Greetings, and welcome to Jacobs Fiscal Second Quarter 2026 Earnings Conference Call and Webcast. [Operator Instructions]. As a reminder, this conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Bert Subin Senior Vice President, Investor Relations. Thank you.
You may begin. [Technical Difficulty]
Solid year-on-year margin expansion and continued robust sales activity. I'll quickly highlight a few key takeaways. First, adjusted EPS grew 22% to $1.75, supported by 9% organic net revenue growth, outpacing the 8% growth rate in Q1 and 70 basis points of year-on-year margin expansion.
Second, our backlog grew 22% to $27 billion, setting another new record with a trailing 12-month book-to-bill of 1.4x on gross revenue and 1.2x on net revenue. And third, we completed the acquisition of PA Consulting, which we celebrated together by ringing the closing bell at the New York Stock Exchange in March. In summary, we are exiting Q2 with significant momentum and the strong first half of the year gives us confidence to increase our FY '26 outlook for the second time in 2 quarters, which Venk will walk through shortly.
Turning to Slide 4. We provide a detailed overview of the quarter. We are very pleased with Q2 results as strong operating performance, paired with our lower share count drove the fifth straight quarter of double-digit growth in adjusted EPS.
During Q2, we also delivered another quarterly book-to-bill above 1.0x with both gross and net coming in at 1.2x. The addition of the net revenue book-to-bill metric will provide a useful context for our investors and analysts and reinforces the strength in our bookings over the last 12 months. Turning to Slide 5.
I'd like to highlight a few notable project awards from the second quarter. But before I do that, I want to recognize a major achievement. Jacobs is ranked the #1 design firm by Engineering News-Record in their newly released 2026 Top 500 Report, marking the seventh time in the last 8 years, we've held this ranking.
Our strong organic growth profile helped us earn this honor. And I want to thank our 47,000 colleagues for delivering leading solutions to our clients every single day. Now moving on to Q2 awards.
In water and environmental, Jacobs was selected by the San Francisco Public Utilities Commission to deliver the Southeast Wastewater Treatment Plan, a landmark investment in environmental protection for the San Francisco Bay. The project will upgrade San Francisco's largest wastewater facility, positioning the plant as the first major discharger to proactively meet new nitrogen limits for the bay. This win highlights another significant award in one of our fastest-growing sectors and positions Jacobs for similar regulatory-driven investments emerging across Northern California, the Pacific Northwest and the Great Lakes.
Also within water and environmental, Jacobs and PA have secured a 2-year economics and policy consultancy contract with Ofwat, the U.K. water regulators. The engagement brings together industry-leading expertise across water regulation as well as financial, technical and strategic consulting. Our solution will be delivered to support pricing, performance oversight and policy development tied to substantial investment across the AMP8 cycle and beyond.
In life sciences and advanced manufacturing, we had multiple wins with hyperscalers and other data center customers spanning the full project life cycle from advisory, design, program management and digital solutions to full EPCM. This includes our recently released data center digital twin developed using the NVIDIA Omniverse DSX Blueprint. Our strategic partnership with NVIDIA continues to gain momentum as we work to expedite the delivery of AI factories with compute load requirements rising substantially.
Last year at our Investor Day, we laid out a road map for how we believe our data center business would evolve and the combination of our deep domain expertise, our full asset life cycle model and the expansion of AI investment has accelerated that journey. We grew our data center business by more than 100% year-on-year in Q2, and we see very strong runway to build on that success in the second half of the year and it's more than the data center sector. We are seeing rising demand in semiconductors, water and energy and power as the technology and infrastructure go hand in hand.
This is bolstering total revenue growth with our backlog and pipeline indicating the investment cycle is still in the early stages. Moving on to critical infrastructure. Jacobs was selected a lead design at Dallas Fort Worth International Airport as part of the Terminal S expansion.
The project involves existing bridge operations essential to allow for up to 16 additional gates and support the airport's growing demand. Combining bridge design expertise with the unique challenge of maintaining operability of the SkyLink people mover during all phases of construction, we are modernizing infrastructure while keeping passengers moving. Jacobs is ranked as Engineering News-Record #1 firm in aviation, a sector where we continue to see significant growth in demand for terminal upgrades and new builds.
In summary, we continue to build on our industry leadership in sectors like wastewater, aviation and data centers, securing key awards that position us for growth in the second half of the year and into FY '27. Now I'll turn the call over to Venk to review our financials in further detail.
Thank you, Bob, and good afternoon, everyone. Please turn to Slide 6, where I'll walk through our results for Q2. Gross revenue increased 27% year-over-year, and adjusted net revenue, which excludes pass-through revenue, grew by 9%.
These both represent the highest consolidated growth rate for the company since the separation of our government services business in 2024. Q2 adjusted EBITDA was $327 million, growing more than 14%, but our margin coming in at 14.1% and are up 70 basis points year-over-year, driven by good operating discipline. This resulted in adjusted EPS rising 22% year-over-year.
Consolidated backlog was also up 22% year-over-year to a record $27 billion with a trailing 12-month book-to-bill at 1.4x. Book-to-bill was strong again in Q2, driven by good awards activity across our end markets. Additionally, on a year-over-year basis, net revenue and gross profit in backlog increased 12% and 15%, respectively, during Q2.
We are demonstrating faster organic growth in the business today and our strong bookings position us well as we look out to fiscal year '27'. As you've seen since the separation of our government services business in fiscal year '24, our earnings quality has been improving. However, as a result of the PA transaction, which we have previously communicated, there was a wider than normal spread between GAAP and adjusted EPS in Q2.
We expect this to be mostly a Q2 phenomenon and we anticipate more normal differentials between GAAP and adjusted EPS in Q3 and beyond. Regarding our performance by end market and infrastructure and advance facilities, let's turn to Slide 7. At a high level, we continue to see strong growth rates in life sciences and advanced manufacturing as well as in critical infrastructure during Q2.
Focusing on life sciences and advanced manufacturing, net revenue grew 12% in Q2, our highest growth rate since we began reporting end markets in late 2024. Combining acceleration in advanced manufacturing with continued solid performance in the life sciences sector, has resulted in a double-digit top line increase for the end market, and we expect revenue growth will likely exceed Q2's level in the second half of the year. Shifting to critical infrastructure, net revenue increased 9% over Q2 2025.
Critical infrastructure continues to be led by strong growth in the transportation sector, where our rail, aviation and ports businesses grew double digits as well as in the energy and power sector on the use of heels of high demand for transmission and distribution services. Net revenue growth in our water and environmental end market came in at 2% as strength in water which has continued to grow in line with our target, was offset by softness in the environmental sector. Performance for our environmental business is on track to show meaningful year-over-year improvement as we reach Q4.
In summary, we saw a diversified strength across our end markets during Q2. Moving now to Slide 8, I'll provide a brief overview of our segment financials. In Q2, I&AF operating profit increased 11% year-over-year or just over 8% on a constant currency basis.
PA Consulting operating profit increased 19% as revenue grew 17% and operating margin came in strong at 22%. On a constant currency basis, operating profit grew 12%. PA has seen demand tailwinds from national security and public investments in the U.K. and the business is centrally positioned to help advise on European defense strategy as well as implement digital solutions across the entire region.
Combined with Jacobs' proven history of delivering complex manufacturing and national security infrastructure, we see a compelling opportunity to augment growth in the sector. Focusing on the second half of the year, we believe PA will continue to grow revenue high single digits on a constant currency basis. Now moving on to Slide 9, we provide an overview of cash generation and our balance sheet.
For Q2, we had an adjusted free cash outflow of $272 million, partly as a function of a favorable Q1 cash timing item that reversed in Q2. This makes our first half adjusted free cash flow to $93 million, a solid increase over fiscal year '25. I just want to note, we're highlighting an adjusted free cash flow figure as we have to account for the portion of the PA transaction proceeds in operating cash under U.S. GAAP reporting guidelines.
These entries impacted Q2 reported free cash flow by approximately $233 million and will impact Q3 reported free cash flow by just over $100 million. But it's important to keep in mind these amounts were already included as part of the upfront consideration paid in connection with the transaction. Focusing on capital returns, we remain aggressive repurchases of our shares during Q2 to take advantage of the value of our stock.
Consequently, our total repurchases in the first half of the year were $472 million, which puts us ahead of our annual target of returning at least 60% of free cash flow back to our shareholders. Our balance sheet is in good shape following the acquisition of PA Consulting with a net leverage at 2.1x ending the quarter, and we plan to return to below 2x by year-end. Additionally, our weighted average interest rate has declined to around 5%, following the successful refinancing of our debt stack and issuance of new bonds to fund the acquisition.
Net leverage is roughly 0.5 turn above our target range, but the increase in EBITDA from the full inclusion of PA as well as our strong outlook for cash generation positions us to lower our net leverage ratio back towards 1.5x during fiscal year '27. Please turn to Slide 10 for our updated fiscal '26 outlook inclusive of our acquisition of PA Consulting. We're increasing our forecast for adjusted net revenue growth, adjusted EBITDA margin and adjusted EPS relative to our guidance from last quarter.
We're increasing our FY '26 organic net revenue growth range, 8% to 10.5% year-over-year, adjusted EBITDA margin rate to 14.6% to 14.9% and an adjusted EPS range to $7.10 to $7.35. We continue to anticipate adjusted free cash flow margin will range from 7% to 8.5%. Notably, our outlook for FY '26 now implies 18% year-on-year growth in adjusted EPS at the midpoint.
As it pertains to Q3, we expect our adjusted EBITDA margin to be approximately 15%, with year-over-year net revenue growth of approximately 7.5%. This implies a margin above 16% in Q4 on double-digit top line growth, inclusive of the extra week we will have this year during that quarter. Additionally, we expect our adjusted effective tax rate will be in the 27% to 28% range in Q3 and in Q4.
We have good line of sight to achieving our updated fiscal year '26 targets, and we're pleased to be trending well ahead of our initial outlook for the year. Now turn to Slide #11 for a few updates to our fiscal year '29 targets. We are reaffirming our range of 6% to 8% organic growth on a 5-year compound annual growth rate basis for net revenue.
Combining our fiscal year '25 results and the midpoint of our fiscal year '26 guidance, we would be ahead of the midpoint for the first 2 years. Adding this to our central positioning in the build-out of AI infrastructure and the potential for growing revenue synergies with PA led to believe we will meet or exceed a 7% compounded annual growth rate. As it pertains to adjusted EBITDA margin, we are increasing our target by 100 basis points to 17% plus for fiscal year '29.
This is due to the implementation of gross margin and G&A initiatives that are well underway as well as the acquisition of the remaining stake in PA Consulting, where we currently see opportunity for at least $20 million in annual cost synergies. This implies at least 75 basis points of identified annual margin improvement from fiscal year '27 through fiscal year '29 in addition to the 200 basis points we're expected to deliver over the course of fiscal year '25 and fiscal year '26. And lastly, our high margin expectation and working capital management give us confidence we can now reach or exceed an 11% free cash flow margin, also up 100 basis points from our prior target.
At our forecasted growth rate that implies $1.2 billion to $1.3 billion for annual free cash generation by fiscal year '29. We're off to a great start just about 1/3 of the way through our strategy cycle. With that, I'll turn the call back over to Bob.
Thanks, Venk. In closing, we're tracking very well heading into the second half of the fiscal year with strong Q2 performance enabled us to increase our full year outlook for the second consecutive quarter. We are seeing momentum in our growth rate, margin and bookings trajectory, all of which give us confidence in our outlook.
Operator, we will open the call for questions.
[Operator Instructions] Your first question comes from the line of Steven Fisher with UBS.
Congrats on the quarter. I just want to ask you a high level, how much of the raise is driven operationally by a better-than-expected demand or operational performance versus bringing the rest of PA Consulting in? We had sort of done some calculations that maybe it would be about $0.10 to $0.20 increase from PA Consulting, maybe our math was off.
But just curious kind of how much was operational? And if so, where within the segment, did you see that upside?
Yes. So Steve, maybe I'll start it off and then I'll hand it over to Venk. Just at a high level, it is purely based on our operational performance.
The drive we're seeing in our bookings, how that's translating into our run rate, that drove the top line. And I'll let Venk talk a little bit about how that flowed down all the way to the bottom line where there in the consolidation, there might have been just a tad.
Yes. Thanks, Steve, for the comment. I would say, yes, as Bob mentioned, pretty solid performance on the I&AF side of the business.
We've got a little bit of a tailwind from PA from an FX perspective, but the bulk of our operational performance is driven by the I&AF section. In addition to it, from a margin perspective, and I alluded to this in my prepared remarks, a lot of operating discipline in terms of just keeping tight controls and that in conjunction with some of the margin improvement that you saw, that's what drove the true outperformance.
Okay. That's very helpful. And then just talk about AI and digital enablement.
Just curious if you can give us an update on kind of what the customer receptivity has been in the past few months to your digital tools and anything AI-enabled? And to what extent are you seeing sort of incrementally more margin opportunities coming from that? And when might we see some of that coming through more materially?
Yes, Steve, thanks for asking the question. AI is absolutely driving our business in what's going on with regard to the AI infrastructure build out. We're seriously at an inflection point and it's accelerating our entire business.
I'll kind of quantify what that means within the data center space, which right now represents between 3% to 4% of our overall business, that's growing at 100% year-on-year. Now the AI ecosystem, which would include all the way from the beginning to the chips through the power and energy requirements and then how that's feeding the data center world. That represents in its entirety with our diversified offering between 10% to 11% of our overall business, and that's growing in excess of 40%.
And so you're talking about a significant part of our business that's growing at a very fast rate, all centered around the AI infrastructure build. And then it's having an indirect effect on AI and drug discovery and what's happening with kind of other sectors that wouldn't traditionally be affiliated with AI. So we are well positioned in the kind of the AI CapEx, AI infrastructure world and our enablement internally is helping us become more efficient and deliver to that demand.
Your next question comes from the line of Sabahat Khan with RBC Capital Markets.
Great. Maybe just extending the line of questioning that Steve just started on. One of the themes that we're discussing a lot is just the visibility to these types of projects for sort of suppliers and vendors like yourself.
Can you maybe just talk about the demand? It sounds like it's growing at a very high clip. But maybe what is the line of sight to sort of projects?
Is it 6 months, 12 months? Is it multiple years? Maybe just talk to us about the near to medium-term visibility in that end market specifically.
Yes. Sabahat, just a clarification, specifically around kind of the AI infrastructure build? Or are you talking broadly across all of our end markets?
More specifically, yes, just on the data center and the 100% clip that you talked about, the growth or just in that end market.
Yes, absolutely. Let me kind of quantify it first, our AI infrastructure pipeline, the data center component of that, the pipeline has gone up 400% year-on-year. We have visibility well through '27 going to '28, and our client relationships, kind of our long-term relationship-based client model is kind of gaining share of that client spend.
And these are the top hyperscalers as well as now the Neocloud providers that are being supported. And then what's backing that visibility is really our relationship with NVIDIA. Our work on the digital twins, the work that we're doing around the plan of record.
And then as that's evolving with the next-generation chip, and now we're talking about Vera Rubin now, and we're in the middle of developing that plan of record is tying us back into these AI players, and so the visibility is strong.
Great. And then maybe just a question for Venk. I guess on the balance sheet side, somewhere between PA and the share repurchase there this quarter, leverage is at about 2.1x, just above your sort of targeted year-end range.
Can you just help us think through likelihood of buybacks? Is it going to be more opportunistic and just sort of broader capital allocation given the free cash flow and the leverage for the rest of the year?
Yes, Sabahat. Clearly, as we highlighted during the press announcement, we did take on some debt to fund PA acquisition, we're at about 2.1x, but we have a clear plan to delever pretty quickly, and we said we'll be below 2x by the end of fiscal year '26, which is just 1.5 quarters away. We've also been very aggressive in terms of our share repurchases.
We are big believers in the value of our stock, and we'll continue to maintain the share repurchase activity. We'll obviously modulate the quantum based on market conditions. But our purpose in terms of -- the goals is to continue to reduce our leverage such that we can get to about 1.5x in fiscal '27 as well as the purchases of our stock.
And then one thing to note is that our second half tends to be very seasonally strong from a free cash flow perspective. We're expecting more than $600 million to $700 million of free cash flow in 2H. So that helps us delever fairly quickly.
So we have a lot of optionality, a lot of ability to do both the buybacks as well as delever without straining the balance sheet.
Your next question comes from the line of Michael Dudas with Vertical Research.
Good afternoon, gentlemen. Bob, you've had, what, 5 years or 2 months of insight into PA. Maybe you could share a little bit about what the combination now that's on board with 100% Jacobs has in store?
What areas that we can look for over the next 6 to 12 months that might show up and help on -- not only the better -- on the bookings or more life cycle driven or maybe even better on the margin front as you execute through the plan of the combined company?
Yes, Mike, I'd probably segregate it into two parts. One is a capability set that we've been working on over the course of that runway of 5 years together and the relationship that we've had. And then the second, apply that to the adjacencies that we've already got a track record on by end market perspective.
So one on the capabilities. So what we've done over the last 5 years is really built out our digital capability set. And this spans everything from software developers all the way through to these digital platforms and digital products that are helping enable innovation within our clients' business as well as our own, but our client business.
And now together, we have nearly 2,000 kind of digital experts. That we're looking at how to further integrate as one company that platform. The end market that, that applies to kind of separate between what we're seeing in Europe with regards to national security, global security in the public sector.
And then in the U.S., energy and utilities and transport. What we're seeing in Europe with a defense independent Europe, is that PA's deep entrenchment, not just with the U.K. MOD, but also now with sovereign nations in Europe building up their own defense posture is turning into defense infrastructure. So that asset life cycle is something that we're primed as a combined entity to deliver as well as what we're seeing in the public sector on the increased digitization and enablement through government deficiencies that PA is in the middle of [indiscernible].
In the U.S., it really is around energy and utilities and transport. That end-to-end cycle of transport advisory all the way through to delivering complex programs and projects is something that we're really excited about. And now with the combined digital capability and driving that in the energy and utility space, driven again by the AI infrastructure, which you just talked about, we're excited about the future with PA.
Excellent. My follow-up, Bob, is the critical infrastructure showing very strong growth this quarter. It's been certainly chugging on quite well.
It probably gets lost in the headlines a little bit given all the data center and advanced the facilities work. Do you continue to see very solid opportunities, certainly second half of the year into 2027. And any additional thoughts on IIJA 2.0 will -- have you think of the issues or your clients are concerned about any of the issues that might arise if there's a delay or with the Congress and the changes?
Yes. Yes. Mike, maybe I'll separate that into two as well.
Yes, we're proud about the critical infrastructure piece that's really being driven by two primary areas. One is global transportation. We're seeing strong in high single digits in certain geographies, kind of double-digit growth within transportation.
And that's really around continued build-out of the aviation sector as well as ports and maritime, which is a really strong subsector for us. And so that's been really good. And these have long tail type of not just procurement processes, which we kind of felt in the last 3 or 4 years, but now the design and the build cycle is something where we're really starting to see the fruits of that.
The second part, as far as in the U.S., IIJA, what happens with the election this year, we're kind of -- we've modeled every scenario, as you can imagine. And in each scenario, we do see, at a minimum, a continuing resolution, which actually would be good for us. And then what happens on the extension of IIJA.
Is there a new bill, looks promising, but probably too early to speculate right now. But even on a continued resolution, these are long-tail type of programs. And we're only 50% outlaid on the current IIJA.
So things continue to look solid.
Your next question comes from the line of Adam Bubes with Goldman Sachs.
Just wondering if you could help us parse out the new versus old guidance. Is there a way to frame what incremental EBITDA and the new guide is coming from the acquired stake in PA Consulting and how much of the incremental EBITDA uplift is underlying?
Yes, I'll take that, Adam. So I'll separate it into fiscal year '26 guidance and then obviously, we provided guidance for fiscal year '29 as well. So in fiscal year '26, we've increased our range from 14.4% to 14.7% to now a new range of 14.6% to 14.9%.
So that is primarily driven by the full consolidation of PA, but there are additional measures and initiatives that we are putting in place that will drive towards the margin expansion. And then on fiscal year '29 basis, it's not just the PA consolidation, but also the fact that we talked about multiple identified initiatives in terms of gross margin drivers, in terms of how we engage with the commercial model, the increased use of AI and so forth. So I'd say the vast majority of that comes from the operational improvements across both the commercial model and global business and global delivery model is also a fundamental part of how we drive margin expansion.
And so that's progressing really well, and we expect that to continue to accelerate. And then last but not least, we are making a commitment to continue to drive operating leverage such that we will grow the OpEx at a substantially lower rate than the revenue run rate. So it's not one thing.
It's a multitude of tools that we have to drive continued margin expansion.
Great. And then can you just update us on how you expect your AI integrated offerings to evolve over the next 12 to 16 months. Any incremental investments or opportunities on that side?
Well, Adam, I'd say that as far as any incremental investments, we don't see it. We've been investing in digital enablement for the better part of this year. I keep saying -- it's now growing.
It's now 7 years that we've been doing this. So I don't see us having to make some huge investment in order to continue on the trajectory that we're on. The way it's evolving is in -- it is definitely being -- it's being pulled from the market with the acceleration that we're seeing in our end markets.
And it's really both what we're doing for our clients business as well as what we're doing for ourselves is really going into full gear. It has been in full gear, but it's accelerating. Again, AI infrastructure, which is kind of the virtuous cycle, is driving that, and we're centrally positioned for that entire build-out.
Your next question comes from the line of Sangita Jain with KeyBanc Capital Markets.
Great. Bob, can you give us an update on the Middle East and what you're seeing there in terms of activity levels and just kind of how your folks are handling the situation?
Yes, Sangita, first and foremost, we have been acutely focused on our -- the safety of our people. From the beginning to now to every single day, we've had crisis management teams stood up and are doing not just daily, hourly check-ins on our people, and they continue to be extremely resilient. The second I would say is that we have been very deliberate and vocal about focusing in on time-based mission-critical programs and projects in the Middle East and for us, that's predominantly in Saudi and in the Emirates.
Those have continued, and they've been centered around transportation as well as water and time-based venues, and those have not stopped. So I'd kind of characterize it right now as we've seen minimal disruption and the team has been extremely resilient in delivering those from the confines of their own home. And just recently today, we went back into a work-from-home scenario.
And so that -- those are kind of the highlights. What's really been the backbone of this and it goes to something that Venk has talked about several times before, is our global delivery model. We're delivering services for our clients, not only with folks that we have in country, in region, in Kingdom, but also from around the world.
And that has really been highlighted and has served as a strength.
Great. That's super helpful. And then I know we've talked about data centers on this call, but can you tell us what you're seeing in life sciences and advanced pharmaceuticals, and if there is any appetite to reshore even further back to the U.S?
Absolutely, Sangita. The life sciences business is in real-time pipeline up 81%. And year-on-year.
A lot of in-flight pursuits that we've been in the early stages are soon to be going into the field. And so that business -- and into the field in the U.S. But we are now starting to see a bit of build going on in Europe as well. But that has been -- continues to be a really strong business for us.
And it kind of goes through the different phases. So some of that reshoring activity that started a year, 2 years ago, you'll start to see those now mature in the field over the course of the next few quarters.
Your next question comes from the line of Jamie Cook with Truist Securities.
Congrats on a nice quarter. I guess just question, Venk, maybe this is more for you versus Bob, but I'm just looking at the EBITDA margin trajectory implied in the back half of the guidance. I think you said third quarter, 15-ish, fourth quarter, 16-ish.
Understanding it's PA Consulting and maybe an extra work, a couple of working days, but still structurally, there still seems to be some margin improvements. And I'm just wondering, given where the margins are implied in the back half of the year, what the setup is for fiscal year 2027 because it doesn't seem like the street is factoring in margins that are implied in the back half. And I don't want to make too much of it, but I'm just wondering if we're missing the margin opportunity potential.
Jamie, thanks for the question. So as you pointed out, we've guided for 15% in Q3, which would represent about a 90 basis point sequential improvement, which is pretty good. And then as you pointed out, that would imply a 16% plus margin in Q4.
As I've talked about in the last quarter, we're investing in some programs that are identified and they're ramping those investments for delivery in Q4. That gives us good visibility to 16% plus in Q4. And the fact that we have executed on that plan last year as well, we feel pretty good about the margin trajectory.
And then looking beyond Q4, obviously, there's still substantial margin improvement ahead of us. Just to put things in context, the last couple of years, fiscal '25 and '26 would have delivered about 200 basis points of margin expansion. And then we're guiding for another 75 basis points per year.
Keep in mind also that some of the other margin drivers for us, apart from the gross margin things that I talked about earlier is global delivery and then the mix, right? As we combine PA Consulting and Jacobs, the opportunity to deliver on the entirety of the asset life cycle and the fact that the PA margins are substantially higher than Jacobs, that gives us the opportunity to go back and upsell some of those margins as well. So lots of room for us to continue to execute on margins, and we feel pretty good about our guidance.
Your next question comes from the line of Jerry Revich with Wells Fargo.
Nice to see the really strong bookings performance. Can you just talk about comfortably what level of organic growth do you think you could ramp the business up to without having significant resource constraints? Is it possible if the bookings trajectory continues to get to double-digit organic growth, the extra week notwithstanding in the fourth quarter?
And what are the implications for margins beyond what you folks just laid out if you do ramp up to that level of capacity utilization implied by getting to double-digit growth?
Jerry, we missed the first part of your question.
The first part was a little garbled, Jerry. Do you mind mentioning the first part again?
Yes. I apologize for the poor connection. I was asking really strong bookings performance.
And I'm wondering, do you have the resources on hand from essentially a capacity standpoint to ramp up to get to potentially double-digit organic growth? And if you do get to that level of growth, what are the implications for potential additional margin upside beyond what you folks laid out?
Yes, absolutely. So the short answer, Jerry, is, yes, we do have the capacity. And this goes to exactly what we've been talking about for quite some time as well as highlighted in our strategy.
That global delivery model if you think about it, just year-on-year, the growth in what we call global delivery is well into the double digits and our ability to access talented labor that's delivering at a very high level has been very, very strong. So short answer is yes. And so our resourcing to meet what is in our backlog, coupled with the progress that's being made on those programs, projects, engagements, we feel strongly about, and it is driving the margins.
And so it's yes, on the margin front as well.
Super. And then separately, on the reshoring side, one area where we're seeing significant progress is in semis and their -- the industry group is talking about a return to '24 levels of highs of CapEx for semis into next year. Can you talk about what you're seeing?
Is that consistent with the opportunity set that you folks see? Is there a potential for additional projects to move forward beyond what the group is looking for in '27?
Again, Jerry, yes and yes. So we are seeing it. And that's why if I go back -- so yes, we are seeing that investment in the semi sector.
And yes, we do see that cycle transcending beyond well into '27. I think what's important is what's driving it, and it goes back to the earlier comments around the AI infrastructure, right? And so where we're positioned right now on high-bandwidth memory manufacturing facilities is putting us on the front end of what we're seeing then translate into the utility sector and then eventually into the racks, so into the compute load in the data centers.
And to see it across that ecosystem is what, quite frankly, is driving our business right now. So those relationships that we've had with high-bandwidth memory manufacturers as well as ASICs and other logic providers is coming true.
Your next question comes from the line of Andrew Wittmann with Baird.
I wanted to ask about the longer-term margin outlook that you guys talked about, the 75 basis points a year. So you guys have talked ad nauseam about the various areas, commercial models. I think you've been through it a million times.
I was just wondering if those out-year drivers are any different from the ones that you've been realizing here over these last 2 very strong years. And also if the benefits that you expect in those out years are going to come just from like basic blocking and tackling? Or do you have to launch some new initiative to achieve those things?
Like in other words, is that going to cost you cash to make -- to implement some changes to achieve that?
Yes, Andy, thanks for the question. So I'd say our margin trajectory, as we highlighted before, a couple of hundred basis points in the first couple of years. And then as you pointed out, 75 basis points per year going forward.
This is a combination of several things that are well underway. Clearly, you saw in the first year, I would have characterized it mostly driven by operating line benefits driven by the separation with the CMS and C&I business and rightsizing our business. But everything thereafter has been driven by specific initiatives that have been identified with gross margin.
The global delivery model that we talked about is actually increasing in pace and in scope and in scale. And so it's a combination of those things. And additionally, as you look at the operating leverage, it's not just what we do from the standpoint of the business side of things, but also on the enterprise side, how we go about running enterprise functions in finance and legal and so forth, deploying AI.
And so that's what's driving those margin expansion opportunities for us. And then to answer the previous question about what does it mean for the CapEx. So our investments, we have maintained about 1% of our revenues is CapEx.
And what's happening is we are reallocating the capital. Traditionally, we would have invested in SaaS software and so forth and things that are now moving more to an AI basis. And that's what's giving us the ability to continue to make those productivity improvements without having to raise our CapEx numbers.
Got it. Just for my follow-up question, you guys alluded in your prepared remarks to the unusually high level of transaction costs. And I'm guessing because some of the consideration that you paid PA for was operating -- was required to be recognized as operating expense rather than capital expense.
That's probably most of it for the quarter, Venk. So I just wanted to kind of just drill in that. Was there anything else in there?
And because you mentioned that there was going to be a fiscal third quarter cash outflow in addition to the substantial cash outflow that was recognized this quarter, does that mean that the exclusions next quarter might be relatively high as well? I know you had a comment that it was mostly contained to the second quarter, but I'm just trying to get a sense of what the balance of the year looks like and then that Nirvana state, hopefully in 4Q where these kinds of exclusions won't be as apparent.
Andy, you're exactly right. So the accounting treatment is what necessitated to be part of cash flow from ops as opposed to cash flow from investing or finance. And that's why you saw this -- that exclusion.
Roughly $235 million of it was what we call compensation expense acceleration for the vesting of the shares. And then in Q3, we called out about $105 million of what's called employee benefit trust payments. And then we're done.
But even with the Q3, that's already imputed in the P&L. So it's only a free cash -- it's only a cash flow item in Q3. So you're exactly -- and then just one other point to note is that if you look at our last couple of years, we've been steadily decreasing our restructuring costs, and we're on track to be substantially lower in fiscal '26 compared to fiscal '25.
Your next question comes from the line of Natalia Bak with Citi.
So now that PA is 100% under J, can you frame for us any potential for sales synergies accelerating?
Very high, very high. We had certain elements of -- it was mostly U.K. regulations around conflict of interest and whatnot as far as visibility into each other's sales pipeline. So the way we expanded the way I've always described it in the past with regards to joint opportunities and increasing the shaded area of the Venn diagram going to market, that's now gone.
And so the pipeline has really increased on that front with regards to going now to market either as PA or as Jacobs, but then the joint opportunities are increasing. I would also say that and it was an earlier question that was asked, the innovation and delivery across the entirety of the asset life cycle, we did that in a collaborative form when we had the majority investment, made a lot of progress. Now that is also going to accelerate what's going to increase that operating [ TAM ].
And where I would say -- the main areas where that would be applied would be in the defense infrastructure and national security in Europe as well as in the U.S. transportation and energy and utility space, again, feeding the AI infrastructure.
Got it. Much appreciate it. And then maybe just on the cost synergy side, any low-hanging fruit with cost opportunities in the near term?
Yes. So I'll take that, Natalia. So in terms of the cost synergies that we highlighted on the prepared remarks, so one is we said when we closed the transaction a few weeks back, we had announced roughly GBP 12 million to GBP 15 million of synergies.
We have now identified specific things in terms of opportunities from a cost perspective. These are specifically real estate, a good opportunity for us to combine the footprints there, vendor rationalization in terms of how we go about procurement with the combined companies. And then on the IT side, a lot of opportunities for us to do system optimization as well.
So specific targets that we've identified, which give us good visibility to getting to $20 million plus of synergies in fiscal '27.
There are no further questions at this time. I will now turn the call back to Bert.
Yes. Thank you, Kara. I know we got cut off in the beginning.
We lost about a minute of time for some audio challenges. So I just wanted to make the mention that I refer you to Slide 2 of the presentation for information about our forward-looking statements, non-GAAP financial measures and operating metrics. I apologize for the technical difficulties.
I'll now pass it over to Bob for some closing remarks.
Thanks, Bert, and thank you, everyone, for joining our earnings call. We really look forward to engaging with many of you over the coming days and weeks, and thank you, and have a good evening. Good day and good morning, depending on where you're coming from.
Thanks, everyone.
This concludes today's call. Thank you for attending. You may now disconnect.
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