Legence Corp. (LGN) Q3 2025 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call highlights strong financial performance with higher gross margins and incremental margin expansion, driven by favorable market trends and strategic acquisitions like Bowers. The company's focus on fabrication expansion and increased visibility into future revenue are positive indicators. However, some uncertainties remain due to management's lack of specific guidance on synergies and pricing strategies. Overall, the positive aspects outweigh the uncertainties, suggesting a positive sentiment towards the company's future prospects.
Key Financial Performance
Revenue $708 million, an increase of $147 million or 26% year-over-year. The growth was entirely organic, driven by strong performance in both Engineering and Consulting (9.5% growth) and Installation and Maintenance (35% growth).
EBITDA $88.8 million, an increase of 39% year-over-year. The growth was attributed to strong project execution and containment of SG&A growth relative to revenue growth.
EBITDA Margins Improved by 110 basis points to 12.5%, driven by strong project execution, particularly in fabrication work for data center and technology clients.
Backlog $3.1 billion, up 29% year-over-year. Growth was mainly in the Installation and Maintenance segment (46% growth), with significant contributions from data center and technology markets.
Gross Profit $148 million, an increase of 25% year-over-year. Gross margin slightly declined by 20 basis points to 20.9%, due to a revenue mix shift towards the lower-margin Installation and Maintenance segment.
Engineering and Consulting Revenue $212 million, a 9.5% increase year-over-year. Growth was driven by strong performance in Life Sciences and Healthcare, as well as state and local government markets.
Installation and Maintenance Revenue $496 million, a 35% increase year-over-year. Growth was driven by installation work and fabrication of liquid-to-chip cooling systems for data centers, as well as strong performance in life sciences and healthcare markets.
Book-to-Bill Ratio 1.5x, indicating strong future outlook and robust backlog growth.
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Operating Highlights
Liquid-to-chip cooling systems: Strong growth in installation and fabrication services, particularly for data centers in Northern Virginia, Arizona, Iowa, Ohio, and Georgia.
New engineering and consulting services: AZPE acquisition expands engineering services in data center and manufacturing sectors.
Data center market expansion: Acquisition of Bowers Group strengthens presence in Northern Virginia, the largest data center capacity region globally.
Geographic expansion: IMD acquisition expands presence in the Mountain West region, targeting healthcare, manufacturing, and education markets.
Revenue growth: Achieved 26% year-over-year revenue growth, driven entirely by organic growth.
Backlog growth: Backlog increased by 29%, with a book-to-bill ratio of 1.5x, indicating strong future demand.
EBITDA improvement: EBITDA grew by 39%, with margins improving by over 100 basis points due to strong project execution.
Acquisition of Bowers Group: Enhances mechanical capabilities in Northern Virginia, adds 1,700 skilled employees, and provides 370,000 square feet of fabrication capacity.
Tuck-in acquisitions: Acquired AZPE and IMD to strengthen engineering and installation capabilities in strategic regions.
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Risk or Challenges
Market Concentration Risk: The company's heavy reliance on the data center and technology market, which accounts for 47% of pro forma revenue post-acquisition, exposes it to risks if demand in this sector declines or if there are disruptions specific to this market.
Integration Challenges: The acquisition of Bowers and other smaller firms like IMD and AZPE may pose integration risks, including cultural alignment, operational synergies, and the ability to effectively cross-sell services.
Leverage and Financial Flexibility: Despite reducing net leverage to 2.4x, the acquisition of Bowers will increase leverage to 2.9x, which could limit financial flexibility and increase vulnerability to interest rate fluctuations or economic downturns.
Geographic and Client Concentration: The acquisition of Bowers increases exposure to the Northern Virginia and D.C. metro area, which could pose risks if economic or regulatory conditions in this region deteriorate.
Supply Chain and Fabrication Risks: The company's reliance on fabrication capacity, including the 370,000 square feet added through Bowers, could face challenges from supply chain disruptions or operational inefficiencies.
Seasonality and Revenue Mix: The company's revenue is subject to seasonal fluctuations, particularly in the Engineering and Consulting segment, which could impact financial performance during certain periods.
Regulatory and Compliance Risks: Operating in highly regulated industries such as healthcare, life sciences, and government projects exposes the company to compliance risks, which could result in financial penalties or project delays.
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Guidance & Outlook
Revenue Guidance for Q4 2025: Legence expects standalone revenue of between $600 million and $630 million for Q4 2025, reflecting seasonality.
Revenue Guidance for Full Year 2026: Legence projects standalone revenue of between $2.65 billion and $2.85 billion for 2026, driven by strong backlog growth.
Adjusted EBITDA Guidance for Q4 2025: Legence anticipates adjusted EBITDA of between $60 million and $65 million for Q4 2025.
Adjusted EBITDA Guidance for Full Year 2026: Legence expects adjusted EBITDA of between $295 million and $315 million for 2026, reflecting growth in backlog and awards.
Capital Expenditures for 2026: CapEx is estimated to total in the low to mid-$50 million range, with approximately two-thirds allocated for expansion.
Interest Expense for 2026: Interest expense is projected to be in the low to mid-$50 million range for 2026.
Depreciation and Amortization for 2026: Depreciation and amortization are expected to be in the low $100 million range for 2026.
Bowers Acquisition Revenue Contribution for 2026: Bowers is expected to generate revenue of $825 million to $875 million for 2026, with a partial year contribution of $725 million to $775 million if the acquisition closes on February 1, 2026.
Bowers Acquisition EBITDA Contribution for 2026: Bowers is projected to contribute EBITDA of $75 million to $85 million for 2026, with a partial year contribution of $67 million to $75 million if the acquisition closes on February 1, 2026.
Backlog Growth: Consolidated backlog and awards totaled $3.1 billion at the end of Q3 2025, up 29% year-over-year, driven by strong growth in the Installation and Maintenance segment.
Book-to-Bill Ratio: The book-to-bill ratio was 1.5x for Q3 2025, indicating strong future revenue visibility.
Debt and Leverage: Pro forma net leverage is expected to be under 2.9x post-Bowers acquisition, with plans to reduce it to 2.5x quickly.
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Shareholder Return Plan
The selected topic was not discussed during the call.
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Key Q&A
Q:What leverage is the company comfortable with over a 2-3 year time horizon, and what is the size of the M&A pipeline?
A:The company aims to maintain a leverage ratio below 3x on a net basis, targeting the low 2x range longer term. They are comfortable taking leverage up to the high 2x range pro forma for Bowers. The M&A pipeline is active, particularly in the E&C segment, focusing on tuck-in acquisitions and technically savvy employee bases. On the I&M side, M&A is more opportunistic and focused on high-growth industries in specific U.S. cities.
Q:What drove the sharp acceleration in data center and technology growth, and what is the growth outlook for 2026?
A:The growth was driven by multiple projects in different geographies, including installation work for data center builds and modular construction technical cooling systems. The data center and technology end market has grown at a 30% CAGR over the last several years, and the company expects this growth rate to continue, offset by single-digit growth in other markets.
Q:What is the company's perspective on working capital tailwinds and negotiating power with customers?
A:The company has improved working capital management through faster collections, better payables timing, and negotiation of contract terms. They see higher upfront payments in custom fabrication services. Negotiating power varies by service and end market, but the company focuses on maintaining strong customer relationships.
Q:What is the company's approach to M&A and acquisitions post-IPO?
A:The M&A pipeline remains active and robust, with ongoing discussions. E&C acquisitions are expected to continue at a steady pace, focusing on smaller tuck-in acquisitions. Larger I&M acquisitions are less predictable. The company is prioritizing the integration of Bowers and does not anticipate another large acquisition in the near term.
Q:How does the company view the evolution of revenue mix over the next 2-3 years?
A:The revenue mix will ebb and flow with M&A opportunities and growth in different end markets. The company aims to maintain a balance between segments but does not have a specific target ratio. They emphasize the importance of scale in both implementation and engineering services for cross-selling and revenue synergies.
Q:What are the expected synergies and operating leverage benefits from the Bowers acquisition?
A:Cost synergies are expected to be offset by increased spending on cybersecurity, finance, and HR compliance in the short term. Revenue synergies are expected to drive value uplift over time. Operating leverage benefits are anticipated as the company integrates Bowers and scales operations, with more significant economies of scale expected by 2027-2028.
Q:What drove higher installation gross margins in the third quarter, and are they sustainable?
A:Higher installation gross margins were driven by strong execution, favorable closeout timing, and a mix of higher-margin manufacturing and fabrication services. The company believes it can continue to leverage operational excellence and expand margins over time.
Q:What visibility does the company have into 2026 backlog and revenue conversion?
A:The company has higher visibility into 2026 than in past years, with $1.8-$1.9 billion of the $3.1 billion backlog expected to convert to revenue in 2026. Growth is driven by data center and technology projects, as well as opportunities in pharmaceuticals, life sciences, and energy efficiency.
Q:What is driving incremental margin expansion in 2026 guidance?
A:Margin expansion is driven by a mix shift toward higher-margin services within the Installation and Fabrication service line, such as custom fabricated projects. This is partially offset by a shift toward the lower-margin I&M segment. Pricing opportunities are pursued cautiously to maintain long-term customer relationships.
Q:What is the company's perspective on fabrication expansion and its impact on growth?
A:Fabrication expansion is important for driving capacity and reducing costs. The Bowers acquisition adds significant fabrication capabilities, particularly on the East Coast, complementing existing operations in the West and Southwest. This expansion supports backlog growth and enhances the company's ability to serve Tier 1 customers.
Q:What trends are observed in job size and end markets?
A:The company is seeing an increasing proportion of revenue from larger jobs, particularly in data centers, health care, semiconductors, and life sciences. While the average job size remains skewed lower due to maintenance and retrofit work, growth in new construction projects is driving larger job sizes.
Q:What synergies are expected from the Bowers acquisition, and how quickly will they materialize?
A:The Bowers acquisition offers cross-selling opportunities and expanded fabrication capabilities. While integration and cross-selling will take time, existing relationships and trust between the companies provide a head start. Revenue synergies are expected to materialize over time, but cost synergies are not expected in the short term.
Q:What is the company's outlook on modular construction and fabrication growth?
A:Modular construction and fabrication are growing segments, supported by demand in data centers, life sciences, and semiconductors. The Bowers acquisition enhances the company's capabilities and geographic reach, particularly on the East Coast. Fabrication-only projects now represent a growing percentage of revenue within the Installation and Fabrication service line.
Q:What factors contributed to higher I&M margins in the third quarter?
A:Higher I&M margins were driven by exceptional project execution, favorable closeouts, and a mix of higher-margin equipment purchases. These factors contributed to the strong performance in the quarter.
Q:Review of Unclear Management Responses
A:Management avoided providing specific timelines or quantifiable impacts for certain synergies and cross-selling opportunities from the Bowers acquisition. They also did not disclose the exact size of the modular construction and fabrication business or provide detailed guidance on pricing strategies in specific end markets.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
Bowers Group
Bowers center
Bowers contractor
DC area
Northern Virginia
Officer Chief
Stephen
Virginia DC
acquisition
agreement
announcement
base
building
capability
center capacity
end market
engineering
expertise
fabrication
industry
installation
knowledge
liquid chip
measure
opportunity
outlook
plumbing
project
region
release
result
scale
solution
system
today
Frequently Asked Questions
Where does this earnings call transcript come from?
All transcripts are sourced directly from the official live webcast or the company’s official investor relations website. We use the exact words spoken during the call with no paraphrasing of the core discussion.
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No material content is ever changed or summarized in the “Full Transcript” section. We only correct obvious spoken typos (e.g., “um”, “ah”, repeated 10 times”, or clear misspoken ticker symbols) and add speaker names/titles for readability. Every substantive sentence remains 100% as spoken.
Why do some answers appear as “Unclear” or “Inaudible”?
When audio quality is poor or multiple speakers talk over each other, we mark the section instead of guessing. This ensures complete accuracy rather than introducing potential errors.
Who creates the AI Summary and Key Q&A highlights shown above the transcript?
They are generated by a specialized financial-language model trained exclusively on 15+ years of earnings transcripts. The model extracts financial figures, guidance, and tone with 97%+ accuracy and is regularly validated against human analysts. The full raw transcript always remains available for verification.
