Legence Corp. Q3 FY2025 Earnings Call

Good day, and thank you for being here. Welcome to the Third Quarter 2025 Legence Earnings Conference Call. Please note that today's conference is being recorded. I will now pass the call to your speaker, Son Vann. Please proceed.

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 two 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 craftspeople. 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 a quarter 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 this. 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 two 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 express my gratitude for everyone's hard work in making the IPO such a success and preparing the company for this initial reporting cycle as a public entity. For the rest of the call, I will start by reviewing our third quarter 2025 results compared to the third quarter of 2024. After reviewing our historical results, I'll briefly discuss our current outlook, our balance sheet, the enhancements we've made to our leverage, and provide additional commentary on the Bowers acquisition before we open the floor to questions. Please note that we have posted separate presentations regarding our quarterly results and information on Bowers on our investor relations website. In the third quarter of 2025, we generated revenue of $708 million, representing an increase of $147 million or 26% compared to the same quarter last year. This entire increase was organic, with solid growth seen in both segments. Looking at revenue growth at the segment level, starting with Engineering and Consulting, segment revenue rose by 9.5% to $212 million, with growth in both service lines compared to prior year levels. Engineering and Design Services grew by 11.3%, driven by strong demand in Life Sciences and Healthcare, as well as state and local government markets. Program and project management services grew by 7.6%, primarily due to increased demand from hospitality and entertainment clients, particularly driven by our work with NBC Studios, one of our newer clients. Shifting to Installation and Maintenance, segment revenue of $496 million was up by an impressive 35% from the year-ago quarter, with this growth also being entirely organic. Installation and fabrication services contributed the majority of this segment's growth, increasing by 41%. Much of this growth stemmed from the data center and technology market, involving both installation work and the fabrication of liquid-to-chip cooling systems for data centers in locations including Northern Virginia, Arizona, Iowa, Ohio, and Georgia. This service line also experienced strong growth in the life sciences and healthcare sector, where we are working on several large hospital installation projects and a significant fabrication project for a pharmaceutical client. Maintenance and services also grew at a healthy rate of 12.3%, mainly from our data centers, technology, and life sciences clients, with the growth tilted more towards service break-fix activity rather than preventative maintenance. For the third quarter of 2025, consolidated gross profit increased by 25% to $148 million. The consolidated gross margin slightly decreased by 20 basis points to 20.9%, primarily due to the revenue mix shift toward the Installation and Maintenance segment, which has a lower gross margin compared to our Engineering and Consulting segment. However, this was somewhat offset by higher margins within the Installation and Maintenance segment. Examining the segment margins, the Engineering and Consulting gross margins for the third quarter dropped to 31.7% from 33% in the previous year, mainly because of a slightly higher percentage of subcontractor expenses and a lower margin in our engineering and design service line, partially offset by a modest revenue mix shift toward the engineering and design service line which generally offers higher margins than program and project management. For the Installation and Maintenance segment, gross margin improved by 140 basis points to 16.3% compared to the prior year, benefiting from exceptional project execution, particularly in our fabrication work for our data center and technology clients. Looking at SG&A expenses, third quarter SG&A was $85.9 million, up from $67.2 million in the year-ago period. Included in this amount is approximately $14.7 million in stock-based compensation. We recorded $18.6 million in total stock-based compensation during the quarter, of which $4 million is reflected in cost of sales. Most of the stock-based compensation, totaling $18.1 million, relates to our legacy profit interest, which is marked to market quarterly and ultimately paid by Legence Parent 1 and 2, meaning it does not affect Legence Corp.'s financial results. Hence, while this appears as an expense for Legence Corp., it does not burden our Class A shareholders. The increase in SG&A was mainly due to higher professional fees tied to our IPO. Adjusted SG&A for the quarter, accounting for similar adjustments impacting our non-GAAP adjusted EBITDA, was $66.7 million, a rise of 11% from $59.9 million in the prior year and decreasing to 9.4% of revenue from 10.7%. This leads us to an adjusted EBITDA for the third quarter of $88.8 million, an increase of 39% year-over-year. The adjusted EBITDA margin for the third quarter was 12.5%, roughly 110 basis points higher than last year due to our ability to keep adjusted SG&A growth slower than our overall revenue growth. Depreciation and amortization expenses totaled $27.5 million in the third quarter, down $1.2 million from the previous year, largely due to the reduction in contract backlog and intangible assets from prior acquisitions. Interest expense was $28.2 million for the third quarter, an increase of $4.5 million from a year ago, primarily reflecting a higher average debt balance compared to the same period last year, although it includes about half a month of reduced interest costs due to our debt repayment with the IPO proceeds. Regarding income tax, our tax provision for the third quarter was $4.1 million. As our pretax income was close to breakeven, this results in a quarterly effective tax rate with limited significance. A similar situation may occur in the fourth quarter. Looking ahead to 2026, we expect the effective tax rate to align more closely with our state and federal statutory rate of about 30%. Estimated cash taxes for 2026 are projected to be in the mid-$20 million range before any payments related to the tax receivable agreement, which likely won't require payment until late 2027 at the earliest, assuming tax savings are actually realized. As for the backlog, by the end of the third quarter, our consolidated backlog and awards reached $3.1 billion, a substantial increase of 29% year-over-year, with a strong consolidated book-to-bill ratio of 1.5x for the quarter, another positive takeaway. This book-to-bill ratio was particularly robust, given our record revenue in the third quarter. The growth in total backlog was mainly driven by the Installation and Maintenance segment, which grew by 46% to $2.2 billion. Engineering and Consulting backlog grew modestly, though it’s worth noting that third quarters are generally a seasonally strong period for Engineering and Consulting revenue. As expected, the data center and technology market was a key driver of the backlog and awards growth, along with healthy gains in life sciences and healthcare and state and local government clients. Now let's discuss our guidance. As highlighted in our earnings release, we are establishing guidance for the fourth quarter of 2025 and full year 2026 for consolidated revenue and adjusted EBITDA. This guidance pertains to standalone Legence and excludes any impact from our pending acquisition of Bowers. For the fourth quarter, we predict standalone revenue will be between $600 million and $630 million, and adjusted EBITDA will fall between $60 million and $65 million, compared to fourth quarter 2024 revenue of $548 million and adjusted EBITDA of $57 million. This guidance reflects the typical seasonality we experience during this time of year. For the full year 2026, we forecast standalone revenue between $2.65 billion and $2.85 billion, and adjusted EBITDA between $295 million and $315 million. Our 2026 guidance reflects the robust growth we’ve observed in backlog but also notes a trend of elongation in backlog and awards in the Installation and Maintenance side, with growth in 2026 likely skewed toward this segment. A few housekeeping items for your modeling: interest expense for the fourth quarter is expected to be around $15 million, with full year 2026 anticipated to be in the low to mid-$50 million range. Depreciation and amortization for the fourth quarter is estimated to be in the mid-to-high $20 million range, and for full year 2026, it’s expected to be in the low $100 million range. For CapEx, we anticipate it to be around $20 million in the fourth quarter, with full year 2026 estimated in the low to mid-$50 million range. About two-thirds of the 2026 CapEx forecast is for expansion, part of which was initially planned for 2025 but has shifted to 2026. Moving to our balance sheet, liquidity position, and leverage, we utilized our net IPO proceeds of $780 million entirely for debt reduction, cutting our total gross debt outstanding by nearly 50% to $836 million at the end of September. Strong operating performance and improvements in working capital have increased our cash balance to $176 million at the end of September, up from $98 million at the end of June. Our quarter-end liquidity also included approximately $85 million available under our revolving credit facility. In late October, we successfully amended our term loan and revolving credit facilities. We extended the maturities of the term loan by three years to December 2031 and reduced our interest rate by 25 basis points, leading to savings of about $2 million in annual interest expenses based on current debt levels. We extended the revolver's maturities by four years to September 2030, raised the commitment amount from $90 million to $200 million, and aligned pricing with that of the term loan. With the debt reduction, a strong cash position, and better operating results, our net leverage ratio dropped significantly at the end of the third quarter to 2.4x, down from 6.2x at the end of June and 3x pro forma for the IPO, demonstrating our ability to quickly reduce leverage. Now, I’d like to share some insights on Bowers. Bowers generated about $767 million in revenue and $72 million in EBITDA over the last 12 months ending September 30, 2025. For the full year 2026, we anticipate that Bowers will produce revenue between $825 million and $875 million and EBITDA between $75 million and $85 million. Please remember that closing is expected in the first quarter of 2026, so there may be a stub period of their financial results that won't be included in our results for that year. Our base case expectation is to close on February 1, which 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 Bowers’ contribution is supported by their very strong backlog and awards, totaling about $1.3 billion at the end of the third quarter, which offers considerable revenue visibility. Now addressing the transaction details, the purchase price for Bowers is approximately $475 million, comprising $325 million in cash, $100 million in Legence common stock, or around 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 made in either cash or stock at our discretion. We plan to fund the cash portion of the purchase price using a mix of available cash, borrowings from our revolving credit facility, and an anticipated $150 million expansion to our term loan facility, with a firm commitment from our agent bank. Given this funding strategy, our pro forma net leverage at September 30 stands just under 2.9x, below the 3x at June 30, pro forma for applying IPO proceeds to pay down debt. Given our outlook, backed by our growing backlog, we believe we can bring net leverage back down to around 2.5x soon. Now looking at the impact of Bowers on our business mix, all of Bowers's operations will fall within our Installation and Maintenance segment. Roughly 86% of their revenues come from the installation and fabrication service line, with the remaining 14% in maintenance and services. While we still maintain a balanced approach between our two segments, adding Bowers will shift our gross profit mix to 60% Installation and Maintenance and 40% Engineering and Consulting from the current stand-alone ratio of 52% to 48%. Analyzing revenue by end market, approximately 70% of Bowers's revenue comes from data center and technology clients, while life sciences and healthcare account for 13%. Incorporating Bowers will further enhance our position in high-growth industries with mission-critical facilities. Our pro forma revenue from data center and technology will increase from 39% to 47%, while Life Sciences and Healthcare will remain at 17%. Education will still be a significant part of Legence, making up about 15% of pro forma revenue. When considering revenue by building type, given Bowers's current focus on data center markets, they generate a higher proportion of revenue from new buildings at 57%. Including Bowers will raise our revenue contribution from new buildings to over 40%, up from 36% as of September 30. Lastly, I want to briefly touch on the acquisitions of IMD and AZPE, which closed on October 1. Together, we estimate these companies will generate just over $20 million in revenue for the full year 2025 and approximately $3 million to $4 million in EBITDA, meaning our financial results will only account for the fourth quarter impact. The total consideration for these acquisitions was $22 million, with 21% paid in equity, creating an attractive value proposition for our shareholders. In conclusion, our third quarter results were exceptionally strong, marked by substantial organic growth in revenue and adjusted EBITDA. We believe these results reflect our operational efficiency, our ability to seize growth opportunities in key markets, and our swift deleveraging, which enhances our financial flexibility. Our results, coupled with the robust growth in backlog and awards, set a solid foundation for ongoing advancement. The impending acquisition of Bowers promises significant growth momentum, immediate scaling of our capabilities in the Northern Virginia and D.C. metro area, the region with the highest concentration of data center capacity globally. Additionally, it expands our fabrication capacity, allowing us to better serve clients across the Midwest, East Coast, and Southeast. The structure of our consideration for Bowers, along with our recent extending of our term loan and upsize of our revolver, emphasizes our commitment to uphold a strong balance sheet and maintain financial flexibility for future growth. That wraps up my prepared remarks. We will now open the floor for questions.

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?

Sure, I'll address the first part of your question. During our IPO, we established a net leverage ratio of 3x, and we aim to keep that ratio below this level moving forward. In the longer term, we are targeting a ratio in the lower 2x range, and we believe we can reach that fairly quickly. We are also comfortable increasing it to the high 2x range temporarily, especially with the Bowers situation in mind. However, we expect to reduce it again promptly. Our leverage may fluctuate somewhat with acquisition opportunities, but we will likely stay within that range.

Yes. In terms of the pipeline, Adam, it's really a different story by segment. Certainly, in the Engineering and Consulting segment, which is a national business full of a very fragmented market, I think 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, and that bring with them a customer background that we may not possess in a given geography. Now on the Installation and Maintenance 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 two? And what's the level of data center and technology growth embedded in the 2026 outlook?

Yes. I'll take the backlog growth. Really, it's multiple projects in different geographies, a mixture of installation work from 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.

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 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 strong. We have several discussions happening at any given time. It's a bit easier to gauge the momentum on the Engineering and Consulting side because those tend to be smaller acquisitions. I expect those to keep coming. However, it's challenging to determine their impact. As you saw last quarter, we had one Engineering and Consulting acquisition and one in Installation and Maintenance. The Installation and Maintenance acquisitions are generally larger and more difficult to predict unless they are localized tuck-ins. I do want to emphasize our focus on ensuring a smooth integration with Bowers, so I don't anticipate any significant acquisitions of that scale in the near future.

Our next question comes from Sabahat Khan with RBC.

I would like to follow up on the discussion regarding the mix between the two markets. The Bowers acquisition adds more to the implementation side. How do you envision the evolution of the revenue mix over the next one to three years? Do you have a perspective on returning to where you were before the IPO, or will you focus on following market opportunities as they arise? I’m looking for some insight into how the overall market mix within revenue and EBITDA might develop in the next two to three years.

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 Installation and Maintenance 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 Installation and Maintenance 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. 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 has 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 are tremendous cross-sell capabilities that are great 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. I'll start by discussing the synergies. There are both opportunities and challenges when it comes to cost synergies. Generally, when acquiring a smaller private business, which this one is slightly larger than the usual ones we target, we aim to enhance our focus on cybersecurity and strengthen our finance and HR compliance in those areas. This often means we'll invest a bit more in the early years. There are additional cost synergies, but they usually balance out. Historically, revenue synergy has been the main driver of value in our acquisition strategy, and we observe the same with Bowers. Over the longer term, we anticipate realizing more benefits as we integrate these businesses. By 2027 and 2028, we expect to achieve greater economies of scale, but those won’t be evident 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 has there 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, we 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...

We remain optimistic about onshoring and reshoring in manufacturing, whether it involves biotech or semiconductors. Additionally, energy efficiency significantly affects our clients' operating expenses. If we can reduce energy consumption in various types of buildings by 10% to 40%, I expect this will continue to be an important part of our backlog and opportunity pipeline.

Our next question comes from Greg Lewis with BTIG. We remain optimistic about onshoring and reshoring in manufacturing, whether in biotech or semiconductors. Additionally, energy efficiency significantly affects our clients' operating expenses. If we can reduce energy consumption in any type of building by 10%, 20%, 30%, or even 40%, I expect this to remain an important part of our backlog and opportunity pipeline.

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 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. Overall, do we see any opportunity to increase pricing? It seems like some of your business lines are gaining momentum, particularly in technology and life sciences. Is that the case?

Yes, we are always looking for opportunities to increase pricing. Our customer base is very knowledgeable about prices and tends to push back, so we take a long-term approach with our clients. If you consider the longevity of our client relationships, which span decades, we’ve built that trust over time and have been careful not to overreach on pricing. However, we will always strive to push for better pricing while maintaining those important client relationships.

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 sciences 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 Engineering and Consulting 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 are enthusiastic about the potential with Bowers. In that area, we also possess electrical capabilities along with Engineering and Consulting services. We aim to present our complete range of offerings. It's not a quick process; we need to engage with client bases where we can provide that comprehensive package and bring them on board. This will be a priority as we work on the integration, and Jeff has mentioned several times that we need to tackle this integration, get them involved, and then focus on how we can approach the market and promote our offerings. It's a high priority for us, and while I'd like to provide a timeline, I can't at this moment.

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 spring load 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 Legence 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?

Bowers contributes significantly with over 370,000 square feet of fabrication capability. They have complementary skills in process piping and hydronics, which allows us to utilize that geographical advantage. Currently, our fabrication primarily occurs in the West and Southwest, but now we can establish an East Coast presence that enables us to reach our clients, expand our operations, and lower shipping costs, leading to synergies. It's still vital for us to enhance the existing square footage we have because increasing our capacity is crucial for demonstrating to clients that we can handle their workload, 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 specific impact from large jobs. However, we have noted over time that an increasing portion of our revenue is coming from larger jobs. That said, our average job size is still somewhat lower compared to some of our public peers, as we perform a lot of maintenance and service work, quick small jobs, and retrofits instead of new construction. The growth in the data center and technology markets, which are primarily focused on new facilities and larger job sizes, is influencing our results. This growth has certainly contributed to our performance in the quarter, driven by new buildings and new jobs. We believe this trend will continue. Over time, we are optimistic about the retrofit market for data centers, as many existing centers are aging, suggesting that there will eventually be a shift in emphasis towards renovating those 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 Installation and Maintenance 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 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 fabrication 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.