J - NYSE

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 everyone to the Jacobs Fiscal Third Quarter 2025 Earnings Conference Call and Webcast. [Operator Instructions] Thank you. I would now like to turn the conference over to Bert Subin, Head of Investor Relations. Bert, you may begin.

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

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

Thank you, Bob, and good day, everyone. Let me begin by summarizing a few of the financial highlights on Slide #6, followed by additional context on our quarterly performance. In the third quarter, gross revenue increased 5% year-over-year and adjusted net revenue which excludes pass-through revenue grew by 7%. Q3 adjusted EBITDA was $314 million, growing more than 13% year-over-year. Our adjusted EBITDA margin during Q3 came in strong at 14.1%, which is an increase of 80 basis points versus the same quarter last year. As a result, adjusted EPS close to $1.62, a 25% increase year-over-year. Our disciplined cost management contributed to a new record for margins, and we're well positioned to build on this momentum in Q4 and in fiscal year '26. Also, as Bob touched on, consolidated backlog was up 14% year-over-year to a record $22.7 billion, including our trailing 12-month book-to-bill at 1.2x. Gross profit in backlog also increased 14% year-over-year during Q3, a strong indicator of our positioning as we head into next year. Regarding our performance by end market in Infrastructure & Advanced facilities, let's now turn to Slide #7. Demand for services in the Water & Environmental end market remains favorable across all major geographies with very strong top line performance in the Water sector during Q3. Total adjusted net revenue growth for Water & Environmental rose more than 5% in Q3, and we expect growth to remain in a similar range in Q4, aided by continued demand strength in Water. In our Life Sciences & Advanced Manufacturing end market, adjusted net revenue also grew approximately 5% in Q3. We've seen notable growth in the Data Center submarket that has complemented continued strong performance in the Life Sciences sector. As we move into Q4, we expect growth to increase relative to our Q3 results. In Critical Infrastructure, adjusted net revenue increased over 6% year-on-year. Within this end market, Energy & Power remain our fastest-growing sector, but improvement in Transportation sector growth particularly in Europe, helped drive better year-on-year performance versus Q2. Encouragingly, growth in the cities and places vertical is also moving in the right direction on the back of Middle East strength. Looking ahead, we expect Critical Infrastructure growth to moderate slightly in Q4, but remain healthy. Now moving on to Slide #8, I will provide a brief overview of our segment financials. In Q3, Infrastructure & Advanced Facilities operating profit increased over 13% year-on-year with a modest tailwind from FX. PA Consulting built on strong second quarter improvement and delivered a notable uptick in revenue growth to 15% during the third quarter. This resulted in operating profit increasing 15% year-over-year in total and 9% in constant currency on a 22% operating margin. PA Consulting's momentum in the U.S. and across the private sector was augmented by improving public sector spending in the U.K. We continue to see favorable trends in PA's backlog and pipeline which have both increased double digits year-on-year. We believe growth in these metrics is a positive leading indicator of future results. Now moving on to Slide #9. We provide an overview of cash generation and our balance sheet. Overall, our balance sheet remains in excellent shape exiting Q3, inclusive of record capital returns through the first 3 quarters of fiscal year '25. Focusing on the quarter, Q3 free cash flow was $271 million, which was in line with our expectation for free cash generation to inflect in the second half of the year as earnings increased and working capital improved. During the quarter, we repurchased $101 million in shares, bringing our fiscal year-to-date repurchases to a record $653 million. Additionally, early in Q3, we received $70 million in favorable working capital adjustments from the CMS transaction, and finalized ownership previously further reduced our quarterly cash dividend. We also distributed the Amentum shares released from escrow to our shareholders on a pro rata basis. This represented approximately $159 million in incremental capital returns to shareholders based on the Amentum share price when declared. Our balance sheet strength supports continued investment in the business, along with continued returns to shareholders via share repurchases and long-term dividend growth. Our commitment to return capital to shareholders is evidenced by our $0.32 per share dividend, representing 10% year-over-year growth as well as our material increase in share repurchase activity this year. We continue to view our shares as an attractive investment and have remained consistent buyers as a result. In total, we returned $927 million to shareholders through repurchases and dividends over the past 3 quarters alone. Summing this all up, we ended the quarter at the low end of our 1.0x to 1.5x net leverage target, and we're on track to return well more than 100% of adjusted free cash flow in fiscal year '25. This puts us in a strong financial position as we close out the year. Finally, please turn to Slide #10. As we enter Q4, we are updating our outlook for fiscal year '25. We now expect adjusted net revenue to grow approximately 5.5% year-over-year, adjusted EBITDA margin to be approximately 13.9%, and adjusted EPS range of $6 to $6.10 and we continue to expect reported free cash flow conversion to be more than 100%. As it relates to the fourth quarter, the midpoint of our guidance implies sequential improvement in net revenue, adjusted EBITDA margin and adjusted EPS. In summary, strong Q3 performance, combined with our forecast for Q4, support our decision to raise the midpoint of our full year adjusted earnings outlook. Now looking ahead to fiscal year '26, we feel good about our positioning. Since we're still in the planning phase, we'll provide a more detailed update on our expectations for fiscal year '26 next quarter. What we can share now is that we expect revenue growth to be ahead of fiscal year '25 with continued margin improvement as our gross margin initiatives begin to phase in. Altogether, this should result in solid adjusted EPS growth next year. In summary, we expect to finish the fiscal year on a strong note and plan to build on this performance in fiscal year '26. With that, I'll turn the call back over to Bob.

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

[Operator Instructions] Your first question comes from the line of Sangita Jain with KeyBanc Capital Markets.

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

Yes. So Sangita, thanks for the question. It's all the above. So right now, if you kind of look at the 3 distinct sectors of Data Centers, hyperscalers, colos and now what we're seeing with regards to vertically integrated -- vertical integration going on in different sectors and companies organically having their own data centers, we're seeing the source of those opportunities come through that. The number of inquiries as well as engagements we have, have grown substantially and the highest that they've been this quarter. The second is that they are multiscope and that before, we were doing predominantly the design, both of the gray space and the white space inside kind of the boundary limits of the data center. Now we're seeing that scope expand into the Power requirements as well as the Water requirements, which in AI Data Centers is substantial. And then from a delivery model, traditionally, we were exclusively an engineer and as I mentioned in the script, we're actually now expanding that scope to deliver full program and kind of full project delivery around that. One other item, Sangita, just to add is that this opportunity with NVIDIA is pretty transformational and that this will be the reference design and the plan of record that NVIDIA will give to their customer base using the NVIDIA chip, which we're already getting inquiries from those customers back into Jacobs. So we're excited.

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

Yes. Yes, I'll start off and then maybe Venk can add to it. I'd say, as far as the end market profile of that backlog, it is growing in the Advanced Facilities and Water sector probably at a faster rate than the others. And those 2 sectors and to your second part of your question, tend to have larger and longer -- kind of longer tail burn profiles to them. When I say longer tail, they're still fast-paced projects, but these are projects that span multiple quarters. And we've been putting those in our backlog to date. The other sectors, good backlog, but then you'd be talking about kind of 4-, 5-, 6-year type of burn profiles in transportation and some of our consultancy work for Defense & Security and PA as well as in the public sectors. I don't know, Venk, if you want to add?

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

Your next question comes from the line of Andy Wittmann with Baird.

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

Yes. Let me talk first, Andy, about the puts. You said it's putting some more stability in the state and local governments, specifically around Transportation and probably a little bit more of a backstop around Water. But I would say, the 2 biggest puts are around DoD and DoD Infrastructure, and that's on the OBBBA bill, but also what's going on in Europe right now with regards to GDP spend as a percent, the defense spend as a percentage of GDP. The second, I would say, is around FAA. And that actually presents a really nice opportunity. It's still kind of in the forming stage right now, but that's going to go really fast. And this bill puts some backstop on that as well. And then the last thing I'd probably point to is the reshoring activity. And for us, with 40% of our business in the private sector, that -- we're seeing that already even prior to the bill, the bill kind of puts a bit of backstop there. So overall, we see it as a net positive. Some of the -- that's the puts. Some of the takes, don't know how state and local governments are going to balance those requirements that the Medicaid drop presents. But today, our clients are not -- as far as right now, not talking about that. I think the secular trends and the needs are going to prevail here.

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

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

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

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

Sure. Maybe I'll start off, Andy, from an end market perspective, and then Veink can kind of talk about how those are actualizing themselves in our backlog today. But from an end market standpoint, I'd point to 3 main areas, Andy. One is Life Sciences, the second is around Data Centers, which -- these are smaller type bookings, but they go fast. And as I mentioned on the question that Sangita asked, our scope is growing on those opportunities. And then the third is Water. And this isn't something that happened this quarter. We've been talking about our backlog growth for the better part of 4 straight quarters. So that's the confidence that we're seeing going into FY '26 because those project cycles are now starting to come to kind of a material burn piece. So Venk, I don't know if you want to add anything else?

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

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

Sure, absolutely. Maybe I'll kind of split them into -- in Critical Infrastructure, really, what we're seeing in Europe is a bit of a rebound we saw -- we kind of telegraphed this happening. Maybe it happened a couple of quarters, maybe later than what we expected. But as the U.K. budget has stabilized, and we saw this in the PA performance as well, that transportation component, whether it be national highways or high-speed rail, those budgets are now being firmed up, and we're the recipient of both those. So kind of that transportation spend there, driven in the U.K., but also in Ireland as well as what we're seeing in the Nordics has been solid and on the rebound, and we're getting a fair share of that. In the Middle East, cities and places, which is kind of our major venue, major program piece, strong double-digit growth, and we're hopefully going to have some announcements here in the next few weeks, but that growth continues, especially as we move closer to time-based events like the Expo and the World Cup and some other major events that are happening there. So nice growth on both of those fronts as well.

Your next question comes from the line of Sabahat Khan with RBC Capital Markets.

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

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

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

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

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

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

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

I appreciate that. And my follow-up maybe for Venk. Two thoughts. One, as you look at the margins into backlog and your margin performance, how would you break down from the mix from scale, from cost efficiency, how that looked this quarter and how that looks as you enter into your 2026 planning budget? And maybe you can touch on some of the organic investments that you highlighted in your prepared remarks on what you're spending internal capital on to help grow the business?

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

And on organic investment?

Yes. Thank you. From that standpoint, you've heard us talk about our investments in terms of our customer engagements with AI, with a lot of the products. A lot of investments also happening internally from an efficiency standpoint, looking at enterprise functions in terms of how we can improve the efficiency through automated tools, agent AI and so forth. And we'll provide a lot more color. But suffice it to say, those are all in the early stages of providing some substantial operating leverage for us going forward.

Your next question comes from the line of Chad Dillard with AB Bernstein.

This is [indiscernible] filling in for Chad. So have you seen a change in customer activity in the design business as it relates to the change in bonus depreciation, particularly for the Advanced Manufacturing segment?

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

Your next question comes from the line of Judah Aronovitz with UBS.

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

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

Okay. That's helpful. And then just on the NSR growth guidance, I think you maybe took it down slightly. And then the Q4 implies growth, I think, decelerating relative to Q3. I would think that assumes kind of a deceleration in PA, as you mentioned, and then a slight acceleration in I&AF. But just curious how you're thinking about that? And then what do you need to see to hit the implied Q4 guide?

Yes, I'll take that. Fair question. I would say, obviously, as you saw in Q3, pretty solid performance in terms of top line growth of 7%. So if you take the full year guidance of 5.5% and impute what it means for Q4, roughly similar outcomes. So I would say, nothing significantly different from that standpoint. If anything, the PA business should continue to hold steady as it has in Q3, which was a pretty substantial improvement quarter-on-quarter. And we're seeing similar performance in our I&AF business as well. So very similar performance between Q3 and Q4, and we feel pretty good about where we stand right now and not decelerating.

Your next question comes from the line of Kevin Wilson with Truist Securities.

Calling on behalf of Jamie Cook. Within Water & Environmental, can you speak to the trends for Environmental specifically? Was this quarter a bit weaker than expected there? And then just how do you think about the differences in performance between Water & Environmental in the context of your long-term targets of, I think, 8% to 10% for Water and 4% to 6% CAGR for Environmental over the next few years?

Yes. Kevin, as far as the projections that we put out on both of those as they break down, we're standing right behind them. In fact, right now, our Water sector is performing at higher than those rates today. So we see continued growth there. On the Environmental piece, I really think that this is -- and we kind of saw this in the early part of the calendar year on what was going on as an indirect impact of some of the U.S. administration government actions that were being taken. And so some slowdown and some pausing in some of those environmental as well as federal infrastructure type of projects for the first half. And so we're seeing that from a year-on-year comp standpoint play out. Those are coming back. And so I think as we move forward from the next quarter forward, you'll see that Environmental business start to inflect forward as kind of the regulatory environment starts to stabilize a bit. So we're seeing this as very near term in the Environmental sector.

Got it. And then for my follow-up, any update on the investment in PA Consulting? Last quarter, I think you made a point to highlight -- now -- I think, 6 or 7 months out from that March 2026 deadline. Just a range of options you're considering and how you think about valuation for that business?

Yes, it continues to -- the dialogue with our partners of PA continues to go well. We're being thoughtful. Both sides are being very, very thoughtful on how we look at performance, both from a retro standpoint as well as moving forward. And so the diligence that's going through and the collaboration on the synergistic value moving forward are all being incorporated into how we value as well as how we structure moving forward. There's been a lot of positive learnings as well as successes over the last 4 years, and we're structuring ourselves to where those moving forward are even going to unlock even more value in the combined partnership. So overall, I'd say positive.

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

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