Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and related notes that appear elsewhere in this filing. In addition to historical consolidated financial information, the following discussion contains “forward-looking statements” that reflect our future plans, estimates, beliefs and expected performance. The forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described under “Cautionary Statement Regarding Forward-Looking Statements” and “Risk Factors” and elsewhere in this filing. Our actual results may differ materially from those contained in or implied by any forward-looking statements. We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law.
Overview
We are a leading provider of engineering, installation and maintenance services for mission-critical systems in buildings. We focus on high-growth sectors that have technically demanding buildings, including technology, life sciences, healthcare and education.
Our business is growing rapidly as data centers, manufacturers, pharmaceutical companies, hospitals, schools and universities make investments in both new and existing facilities to support growing demand for their products and services, reduce energy costs and increase resiliency. In 2025, we generated more than half of our revenues from “high growth industries,” which we define as clients operating in the data center & technology and life sciences & health care end-markets. As of December 31, 2025, we had $3.7 billion of backlog and awarded contracts, representing an increase of 49% over the same date last year.
We specialize in designing, fabricating and installing complex HVAC, process piping and other MEP systems for new facilities and upgrading HVAC, lighting and building controls in existing facilities to enhance building performance, improve reliability and drive efficiency. In 2025, we generated approximately 40% of our revenues from new building projects and approximately 60% of our revenues from retrofits, upgrades and maintenance for existing buildings. Our team includes approximately 1,200 MEP engineers and energy consultants, and approximately 6,200 HVAC and plumbing service technicians, fitters, electricians and sheet metal workers.
Our clients include large technology and industrial companies and public sector institutions who contract with us directly to provide services, as well as intermediaries such as architects and general contractors who subcontract MEP services to us as part of a larger project. We served approximately 20,000 clients from 2019 through 2025. In 2025, we generated approximately 2% of our revenues from the federal government. Excluding maintenance contracts which can span multiple years, we typically complete most of our jobs within nine months.
Table of Conten t s
The contribution to our revenue by building type and client end market is as follows (dollars in thousands):
Year Ended December 31,
Revenue by Building Type
Existing building
New building
Revenue
Revenue by Client End Market (1)
Data centers & technology (2)
Life sciences & healthcare (3)
Education (4)
Mixed-use (5)
State & local government (6)
Other (7)
Revenue
(1) The information provided in the table under “Revenue by Client End Market” represents the revenue generated from clients in each of the end markets indicated in that period; provided, that where the client is a lessor, we use the lessee’s end market.
(2) Includes facilities housing servers, networking equipment, systems critical for storing and managing data, operational facilities for internet service providers, software companies, IT development hubs, AI development facilities, and high-precision manufacturing plants producing semiconductor chips and electronics.
(3) Includes facilities supporting life sciences research and development, pharmaceutical manufacturing and healthcare facilities providing inpatient and outpatient health services.
(4) Includes kindergarten through twelfth-grade educational facilities, as well as colleges, universities and research facilities.
(5) Includes buildings or complexes combining commercial and retail.
(6) Includes facilities owned or operated by state and municipal government agencies to the extent not otherwise included in the education client end market.
(7) Includes a variety of other industries such as manufacturing, aerospace & defense, energy, agriculture, multi-family, hospitality & entertainment, among others, as well as the federal government. Revenues from the federal government were approximately 2% of revenues in 2025.
Recent Developments
On November 13, 2025, the Company entered into an equity purchase agreement to acquire all of the outstanding equity of The Bowers Group, Inc. The acquisition was completed on January 2, 2026. In connection with the consummation of the Bowers acquisition, Legence Holdings obtained a $200.0 million incremental term loan, and used the proceeds to fund acquisition-related payments. The incremental term loan increased the quarterly principal payments to $2.5 million.
On March 1, 2026, the Company acquired Metrix Engineers, LLC.
On February 25, 2026, the Board adopted the 2026 Employee Stock Purchase Plan ("2026 ESPP"), including the reservation of 1,580,053 shares of Class A Common Stock for issuance under the 2026 ESPP. The 2026 ESPP is subject to the approval of our stockholders.
In March 2026, we entered into interest rate swap agreements.
These items are further described under “ Note 4—Acquisitions , ” “ Note 9—Debt ," “ Note 12—Stockholders' Equity / Member's Equity ” and “ Note 11—Derivatives ,” respectively, in Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data".
Business Segments
We operate through two segments: Engineering & Consulting and Installation & Maintenance.
Table of Conten t s
Engineering & Consulting
Our Engineering & Consulting segment designs HVAC and other MEP systems for buildings, develops strategies to help reduce energy usage and make buildings more sustainable and provides program and project management services for clients’ installation and retrofit projects. Our Engineering & Consulting segment has two principal service offerings:
• Engineering & Design . We provide planning, design and engineering services for HVAC, process piping and other MEP systems in both new and existing buildings. We also develop strategies for building owners and operators to help reduce their utility consumption and enhance building performance, improve reliability, and drive efficiency. We generated approximately 59% of our 2025 Engineering & Consulting segment revenues from selling Engineering & Design services.
• Program & Project Management . We provide comprehensive program and project management services, including facility condition and operational assessments, space utilization and capacity analyses, funding source identification and construction management. For certain clients, we provide design-build services through ESPCs for building retrofits. Under ESPC contracts, financing sources provide the funds required to pay us for the upgrades and receive a portion of the client’s energy savings to recoup their investment and generate a return. We generated approximately 41% of our 2025 Engineering & Consulting segment revenues from selling Program & Project Management services.
Installation & Maintenance
Our Installation & Maintenance segment fabricates and installs HVAC systems, process piping and other MEP systems in new and existing industrial, commercial and institutional buildings and provides ongoing preventative and corrective maintenance services for those systems. Our Installation & Maintenance segment has two principal service offerings:
• Installation & Fabrication. We provide HVAC, electrical, plumbing, process and control system installations, refurbishments and renovations in technically demanding new and existing buildings. We perform both “design-build” and “plan and specification” (“P&S”) projects. Under design-build projects, we provide the design for the project and install it. Under P&S projects, our client is responsible for designing the project and we install it to their specifications. For certain jobs, we also fabricate customized components that are not readily available for purchase from other third-party vendors or provide modular construction services based on a client’s specifications. We generated approximately 82% of our 2025 Installation & Maintenance segment revenues from Installation & Fabrication services.
• Maintenance & Service. We provide preventative maintenance, emergency repair and break-fix services over the life of a building’s mechanical systems. Our services include regular inspections and maintenance to prevent downtime; responding to calls and sending technicians onsite to repair a system failure or malfunction; and other complementary services such as facility energy analysis, automation and optimization, system certification and testing. We typically provide preventative maintenance services under annual or longer-term agreements that range from one to five years. The majority of these services are provided using a cost-plus contract type. We generated approximately 18% of our 2025 Installation & Maintenance segment revenues from Maintenance & Service work.
Key Factors Affecting Our Performance
We believe that our financial performance, results of operations and future success depend on a number of factors that present significant opportunities for us but also pose risks and challenges, including those described below and in the information contained or referenced under "Part I, Item 1A. Risk Factors."
Commercial Construction Activity
Demand for our services depends in part on commercial construction activity, which is subject to business and economic cycles. We typically see greater demand for our services when the economy is growing and interest rates are stable or falling because these conditions encourage businesses to invest in their facilities. We typically see less demand for our services when the economy is contracting and interest rates are rising. To mitigate the impact of downturns in the economy on our business, we have focused on sectors with strong secular growth that we believe are less sensitive to macroeconomic conditions, including technology, life sciences and education, and on services that help clients reduce their energy costs because we believe cost reduction is attractive to clients in all economic environments.
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Investment in Technology and Related Infrastructure
We derive a significant portion of our revenues from technology companies, and demand for our services depends, in part, on technology companies making continued investments in their facilities. Investment in technology is subject to a number of factors, including the frequency and nature of innovations, whether or not developing or implementing those innovations requires new physical infrastructure and the availability of capital to fund investments in that infrastructure.
Service Mix
The margin we earn can vary significantly based on the type of service we perform, the size of the job as well as other factors. We typically earn higher margins on engineering and design, program and project management, and maintenance services than we earn on installation and fabrication services and higher margins on smaller jobs than we earn on larger jobs. Our overall margins can vary between quarters based on service mix in the period.
Labor Costs and Productivity
Our largest expense is the wages and salaries of our employees. Our margins depend on our ability to accurately estimate the amount of labor that each job will require because our customer contracts are typically fixed-price. We have a long track record of accurately estimating our job costs.
Subcontractor and Equipment Expenses
We subcontract certain scopes of work to third parties, particularly in our Program & Project Management service line within our Engineering & Consulting segment. We record the amounts we pay to subcontractors as subcontractor expense in our cost of revenue.
We also purchase certain types of equipment that we install in our clients’ facilities, including chillers, heat pumps, packaged HVAC systems, pumps, valves and switchgear, primarily in our Installation & Fabrication service line within our Installation & Maintenance segment. We record the amounts we pay for equipment in our cost of revenue.
We may pass both subcontractor and equipment costs on directly to our customers as a specific line item or incorporate them into our overall price for the job. Variability in the amount of subcontracting that we do, subcontractor pricing, equipment purchases, including equipment that is fabricated in-house, and associated markups can impact our margins. Generally, these markups may not be as large as the markup on our labor and, therefore, the volume of subcontractor and equipment costs can also impact our margins.
The following table presents our subcontractor and equipment expenses (dollars in thousands):
For the Year Ended December 31,
Subcontractor Expense
Equipment Expense
Acquisitions
We have a pipeline of acquisition opportunities and intend to continue to pursue acquisitions as part of our strategy to increase our scale, expand existing or acquire new capabilities, access new clients, or broaden our geographic reach. While we target acquisitions that will enhance our growth and profitability, they may add redundant operating expenses in the short-term. Our ability to successfully execute strategic acquisitions depends upon a number of factors, including sustained execution of a disciplined acquisition strategy and our ability to effectively integrate acquired companies or assets into our business.
Effects of Seasonality
Our revenues are subject to seasonal fluctuations, particularly in regions with colder winter climates and areas prone to extreme weather events, such as wildfires, storms, flooding, and hurricanes. We generally see greater levels of activity in the spring and summer months than we do in the winter months due to reduced construction activity during inclement weather and less use of air conditioning during colder months. Activity in our business also fluctuates with the academic
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calendar, as most schools and colleges prefer to have work performed on their facilities when classes are not in session, which drives increased revenue from education clients during the second and third quarters of the year. Consequently, we may occasionally experience consecutive quarterly declines in revenues or earnings that are not indicative of the future performance of our business.
Supply Chain Disruptions and Other Global Factors
We continue to monitor the impact of global economic conditions on our operations, financial results and liquidity, such as the impact of tariffs, supply chain challenges and geopolitical tensions. On February 20, 2026, the U.S. Supreme Court ruled that certain trade tariffs imposed by the U.S. federal government under the IEEPA were unconstitutional. Following the U.S. Supreme Court’s decision, the U.S. presidential administration announced its intention to invoke other laws to collect tariffs and announced new tariffs on imports from all countries, in addition to any existing non-IEEPA tariffs. Significant uncertainty remains regarding the status of existing and newly announced tariffs, potential changes or pauses to such tariffs, tariff levels, and whether further additional tariffs or other retaliatory actions may be imposed, modified, or suspended. Import duties, tariffs and other import restrictions restrict the global supply of, and raise prices for, supplies needed for our business. In addition, the imposition of tariffs on certain foreign goods and the occurrence of a trade war or other governmental action related to tariffs or trade agreements or policies may adversely impact demand for our services, our costs, our customers and the U.S. economy. As noted above, the impact to our future operations and results of operations as a result of these global trends remains uncertain and we may face including increases in costs for logistics and supply chains, supplier and of certain components needed for our business, such as HVAC equipment, electrical equipment, steel and aluminum. These tariffs, restrictions and trade relations may affect our ability to source materials and products, potentially to increased costs and operational and decreased demand for our offerings. We are closely monitoring the regulatory environment and actions of the current U.S. administration that could impact our business.
From time to time, as a result of macroeconomic conditions, we have been impacted by inflation, including escalating transportation, commodity and other supply chain costs and disruptions. We continue to monitor macroeconomic conditions to remain flexible and to optimize and enable our business to evolve as appropriate to address the challenges presented from these conditions. If our costs are subject to significant inflationary pressures, we may not be able to offset such higher costs through price increases, which could adversely affect our business, results of operations or financial condition.
Components of Results of Operations
Revenue
Revenue is derived from customer contracts, pursuant to which we provide engineering, consulting, installation and maintenance services for industrial and commercial buildings. Customer contracts typically have terms that span from one day to several years, though the vast majority of contracts are completed in less than one year. The majority of our contracts are fixed-price.
Cost of Revenue
Cost of revenue primarily consists of direct costs including labor, material and equipment, as well as overhead costs including project management, facilities, IT, vehicles and various third-party expenses, such as insurance, rentals and subcontractor costs.
Selling, General and Administrative
Selling, general and administrative expenses primarily consist of personnel costs, including wages, payroll tax, benefits and incentive compensation, as well as the costs of our real estate and IT services, integration costs for acquisitions after the acquisition date and various third-party professional fees.
Depreciation and Amortization
Depreciation and amortization expenses primarily consist of depreciation on property or equipment such as vehicles, computer equipment, leasehold improvements, tools and other equipment. The amortization of our intangible assets includes tradenames, customer relationships, contract backlog, and right of use assets of our finance leases.
Table of Conten t s
Acquisition-Related Costs
Acquisition-related costs are costs we incur to effect a business combination, such as legal and professional fees.
Changes in the Fair Value of Contingent Consideration Liabilities
Contingent consideration liabilities are related to business acquisitions as further described in "Item 8. Financial Statements and Supplementary Data, Note 4—Acquisitions ” in Notes to Consolidated Financial Statements. Changes in the fair value of contingent consideration liabilities are recorded to Changes in the fair value of contingent consideration liabilities on the Company’s Consolidated Statements of Operations. As of December 31, 2025 and 2024, there were no outstanding contingent consideration liabilities, though future business acquisitions may result in future contingent consideration liabilities.
Goodwill Impairment
Goodwill impairment includes the expense recorded in a reporting period for impairment when we determine that the carrying value of goodwill exceeds its fair value. We conduct our annual goodwill impairment testing at the beginning of our fourth quarter each year.
Equity in Earnings of Joint Venture
Equity in earnings of joint venture reflects our share of joint venture income or loss, as well as any impairment loss. Distributions received from the joint venture investment are accounted for under the cumulative earnings approach, which compares our cumulative distributions received from the joint venture against our cumulative equity in earnings of joint venture.
Interest Expense, Net of Capitalized Interest
Interest expense includes interest on the indebtedness, amortization of deferred debt issuance costs and debt issuing discounts, as well as gains and losses from interest rate related derivative instruments.
Interest Income
Interest income includes interest earned on our cash balances and short-term marketable securities.
Loss on Debt Extinguishment
Loss on debt extinguishment represents accelerated amortization of debt issuance costs related to early debt payment.
Credit Agreement Amendment Fees
Credit agreement amendment fees represent costs incurred in connection with our debt refinancings or amendments.
Income Tax Expense (Benefit)
We are subject to federal, state and local taxes based on income in the jurisdictions in which we operate. Accordingly, our effective tax rate is subject to significant variation due to several factors, including variability in our pre-tax and taxable income and loss and the mix of jurisdictions to which they relate, changes in how we do business, acquisitions, tax audit developments, changes in our deferred tax assets and liabilities, changes in statutes, regulations, case law and administrative practices, principles and interpretations related to tax and relative changes of expenses or losses for which tax benefits are not recognized.
Legence is subject to federal and state income taxes with respect to our allocable share of any taxable income or loss of Legence Holdings, as well as any stand-alone income or loss we generate. Legence Holdings is treated as a partnership for federal and state income tax purposes. Generally, entities characterized as a partnership for federal and state income tax purposes are not subject to entity-level income taxes. Legence Holdings’ taxable income or loss is passed through to its members, including Legence, which is responsible for its own U.S. federal and state income taxes. Certain other subsidiaries of Legence are treated as corporations and will file as a consolidated group in various jurisdictions within the United States, including both federal and state and local jurisdictions.
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Income taxes for these entities are provided for under the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the consolidated financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to an amount that is more likely than not to be realized.
Factors Affecting the Comparability of Our Financial Results
Our future results of operations may not be comparable to the historical results of operations of our predecessor for the periods presented, primarily for the reasons described below.
Refer to “ Note 1—Nature of Operations ” for a summary of our Initial Public Offering and Corporate Reorganization, “ Note 12—Stockholders' Equity / Member’s Equity ” for our Secondary Offering, “ Note 13 — Stock-Based Compensation and Long-term Incentive Awards ” for our 2025 Omnibus Incentive Plan, and “ Note 16 — Tax Receivable Agreement ” in Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data."
Acquisitions
We have pursued and plan to continue to pursue acquisitions as part of our growth strategy, including acquisitions that expand our capabilities, give us access to new clients or extend our geographic reach. As a result of our acquisition strategy, our results include incremental revenues and expenses following the completion date of an acquisition, as well as various transaction expenses to support the completion of these acquisitions.
Public Company Expenses
As a result of being a publicly traded company, we incur incremental general and administrative expenses such as expenses associated with SEC reporting requirements, including annual and quarterly reports, SOX compliance expenses, expenses associated with listing our Class A Common Stock on the Nasdaq, independent auditor fees, legal fees, investor relations expenses, registrar and transfer agent fees, director and officer insurance expenses and director and officer compensation expenses. These incremental general and administrative expenses are not reflected in the historical financial statements of our predecessor. Additionally, we have hired additional employees and consultants, including accounting, finance, tax, human resources and legal personnel for the requirements of being a publicly traded company.
Income Taxes
Legence is subject to U.S. federal and state income taxes as a corporation. Our predecessor was treated as a pass-through entity for U.S. federal income tax purposes, and as such, was generally not subject to federal income tax at the entity level. However, several of the predecessor’s subsidiaries are corporations for tax reporting purposes and therefore require a U.S. federal and state income tax provision for that portion of such entities’ results.
On July 4, 2025, a reconciliation bill commonly referred to as the One Big Beautiful Bill Act (the “OBBB Act”) was signed into law, which includes a broad range of tax reform provisions that may affect our financial results. The OBBB Act allows an elective deduction for domestic research and development, a reinstatement of elective 100% first-year bonus depreciation, and modifications to the calculation for the excess business interest expense limitation under Section 163(j) of the Internal Revenue Code. Our analysis shows the OBBB Act did not have a material impact on our consolidated financial statements for the year ended December 31, 2025. We will continue to monitor regulatory guidance and interpretations as they are issued.
On September 12, 2025, Legence conducted its IPO through an Umbrella Partnership C-Corporation (UP-C) structure, and on December 16, 2025, Legence Corp. completed a secondary public offering on behalf of certain selling shareholders. As a result of these transactions, there are now public shareholders that own shares of Legence and those shareholders are subject to U.S. federal income tax on dividends received from Legence and on gains realized upon the sale or disposition of Legence shares. Because the public shareholders do not hold direct interests in Legence Holdings, they will not generally receive any direct flow-through of Legence Holdings’ tax attributes, such as losses or deductions, and will be subject to the standard rules applicable to shareholders of C corporations.
Table of Conten t s
Results of Operations
For the Year Ended December 31, 2025 Compared to Year Ended December 31, 2024
A summary of our consolidated results of operations, selected data as a percentage of revenues for the years indicated, as well as the dollar and percentage change from the prior year is presented as follows (dollars in thousands):
Year Ended December 31,
Year over Year
Change
Revenue
Cost of revenue
Gross profit
Selling, general and administrative
Depreciation and amortization
Acquisition-related costs
Gain on sale of property and equipment
Goodwill impairment
Long-lived asset impairment
Equity in earnings of joint venture
Income from operations
Interest expense
Interest income
Loss on debt extinguishment
Credit agreement amendment fees
Other expense (income), net
Total other expense, net
Loss before income tax
Income tax expense (benefit)
Net loss
Net (loss) income attributable to noncontrolling interests
Net loss attributable to Legence
* Not meaningful.
Revenue
Consolidated revenue increased $451.9 million, or 21.5%, during the year ended December 31, 2025 compared to the year ended December 31, 2024. The increase is attributable to the results of our operating segments, which are discussed below.
Table of Conten t s
The following table presents our revenue by reportable segment, as well as our primary service lines (dollars in thousands):
Year Ended December 31,
Year over Year
Change
Revenues:
Engineering & Consulting
Engineering & Design
Program & Project Management
Total Engineering & Consulting segment
Installation & Maintenance
Installation & Fabrication
Maintenance & Service
Total Installation & Maintenance segment
Revenue
Engineering & Consulting : Engineering & Consulting segment revenue increased $124.7 million for the year ended December 31, 2025 compared to the year ended December 31, 2024. Approximately 80% of the revenue increase in the Engineering & Consulting segment resulted from the impact of acquisitions completed in 2024 and the impact of an acquisition completed in late 2025. The Engineering & Design service line increased by 22.8% primarily driven by higher demand from life sciences & healthcare clients and hospitality & entertainment clients within Other . The Program & Project Management service line increased by 17.9% primarily driven by greater demand from hospitality & entertainment clients within Other .
Installation & Maintenance : Installation & Maintenance segment revenue increased $327.2 million for the year ended December 31, 2025 compared to the year ended December 31, 2024, driven by $310.1 million of incremental revenue from the Installation & Fabrication service line. The revenue increase in the Installation & Fabrication service line is primarily due to greater demand from data centers & technology as well as life sciences & healthcare clients, partially offset by lower demand from mixed-use clients and hospitality & entertainment clients within Other. The $17.1 million increase in revenue from the Maintenance & Service service line is primarily due to greater demand from data centers & technology as well as life sciences & healthcare clients, partially offset by lower demand from clients within Other.
Gross Profit
Consolidated gross profit increased $105.2 million, or 24.4%, during the year ended December 31, 2025 compared to the year ended December 31, 2024. The increase is attributable to the results of our operating segments, which are discussed below.
The following table presents our consolidated gross profit by reportable segment (dollars in thousands):
Year Ended December 31,
Year over Year
Change
% Margin
% Margin
% Margin
Gross profit:
Engineering & Consulting segment
Installation & Maintenance segment
Consolidated gross profit
Engineering & Consulting : The $33.8 million, or 16.5%, increase in gross profit for the year ended December 31, 2025 compared to the year ended December 31, 2024 was primarily attributable to higher revenue from the impact of acquisitions completed in 2024, partially offset by a lower gross margin. The decrease in gross margin reflects the impact of higher stock-based compensation related to legacy profit interest units paid for by entities outside of Legence as well as
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lower margin within our Engineering & Design service line, primarily from life sciences & healthcare, state & local government and education clients, partially offset by greater efficiency in customer fulfillment support costs.
Installation & Maintenance : The $71.4 million, or 31.6%, increase in gross profit for the year ended December 31, 2025 compared to the year ended December 31, 2024 was primarily attributable to revenue growth and higher gross margin in the Installation & Fabrication service line. The increase in gross margin was driven by strong project execution, partially offset by lower efficiency in customer fulfillment support costs, which includes higher stock-based compensation related to legacy profit interest units paid for by entities outside of Legence.
Selling, General & Administrative
Selling, general and administrative expenses increased by $99.7 million during the year ended December 31, 2025 compared to the year ended December 31, 2024. Approximately $12.5 million of the increase in selling, general and administrative expenses related to the full-year impact in 2025 for acquisitions completed in 2024. Compensation expense increased $70.8 million compared to the prior year largely due to an increase in fair value of profits interest awards as well as higher headcount. Professional fees increased $17.6 million primarily related to the preparation of our IPO while lease and related expenses increased $7.0 million.
Goodwill Impairment
During the year ended December 31, 2025, it was determined the carrying amount of goodwill for one reporting unit in the Engineering & Consulting segment exceeded fair value, resulting in goodwill impairment of $25.0 million. The impairment was primarily driven by a decline in projected cash flows due to lower customer demand, extending sales cycles and project funding uncertainty in the alternative energy industry.
During the year ended December 31, 2024, it was determined the carrying amount of goodwill for one reporting unit in the Engineering & Consulting segment exceeded its fair value, resulting in goodwill impairment charges of $17.8 million. The impairment was primarily driven by a decline in projected cash flows due to lower revenue projections.
Long-Lived Asset Impairment
During the year ended December 31, 2025, it was determined the carrying amount of Long-lived assets for one asset group in the Engineering & Consulting segment exceeded fair value, resulting in Long-lived asset impairment of $2.4 million. The impairment was primarily driven by declining revenue, margins and cash flow projections.
Interest Expense
The increase in interest expense is primarily attributable to higher average borrowings during the year ended December 31, 2025 compared to the year ended December 31, 2024.
Loss on debt extinguishment
The loss on debt extinguishment is primarily due to accelerated amortization of debt issuance costs related to the early debt payment of $780.3 million during the year ended December 31, 2025.
Other Expense (Income), net
Other Expense (Income), net increased by $7.0 million during the year ended December 31, 2025 compared to the year ended December 31, 2024. The year ended December 31, 2025 includes $3.8 million for adjustments to an indemnification asset related to unrecognized tax benefits acquired in a prior acquisition, which is fully offset as an income tax benefit netted in Income tax expense on the Consolidated Statements of Operations and $2.9 million related to TRA liability remeasurements for changes in state income tax rates.
Income Tax Expense
Income tax expense was $22.2 million for the year ended December 31, 2025, and resulted in an effective tax rate of negative 40.2%, as compared to an income tax expense of $4.5 million for the year ended December 31, 2024 and an effective tax rate of negative 19.6%. These rates are lower than the federal statutory rate of 21%. The effective tax rate in the year ended December 31, 2025 was primarily due to a significant portion of the pre-tax loss being generated by pass-through entities that are not subject to income taxes at the Company level and an impairment that was not deductible for
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tax. The effective tax rate in the year ended December 31, 2024 was primarily due to a significant portion of the pre-tax loss being generated by pass-through entities that are not subject to income taxes at the Company level and unfavorable permanent adjustments including goodwill impairment, and was partially offset by a reduction in the Company’s deferred state tax rate.
For the Year Ended December 31, 2024 Compared to Year Ended December 31, 2023
A summary of our consolidated results of operations, selected data as a percentage of revenues for the years indicated, as well as the dollar and percentage change from the prior year is presented as follows (dollars in thousands):
Year Ended December 31,
Year over Year
Change
Revenue
Cost of revenue
Gross profit
Selling, general and administrative
Depreciation and amortization
Acquisition-related costs
Changes in the fair value of contingent consideration liabilities
Goodwill impairment
Equity in earnings of joint venture
Income from operations
Interest expense, net of capitalized interest
Interest income
Credit agreement amendment fees
Other (income) expense, net
Total other expense, net
Loss before income tax
Income tax expense (benefit)
Net loss
Net income attributable to noncontrolling interests
Net loss attributable to Legence
* Not meaningful.
Revenue
Consolidated revenue increased $483.5 million, or 29.9%, during the year ended December 31, 2024 compared to the year ended December 31, 2023. The increase is attributable to the results of our operating segments, which are discussed below.
Table of Conten t s
The following table presents our revenue by reportable segment, as well as our primary service lines (dollars in thousands):
Year Ended December 31,
Year over Year
Change
Revenues:
Engineering & Consulting
Engineering & Design
Program & Project Management
Total Engineering & Consulting segment
Installation & Maintenance
Installation & Fabrication
Maintenance & Service
Total Installation & Maintenance segment
Revenue
Engineering & Consulting : Engineering & Consulting segment revenue increased $175.4 million for the year ended December 31, 2024 compared to the year ended December 31, 2023.
The Engineering & Design service line accounted for $123.8 million, or 71%, of the increase in Engineering & Consulting segment revenue. Higher demand, primarily from education, data centers & technology and state & local government, accounted for approximately 15% of the increase in Engineering & Design service line revenue. Approximately 85% of the increase in Engineering & Design service line revenue resulted from the full year impact of acquisitions completed in 2023 and the contribution from companies acquired in 2024.
The Program & Project Management service line accounted for $51.6 million, or 29%, of the increase in Engineering & Consulting segment revenue. Higher demand, primarily from education clients, drove the increase in Program & Project Management service line revenue. Approximately 30% of the increase in Program & Project Management service line revenue was the result of an acquisition completed in 2024.
Installation & Maintenance : Installation & Maintenance segment revenue increased $308.2 million for the year ended December 31, 2024 compared to the year ended December 31, 2023.
The Installation & Fabrication service line accounted for $240.9 million, or 78%, of the increase in Installation & Maintenance segment revenue. Higher demand from data centers & technology clients accounted for approximately 40% of the increase in Installation & Fabrication service line revenue. Approximately 60% of the increase in the Installation & Fabrication service line revenue resulted from the full year impact of acquisitions completed in 2023.
The Maintenance & Service service line accounted for $67.3 million, or 22%, of the increase in the Installation & Maintenance segment revenue. Approximately 80% of the increase in Maintenance & Service service line revenue resulted from the full year impact of acquisitions completed in 2023.
Gross Profit
Consolidated gross profit increased $115.6 million, or 36.7%, during the year ended December 31, 2024 compared to the year ended December 31, 2023. The increase is attributable to the results of our operating segments, which are discussed below.
Table of Conten t s
The following table presents our consolidated gross profit by reportable segment (dollars in thousands):
Year Ended December 31,
Year over Year
Change
% Margin
% Margin
% Margin
Gross profit:
Engineering & Consulting segment
Installation & Maintenance segment
Consolidated gross profit
Engineering & Consulting : The increase in gross profit was attributable to higher revenue partially offset by modestly lower gross margin resulting from lower sustainability consulting revenue, which typically generates higher margins. Additionally, 2023 gross profit benefited from $7.4 million in revenue related to one-time amendments to several contracts with a developer in exchange for discounted fees.
Installation & Maintenance : The increase in gross profit was primarily attributable to higher revenue. The increase in gross profit margin was driven by several larger projects with higher margins.
Selling, General & Administrative
The increase in selling, general and administrative expenses is primarily attributable to a $29.7 million increase in compensation costs during the period resulting from more headcount. Additionally, there was an increase in professional fees of $7.4 million as compared to the prior year related primarily to IT costs, acquisition-related costs and other costs related to our strategic initiatives.
Depreciation and Amortization
The increase in depreciation and amortization is attributable to a $10.9 million increase in the amortization of intangible assets and a $7.1 million increase in the depreciation of property and equipment, primarily from the full year impact of acquisitions completed in 2023 and the contribution from companies acquired in 2024.
Changes in the Fair Value of Contingent Consideration Liabilities
The decrease in changes in the fair value of contingent consideration liabilities is primarily attributable to the contingent earnout obligation associated with the Black Bear acquisition, which we completed in 2022. During the year ended December 31, 2023, the fair value of the contingent earnout obligation increased $27.0 million as the maximum earnout was achieved. We paid the earnout amount in 2024 and have no further obligations to Black Bear shareholders under the earnout agreement and as such did not recognize any changes in the fair value of the contingent earnout obligation during the year ended December 31, 2024.
Goodwill Impairment
During the year ended December 31, 2024, it was determined the carrying amount of goodwill for one reporting unit in the Engineering & Consulting segment exceeded its fair value, resulting in goodwill impairment charges of $17.8 million. The impairment was primarily driven by a decline in projected cash flows due to lower revenue projections. During the year ended December 31, 2023, it was determined the carrying amount of goodwill for one reporting unit in the Engineering & Consulting segment exceeded fair value, resulting in goodwill impairment charges of $5.1 million. The impairment was primarily driven by a decline in projected cash flows due to lower revenue projections and investments in support functions.
Interest Expense, Net of Capitalized Interest
The increase in interest expense, net of capitalized interest is primarily attributable to additional borrowings. This includes $565.0 million of borrowings under the Term Loan Credit Facility during 2024, as well as the full year impact of $155.0 million of incremental borrowings under the Term Loan Credit Facility during 2023.
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Income Tax Expense (Benefit)
Income tax expense was $4.5 million in the year ended December 31, 2024, and resulted in an effective tax rate of negative 19.6%, as compared to an income tax benefit of $7.9 million in the year ended December 31, 2023 and an effective tax rate of 14.5%. These rates are lower than the federal statutory rate of 21%. The effective tax rate in the year ended December 31, 2024 was primarily due to a significant portion of the pre-tax loss being generated by pass-through entities that are not subject to income taxes at the Company level and unfavorable permanent adjustments including goodwill impairment, and was partially offset by a reduction in the Company’s deferred state tax rate. The effective tax rate in the year ended December 31, 2023 was primarily due to a significant portion of the pre-tax loss being generated by pass-through entities that are not subject to income taxes at the Company level and to taxable income in the tax paying C corporations.
Non-GAAP Financial Measures
Adjusted EBITDA and Adjusted EBITDA Margin are financial measures not presented in accordance with GAAP but are intended to provide useful and supplemental information to investors and analysts as they evaluate our performance. EBITDA is defined as earnings before interest and other financing expenses, taxes, depreciation and amortization. Adjusted EBITDA is defined as net loss adjusted to exclude, or otherwise reflect, interest expense, net of capitalized interest, interest income, income tax expense (benefit), depreciation and amortization, credit agreement amendment fees, goodwill impairment, long-lived asset impairment, net (gain) loss on sale and disposition of property and equipment, loss on debt extinguishment, changes in the fair value of contingent consideration liabilities, acquisition and integration costs, system deployment costs, strategic initiative costs, indemnification asset adjustments, Tax Receivable Agreement liability remeasurements, stock-based compensation expense and accelerated project sale. Adjusted EBITDA Margin is defined as Adjusted EBITDA divided by revenue. Adjusted EBITDA should not be considered an alternative to net loss that is derived in accordance with GAAP. Management believes that the exclusion of the above-described items from gross profit and net in the presentation of the non-GAAP measures identified above us and our investors to more effectively evaluate our operations period over period and to identify operating trends that might not be apparent due to, among other reasons, the variable nature of these items, both in value and frequency, period over period. In addition, management believes these measures may be useful for investors in comparing our operating results with those of other companies.
Our non-GAAP financial measures may not be comparable to similarly titled measures used by other companies, have limitations as analytical tools and should not be considered in isolation, or substitutes for analysis of our operating results as reported under GAAP. Additionally, we do not consider our non-GAAP financial measures superior to, or a substitute for, the equivalent measures calculated and presented in accordance with GAAP. Some of the limitations are that such measures:
• may exclude the recurring expenses of depreciation and amortization of property and equipment and definite-lived intangible assets and the assets being depreciated and amortized may have to be replaced in the future;
• do not reflect changes in our working capital needs;
• do not reflect the interest (income) expense on our indebtedness; or
• do not reflect the income tax (benefit) provision we are required to make.
In order to evaluate our business, we encourage you to review the financial statements included elsewhere in this filing, and not rely on a single financial measure to evaluate our business.
The following table provides a reconciliation of our Net Loss, the most directly comparable financial measure presented in accordance with GAAP, to Adjusted EBITDA, and a calculation of Adjusted EBITDA Margin for the periods presented herein (dollars in thousands):
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For the Year Ended December 31,
Net loss
Interest expense, net of capitalized interest
Interest income
Income tax expense (benefit)
Depreciation and amortization
Credit agreement amendment fees (1)
Goodwill impairment (2)
Long-lived asset impairment (3)
Net (gain) loss on sale and disposition of property and equipment
Loss on debt extinguishment
Changes in the fair value of contingent consideration liabilities
Acquisition and integration costs (4)
System deployment costs (5)
Strategic initiative costs (6)
Indemnification asset adjustments (7)
Tax Receivable Agreement liability remeasurements (8)
Stock-based compensation expense
Accelerated project sale (9)
Adjusted EBITDA
Net Loss Margin
Adjusted EBITDA Margin
(1) Represents costs incurred in connection with our debt refinancings in each of the periods presented.
(2) Refer to “Item 8. Financial Statements and Supplementary Data, Note 5—Goodwill and Intangible Assets ” in Notes to Consolidated Financial Statements, for details on the nature of the impairment.
(3) Refer to “Item 8. Financial Statements and Supplementary Data, Note 2—Summary of Significant Accounting Policies , Long-Lived Assets Impairment” in Notes to Consolidated Financial Statements, for details on the nature of the impairment.
(4) For the years ended December 31, 2025, 2024 and 2023, the figures include $5.7 million , $5.6 million and $3.8 million , respectively, of acquisition costs recorded in Acquisition-related costs, and $2.7 mil lion, $3.6 million and $1.6 million, respectively, of acquisition integration costs recorded in Selling, general and administrative on the Consolidated Statements of Operations.
(5) Represents consulting and initial upfront costs associated with implementing and optimizing certain enterprise resource planning systems, including IFS, Onestream and Ceridian Dayforce.
(6) Represents (i) consulting costs associated with rebranding efforts in connection with our name change to Legence that we do not expect to recur in the future, (ii) upfront consulting and out-of-pocket costs related to developing and launching the cross-selling framework amongst our brands, many of which were more recently acquired and integrated into the Legence brand, (iii) consulting and legal fees associated with education and marketing efforts for our clients with respect to utilizing certain government incentive programs, (iv) consulting, legal, accounting, and other expenses in connection with non-recurring extraordinary company transactions, including fees related to our IPO that did not meet the requirements to be deferred issuance costs, and (v) consulting, legal, accounting, and other expenses in connection with the secondary offering conducted on behalf of our selling shareholders.
(7) Represents adjustments to an indemnification asset related to unrecognized tax benefits acquired in a prior acquisition recorded in Other expense (income), net on the Consolidated Statements of Operations and is fully offset as an income tax benefit netted in Income tax expense on the Consolidated Statements of Operations .
(8) TRA liability remeasurements are recorded in Other expense (income), net o n the Consolidated Statements of Operations
(9) Our Black Bear subsidiary helps businesses and real estate owners procure on-site generation and storage systems for their buildings. Black Bear receives compensation for its services from project developers who pay Black Bear a fee if they are
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selected to provide the system for the client. The fee is typically earned and paid when the client enters into a binding contract with the project developer and permits to begin construction have been issued. If a contract is not signed or permits are not issued, Black Bear is typically not owed a fee from the project developer. In the fourth quarter of 2023, a project developer who had been selected for a large number of projects by Black Bear’s clients offered to immediately pay Black Bear all of the fees that Black Bear would earn in the future if all of the projects received permits, provided that Black Bear would agree to discount the fee amounts. Black Bear agreed to discount the fee amounts and recorded significantly higher revenues than would be typical in a quarter. Given the unique nature of the transaction, we consider it to be non-recurring in nature. This adjustment is to eliminate the approximately $7.4 million profit we recorded from the transaction.
Backlog and Awarded Contracts and Book-to-Bill Ratio
We track backlog and awarded contracts. We believe that these measures enable us to more effectively forecast our future results and working capital needs, as well as better identify future operating trends that may not otherwise be apparent. We believe this measure is also useful for investors in forecasting our future results and comparing us to our competitors. We also track our book-to-bill ratio, based on backlog and awarded contracts, for the same reasons. Our backlog is equivalent to our remaining performance obligations. As a result, there are no adjustments being made that would be reflected in a reconciliation. Our methodology for calculating backlog and awarded contracts or book-to-bill ratio may not be consistent with methodologies used by other companies.
Our backlog and awarded contracts measure has two components: backlog and awarded contracts. Backlog represents, as of any date of determination, the expected revenue values of the remaining performance obligations under our contracted fixed-price projects. Awarded contracts represents as of any date of determination, the expected revenue values of projects awarded to us following a request for proposals but for which a formal contract has not yet been signed. We only include fixed-price contracts in our backlog and awarded contracts because they have defined revenue values. We do not include cost-plus contracts, which are primarily generated in our Maintenance & Service service line, in our backlog and awarded contracts because their total revenue values are not known. Historically, cost-plus projects have comprised a relatively small portion of our revenue. We calculate our book-to-bill ratio by taking our additions to backlog and awarded contracts, excluding additions that were attained through acquisition, for the period, and dividing it by revenue from fixed-price contracts for the same period. A book-to-bill ratio of 1.0 indicates that we are booking backlog and awarded contracts at the same pace as we are recognizing revenue, suggesting stable revenue in future periods. A book-to-bill ratio above 1.0 indicates that backlog and awarded contracts are outpacing revenue, which could indicate an increase in revenue in future periods. Conversely, a book-to-bill ratio below 1.0 indicates that backlog and awarded contracts are trailing revenue, which could indicate a decrease in future revenue. Given that backlog and awarded contracts and book-to-bill ratio are operational measures and that our methodology for calculating backlog and awarded contracts and book-to-bill ratio does not meet the definition of a non-GAAP measure, as that term is defined by the SEC, a quantitative reconciliation for each is not required nor provided.
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The following tables present our backlog and awarded contracts and book-to-bill ratio by reportable segment with book-to-bill ratio calculated during the periods noted (dollars in thousands):
As of and for the Years Ended December 31,
Engineering & Consulting
Backlog
Awarded contracts
Backlog and awarded contracts
Book-to-bill ratio
Installation & Maintenance
Backlog
Awarded contracts
Backlog and awarded contracts
Book-to-bill ratio
Total
Backlog
Awarded contracts
Backlog and awarded contracts
Book-to-bill ratio
The increase in backlog and awarded contracts from December 31, 2024 to December 31, 2025 resulted from an increase in awards in both segments. The increase in Engineering & Consulting was primarily driven by new projects within the state & local government and life sciences & healthcare client end markets. The increase in Installation & Maintenance was primarily driven by new projects within the data centers & technology client end market. The increase in backlog and awarded contracts from December 31, 2023 to December 31, 2024 resulted from an increase in awards in both segments. The increase in Engineering & Consulting was primarily driven by new projects within the education client end market and additional backlog from the acquisition of P2S and AMA. The increase in Installation & Maintenance was primarily driven by new projects within the life sciences & healthcare and data centers & technology client end markets.
Liquidity and Capital Resources
Overview
As of December 31, 2025 and 2024, our primary sources of liquidity included cash and cash equivalents of $230.2 million and $81.2 million, respectively, and $194.3 million and $84.8 million, respectively, available to be borrowed under the Revolving Credit Facility and cash flows from operations as of December 31, 2025 and 2024. We expect our primary sources of liquidity to be cash flows from operations, borrowings incurred under our Revolving Credit Facility or proceeds from offerings of debt or equity securities. Access to additional liquidity, such as a further increase in the capacity under our existing Revolving Credit Facility or a new financing arrangement, will be dependent upon our future financial position and debt market conditions.
To date, our primary uses of capital have included funding working capital, capital expenditures for equipment used in our business, acquisitions and refinancing or repayment of debt and associated interest. Although our capital expenditures have historically been low relative to our revenues, we expect an increase in future periods due to our investment in fabrication capacity expansion within our Installation & Maintenance segment.
Although we cannot provide any assurance that our cash flows from operations will be sufficient to fund our operations or that additional capital will be available to us on acceptable terms, or at all, we believe our primary sources of liquidity are sufficient to fund our ongoing working capital, investing and financing requirements for at least the next twelve months and beyond. In the event that we require additional capital, we may seek to raise funds at any time through equity, equity-linked arrangements and debt. If we are unable to raise additional capital when desired and on reasonable terms, our business, results of operations, and financial condition would be adversely affected. Refer to "Part I, Item 1A. Risk Factors” for additional information.
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Cash Flows
The information presented below was derived from our Consolidated Statements of Cash Flows within the Consolidated Financial Statements and summarizes cash flow activity (dollars in thousands):
Year Ended December 31,
Cash provided by (used in):
Operating activities
Investing activities
Financing activities
Increase (decrease) in cash and cash equivalents and restricted cash
Please refer to the supplemental cash flow information included in “ Note 22—Other Financial Information ” in Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for further details.
Operating Activities
Cash flow from operating activities is primarily influenced by the level of revenue we generate and the gross margin we earn on that revenue. It is also influenced by the timing of working capital investment associated with the services that we provide. Our working capital needs may increase when we commence large volumes of work under circumstances where project costs are required to be paid before the associated receivables are billed and collected. Our management strives to negotiate payment terms that minimize the working capital investment that we are required to make in connection with large projects. Additionally, changes in project timing due to delays or accelerations and other economic, regulatory, market and political factors may affect customer spending and, thus, impact cash flows from operating activities. We typically require the most working capital during the second half of the year as activity levels increase in the spring and summer months and less working capital in the first half of the year as activity levels decrease and we receive final payments on completed jobs.
Cash flows provided by operating activities increased by $227.6 million during 2025 compared to 2024. The increase mainly reflects fluctuations in the primary components of working capital, as detailed in the Consolidated Statements of Cash Flows. Operating cash flows from contract liabilities increased by $186.7 million, primarily due to increased billings net of recognized revenue. Operating cash flows from accounts payable increased by $107.2 million, primarily due to increased business activity and timing of payments. Additionally, operating cash flows from accrued and other current liabilities increased by $22.7 million, primarily because there were no payments of contingent consideration during 2025 compared to $32.5 million during 2024. These increases are partially offset by a $168.2 million decrease in operating cash flows from accounts receivable and contract assets. The change in accounts receivable and contract assets is primarily driven by higher revenue and the timing of billing and collection. The impact of adjustments for non-cash items was mostly offsetting in nature and is detailed on the Consolidated Statements of Cash Flows.
Cash flows from operating activities decreased by $4.6 million during 2024 compared to 2023. This decrease is primarily attributable to fluctuations in the main components of working capital, as detailed in the Consolidated Statements of Cash Flows. Specifically, net loss decreased by $18.4 million, while the benefit was partially offset by a $22.5 million decrease in cash provided by the effects of changes in operating assets and liabilities. The decrease from changes in operating assets and liabilities is primarily attributable to an increase in contract assets of $27.3 million due to increased revenue and contract retentions and the decrease in accrued and other current liabilities of $37.9 million, most of which related to the payment of contingent earnouts from acquisitions in excess of the amounts of the acquisition-date fair value of the liability. These changes were partially offset by other operating assets and liabilities, primarily an increase in accounts payable of $15.7 million due to the volume and timing of payments to vendors, and a $98.9 million benefit from changes in accounts receivable due to the timing of collections from customers. The impact of adjustments for noncash items was mostly offsetting in nature and is detailed on the Consolidated Statements of Cash Flows.
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Investing Activities
Cash flows used in investing activities primarily consist of payments for the acquisition of businesses, capital expenditures and proceeds from the sale of property and equipment.
Cash flows used in investing activities decreased by $189.9 million during 2025 compared to 2024. The decrease is primarily attributable to a decrease of $208.7 million in consideration paid for acquisitions, partially offset by an $18.9 million increase in purchases of property and equipment.
Cash flows used in investing activities increased by $110.1 million during 2024 compared to 2023. The increase is primarily attributable to a $105.4 million increase in consideration paid for acquisitions.
Financing Activities
Financing cash flows primarily consist of the issuance and repayment of short-term and long-term debt, debt issuance costs, contingent earnouts from acquisitions, financing lease payments, and cash distributions and contributions to and from Legence Parent.
During 2025, cash used in financing activities was $53.8 million compared to cash provided by financing activities of $207.0 million during 2024, which is a $260.8 million decrease in cash flows from financing activities. The change is impacted by a $505.4 million decrease in term loan borrowings and an $838.5 million increase in term loan payments in 2025 compared to 2024. In 2025, the Company received $780.2 million of net IPO proceeds and used those proceeds and cash on hand to pay $28.1 million of outstanding offering costs and prepay a portion of the term loan. The rest of the change is primarily related to $301.6 million in distributions to Legence Parent and $32.5 million of payments of contingent consideration, both of which occurred in 2024.
Cash flows provided by financing activities increased by $78.5 million during 2024 compared to 2023. The increase is primarily attributable to a $410.0 million increase in proceeds from borrowings, partially offset by the $300.1 million increase in the cash distributions to Legence Parent and the $27.0 million increase in the payment of contingent earnouts from acquisitions.
Debt
Debt obligations consist of the following (dollars in thousands):
December 31,
Term loan
Notes payable
Finance lease liabilities
Total debt
Less: Current portion
Less: Unamortized debt issuance costs and discounts
Long-term debt, net of current portion
The ensuing summary and discussion are not a complete description of all of the terms of our significant debt instruments. Please refer to “ Note 9—Debt ” and “ Note 20—Related Party Transactions ” in Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for further information.
Credit Agreement
On December 16, 2020, Legence Holdings entered into a credit agreement with Jefferies Finance LLC as the administrative agent for a group of lenders, which provided for (a) a term loan credit facility, (b) a delayed draw term loan credit facility and (c) a revolving credit facility. The term loan matures on December 16, 2031, and is secured by substantially all assets of the Company, subject to customary exclusions.
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On February 6, 2025, Legence Holdings amended the credit agreement to reduce the interest rate applicable to borrowings of term loans or delayed draw term loans and extend the maturity date applicable to the Term Loan Credit Facility and the Delayed Draw Term Loan Credit Facility by one year from December 16, 2027 to December 16, 2028. The amendment also removed the 0.10% credit spread adjustment applicable to borrowings of term loans that are SOFR loans.
On September 8, 2025, Legence Holdings and certain of its subsidiaries amended the credit agreement to, among other things, facilitate the Corporate Reorganization.
As a result of the IPO, the interest rate for term loans, revolving credit loans and the fee rate on letters of credit was reduced by 0.25%.
On September 15, 2025, the Company used IPO proceeds and cash on hand to prepay $780.3 million of the term loan debt, which reduced the outstanding term loan balance to $797.8 million as of September 30, 2025.
On October 30, 2025, Legence Holdings and certain of its subsidiaries entered into Amendment No. 11 to the credit agreement to, among other things, refinance and replace the previously existing (i) $797.8 million term loan facility with a $797.8 million term loan facility that extends the maturity date by three years to December 16, 2031 and reduces its applicable interest rate by 0.25% to the Secured Overnight Financing Rate (“SOFR”) plus 2.25% and (ii) $90.0 million revolving credit facility with a $200.0 million revolving credit facility that extends its maturity date by approximately four years to September 22, 2030 and sets its applicable interest rate at SOFR plus 2.25%, in alignment with the replacement term loan credit facility.
Subject to the requirements of the credit agreement, Legence Holdings may also be required, as applicable, to make additional principal payments based on its excess cash flow, as defined in the agreement.
Under the terms of the credit agreement, Legence Holdings and its subsidiaries may be able to incur substantial additional indebtedness in the future, subject to certain conditions.
The credit agreement contains a springing financial maintenance covenant that requires the First Lien Net Leverage Ratio not to exceed 8.50 to 1.00 if certain testing conditions are satisfied. The credit agreement generally defines this as the ratio of first lien secured indebtedness (net of cash) to consolidated pro forma adjusted EBITDA for the preceding four fiscal quarters. The springing financial maintenance covenant is only tested if, as of the last day of each fiscal quarter, the amount of loans and/or letters of credit outstanding under the Revolving Credit Facility is greater than 35% of the aggregate revolving credit commitments. The springing financial maintenance covenant was not required to be tested during the periods presented in the Consolidated Financial Statements.
The credit agreement includes customary covenants restricting the ability of Legence Holdings and its subsidiaries to, among other things, incur additional indebtedness, sell or convey assets, make loans to or investments in others, enter into mergers, incur liens and pay dividends or distributions.
Other Notes Payable
The Company holds various other promissory notes payable in connection with certain acquisitions. These notes payable comprise a small portion of our outstanding indebtedness. Please refer to “Item 8. Financial Statements and Supplementary Data, Note 9—Debt ” in Notes to Consolidated Financial Statements for further information.
Tax Receivable Agreement
In connection with the consummation of our IPO, we entered into the TRA with the TRA Members. This agreement generally provides for the payment by us to the TRA Members of 85% of the net cash savings, if any, in U.S. federal, state and local income tax that we (a) actually realize with respect to taxable periods ending after our IPO or (b) are deemed to realize in the event the TRA terminates early at our election, as a result of our breach or upon a change of control (as defined under the TRA, which includes certain mergers, asset sales and other forms of business combinations and certain changes to the composition of our Board) with respect to any taxable periods ending on or after such early termination event, in each case, as a result of (i) our allocable share of existing tax basis acquired in connection with our IPO and increases to such allocable share of existing tax basis; (ii) our utilization of certain tax attributes of the Blocker Entities; (iii) Basis Adjustments; and (iv) certain additional tax benefits arising from payments made under the TRA. We will retain
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the benefit of the remaining 15% of these cash savings, if any. If the TRA terminates early, we could be required to make a substantial, immediate lump-sum payment.
We expect that the payments that we will be required to make under the TRA could be substantial. The exact amount of expected future payments under the TRA is dependent upon a number of factors, including the Company’s cash tax savings, the timing of exercises of the Exchange Right, the enacted tax rate in the years in which it utilizes tax attributes subject to the TRA, and current taxable income forecasts. These estimated rates and forecasts are subject to change based on actual results and realizations, which could have a material impact on the liability to be paid. Due to the uncertainty of these factors, we cannot precisely quantify the likely tax benefits we will realize. Any payments made by us to the TRA Members under the TRA will not be available for reinvestment in Legence Holdings (or indirectly, its business) and generally will reduce the amount of overall cash flow that might have otherwise been available to us. We expect to fund the required payments under the TRA with our actual cash tax savings generated by the exchanges of LGN Units in the UP-C structure. Our ability to satisfy our long-term liquidity requirements depends on our future operating performance, which is affected by and subject to prevailing economic conditions, market conditions in our industry and financial, business and other factors that we will not be able to predict or control.
The term of the TRA commenced upon the completion of the IPO and will continue until all such tax benefits have been utilized or expired and all required payments are made, unless we exercise our right to terminate the TRA (or the TRA is terminated due to other circumstances, including our breach of a material obligation thereunder or certain mergers or other changes of control) by making the termination payment specified in the agreement.
Material Cash Requirements
As of December 31, 2025, our material cash requirements primarily consist of obligations under our lease arrangements and financing arrangements. These obligations and their expected timing on future cash flows and liquidity are summarized within “ Note 8—Leases ” and “ Note 9—Debt ” in Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data", respectively (dollars in thousands).
Payment Due by Period
Contractual Obligations and Commitments
Total
Less than One
Year
One to Three
Years
Three to Five
Years
More than Five Years
Debt
Interest on debt (1)
Operating lease obligations
Finance lease obligations
Total cash requirements from contractual obligations and commitments
(1) These amounts do not include the effect of our interest rate swap agreements. Further, the amounts assume (i) that interest rates as of December 31, 2025 remain constant until the maturity of the debt and (ii) that we do not refinance or incur additional debt.
Contingent Obligations
We have various contingent obligations that we anticipate could require the use of cash based on contractual obligations as of December 31, 2025; however, the final amount payable or the timing may not be fixed and determinable. Such contingent obligations include the following:
• Some of our customers require us to secure surety bonds from reputable financial institutions to guarantee execution on certain projects. In the event Legence or its subcontractors fail to meet its performance obligations, customers have the option to request the surety bond provider fund the completion of the project using other service providers. Under the terms of these agreements, we are liable for any disbursement made by the bonding company because of our failure to perform. Surety bonds expire at various times ranging from final completion of a project to a period extending beyond contract completion in certain circumstances. Such amounts can also fluctuate from period to period based upon the mix and level of our bonded operating activity. For example, public sector contracts require surety bonds more frequently than private sector
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contracts, and accordingly, our bonding requirements typically increase as the amount of our public sector work increases. Our estimated maximum exposure as it relates to the value of the surety bonds outstanding is lowered on each bonded project as the cost to complete is reduced, and each commitment under a surety bond generally extinguishes concurrently with the expiration of its related contractual obligation. As of December 31, 2025 and 2024, $561.5 million and $384.2 million, respectively, of backlog and awarded contracts was subject to surety bond obligations. In the eleven years prior to December 31, 2025, we did not receive a claim for liquidated damages in excess of $100,000.
• As part of our normal course of business, we offer guaranteed energy savings to customers under certain contracts. As of December 31, 2025 and 2024, total guarantees were $307.4 million and $308.2 million, respectively. Should the guaranteed energy savings not be achieved, these guarantees would become due to the customers. Historically, we have not incurred notable losses in connection with these guarantees.
• We have standby letters of credit that are secured through the revolving line of credit. Obligations under these letters of credit are not normally called, as we typically comply with the underlying requirements. As of December 31, 2025 and 2024, we had $5.7 million and $5.2 million, respectively, in standby letters of credit primarily related to the deductibles of insurance policies. Please refer to “Item 8. Financial Statements and Supplementary Data, Note 9—Debt ” in Notes to Consolidated Financial Statements for further information.
• We make payments for collective bargaining agreements, multiemployer pension plan liabilities and liabilities related to our deferred compensation and other employee benefit plans, as discussed in “Item 8. Financial Statements and Supplementary Data, Note 13—Stock-Based Compensation and Long-term Incentive Awards ” and “ Note 17—Union-Sponsored Pension Plans and Other Employee Benefit Plans ” in Notes to Consolidated Financial Statements.
Critical Accounting Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our Consolidated Financial Statements. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.
Our significant accounting policies are discussed in the “Item 8. Financial Statements and Supplementary Data, Note 2—Summary of Significant Accounting Policies ” in Notes to Consolidated Financial Statements. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to areas involving a significant level of estimation uncertainty and have had or are likely to have a material impact on our financial statements.
Revenue Recognition
The Company recognizes revenue at the time the related performance obligation is satisfied by transferring the promised good or service to its customers. A good or service is considered to be transferred when the customer obtains control. The Company can transfer control of a good or service and satisfy its performance obligations either over time or at a point in time, though the majority of the Company’s contracts have over time performance obligations.
Management has concluded performance obligations related to construction and service contracts are satisfied over time because the Company’s performance typically creates or enhances an asset that the customer controls. The Company primarily measures the progress toward complete satisfaction of the performance obligation(s) using an input method (i.e., “cost-to-cost”), though some contracts use an output method (i.e., “milestone achievement”) when our performance does not produce significant amounts of work in process prior to complete satisfaction of such performance obligation(s).
The accuracy of the Company’s revenue and profit recognition in each year at the balance sheet date depends on the accuracy of management’s estimates of the cost to complete each project as well as variable consideration. There are several factors that can contribute to changes in estimates of contract cost and profitability, such as changes in project scope, input costs and productivity, among others. Such factors may cause fluctuations in gross profit and gross profit margin from period to period. These changes may have a significant impact on the financial statements. At the time a loss on a contract becomes probable, the entire amount of the estimated loss is accrued. Management monitors for circumstances that may affect the accuracy of its estimates, and material changes in estimates are disclosed accordingly.
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Goodwill
Goodwill represents the excess of the purchase price over the fair value of identifiable assets and liabilities of the acquired business. Goodwill is not subject to amortization but is tested for impairment at the reporting unit level, which represents the operating segment level or one level below the operating segment level for which discrete information is available. Goodwill is evaluated for impairment on an annual basis in the fourth quarter of the fiscal year and on an interim basis if events or circumstances arise which indicate that the carrying value of goodwill may not be recoverable from future cash flows.
Fair values of reporting units are estimated based on a market approach and an income approach. The income approach utilizes discounted future cash flows and assumptions critical to the fair value estimate of the discounted cash flow model including revenue growth rates, forecasted EBITDA margins and discount rate. The market approach utilizes market multiples of EBITDA margin on invested capital from comparable publicly traded companies. During the year ended December 31, 2025, it was determined the carrying amount of goodwill for one reporting unit in the Engineering & Consulting segment exceeded fair value, resulting in goodwill impairment charges of $25.0 million. The impairment was primarily driven by a decline in projected cash flows due to lower customer demand, extending sales cycles and project funding uncertainty in the alternative energy industry. As of December 31, 2025, all other reporting units had fair value estimates exceeding carrying values by at least 19%, except for two reporting units in the Engineering & Consulting segment. These reporting units had a combined goodwill balance of $88.3 million with fair value exceeding carrying value by less than 10%.
During the year ended December 31, 2024, it was determined the carrying amount of goodwill for one reporting unit in the Engineering & Consulting segment exceeded fair value, resulting in goodwill impairment charges of $17.8 million. The impairment was primarily driven by a decline in projected cash flows due to lower revenue projections. During the year ended December 31, 2023, it was determined the carrying amount of goodwill for one reporting unit in the Engineering & Consulting segment exceeded fair value, resulting in goodwill impairment charges of $5.1 million. The impairment was primarily driven by a decline in projected cash flows due to lower revenue projections and investments in support functions.
There are inherent uncertainties related to these factors and management’s judgment in applying them to the analysis of goodwill impairment. It is possible that changes in facts, judgments and assumptions made in estimating the fair value of reporting units could occur, resulting in possible impairment in the future.
Tax Receivable Agreement
The TRA generally provides for the payment by us of 85% of the net cash savings, if any, we realize, or are deemed to realize, as a result of certain tax attributes and benefits covered by the TRA.
We estimate our obligation under the TRA utilizing various assumptions set forth in the TRA, including: (i) a constant combined federal and state corporate tax rate of 26.73%; (ii) we have sufficient taxable income to fully utilize the tax benefits; and (iii) no material changes in tax law. Because the timing and amount of realized tax savings depend on future taxable income, stock price, and exchange activity, actual TRA payments could differ materially from estimates. Estimating future taxable income is inherently uncertain and requires judgment. Refer to “Item 8. Financial Statements and Supplementary Data, Note 1 6 —Tax Receivable Agreement ” in Notes to Consolidated Financial Statements included elsewhere in this filing for further information.
Income Taxes
We utilize the asset and liability approach in reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount that is more likely than not to be realized.
Under the provisions of ASC 740-10 Income Taxes, the Company evaluates uncertain tax positions by reviewing against applicable tax law all positions taken by the Company with respect to tax years for which the statute of limitations is still open. ASC 740-10 provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits.
Table of Conten t s
Refer to “ Note 2—Summary of Significant Accounting Policies ” and “ Note 18—Income Taxes ” in Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for further information, including the identification and measurement of deferred tax assets and liabilities, the measurement of valuation allowances on deferred tax assets, gross unrecognized tax benefits and other additional acquired tax attributes.
Acquisitions and Valuation of Intangible Assets
We assign purchase consideration to the assets acquired and liabilities assumed as of their acquisition dates based on their fair value. We record our acquisitions under the acquisition method of accounting, and the total purchase price is allocated to the acquired net tangible and identifiable intangible assets based on their fair values as of the acquisition dates. Determining the fair value of certain long-lived assets, specifically intangible assets, requires judgment and often involves the use of significant estimates and assumptions.
The estimated fair value of identified intangible assets are Level 3 fair value measurements and are determined using discounted cash flow techniques. Fair value is estimated using a multi-period excess earnings method for customer relationships and backlog and a relief from royalty method for trade names. The significant assumptions used in estimating fair value of customer relationships and backlog include (i) the estimated life the asset will contribute to cash flows, such as remaining contractual terms, (ii) revenue growth rates and EBITDA margins, (iii) attrition rate of customers, and (iv) the estimated discount rates that reflect the level of risk associated with receiving future cash flows. The significant assumptions used in estimating fair value of trade names include discount rates and estimated royalties that would be paid to license a comparable asset. The royalty rates used in this method are based on published comparable market royalty transactions.
Refer to “ Note 2—Summary of Significant Accounting Policies ” and “ Note 4—Acquisitions ” in Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for further information on valuation methods, inputs and assumptions.
Recent Accounting Pronouncements
Refer to “Item 8. Financial Statements and Supplementary Data, Note 2—Summary of Significant Accounting Policies ” in the Notes to Consolidated Financial Statements included elsewhere in this filing for more information regarding recent accounting pronouncements.
