LGN - NASDAQ

Good day, and thank you for standing by. Welcome to the Third Quarter 2025 Legence Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Son Vann. Please go ahead.

Thank you, Daniel, and good morning, everyone. Welcome to Legence Third Quarter 2025 Earnings Call. With me today are Jeff Sprau, our Chief Executive Officer; Stephen Butz, Chief Financial Officer; and Steve Hansen, Chief Operating Officer. This morning, we issued 2 press releases, one covering our third quarter results and the other on our pending acquisition of the Bowers Group. There are also separate slide presentations that accompany each release. All materials can be found on the Investor Relations section of our company's website, wearelegence.com. Before we begin, I want to remind you that comments made during this call contain certain forward-looking statements and are subject to risks and uncertainties, including those identified in our risk factors contained in our SEC filings. Our actual results could differ materially, and we undertake no obligation to update any such forward-looking statements. During this call, we will refer to certain non-GAAP financial measures, which should not be considered in isolation from or as a substitute for measures prepared in accordance with generally accepted accounting principles. Please refer to our quarterly earnings presentation for reconciliations of these non-GAAP measures to the most directly comparable GAAP measures. With that, let me turn the call over to Jeff.

Thank you, Son, and thanks, everyone, for joining today's inaugural quarterly earnings call as a public company. First off, I want to thank everyone involved with our successful IPO and express my gratitude to our new shareholders that have put their trust in Legence. Today, we'll discuss our record third quarter performance as well as our announcement to acquire the Bowers Group. One of the premier mechanical contractors in the Northern Virginia, D.C. area. Now for some on this call who may not be familiar with Legence, I want to give a brief overview of who we are. Legence is a leading provider of engineering, installation and maintenance services for mission-critical systems in buildings. We offer the full suite of building services from engineering and consulting to the implementation and maintenance of these complex systems. In essence, we are a design builder with national scale. This is a key differentiator. Most companies in our industry are either an engineering firm or a company that focuses solely on installation. We're different in that we provide both capabilities on a national scale. We focus on mission-critical, technically demanding MEP or mechanical electrical and plumbing systems. For mechanical, think HVAC. Electrical is self-explanatory. On plumbing, this also includes high-purity process piping, which is critical to the semiconductor, biotech, pharma and food and beverage industries and now extremely important to data centers as they transition to liquid-to-chip cooling systems. Another differentiator is the markets we serve. We skew towards high-growth industries, specifically data centers and technology and life science and health care, which accounts for over half of our revenue mix. We also service more stable target-rich markets such as education, state and local government, mixed-use and a few other industries. By serving a diverse mix of customers, we're able to transfer technical knowledge between end markets. Take, for example, our success with data centers. We leveraged our decades-long expertise in the semiconductor space and applied those same concepts to our direct liquid-to-chip cooling systems for the data centers that are being built today. This knowledge sharing is critical to our ability to evolve with ever-changing technical demand of our customers and our end market diversification positions us well for long-term success. Turning now to our financial results, which Stephen will discuss in detail. From my perspective and with gratitude to our amazing employees, we had an incredible record-setting quarter with year-over-year revenue growth of 26% EBITDA growth of 39% and backlog growth of 29%. Even more impressive is that this growth is all organic. EBITDA margins improved by over 100 basis points, driven by strong project execution, particularly with our fabrication work. Our book-to-bill ratio, which is a good indicator of our outlook, was also very strong at 1.5x. In this morning's press release, we also provided our initial guidance for revenue and adjusted EBITDA through 2026. Stephen will talk more on our guidance. This outlook reflects the strong momentum in our business, driven by the solid growth in our backlog. Shifting to our announcement that we've entered into a definitive agreement to acquire Bowers. We're really excited about this agreement to acquire one of the premier mechanical contractors in the Northern Virginia, D.C. metro area with over 40 years of expertise in mechanical and plumbing solutions for complex building systems. This region is well known as data center alley, where the largest installed base of data center capacity in the world resides. And Bowers is one of the leading mechanical contractors for the data center and high-performance computing market. Their strong reputation for safe operations and operational excellence aligns perfectly with our values. The integration of our teams will foster collaboration and knowledge sharing, enabling us to drive growth and ultimately deliver value for our clients and our shareholders. Now this transaction is compelling for a number of reasons. With Bowers, we are adding at scale, high-quality mechanical capabilities in the Northern Virginia region, complementing our existing electrical capabilities in the area. Bowers is one of the most well-regarded mechanical contractors in the region, and we have firsthand knowledge of their expertise from the many projects that we've partnered on. Bowers has some 1,700 employees, most of whom are highly skilled unionized crafts people. Similar to Legence, Bowers has a strong commitment to training, development and retention of top talent. Their leadership consists of seasoned veterans having an average of over 20 years' experience at Bowers. I've gotten to know the leadership better over the past few months, and I couldn't be more impressed by both their knowledge and experience. We both share a common desire to deliver at the highest level and capitalize on the extraordinary growth opportunities in front of us. Their leadership team is staying on board with Legence, adding to our deep bench. As previously discussed, the Northern Virginia, D.C. area has the most data center capacity globally, and Bowers has been at the center of this build-out since its first data center project for Amazon way back in 1999. The outlook for new construction of data center capacity remains strong in the region. In addition, the retrofit market is a significant area of opportunity given the massive and aging installed base of data centers. Roughly 1/4 of Bowers' data center revenues are from retrofit projects. Bowers also brings over 370,000 square feet of fabrication capacity strategically located in the D.C. area. Bowers has historically used this capacity for their internal project delivery needs. We now have the opportunity to utilize this capacity to serve customers along the East Coast, Southeast and Midwest as demand for modular fabrication and liquid-to-chip solutions continues to grow, especially from data center customers. I'm also very excited about the tremendous cross-selling potential that comes with ours. As previously discussed, their mechanical expertise is a great complement to our existing electrical solution capabilities in this key Mid-Atlantic region. Gaining access to their extensive fabrication resources creates an opportunity to serve a broader range of customers in different regions. Furthermore, by offering our engineering and consulting solutions to their client base, we see exciting opportunities to drive revenue growth for both organizations. Outside of Bowers, on October 1, we closed on 2 attractive tuck-in acquisitions, one on the engineering side and the other on the installation side. A

Thank you, Jeff, and good morning, everyone. I also want to echo Jeff's appreciation for everyone's efforts in making the IPO such a success as well as preparing the company for this initial reporting cycle as a public company. For the remainder of the call, I'll begin with a review of third quarter 2025 results in comparison to third quarter of 2024. Following my review of our historical results, I'll make some brief comments about our current outlook, discuss our balance sheet and the improvements we've made to our leverage and close out with additional commentary on the Bowers acquisition before opening up to Q&A. Please note that we posted separate presentations pertaining to our quarterly results as well as information on Bowers on our IR website. During the third quarter of 2025, we generated revenue of $708 million, an increase of $147 million or 26% from the year ago quarter. 100% of this increase was organic, with both segments generating solid growth. Breaking down revenue growth at the segment level, starting with Engineering and Consulting. Segment revenue increased by 9.5% to $212 million. Both service lines grew from prior year levels. Engineering and Design Services increased by 11.3%, driven by strong growth in Life Sciences and Healthcare as well as state and local government end markets. Program and project management services grew by 7.6% from higher demand, primarily with hospitality and entertainment clients, driven by work at NBC Studios, one of our newer clients. Moving to Installation and Maintenance. Segment revenue of $496 million increased by an extremely robust 35% versus the year ago quarter. Again, this growth was entirely organic. Installation and fabrication services accounted for the majority of the segment growth, increasing by 41%. Much of the increase was in the data center and technology market, both with installation work and fabrication of liquid-to-chip cooling systems for data centers in Northern Virginia, Arizona, Iowa, Ohio and Georgia. This service line also saw strong growth in life sciences and health care market as we're working on several large hospital installation jobs and a large fabrication project for a pharmaceutical client. Maintenance and services also grew at a healthy rate of 12.3%, mainly from our data centers and technology and life sciences and health care clients with the growth skewed towards service break fix activity versus preventative maintenance. Consolidated gross profit for the third quarter 2025 increased by 25% to $148 million. Consolidated gross margin slipped by a very modest 20 basis points to 20.9%, mainly due to the overall revenue mix shift toward the Installation and Maintenance segment, which carries a lower gross margin profile than our Engineering and Consulting segment. This was partially offset by higher Installation and Maintenance segment margins. Delving further into margins at the segment level. Third quarter 2025 Engineering and Consulting gross margins of 31.7% declined from year ago margins of 33%, driven by a slightly higher percentage of subcontractor expenses and a lower margin in our engineering and design service line. This was partially offset by a modest revenue mix shift toward the engineering and design service line, which carries a higher margin than program and project management. For the Installation and Maintenance segment, gross margin improved by 140 basis points during the third quarter versus the year ago levels to 16.3%. The Installation and Fabrication service line margins benefited from exceptional project execution, particularly with our fabrication work for data center and technology clients. Turning to SG&A expense. Third quarter 2025 SG&A totaled $85.9 million compared to $67.2 million in the year ago quarter. Included in the third quarter 2025 SG&A is approximately $14.7 million of stock-based compensation. While we incurred $18.6 million in stock-based compensation in total during the quarter, $4 million is recorded in cost of sales. The overwhelming majority of the stock-based compensation, in fact, $18.1 million of the $18.6 million is related to our legacy profit interest that are marked to market each quarter and will ultimately be paid for by Legence Parent 1 and 2 and will never be borne by Legence Corp. So while this is recorded as an expense on Legence Corp.'s consolidated results as the compensation will ultimately go to our employees, Legence Corp. Class A shareholders do not bear the burden of this expense. The remainder of the increase in SG&A was primarily driven by higher professional fees related to our IPO. When backing out the same adjustments that impact SG&A on our non-GAAP adjusted EBITDA schedule, adjusted SG&A for the quarter of $66.7 million increased by 11% from $59.9 million in the year ago quarter and declined to 9.4% of revenue from 10.7% in the year ago quarter. That gets us to adjusted EBITDA for the third quarter of $88.8 million, an increase of 39% from prior year levels. Adjusted EBITDA margin for the third quarter of 2025 was 12.5%, approximately 110 basis points higher than year ago levels as we were able to contain adjusted SG&A growth to a slower rate than our overall revenue growth. Depreciation and amortization totaled $27.5 million in the third quarter, down $1.2 million from the year ago quarter with the decline primarily stemming from the runoff of contract backlog and intangible assets from prior acquisitions. Interest expense of $28.2 million for the third quarter increased by $4.5 million from a year ago, primarily due to the higher average debt balance than the year ago period, though it does include about 0.5 month of lower interest costs as a result of our debt repayment with the IPO proceeds. Turning to income tax. Our third quarter 2025 tax provision was $4.1 million. Because pretax income at the consolidated level was fairly close to breakeven for the quarter, this makes for a quarterly effective tax rate that isn't overly meaningful. We may have a similar dynamic in the fourth quarter. Looking ahead to 2026, the effective tax rate is likely to be more in line with our state and federal statutory rate of approximately 30%. Cash taxes for 2026 are estimated to be in the mid-$20 million range. This is before any payment related to the tax receivable agreement, or TRA, which likely won't have any payment requirement until late 2027 at the earliest and only if tax savings are actually realized. Switching gears to backlog. At the end of the third quarter, our consolidated backlog and awards totaled $3.1 billion, up sharply by 29% from the year ago levels, and our consolidated book-to-bill ratio was a very robust 1.5x for the quarter, certainly another highlight. This book-to-bill was particularly strong given our record revenue in the third quarter. Total backlog came mainly -- growth came mainly in the Installation and Maintenance segment, which grew by 46% to $2.2 billion. Engineering and Consulting backlog grew modestly, though I should point out that third quarters are usually a seasonally high period for the Engineering and Consulting revenue. Not surprisingly, the data center and technology end market was the key driver in backlog and awards growth, but we also saw some healthy gains in life sciences and health care as well as state and local government clients. Turning now to our guidance. As you saw in our earnings release, we are establishing fourth quarter 2025 and full year 2026 guidance for consolidated revenue and adjusted EBITDA. This guidance is for standalone Legence and excludes the impact of our pending acquisition of Bowers. For the fourth quarter, we expect stand-alone revenue of between $600 million and $630 million and adjusted EBITDA of between $60 million and $65 million. This compares to fourth quarter 2024 revenue of $548 million and adjusted EBITDA of $57 million. Our fourth quarter guidance reflects the seasonality we typically experience during this time of year. For the full year 2026, we expect to generate stand-alone revenue of between $2.65 billion and $2.85 billion and adjusted EBITDA of between $295 million and $315 million. Our 2026 guidance reflects the strong growth that we've experienced in backlog, but also a general trend of elongation in that backlog and awards on the I&M side. Growth in 2026 revenue will likely be a bit more skewed to the Installation and Maintenance segment following the trend in backlog growth. Just a few other housekeeping items to help with your modeling. Interest expense for the fourth quarter is expected to be in the $15 million range, with full year 2026 in the low to mid-$50 million range. Depreciation and amortization for the fourth quarter is expected to be in the mid- to high $20 million range, with full year '26 D&A in the low $100 million range. In terms of CapEx, fourth quarter is expected to approximate $20 million with the full year 2026 estimated to total in the low to mid-$50 million range. Approximately 2/3 of the 2026 CapEx forecast is for expansion, part of which is related to spending previously planned for 2025. but that has slipped into 2026. Now moving to our balance sheet, liquidity position and leverage. As previously disclosed, we utilized our net IPO proceeds of $780 million entirely for debt reduction, which reduced our total gross debt outstanding by nearly 50% to $836 million at the end of September. Strong operating results, coupled with improvements in working capital, led to our cash balance increasing to $176 million at the end of September, up from $98 million at the end of June. Liquidity at quarter end also included approximately $85 million of availability under our revolving credit facility. In late October, we successfully amended our term loan and revolving credit facilities. For the term loan, we extended maturities by 3 years to December 2031 and reduced our interest rate by 25 basis points, which will save us approximately $2 million in annual interest expense based on current debt levels. For the revolver, we extended maturities by 4 years to September 2030, increased the commitment amount from $90 million to $200 million and aligned pricing to match the term loan. Given the debt reduction, strong cash position and improved operating results, our net leverage ratio declined meaningfully at the end of the third quarter to 2.4x compared to 6.2x at the end of June and 3x pro forma for the IPO, which we believe demonstrates our ability to quickly delever. Now I'd like to make a few comments on Bowers. Bowers generated approximately $767 million of revenue and $72 million of EBITDA over the last 12 months ended September 30, 2025. For the full year 2026, we expect Bowers to generate revenue of between $825 million and $875 million and EBITDA of between $75 million and $85 million. Now please keep in mind that closing is expected sometime during the first quarter of 2026. So there may be a stub period of their financial results that won't be included as part of our results for 2026. Our base case expectation is that we close on February 1. This would imply incremental revenues of $725 million to $775 million and EBITDA of $67 million to $75 million for Legence, given the partial year impact. Our guidance for Bower's contribution is underpinned by their extremely strong backlog and awards, which totaled approximately $1.3 billion at the end of the third quarter and really provides attractive revenue visibility. Now moving on to the transaction consideration. The purchase price is approximately $475 million, consisting of $325 million in cash, $100 million of Legence common stock or approximately 2.55 million Class A shares and $50 million in deferred consideration to be paid at the end of 2026. The deferred payment can be in either cash or stock at our discretion. Legence will fund the cash portion of the purchase price through a combination of cash on hand, borrowings under our revolving credit facility and an anticipated $150 million upsizing to our term loan facility, which is supported by a firm commitment from our agent bank. Based on this funding approach, our pro forma net leverage at September 30 is just under 2.9x, and that's below the 3x at June 30, pro forma for the application of the IPO proceeds to repay debt. Given our outlook, supported by our growing backlog, we believe we can bring net leverage back down to where we ended the third quarter of just under 2.5x fairly quickly. Now on to the impact of Bowers to our business mix, starting with revenue. All of Bowers's activity will fall within our Installation and Maintenance segment. Approximately 86% of the revenues are generated from the installation and fabrication service line, with the remaining 14% in maintenance and service. While we still remain fairly balanced between our 2 segments, adding Bowers to our I&M segment shifts our gross profit mix to 60% I&M and 40% E&C from 52% to 48% on a stand-alone basis today. Looking at revenue by end market, approximately 70% of Bowers's revenue is derived from data center and technology clients. The other large end market is life sciences and health care, which accounts for 13% of the revenue mix. Adding Bowers further increases our presence in high-growth industries with mission-critical facilities. Our pro forma revenue contribution from data center and technology increases to 47% from 39% and Life Sciences and Healthcare will still comprise 17%. Education will remain a meaningful contributor to Legence at approximately 15% of pro forma revenue. In terms of revenue by building type, as you would imagine, their current position in data center markets, they skew a bit more toward new buildings at 57% of revenue. Adding Bowers would increase our revenue percentage from new buildings to over 40% from 36% at 9/30. Now I'd like to make a few brief remarks on the acquisitions of IMD and A

[Operator Instructions]. Our first question comes from Adam Bubes with Goldman Sachs.

Congrats on your first quarter. I think it's clear M&A will be a part of the growth strategy. And so just wondering if you could speak to what leverage you're comfortable with on sort of like a 2- to 3-year time horizon? And any way to size the pipeline of M&A opportunities you're actively working on?

Yes, I'll take the first part of that. We came out at the IPO, as we mentioned, at 3x on a net basis, and we look to maintain the leverage ratio below that level going forward. And longer term, target something in the low 2x range. And you can see we can pretty -- we're pretty quickly able to get there. We're comfortable taking that back up to the high 2x range pro forma for Bowers. I think we'll work that back down again quickly. And it will ebb and flow a bit with acquisition opportunities, but we'll likely remain in that sort of range.

Yes. In terms of the pipeline, Adam, it's really a different story by segment. Certainly, in the E&C segment, which is a national business, full of a very fragmented market, I think we'll -- we have a very active pipeline, and we'll continue to pursue those acquisitions that probably trend more towards the tuck-in type. Certainly, we're interested in businesses where the employee base is really technically savvy in the markets that we play in, that has capacity and are in -- that bring with them a customer background that we may not possess in a given geography. Now on the I&M side, that is much more opportunistic. And as we've discussed previously, we really focus on those cities in the U.S. that have a high concentration of these high-growth industries. And so it's a bit harder to predict. Now to be fair, we'll be spending the next several months integrating Bowers into our organization. So I would not anticipate another Bowers level acquisition in the near term. But we're always on the lookout for those parts of the country that, again, have a high concentration of our customer base, where adding scale can have a meaningful impact on our results.

Terrific. And then it looks like data center and technology growth accelerated pretty sharply sequentially. I think it was 23% growth last quarter, now up over 60%. What drove that sharp acceleration? Is that a particular project or 2? And what's the level of data center and technology growth embedded in 2026 outlook?

Yes. I'll take the backlog growth. Really, it's multiple projects in different geographies, a mixture of installation work from a ground-up data center builds and modular construction technical cooling systems that we're shipping around the country, the increase in the need for that type of work and the technical nature of it is really driving some of that increased backlog we're seeing. And I'll hand it to Stephen on this.

Yes. In terms of our forecast, the data center and technology end market has grown for Legence over the last several years at a 30% CAGR. And our outlook remains pretty consistent with that. We think that it's going to continue to grow at that rate for some time. And that's, of course, offset by us to a degree and baked into our guidance with other markets growing generally more in the single-digit range.

[Operator Instructions]. Our next question comes from Julien Dumoulin-Smith with Jefferies.

Congrats on the inaugural call here. And as you know, we're always focused on cash, so I wanted to kick things off on that front. And I wanted to focus on this working capital tailwind that you guys are talking about here from these contract liabilities. Can you walk us through what you're seeing in terms of further willingness from customers here to accept higher down payments? It's a fascinating trend. Obviously, the sector is evolving, and it seems like some of the negotiating trends are certainly heading in your direction as a tailwind. And then more to the point, is there negotiating power for you here to protect further project economics in other manners, right? Clearly, working capital is one manifestation of those terms. I'd love to hear.

Yes. Great question, Julien. As we've talked about before, working capital management is something that the company really puts an increased focus of emphasis on this year and an area where we wanted to improve. And you can see that manifest itself in the third quarter results. Certainly, part of that is just faster collections as well as better management of the payables timing, and you can see that. But also, as you point out, negotiation of contract terms, contract liabilities, and we've seen some improvement there. Now of course, it varies by the service that we're providing and the end markets, as you know. And typically, when we're custom fabricating items, we tend to get more payments -- higher payments upfront than in other instances. And so I think that's driving that to a degree.

Got it. And then my next one is just as a follow-up to the last question, if I can. How do you think about just where you are in the life cycle of M&A and acquisitions to continue to announce these kinds of transactions? I know that was never necessarily promised as part of the IPO process here, but how would you frame that conversation and set a cadence? In contrast to the conversation on leverage, just how would you set an expectation around where you are in conversations with folks?

Yes. I would say our pipeline of targets remains active and robust. And at any given time, we have several discussions ongoing. Like I mentioned previously, it's a little easier to sort of understand, I guess, velocity on the E&C side because those are going to be smaller tuck-in type acquisitions. So I would continue -- I would expect those to continue. It's just hard to pick or to peg rather the impact, as you saw last quarter, we had one E&C and I&M. And then again, on the I&M side, those generally, unless they're a tuck-in to a local geography, those are just bigger and harder to call. But I do know that we're going to be focusing like a laser in terms of making sure that everything goes smoothly with the Bowers integration. And so I would not expect anything of that magnitude along those lines in the near term.

Our next question comes from Sabahat Khan with RBC.

Just following up on some of the commentary around the mix between the 2 markets. Obviously, this one is adding a bit more to the sort of the implementation side, the Bowers acquisition. How do you just think about the evolution of the revenue mix kind of 1, 2, 3 years out? Is there sort of a management perspective on getting it back to maybe what -- where you were sort of pre-IPO? Or is it where the opportunities show up, you'll just kind of follow where the market is headed? Just some perspective on how the overall end market mix within revenue and EBITDA could evolve over the next 2-, 3-year period?

Yes. Good question. While we'd like to maintain a reasonable balance there, it is going to ebb and flow with M&A opportunities, also the growth in different end markets. And we do see a shift next year, certainly, as we discussed, more towards the I&M segment. As Jeff mentioned, on the M&A side, we tend to see more opportunities on the more fragmented engineering industry, right? And so over time, we'll probably tend to do more acquisitions on that side, which could bring it back closer toward a 50-50. But then again, if we have an opportunity to acquire really a leading I&M firm in a target market, that can swing it back the other direction to a degree as Bowers has. But we really like both segments and both businesses and the integration that we're driving there, the cross-selling opportunities. the revenue synergy as we bring these businesses into the fold. And so we're not certainly not going to shy away from attractive opportunities in either segment.

Yes. We have -- that's all true, Stephen. We have extreme conviction in being a life cycle provider. And to be able to do that, you have to have scale. You have to have scale on the implementation side and you have to have scale on the engineering of our professional services side. And so you're right. We don't have a goal. It's got to be 50-50 or 60-40 or 62-38, but we want to have national scale in both because we believe it's a differentiator. We believe it's better for the customer, and we believe there's tremendous cross-sell capability that are great tailwinds, further tailwinds for our future growth.

Great. And then maybe just as a follow-up, a bit more on the margin side, I guess, similar to the mix question. And obviously, on a mix or from a mix perspective, this transaction probably a bit diluted. But I guess this was immediate scale that the market probably wasn't expecting. So can you maybe just talk about the operating leverage benefits from adding this much revenue? And then second part, maybe just some of the synergies opportunities that you might realize from Bowers over the next 1, 2 years, both revenue and cost.

Sure. The -- on the -- I'll start with the synergy side. There are puts and takes on the cost synergy side. Typically, when we're acquiring the smaller private business, even though this is a little bit bigger than the others, but we're typically going to focus on increasing the focus on cybersecurity, improving the strengthening finance and HR compliance in those areas. And so typically an area where we'll spend a bit more, at least in those early years. And then, of course, there are some other cost synergies, but they tend to offset. And so really, the revenue synergy is what's driven more value uplift in our acquisition strategy historically. And that's really what we see with Bowers as well. Now over the longer term, we do expect to get more benefit as we drive integration in these businesses and get some -- so as we get into 2027, 2028, we expect to see a little bit more economies of scale, but you just don't see that in the short term.

Our next question comes from Brian Brophy with Stifel.

Congrats on the very nice start here. Just had a question on installation gross margins. It looks like they were a little bit higher than what folks were expecting. And certainly, they were higher than a year ago. You touched on strong execution in the release. But just curious, any more color on what's driving the gross margins on the installation side. Was there anything more onetime in there like closeouts in the quarter? Or how should we be thinking about the sustainability of the margins we saw in the third quarter?

Yes. I mean continued focus on operational excellence is part of our goal. I do think there was a mixture of some closeout timing as well as the mix on the manufacturing fabrication service line that is coming with a little bit higher margins. So we feel like we can continue to leverage that as we continue to even to Stephen's point, in the future, take some operating leverage to help to expand margins on that side of the business.

Our next question comes from Michael Dudas with Vertical Research Partners.

Maybe for Stephen or Jeff, as you look at the backlog, which is a very strong growth and you put out your 2026 guidance, maybe you could share a little bit about what visibility you typically have 6 to 12 months out in the current backlog and the conversion rates to revenue the following year. And there's been any change in the end market? Obviously, data center has been helpful, but any other areas that as you look into 2026, may be a bit more additive to the maybe potential backlog growth or the mix of revenues that you put forth?

Yes. We probably have a little higher visibility into 2026 than we have in past years at this point in the year. And so our forecast is a little bit more skewed toward projects that are in backlog versus what we refer to internally as like go get jobs that we're going to secure during the year. Today, I would estimate of our $3.1 billion in backlog that just a little bit less than $2 billion. So $1.8 billion to $1.9 billion of that will burn in 2026. Of course, a good portion will burn in the fourth quarter as well. And then some extends into 2027 and 2028. But today, have a little bit higher visibility into the next year than we historically have. And certainly more visibility into 2027 than we would have had in past years. And what was the other part of your question?

Different markets...

Yes. Again, tremendous growth in the data center and technology space. We've also had some nice wins in the pharmaceutical side, life sciences. Education is still going to remain a key contributor, but...

And I think we remain bullish on onshoring and reshoring from a manufacturing perspective, be it biotech, be it semiconductor. And then the fact that energy efficiency is a major -- has a major impact on our clients' operating expenses. And to the extent that we can go into a building of any type and reduce their energy consumption by 10%, 20%, 30%, 40%, I would expect that to continue to be a meaningful component of our -- both our backlog as well as our opportunity pipeline.

Our next question comes from Greg Lewis with BTIG.

I had a first one around next year's guidance. As we look at, I guess, trying to back in an applied margin, any kind of color you can give us around what's driving that incremental expansion and then where you potentially see opportunities for upside around that guidance?

Sure. I think there's always mix shifts by service line and end market that are going to be a big driver in our forecast. And so we see within installation and -- Installation and Maintenance, we do see within the Installation and Fabrication service line, selling more of our higher-margin services. While we are going to be working on the typical large installation jobs, we're also now fabricating modules that we can ship to rural areas of the country where we won't be working on the full installation or the full scope, but we tend to generate a higher margin on those sort of custom fabricated projects. And so that's increasing in proportion to that overall service line. And so that could drive some margin accretion in the installation and maintenance space. Now somewhat offsetting that is a mix shift, as we talked about toward that segment, which is lower margin than our Engineering and Consulting segment. And so all that's sort of baked into our expectations for next year.

Okay. But for overall, do we see any -- I mean, as pricing, it seems like all these -- some of your business lines are starting to gain momentum. How -- it seems like there should be an opportunity to push pricing maybe in the technology, maybe in the life sciences. Is that kind of -- is that?

Yes. I think I mean we're always looking for opportunity to push pricing. We do have a very technical customer base that is savvy on price and they push back. So we are a long play with our clients. If you kind of look at the tenure of our clients and long decades-long relationships. We've built that through the years of trust and not overreaching on pricing. So -- but we will always push. We want to walk that fine line of not losing that client relationship.

Our next question comes from Oliver Davies with Rothschild & Co. Redburn.

Two from me. So firstly, you mentioned that some of the fabrication CapEx had slipped to 2026. So can you provide an update there and the demand you're seeing for fabrication alongside the kind of incremental growth you assume in 2026? And then secondly, I mean, obviously, the sort of more traditional end markets continue to be soft. So is there anything sequentially to call out there or any signs of improving backdrop that you're seeing?

Yes. I'll start with the CapEx slip. We're continuing to build out several hundred square feet of facilities in operation. And though we're using the square footage, we've got the leases tied down and we're in those buildings, just permit issues with local entities have kind of pushed us back on that build. And so it's really the tooling side that's pushed on the CapEx. And we do see continued opportunities not only in the data center market for modular construction, but in our life science and pharma industry as well as semiconductor, we're seeing those opportunities and taking advantage.

And I'd say on the additional markets, probably the biotech life sciences space has been soft for the last couple of years. We're seeing some of our leading indicators would be the amount of proposals that we have submitted to clients or have been requested by clients, that is starting to tick up as lab space and R&D and office space gets absorbed. So we expect that to continue that upward trend over the next several quarters.

Our next question comes from Craig Irwin with ROTH MKM.

So I was hoping you could maybe give us a little bit more color on the cross-selling opportunity through the Bowers Group. You have strong E&C capabilities in the region. Is this something that you think could come together relatively quickly? How long would it take for you to get back to the regular mix from the rest of the business of roughly 25% overlap in there? Any color you could offer to help us unpack the synergies on the cross-selling there?

Yes. We're excited about the opportunity with Bowers. In that region, as you know, we also have electrical capabilities. We have E&C capabilities in that region. So really our full suite of offerings. It's not overnight. We've got to go and chase down those client bases where we can offer that full package and get them on board, but it is going to be a focus as we integrate and Jeff touched on it several times, we've really got to -- we're going to bite off that integration and get them in the mix and then really work hard on how we can go approach the market and push that. So high on our target list, I'd love to give you a time line, but...

Well, and I'd piggyback on that, Steve. We have a nice head start in that both companies know each other and have known each other for decades. And so there are relationships and most importantly, trust that already exist. And that is a nice head start to sort of springload some results.

And I'll just pile on to that while our integration plan, obviously, there's a lot of granular tasks that we're looking to accomplish. Part of that also is high level and going in and educating the employees at Target on all the different services that Legion can bring to bear. And so we will do and we'll undertake that fairly early on. But as Steve mentioned, it still takes some time for that to bear fruit.

Understood. Then I wanted to follow up with a question on the fabrication expansion. So you did mention the adjustment on the tooling CapEx as you build out increased capacity into '26. Does Bowers bring anything substantially different that maybe changes the urgency or necessity of some of the investments that you're making? Are there new capabilities that were not in existence on the Legence side? And how important is this expansion that you're working on for improved capture and increased share of business with several of these Tier 1 customers that you're pursuing?

Yes. Bowers brings a lot to the table. They bring both 370,000 square feet plus of fabrication capability. New capabilities, really, we have shared capabilities. They bring the same thing to the table. They've got a high background in process piping as well as hydronics and everything else that tie to this. And it allows us to leverage that geography, right? Currently, most of our fabrication is done in the West and Southwest of the country. And now we have an East Coast presence where we can go to our clients and expand that footprint and reduce cost and shipping and different things like that, that will give us synergies. So we still -- it's still important for us to build out that other square footage that we're already on because it is important for us to drive capacity and be able to show our clients that we can take that workload, so -- which is supported by our backlog.

Our next question comes from Derek Soderberg with Cantor Fitzgerald.

Can you quantify any impact from larger job size in the third quarter results? And when you look at backlog, can you just talk about the trend you're seeing in job size, which end markets are influencing that at all? And then I've got a quick follow-up.

Yes. I can't quantify the impact specifically from large jobs. So what I'll say is we have -- as we pointed out over time, we are seeing an increasing proportion of our revenue coming from larger jobs. That said, our average job size is probably still skewed a bit lower than some of the other public peers as we do a lot of maintenance and service, a lot of quick hitting small jobs, a lot of retrofits as opposed to new construction. Though the growth in the data center and technology end market, which tends to be more new facilities today at larger job sizes, that is having an impact. And that impact drove some of the growth in the quarter, certainly, was driven by that end market, new buildings, new jobs. So yes, we think that's going to continue. So over time, we're bullish about the retrofit market for data centers. There's a lot of data centers that are probably getting long in the tooth. And so we think that at some point, there's going to be a shift in focus toward renovation of those types of facilities.

Well, and I'd add on the health care, semiconductor markets, life science markets, these larger projects, those are projects that will stay and continue once they're done and do recurring revenue work there that is on a smaller scale.

Got it. That's helpful. And then as my follow-up, it sounds like there might be some upside to 2026 with some of the synergies. But just to clarify, to what extent was any sort of synergy embedded in the full year '26 guidance? Or were they really just a continuation of the stand-alone businesses?

Yes. Again, we don't see cost synergy in the short run. So over 2026, we'd expect the cost synergies to be offset by some incremental costs as we talked about. And revenue synergies, we're typically not going to model that in because it does take some time, as Steve mentioned, for that to bear fruit. Though we have historically generated a significant uplift over time from cross-selling.

And we do have time for one more question. Our final question comes from Miguel Marques with Bernstein.

Stepping in for Chad Dillard. First question for me just is your I&M margins were obviously up to 16.3% this quarter. You guys mentioned better project execution. But is there any additional color you guys can offer on like what levers you pulled exactly? And if at all, how much of this was driven by like better favorable end market mix or size of projects?

Yes, a little bit of all of the above. I mean it definitely just, as we mentioned, exceptional project execution, late-stage projects that become visible that we're going to generate a higher margin on those jobs as well as favorable closeouts. And in terms of the top line, we also had some equipment purchases and things of that nature that were more expected to come in, in the fourth quarter that actually came in, in the third. So that provides a little benefit to the quarter as well. But that's all baked into our fourth quarter guidance.

Understood. And then just second on Bowers. It obviously appears as though modular capacity played a big factor in your guys' interest. I think you guys are at 500,000 square feet today, scaling up pretty soon. Bowers is just under you guys. But for one, I guess, how much of a role did this play in your thinking and expanding on that? Could you offer any color on how big the modular business is for you today? How fast is it growing? And I guess what Bowers can add to that?

Yes. On the Bowers front, it's interesting. We started talking to Bowers back way back in 2020, so over 5 years ago. And we were always really interested in them based on their history, based on their culture, based on their end markets. I would tell you that we didn't know exactly what their footprint was from a fabrication perspective until we got into diligence. And that was a nice sort of frosting on the cake, so to speak, as opposed to being the initial driver. And I'll throw it to Steve or Stephen in terms of the size of our fab business in general.

Yes. And we don't disclose that separately. It's part of our installation and fabrication service line. But if you were to look at where are we just doing fabrication only, it's in the low to mid-teens percentage of revenue of that overall service line, where previously a year ago, it would have been in the single digit percentages. So it's growing nicely.

This concludes the question-and-answer session. I would now like to turn it back to Son Vann for closing remarks.

Thank you, everyone, for attending our call. A recording will be available on our website in a few hours. We look forward to updating you again on our next earnings call. Thanks again, and have a great day.