Legence Corp.LGN
Legence Corp. Fair Value Disclosure
Fair Value Measurements
The Company recognizes certain financial assets and liabilities at fair value on a recurring basis following the fair value hierarchy detailed in “Note 2—Summary of Significant Accounting Policies.”
The following table presents the input level used to determine the fair value of the financial instruments measured at fair value on a recurring basis (in thousands):
| December 31, 2025 | |||||||||||||||||
| Level 1 | Level 2 | Level 3 | |||||||||||||||
| Assets: | |||||||||||||||||
| Cash equivalents - money market | $ | 572 | $ | — | $ | — | |||||||||||
| Interest rate swap instruments | $ | — | $ | 42 | $ | — | |||||||||||
| Liabilities: | |||||||||||||||||
| Interest rate swap instruments | $ | — | $ | 1,194 | $ | — | |||||||||||
| December 31, 2024 | |||||||||||||||||
| Level 1 | Level 2 | Level 3 | |||||||||||||||
| Assets: | |||||||||||||||||
| Cash equivalents - money market | $ | 49,217 | $ | — | $ | — | |||||||||||
| Interest rate swap instruments | $ | — | $ | 9,248 | $ | — | |||||||||||
| Liabilities: | |||||||||||||||||
| Interest rate swap instruments | $ | — | $ | 137 | $ | — | |||||||||||
The carrying value of Cash approximates fair value due to its short-term nature.
Interest Rate Swap Instruments: Additional information regarding the accounting policies and relevant derivative instrument disclosure information for the Company’s interest rate swaps can be found in “Note 2—Summary of Significant Accounting Policies” and “Note 11—Derivatives.”
For determining the fair value of the interest rate swap contracts, the Company uses significant observable market data or assumptions (Level 2 inputs) that market participants would use in pricing similar assets or liabilities, including assumptions about counterparty risk. The fair value estimates reflect an income approach based on the terms of the interest rate swap contracts and inputs corroborated by observable market data, including interest rate curves.
Contingent Consideration Liabilities: Contingent consideration liabilities are related to business acquisitions with earnout provisions included in the respective purchase agreement, as further described in “Note 4—Acquisitions,” pursuant to which a payment may be made at a specified future date based on the performance of the acquired business subsequent to the acquisition.
The Company's contingent consideration liabilities are measured at fair value using Level 3 unobservable inputs. The Level 3 inputs include internally developed assumptions of the probabilities of achieving the specified earnout target. A probability weighted discounted cash flow method is used to convert the projected earnings to a present fair value, including inputs such as projected earnings from the acquired business, the likelihood of such outcomes, and specific contractual terms governing the individual earnout.
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.
During the years ended December 31, 2024, there were no significant changes in the valuation techniques or inputs related to the Company's contingent consideration liabilities.
The following is a Level 3 summary of changes in contingent consideration liabilities (in thousands):
| 2024 | |||||
| Balance, beginning of period | $ | 65,700 | |||
| Payment of contingent consideration - cash | (65,700) | ||||
| Balance, end of period | $ | — | |||
During the year ended December 31, 2024, all contingent consideration liabilities were paid in cash, primarily relating to A.O. Reed, OCI and a 2022 acquisition; $33.2 million of these payments were made to related parties.
During the year ended December 31, 2023, the Company recognized $31.1 million in Changes in fair value of contingent consideration liabilities in the Consolidated Statements of Operations, paid $10.7 million of contingent consideration in cash, and paid $9.3 million of contingent consideration in Parent interests. Included in these amounts are $13.4 million, $10.7 million, and $9.3 million, respectively, of amounts related to related parties. Included in the $31.1 million of Change in fair value of contingent consideration liabilities is a $27.0 million increase related to a 2022 acquisition due to the achievement of the targeted EBITDA, as defined in the purchase agreement.
Cash payments made for the settlement of contingent consideration liabilities are included within the financing section on the Consolidated Statements of Cash Flows for amounts up to the acquisition-date fair value of the liability. Noncash payments, related to a 2021 acquisition, made for the settlement of a contingent consideration liability during the year ended December 31, 2023 include 6,800 Parent interests to a related party.
Financial Instruments Not Carried at Fair Value: The table below shows the fair value and carrying value of the term loan and promissory notes (a component of notes payable) included in Total debt as shown in "Note 9—Debt" (in thousands):
| December 31, 2025 | December 31, 2024 | ||||||||||||||||||||||
| Fair Value | Carrying Value | Fair Value | Carrying Value | ||||||||||||||||||||
| Term loan | $ | 803,995 | $ | 792,515 | $ | 1,597,825 | $ | 1,576,502 | |||||||||||||||
| Promissory notes | $ | 21,490 | $ | 22,906 | $ | 19,475 | $ | 22,646 | |||||||||||||||
The fair value of the term loan as of December 31, 2025 and 2024 was derived by taking the mid-point of the trading prices from observable market inputs in the secondary bond market for the term loan (Level 2 measurement) and multiplying it by the outstanding face value of the term loan.
The fair value of the promissory notes as of December 31, 2025 and 2024 was calculated using a discounted cash flow methodology under the income approach, using interest rate indices, risk premiums, and adjustments for the size and subordination of the instrument (Level 3 measurement).
The carrying value of the remaining notes payable and finance lease liabilities approximates fair value as of December 31, 2025 and 2024.
About Fair Value Disclosures
Fair value disclosures classify all assets and liabilities measured at fair value into a three-level hierarchy: Level 1 (quoted market prices), Level 2 (observable inputs like yield curves), and Level 3 (unobservable inputs requiring management estimates). The proportion of Level 3 assets directly reflects how much of the balance sheet depends on internal models rather than market evidence.
Key signals: a growing Level 3 balance relative to total fair-value assets increases valuation uncertainty and earnings volatility risk. Watch for transfers between levels — assets moving from Level 2 to Level 3 often signal deteriorating market liquidity. Unrealized gains and losses on Level 3 positions flow through earnings or other comprehensive income, so large swings deserve scrutiny. For financial institutions, examine the sensitivity disclosures that show how Level 3 valuations change under alternative assumptions. Compare the fair value of debt against its carrying amount to gauge hidden leverage.