair and CEO)

Hi, good afternoon.

Venkatesh Nathamuni (CFO)

Afternoon.

Andy Kaplowitz (Analyst)

Bob, I just wanna dig in on a couple of areas. You know, I think historically you guys have been very strong in semicon, particularly on the memory side. So what are you seeing in terms of investment there? Could we actually be in acceleration mode again? Like, it seems like we are, but maybe any more detail there would be helpful.

Bob Pragada (Chair and CEO)

Absolutely. Short answer is yes. Yes, Andy, we are, we are in acceleration mode. You know, there are three main players around the world, one is American. And, and the advances in high bandwidth memory that the American provider is, is going to market with at record pace, you know, took 20 years during the traditional DRAM cycle to advance nodes. That 20 years is now being shortened into 2-3. And so to get the plant ready and delivering on those chips, is a, is a big deal. So they've made some announcements, in, in Idaho and New York, and, we're, we're squarely in the middle of those.

Andy Kaplowitz (Analyst)

Then, Bob, like, just following up on the water vertical, I mean, I think you answered a question earlier about environmental. Water's been strong for you guys for a while. I get some questions occasionally about, you know, municipal spending, what eventually happens as IIJA starts to run down. So maybe you can talk about... I think you, you've had good bookings here recently on water, but maybe you can talk about the longevity of the water infrastructure cycle as you see it.

Bob Pragada (Chair and CEO)

Yeah. It's high single digits for us right now and how it's flowing through, Andy. So maybe I'd kind of divide it between U.S. and international. Maybe start with the real positive. You know, the result of the AMP8 cycle in the U.K. is driving kind of double-digit growth for us in the water market there in Europe, but we're also seeing strong tailwinds in the Middle East and in Australia. Australia has been a real highlight for us, both in water and in transportation. You know, the municipal spending and the tie to IIJA never really was a strong one. IIJA really was focused heavily on transportation, and so that has continued, and again, the whole water scarcity, aged assets, and just the sheer effects of climate.

I'm not saying they're completely delinked from, you know, funding opportunities that states and locales have, but definitely have risen up on the priority list, just because of the severity. So we see kind of a long-term tail on that.

Venkatesh Nathamuni (CFO)

Andy, if we could add to just what Bob said, you know, there's been tremendous strength in bookings in water over the last several quarters, and we've highlighted some marquee wins that typically take multiple years to play out. We see that pipeline continue to grow and the visibility for a multi-year period, so we feel really good about our water market overall.

Andy Kaplowitz (Analyst)

... Appreciate the call, you guys.

Operator (participant)

Your next question comes from the line of Jerry Revich with Wells Fargo. Please go ahead.

Jerry Revich (Analyst)

Yes, hi, good afternoon and good evening. Hey, can I ask on critical infrastructure, you know, really impressive performance relative to the end markets that you folks are clearly gaining share. Could you just double-click for us in terms of the drivers of the share gains? Is it just part of the market where you folks have higher concentration? Have you been on the right projects moving forward? Can you just expand on the drivers of what looks to be about 5-6 points of end market outgrowth that you're delivering?

Bob Pragada (Chair and CEO)

Yeah, well, maybe I'd most succinctly talk about it in two main areas, Jerry. One is that our international business in transportation, not that it has been strong, very strong, and that's been highlighted by really key wins that we've had in Europe, in the Middle East, and in Australia. Australia, it's been really nice growth there as well. Aviation and rail has really been the strong drivers there. We still do a lot of work on the highways work, but those two have been really strong drivers. And then the U.S., you know, with continued growth in the aviation sector there, coupled with now some high-speed opportunities, as well as faster rail in locations, we've been capturing share gain in that area, as well.

So, strong internationally, driven by aviation and rail and highways. Strong in the U.S., driven by aviation and rail.

Jerry Revich (Analyst)

And, you know, if we could just pull on that market share thread, you know, into the AI theme, you folks on the semi plant side, with the use of digital twins, have been able to allow your customer to deliver projects really quickly. Just it sounds like based on your comments earlier on the call, Bob, you see yourselves as gaining share in that type of environment. What's the outlook for the broader industry structure as you see it five years down the line, 10 years down the line? Do companies that look like Jacobs gain share? Do companies like Jacobs do more EPCM-type work for an integrated solution like you're doing here on the data center example that you gave us?

Can you just talk about how you see this all playing out for the industry as a whole? Because, you know, you folks have been ahead of the pack in terms of your digital twin investments, et cetera.

Bob Pragada (Chair and CEO)

Yeah. So maybe, and just to clarify, Jerry, you were talking specifically about semi, or were you talking kind of broader base across the, you know, kind of the tech landscape?

Jerry Revich (Analyst)

Yeah, thank you, Bob. I was just talking across the broader tech landscape, right? So in other words, you folks have clearly used digital tools-

Bob Pragada (Chair and CEO)

Yeah

Jerry Revich (Analyst)

... and led the market and gained share, and I just want your perspective on where you see the industry headed in five years, now that-

Bob Pragada (Chair and CEO)

Yeah

Jerry Revich (Analyst)

... the tools are getting better and better.

Bob Pragada (Chair and CEO)

Got it. Got it. So I kind of talk about it from our participation across the ecosystem of, you know, call it the electron landscape. So everything from the chip at the semi side through power and water, whether it be at the grid level or what eventually goes into the data center, our participation across that ecosystem, I think has been a very big differentiator. And so when I look out five years from now, you know, the partnership that we have with NVIDIA and the kind of the tech relationship down to the chip design and how that affects utilities for these plants, whether it be with any of the high bandwidth memory players or other traditional logic players, that's what's driving that out-year growth. Because as these plants...

No plant is the same. As these plants are continuing to become more and more complicated, we're out in front of those. Now, you back all that up with design automation, AI tools in order to get greater data insights, and digital twins, like you said, and I'm sorry, Jerry, then you're, you know, that protective, I don't know if I'm allowed to call it a moat, but I will. That moat starts to develop, and we go from there. So we're excited about where we're positioned. This is something we've been in for the better part of 40 years, and we see that going forward for another 40.

Jerry Revich (Analyst)

Thank you.

Operator (participant)

That concludes our question and answer session. I will now turn the conference back over to Bob Pragada for closing comments.

Bob Pragada (Chair and CEO)

Thank you, Krista. Thank you, everyone, for joining the earnings call. Some great questions. Really excited about the performance last quarter and our performance for the balance of the year, and we look forward to engaging with many of you over the coming days and weeks. Thanks, everyone.

Operator (participant)

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.