Legence Corp-cl A Aktie

Good day, and thank you for standing by. Welcome to the First Quarter 2026 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, Vice President, Investor Relations. Please go ahead.

Thank you, Daniel, and good morning, everyone. Welcome to Legence First Quarter 2026 Earnings Call. With me today are Jeffrey Sprau, our Chief Executive Officer; Stephen Butz, Chief Financial Officer; and Stephen Hansen, Chief Operating Officer.

This morning, we issued a press release that covers our first quarter 2026 financial results and posted a slide presentation that accompanies the earnings release. All materials can be found on the Investor Relations section of the 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.

On 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 to discuss our first quarter performance and current outlook for Legence. It's only been 1.5 months since our last earnings call, and the themes that we spoke about then are still applicable today. These themes include a very healthy demand environment for mission-critical building systems, particularly in the data center and technology end market. Our strong project execution, our ability to attract talented labor and the impact that M&A can bring to accelerate our growth. All of these factors contributed to our strong first quarter results that exceeded quarterly guidance as well as provide the underpinning to raise our full year 2026 guidance.

On our first quarter results, Stephen will go into greater detail. But at a high level, total revenues more than doubled year-over-year to just over $1 billion. Now to put that into perspective, Legence generated $1.2 billion of revenue for all of 2022. So we've grown revenue at an incredible pace over the past 3 years. Our historic growth was roughly split evenly between organic growth and through acquisitions. This was the case in our latest quarterly results, where our acquisition of Bowers accounted for just under half of the year-over-year revenue gains with organic growth essentially making up the other half.

Excluding the impact from Bowers, revenues increased by a robust 57% year-over-year, with the majority of this growth coming from the Installation & Maintenance segment. While data centers and technology clients drove our growth, other key end markets such as life science, healthcare, education and state & local government also posted solid gains. Engineering & Consulting segment revenue growth was a bit more broad-based across our end markets, and that segment is seeing more traction with our data center and technology clients.

Adjusted EBITDA grew by 132% year-over-year, reflecting the contribution from Bowers as well as overall growth in our existing businesses. EBITDA margins expanded by over 130 basis points as we benefited from strong project execution, particularly with our Installation & Fabrication projects and better leverage of our SG&A costs. Total backlog and awards ended the quarter at a record $5.4 billion, up 104% year-over-year, which reflects the inclusion of Bowers. Excluding Bowers, backlog and awards grew by 36% from a year ago.

Now on a sequential basis and pro forma for the inclusion of Bowers backlog, we added approximately $200 million of net new backlog on top of the $1 billion in revenue recorded during the first quarter. Most of the increase in backlog and awards came in the Installation & Maintenance segment, driven by the data center and technology market. While the addition of Bowers not only expanded our mechanical presence in the D.C., Virginia region, we also diversified our client base in this end market, increasing our presence with certain hyperscalers and colocators.

Engineering & Consulting backlog rose by 13% on a year-over-year basis, driven by state & local government and education clients. The resulting book-to-bill ratio for the 3 months ended March 2026 was 1.2x. While this is lower than the book-to-bill experienced in the fourth quarter, realize that we had several very large awards that from a timing standpoint, were booked at the end of last year. This added to backlog growth and elevated book-to-bill in the fourth quarter, but also impacted what we would have otherwise booked in the first quarter.

Now setting aside the timing aspect of when awards are booked, the underlying growth that we expect in our end markets, particularly in data centers and technology remains very robust. And we feel confident in our ability to continue to grow total backlog as the year progresses based on what we see in our pipeline.

We continue to grow our labor force to meet the strong demand that we see in the end markets that we serve. In April, we crossed over 10,000 full-time employees at Legence. This includes approximately 7,400 skilled technicians and crafts people, which is over 1,000 more than what we began the year with. They work alongside our 1,200-plus engineers and consultants to deliver projects at the highest standards for our clients across both segments. While we're always mindful of having the right people necessary to execute on our projects, we do not expect labor to be a material constraint on our ability to grow.

Finally, on our fabrication capacity and expansion plans. While there are some advanced tooling installations and other operational items that we need to complete to get where we want to be from a functionality and efficiency standpoint, we are largely up and running on 1.3 million square feet of fab capacity today. At this level of capacity and the operational flexibility that we have with this capacity, we feel good about our ability to execute on our current book of business with some room to meet the additional demand that we see in our pipeline.

Our fabrication business continues to be driven by our technical cooling systems for data centers and will likely continue to be the case for some time. With that said, we're seeing additional indications of interest for fabrication services with our pharmaceutical and semiconductor clients. As the benefits of fabrication and modular construction are recognized by more mission-critical markets and given our relationships with many of the most technologically innovative companies in the world, we're in a great position to capitalize on this trend.

With that, let me turn the call over to Stephen.

Thank you, Jeff, and good morning, everyone. For the remainder of our call, I'll begin with a review of first quarter 2026 results in comparison to first quarter of 2025. Following my review of our historical results, I'll make some brief remarks about our current guidance, discuss our balance sheet and liquidity position before handing the call back to Jeff.

Starting with the first quarter of 2026, we generated revenue of $1.038 billion, an increase of $506 million or 105% from the year ago quarter. The Bowers Group acquisition contributed a little over $240 million of revenue. Excluding Bowers, our revenues grew by approximately 57% year-over-year. Our first quarter 2026 revenue surpassed our guidance, primarily due to outperformance in the Installation & Maintenance segment with very strong project execution and fabrication as a key driver. The larger scale of data center projects, in particular, has given us a chance to apply best practices and continuously improve our delivery model and efficiencies.

As we gain in efficiency, one of the outcomes is that we're able to complete and ship product ahead of schedule, all while maintaining our high-quality standards. As a result, our clients are able to install and commission our systems sooner, allowing us to release contingencies earlier than expected, effectively pulling forward some revenue that was originally expected in later periods and also lift our margin profile. Increased confidence around this dynamic is also behind why we are raising our full year 2026 guidance, which I'll cover later in my remarks.

Breaking down our latest quarterly revenue growth at the segment level, starting with Engineering & Consulting. The segment revenue grew by 14%, most of which was organic to $166 million. Program & Project Management service revenues grew at a robust 75% with particularly strong growth in K-12 schools as we're working on several large projects in Pennsylvania, Virginia and West Virginia.

We also saw additional activity in data centers and technology. However, Engineering & Design revenues declined by 8%, largely due to a very tough comparable prior year quarter that included some strong revenues from commercial solar advisory services, coupled with softer demand in the current period for sustainability consulting from mixed-use clients. We are hopeful that sustainability consulting will pick up in future periods as backlog for this service has increased since year-end 2025.

Moving to Installation & Maintenance segment revenue of $872 million increased by 142% versus the year ago quarter. Roughly half of this growth was from the addition of Bowers with the remaining growth largely organic. Installation & Fabrication services accounted for the majority of segment growth, increasing by 162%, driven by the inclusion of Bowers and robust organic growth with data center and technology clients. The segment also experienced attractive organic growth in life science and healthcare, in part reflecting our work on some larger hospital projects.

Maintenance & Service revenue increased by 60% year-over-year. When excluding the impact of Bowers, this service line still grew at a robust rate in excess of 20%. This high growth rate was due in part to a somewhat softer first quarter of 2025 comparison, but also reflected healthy increases in education, hospitals and semiconductor clients, the latter of which are included in our data center and technology end market classification.

Turning to gross profit. Consolidated gross profit for the first quarter of 2026 increased by 67% to approximately $186 million. Similar to our fourth quarter results, gross profit includes stock-based and other compensation expense related to legacy profit interest units, where the payment of this expense is borne by entities outside of Legence Corp., essentially the legacy pre-IPO shareholders. As a reminder, the settlement of legacy profit interest does not impact Legence Corp., either in the form of cash outlay or the issuance of additional common shares. Because these profit interest units are mark-to-market, any significant changes to our share price will have a material impact on this expense as it did in the first quarter of 2026.

Excluding the impact of profit interest expense, adjusted gross profit on a consolidated basis totaled approximately $194 million and adjusted gross margin was 18.7% for the first quarter 2026 compared to approximately $111 million and 21.9% in the first quarter of 2025. The lower adjusted gross margin was primarily due to a revenue mix shift to the Installation & Maintenance segment as a result of the addition of Bowers and the high growth rate in this segment as well as lower gross margins in Engineering & Consulting segment. This was somewhat offset by the strong margin improvement in the I&M segment.

Delving into margins at the segment level. First quarter 2026 Engineering & Consulting adjusted gross margin was 33.2%, down from 40.7% in the first quarter of 2025. As mentioned, the year ago quarter was a tough comparison in E&C as we had a few projects which generated very high margins that were not replicated in the latest quarter. Furthermore, the segment gross margin reflected a significant revenue mix shift towards the Program & Project Management service line, which accounted for 41% of segment revenue compared to only 27% in the year ago quarter.

Program & Project Management services typically generate a lower margin profile than the Engineering & Design due to the bigger ticket nature of these expenses and high subcontractor pass-through costs of this service line. The Installation & Maintenance segment generated an adjusted gross margin of 15.9%, up from 14.3% in the year ago quarter. Adjusted gross margin improvement was driven by strong project execution within the Installation & Fabrication service line. We also benefited from economies of scale with our support costs within this segment.

Turning to SG&A. This expense includes approximately $32 million of stock-based and noncash compensation expense, the vast majority of which, almost $29 million was related to the legacy profit interest that is paid for by entities outside of Legence Corp. Excluding the impact of stock-based and noncash compensation expense as well as a little over $1 million of acquisition and strategic initiative expenses that are part of SG&A, the adjusted SG&A expense was $83 million, up from $64 million in the year ago quarter. This increase was primarily due to the inclusion of Bowers, our general headcount to support our growth and operate as a public company as well as higher lease expenses.

More importantly, though, adjusted SG&A as a percentage of revenue improved significantly to 8%, down from 12.6% in the year ago quarter as we benefit from greater economies of scale with these costs relative to our strong revenue growth. All in all, we generated adjusted EBITDA of $118 million in the first quarter of 2026, an increase of 132% from first quarter 2025 levels. Adjusted EBITDA margin for the first quarter 2026 improved by approximately 133 basis points to 11.4% compared to the year ago quarter. Depreciation and amortization totaled $42 million in the first quarter '26, up from $29 million in the year ago quarter, with the increase largely due to incremental amortization and depreciation that stemmed from the Bowers acquisition. Interest expense net of interest income was $16 million for the first quarter of 2026 and declined by $13 million from a year ago, primarily due to our lower average debt balance than the year ago period.

Turning to income tax. Even though we had pretax income during the first quarter of 2026, we reported an income tax benefit of $13 million. This is largely due to the release of a valuation allowance on our deferred tax assets of approximately $20 million, which flipped income tax from an expense to a benefit. Partially offsetting the release is that a number of expense items are not tax deductible, such as the profit interest expense and certain amortization within our corporate taxpaying subsidiary group.

We currently estimate our effective tax rate or ETR for the full year 2026 to be in the mid-20% to low 30% range, though this will be substantially affected by any future profit interest expense, which is difficult to forecast due to the mark-to-market nature of this expense. Beyond 2026, we expect our ETR to gradually gravitate towards the low 30% range, though in any given year, our ETR could be impacted by discrete items that may not be deductible for tax purposes. Regarding cash taxes, our current estimate for 2026 is in the high $20 million to mid-$30 million range. In addition to our cash tax payments to federal and state jurisdictions, we currently expect to make a TRA payment of around $8 million to $9 million related to our 2025 operating activity sometime in late 2026 or early 2027.

Our TRA payment relating to estimated 2026 activity is under evaluation, but preliminary estimates put this range anywhere from the high $20 million to low $30 million range with this payment likely to occur in early 2028. To the extent we have additional share exchanges, this should reduce our cash tax payments while increasing TRA payments by 85% of the reduction in cash tax. So the net difference for Legence is a 15% reduction in the cash outflow.

Speaking of cash flow, our free cash flow, defined as net income, adding back depreciation and amortization, stock-based comp and other noncash items, changes in working capital and capital spending exceeded $100 million in the first quarter of 2026, which translates to a conversion rate of over 85% of adjusted EBITDA. This is well above the roughly $25 million of free cash flow and 50% conversion rate in the year ago quarter, reflecting our operating performance, lower interest burden and improved working capital management.

Switching gears now to backlog. We ended March with consolidated backlog and awards of $5.4 billion, up 104% from year ago levels. Excluding Bowers, backlog and awards grew by almost $1 billion or 36%. Now when compared to pro forma year-end 2025, backlog and awards grew by approximately $200 million, translating to a book-to-bill for the first quarter of 1.2x. As Jeff mentioned, we closed out 2025 with some very large awards, which elevated the 3-month book-to-bill figure in the fourth quarter. I'd also note that a book-to-bill ratio measured over a 3-month period is quite sensitive to award timing, especially as our business is experiencing more elevated awards in the $100 million-plus range than we have seen in the past.

In terms of our organic growth in backlog and awards, the data center and technology end market is the predominant driver, though we are also seeing growth in state & local government and education markets.

Turning to our guidance. We are establishing second quarter 2026 guidance for consolidated revenue of between $1.05 billion and $1.1 billion and adjusted EBITDA between $115 million and $125 million. For full year 2026, we are increasing our revenue guidance to a range of $4.1 billion to $4.3 billion, up roughly 10% from our previous guidance range of $3.7 billion to $3.9 billion that we presented during our fourth quarter report on March 27, just 7 weeks ago. As previously discussed, this increase in part reflects our current expectations on project timing and execution as well as our outperformance in the first quarter.

We are also raising our full year 2026 EBITDA guidance range to $470 million to $490 million, up from $400 million to $430 million. Our EBITDA guidance revision reflects the changes to our revenue guidance as well as a slight improvement in margin expectations, in large part based on our recent track record of outperformance and improved execution expectations. Now just a few other housekeeping items to help with your modeling efforts. Interest expense net of interest income for the second quarter is expected to be in the $15 million range, with full year 2026 in the high $50 million range. Depreciation and amortization for the second quarter is expected to be slightly higher than the first quarter with full year 2026 D&A in the mid-$170 million range. In terms of CapEx, we still expect full year 2026 spending to be in the $65 million range, 2/3 of which we would classify as for growth.

Now moving to our balance sheet, liquidity and leverage. We ended the first quarter with $245 million of cash, up from $230 million at the end of 2025. Total liquidity was $414 million at quarter end, nearly flat when compared to $424 million at year-end 2025, despite our use of cash for both the Bowers and Metrics acquisitions. Total debt at the end of March was slightly over $1 billion, up approximately $200 million from year-end to reflect the upsizing of our term loan used to fund the Bowers acquisition. Based on pro forma last 12 months EBITDA, which would include EBITDA from Bowers between April through December 2025 prior to our ownership, our pro forma net leverage ratio is now 1.8x compared to 2.9x just 9 months ago, pro forma for the application of IPO proceeds, which were used to repay debt.

Barring acquisitions, we expect our net leverage ratio to continue to gravitate lower on the overall growth in the business and resulting cash generation. Based on this current leverage profile, we believe this gives us flexibility for M&A, though as always, we will take a disciplined approach to our evaluation of any opportunities.

This concludes my remarks, and I'll now turn the call back to Jeff.

Thanks, Stephen. In closing, and before we get to the Q&A, our first quarter performance was a great start to the year. We continue to execute extremely well on our projects, particularly with the larger Installation & Fabrication projects that allow us greater opportunities to leverage our skilled workforce and technical capabilities. This was our first quarter with Bowers, and I'm really pleased with the integration progress and the financial impact that Bowers has already delivered, and we aim to improve further from here.

Backlog and awards continue to grow to record levels, which further derisks our 2026 guidance and provides additional visibility into a portion of 2027. Our leverage position shows how quickly we can delever and puts us in a good financial position to be flexible with future M&A opportunities. I'd like to close out our prepared remarks by acknowledging the outstanding contributions of our truly amazing employees. Your dedication and commitment to serving our customers is greatly appreciated.

With that, we'll now open the call up to questions. Operator?

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

With leverage now back below 2x, do you see scope for larger-scale M&A in the medium term similar to something that looks like a Bowers? And any updated thoughts on puts and takes on pursuing M&A in Engineering & Design versus Installation & Maintenance?

Yes. I'll take the first part of that, and Jeff will probably jump in on the second. But I mean, certainly, the improved leverage profile does give us, I mean, improve our flexibility to do acquisitions sooner. That said, I wouldn't expect another acquisition the size of Bowers in the very near term as we discussed at the time we announced the Bowers acquisition, we're going to be very focused on executing on a successful integration, which we're well along the way there, made a lot of great progress. Bowers is exceeding expectations. So we're going to continue to keep our eye on the ball with Bowers. But I think over the medium term, it certainly does give us more flexibility to do some larger-scale M&A.

Yes, that's exactly right, Stephen. And certainly, on the E&C front, Adam, we love bolt-on or tuck-in acquisitions that add customers, add capacity, add expertise in given markets and systems. And so I'd expect we will continue to do that as we have historically. And Stephen is exactly right. Optionality is a huge word for us and having the option to be able to pursue some larger or some might even call transformative acquisitions, now that we've proven that we can delever in a rather quick fashion really helps us as we look at the market and look at our pipeline of opportunities.

We're super picky in terms of the requirements that fit in our family in terms of the right marketplace and the right geographies and the right profitability and the right services and the right outlook. So there's a lot of boxes to tick, so to speak, but having the capability to be able to act quickly now is really a great position to be in.

Great. And then second question, I just wanted to ask on the data center growth backlog, obviously, this provides really nice visibility over the next 12 months. But based on your discussions with clients and visibility into bid pipeline, what's your visibility on duration and magnitude of data center-driven growth beyond 12 months out?

Yes, it's a great question. We continue to have conversations daily, weekly with our data center clients, and we're getting further and further visibility into that backlog. We've got orders in some of our fabrication stuff that go out to the end Q4 of '28, and we continue to help them and plan and spend their CapEx as they move forward. So...

Our next question comes from Julien Dumoulin-Smith with Jefferies.

This is Tanner on for Julien. So the order activity continues to be robust in I&M. You've got the visibility extending. Can you maybe walk us through your view on the adequacy of your current modular capacity with Bowers integrated and maybe what considerations could go into either further organic or inorganic investment to increase capacity?

Yes. Our capacity ebbs and flows with the demand and schedules from our clients. We have capacity to continue to grow and take on more opportunities. And we see a lot of strength in that market. The OSM market and our clients moving to very rural areas and the size and complexity of these projects is really driving that business. And so we feel really strongly about it, and we have the capacity to continue to grow it. Obviously, if demand continues to get larger, we'd have to look at further expansion, but it's always on our forefront of our minds.

Yes. And we continue to leverage certainly new square footage, but also automation, adding shifts, extending hours, and we're benefiting from learning curve. These are custom projects, but they're also in the data center space, high volume. And so we're seeing, I guess, for lack of a better term, higher throughput on these jobs as we get better at them. And that certainly plays into the capacity evaluation.

Great. And I too will follow up on the M&A angle, given the nice delevering position here. And as you weigh platforms for inorganic growth, maybe this is an offshoot of Adam's question. But I wanted to ask this in the context of growth versus margin. With Bowers, you saw an opportunity to target growth, primarily with a longer-term margin expansion opportunity. But even within I&M, how do you expect to consider margin accretion or margin improvement from an inorganic front and opportunities that you're seeing in the market?

Yes. We like all 4 service lines that we participate in today, and they each have a bit different margin profile. But we're certainly open to expansion within any of those. And as Jeff mentioned, we're picky. We look for companies that have strong margins within those service lines or if we see an opportunity to improve their margins in those service lines, that would also be a factor that we would consider.

But I wouldn't say that we would shy away from -- for example, another better business that has a large Installation & Fabrication component, which would be our lowest margin profile of all our core service lines. As you can see from Bowers, that can add significant shareholder value with the overall accretion it can bring. And we've been able to increase our margins kind of despite what could have been seen as a headwind there.

Our next question comes from Brian Brophy with Stifel.

Nice quarter. There was a notable sequential jump in the life sciences and healthcare backlog, it looks like based on some of the disclosures in the deck. And it appears only some of that was related to Bowers. So just any color -- any other color you can provide on what's driving that?

Yes. We've noted in the past that coming out of COVID, there was some hangover in that life science end market with the overbuild through that period, and we are seeing that open back up. RFQs have been increasing. We've been able to book a couple of really nice large projects with our clients that we have been with for decades. So we expect that to continue. We're seeing more and more activity in that market. And some of that is also in our fabrication stuff line. We are doing both Installation & Fabrication in that market. So really positive right now.

Yes. That's great. That's helpful. And then if you wouldn't mind touching on the fab-only growth that you saw in the quarter. Any update on how much that accounts for as a percentage of revenue at this point? And just how you're thinking about the outlook there for the rest of the year?

Sure. It's continued to grow as expected as a percentage of the Installation & Maintenance segment. I think in the fourth quarter, we were near the 20% area, and it's increased into the low 20s. We'd expect that to probably continue to gravitate higher in the near term.

Our next question comes from Derek Soderberg with Cantor Fitzgerald.

I wanted to start with the E&C segment margins, 33% or so this quarter. It looks like the E&C margin over the past few quarters has been kind of in the low 30s or so and maybe behind the historical kind of mid-30s margin. I was wondering if you can maybe comment on where you think margin will be for E&C this year? And maybe what's the time line to get back to more of that normal margin?

Yes. No, great question. And as we pointed out, first quarter of last year was really an outlier when we look back over the last 4 or 5 years. And our more typical margin range has been from low 30s to, say, 37% or so. We're kind of falling squarely right in the middle of that now. And the gravitation a bit lower the last few quarters than, say, from the 35%, 36%, 37% range has been a higher growth rate in Program & Project Management. And we certainly provide a lot of engineering services in that, and we lead with the engineering, but because of the overall size of the project management activities in there, it's just a lower margin service line. But I would expect going forward it to remain more in that historic range of low to mid-30s.

Got it. That's helpful and then as my...

It's quarter-to-quarter.

Got it. And then as my follow-up, just a clarification and maybe some more detail on the equipment costs. Just looking at it from a percentage of revenue, it looks like it was up a bit at $283 million. I was wondering how much of that is sort of low-margin pass-through on some of the equipment. And if you sort of exclude that, how would the underlying gross margins trend sort of look like? I was wondering if you could maybe provide some more detail on that.

Yes. And that's why we've broken that out historically that in the subcontractor costs because we typically wouldn't expect to get the same margin as we do on our labor on both of those activities and -- but it really varies. Sometimes something might be a pure pass-through. Other times, someone might be able to get 10% or 5%. So there's not one specific margin number we can give you on that pass-through, but it is typically much lower than our overall margin that we'd expect to generate on our labor.

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

Jeff, in your prepared remarks, you talked about in the Engineering & Consulting business, some gaining traction with some of your data or technology customers. Maybe you can elaborate a little bit about what that means and how that impacts maybe the mix of business or the tempo of bookings over the next few quarters?

Yes. No, it's really a function of leveraging our experience and relationships with a lot of these customers that we've had for decades and our ability to take an I&M relationship in the semiconductor space and introduce them to our E&C capabilities as they look to either expand their facilities or actually greenfield facilities. We've been able to leverage those relationships and now offer this integrated service offering to them. And so I would expect that to continue. That's part of the thesis of Legence in general, is to be more relevant and more sticky and provide more end-to-end services to our clients. And so that was a really great example for us.

Now historically, E&C's markets have been in other markets such as healthcare and state & local government and K-12 and higher education schools. And so to be able to really expand that their market set is really exciting for us. And it's in these high-tech customers, the credibility is a big deal for you to gain new business and to be able to leverage credibility that has been well earned, hard earned for decades, and introduce a complementary service has really been great to see. And it's a big focus internally as we look at opportunities and share cross-selling tactics and training and that sort of thing. So I don't have a number I could quote you in terms of predictions, but it's absolutely the trend that we're supportive of and we'll be pushing hard going forward.

That sounds good. And the follow-up, you mentioned or Steve mentioned on your bookings, you had accelerated bookings in Q4 that took a little bit from, say, Q1. Maybe just to look at the pipeline and your conversion cadence and how that may flow through the next few quarters. I assume, given what we're seeing in the marketplace, customers want things done yesterday as opposed to tomorrow?

Well, that's true. The timing of the bookings, though, again, a quarter is a short period. So we certainly look at it over a little bit longer period. If you average the first quarter and the fourth quarter, very robust at 1.5x. We don't typically forecast a book-to-bill, but we're not really seeing a slowing in the data market.

No, I agree, Stephen. And from a pipeline standpoint, as we put some real chunky bookings into our backlog and though we don't report on pipeline, we've been able to replenish it and keep it strong. So we feel positive that, that trend will continue.

Yes. And just to pile on there, certainly, in the case of data centers and modular construction, by the time we get called in, that project is well underway. And so you're right, Michael, in terms of when they say, "Hey, we need your help here, it's go time, right? It's a quick, quick turnaround. And that's actually to our benefit. Our ability to be quick to scale, quick design and quick to manufacture is a differentiator. And that's the reality. If you want to participate in that business, you have to have that skill set.

Our next question comes from Miguel Marques with Bernstein.

Just a 2-parter for me. On the modular business first, what sort of margin profile does that business have even in context to the rest of I&M, if you could, just to get a sense of the mix impact there if that could either be accretive or not to margin going forward?

Yes. We don't disclose the margin separately on that. I would say, though, that it is accretive. Our margin profile is higher when we're doing custom fab work than a large installed job. So it is -- benefits to us that, that percentage of fab is increasing.

Understood. And more just a high-level question on free cash flow. So I guess, first, how are you guys thinking about free cash flow for this year? And second, obviously, there's been a trend of your business just being less working capital intensive over the last several quarters. So in that vein, if this were to be structural, I guess, what do you think it could mean in terms of your longer-term free cash flow profile? And if there's a way to think about that or not, be it free cash flow margin or conversion. I know you guys talked about more than 85% adjusted EBITDA conversion this quarter, but is that something that we could anchor to going forward? Or what should that look like?

Yes. Good question. It's not something we specifically guide to, but just when thinking about some of the puts and takes, we do certainly have good momentum in the business and even at the time of the IPO, we talked about the fact that we saw our conversion rate increasing from historic levels going forward, and it has. And certainly, the debt paydown helps. Better working capital management was something that we talked about that we were focused on. We're seeing the benefits of that.

All that said, the first quarter, we grew revenues tremendously and still had a benefit from working capital. I don't know that I would guide to that every quarter. Though with our custom fab work, we do tend to typically get a higher level of prepayments than we do on other work. And so that's a trend that we would still expect to continue. But again, I think when you're growing revenue at such a high rate, probably typically quarter in, quarter out, maybe expect working capital to be a bit of a use of cash.

[Operator Instructions] Our next question comes from Oliver Davies with Rothschild & Co Redburn.

Just 2 for me. I was just wondering if you could provide any color on end market growth organically, particularly data centers and anything else that you'd call out? And then secondly, how should we think about adjusted SG&A as a percent of sales going forward, particularly in the context of the relative growth rates of E&C and I&M.

You want to start?

Yes, I'll start with the second question and then hand it to Steve. But adjusted SG&A as a percent of revenue, I think we'd expect it to probably gravitate down if we're continuing to grow revenue at double-digit pace. That's obviously a key factor. We are going to need to grow our G&A, but we'd expect when we're growing at a double-digit pace on the top line that it wouldn't grow at quite the same pace. And so we should continue to see some economies of scale over time.

And then on end market growth in the data center and technology, we're seeing that about 30% organic growth in there. And I'd point out that we're continuing to grow all of our other end markets as well. As a percentage of revenue, they take a hit because the data center technology is large. But on a true dollar basis, we're seeing growth in all of our end markets, maybe except what we would call commercial real estate. It's a soft market right now and not a key market that we're pursuing day in and day out.

And our next question comes from Chris Senyek with Wolfe Research.

Congrats on nice quarter. Just going back to M&A, given all the hype and interest around MEPs for data centers, are you seeing valuations for M&A target to rise? Like is price becoming a larger factor?

Yes, it's a good question. Maybe a little bit. We don't have, obviously, visibility in every single deal and every single process. I think people realize that the systems that are going into these data centers are really, really critical and the good providers are delivering a ton of value. And so as a really vague but general statement, I think they're probably going up a little bit. I don't, however, think they're going up so much that they would not be attractive to pursue.

Of course, like -- whether it's MEP or E&C or any consultancy, we're always going to look at sort of the value that they would bring from a pricing perspective. But we don't see anything that's prohibitive for us from a pursuit perspective.

Okay. And just on my follow-up, on your revised guide, are we -- can we use 1Q as like a run rate, so like thinking of E&C revenue annualizing to, let's say, $660 million and then I&M to like $3.5 billion to get to that $4.3 billion revenue range. Is that a fair split for like your two segments?

I think for E&C, we do have -- we still have a bit of seasonality. So I probably wouldn't take the first quarter as a kind of an annualized type figure today. I&M is probably quite a bit less cyclical or seasonal, I should say. So that's probably going to be driven more so by backlog in other words scheduling.

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 first quarter '26 earnings call. A recording of this call will be available on our website in a few hours. I look forward to updating you again on our next earnings call. And with that, this concludes our call. Thank you very much.

This concludes today's conference call. Thanks for participating. You may now disconnect.

Good day, and thank you for standing by. Welcome to the Fourth Quarter and Full Year 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, Vice President, Finance and Investor Relations. Please go ahead.

Thank you, Daniel, and good morning, everyone. Welcome to Legence Fourth 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 a press release that covers our fourth quarter and full year 2025 results and posted a slide presentation that accompanies the earnings release. All materials can be found on the Investors section of the 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 substitutes 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 to discuss our fourth quarter performance and current outlook for the business. I'll also briefly cover a few other topics, including our integration efforts of The Bowers Group, the tuck-in acquisition we made earlier this month of Metrix, an engineering firm in the Seattle, Washington area, and provide an update on our growing craft labor force.

First off, our fourth quarter results. Now Stephen will go into greater detail, but at a high level, we delivered an incredibly strong fourth quarter, which was well ahead of our prior guidance.

Total revenues grew by 35% to a quarterly record of $738 million, and most of our revenue growth was organic with contributions from both segments. Adjusted EBITDA grew 53% as EBITDA margins expanded by approximately 140 basis points.

For the year, revenues grew by 22% and adjusted EBITDA by 30%. Most impressively, total backlog and awards grew by 49% year-over-year and 20% from just the end of the third quarter 2025. Backlog growth was essentially all organic and came on top of the aforementioned record revenue quarter.

This translated to a book-to-bill ratio for the 3 months ended December 2025 of 1.9x, an acceleration from what was already a robust third quarter book-to-bill of 1.5. Both segments saw strong total backlog growth. Year-over-year, Engineering & Consulting backlog rose by 16%, driven by state and local governments, along with contributions from hospitals and data center clients.

Our Installation & Maintenance segment grew by 66%, driven by data center and technology clients, in particular, for fabrication demand of our direct liquid-to-chip technical cooling systems. Outside of what's already in our backlog, we expect strong Installation & Fabrication demand to continue well beyond 2026.

Now to give you a sense of our planning horizon, we're in discussions with certain data center clients for deliveries that extend into 2029. I should mention this fabrication demand is on top of the day in, day out installation and retrofit work we do in existing data center facilities built over the past 20-plus years.

Okay. Shifting our attention to Bowers and how the integration process is going. As a reminder, Bowers is one of the premier mechanical contractors in the Northern Virginia, D.C. metro area, home to the world's largest installed base of data center capacity. They're one of the key contractors that have contributed to the region's data center build-out since their first data center project for Amazon way back in 1999.

With Bowers, we're now able to expand our mechanical capabilities into this critical region, broaden our customer base and add roughly 50% to our fabrication footprint. This is in addition to the cross-selling opportunities that are now available with our existing engineering and electrical contracting presence in the region.

When we announced the acquisition last November, we thought it would take until mid-first quarter to clear regulatory approval. We're actually delighted that the approval came sooner than expected, which allowed us to close on January 2. Since closing, we've been focused on critical integration work streams to establish a secure, standardized operating base that aligns with our safety procedures, processes, controls, communications and financial rigor.

Our leadership team has also put in a lot of effort to build a solid foundation of trust with the roughly 2,000 employees of ours. We've been involved in several joint sessions to discuss operational alignment and opportunity reviews. I personally came away from those interactions with even greater conviction of what an incredible addition Bowers is for Legence and our shareholders.

Our first quarter 2026 results will include a full quarter's contribution from Bowers as well as partial contribution from a really nice tuck-in acquisition of an engineering firm, Metrix based near Seattle, Washington that we closed on March 1.

Metrix is highly complementary with our existing engineering team in the area and has a solid base of clients that skewed towards the education market, and they operate with a really strong margin profile. There's great cultural alignment with a very talented group of engineers led by a motivated leadership team that's excited to join Legence. I want to publicly welcome metrics to the Legence organization and look forward to working together to better serve our clients.

One final point before handing the call over to Stephen, it's around our labor force, specifically on the contracting side. At the end of 2025, we employed almost 4,500 unionized craftsmen and women. This is up from 3,800 at the end of September and 3,400 at the end of June.

Now with the addition of 1,700 union crafts people from Bowers at the beginning of the year and growing our existing workforce throughout this year, we currently have approximately 6,600 skilled crafts people. Now we recognize there are pockets of tightness in various labor markets from time to time and highly skilled labor will always be in demand.

That said, as a company, we're fortunate in that we have not experienced any significant labor constraints that would impact our ability to execute on our commitments or cause us to pass on attractive new business opportunities. Our ability to add roughly 1,000 crafts people to our workforce, almost 1/3 of our base during the second half of last year reflects the general availability of union labor in our markets.

It also reflects who we are as a preferred and safety-first employer and how we attract and retain people. As a unionized organization on the contracting side, our retention rate is extremely high. Workers are attracted to Legence because we invest in our people with training and advanced tools to make them more safe and efficient.

They also see our growing backlog with blue-chip customers and feel confident that there's a continuation of work after each project. As a result, we have great relations with the unions that we partner with, and Legence is typically one of the top union employers in the markets where we operate. Now as someone who has run other companies that employ both nonunion and union workers, there are clear benefits to being unionized, and we're in a strong competitive position due to our skilled field workforce.

With that, let me turn the call over to Stephen.

Thank you, Jeff, and good morning, everyone. For the remainder of our call, I'll begin with a review of fourth quarter 2025 results in comparison to fourth quarter of 2024 as well as a review of our full year 2025 performance.

Following my review of our historical results, I'll make some brief remarks about our current guidance, discuss our balance sheet and liquidity position at year-end and pro forma for the acquisition of the Bowers Group, and we will close out with a few additional comments on the recent tuck-in acquisition of metrics before handing the call back to Jeff.

Starting with our fourth quarter 2025 results. We generated revenue of $738 million, an increase of $189 million or 35% from the year ago quarter. The overwhelming majority of this increase was organic, with both segments contributing to the strong growth rate.

Breaking down quarterly revenue growth at the segment level, starting with Engineering & Consulting. Segment revenue increased by 10% to $173 million, most of which was organic growth, was driven by program and project management services, particularly with hospitality and entertainment and education clients.

Engineering & Design revenues were essentially flat as higher demand from life science and healthcare and hospitality and entertainment clients were offset by lower revenues from data center and technology and education clients.

Moving to Installation & Maintenance. Segment revenue of $565 million increased by a very robust 44% versus the year ago quarter, almost all of which was organic.

Installation & Fabrication Services accounted for the majority of the segment growth, increasing by 53%, driven largely by demand across high-growth industries, including from data centers and technology and life sciences and healthcare clients. As Jeff mentioned, a good portion of the demand growth is for our direct liquid-to-chip technical cooling systems that we fabricate in our shops and ship to data centers across the United States.

When we include the latest backlog additions, we will be shipping our cooling systems to data center locations in Iowa, Ohio, Utah, Georgia and Texas as well as Arizona, where we also do the installation. Maintenance & Service revenue also increased at a low double-digit pace of 11%, rebounding from the slower growth that we experienced in Maintenance & Service in the first half of 2025.

For the full year 2025, consolidated revenue was $2.6 billion, up 22% from 2024 levels. Engineering & Consulting segment revenues grew by 21%, driven in part by the full year impact of acquisitions completed in 2024 and partial year impact of acquisitions completed in late 2025.

Installation & Maintenance segment revenues grew by 22%, almost all of which was organic, driven by greater demand for Installation & Fabrication services, primarily from data centers and technology and life science and healthcare clients.

Turning to gross profit. Consolidated gross profit for the fourth quarter 2025 increased by 31% to approximately $147 million. Our reported gross profit includes noncash stock-based compensation expense related to legacy profit interest units. While this expense burdens the income statement at Legence Corp., the payment of this expense is borne by entities outside of Legence Corp., essentially the legacy pre-IPO shareholders.

The settlement of this expense does not impact Legence Corp., either in the form of cash outlay or the issuance of additional common shares. Additionally, because these profit interest units are mark-to-market, fluctuations in our stock price can lead to significant volatility in this expense line.

As such, we've included in our press release a table reconciling our GAAP gross profit to adjusted gross profit, which excludes this expense related to these legacy profit interest, which the company doesn't bear the burden of. We believe this information will provide additional insight into our underlying operational trends.

So with all that said, adjusted gross profit totaled approximately $157 million for an adjusted gross margin of 21.2% for the fourth quarter of 2025, up from approximately $112 million and 20.5% in the fourth quarter of 2024. The improvement in adjusted gross margin was primarily due to higher gross margins in the Installation & Maintenance segment despite lower Engineering & Consulting margins and a revenue mix shift toward the I&M segment.

Delving further into margins at the segment level, fourth quarter 2025 Engineering & Consulting adjusted gross margin was 30.9%, down from 32.6% in the year ago quarter. The decline was mainly driven by a revenue mix shift towards the program and project management service line, which generates a lower margin profile than Engineering & Design as well as slightly lower margins within the program and project management service line on project mix.

The Installation & Maintenance segment generated an adjusted gross margin of 18.3%, up from 15.6% in the year ago quarter. Adjusted gross margin improvement was driven by strong project execution within the Installation & Fabrication service line, partially offset by a higher revenue mix from the service line, which carries a lower margin profile than Maintenance & Service activities.

For the full year 2025, consolidated gross profit was $536 million, up 24% from 2024 levels. Excluding stock-based comp expense from the legacy profit interest, adjusted gross profit of $550 million with adjusted gross margin of 21.6% increased from full year 2024 adjusted gross profit of $432 million and adjusted gross margin of 20.6%. Higher adjusted gross margin was primarily due to stronger margins at the Installation & Maintenance segment.

Turning to selling, general and administrative expense. Fourth quarter 2025 SG&A totaled approximately $115 million compared to $63 million in the year ago period. Included in the fourth quarter 2025, SG&A was $36.4 million of stock-based compensation, of which $34.4 million was related to the legacy profit interest.

SG&A also includes other adjusted EBITDA add-back items such as acquisition and strategic initiative expenses. When backing out these items in both quarters, our adjusted SG&A for the fourth quarter 2025 was approximately $75 million, up from $59 million in the year ago quarter, though lower as a percentage of revenue at 10.1% in the fourth quarter 2025 versus 10.8% in the year ago quarter.

The increase in adjusted SG&A expense was primarily driven by increased headcount, compensation costs, IT software and professional fees related to both support our robust revenue growth and our operations as a public company.

For the full year 2025, adjusted SG&A was $267 million or 10.5% of revenue, essentially the same percentages of revenue as in 2024 despite now in 2025 being publicly traded. All in all, we generated adjusted EBITDA of $87 million in the fourth quarter of 2025, an increase of 53% from fourth quarter 2024 levels.

Adjusted EBITDA margin for the fourth quarter 2025 improved by approximately 140 basis points to 11.8% when compared to the year ago quarter. For the full year 2025, we generated adjusted EBITDA of approximately $299 million, up 30% from year ago levels and adjusted EBITDA margins of 11.7% which improved by approximately 80 basis points compared to 2024 levels.

Depreciation and amortization totaled $28.7 million in the fourth quarter '25, down slightly from $29.9 million from the year ago quarter. The quarter also included a noncash charge of approximately $27.4 million to impaired goodwill and related intangible and long-life assets at one of our smaller business units in the Engineering segment.

This particular business unit supports customer energy-related initiatives focused on improving facility efficiency and sustainability. It's largely a success fee-based business that has very long lead times between pipeline to revenue recognition.

With the passage of the one big beautiful bill last year, while that may have been some beneficial impacts to shorter cycle projects, it led to a period of transition and uncertainty for commercial renewables, including solar, which is a focus of this particular entity.

We elected to write off the goodwill of that entity to reflect the uncertainty around our current ability to forecast cash flow for that business unit. Interest expense of $13.6 million for the fourth quarter 2025 decreased by $12.7 million from a year ago, primarily due to lower average debt balance than the year ago period.

We also reported $6.7 million of other expenses in the fourth quarter 2025. Approximately $3.8 million of other expense is related to a tax indemnity receivable asset, which expired towards the end of last year that was related to a prior acquisition. The expiration of that indemnity requires us to record a noncash pretax expense.

There is an offsetting tax liability against that receivable that also expires, which reduced our income tax expense provision by an identical amount. Again, there is no net income statement impact. However, these offsetting amounts are on different financial statement line items.

Please note that this could impact our fourth quarter results for the next few years as each portion of this tax indemnity receivable expires. Also included in other expense is $2.9 million related to an adjustment of our Tax Receivable Agreement or TRA liability for a change in our pretax earnings mix by state.

Turning to income tax. We had income tax expense of $22.2 million for the full year 2025 despite incurring a book loss. There are a large number of expense items that led to a fourth quarter and full year book loss for Legence that are not deductible for income tax purposes, such as certain amortization expenses, the goodwill impairment charge and certain other corporate expenses as well as some of our interest expense.

Cash taxes for 2025 totaled $16.4 million. For 2026, we estimate our Effective Tax Rate or ETR, to be in the mid-30% to 40% range. and to incur cash taxes in the low $30 million range. Beyond 2026, we expect our ETR to gradually gravitate toward 30%. However, in any given year, our ETR will be impacted by any discrete items that may not be deductible for tax purposes.

Lastly, our cash tax payments exclude any payments related to the TRA. We expect to make a payment on the TRA in early 2027 in the mid-single million dollar range related to 2025 income.

Switching gears to backlog. At the end of the year, our consolidated backlog and awards totaled $3.7 billion, up nearly 50% from year ago levels and 20% sequentially. Almost all of this growth was organic as the 2 tuck-in acquisitions completed last quarter only accounted for about $20 million of the $609 million in backlog and awards growth during the fourth quarter of 2025.

Our consolidated book-to-bill ratio was a very robust 1.9x for the quarter and 1.6x for the full year 2025. We experienced backlog and awards growth in both segments. Installation & Maintenance grew by 66% year-over-year and 24% sequentially. As you might expect, much of this growth was with data center and technology clients.

While much of the press on backlog growth will likely go to the installation side of our business, our engineering and consulting backlog grew at a healthy 16% clip year-over-year and 11% sequentially. This growth occurred across several end markets, state and local government, life science and healthcare and data centers and technology.

While our backlog and awards at year-end 2025 does not include Bowers, I want to provide you with some preliminary figures on their backlog and awards. They wrapped up 2025 with approximately $1.5 billion in backlog and awards, up from the $1.3 billion at the end of September 2025.

Turning now to our guidance. We are establishing first quarter 2026 guidance for consolidated revenue of between $925 million and $950 million and adjusted EBITDA between $90 million and $100 million. Our first quarter guidance includes a full quarter contribution from Bowers.

For full year 2026, we are increasing our revenue guidance to a range of $3.7 billion to $3.9 billion. This represents an increase from the initial 2026 revenue guidance range of $3.475 billion to $3.725 billion that we presented during our third quarter report in mid-November, which figures included a full year of a full year of Bowers.

We are also increasing our full year 2026 EBITDA guidance to a range of $400 million to $430 million. This represents an upward revision to our prior guidance of $370 million to $400 million. A key driver of the upward guidance revision for 2026 is to reflect the strong backlog and awards growth that we experienced in the fourth quarter of 2025.

Now just a few other housekeeping items to help with your modeling efforts. Interest expense net of interest income for the first quarter is expected to be in the $15 million range, with full year 2026 in the high $50 million range. Depreciation and amortization for the first quarter is expected to be in the $45 million range with full year 2026 D&A in the $170 million to $180 million range.

In terms of capital spending, full year 2026 is estimated to total $65 million. Approximately 2/3 of the 2026 CapEx forecast is for growth. A portion of this growth CapEx is for fabrication capacity expansion in Colorado and to finish out our previously announced capacity expansion at our other facilities. Once completed, we will have just under 1.3 million square feet of fabrication capacity, including the 372,000 square feet of capacity that came with the Bowers acquisition.

Now to our balance sheet, liquidity and leverage. We ended the year with a cash balance of $230 million, up from $176 million at the end of September as we benefited from strong operating performance and continued to emphasize working capital management.

Total liquidity increased to $424 million at quarter end, up $164 million from September, reflecting both our higher cash balance and the revolver upsize that we completed last October.

Total debt at year-end was largely unchanged at $825 million from September 30, 2025 levels. Based on our last 12 months adjusted EBITDA, our net leverage ratio declined to 2x, down from 2.4x at the end of September.

Our year-end balance sheet does not, however, include the impacts from the Bowers acquisition, which occurred on January 2. On a pro forma basis for Bowers, our net debt balance would have totaled a little over $1 billion, equating to a pro forma net leverage ratio of approximately 2.4x, flat with third quarter levels despite the acquisition.

As Jeff mentioned, we closed on a nice tuck-in acquisition of an engineering firm in Seattle, Washington area, which complements our existing engineering business and broadens the client base in the region. Total purchase price was a little over $30 million, of which about 25% was paid in equity. The acquisition multiple was broadly in line with many of our past transactions for engineering firms of this size. This concludes my prepared remarks, and now I'll turn the call back to Jeff.

Thanks, Stephen. In closing, and before we get to the Q&A, our fourth quarter results capped a very strong year for Legence, marked by robust growth in backlog, revenue and adjusted EBITDA with most of this growth organic.

We also made significant progress by deleveraging our balance sheet and adding to our liquidity, using 100% of the proceeds from our IPO in September to pay down debt, adding capacity to our existing credit and term loan facilities, focusing on improving our working capital management and, of course, benefiting from our strong operating results throughout 2025.

All of this tremendous performance is a direct result of our amazing 9,000 employees who wake up every single day with the goal of delivering exceptional solutions for our customers, colleagues and communities.

Now heading into 2026, our outlook reflects the strong fundamentals that are driving growth in our core businesses as well as the addition of Bowers and our other recent tuck-in acquisitions.

Now a lot of press coverage goes to the incredible demand in the data center market, and we're certainly participating in that megatrend. But we also really like the balance from our portfolio of life science, hospitals, education and other end markets that are also growing and continue to provide a large, diverse base of clients to work with. So with that, we'll now open the call up to questions. Operator?

[Operator Instructions] and our first question comes from Joseph Osha with Guggenheim Partners.

Congratulations on the strong results. You talked a lot about how your craft labor force availability is allowing you to take work even in very tight markets like data centers, which is great. I'm wondering if you're seeing any other challenges in that market, in particular, as it relates to your customers' availability of material or other things or whether you're seeing those projects able to proceed on a timely basis for the most part.

Yes, Joe, Its Steve Hansen. Great question. To date, we haven't seen a supply chain issue that is pushing schedules out. Data center clients and our blue-chip clients, they're looking far into the future and securing the materials they need and working with us upfront to make sure that the material chain that we are working within is also available. So to date, no, we have not.

Our next question comes from Adam Bubes with Goldman Sachs.

Data center technology revenue, I think, was up 80% year-over-year. Can you just help us parse out that performance? How much was fabrication versus installation growth? And then in 2026, can you just talk about your expectations for the growth trajectory of the data center fabrication business specifically?

Sure. We are growing both just our installation at a nice clip of data centers where we're completing the whole installation for the mechanical or electrical services, but also the fabrication is growing probably at an even higher rate as we're participating in build-outs in these rural areas where we don't have an installation footprint.

Just to give you a sense, even though we don't break out the fabrication-only revenue, but it is a proportion of our I&M segment revenue, in 2024 would have been a mid-single-digit percentage of our revenue was fab-only work, where it was a mid-teens percentage in 2025 with fab-only.

So it is growing at a higher rate. As you'd expect, given where many of these data centers are being built. We expect that to probably tick up a bit in 2026, but maybe not quite as much as you'd expect because as we bring in Bowers, they historically, almost all of their fab capacity is going for their installation jobs and not serving other markets. So there's probably opportunity as we get further into 2027 and beyond.

Got it. That's helpful. And then backlog at pretty robust levels. Are you seeing any changes in the duration of backlog? And can you just talk about how much is expected to burn over the next 12 months?

Yes, that's a great question. We are seeing in a positive way, an elongation of that backlog driven by a couple of factors. Obviously, with the ongoing boom in data centers, just longer lead times and also larger projects, larger projects, obviously, take a little bit longer to burn than smaller projects.

So those are some of the factors. We expect to burn a little bit over half of our backlog in 2026. And so -- and then, of course, the majority of the remainder would be in 2027, but we also have backlog extending into 2028 and not an insignificant portion. So we have visibility of -- through our backlog and awards of revenue going out much further than we ever would have in the past.

Our next question comes from Sherif Elmaghrabi with BTIG.

Pretty impressive beat this quarter. Can you shed some light on how much of Q4 revenue was driven by the backlog versus book and ship type orders that might have come in intra-quarter and how you see the business mix evolving over the last few months?

Yes. There's certainly a bit of both, probably more from backlog and just really exceptional performance on larger projects, favorable project closeouts, increasing proportion of the fab work that we discussed. But certainly some quick hitting jobs that provided some upside to the quarter also contributed to the beat versus our expectation in November.

Does that answer your question?

Yes, it does. Thank you, Steve.

Our next question comes from Brian Brophy with Stifel.

Nice quarter. Just had one on I&M gross margins. Obviously, they were a little bit better than folks were expecting. You mentioned some strong execution benefits in the comments. But any other color on what drove the strength there? Was there any improvement that was more of a onetime benefit? And how should we be thinking about the sustainability of gross margins into 2026?

Yes, it's a great question. And we're certainly optimistic about our ability to continue to have this exceptional performance. But of course, we don't want to get ahead of ourselves on the guidance. We have had 2 exceptional quarters in a row from a project execution perspective.

And so we're not going to forecast that level of beat every quarter. But there -- again, I think I mentioned the increased proportion of fab only, which tend to get a little bit higher margins on the fabrication-only business as opposed to the full installed jobs, which are much bigger and tend to be much bigger even in scope, a bigger revenue opportunity. But also, as we continue to complete more and more of these larger data center jobs, the work is similar. And so we're probably benefiting from that as well and just that additional experience in that area.

Understood. That's helpful. And then there was a comment made in the opening comments on having some visibility into 2029 on the data center side. Just any more color on that comment and what you're seeing there? And to what extent are you getting some commitments from some of your hyperscaler customers on projects looking out that far?

Yes. As we mentioned earlier around the supply chain question, hyperscalers and developers are looking further out and getting commitments to build and we've worked really hard with them. The earlier we are in with them, the better we can help them plan and manage and mitigate risk from supply. And so we're having more and more conversations with them on projects being built all over the place. And Stephen said it earlier, some of these projects that are just getting bigger in scale, they have to plan further out. So we're well into '29 in conversations.

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

As you're taking a look at the non-data center technology side of the business, you highlighted a few times in your prepared remarks about diversity and the opportunities there. As you look to 2026 and into '27, is it a normal growth rate relative to what you've seen? Is it accelerating? Is there any areas?

Certainly, we have a lot of visibility on life science and healthcare, a lot of press releases on that front. But also it seems like the education and state local could be very helpful. So how a contributory will that -- is that going to be relative to your prior expectations going into 2026 on your outlook?

It's a great question. I'll start and my colleagues will chime in. We certainly like the long-term macro tailwinds from an onshoring and reshoring perspective on manufacturing that certainly also applies to the life sciences space.

We like -- I think we're seeing some green shoots, if you will, on the biotech lab space as existing square footage gets absorbed and that turns into ultimately new demand for us from a tenant fit-out perspective. And then I think we always have loved the education business because the installed base is so massive, and there's always a need to improve the efficiency of existing schools, whether it's primary schools, K-12 schools or higher education from an R&D and STEM perspective. And that really fits right into our wheelhouse of having this holistic view of design build on those facilities.

And finally, this increase in the price or expense related to electricity helps from an energy efficiency return on investment perspective. And essentially, the math is easier as energy becomes more expensive, which is a demand driver for us. Now how do we turn that into a hard number in terms of expected growth rates from before versus today? I'll sort of pass the mic to Steve and Stephen to try to take those vague comments and boil them down into a more specific number.

Yes. And Jeff, you nailed it on those trends that are impacting the results. We -- the restoring is definitely a longer-term impact and something that we've probably talked about in past meetings with you all that we really see that having more of an impact as we get further and further into the decade that a lot of these big projects like semiconductor fabs multiyear planning cycle. And so we're seeing now benefits from reshoring that started at the time of COVID.

Of course, there's been a lot of reshoring announcements with some of the administration's policies that we've seen in 2025 and 2026. And so we're obviously optimistic that that's going to provide some nice uplift as we get into 2027 and beyond.

[Operator Instructions] Our next question comes from Derek Soderberg with Cantor Fitzgerald.

On your proprietary software, Trove, the real-time data evaluation software, to what degree is software now contributing to revenue? And is it a mandatory pull-through for some of your larger data center installations?

Yes, that's a great question, Derek. Trove is really focused on the commercial real estate market. And it's a tool that we use internally to do analysis of portfolios of buildings for building owners to sort of rack and stack and prioritize capital improvements to improve the performance of their buildings.

It also is at times used by customers who want to sort of DIY that same analysis. We're happy to do it either way. That said, in either scenario, that really has a de minimis impact on our revenue. It's really part of our bundled solution that we sell to the large global property managers in the world.

Our next question comes from Chris Senyek with Wolfe Research.

Maybe just asking on the data center deliveries in '29 a little bit differently. Are the data center opportunities like for '29 onwards? Or are there still hyperscalers bookings for '26, '27, '28 for new data centers?

Yes. No, we're still looking at opportunities before that time line, '26, '27, '28 as well. I think that the key point is the relationship has allowed us to get further into the planning weeds with our client base and get a much better view of what's coming in the future.

Great. And just on a follow-up on the backlog growth, how much reflects new customers versus existing customers?

Yes. I mean we don't have a breakdown of that, handy. But I mean, certainly, we're continuing to win larger and larger awards with our existing clients and then -- and we're continuing to see new clients, even new blue-chip clients. Often, those initial awards are probably smaller than the awards that we see from our existing clients. But as we execute, we'd expect those to grow over time.

Our next question comes from Joseph Osha with Guggenheim Partners.

I made it back. This is a bit of a geeky question. We've heard a lot about the shift to 800 volt DC in data centers. I'm wondering if you all have encountered any of those yet.

Yes, we have not. And really, that shift will not affect our work that we do for them. The conveyance of material and everything else that we're doing, that shift won't be a big driver for us. Our [indiscernible] electrical installation team will see some of that, but we have not really seen that become prevalent in the market yet.

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

Just one for me. So I guess, obviously, a very strong Q1 guide even on an organic basis. So can you sort of discuss how you expect the cadence of organic growth to progress through the rest of the year?

Yes. We don't have huge seasonality in our business, though we do have some. We tend to peak in the third -- in the second and third quarters, and it's really driven primarily by our program and project management business.

If you look at the disaggregation of revenues, that business, a lot of that business is in the education end market, which really tends to peak in the summer months. There may be some pockets of seasonality elsewhere in the business, but that's the pocket that I would highlight as being most significant.

[Operator Instructions] I'm showing no further questions at this time. I would now like to turn it back to Son Vann for closing remarks.

Thanks, Daniel, and thanks, everyone, for attending our fourth quarter 2025 earnings call. A recording of this call will be available on our website in a few hours. We look forward to updating you again on our next earnings call. Thank you, everyone, again, and have a great weekend.

This concludes today's conference call. Thank you for participating. You may now disconnect.

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. AZPE is an Arizona-based engineering firm with customers in the data center and manufacturing space, among others.

Legence has partnered with them on several projects previously, and we know them well. IMD is a Colorado-based mechanical contractor, primarily serving the health care, manufacturing and education end markets in the Mountain West region. This is a good geography for technically demanding buildings where we've been looking to expand for some time. It also gives us another strategic and centrally located area to potentially expand our fabrication capacity. Both companies also have interesting cross-sell potential with our existing brands and are a great cultural fit.

With that, let me turn the call over to Stephen to discuss our quarterly results and provide more transaction details on Bowers.

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 AZPE, which closed on October 1. Combined, we estimate these companies will generate a little over $20 million in revenue in full year 2025 and approximately $3 million to $4 million in EBITDA. So of course, our financial results will only include the fourth quarter impact.

Total consideration of $22 million with 21% of this consisting of equity provides an attractive value proposition for our shareholders. In closing, our third quarter results were exceptionally strong, marked by robust organic growth in revenue and adjusted EBITDA. We believe these results demonstrate our operational efficiency, ability to capitalize on growth opportunities in key markets and to quickly delever, strengthening financial flexibility. The results and the robust growth in backlog and awards established a solid foundation for continued progress.

Our pending acquisition of Bowers will add a significant lever of growth, immediate scale to our capabilities in the Northern Virginia and D.C. metro area, an area with the largest concentration of data center capacity in the world. It also brings a meaningful expansion of fabrication capacity, enabling us to better serve clients in the Midwest, East Coast and Southeast regions.

The structure of our consideration for Bowers, together with our recent expansion -- extension on our term loan and upsize of our revolver underscores our commitment to maintain a strong balance sheet and preserve financial flexibility for continued growth.

That concludes my prepared remarks. So we will now open the call for questions. Operator?

[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.

This concludes today's conference call. Thank you for participating. You may now disconnect.