LGN Q3 2026 earnings call transcript, November 12, 2026

Thanks everyone for joining today.

We are asking our amazing employees for providing high-quality service to our customers on a daily basis. Your commitment is this includes record 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 mid-shift. 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 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, such as life science, education, diversification, and

technology. 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 in the economy exists. All we continue to have a positive 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 offer this morning, 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 launch pad for us to expand our physical labor presence in Central Texas. CTI adds highly skilled unionized craftspeople 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 Legion's 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. 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. Let me turn the call over to Stephen.

Those programs are going to be a little bit more than $15 million in the third quarter of 2025. 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 and 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 and industry. 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. Unlike, 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 Legion 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 Legion's Corp., namely, our legacy pre-IPO shareholders, and therefore does not result in the issuance of additional common shares or a cash outlay by Legion's 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 and maintenance segment, reflecting the addition of Bowers and the segment's higher rate of growth. More importantly, looking at margins to the end of the year. at the segment level, the installation and 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 and 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

in the prior year quarter. Project margins in our program and project management service line, as well as a favorable revenue mix shift toward engineering and 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 expense. 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 headcount to support continued growth across the business, and public company-related costs. Importantly, though, adjusted SG&A as a percent of revenue improved to down from 9.3% in the prior year quarter, reflecting greater economies of scale as we continued 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 of 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 of 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 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 non-taxable income related to the gain from legacy. as well as income from pass-through businesses not subject to income tax at the corporate level. Excluding the impact of these items to Allegiance 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 to $18 million during the fourth quarter. Aside from our cash tax payments, we expect to make a TRA payment of approximately $8 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 taxes. Legions would retain 15% of the cash tax savings, reducing our net cash output. Now switching gears to backlogs. 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 1.2 times. On an LTM basis, our book-to-bill ratio was 1.3 times. In either case, solid ratios, particularly when viewed against our strong 2026 quarterly revenue realizations. 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 and consulting segment experienced

solid backlog and awards growth, which, to reiterate an earlier comment, is the reason why we expect revenue growth to improve for this segment in 2027. advanced 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 and 1.3 billion, an adjusted EBITDA of between 160 and 170 million. For full year 2027, we are establishing our revenue guidance range of 5.3 to 5.6 billion. We are also introducing our full year 2027 EBITDA guidance range of 690 to 730 million. Our guidance for the full, for the four quarter and 2027 reflects our growing backlog in 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, 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. Side 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 a billion dollars, 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 1.2 times, 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 three notches of credit rating upgrades over the past year, all while completing our largest acquisition ever in Bowers, along with three 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 legions has grown and our cash flow has increased, our board determined that it was a 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.

Before we open the call for questions, I just want to reiterate our positive outlook for the business and recognize our amazing people across legions 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.

Our first question comes from

Adam Bubes with Goldman Sachs. Your line is open.

Chad Dillard with Bernstein. Your line is open.

Your line is open.

Our next question comes from Derek Soderbergh with Cantor Fitzgerald. Your line is open.

Thank you for participating.

You may now disconnect.