Comfort Systems USA Inc Q1 FY2026 Earnings Call

Thank you for standing by and welcome to Comfort Systems USA's First Quarter 2026 Earnings Conference Call. Operator provided instructions. I would now like to hand the call over to Julie Shaeff, Chief Accounting Officer. Please go ahead.

Thanks, Latif. Good morning. Welcome to Comfort Systems USA's First Quarter 2026 Earnings Call. Our comments today as well as our press releases contain forward-looking statements within the meaning of the applicable securities laws and regulations. What we will say today is based upon the current plans and expectations of Comfort Systems USA. Those plans and expectations include risks and uncertainties that might cause actual future activities and results of our operations to be materially different from those in our comments. You can read a detailed listing and commentary concerning our specific risk factors in our most recent Form 10-K and Form 10-Q as well as in our press release covering these earnings. A slide presentation is provided as a companion to our remarks and is posted on the Investor Relations section of the company's website found at comfortsystemsusa.com. Joining me on the call today are Brian Lane, Chief Executive Officer; Trent McKenna, President and Chief Operating Officer; and Bill George, Chief Financial Officer. Brian will open our remarks.

All right. Thanks, Julie. Good morning and thank you for joining our call today. We had a fantastic quarter and a strong start to 2026, driven by continued outstanding performance by our field teams. Our same-store revenue grew by 51% and quarterly gross margins hit a new all-time high. We earned $10.51 per share this quarter, more than double our strong first quarter in 2025. We also ended the quarter with record backlog of $12.5 billion, reflecting persistent demand, including strong demand from our tech customers. And we entered the second quarter of 2026 with total backlog that is $5 billion higher than it was 1 year ago. We also announced another increase to our quarterly dividend to $0.80 by adding $0.10 per share and we remain committed to consistently rewarding our shareholders while maintaining a strong balance sheet. Trent will discuss our business and outlook in a few minutes. But first, I will turn the call over to Bill to review our financial performance. Bill?

Thanks, Brian. So yes, we had a really great start to 2026. Our first quarter revenue was $2.9 billion, an increase of 56% compared to last year. Same-store revenue increased by 51% or $943 million. Revenue increased in both segments with an increase of 88% in our Electrical segment, while our Mechanical segment revenue increased by 47%. Both segments also continue to benefit from strong demand in the technology sector. Although we will face higher comparables in the second half of 2026, we believe same-store revenue for the full year 2026 is likely to be higher than 2025 revenue by percentage growth in the mid- to high 20% range. Gross profit was $754 million for the first quarter of 2026, which is $351 million higher compared to a year ago. Our gross profit percentage grew to 26.3% this quarter compared to 22.0% for the first quarter of 2025. Gross profit in the quarter benefited from $43 million in favorable developments on late-stage projects, including change orders, especially in our Mechanical segment. Quarterly gross profit percentage in our Mechanical segment improved to 26.9% this year compared to 21.7% last year. Margins also moved up by almost two full percentage points in our Electrical segment to 24.9% as compared to 23% in the first quarter of 2025. We currently expect that gross profit margins will continue in the strong ranges that we have averaged over the past several quarters. SG&A expense for the quarter was $269 million compared to $195 million in the same quarter of 2025 as we grew people and rewarded our busy teams in markets across the nation. With the large jump in revenue, SG&A as a percentage of revenue was 9.4% this quarter compared to 10.6% in the prior year. Our operating income increased by 132% from $209 million in the first quarter of 2025 to $486 million for the first quarter of 2026. With improved gross profit margins and SG&A leverage, our operating income percentage increased sharply from 11.4% to 17.0%. Our quarter-to-date effective tax rate was 23.2% compared to 18.6% in 2025. Our prior year effective tax rate was lower due to interest we received on a prior year tax refund. We expect our full year effective tax rate to be around 23%. After considering all these factors, net income for the first quarter of 2026 was $370 million or $10.51 per share and that compares to net income for the first quarter of 2025 of $169 million or $4.75 per share. EBITDA increased by 116% to $524 million this quarter from $243 million in the first quarter of 2025. And our trailing 12-month EBITDA at the end of March 2026 is $1.74 billion. Our free cash flow was a positive $242 million in the first quarter. Capital expenditures were $147 million in the quarter compared to $22 million in 2025. CapEx was 5.1% of revenue compared to 1.2% in 2025. Expenditures included a large modular assembly building purchase in Texas and other investments in our modular capabilities. We plan similar capital investment for the remainder of the year and we estimate full year CapEx will be in the range of 5% of revenue. We're also happy to note that during March, we entered into a definitive agreement, subject mainly to regulatory approval, to acquire another highly skilled electrical contractor. The transaction is expected to close in early May and we expect our new partner to initially contribute annualized revenues of roughly $250 million with EBITDA margins in the 8% to 10% range. And that's what I've got. Trent?

Thanks, Bill. Brian has asked me to comment on our business operations and provide an assessment of our outlook. Backlog at the end of the first quarter was a record $12.5 billion, a same-store sequential increase of just over $500 million and a remarkable same-store year-over-year increase of $5.3 billion. First quarter bookings were especially strong in the technology sector. Our companies are collaborating more than ever to deliver superior mechanical and electrical solutions for our customers. Our revenue mix continues to be led by the industrial sector with that sector accounting for 75% of our volume in the quarter. Advanced technology dominated by data center work increased to 56% of our revenue and advanced technology remains the largest driver of pipeline and backlog. Institutional markets, including education, health care and government are also solid, comprising 17% of our revenue. The commercial sector now accounts for about 8% of revenue with most of our commercial sector revenue flowing through our service activities. Construction accounted for 90% of our revenue with projects for new buildings representing 75% and existing building construction 15%. Modular revenue was 17% of total revenue in the quarter. We are on track to have 4 million square feet of modular capacity by the end of 2026 and we are actively evaluating additional capacity investments. We include modular in new building construction and in our Mechanical segment. Service revenue was up 8% this year but with faster growth in construction, service is now 10% of total revenue. Service profitability was strong this quarter and service continues to be a growing and reliable source of profit and cash flow. Before we turn the call over for questions, I want to join Brian and Bill and the team here in Houston in thanking our over 23,000 employees for their hard work and dedication. Comfort Systems USA's success is a direct result of the people that serve our customers every single day. We're now going to turn this call back to Latif for questions. Thank you.

Operator provided instructions. Our first question comes from the line of Adam Thalhimer of Thompson, Davis.

Bill, the CapEx forecast for the rest of the year, can you give a little more color on what that is? And is that more geared towards projects you've already booked? Or are you getting ready to handle future orders?

So just as it's been for the last couple of years, the answer to that question is all of the above. We did buy our biggest building ever in Houston in the first quarter. Once you buy them, you then have to spend tens of millions of dollars putting cranes and robots and various turntables and paint booths and other equipment into the building. One of the reasons we're buying these buildings now is because we've become a lot more automated and we put so much money into the building that it doesn't make sense to make those big investments into a building you don't own. We are looking at other building investments later in the year. This building was part of getting to the 4 million square feet. But of course, we definitely have the demand from our existing largest customers and from new customers that we're doing large trial orders with. Additional capacity could be added if we become comfortable with that later in the year.

Okay. And then the other one for me, geographically, I'm curious where you are seeing more of the data center demand these days and how that matches up with your capabilities?

I would say, by far, the biggest epicenter of demand is Texas, and it's really, really strong. But we are seeing data center activity across many places. The Mid-Atlantic, the Carolinas and Virginia continue to have a ton of activity. There is activity in places like Mississippi and up in the Upper West as well. It's remarkable for the sheer span of it.

And Adam, we can handle the geographies because we have a significant traveling workforce. So where they want to build them, we pretty much can accommodate them.

Our next question comes from the line of William Blair.

This is Sam Kusswurm on for Tim. I want to dig a bit more into your new guidance here. Mid- to high 20% organic growth for the year would obviously be a great result. It does imply though a fair amount of growth moderation through the year. I understand the comps get a bit harder here, but you had great momentum in the first quarter and your backlog growth continues to outpace revenue growth. Given this, I think it would be helpful for us to understand a bit more how you came to the mid- to high 20% organic growth rate for the year here.

At Comfort, the way that we come up with this is very organic. We get projections from our field and we know the work that's committed. If we give guidance, it's at levels that we feel have very good reasons to believe are extremely achievable. Having said that, to get to something like the high 20s, you'd still need to be above 20% on average for the next three quarters. We had some really big revenue quarters in the third and fourth quarter of last year. And the last thing I'll say is revenue is never our goal; our goal is profit. We want to make sure we take the amount of work we can do, that we get paid fairly for the unbelievable productive capacity that we have, and that the risk we take is also well compensated.

That makes sense. Maybe another one on the data center topic. Several states have begun talking about data center bans or even limiting access to power. For the regions you're more exposed to on the data center side, are there any pieces of legislation or proposals that you're actively tracking or closely following that could put some of your projects or backlog at risk?

At this point, no. There are no states where we're involved that have proposals out that we've been tracking, as they just don't impact our geography. Any time a large project with a big footprint is being considered in a community or state, there's always pushback historically, but this is something we've been able to work around for years. It's not a high level of concern. Additionally, we have a very good nexus of work in states that are not currently in any such discussions. In fact, those states are encouraging the build-out in the areas where we are primarily focused. It's something we'll continue to monitor, but it's not a pressing concern in the current environment.

And as we sit here today, the demand for data centers still exceeds the supply.

Our next question comes from the line of Sangita Jain of KeyBanc Capital Markets.

Can I ask one on the electrical acquisition that you just mentioned, maybe the geography of that acquisition, the core end markets it participates in or any other information that you can help us with?

This is a company that is right in our sweet spot. It's incredibly strong in its market, and its market is in the West. I can't get too specific until the transaction is announced because they and their folks should hear about it first. But it's in a core market that we love where we already have a mechanical presence. It's going to be a great acquisition.

Got it. And appreciate you giving us more details on how you came up with the guidance for this year. As you are planning for your guidance for the remainder of the year, can you talk about where you found the biggest pinch points for growth? Is it labor? Is it procuring the equipment that you need or maybe something else? Any color would be helpful.

It's always labor for us. That may change someday, but as of today, our workforce is strong but they can only do so much work. They basically tell us they take the work they can confidently deliver for their customers. If you look at our same-store growth, it's unbelievable what our workforces are accomplishing. Our headcount in the first quarter of 2026 is several thousand higher than the first quarter of 2025, depending on how you count travelers and temporary workers. That's a very, very big source of the increase. In addition, materials and equipment as a percentage of our revenue is up by a couple hundred basis points. A lot of the headcount increase last year happened from the first to the second quarter. We had a great spring hiring season last year. We're comfortable with mid- to high 20s guidance. Obviously, in the real world we never know, but we feel like we should give guidance based on what we see and we're confident in it.

Our next question comes from the line of Josh Chan of UBS.

Congrats on a really good quarter. Can you talk about the project pipeline — the future projects that could enter the backlog? I'm asking because book-to-bill this quarter was about 1.2, which is typical for Q1, but over the last four quarters you've been running very strong book-to-bill. Is there any cadence change or how are you thinking about the market?

Josh, the high-level answer is the pipelines are still very full and very strong, coast to coast. There's no issue with pipelines or availability of work. What I'm pleased about is we're maintaining our discipline in selecting work. We're not overcommitting on work we can't do properly. We make sure we can deliver a good product and service to our customers, staying within our lanes. The work we're taking is in our wheelhouse, and that's evidenced in the margins we're delivering. Pipelines are good and we're comfortable with the backlog we have.

In the 30 years I've been watching this industry, whenever you saw deceleration or limitations in converting bookings to revenue, it was usually a demand issue. Today, it's important to understand this is a supply issue. There is plenty more work we could take if we could possibly do it. It's hard to internalize that after it never having been true in living memory. When you see firms like McGraw-Hill or FMI revise downward their numbers for next year, especially related to the super cycle in the Mid-Atlantic, Southeast, Texas and Rocky Mountain states, it's not that people don't want to build — it's that only a certain amount of buildings can be built, and that's what's going on.

Great color. My second question is on CapEx. Historically you've leased buildings for modular capacity, and you mentioned why you're purchasing them now. What does that mean for how you think about the durability of the cycle, now that you're willing to put money into buildings? Does it suggest you have more confidence in the outlook?

You know us well enough to know we don't invest in buildings without being very confident we have customers for those buildings. For many of these facilities, we are insisting as a condition of committing capacity that customers make multiyear commitments at volume levels. That allows us to give them better pricing and justify the investment. It also tightens our relationship with these customers. We find out what they need and help them get it.

Our next question comes from the line of Brian Brophy of Stifel.

Congrats on another nice quarter. I wanted to ask about the $43 million change order closeout benefit you mentioned. Any more color on what drove that benefit this quarter? From your perspective, was this more of a one-time benefit, or is it a reflection of the environment and favorable terms and conditions? Is there an opportunity to continue getting these kinds of benefits more consistently moving forward?

Numerically, the reason we called this out and quantified it in the MD&A is that there were a few unique things we don't believe are business as usual. We had late-stage jobs where we received change orders and some negotiations where we collected more than expected. We want to be transparent when something in the quarter is unusual. Those are not repeatable things; they happen sometimes, but not every quarter. If you take that $43 million out, it’s almost $1 a share and it would put our gross margin around 25.2%, which is sequentially much closer to what you'd expect in the first quarter. It's still very high. We felt disclosure was appropriate because you ask whether there's anything special in the quarter, and we want to answer truthfully.

It was a mixture of change orders from a descope and some really favorable closeouts on work that was new to the operating companies performing it. They recognized disproportionate gains at the end of the job because of their ability to deliver. It's a credit to the teams that worked hard to deliver for their customers.

That's helpful. Looking at electrical growth, it was about 80% organic this quarter and has been around that range for a few quarters. I realize some of that is price and productivity, but headcount is a big part as well. Where are you finding all these electricians, and how sustainable is your ability to grow headcount at this pace?

We're finding them everywhere. We are a good place to work: we pay people well, we offer training, and we have a lot of work that attracts people. The type of work we're getting is attracting electricians across the country. Can we keep the pace? We'll try to. We're full-court press on recruiting and hiring and so far we've had good luck. We'll continue to work at it.

Our next question comes from the line of Julio Romero of Sidoti & Company.

Bill, you mentioned earlier that Comfort's goal and focus is on gross profit dollars. Still, the 26.3% gross margin percentage you put up this quarter is eye-popping. Even backing out the $43 million change order, as you said, 25.2% is still very strong. Can you speak to the sustainability of those gross margins on a core basis going forward? Related to that, as you take on these additional larger projects, are we seeing any change in the mix of activity versus cost pass-throughs that might cause gyrations in the gross margin percentage?

On the mix question, no — if anything, we're seeing more uniformity and repeatability in the work we take, which is one reason we're doing well. We're able to pick counterparties and do work with people we've done similar work with and who are constructive when issues come up. We feel comfortable with that structural cadence. As far as maintaining margins, we expect to stay at the high margins we've averaged over the last several quarters. The other points made on this call support our ability to extract high margins and be rewarded for the work we do. We've got the best teams in the world, and sometimes you just have to take the win.

I want to keep crying, Bill, on that.

Just one thing to add: we wouldn't be achieving these results if it wasn't for the teams in the field and their commitment to constant improvement. Our field leadership fosters a culture of continuous improvement and it shows in these results. Hats off to the teams out there making this happen.

Really helpful. My second question: related to partnering with repeat customers and choosing customers, is there an opportunity to expand wallet share with data center owner-operators beyond initial construction scope by cross-selling adjacent solutions related to monitoring sensors or overall optimization of the data center?

I think there's a wonderful maintenance and service opportunity tied to the installed base being created. Think about the companies doing this work and the advantage we have in understanding it. Our modular units are built to be maintained with great accessibility to parts and pieces we'll need in the future. There's a lot of consideration today about ways things might need to be retrofitted in the future. For example, if chips require less cooling down the road, you might still need to add electrical capacity for additional servers. Consideration is being given to how technology might change and providing options. Doing this at scale and across many states with companies that communicate allows us to bring something to customers that is close to unique.

I would now like to turn the conference back to Brian Lane for closing remarks. Sir?

Thank you. In closing, I really want to thank our amazing employees again. We are truly fortunate to have the people that work at all levels of this organization. It's a real privilege to be here. We appreciate all your interest in Comfort Systems and we look forward to having a really strong 2026. Thanks again and I hope you all have a great weekend. Thank you.

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