LGN Q2 2026 Earnings Call Transcript

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Provided by Quartr
August 13, 2026

Key Takeaways

  • Positive Sentiment: Revenue and adjusted EBITDA more than doubled year over year in Q2 2026, reaching $1.262 billion and $155 million, respectively, while adjusted EBITDA margin improved sequentially by nearly 90 basis points.
  • Positive Sentiment: Demand remains strongest in data centers and technology, with organic revenue growth near 60%, organic backlog and awards growth above 35%, and total backlog reaching a record $5.7 billion with a 1.4x trailing-12-month book-to-bill ratio.
  • Positive Sentiment: Management raised full-year 2026 guidance to $4.7 billion-$4.8 billion of revenue and $565 million-$585 million of adjusted EBITDA, citing strong backlog, project acceleration, and continued execution.
  • Positive Sentiment: Net leverage fell to 1.5x from approximately 3.0x following the IPO, while debt repricing and credit-rating upgrades reduced borrowing costs and leave the company positioned to pursue additional acquisitions.
  • Negative Sentiment: Consolidated adjusted gross margin declined to 18.5% from 21.8% a year earlier due to mix shifting toward installation and fabrication, while weaker sustainability-consulting demand led to goodwill and intangible-asset impairments; higher fabrication-capacity investment also lifted second-half 2026 capital-spending expectations by $15 million-$20 million.
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Earnings Conference Call
LGN Q2 2026
00:00 / 00:00

There are 15 speakers on the call.

Operator

Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Son Vann, Vice President of Investor Relations. Please go ahead.

Speaker 1

Thanks, Daniel, and good morning, everyone. Welcome to Legence second quarter 2026 earnings call. With me today are Jeff Sprau, Chief Executive Officer, Stephen Butz, Chief Financial Officer, and Steve Hansen, Chief Operating Officer. This morning, we issued a press release that covers our second quarter 2026 financial results and posted a presentation that accompanies the earnings release. All materials can be found on the investor relations section of the company's website, wearelegence.com. Before we begin, I want to remind you that comments made during this call contain certain forward-looking statements and are subject to risks and uncertainties, including those identified in our risk factors contained in our SEC filings. Our actual results could differ materially, and we undertake no obligations to update any such forward-looking statements.

Speaker 1

During this call, we will refer to certain non-GAAP financial measures, which should not be considered in isolation from or as a substitute for measures prepared in accordance with generally accepted accounting principles. Please refer to our quarterly earnings presentation for reconciliations of these non-GAAP measures to the most directly comparable GAAP measures. With that, let me turn the call over to Jeff.

Speaker 2

Thank you, Son, and thanks, everyone, for joining today to discuss our second quarter performance and current outlook for Legence. As we have talked about on our past earnings calls, the demand environment for mission-critical building systems continues to be robust. This strength is evident in the exceptional growth in both our record revenue and backlog. Excluding the impact of acquisitions, organic revenue growth was nearly 60%, while backlog and awards grew organically by over 35% year-over-year. When we include acquisitions, revenue more than doubled, with similar growth in total backlog. As you would expect, the data center and technology end market led this growth. Recent discussions with our data center clients suggest continued risk demand over the next several years.

Speaker 2

These discussions suggest no change in the pace of activity from what was discussed at the beginning of the year, and in some cases, speed to market has actually accelerated. Within the data centers and technology end market, it is worth noting that this sector also includes semiconductors, an area where we are also experiencing solid revenue growth. Our growth extends to other core markets as well, including life science and healthcare, education, and state and local government, all of which are experiencing solid high single to double-digit organic revenue growth year to date. Also worth noting is our activity level in manufacturing, which is embedded in our other end market category. While this end market represents less than 3% of our overall revenue base, it is experiencing very strong revenue growth and is now about equal to the size of our mixed-use market.

Speaker 2

We expect reshoring to favorably impact our manufacturing end market in the coming years. As I mentioned before, I really like our exposure to diverse end markets, understanding that growth rates between markets can ebb and flow. By intentionally focusing on attractive, higher growth, target-rich sectors that align well with our mission-critical services, this diversity can offset, to a degree, some of the volatility of each market. We, of course, value every client relationship and strive to deliver exceptional outcomes on every project. This customer-first philosophy has served us well for decades, and in some cases over a century, and is the foundation of the reputation, trust, and long-standing partnerships that we built across our broad client base.

Speaker 2

On our quarterly results, Stephen will go into greater detail, but at a high level, total revenue of $1.3 billion increased by 111% year over year, and over half of this growth was organic. In a similar fashion, adjusted EBITDA grew by 114% year over year. Adjusted EBITDA margins expanded by almost 90 basis points sequentially. Total backlog and awards ended the quarter at a record $5.7 billion, up 105% year over year and 5% sequentially. We saw strong growth in backlog in both segments. Notably, our engineering segment backlog grew by 27% year over year and 11% sequentially, mostly on an organic basis. Our consolidated book-to-bill ratio for the three months ended June 2026 was 1.2 times. Book-to-bill over the last 12 months was 1.4 times. As our markets evolve, particularly the data centers and technology market, the award sizes have grown quite significantly.

Speaker 2

In fact, it is not uncommon these days for some of the larger bookings to exceed $100 million. These bookings can come in waves, with some of the large projects burning pretty quickly. All of these factors can create some volatility in our quarterly net bookings and book-to-bill ratio, which is why we like to also look at the book-to-bill ratio over a 12-month period. Overall, we feel confident in our ability to continue to grow total backlog as the year progresses based on what we see in our opportunity pipeline. Our confidence in the future is also reflected in our revised guidance for full year 2026, which Stephen will walk you through shortly. To support the execution of our growing backlog, we continue to grow and invest in our workforce. Total employee headcount is now close to 11,000 at the end of July, including approximately 8,000 skilled technicians and craftspeople.

Speaker 2

As demand for our services continues to grow, we expect to further expand our labor force. Combined with our continuous efforts to drive operational efficiencies, optimize workforce scheduling, and stay selective on our project pursuit, these efforts position us to better serve our customers going forward. Our fabrication footprint is a big part of our efficiency efforts. During the second quarter, we grew our fabrication capacity by about 200,000 square feet, putting our current capacity at 1.5 million square feet. We expect to add another 100,000 within the next couple of weeks and are looking at opportunities to expand even further. There are a lot of efficiencies that we can implement in our square footage through the use of advanced tooling, automation, optimization of floor spacing, and flexibility with labor shifts, among other levers.

Speaker 2

I should also note that the capacity expansion is based on existing demand that we see in our backlog. When adding this incremental capacity with the organic expansion that we have completed over the past year and the capacity that came with The Bowers Group, we will have grown our fabrication capacity by over 1 million square feet across our key geographies. Our third-party fabrication demand continues to be concentrated on data center and, to a lesser extent, pharmaceutical clients. More recently, we have seen increased demand from semiconductors and memory chip clients. Before handing the call to Stephen, I want to point out the continued improvement to our net leverage. During our IPO process, we heard from the investment community about the importance of having a strong balance sheet, and as a result, prioritized the entire IPO proceeds toward debt reduction.

Speaker 2

This allowed us to exit the IPO at 3 times net leverage last September. In just three quarters, we have essentially cut our financial leverage in half, with pro forma net leverage now standing at 1.5 times. This reduction was achieved during a period when Legence completed our largest acquisition in company history, namely Bowers in the DMV. At 1.5 times net leverage, we are in a great financial position to pursue other attractive, impactful acquisition opportunities that meet our strategic and financial objectives. Our M&A pipeline has never been as active as it is today. Of course, we will be disciplined with our evaluation of these opportunities. With that, let me turn the call over to Stephen.

Speaker 3

Thank you, Jeff, and good morning, everyone. I will begin with a review of second quarter 2026 results in comparison to second quarter of 2025. Following my review of our historical results, I will provide a brief update on our current guidance and discuss our balance sheet and liquidity position before turning the call back to Jeff. Starting with the second quarter 2026, we generated revenue of $1 billion and $262 million, an increase of $663 million or 111% from the year ago quarter. The Bowers Group acquisition contributed approximately $300 million of revenue. Excluding Bowers, our revenues grew by nearly 60% year-over-year. Looking at our latest quarterly revenue growth at the segment level, starting with engineering and consulting. Segment revenue increased by 6% to $207 million, which was mostly organic.

Speaker 3

Program and project management service revenues grew by 17%, with particularly strong growth in state and local government as we are working on several large projects in Washington, D.C., South Carolina, Colorado, and Minnesota. We also saw strength in data centers and technology. Engineering and design revenues declined by 4%, with the decrease mainly attributable to soft demand from our sustainability consulting services for mixed-use clients, primarily large owners of commercial real estate. Our sustainability consulting business has experienced softer market conditions over the past several quarters, reflecting both broader challenges across the commercial real estate sector and evolving client demand for these services.

Speaker 3

Because impairment testing reflects our longer-term forecast, but the near term is often underpinned by customer contracts, the downward trend we have seen in backlog for those services was a key consideration and led to our decision to impair goodwill and other intangibles for this business during the second quarter. We still have conviction in the long-term value that our sustainability consulting services can deliver to clients, particularly in an environment with rising energy costs. Turning now to our larger installation and maintenance segment. Segment revenue of $1 billion and $55 million increased by 162% versus the year-ago quarter. Over half of the segment's revenue growth was organic, while the remainder was largely attributable to the addition of The Bowers Group. Installation and fabrication services drove the majority of the segment growth, increasing by 189% year-over-year due to both strong organic growth and again, a meaningful contribution from The Bowers Group.

Speaker 3

With respect to the organic growth, data center and technology was a key driver. Our other core markets, such as life science and healthcare and education, also saw solid organic growth in the low to mid-teens. State and local government growth was also very strong, though from a lower base. Maintenance and service revenue increased by 58% year-over-year. Excluding the impact of The Bowers Group, this service line delivered organic growth of nearly 20%. The high growth rate was spread across essentially all of our end markets, with the exception of mixed use. Turning to reported gross profit. Consolidated gross profit for the second quarter 2026 increased by 71% to approximately $220 million.

Speaker 3

Similar to our prior quarterly results, reported gross profit includes stock-based and other compensation expense related to legacy profit interest units, the payment of which is entirely borne by entities outside of Legence Corp., essentially the legacy pre-IPO shareholders. As a reminder, the settlement of legacy profit interest expense does not impact Legence Corp., either in the form of cash outlay or the issuance of additional common shares. Because these profit interest units are marked to market, any significant change to our share price will have a material impact on this expense, as it did in the second quarter. Excluding the impact of profit interest and related expense, adjusted gross profit on a consolidated basis totaled approximately $234 million, and adjusted gross margin was 18.5% for the second quarter 2026, compared to approximately $130 million and 21.8% in the second quarter 2025.

Speaker 3

The decrease in adjusted gross margin was primarily driven by the combined impact of a shift in revenue mix to our installation and maintenance segment, reflecting the addition of Bowers and the segment's higher growth rate, as well as somewhat lower adjusted gross margin within the engineering and consulting segment. Looking into margins at the segment level, second quarter 2026 engineering and consulting adjusted gross margin was 31.1%, down from 33.2% in the second quarter 2025. The adjusted gross margin decline largely reflects a revenue mix shift toward the program and project management service line, which accounted for 51% of segment revenue, compared to 46% in the year ago quarter. The installation and maintenance segment generated an adjusted gross profit margin of 16.1%, essentially in line with 16.2% reported in the year ago quarter.

Speaker 3

As you would expect, there are a lot of moving parts that take us to that flat level year-over-year in the I&M segment. To name a few, we saw a mix shift toward the installation and fabrication service line at the expense of the higher margin maintenance and service line. Our overall mix of fabrication only work within the installation and fabrication service line increased year-over-year. Turning to SG&A. This expense includes approximately $59 million of stock-based and non-cash compensation expense, the vast majority of which, almost $54 million, was related to the legacy profit interest that is paid for by entities outside of Legence Corp. Excluding the impact of stock-based compensation expense, as well as approximately $2 million of acquisition and strategic initiative expenses, our adjusted SG&A expense was $87 million, up from $62 million in the year ago quarter.

Speaker 3

This increase was primarily driven by the addition of Bowers and higher general head count to support our strong growth. More importantly, though, adjusted SG&A as a percentage of revenue improved significantly to 6.9%, down from 10.3% in the year ago quarter, as we benefit from greater economies of scale. All in all, we generated adjusted EBITDA of $155 million in the second quarter 2026, an increase of 114% from second quarter 2025 levels. Adjusted EBITDA margin for the second quarter 2026 improved by almost 20 basis points to 12.2% when compared to the year ago quarter. However, given the sequential comparison to first quarter 2026, adjusted EBITDA margins includes Bowers. We believe this is probably a more relevant comparison and yields an almost 90 basis point improvement.

Speaker 3

Depreciation and amortization totaled $44 million in the second quarter 2026, up from $29 million in the year ago quarter, with the increase largely due to the incremental depreciation and amortization that stem from the Bowers acquisition. Interest expense net of income was $15 million for the second quarter 2026 and declined by almost $15 million from a year ago, primarily due to lower average debt balance and average interest rates than the year ago period. Turning to income tax. Though we reported a pre-tax loss for the second quarter 2026, we recorded income tax expense of $11 million due to the non-deductible nature of various items, primarily the legacy profit interest expense. As a result, on a reported basis, the effective tax rate for the quarter isn't all that meaningful. This dynamic is expected to continue through 2026 and into 2027 to some degree.

Speaker 3

Excluding the impact of these material non-recurring and non-cash items, the normalized effective tax rate would be closer to the high 20%-low 30% range, which we would expect to gravitate towards over time. Regarding cash taxes, our current estimate for 2026 is in the mid $50 million range. This is an increase from our prior estimate based on our revised profit outlook and states where our revised profit outlook originates from. Aside from our cash tax payments, we continue to expect to make a TRA payment of around $8 million-$9 million related to our 2025 operating activity, likely in early 2027. Our TRA payment related to estimated 2026 activity is expected to total between $25 million and the low $30 million range, and this payment is likely to occur in early 2028.

Speaker 3

To the extent we have additional share exchanges, this could slightly reduce our cash tax payments while increasing our TRA payments by 85% of the reduction in cash tax. The net difference for Legence is a 15% reduction in cash outflow. Now, switching gears to backlog. We ended June with consolidated backlog and awards of $5.7 billion, up 105% from year ago levels. Compared to the first quarter of 2026, backlog and awards grew by approximately $289 million, translating to a book-to-bill for the second quarter of 1.2 times. Considering that our bookings tend to fluctuate due to the growing size of our project awards, viewing book-to-bill over a longer time horizon is also important. To that end, our last 12 months book-to-bill ratio was 1.4 times. In either case, these are fairly solid ratios, especially when taking into account our particularly strong quarterly revenue realization.

Speaker 3

In terms of our organic growth and backlog and awards, the data center and technology end market remains the primary driver. However, we are seeing healthy growth in state and local government, education, and manufacturing clients. Now, turning to our guidance. We are establishing third quarter 2026 guidance for consolidated revenue of between $1.225 billion and $1.275 billion, and adjusted EBITDA of between $150 million and $160 million. For full year 2026, we are increasing our revenue guidance to a range of $4.7 billion-$4.8 billion. At the midpoint, this is increased by 13% from our previous guidance range of $4.1 billion-$4.3 billion that we presented during our first quarter report in mid-May. We are also raising our full year 2026 EBITDA guidance range by about 20% from prior guidance to $565 million-$585 million, up from $470 million-$490 million, again, just three months ago.

Speaker 3

While part of our full-year guidance increase is to account for our second quarter outperformance relative to guidance, it is more of a reflection on our growing backlog, current expectations on project timing, and a continuation of the strong execution that we have experienced in recent quarters. Now, just a few additional housekeeping items to support your modeling efforts. Interest expense, net of interest income for the second half of the year is expected to average approximately $15 million per quarter. Depreciation and amortization for the third quarter is expected to be similar to second quarter levels of $44 million. In terms of capital spending for the second half of 2026, we currently expect to spend between $40 million and $45 million.

Speaker 3

This represents an increase to our prior full year guidance by $15 million-$20 million, largely reflecting additional spending related to incremental fabrication capacity expansions that Jeff discussed earlier to outfit the new space, including cranes and advanced tooling, as well as additional spend on existing facilities. Our current capital spending forecast remains within 2% of expected revenue for the year, consistent with our historical spending levels for growth and maintenance CapEx. Now turning to our balance sheet, liquidity, and leverage. We ended the second quarter with $292 million of cash, up from $245 million at the end of the first quarter. Total liquidity was $461 million at quarter end, compared to $414 million at the end of the first quarter. Total debt at the end of June was slightly over $1 billion, approximately flat from the end of the first quarter.

Speaker 3

Based on pro forma last 12-month EBITDA, which would include pro forma EBITDA from Bowers during the second half of 2025, our pro forma net leverage ratio is now 1.5 times, which is about half the level that we were after our IPO last September. During the quarter, we further lowered our debt costs with the repricing of our term loan. That repricing lowered our interest costs by 25 basis points at the outset.

Speaker 3

In early June, we received a credit rating upgrade from Standard & Poor's, from B+ to BB-, as well as from Moody's, from B1 to BA3. With our credit rating upgrade, the loan pricing will step down by an additional 25 basis points to SOFR plus 175. That concludes my remarks, and now I'll turn the call back to Jeff.

Speaker 2

Thanks, Stephen. In closing, and before we get to the Q&A, I want to thank our entire team at Legence. Your commitment to safely serving our customers every single day makes it possible to deliver the incredible results that we're reporting today. Operationally, we continue to experience very robust organic growth across our diverse end markets and service lines. Backlog continues to grow to record levels, and we are leveraging our growing scale and national footprint to deliver higher EBITDA margins. We expect these trends to continue, and I'm really excited for what's next. With that, we'll now open the call up to your questions. Operator?

Operator

As a reminder, to ask a question, please press *11 on your telephone and wait for your name to be announced. To withdraw your question, please press *11 again. In the interest of time, we ask that you please limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster. Our first question comes from Adam Bubes with Goldman Sachs. Your line is open.

Speaker 4

Hi, good morning.

Speaker 2

Morning.

Speaker 4

Morning. Nice to see the sequential bookings acceleration in the quarter, I think to about $1.5 billion in bookings. Can you just give us a sense of the size of the largest projects you're putting in backlog this quarter and makeup of data center customers, whether hyperscalers or co-locators? How are you thinking about the bookings trajectory in the balance of the year?

Speaker 5

Yeah, we've had some really strong bookings in the data centers, specifically in some TFO projects, which follow after base builds. They're ranging in anywhere from the $175 million range to between $200 million range there, as well as in our off-site manufacturing, third-party manufacturing. We've had some solid bookings there as well. The trend, our pipeline that we don't report on, is strong now, and we feel like that trend will continue to be on a positive going forward.

Speaker 4

Can you just update us on a high-level breakdown on your key data center regions today? To what extent are your crews traveling, and do you expect travel to increase as data center developments shift towards more rural markets?

Speaker 5

Yeah. Today, on boots on the ground, California, Phoenix, and the DMV are our three major locations that we are performing installation work. Our fabrication is shipping all around the country from Salt Lake City to Georgia to Charlotte, North Carolina. So we are covering a large part of the country where we aren't located and have the resources to do installation.

Speaker 2

Yeah. Adam, this is Jeff. We've also, over the last several quarters, begun to travel into Texas via our adjacent business in New Mexico and are serving a handful of customers in that region as well.

Speaker 4

Great. Thanks so much.

Speaker 2

Thanks, Adam.

Operator

Thank you. Our next question comes from Julien Dumoulin-Smith with Jefferies. Your line is open.

Speaker 6

Yeah, kudos. I got to echo that last comment. Nice acceleration all around here. Jeff and team, look, if I can ask, just to lead off with this. Bookings trend, how do you think about 2027? You've obviously started the continue this year fabulously, put up even better results. It looks like the order book is accelerating here quarter-over-quarter. I just want to get a little bit of your commentary. You said it even at the end in your concluding comments that you're seeing an acceleration here. How does this portend into the next year? I just want to make sure I'm hearing you very clearly, because obviously the near-term results are translating very squarely. Just want to hear how it extends here and sort of the duration, if maybe if I were to zero in on one aspect of this.

Speaker 2

Yeah.

Speaker 6

Can you compound off these elevated levels with the same confidence?

Speaker 2

Yeah. I use the word momentum. The momentum continues to increase, Julien, and it's remarkable, and I think it's a function of course, amazing demand drivers. It's also a function of the fact that these projects are getting bigger, and as you are well aware, only certain companies are positioned to accommodate those larger projects. You need to have lots of employees, you need to have lots of square footage, and most importantly, you have to have the technical expertise and the relationships to be able to capitalize. We're just seeing it continuing to go up and to the right, and I think the fact that we're not a one-trick pony in terms of just doing one service line, we do all service lines, and we do it for many customers.

Speaker 2

When you have that sort of, I guess, diversity of capability and diversity of customer, and you have an amazing market backdrop, that turns into momentum, and that's what we're seeing. I don't know, Steve, if you have anything to add to that.

Speaker 5

Well said. I think the diversity in our end markets helps to continue that growth as well. We're just starting to see, Jeff mentioned it, the manufacturing end market and the reshoring that's happening gives us nothing but positive outlook.

Speaker 6

Excellent. If I can zero in a little bit more on this. If you can speak a little bit more specifically the working capital needs as you think about that as maybe an offset here, just as the business accelerates. Then related modular capacity expansion, how large does your capacity need to be to adequately serve, right? Just if you can speak into how you accommodate this accelerating outlook as well, in terms of the different pieces of this.

Speaker 3

Yeah, Julien, good question. On working capital, as you will probably recall, at the time we went public, we said that we could drive some improvements in working capital management, and I think you saw that the first few quarters out of the box where we even generated cash from working capital despite really strong revenue growth. We are probably now much closer to what I would call normalized levels this quarter. It was a modest use of cash, and I would expect with revenue growth that to continue to be the case generally. It is always hard to call quarter to quarter because of the lumpiness of a balance sheet type metric like that. But I think that most of the improvements have already been driven through. That said, where we are working on customized fabrication modules, we tend to generate higher levels of prepayment than we do for our other services.

Speaker 3

To the extent that continues to increase in our mix, that could be a positive.

Speaker 5

From a fabrication square footage, Julien, we are sitting at 1.5 million sq ft today. We have capacity for growth with that number now, and we can pull several levers within that footprint, right? We can add multiple shifts, more days on manpower load. But we will continue to grow. We look to add about another 100,000 sq ft here in the coming weeks to that number, and we will monitor our incoming requests and backlog and size appropriately for work to come.

Speaker 6

Awesome, guys. Nicely done. Yeah, kudos.

Speaker 3

Thank you.

Speaker 5

Thank you.

Operator

Thank you. Our next question comes from Chad Dillard with Bernstein. Your line is open.

Speaker 7

Hey, good morning, guys.

Speaker 3

Morning.

Speaker 7

Hey, good morning. I was hoping you could talk about your gross margins in backlog. What are they today, and can you bridge it to the gross margins that you have in your current P&L?

Speaker 3

Yeah. Our gross margins in backlog are generally similar to what our recent realizations are. We haven't seen a dramatic change in pricing across the service lines versus, say, what we would've reported this quarter or even last, if that answers your question. Of course, there's always changes

Speaker 7

Yeah

Speaker 3

in mix, like what's in the backlog. But for the underlying services and service lines, similar levels of margin.

Speaker 7

Okay. Yeah, that's helpful. As you look forward over the next couple of years, what share of your revenues do you think will be on the modular and prefab side, and how do you put that into context of your margin potential for just the broader business?

Speaker 3

Yeah, great question. We did see, as you recall, really a ramp in our mix of fab-only type work, particularly in the second and third, fourth quarter of 2025. It's been at a relatively similar percentage the last three quarters when we think about our overall I&M revenue. It's been in the low 20% range, the last three quarters now. While we're experiencing really nice growth in that fab-only work, we're also winning large installation jobs. Both have been growing at a pretty similar rate. I'll hand it to Jeff or Steve in terms of the outlook for both of those, but

Speaker 5

Yeah, from a third party manufacturing solid outlook, lots of inbound stuff. As we continue to see large projects built in more rural areas where there's just not a lot of resources there, we expect to see that continue. To Stephen's point, the large installation projects that are inbound and continuing to get booked and run into our pipeline, we just see a solid outlook there.

Speaker 7

Great. Thanks, guys.

Operator

Thank you. Our next question comes from Brian Brophy with Stifel. Your line is open.

Speaker 8

Yeah. Thanks. Good morning, everybody. Thanks for taking the question. Just continuing the conversation on some of the regional areas where you have data center exposure, are you experiencing any notable difference in demand trends by region? Particularly curious on D.M.V. relative to other areas. Thanks.

Speaker 2

Yeah. I will start, Brian, and I will hand it over to Steve. I think any changes that we have seen probably happened a couple of quarters ago when we started to see data centers get placed in more rural parts of the country, call it Middle America, which really changed the ship-to address on our fabrication work. Now we are shipping to the Iowas of the world, and the North Carolinas of the world, and the Ohios of the world. That we obviously did not see a couple of years ago. I think that is a notable difference. Now, within the sort of primary markets, they are still the primary markets. The D.M.V. is still data center alley. Arizona, and I would say the broader Southwest is still humongous. Obviously over the last probably 12 plus months, Texas has sort of broken into the top three.

Speaker 5

Yeah. Well said. To Jeff's point, D.M.V. continues to be strong. The Phoenix market and that Texas market that we have moved into and are shipping our manufactured product into Texas has been a strong growth pattern for us.

Speaker 8

Appreciate it. That is very helpful. Then just maybe touching on the demand environment you are seeing on the semi-fab side, did you book anything notable in the quarter? Just general thoughts on the outlook there. Thanks.

Speaker 5

Yeah. Semiconductor still is ramping and getting stronger. We are seeing some incoming demand for OSM manufactured product for our semiconductor clients. We did grow our revenue in that end market as well in the quarter. We are booking projects to continue that growth.

Speaker 8

Appreciate it.

Operator

Thank you. Our next question comes from Joseph Osha with Guggenheim Partners. Your line is open.

Speaker 9

Oh, hi. Thanks for taking my question. I was going to ask about semiconductors as well. I want to drill down on that a bit. If you look at Intel and TSMC down in Arizona and Micron up in New York, the numbers are pretty substantial with perhaps the floor space is not quite the same. I guess I am curious, looking a few years out, can we imagine this segment maybe becoming as large for you as data centers, or am I being overly optimistic there? Then I have a follow-up.

Speaker 2

Yeah. Steve alluded to the fact that we did have nice revenue growth in semiconductors. The contribution this quarter, it was stellar, over 50% growth. That said, that of course, even pales to what we're seeing in the data center space. Over time, though, the outlook is certainly good for semiconductors, but tough to

Speaker 5

Yeah, I would say, and you hit on some of the key players that are growing and building out right now, and we will target them as Intel's one of our main clients in the Bay Area and other places. The TSMC Phoenix market is super competitive in that region right there for the semiconductor stuff, but we are seeing inbounds from all others that are in memory and chip production.

Speaker 2

Yeah. Just to pile on here, the characteristics required for success in the semiconductor and the memory space are the same characteristics you need for success in the data centers. They're complex systems. They're really, really big. They're custom, but they're high volume. You have to be in that space. We grew up in the semiconductor space, we grew up in the biotech space, and we grew up in the data center space. So we love to see those announcements, because it's going to fit right into our wheelhouse.

Speaker 9

Excellent. Thanks. Just as a follow-up, we're starting to see some conversation following the 232 ruling on larger scale investments in steel wafer and ingot capacity onshore in the U.S., notably that Tesla announcement the other day. I'm curious, is that a market that is of interest to you all? Thank you.

Speaker 2

I'd say, Joe, certainly we're interested in our large clients and what drives their demand. But I wouldn't say there's an outsized reliance upon or attractiveness to that sort of, I guess, evolution or volatility, for lack of a better term.

Operator

Thank you. Our next question comes from Sabahat Khan with RBC Capital Markets. Your line is open.

Speaker 10

Great. Thanks, and good morning. I just wanted to talk a little bit about the sort of the non-semis, non-data center manufacturing side that you called out more on the industrial side. Can you maybe just talk about some of the silos where you are seeing some of that reshoring activity? There's some folks out there saying they're not really seeing it in their business lines. Maybe if you can talk about which end markets you're seeing that in, kind of the opportunity set. Are you doing some of the same type of work? You're providing some of the technology customers. Just a little bit more color on that opportunity. Thanks.

Speaker 5

Yeah. Reshoring, I think, is still in early stages, and we expect to see that grow over coming years. Currently, places like Tesla, SpaceX for us are great clients, and we're seeing growth with them. They're going to continue to build and inbound. We've got a great engineering relationship with them as well as the installation. So from both sides of our business, we'll benefit from that.

Speaker 2

Yeah. It is interesting from a terminology perspective. Obviously, GLP-1 drugs on the pharma side are huge. We have some great clients that we are helping them out in that regard. Now, is that reshoring or onshoring or just starting from scratch? I am not sure. But again, those same characteristics, highly complex. You need engineering chops to be able to pull it off. You need the relationships. You need to have a resume. You got to prove that you can do it. So as Steve mentioned, it is baseball season. Feels early innings on the reshoring perspective from our view.

Speaker 10

Great. Then just in terms of my follow-up, it looks like the $5.67 billion number here is about 60% of the data center and technology space. A round number is almost double the mix of last year. Do you have a threshold in mind for the right mix of this business or a lot of opportunities there you will capitalize on it and go from there? Just trying to think about how you think about your go-to-market strategy. Are you still actively pursuing these customers, and if the mix gets larger, that is fine? Just how do you think about the mix of end markets across your business? Thanks.

Speaker 2

Yeah, I will start and then I will hand it over to Steve. We have always wanted this growth to be an and versus an or. I mean by that, we want to be able to satisfy demand from our customers, but not at the exclusion of our amazing customers in these other markets. So we want it to be additive. Now, in a perfect world, I think it would be nice and balanced. But so long as we are keeping our customers happy and we are not missing out or turning down opportunities in other markets that maybe are just sort of clicking along at high single digits, we really want it to be both. To me, if data centers are 60% or 65% or 55 or 70, it does not matter so long as that we feel good about handling all of the opportunities.

Speaker 2

Now, if we have to start making decisions, then that is a different story, but I hope we never get to that position. I do not know, Steve, if you.

Speaker 2

Yeah. Great point, Jeff. We do not want to turn away business from any of our good clients, no matter the end market. That is going to change our mix over time. The other area where we can change our mix over time is through M&A. As you know, we are focused on high-end contractors and of course on the engineering side as well, but those that focus on mission-critical facilities. Many of those are also going to have some data center exposure. But there certainly may be opportunities to add to our mix, with other high-quality businesses that maybe are a little bit more skewed towards some of our other mission-critical end markets. That is something that we will continue to evaluate over time.

Speaker 10

Thanks so much.

Operator

Thank you. Our next question comes from Michael Dudas with Vertical Research Partners. Your line is open.

Speaker 11

Yes. Good morning, gentlemen.

Speaker 2

Morning.

Speaker 11

Jeff, I get your sense of your customer. Obviously, your customers across the board seem to be quite active. How are you looking at allocating capacity, time, your current labor force? How does that look relative to what you have to execute out of your backlog the next 3 to 5 quarters? Are your clients looking to secure your services a much greater time into the future, trying to secure opportunities where maybe it is even a couple of years away before they are going to need what you guys do?

Speaker 2

Yeah. Great question, Michael, and I will start and then I will hand it over to Steve. You called it. The two levers that we look at, after we get inbound demand, which thankfully has continued to be up and to the right, is do we have the labor to accommodate it both on the engineering side and the implementation or the boots on the ground side? Number two, do we have the right square footage on the fab side? Those obviously work together. The more that we can do in the factory, all things being equal, you can do factory work with fewer people. It reduces the, I guess, pressure from a labor perspective. That said, and Steve, correct me if I am wrong, we are not seeing labor constraints, to the extent that we would have to either push out a project or anything like that.

Speaker 2

The fabrication square footage is an interesting capacity challenge, and I will hand it to Steve to walk through how we think through that.

Speaker 5

Yeah, you are right, Jeff. Though there is tight labor around the country, we have been very successful at recruiting and bringing in people. As we build out that capacity and improve our fabrication footprints, we are doing it with the latest in technologies and automation, and skilled labor wants to come work on that stuff, right? We have been able to attract the labor we need. We have not run into labor shortages. We are always mindful of it and looking and planning ahead. From a capacity standpoint on our manufacturing, and we talk a lot about our OSM third-party manufacturing, even our installation and everything, we have a high priority on pre-fabrication, right? Take as much as we can out of the field, put it into our shops where we are much more efficient. You need less headcount. It is safer. There is a ton of positives to it.

Speaker 5

We can adjust by running multiple shifts. Today, we run two shifts in a lot of our facilities, and our second shifts are just light shifts to keep things moving for the next day. We can ramp those up and create capacity within our existing footprint to equal demand.

Speaker 2

The thing that probably is underappreciated, we really benefit from being a unionized workforce. It's a national labor force for us that we can pull from, and people can travel on a moment's notice. What's beautiful about that, there's several great things about that, one of which is you know exactly you're getting a trained, safe, certified employee, and you're pulling from all parts of the country. If there's a soft part in one area of the country, we get travelers that come and they go to where the work is. Certainly one of the ways that you can become a sort of preferred employer is when you have a huge backlog and when you have amazing customers and when you have challenging technologies and cutting-edge technologies, and you're safe.

Speaker 2

Those are the criteria that folks think about when they decide if they want to go work on a job in, say, Texas or say, Idaho, for instance.

Speaker 5

Well said.

Speaker 11

Jeff, just to follow up, what about on the client side? Are they looking to lock you in longer into the future, or how are those discussions and how are you allocating those resources to some of your you try to keep it balanced, as you mentioned in the response to a prior question of throughout all your customers and markets?

Speaker 5

No, it's a great question, and we are having those conversations every day with our clients, and we are seeing our backlog stretch into further out periods than we had historically. Because they're aware too, right? That they need the resources to get their builds completed. So yes, we are seeing incoming demand for what does it look like 2027 and beyond. So it continues to be a positive.

Speaker 2

Yeah. I don't have data to support it, but generally speaking, it's driving ideally earlier decision-making. We're a humble company, and we basically tell our clients that we need to know, because we need to lock in on whether it's designs or headcount or fabrication square footage. I think they realize that. So the earlier that we get engaged and start having those discussions, the better. That's, I think, one of the benefits of the fact that we have engineering as well as installation. It's earlier client involvement. In mostly any industry, the earlier you're talking to a customer, the better. The more you understand the customer, you understand their decision-making process, you understand the competition, you understand their pain points, all that stuff, earlier the better for us.

Speaker 2

I think people are realizing, and again, I don't know that I have anything other than anecdotes, that since this is such a huge ramp, the earlier we talk, the better.

Speaker 11

Very helpful. Thanks, guys.

Operator

Thank you. Our next question comes from Oliver Davies with Rothschild & Co./Redburn. Your line is open.

Speaker 12

Yeah. Good morning, guys. Just two from me. Firstly, could you just provide a bit of color on the margin difference between installation and third-party fabrication sales? Secondly, I guess you mentioned larger awards, but speed to market is key. So just any comments on the sort of conversion then to the backlog, whether that's materially changed over the past six months or so? Thanks.

Speaker 2

Yeah. On the first one, of course, we don't disclose the differences of the sub-levels of services versus how we disaggregate revenue. But I think what we can happy to say is that when we're completing a full installation job, those margins, the revenue opportunity is much, much bigger than just a fab only. There's flow through equipment, sometimes subcontractor costs, and so our margins are lower than when we're essentially manufacturing customized products. We do get a nicely higher margin on those. So that should be a positive to our margins over time as we continue to do more fab-only work. Then I'll hand it to Steve for the second half of it.

Speaker 5

Yeah. On the acceleration of schedules and on these projects, we are seeing acceleration in every end market we are in. There is a race to the finish line, especially in the data center world and the semiconductor world that we are in. They want to ramp their projects and get them done, right? They are all competing with their peers just like we are. We are seeing those pull in. We are seeing shorter time frames. Again, our ability to leverage the 1.5 million square feet of fabrication capacity allows us to work with our clients and pull those projects in on a timely manner for them.

Speaker 12

Great. Thank you.

Speaker 2

Thank you.

Operator

Thank you. Our next question comes from Chris Snook with Wolfe Research. Your line is open.

Speaker 13

Hey, good morning.

Speaker 2

Morning.

Speaker 13

Just one question for me. Stephen, you mentioned project timing continued strong execution as drivers of the raise, and I think Steve, you just talked about the acceleration of projects ramping faster. Can you just separate how much of the increase in guidance this year is revenue being pulled forward versus incremental work that wasn't necessarily contemplated last quarter? Thanks.

Speaker 3

Yeah. It's hard to provide a split on that. I think it's a combination. I think the pull forward, we've certainly benefited from that in a sense in the second quarter, versus our guidance. When I say pull forward, we're just executing on some of, particularly the fab projects quicker than originally anticipated. So there's some of that in our guidance. But also, we've got a strong backlog coverage, on our second half results, and so that was part of our overall guidance raise as well.

Speaker 13

Okay, thanks.

Operator

Thank you. Our final question comes from Derek Soderberg with Cantor Fitzgerald. Your line is open.

Speaker 14

Yeah. Hey, guys. I just wanted to dig into the engineering and consulting segment. I think gross margins there were down a little bit. I was wondering if that was more labor costs or project mix. Then just as a follow-up on that, I'm curious if the E&C margins are different for work that's sort of attached to larger projects versus smaller projects. Thanks.

Speaker 2

Yeah, I'll take the first part of that. Our margins, again, the difference in the year-over-year margin was driven by a mix. We had a larger contribution from our program and project management, which includes performance contracting, than our higher margin engineering and design service line. That's really what accounted for the difference year over year. Then just more broadly, as I look at the thing about the margins in that segment, we had one quarter that was an outlier quarter where we had really high margins over the past two years. Otherwise, over the last eight quarters, we've generally been in the 31%-33% range, and the difference driven by mix shifts. The one area, again, that we talked about, sustainability consulting, where we've seen a little bit of degradation as we discussed.

Speaker 2

That's sort of plus or minus 10% of that overall engineering and design service line. So very small piece. Overall, though, the margins for the underlying services have been consistent, essentially, within that period and other than that, and the changes have been driven by mix shifts.

Speaker 5

Yeah. I would just piggyback on that. We haven't seen, I don't think, a material difference in engineering fees by vertical market, whether the engineering fee for a data center versus a hospital, versus a university versus a K-12. I think they're similar. I'm sure they're not identical, but nothing that would sort of move the needle from our perspective.

Speaker 14

Got it. Thanks, guys.

Speaker 2

Thank you.

Operator

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

Speaker 1

Thank you, Daniel, and thank you everyone for attending our second quarter 2026 earnings call. A recording of this call will be available on our website in a few hours, and we look forward to updating you again in our next earnings call. Until then, have a great week. Talk to you soon.

Operator

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

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