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Jacobs Solutions Inc. posted a strong Q3 FY2025 beat with record backlog, margin expansion, raised guidance, and robust free cash flow, positioning it for continued outperformance despite some debt and regulatory risks.

# Jacobs Solutions Inc. Delivers Strong Q3 FY2025 Beat with Record Backlog and Raised Guidance

---

## Executive Summary

- **Jacobs Solutions Inc. (J)** delivered a robust Q3 FY2025, with **revenue of $3.03B (+5.1% YoY)** and **adjusted EPS of $1.62**, both exceeding consensus estimates. **GAAP net earnings surged 119% YoY** to $181.2M, reflecting broad-based operational strength rather than one-off gains.
- **Margins expanded** meaningfully, with adjusted EBITDA margin up 80bps YoY to **14.1%**, driven by disciplined cost management, reduced restructuring charges, and strong free cash flow conversion (over 100% of net income).
- Management’s tone was **decisively bullish**, underpinned by a **record $22.69B backlog** and a **book-to-bill ratio of 1.2x**. FY2025 adjusted EPS guidance was raised to **$6.00–$6.10**, and capital returns remain aggressive with **$653M in share repurchases YTD**.
- **Risks** include a temporary slowdown in environmental/federal infrastructure projects due to U.S. government actions, macro/regulatory uncertainties, and a rising long-term debt profile. However, **opportunities** in digital & AI, high-growth sectors, and continued operational efficiencies are significant.
- **Catalyst watch:** Expect continued positive sentiment as backlog converts to revenue, with digital/AI initiatives and further capital returns as near-term drivers. Watch for any updates on federal project timing and debt management.

---

## Performance Snapshot

| Metric                | Reported   | Consensus | Surprise | YoY Change |
|-----------------------|------------|-----------|----------|------------|
| Revenue               | $3.03B     | $2.97B    | +2.0%    | +5.1%      |
| Adjusted EPS          | $1.62      | $1.54     | +5.2%    | +7.3%      |
| GAAP Net Earnings     | $181.2M    | —         | —        | +119%      |
| GAAP EPS              | $1.56      | —         | —        | +120%      |
| Adjusted EBITDA       | $314.3M    | —         | —        | +11%       |
| Adjusted EBITDA Margin| 14.1%      | —         | +80bps   | +0.8 pts   |
| Backlog               | $22.69B    | —         | —        | +4.5%      |
| Book-to-Bill Ratio    | 1.2x       | —         | —        | +0.1x      |
| Free Cash Flow Conv.  | >100%      | —         | —        | —          |

---

## Earnings Quality

Jacobs Solutions Inc. delivered high-quality earnings, with **broad-based revenue growth** across Infrastructure & Advanced Facilities (I&AF) and PA Consulting. **Margin expansion** was driven by operational efficiencies, lower restructuring charges, and disciplined SG&A management. The company’s **free cash flow conversion exceeded 100% of net income**, reflecting strong underlying cash generation and working capital discipline. There was no evidence of material one-offs, and the improvement in both sales and profitability was well-aligned.

---

## Management Commentary & Guidance

Management’s tone was **confident and optimistic**, highlighting sequential improvement in GAAP EPS and robust capital returns. The **FY2025 adjusted EPS guidance was raised to $6.00–$6.10**, with a narrow and confident revenue/margin outlook. Strategic investments in digital and AI, along with a focus on high-growth sectors, underpin management’s bullish stance. The company’s record backlog and book-to-bill ratio support the sustainability of current momentum.

---

## Key Risks

- **Cost inflation** and potential margin pressures if macro conditions deteriorate.
- **Regulatory and demand-side risks**, particularly from U.S. government actions affecting environmental/federal infrastructure projects.
- **Rising long-term debt** could constrain future capital returns if not managed prudently.
- **Geopolitical uncertainties** and sector-specific slowdowns may impact backlog conversion.

---

## Expected Market Reaction

Analyst and investor sentiment is expected to be **positive**, given the clear beats on revenue and EPS, margin expansion, and raised guidance. The **record backlog** and strong free cash flow conversion are likely to drive further optimism, though some may express caution regarding the increase in long-term debt. The market may also begin to price in the upside from digital and AI investments, which have been underappreciated.

---

## Final Takeaway

**Jacobs Solutions Inc. delivered a strong, high-quality quarter**, with operational momentum, margin expansion, and a record backlog supporting a raised outlook. The market may be underestimating the impact of improved working capital and digital transformation initiatives, while overemphasizing short-term capital returns relative to the rising debt load. 

**Upcoming catalysts:**  
- Further backlog conversion and digital/AI initiative updates  
- Clarity on federal project timing and debt management strategy

Overall, Jacobs Solutions Inc. is well-positioned for continued outperformance, provided it navigates sector-specific and macro risks effectively.

Jacobs (J): Record Backlog Drives Raised FY25 Outlook

Jacobs Solutions’ record backlog and margin gains are offset by persistent negative cash flow, raising concerns about earnings quality and growth flexibility for Q3 2025.

# Jacobs Solutions Inc.: Navigating Backlog Strength and Cash Flow Headwinds – Q3 2025 Earnings Outlook

## Executive Summary

We maintain a **Neutral** outlook on Jacobs Solutions Inc. (NYSE: J) for the upcoming quarter. The company’s **record $22.2B backlog** and **book-to-bill ratio of 1.3x (TTM)** provide strong near-term revenue visibility, while **operating margin expansion to 7.2% in Q2 FY25** signals operational discipline. However, persistent **negative free cash flow (Q2: -$96.4M)** and a **$109.5M mark-to-market investment loss** introduce risk to earnings quality and liquidity. The market may be underestimating the impact of continued working capital outflows on both margin stability and management’s ability to invest for growth.

## Recent Trends Signal What’s Next

Jacobs’ last two quarters highlight a pattern of **modest revenue growth (+2.2% YoY in Q2 FY25)** and **sequential margin improvement**. The company’s **gross margin rose to 25.4%** and **operating margin expanded by 73 bps to 7.2%** in Q2, reflecting improved project mix and cost control. The following table summarizes the last four quarters’ key financials, illustrating a trend of stable revenue and gradually improving margins:

### Quarterly Financial Trends

| Quarter      | Revenue ($B) | Gross Margin (%) | Operating Margin (%) | EPS ($) |
|--------------|--------------|------------------|----------------------|---------|
| Q3 FY24      | 2.85         | 24.8             | 6.5                  | 1.32    |
| Q4 FY24      | 2.88         | 25.0             | 6.7                  | 1.36    |
| Q1 FY25      | 2.89         | 25.1             | 6.9                  | 1.40    |
| Q2 FY25      | 2.91         | 25.4             | 7.2                  | 1.43    |

**Trend:** Revenue is inching higher each quarter, while both gross and operating margins are expanding, supporting a base case for continued margin stability or slight improvement in Q3.

## Management’s Forward Tone and Positioning

Management’s Q2 FY25 commentary was **cautiously optimistic**, emphasizing “robust bookings” and a “healthy pipeline.” Notably, the CEO stated, **“We’re seeing tailwinds from infrastructure and digital transformation demand,”** and reaffirmed full-year guidance despite cost headwinds. This is a shift from the prior quarter’s more defensive tone, which focused on “navigating a challenging working capital environment.” The current messaging suggests management expects **demand resilience** to offset ongoing cost and cash flow pressures, but is not signaling aggressive upside.

## KPI Trends & Upcoming Quarter Drivers

The most relevant KPIs for Q3 are:

- **Backlog:** Reached a record **$22.2B** in Q2, up 4% YoY, supporting revenue visibility.
- **Book-to-Bill Ratio:** Averaged **1.3x TTM**, indicating more contracts won than delivered.
- **Operating Cash Flow:** **- $96.4M** in Q2, a deterioration from prior quarters.

### KPI Movement Table

| KPI                | Q2 FY24 | Q1 FY25 | Q2 FY25 | YoY Change | QoQ Change |
|--------------------|---------|---------|---------|------------|------------|
| Backlog ($B)       | 21.3    | 21.8    | 22.2    | +4%        | +2%        |
| Book-to-Bill (x)   | 1.2     | 1.3     | 1.1     | -0.1       | -0.2       |
| Op. Cash Flow ($M) | 12.0    | -45.0   | -96.4   | N/A        | -51.4      |

**Implication:** Backlog and book-to-bill support stable revenue, but worsening cash flow could limit margin upside and flexibility.

## Missed by the Street

A key overlooked signal is the **persistent negative operating cash flow** and management’s subtle shift in language around “working capital outflows.” While consensus focuses on backlog strength, the **$109.5M mark-to-market loss on the AMTM investment** and the phrase, **“higher operating cash use,”** from the Q2 call, suggest that underlying cash conversion is a growing risk. This could impact both near-term EPS quality and the company’s ability to fund new initiatives.

## Scenarios for the Upcoming Quarter

### Q3 FY25 Scenario Table

| Scenario | Revenue ($B) | Adjusted EPS ($) | Operating Margin (%) | Key Assumptions                                              |
|----------|--------------|------------------|----------------------|--------------------------------------------------------------|
| Bull     | 3.00         | 1.60             | 7.5                  | Strong contract execution, easing cost pressures, improved cash flow |
| Base     | 2.91         | 1.43             | 7.2                  | Backlog conversion steady, cost structure stable, FCF remains negative |
| Bear     | 2.85         | 1.35             | 7.0                  | Margin pressure from cost inflation, project delays, continued FCF drag |

**Most Likely:** The **Base case** is most probable, given stable backlog conversion and management’s reaffirmed guidance, but with ongoing cash flow headwinds limiting upside.

## Appendix – Data Tables & Management Quotes

### Quarterly Revenue, EPS, and Margin Trends

| Quarter      | Revenue ($B) | EPS ($) | Gross Margin (%) | Operating Margin (%) |
|--------------|--------------|---------|------------------|----------------------|
| Q3 FY24      | 2.85         | 1.32    | 24.8             | 6.5                  |
| Q4 FY24      | 2.88         | 1.36    | 25.0             | 6.7                  |
| Q1 FY25      | 2.89         | 1.40    | 25.1             | 6.9                  |
| Q2 FY25      | 2.91         | 1.43    | 25.4             | 7.2                  |

### KPI Movement (YoY and QoQ)

| KPI                | Q2 FY24 | Q2 FY25 | YoY Change | Q1 FY25 | Q2 FY25 | QoQ Change |
|--------------------|---------|---------|------------|---------|---------|------------|
| Backlog ($B)       | 21.3    | 22.2    | +4%        | 21.8    | 22.2    | +2%        |
| Book-to-Bill (x)   | 1.2     | 1.1     | -0.1       | 1.3     | 1.1     | -0.2       |
| Op. Cash Flow ($M) | 12.0    | -96.4   | N/A        | -45.0   | -96.4   | -51.4      |

### Key Management Quotes

1. **“We’re seeing tailwinds from infrastructure and digital transformation demand.”**  
   – Q2 FY25 Earnings Call  
   *Signals management’s confidence in end-market demand supporting near-term revenue.*

2. **“Our record backlog of $22.2 billion provides strong visibility into future quarters.”**  
   – Q2 FY25 Earnings Call  
   *Highlights revenue stability and pipeline strength.*

3. **“We continue to experience working capital outflows and higher operating cash use.”**  
   – Q2 FY25 Earnings Call  
   *Warns of ongoing cash flow pressure, a risk to margin and investment capacity.*

4. **“We reaffirm our full-year guidance despite cost headwinds.”**  
   – Q2 FY25 Earnings Call  
   *Indicates cautious optimism and commitment to targets.*

5. **“The AMTM investment loss was a non-cash mark-to-market adjustment, but we are monitoring volatility.”**  
   – Q2 FY25 Earnings Call  
   *Acknowledges investment risk that could impact reported earnings.*

6. **“We’re focused on operational discipline to drive incremental margin improvement.”**  
   – Q2 FY25 Earnings Call  
   *Suggests ongoing cost control efforts may support margin stability.*

7. **“Our digital and advisory business continues to outperform, with PA Consulting up 5% YoY.”**  
   – Q2 FY25 Earnings Call  
   *Points to segment strength as a potential margin lever.*

---

**Bottom Line:**  
Jacobs Solutions enters Q3 2025 with strong backlog-driven revenue visibility and improving margins, but persistent negative cash flow and investment volatility temper the outlook. The base case scenario of stable revenue and margin is most likely, with upside or downside hinging on cash conversion and cost discipline.

Jacobs (J): Backlog Strength vs. Cash Flow Risks