Legence Corp.: Form 10-Q for the period ended Sep 30, 2025

Recent Sales of Unregistered Securities

In connection with our incorporation on January 9, 2025, under the laws of the State of Delaware, we issued 1,000 shares of our common stock, par value $0.01, to Legence Parent for an aggregate purchase price of $10.00. The shares of our common stock described in the foregoing sentence were issued in reliance upon the exemption from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), provided by Section 4(a)(2) of the Securities Act as sales by an issuer not involving any public offering.

On September 15, 2025, in connection with the closing of the IPO, the Company issued (i) 178,571 shares of Class A Common Stock and 46,680,762 shares of its Class B Common Stock, to Legence Parent and (ii) 28,844,369 shares of Class A Common Stock to Legence Parent II. Such issuances were undertaken in reliance on an exemption from the registration requirements of the Securities Act pursuant to Section 4(a)(2) thereof as transactions by an issuer not involving any public offering.

Subject to the terms of the Amended and Restated Limited Liability Company Agreement of Legence Holdings and the Exchange Agreement, Legence Parent may exchange the LGN B Units, along with surrendering a corresponding number of shares of Class B Common Stock, held by it for shares of Class A Common Stock on a one-for-one basis (subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications) or, at the Company’s option and subject to certain conditions, an equivalent amount of cash.

Subsequent to September 30, 2025, on October 1, 2025, in connection with the closing of certain asset purchase and contribution transactions, the Company issued an aggregate of 145,600 shares of Class A Common Stock to the sellers.

Such issuances were undertaken in reliance on an exemption from the registration requirements of the Securities Act pursuant to Section 4(a)(2) thereof as transactions by an issuer not involving any public offering.

The stock issuances described above did not involve any underwriters, underwriting discounts or commissions, or any public offering and we believe such issuances are exempt from the registration requirements of the Securities Act by virtue of Section 4(a)(2) thereof.

Use of Proceeds

On September 15, 2025, we completed our initial public offering in which we issued and sold 29,487,627 shares of our Class A Common Stock (including pursuant to the partial exercise of the underwriters’ overallotment option) at an initial public offering price of $28.00 per share. The shares sold in the IPO were registered under the Securities Act pursuant to our Registration Statement on Form S-1 (File No. 333-289629), which was declared effective by the SEC on September 11, 2025. The IPO, including the partial exercise of the underwriters’ overallotment option, generated gross proceeds of approximately $825.7 million, which resulted in net proceeds to us of approximately $780.2 million, after deducting underwriting discounts and commissions of approximately $45.4 million. We used approximately $7.2 million of proceeds to pay the outstanding portion of the IPO's $28.4 million deferred offering costs. The IPO commenced September 2, 2025 and terminated following the sale of the shares in connection with the closing of the IPO. Except as set forth herein, no offering expenses were paid or are payable, directly or indirectly, to (i) any of our officers or directors or their associates, (ii) any persons owning 10% or more of any class of our equity securities or (iii) any of our affiliates.

We indirectly contributed all of the net proceeds from the IPO to Legence Holdings in exchange for LGN A Units. Legence Holdings used approximately $773.0 million of the net proceeds from the IPO to repay amounts then outstanding under our term loan credit facility, with the balance being used for general corporate purposes. There has been no material change in the expected use of the net proceeds from the IPO as described under the heading “Use of Proceeds” in the Prospectus.

Goldman Sachs & Co. LLC and Jefferies acted as joint lead book-running managers and as representatives of the underwriters for the IPO. Blackstone Securities Partners L.P., an affiliate of Blackstone, underwrote approximately 3.9 million shares of the aggregate 29,487,627 shares of Class A Common Stock purchased by the underwriters in connection with the IPO (which figures take into account the partial exercise of the underwriters’ option to purchase additional shares), with underwriting discounts and commissions of $1.54 per share paid by the Company.

In the normal course of business, we are exposed to financial risks such as changes in interest rates and inflation risk associated with our input costs. We utilize derivative instruments, classified as cash flow hedges, to manage interest rate exposures on our floating rate debt.

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily to our long-term debt. The interest expense associated with our long-term debt will vary with market rates. We seek to mitigate this risk with an appropriate amount of fixed rate debt obligations through interest rate derivative contracts that fix the interest rate on the respective floating rate debt obligations. Without taking into consideration the effect of our interest rate swap agreements, based upon our outstanding principal amount of floating rate debt of $797.8 million as of September 30, 2025, and $1,590.4 million as of December 31, 2024, an increase in the current interest rate levels of 1.0% would result in an increase in our annual interest expense of $8.0 million and $15.9 million, respectively.

Inflation Risk

While inflation pressures have recently and relatively subsided, rising or consistently high rates of inflation, including as a result of geopolitical tensions and trade wars, have the potential to increase costs of labor and other inputs for our services. We have experienced, and may experience in the future, higher than expected inflation, including escalating transportation, commodity and other supply chain costs and disruptions. 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.

Credit Risk

Financial instruments that potentially subject us to a concentration of credit risk consist principally of contract assets and accounts receivable. Exposure to losses on receivables is principally dependent on each customer’s financial condition. We monitor the exposure for credit losses and maintain allowances for anticipated losses. We may also require prepayments for certain of our services. Concentrations of credit risk with respect to our receivables are limited due to the large number of customers comprising our customer base and their dispersion among many different geographies.

Evaluation of Disclosure Control and Procedures

In accordance with Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), management has evaluated, under the supervision and with the participation of management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2025. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Commission. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of September 30, 2025 at the reasonable assurance level due to the material weakness in our internal control over financial reporting described below. However, after giving full consideration to such material weakness, and the additional analyses and other procedures that we performed to ensure that our condensed consolidated financial statements included in this Quarterly Report were prepared in accordance with U.S. GAAP, our management has concluded that our consolidated financial statements present fairly, in all material respects, our financial position, results of operations and cash flows for the periods disclosed in conformity with U.S. GAAP.

In connection with the audit of our financial statements for the year ended December 31, 2024, we and our independent registered public accounting firm, identified certain control deficiencies in the design and implementation of our internal control over financial reporting that in aggregate constituted a material weakness. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis. We did not design and implement effective general information technology controls (“GITCs”), for multiple business units’ information systems that are relevant to the preparation of the consolidated financial statements. Specifically, we did not design and implement sufficient user access controls to ensure appropriate segregation of duties and adequately restrict user and privileged access to financial information systems to appropriate Company personnel. As a result, it is possible that the Company’s business process controls that are dependent on the ineffective GITCs, or that rely on data produced from systems, could be adversely affected. Further, we identified inappropriate segregation of duties within multiple systems to address the risk of management override over the preparation and review of manual journals, without sufficient detective controls designed to fully mitigate these risks.

Our management is in the process of developing and implementing a remediation plan. The material weakness will be considered remediated when our management designs and implements effective controls that operate for a sufficient period of time and management has concluded, through testing, that these controls are effective. Our management will monitor the effectiveness of its remediation plans and will make changes management determines to be appropriate. We have not incurred any material costs to date and do not expect to incur any material costs in connection with the remediation of the material weakness in the future. We cannot assure you that the measures that we have taken, and that will be taken, to remediate this material weakness will remedy the material weakness or will be sufficient to prevent future material weaknesses from occurring. We also cannot assure you that we have identified all of our existing material weaknesses.

If we are unable to remediate our existing material weakness or identify additional material weaknesses and are unable to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 in a timely manner or attest, starting with the filing of our annual report for the year ended December 31, 2026, that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, starting with the filing our annual report for the year ended December 31, 2026, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Class A Common Stock could be negatively affected, and we could become subject to investigations by the Nasdaq, the Commission or other regulatory authorities, which could require additional financial and management resources.

Changes in Internal Control over Financial Reporting

Except for the remediation efforts related to the identification of the material weakness described above, there was no change in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) during the three months ended September 30, 2025 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Our business faces many risks. In addition to the other information set forth in this Quarterly Report, you should carefully consider the risk factors and other cautionary statements described under the heading “Risk Factors” included in the Prospectus, and other risk factors and cautionary statements contained in our other Commission filings. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results. There have been no material changes in our risk factors from those described in the Prospectus.