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Comfort Systems USA delivered standout Q1 2026 results, with revenue climbing 56% to $2.9 billion and EPS more than doubling to $10.51. The company is benefiting from a "super cycle" in technology construction, with data centers now accounting for 56% of total revenue. Backlog reached a record $12.5 billion, up $5 billion from 2025. Strategic highlights include a definitive agreement to acquire a western electrical contractor and significant investments in modular manufacturing capacity, including a major facility purchase in Texas. Gross margins reached a record 26.3%, though management noted a $43 million one-time benefit from project closeouts. Adjusted margins remain strong at 25.2%. Management identified labor supply, not demand, as the primary constraint on growth, leveraging a 23,000-strong workforce to navigate the high-demand environment. For the full year 2026, the company expects mid-to-high 20% organic revenue growth. Analysts questioned potential power constraints and regional data center bans, but management remains bullish, citing their traveling workforce and deep customer partnerships. The company also raised its quarterly dividend to $0.80 per share, reflecting confidence in its cash flow and balance sheet strength.

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Comfort Systems USA, Inc.: Heavy Dependency on Technology Sector Expansion and Estimate-Driven Earnings Quality

Full Earnings Call Transcript — Q1 • 2026-04-24

Operator: Thank you for standing by and welcome to Comfort Systems USA's First Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to hand the call over to Julie Shaeff, Chief Accounting Officer. Please go ahead.
Julie Shaeff: 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.
Brian Lane: 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?
William George: 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 2 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?
Trent McKenna: 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: [Operator Instructions] Our first question comes from the line of Adam Thalhimer of Thompson, Davis.
Adam Thalhimer: 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?
William George: So just as it's been for the last really couple of years, the answer to that question is, all of the above. So 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 turn tables and paint booths and stuff like that 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. We are -- 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 trial -- large -- very large trial orders with -- adds additional capacity if we become comfortable with that later in the year.
Adam Thalhimer: 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?
William George: Well, I would say, by far, in a way, the biggest epicenter of demand is Texas, right? And it's really, really strong. But we're seeing data center -- I don't know that there is a strongest place. I mean there's certainly the Mid-Atlantic, Carolinas and Virginia continue to have a ton of activity. And then you've got stuff in places like Mississippi and I don't know, up in the Upper West, there's stuff going in. So I just kind of -- it's kind of amazing just the sheer sort of span of it.
Brian Lane: 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.
Operator: Our next [Audio Gap] comes [Audio Gap] William Blair.
Samuel Kusswurm: 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. And 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. I guess 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.
William George: So at Comfort, the way that we come up with this is very organic. We get projections from our field and we know what our work that's committed is. We -- obviously, if we give guidance, it's at levels that we feel have very good reasons to believe are extremely achievable. Having said that, I'm not sure I agree with you that to get to something like the high 20s or something, you still got to be above 20% on average for the next 3 quarters. And I know you acknowledge this but we had some really big revenue quarter -- revenue quarters in the third and fourth quarter. And then the last thing I'll say is, revenue is never our goal. Our goal is profit. And so we just want to make sure that we take the amount of work we can do, that we get paid fairly for the unbelievable productive capacity that we have and the risk that we take is also well compensated.
Samuel Kusswurm: Yes. That makes sense. That's helpful. Maybe another one on the data center topic here. But several states have begun talking about data center bans or even limiting access to power. I guess I'm wondering, 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?
Trent McKenna: At this point, no. There's no states where we're involved that have proposals out that we've been tracking as they just don't impact our geography. And then the other thing I'd add to that is, any time a large project that has a big footprint is getting put into some sort of community or state and there's a lot of build occurring, there's always been pushback on these things historically. So this is something that we've been able to work around for years. It's not, I don't think, a high level of concern. Additionally, we have a very good nexus of work in the states that are not currently in any sort of discussions. In fact, they're encouraging the build-out in the states that we are primarily focused on right now with where our geographies are. So in the long term, something we'll continue to keep an eye on but it's not a pressing concern in the current environment.
Brian Lane: And as we sit here today, the demand, the data centers still exceeds the supply.
Operator: Our next question comes from the line of Sangita Jain of KeyBanc Capital Markets.
Sangita Jain: 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?
William George: So this is a company that is right in our sweet spot. It's the kind of company that is incredibly strong in its market. Its market is in the West. I can't get too specific because, obviously, until we announce it, you don't need to know about it before the people there know about it. But it's in a core market that we love where we already have a mechanical. It's going to be a great acquisition. I hope that helps a little.
Sangita Jain: Got it. And appreciate you giving us more details on how you came up with the guidance for this year. So 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.
William George: I mean it's always and forever for us, it's labor. That may change someday. But as of today, we have unbelievable workforce but they can only do so much work. And they basically tell us they take the work that they can confidently deliver for their customers. If you look at our same-store growth, it's unbelievable what these -- our workforces are accomplishing. -- the additional work they're able to take. Our headcount, if you look at the headcount in the first quarter of 2025, it's 3,000 or 4,000 people higher in the first quarter of 2026, depending whether you include or don't include sort of travelers and temporary workers that aren't always W-2 employees. That's a very, very big source of that increase. In addition, our materials and equipment as a percentage of our revenue is up by a couple of hundred basis points and that drives -- a lot of that increase in headcount last year happened from the first to the second quarter. So a lot of the, sort of the 23,000-plus level that were -- we were much closer to our current level of employment by the end of the second quarter last year than we were -- we had a great spring hiring season last year. So we're just comfortable mid- to high 20s. Obviously, if you average that, it's well above 20% on average a quarter for the next 3 quarters. In the real world, what will happen, we never know but we feel like we should give you guidance based on what we see and we're confident in.
Operator: Our next question comes from the line of Josh Chan of UBS.
Joshua Chan: Congrats on a really good quarter. I guess I was wondering if you can talk about the project pipeline. So basically, the future projects that could enter the backlog in the future. I guess I'm asking this because book-to-bill this quarter was like 1.2, which is pretty normal for Q1. But for the last 4 quarters, you have been running massively strong book-to-bill. So I was just wondering if there's cadence change or how you're thinking about the market?
Brian Lane: Yes. So Josh, we -- the high-level answer is the pipelines are still very full, very strong, coast to coast. So there's no issue with the pipelines and availability of work. What I am -- what I -- and we're really happy to see is, we're maintaining our discipline in the selection of work we're taking. There is no sense overcommitting ourselves on work that we can't do properly. So I think the way we're approaching this is the way we've always approached it, is just to make sure we can deliver a good product and service to our customers. And that means staying within our lanes, the work we're taking is in our wheelhouse and it's evidenced in the margins we're delivering. So pipelines are good and we're really comfortable with the backlog we have.
William George: In the 30 years I've been watching this industry, almost the whole time, whenever you saw deceleration or whenever you saw limitations until the last couple of years in sort of the ability to convert revenue or book work, it was a demand issue. Today, I think it's really important for people to understand that it's a supply issue. We -- there is plenty more work we could take if we could possibly do it. And so it's very, very hard to really internalize that paradigm after it never having been true in living memory. But today, when you see somebody like a prognosticator like McGraw-Hill or FMI revise downward their number for next year, especially if it's anything remotely close to the super cycle and in the kind of markets we're in, in the Mid-Atlantic and the Southeast and Texas and the really, really hot Rocky Mountain states, it is not that suddenly people don't want to build buildings. It's that only a certain amount of buildings can be built and that's what's going on.
Joshua Chan: Yes. Great color. And then maybe my second question on CapEx. So I know that for the modular capacity, you've historically leased your buildings and you mentioned why you're purchasing them now. I guess like what does that mean in terms of what you think about the durability of the cycle now that you're willing to kind of actually put your own money into the buildings? And does that suggest you have much more confidence in the outlook?
William George: Well, so for one thing, you know us well enough to know that we don't go invest in buildings without being very, very confident that we have customers for those buildings. And for many of these buildings, we are insisting as a condition of us committing our capacity that customers make multiyear commitments at volume levels. And that allows us to give them better pricing, right? We would have to demand higher pricing if we were certain that the capacity we were building wouldn't have a longer period to pay off. And it also tightens our relationship with these customers, right? We try to find out what they need and we try to help them every way we can to get what they need.
Operator: Our next question comes from the line of Brian Brophy of Stifel.
Brian Brophy: Congrats on another nice quarter here. I wanted to ask about the $43 million change order closeout benefit you mentioned in your opening comments. Just any more color on what drove that benefit this quarter? And I guess to the extent, was this more of kind of a onetime benefit from your perspective? Or is this more of a reflection of the environment we're in, the favorable T&Cs? And is there an opportunity to continue to get these kind of benefits more consistently moving forward?
William George: So I'll talk about it numerically. And then if Trent wants to, he can talk -- he's the one who would be able to talk about sort of what's happening in the jobs. But essentially, the reason we called this out, put it in the MD&A, quantified it, is because there really were a few unique things that we don't believe are just business as usual. We had late-stage jobs where we received change orders. You may recall we had something like this 2 or 3 quarters ago where we collected some money on a job based on a negotiation that we didn't expect. Where we see something that -- like we get the question from shareholders like you, was there anything special in the quarter? We like to be able to answer that truthfully. So to answer it truthfully, we have to disclose it in this forum. And those really are not repeatable things. Things like that. Things like that can happen in the future. They have happened in the past but they don't happen every quarter. If you take that $43 million and you back it out, it's almost $1 a share and it takes our gross margin and it puts it sort of at something like 25.2%, which sequentially is much, much closer. It's still very high but it's much closer to what you would expect in the first quarter. And so we just felt like the disclosure would be -- we don't like to give information but we do, do that when we feel like we owe it to you guys. So that's -- hopefully, that helps.
Trent McKenna: It was just a mixture of change orders from a descope and then also additionally some really favorable closeouts on some work that was new to the operating companies that were performing it. And they just recognized disproportionate gains at the end of the job because of their ability to deliver. It's really just a -- it's really a credit to the teams that were working so hard to make sure that they deliver for their customers. So that's what it boils down to.
Brian Brophy: Yes. That's helpful. And then I guess just looking at electrical growth, it was about 80% organic this quarter. It's been around that range for a few quarters now. I realize some of that is price and productivity but obviously, headcount is a big part of that as well. I guess maybe just touch on where are you finding all these electricians? And just how sustainable do you think your ability to grow headcount at this pace is?
Brian Lane: Well, I think we're finding them everywhere. But as we've said, there is some -- we're a really good place to work. We pay people well. We do a lot of training. We have a lot of work that attracts people. So the type of work we're getting is attracting a lot of electricians throughout the country. Can we keep the pace? We're going to try to. We're full-court press on recruiting and hiring. And so far, we've had good luck doing it. But we'll continue swinging away at it, Brian.
Operator: Our next question comes from the line of Julio Romero of Sidoti & Company.
Julio Romero: Bill, you mentioned earlier that Comfort's goal and focus is on the gross profit dollars and still the 26.3% gross margin percentage you put up this quarter, eye-popping, even backing out the $43 million change order, as you said, 25.2% is still very strong. Just asking about the sustainability of those gross margins on a core basis going forward. And then kind of 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 flow through the revenue line that might cause gyrations in the gross margin line on a percentage basis?
William George: So the answer to the second one is no. Actually, we're seeing, if anything, more uniformity in the work that we're taking and more repeatability, which is one of the reasons that we're doing so well. We're able now to sort of -- we have a much stronger ability to pick our counterparties to make sure that we do work with people we've done similar work with, people who have proven that they're constructive when issues come up. And so I would say, if anything, we probably feel more comfortable than ever with that sort of structural internal cadence. As far as the ability to maintain the margins, we said we expect to stay at the high margins that we've averaged over the last several quarters -- for the next several quarters. Everything else we said on this call is super supportive of our ability to extract high margins and to get rewarded for the work we do. And I -- as much as Brian Lane likes to complain and cry, we're in a pretty good market and we got the best teams in the world. And so at some point, we just have to take the win.
Brian Lane: I want to keep crying, Bill, on that.
Trent McKenna: And Julio, only one thing I'd like to tack on to that is just we wouldn't be achieving these types of results if it wasn't for the teams in the field and their commitment to constant improvement. It's really our companies, especially our company's field leadership that foster a culture of continuous improvement and that is -- it shows in these results, right? It's just hats off to the teams out there that are making this happen.
Julio Romero: Really helpful and insightful. And then secondly, related to kind of your point earlier, Bill, about partnering with repeat customers and choosing your customers and repeat end-use customers. Kind of a broader question about the longer-term revenue opportunity on these technology construction projects. Is there an opportunity or have you thought about an opportunity to expand wallet share with the owner-operator of the data center beyond the initial construction scope by cross-selling any adjacent solutions related to monitoring sensors or just overall optimization of the data center?
William George: I think there's a wonderful maintenance and service opportunity that -- think about the installed base that's being created and then sort of think about the companies that are doing it, the advantage we have in understanding it. And even if you take our modular stuff, the modular units that we build are built to be maintained. They're built to have great accessibility to the parts and pieces that we'll need in the future. There are also -- there's a lot of consideration that's going into the work we do today about what -- in what ways things might need to be retrofitted in the future. For example, if they were to achieve chips that do not need to be cooled as much, then at some point, you would -- you could keep high levels of cooling but you would still have to add electrical capacity in order to add additional servers. And I know for a fact that in some cases, consideration is being given much more than it has in the past about the ways that the technology might change in the future and making sure that you can't exactly future-proof stuff but you can give yourself options and a lot of that's happening. It's really -- what's one of the great advantages of doing something on this scale, you -- and for us, right, doing it in so many states with so many great companies that talk to each other, we can bring something to our customers that is pretty close to unique.
Operator: I would now like to turn the conference back to Brian Lane for closing remarks. Sir?
Brian Lane: 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 then we look forward to having a really strong 2026. Thanks again and I hope you all have a great weekend. Thank you.
Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.