Legence Corp. (LGN) Q3 2026 Earnings Call Transcript

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DATE

Thursday, Nov. 12, 2026

CALL PARTICIPANTS

• VP of Investor Relations - Son Vann
• Chief Executive Officer - Jeff Sprau
• Chief Financial Officer - Stephen Butz
• Chief Operating Officer - Steve Hansen

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TAKEAWAYS

• Revenue -- $1.31 billion, representing 85.1% growth driven by the Bowers acquisition and organic demand in the data center sector.
• Organic Revenue Growth -- 39.5%, excluding approximately $322.7 million in revenue contributed by the Bowers acquisition.
• Adjusted EBITDA -- $177.0 million, an increase of 99.3% year over year due to improved project execution and fixed cost leverage.
• Adjusted EBITDA Margin -- 13.5%, an improvement of 100 basis points from the prior year despite a revenue mix shift toward the Installation & Maintenance segment.
• Installation & Maintenance Revenue -- $1.11 billion, increasing 124% year over year as a result of demand for installation and fabrication services.
• Engineering & Consulting Revenue -- $199.9 million, a 5.8% decrease from the prior year following the completion of projects for NBC Studios.
• Backlog and Awards -- $5.9 billion, representing a 92.5% increase year over year driven by the data centers and technology end markets.
• Book-to-Bill Ratio -- 1.2x for the quarter, with a trailing 12-month ratio of 1.3x.
• Net Income -- $89.6 million, compared to a net loss of $0.6 million in the third quarter of 2025.
• Diluted EPS -- $1.15 per diluted share, an increase from a loss of $0.02 per share in the year-ago quarter.
• CTI Acquisition Price -- $100 million, comprised of $90 million in cash and approximately 260,000 common shares.
• Share Repurchase Authorization -- $150 million, providing additional capital allocation flexibility for the Board of Directors.
• 2027 Revenue Guidance -- $5.3 billion to $5.6 billion, reflecting current backlog levels and projected project timing.
• 2027 Adjusted EBITDA Guidance -- $690 million to $730 million, incorporating anticipated operational efficiencies and mix shifts.
• Capital Expenditures -- $32 million expected for the fourth quarter, primarily for advanced tooling and growth investments.
• Pro Forma Net Leverage -- 1.2x, representing a reduction from 2.4x in the third quarter of 2025.
• Total Liquidity -- $510 million, consisting of $341 million in cash and available borrowing capacity.
• I&M Adjusted Gross Margin -- 18.0%, up from 16.6% in the prior year due to fabrication mix and economies of scale.
• E&C Adjusted Gross Margin -- 33.3%, a modest increase from 32.8% in the third quarter of 2025.
• Net Interest Expense -- $14 million, a decrease of approximately $13 million year over year due to lower average interest rates and debt balances.
• Cash Tax Payments -- $16 million to $18 million expected in the fourth quarter, part of a $50 million total estimate for the full year.

SUMMARY

Legence Corp. (NASDAQ:LGN) reported financial results for the third quarter that management attributed to project execution and a continued mix shift toward fabrication services. The company expanded its geographic footprint in the Texas market through a recent acquisition while establishing new multiyear revenue and profitability targets. Management stated that capital allocation priorities will now include opportunistic share repurchases alongside ongoing investments in internal capacity and strategic acquisitions.

• CEO Sprau stated that data center demand signals remain unchanged despite regional regulatory developments in Northern Virginia, noting that "since acquiring Bowers at the beginning of the year, its backlog growth has been among the fastest across all of our businesses."
• The company plans to spend approximately $90 million on capital expenditures in 2027, maintaining a spending level below 2% of total revenue.
• Management reported that fabrication capacity currently stands at 1.6 million square feet, with CEO Sprau stating that "fabrication is where the market is heading, whether customers are building data centers, semiconductor fabs or large-scale manufacturing facilities."
• COO Hansen noted that approximately 40% of the company's data center revenue originates from the Virginia region, but confirmed that the company "can very easily shift to adjacent regions" if local conditions fluctuate.
• CEO Sprau indicated that the acquisition of Central Texas Industrial provides a launchpad for labor expansion, stating that "CTI adds highly skilled unionized crafts people with particular expertise in process piping."
• Management indicated that a $50 million deferred payment related to the Bowers acquisition is scheduled for the end of 2026.

INDUSTRY GLOSSARY

• MEP: Mechanical, electrical, and plumbing systems.
• I&M: Installation & Maintenance segment.
• E&C: Engineering & Consulting segment.
• Fabrication: The process of constructing building components in a controlled facility for on-site assembly to improve safety and predictability.
• CTI: Central Texas Industrial, a mechanical contractor acquired by Legence in Nov. 2026.
• Book-to-Bill Ratio: A financial metric that compares the amount of orders received to the amount of revenue recognized during a period.
• TRA: Tax Receivable Agreement.

Full Conference Call Transcript

Operator: Good day, and thank you for standing by. Welcome to the Q3 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, VP of Investor Relations. Please go ahead.

Son Vann: Thank you, Daniel, and good morning, everyone. Welcome to Legence's Third Quarter 2026 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 third quarter 2026 financial results and posted a slide presentation that accompanies the earnings release. All materials can be found on our 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 the 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 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 comparable GAAP measures. With that, let me turn the call over to Jeff.

Jeffrey Sprau: Thank you, Son, and thanks, everyone, for joining today to discuss our third quarter results and current outlook for Legence. Let me start by thanking our amazing employees for staying focused, working safely and providing high-quality service to our customers on a daily basis. Your commitment is the reason for our overall success and the driver of our strong financial performance in the latest quarter. This includes record quarterly revenues that grew 85% year-over-year, record backlog and awards that grew by over 90% and record quarterly adjusted EBITDA that nearly doubled. And just under half of our growth was organic.

Strong project execution and continued improvement in fixed cost leverage also contributed to record adjusted EBITDA margins, which rose by 100 basis points from the prior year. All the more impressive as this result was delivered despite a mix shift toward I&M. To our external stakeholders and the investment community, let me start by saying that operating conditions and demand signals remain very strong, and we expect that strength to continue in the years ahead. We also expect solid growth in data center activity including in regions such as Northern Virginia, where certain tighter regulatory conditions have actually been in place starting in early 2026.

In fact, since acquiring Bowers at the beginning of the year, its backlog growth has been among the fastest across all of our businesses. Opportunities in the region extended several years out and that pipeline remains significant. While the DMV is a substantial region for us, we also serve data center clients nationwide, shipping fabricated products across multiple regions and supporting clients wherever they choose to build. Conversations with our data center customers post election indicate a continuation of their plans to build. Now beyond data centers, we expect the semiconductor and memory chip market to be quite robust going forward.

Our other end markets such as life science, education and state and local government provides diversification and exposure to other target-rich clients that have historically delivered solid growth. As a leading provider of services for mission-critical building systems, we have both the expertise and customer relationships to serve a wide range of end markets and, of course, we can shift resources to wherever the growth in the economy exists. All in all, we continue to have a positive outlook on the fundamentals of our business, underpinned by our backlog pipeline of opportunities and discussions with customers.

This outlook is reflected in our guidance, which now extends through 2027 and plays a key role in our decision to authorize a stock buyback program that we announced earlier this morning. The buyback program provides the company with another tool to thoughtfully allocate capital in addition to acquisitions and internal capital investment options. On the topic of acquisitions, we recently completed a really nice tuck-in of a mechanical contractor in Austin, Texas. Several of our clients have asked us to work with them in this region. But to date, our capabilities have been largely limited to professional engineering services and a bit of fabrication.

The company we acquired Central Texas Industrial or CTI provides a great launchpad for us to expand our physical labor presence in Central Texas. CTI adds highly skilled unionized crafts people with particular expertise in process piping, and has established itself as a key contractor for the semiconductor sector in the area. The pipeline of opportunity in the region from both our existing client base and CTI is really exciting. I want to welcome CTI to the Legence team and look forward to growing in this market together. Turning to our internal capital investment plans. We continue to invest in our fabrication capabilities to support customer demand and improve productivity across our nationwide operations network through advanced tooling and automation.

We currently have approximately 1.6 million square feet of fabrication capacity and we'll continue to thoughtfully evaluate additional expansion opportunities. Any future expansions would continue to be driven by demand we see in our backlog and pipeline and through ongoing customer conversations. Fabrication is where the market is heading, whether customers are building data centers, semiconductor fabs or large-scale manufacturing facilities. So with that, let me turn the call over to Stephen.

Stephen Butz: Thank you, Jeff, and good morning, everyone. I'll begin with a review of our third quarter 2026 results in comparison to the third quarter of 2025. Following my review of our historical results, I'll provide an update on our current guidance, discuss our balance sheet and liquidity position and provide a bit more detail on the share buyback authorization and CTI acquisition before turning the call back to Jeff. In the third quarter of 2026, we generated revenue of $1.310 billion, an increase of $603 million or 85% from the year ago quarter. The Bowers Group acquisition contributed approximately $323 million of revenue. Excluding Bowers, our revenue grew by 40% year-over-year.

Looking at our latest quarterly revenue at the segment level, starting with Installation & Maintenance. Segment revenue increased by 124% year-over-year to $1.110 billion. Excluding the contribution from Bowers, organic revenue growth totaled 59%. The majority of the segment's growth was driven by strong demand for our installation and fabrication services, up 143% year-over-year, reflecting healthy organic growth and a meaningful contribution from Bowers. Data center & technology remains the primary driver of organic growth. Maintenance and Service revenue increased by nearly 36% year-over-year, primarily driven by the contribution from Bowers as well as growth in the education end market and manufacturing clients within other. Excluding Bowers, the service line delivered organic growth of approximately 11%.

Turning to Engineering & Consulting. Segment revenue decreased by 6% to $200 million, most of the decrease came from our program and project management service line, which declined by approximately $10 million year-over-year. Last year included work on several large projects for NBC Studios that generated revenue of approximately $15 million during the third quarter of 2025. Those projects were largely completed early this year and nothing similar was replicated. We're optimistic about program and project management revenue growth in 2027 based on our backlog and awards for the service line, which have grown by 19% since the beginning of the year.

This includes several large projects in the education market and work schedules for these projects are expected to commence in early 2027. The fourth quarter is also typically a seasonally lower quarter for this service line. Engineering & Design service line revenue saw a modest decline of 1.6% to $109 million, primarily due to softer demand from education clients, largely offset by increased activity in data centers and technology and manufacturing. We expect technology and manufacturing to provide greater contributions to growth in engineering and design services going forward. Turning to gross profit. Consolidated gross profit for the third quarter of 2026 increased by 86% year-over-year to approximately $275 million.

Similar to prior quarters, reported gross profit includes stock-based and other compensation expense related to legacy profit interest units. However, unlike prior quarters, the legacy profit interest that flows through gross profit was a net benefit of $8.9 million in the third quarter of 2026 compared to an expense of $3.8 million in the year ago quarter. The benefit was due to the decline in Legence stock price during the third quarter of this year, which reduced the mark-to-market liability of the settlement of these units. As a reminder, though, the settlement of legacy profit interest units is entirely borne by entities outside of Legence Corp., namely our legacy pre-IPO shareholders.

And therefore, does not result in the addition -- the issuance of additional common shares or a cash outlay by Legence Corp. Excluding the impact of the profit interest, adjusted gross profit on a consolidated basis was approximately $267 million, with adjusted gross margin of 20.3% for the third quarter of 2026 compared with approximately $152 million and 21.5% in the prior year quarter. The decrease in adjusted gross margin was primarily driven by a shift in revenue mix to our Installation & Maintenance segment, reflecting the addition of Bowers and the segment's higher rate of growth.

More importantly, looking at margins at the segment level, the Installation & Maintenance segment delivered an adjusted gross margin of 18%, up from 16.6% in the prior year quarter. The improvement was driven by higher project margins in our installation and fabrication service line, driven in part by a continued mix shift towards fabrication, strong project execution, and greater economies of scale and segment support costs. This was partially offset by a revenue mix shift toward the installation and fabrication service line and lower project margins in Maintenance and Services. Engineering & Consulting adjusted gross margin was 33.3% in the third quarter of 2026, up modestly from 32.8% in the prior year quarter.

The improvement primarily reflected higher project margins in our program and project management service line as well as a favorable revenue mix shift toward Engineering & Design, which represented approximately 55% of segment revenue compared to 52% in the prior year quarter. Now turning to SG&A. Reported SG&A expense in the third quarter of 2026 of $71 million includes a net benefit from stock-based compensation of approximately $28 million. Stock-based compensation was a benefit rather than an expense because it included legacy profit interest expense, which provided a gain of approximately $33 million.

In comparison, reported SG&A expense for the year ago quarter of $86 million included $15 million of stock-based compensation expense, almost entirely related to the legacy profit interest. Excluding the impact of stock-based compensation expense as well as acquisition-related expenses and other strategic initiatives. Our adjusted SG&A expense was $98 million, compared with $66 million in the prior year quarter. The increase was largely driven by the addition of Bowers, higher head count to support continued growth across the business and public company-related costs. Importantly though, adjusted SG&A as a percent of revenue improved to 7.5%, down from 9.3% in the prior year quarter, reflecting greater economies of scale as we continue to grow.

All in all, we generated adjusted EBITDA of $177 million in the third quarter of 2026, an increase of just under 100% year-over-year. Adjusted EBITDA margin for the third quarter 2026 improved to 13.5% or by approximately 100 basis points when compared to the year ago quarter. We also believe the sequential comparison is particularly relevant given that our second quarter 2026 results included Bowers. On that basis, adjusted EBITDA margin improved by approximately 130 basis points sequentially. Depreciation and amortization totaled $44 million in the third quarter of 2026, up from $27 million in the prior year quarter, with the increase largely due to incremental depreciation and amortization associated with the Bowers acquisition.

Interest expense net of income was $14 million for the third quarter of 2026, a decrease of nearly $13 million from a year ago, primarily due to a lower average debt balance and lower average interest rates. Turning to income tax. We recorded an income tax expense of $20 million in the third quarter of 2026. On a reported basis, the effective tax rate for the quarter was approximately 13%, which is below the U.S. federal statutory and state rates, primarily due to nontaxable income related to the gain from legacy profit interest as well as income from pass-through businesses, not subject to income tax at the corporate level.

Excluding the impact of these items to Legence Corp., the normalized ETR would be closer to the high 20% to low 30% range, which we would expect to gravitate towards over time. Regarding cash taxes, our current estimate is around $50 million of total cash tax for 2026, of which we expect to pay $16 million to $18 million during the fourth quarter. Aside from our cash tax payments, we expect to make a TRA payment of approximately $8 million to $9 million in the first quarter of 2027 related to our 2025 operating activity.

Our TRA payment related to estimated 2026 activity is expected to total $25 million to the low $30 million range, with the payment expected to occur in early 2028. This TRA payment estimates are essentially unchanged from our prior guidance. As a reminder, to the extent we have additional share exchanges, our cash tax payments would be reduced, while our TRA payments would increase by 85% of those cash tax savings. As a result, Legence would retain 15% of the cash tax savings, reducing our net cash outflow. Now switching gears to backlog. We ended September with consolidated backlog and awards of $5.9 billion, up 92% from year ago levels.

Compared with the second quarter of 2026, backlog and awards increased by approximately 4% or $229 million, translating to a third quarter book-to-bill ratio of 1.2x. On an LTM basis, our book-to-bill ratio was 1.3x. In either case, solid ratios, particularly when viewed against our strong 2026 quarterly revenue realization. In terms of our recent organic growth in backlog and awards, the data center and technology end market has been the primary driver for the installation and maintenance segment, along with education. Our Engineering & Consulting segment experienced solid backlog and awards growth, which to reiterate earlier comment is the reason why we expect revenue growth to improve for this segment in 2027.

We have experienced engineering backlog and award growth from almost all our reported end markets except for mixed use. Now to our guidance. We are establishing fourth quarter 2026 guidance for consolidated revenue of between $1.26 billion and $1.3 billion and adjusted EBITDA of between $160 million and $170 million. For full year 2027, we are establishing our revenue guidance range of $5.3 billion to $5.6 billion. We are also introducing our full year 2027 EBITDA guidance range of $690 million to $730 million.

Our guidance for the fourth quarter and 2027 reflects our growing backlog and awards, current expectation on project timing, and our ability to maintain a certain level of strong execution that we've been able to achieve in recent quarters. Now just a few additional housekeeping items to support your forecasting efforts. Interest income net of interest expense -- net of interest income for the fourth quarter of the year is expected to approximate $15 million. Depreciation and amortization for the fourth quarter is expected to come in at similar to third quarter levels of $44 million. In terms of CapEx for the fourth quarter of 2026, we expect to spend in the low $30 million range.

Fourth quarter CapEx will largely be for advanced tooling and other growth-related investments. At this stage, for 2027, we currently expect capital spending to be in the low $90 million range or less than 2% of revenue. Outside of CapEx, we expect to make our $50 million deferred payment related to the Bowers acquisition in the form of cash at the end of this year. Payment for the CTI acquisition also resulted in a cash payment of approximately $90 million and the issuance of approximately 260,000 shares for a total purchase price of approximately $100 million. Now to our balance sheet, liquidity and leverage.

We ended the third quarter with $341 million of cash, up from $292 million at the end of the second quarter. Total liquidity was $510 million at quarter end compared with $461 million at the end of the second quarter. Total debt at the end of September was slightly over $1 billion, relatively unchanged from the end of the second quarter. Based on pro forma last 12 months EBITDA, which would include pro forma EBITDA for Bowers during the fourth quarter of 2025, our pro forma net leverage ratio is now down to 1.2x, approximately half the level we were at this time last year. Finally, I'd like to spend a moment on capital allocation.

Our priorities have remained consistent since going public, maintaining a strong balance sheet, reinvesting in the business, and pursuing strategic acquisitions that strengthen our capabilities and expand our addressable markets and wallet share with our clients. Over the past year, we've made meaningful progress against these priorities. This includes a significant reduction in leverage that I just mentioned, which helped to drive our 3 notches of credit rating upgrades over the past year, all while completing our largest acquisition ever in Bowers, along with 3 tuck-in acquisitions and continuing to reinvest in our business, including expanding our fabrication capacity that's been a major contributor to our growth.

As Legence has grown and our cash flow has increased, our Board determined that it was appropriate to add another tool to our capital allocation toolkit by authorizing a share repurchase program. The program provides us with greater flexibility in how we allocate capital, enabling us to opportunistically repurchase shares when we believe doing so represents an attractive use of capital relative to other opportunities. This doesn't change our commitment to a strong balance sheet, nor does it signal a shift in our intention to continue to acquire attractive businesses. In fact, the Board's decision to authorize the buyback program coincides with our acquisition of CTI.

Moving forward, we will remain disciplined in our capital deployment approach, weighing our options between acquisitions, organic CapEx, debt reduction and share repurchases. With the objective of deploying capital where we believe it will generate the most long-term value for our shareholders. And with that, I'll turn the call back to Jeff.

Jeffrey Sprau: Thanks, Stephen. Before we open the call for questions, I just want to reiterate our positive outlook for the business and recognize our amazing people across Legence for their contribution. Our strong operational performance is made possible only through your commitment to delivering exceptional services for our customers. And with that, we'll now open the call up to questions. Operator?

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

Adam Bubes: Following the midterm results and potential for increased state-level moratoriums. Can you just talk about what you're hearing from data center customers, whether you're seeing any change in behavior across the pipeline? And do you expect any impact on near-term bookings or timing of revenue for?

Jeffrey Sprau: Yes. Thanks, Adam. I'll start and then I'll hand it over to Steve. The short answer is no. We're seeing no change in terms of demand signals or conversations or request for proposals or shipment schedules or deployments or anything like that. And so we continue -- in fact, it's probably grown since the last several months. And Steve, you're closer to the recent dialogue.

Steve Hansen: Yes, you're absolutely right, Jeff. We've had conversations with our customer and client base over the last few days and their indications are that they see no change to their forecast. And some regulations put in place isn't always a bad thing. Keeps the competition levels the same, and it will allow them to continue to build and push forward. So right now, our outlook is still positive in that market.

Adam Bubes: And then in Virginia, specifically, even prior to the midterms, there was a pause in Loudoun County. Is there a way to frame what percent of your data center revenue comes from Virginia and your view of the trajectory of backlog in that market? And can you just discuss your ability to pivot craft labor to other geographies?

Steve Hansen: Yes. We've got a substantial amount of work there, about 40% in that area, and we have not seen any of the projects that we're doing there, pause or delay in any way. And outlook is still strong in that market. And we do -- we can very easily shift to adjacent regions, markets around that county if it does start to shift, but we still are very positive on Loudoun County.

Jeffrey Sprau: Yes. I think that's a good example of it's really the local decision and we see demand growth in the Richmond area. And so our ability to serve that demand is very easy, given our adjacency in Northern Virginia.

Steve Hansen: Yes. And I'd just add on filing on here. While we do have quite a bit of activity in Loudoun County, Prince William County, Fairfax County, Culpeper County, those also represent nice size market for us in the data center market as well.

Operator: Our next question comes from Sabahat Khan with RBC Capital Markets.

Sabahat Khan: Great. I guess one of the sort of the things that's evolved in the business is a mix between the engineering side and the installation and maintenance and more hands-on stuff. Maybe just take into account sort of the margin considerations across the 2 silos. Do you have sort of an ideal mix? Is it sort of look, there's more demand in the sort of the construction installation side you're pursuing that? Maybe just walk us through with Bowers now in the mix, how you view that mix and how that could evolve over time.

Steve Hansen: Yes. I don't say we have -- I wouldn't say we have an ideal mix. I mean certainly, the activity, as you've seen over the past year has been extremely strong on the I&M side, where traditionally, our business units have been -- have really strong position in mission-critical facilities, data centers, technology, life science, where our E&C side has been a little bit more levered towards most markets, municipalities, health care. Now that said, while data center and technology has been a much smaller portion of our E&C segment, it is growing nicely. It's just off of a much smaller base.

So it is an increasing focus for us as we're also getting more business on the education side in the I&M business, just with the cross-pollination across the company.

Jeffrey Sprau: For sure. And I really love the early customer engagement that comes with the E&C business. I also really love the design build capabilities that we can deliver to clients. And most recently, we were awarded a very large contract with the University of California system to do a campus-wide electrification. And the only way we won that is because we had the upfront plan and the upfront design and the ability to implement the changes.

And that is unique in our capabilities as compared to other companies that could only provide part of the solution, and so sort of piggybacking on Stephen's comment, I'm less concerned about what the size of the pie is, I'm more concerned about are we serving our customers in the most comprehensive way.

Sabahat Khan: Great. And then just for my follow-up, the guidance for '27 when we look at sort of where the margins are expected to shake out this year. Can you walk through the margins? Is this based on the margin that's embedded in the guide, some underlying margin improvement. So just walk us through the bigger buckets on the margin improvement, puts and takes for the '27 guide.

Steve Hansen: Sure. Yes. I think in this quarter, again, we had exceptional project execution, which we don't model that level of execution and going forward, but we do model in the mix shifts that we've seen. And again, some really strong performance that we've had all year. And so you see that reflected in the higher overall year-over-year margin. So that would reflect the mix shift we've seen toward a higher level of fabrication as well as the overall I&M taking a bigger piece of pie.

Jeffrey Sprau: Yes. And we continue to drive performance in the field to make sure everywhere we can, we're affecting margin and driving performance. And to Stephen's point, that mix of fabrication helps keep that segment strong.

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

Julien Dumoulin-Smith: Look, maybe just to kick it off here, can you talk a little bit about the '27 guidance in light of where you stand on backlog and awarded orders and as much as, obviously, one seems to trend better than the other. Just maybe some of the discrepancies, the duration of the backlog, any dynamics? I mean, clearly, you guys have a track record here vis-a-vis guidance, but just wanted to ask explicitly as to a little bit of the bifurcation between the 2.

Steve Hansen: Yes. Thanks, Julien. It's a great question. As our project sizes, our average project sizes have increased over the last year. There is a bit of elongation on that backlog also a little bit longer lead time on some of our E&C backlog as well in terms of when those jobs are starting. So we forecast down these larger individual projects, and that's what goes into the guidance for a little bit lower revenue growth than we've seen in the backlog and awards. But we'll -- you, of course, have some of that backlog burning well into 2028 and even some into 2029.

Julien Dumoulin-Smith: Yes. Absolutely. Excellent. And then maybe just a quick follow-up here. In as much as you delineated here on the call, a tuck-in Texas and then talk about really using that as a platform to grow in the state. You talk about fabrication. And then now at the end of the transcript, you talk about buyback, can you talk a little bit about prioritization between those, right? Obviously, we've seen gyrations in the shares. And I'm cognizant of perhaps the decision to introduce the buyback opportunistically, but just how should we read that? Because certainly, it seems like you got 3 very clear potential avenues that you're articulating on the call.

Steve Hansen: Yes. Look, I think we've got a lot of good options in front of us. Of course, acquisitions, by their nature, are a bit opportunistic, right? We can't force anyone to sell, and we can't force the multiple that they want to sell that. And so it gives us another avenue if the right acquisitions aren't there. Certainly, we like the benefit of adding scale to the business and the operational leverage that, that can provide. So all else equal, we'd expect to continue to allocate capital toward acquisitions. But if the math doesn't work, it gives us another tool where we can look at our own stock.

Jeffrey Sprau: Yes. And specifically, Julien, with respect to CTI, we've wanted to expand our presence in Texas for quite some time. And certainly, data centers get all the press, but there's a tremendous market in terms of semiconductor. There's a tremendous health care market and education market due to the fact that's a population growth area. So we've always wanted to have a bigger footprint. And to date, we've been serving it through fabrication and through our adjacent business in New Mexico.

And so we always sort of had our eyes out to find a company that checks the boxes for us and those boxes would be -- obviously has to be a culture fit, and they have to be a safe company, but they have to have design build capabilities and skew towards those higher-end projects and capabilities such as process piping. And CTI certainly check those boxes, and it gives us a great labor force, and Steve can...

Steve Hansen: Yes, Jeff, you're 100% right, and we're really excited about entering into that market, continuing to diversify our end market and customer base and the process piping capabilities that come there. And just the overall capacity for growth in that market, we're excited to be there and it's a great addition.

Operator: Our next question comes from Sherif El-Sabbahy with Bank of America.

Sherif El-Sabbahy: I just wanted to speak to maybe some of the out years. As you said, you have coverage on backlog for '27 and some burning off in 2028 and 2029. What conversations are you having with customers? Or what visibility do you have into that 2028 or '29 time frame?

Steve Hansen: Yes. We're constantly in communication with our clients and planning for not only just capital allocation for our growth, but what they're doing, helping them with capital planning looking at estimates for projects outwards. And Jeff mentioned earlier, our pipeline is still really strong in out years, and we're not seeing a slowdown for -- on any of those inbound requests. So we feel really good about continuing our growth in not only the data center market, precision manufacturing, a lot of the onshoring work that's being planned right now that will take place during that time.

Sherif El-Sabbahy: And there's obviously been a huge cycle for new build, particularly in data center. But as we think about mechanical and some of these other components, that has a shorter useful life in high-voltage components, for example. So with all this new build work, how do you see that transforming into a refurbishment or replacement cycle in the coming years, maybe as that new build cycle rolls off?

Steve Hansen: Yes. Existing facility mix has changed for us from new build to -- or from existing to new with the data center boom. But you hit it right on the head, these buildings, they run 24/7, mechanical equipment breakdown gets old. And we have a big focus on staying in contact with our clients long-going and looking at those refurbishment opportunities. And we're doing them today data centers, for example. We've been building data centers since the late '90s. And we are refurbishing them today in many of our markets.

Jeffrey Sprau: Yes. And that cycle of helping with the design, giving the installation, then getting a preventative maintenance contract and then getting the break-fix work and being a constant presence, you are in the best position. The incumbency advantage is huge. You're in the best position to get that next piece of work when it's a new wing of a hospital or a new expansion of a school district because you have the relationship and more importantly, you have the technical capabilities and the knowledge of those facilities, you're in the best position to win and then it sort of starts over. So we see that the recipe for success, so to speak, continuing.

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

Michael Dudas: Jeff, maybe you can elaborate. You highlighted very positively the fabrication mix in your business. Maybe you can refresh us on, you mentioned your square footage. Are the -- is increasing amount of the new work or for third party and for your own client leaning fabrication, what's your capacity there? And when you think about expanding, is it around the margins? Are you looking for opportunities to serve maybe that '29 -- '28, '29, '30 opportunity in business given that seems to be a very strong trend within the construction industry?

Jeffrey Sprau: No, you nailed it, and I'll start and Steve can talk a little bit about our planning, which is now becoming real time. It used to be a once a year activity and decide how much fab you need now it's a real-time activity. Certainly, like I said in my prepared remarks, prefabrication is here to stay, modulate construction is here to stay given labor shortages and just the fact that it's a better solution. It's safer, it's more economical, it's more predictable, more sustainable. And what we've seen when we look at square footage, we need it for 2 reasons, one of which our business just in general is growing.

And so the more prefab work you can do for your existing business, the better. Secondarily, the third-party sales, which you referenced, continues to grow. And as facilities get bigger, especially if they're semiconductor fabs or data centers or advanced manufacturing, those modules, so to speak, are repeatable. And so you might be shipping 100, 200 of a given assembly, which again just calls out for doing a, in the shop and b, having automation such as fancy laser-cutting devices and robotic welders and that sort of thing. And buildings like Stephen said, are getting bigger. Our jobs are getting bigger.

So all those sort of factors are sort of converging on more and more of our mix our deliverables rather being done in a factory versus on-site or stick built, which what the industry calls it. Now $1.6 million is where we are today. It's not where we're going to be my guess in the future, and Steve can talk to sort of our planning process.

Steve Hansen: Yes. So we are currently actively looking at inbound conversations with our clients, backlog that to Stephen's point, it goes out in the '28 and '29 for some of this off-site manufacturing. And we are and we'll be expanding our footprint. We'll have more details in months to follow on what that square footage looks like. But along with the square footage and Jeff hit on it, automation and technology staying ahead of that curve in order to get the most we can out of all of our facilities is a big focus for us as well, right?

So latest in automation and whether it's robotic welding, co-robotic welding, laser cutters, all the things that we're investing in today will just help us continue to grow and be able to say yes to our clients when they have large projects.

Operator: Our next question comes from Chad Dillard with Bernstein.

Charles Albert Dillard: So a question for you on the order book. Maybe if you can narrow it down into the data center portion. So can you talk about just your mix of customers between hyperscaler versus colo versus Neocloud developer? And if you can, how much of the business is in Texas?

Jeffrey Sprau: Yes. I'll start. In terms of our mix between hyperscaler and colo developer, that's a little hard to flesh out because many of the developers are building for the hyperscalers. The one thing I could definitively say is we don't have a lot of Neocloud. We have a little bit, I'm sure probably single-digit percent of our data center spend, our demand rather is Neocloud. The rest would be primarily a little bit of enterprise but primarily hyperscaler/developers. And I don't know, Steve, if you can...

Steve Hansen: Yes. I mean I think if you look across the world of data centers, we touch pretty much every name that you could put in that box. And Jeff hit it, right? The developers build for the hyperscalers, and we do both direct for each. So narrowing it down to percentage is a little tough for us. On the Texas market, a little less than 10% of our data center work is currently in Texas. And again, it's why we are excited to be able to plant that flag in Austin and to continue to grow from our Albuquerque location over into West Texas as well and take advantage of that market.

Charles Albert Dillard: Great. That's super helpful. And maybe just sticking with orders during 3Q, can you just talk about the order momentum or trends by end market? And just any thoughts on just forward order expectations as we think about third quarter -- fourth quarter and beyond?

Steve Hansen: Yes. In terms of the orders by end market, as we mentioned, our revenue for the education end market has been one of the softer ones, but we did have some nice wins, particularly in the program and project management side as well as I&M, of course, data center and technology. We've been talking about most of this call. That's extremely robust. Life science and health care, our revenue realization was up versus where we were a year ago, but I think the backlog build is not as strong. We've got some large projects, hospital projects that we've been working through and haven't replaced those yet. Those are some of the big things that come to mind.

Jeffrey Sprau: Yes. No, Steve, you nailed it. On health care and life science, those large hospital jobs come in, they take some time to roll through. We have some healthy backlog in out years on some hospital work that we're working through now in design and development. And we continue to see inbounds in the life science arena that has been soft since COVID still, but we are seeing more and more pipeline inbound for looking at build-outs and whatnot, which is a great signal for us in quarters to come.

Operator: Our next question comes from Craig Irwin with ROTH Capital Partners.

Craig Irwin: First, congratulations on another beat and raise quarter here. Jeff, you seem particularly excited about the semiconductor market. You're usually pretty tempered in the way you phrase things and you've been clear. This is a priority for you. So when I look at the acquisition of CTI, I see this as particularly interesting timing. I know that you do have experience in the semiconductor market, but can you maybe flesh out for everybody on the call, the diligence you've done, how long you've worked with them, what their experience is in the semiconductor market? And many of us are assuming that you have substantial work in Grimes, Texas.

This past week, they were very clear or at least the suppliers from Japan were clear, 1 million wafers a month means it is a $300 billion CapEx by 2032. Just interesting timing here, and I know this is not the only mega fab you're working in. So any color here?

Jeffrey Sprau: Yes. Thanks, Craig. And I'll start and again hand it over to Steve on some specifics. It's interesting. We grew up in the semiconductor space. If I go to our very initial business in San Jose grew up in semiconductors. And so I've always had a soft spot in my heart for semiconductors. And as that trend of reshoring and just the need for chips, be it memory or otherwise, really flows exactly into our wheelhouse and our relationships that really started in Silicon Valley now have traveled across the country, whether it's in Idaho or Upstate New York or the great state of Texas.

And so whenever we come across somebody that has those technical chops, and the relationships, you got to have both that sort of jumps right to the top of the list. And I think we see that in CTI.

Steve Hansen: Yes, absolutely. And that team down there will help us build that base of work, and Jeff hit it, our original business in the Bay Area grew up in the heart of Silicon Valley. We've had some really strong recent wins there in that market where we're seeing our existing client base that we're in their facilities, and Jeff hit on earlier, we live in these facilities doing maintenance and project work for them day in and day out and have been able to negotiate some new fab work that will be happening there and in other markets that we're excited to be moving into, including Texas, and CTI will be a big part of that.

Craig Irwin: Understood. The second question I want [Technical Difficulty].

Jeffrey Sprau: Craig, I think your line is coming out.

Craig Irwin: So sometimes it's best to talk about the elephant in the room, right, one way to move it off to the side. And your stock is trading at a multiple where there's clearly some skepticism about the backlog. You've had several quarters of beat and raise, nothing but impressive performance, at least a few hundred million dollars in free cash to use next year for deleverage or buybacks or acquisitions. And questions that none of us really have crystal clear answers to around data center and the what actually gets completed in the long run? So you have diligence to your customers, you will know them far better than we ever will.

But my question really is, if we take the skeptical view and we step back, you have tremendous capacity that you've developed to serve this customer base that is entirely applicable to other markets. Can you really talk about the fungibility of your fabrication capacity in other markets? So one of your primary competitors their business and fab around HVAC for rooftop units, right? So you've built it from coming in from the very high end from clean rooms, -- this seems like it would be more applicable into some of the life sciences opportunities and new pharma opportunities.

If you could maybe unpack for us that if you had to move 10% or 20% of your business in the next 2 years, how applicable is this resource base to actually serve that?

Steve Hansen: Yes. That's a great multifaceted question. I think for starters, if I look at our business mix, we've always wanted to be flexible and opportunistic. And we didn't want to focus on one market at the exclusion of the other. We always wanted this to be an and not or. We didn't want to have to decide between markets. We wanted to say yes to everything and just respond to those markets that were hot. Data centers is a perfect example. We didn't say no to health care. We didn't say no to education. We didn't say no to aviation. In fact, all of those markets have been growing as well. It's just overshadowed.

And so I think fungibility is a great word because it certainly applies to our fabrication. It also applies to our people. It applies to our technicians and our trades men and women and our engineers and our planners. And the reason it's fungible is we're starting at the high end of the market. And so we're in these very complicated, to your point, clean rooms and surgical suites and R&D facilities where you have to know what you're doing. And if you need to go to down market opportunities, so to speak, you can do that versus the other way around.

Certainly, our ability to have a variable workforce and sort of rightsize our field labor force based on our backlog. The fact that we're a union-based field labor force gives us tremendous flexibility. And we can have somebody that works on a semiconductor facility today be in a surgical suite tomorrow because it's the same sort of technical chops you need to be able to deliver. And I think -- and you hit on it, and Steve has mentioned that I think people are realizing that prefabrication is the way to go. And it's the way to go, it's better and it's a better use of scarce labor.

And we -- in fact, if you would go to our facilities, you would see a life science skid, industrial skid being built -- and then you'd see a hospital skid being built right alongside it.

Jeffrey Sprau: Yes. Jeff hit it and just I'll pile on a little bit. We talk a lot about data center off-site manufacturing everything, but we are way more diverse than that than what we do. And from semiconductor to pharma to quantum computing. We've got clients that we do a little bit of everything for from that prefabrication lens. And your question was right on, we can lift and shift those resources to what is where the market is going. It's historically what we've always done when there's a rise or a fall in any given end market, we can easily shift resources.

Steve Hansen: Yes. And just to final, we sort of can control the controllables, right? And we can't control the narrative or sentiment or stock price for that matter. What we can control is taking care of our customers. We can control being safe and delivering and developing our employees and making sure we're doing a nice job and play the long game. And so that's what we do every single day, and that's what we'll continue to do.

Craig Irwin: Great. Well, congrats again on another really strong quarter.

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

Derek Soderberg: Just one quick one for me. Wondering if you can touch on how your capital allocation priorities are sort of evolving across new capacity expansion opportunities, M&A, reducing debt and then now with the buyback. I just want to get your high-level view on sort of the order of priorities as we head into 2027 here.

Steve Hansen: Sure. Just to reiterate, like we do intend to continue to maintain a strong balance sheet. That said, I think we've been able to grow into the debt and not have to use the cash to pay down debt. Our balance sheet has strengthened just because of the cash flow we're generating, the growth in the EBITDA. So I don't necessarily see us repayment of debt being a priority in this market, but we intend to still maintain attractive levels of debt to EBITDA. And then you shift to the other categories, as I mentioned, we certainly see significant benefits of scale, right? And that also accrues to better credit quality as well. Scale is an important credit metric.

And you can accomplish that through acquisitions. If you find the right opportunities, it will be accretive to shareholder value as well as internal expansion. And so those is just going to depend on a case-by-case basis. We've done some meaningful expansion of fab capacity this year. We're continuing to look at opportunities to expand fab further, likely look for some of that to continue to be underwritten by orders. So that will be a balance. But those are going to remain significant priorities. And then, of course, we have the opportunity now to also retire shares at attractive valuation as well. So that's sort of how we're thinking about these priorities.

Operator: Our next question comes from Chris Senyek with Wolfe Research.

Christopher Senyek: Just wanted to ask, when you look at your initial '27 guidance, what assumptions do you have least visibility into today? And where do you think there's the greatest room for change? And I guess, more particularly, how does it compare to the visibility you guys had entering in '26.

Jeffrey Sprau: Visibility in '27 as compared to visibility in prior years.

Steve Hansen: Yes, it's actually -- it's quite similar to where we were last year at this time. Now that said, this year and last year a bit higher than we were historically. So a little bit better visibility, a little bit more of the revenue covered by backlog going into next year than we had historically, though, pretty similar levels to where we were last year.

Christopher Senyek: Okay. And for my follow-up for -- with CTI, how does that labor model compared to the rest of Legence? And as you expand in Texas, do you expect to leverage more of your existing union workforce or build out a more localized one?

Steve Hansen: Yes. No, it's a good question. We'll continue to build out a local labor force there. We want to be boots on the ground in the markets we're in. And we do have capacity and capability to pick up labor and move it around the country where we need to. But our goal is always to build a labor force in that geo where we acquire a business. So we will work closely with CTI, the local unions and teams down there to help grow that business much like we've done all the others that we've acquired.

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

Son Vann: Thank you, everyone, for attending our third quarter '26 earnings call. A recording of this call will be available on our website in a few hours. And we'll look forward to talking to you again next quarter. Good afternoon.

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

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