Comfort Systems USA, Inc.

Thank you for standing by and welcome to the Comfort Systems USA second quarter 2026 earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 1-1 on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star 1-1 again. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Julie Shaeff, Chief Accounting Officer. Please go ahead.

Thanks, Jonathan. Good morning. Welcome to Comfort Systems USA's second quarter 2026 earnings call. Our comments today, as well as our press releases, contain forward-looking statements within the meaning of the applicable security 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 operations to be materially different from those set forth 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. The presentation is provided as a companion to our remarks and is posted on the investor relations section of the company's website on the ComprehensiveSystemsUSA.com. Joining me on the call today are Brian Lane, Chief Executive Officer, Trent McKenna, President, and Bill George, Chief Financial Officer. Brian will open our remarks.

Okay. Thanks, Julie. Good morning, and thank you for joining us on the call today. We had a fantastic quarter. with amazing execution by our teams. This is the first time that our quarterly revenue has exceeded $3 billion. We earned $12.53 per share this quarter, which is an increase of 92% compared to a year ago. Our mechanical business experienced a sharp increase in profitability, and our electrical segment also performed exceptionally well. Bookings continued to trend upwards, and our backlog increased to a new high of $14.1 billion. Demand remains strong, especially in technology, as we continue to book work with good margins and favorable working conditions for our valuable people, and we enter the second half of 2026 with increased sequential and year-over-year backlog. I want to welcome my newest acquisition, Hunt Electric, a transaction we mentioned last quarter and that closed on May 1st. Hunt is a great electrical business based in Utah, and we expect Hunt will contribute about $250 million of annualized revenue. We also increased our quarterly dividend by $0.10 to $0.90 per share. Thanks to our amazing people, we expect strong results for the rest of 2026 and continuing success into 2027. Trent will discuss our operations and outlook in a few minutes, and I will make a few closing comments after our Q&A. But first, I will turn the call over to Bill to review our financial performance. Bill? Thanks, Brian.

Our results were once again extraordinary, with 44% same-store revenue growth, approximately $1 billion in free cash flow, and EBITDA that was higher than last year by 80%. Revenue for the second quarter of 2026 was $3.3 billion, an increase of $1.1 billion compared to last year. Electrical segment revenue grew by 81%, while mechanical segment revenue increased by 40%. Through six months, same-store revenue has grown 47%, and we estimate that 2026 same-store revenue growth will likely finish with a full-year increase that is in the mid to high 30% range. Gross profit was $844 million for the second quarter of 2026, $334 million higher than a year ago. Our gross profit percentage grew to a noteworthy 25.9% this quarter compared to 23.5% for the second quarter of 2025. Gross profit percentage ticked down by a small amount from our first quarter as it was reported. However, absent the unique gains that we identified and quantified last quarter, our second quarter gross profit percentage actually increased from 25.2% in the first quarter to 25.9% this quarter. Quarterly gross profit percentage in our mechanical segment jumped to 25.6% this year compared to 22.9% last year. Margins in our electrical segment also increased by a full percentage point to 26.4% compared to 25.3% in the second quarter of 2025. We believe that gross profit margins are likely to continue in the strong ranges that we have averaged in recent quarters. SG&A expense for the quarter was $287 million compared to $210 million in the second quarter last year as we continue to invest in people and innovation to support our growing business. SG&A as a percentage of revenue declined from 9.7% of revenue last year to 8.8% this quarter. Our operating income increased by 86% from last year, from $300 million in the second quarter of 2025 to $558 million for the second quarter of 2026. With our strong gross profit margins combined with our SG&A leverage, our operating income percentage surged to 17.1% this quarter from 13.8% in the prior year. Our year-to-date effective tax rate was 22.5% and benefited from a discrete tax item in the second quarter. We expect our full year effective tax rate to be around 23%. After considering all these factors, net income for the second quarter of 2026 was $442 million, or $12.53 per share. And that compares to net income for the second quarter of 2025 of $231 million or $6.53 per share. So we are more than 90% higher than the already elevated numbers we achieved a year ago. EBITDA increased to $600 million this quarter from $334 million in the second quarter of 2025. This 80% increase reflects great execution by our workforce and strong demand in our markets. At the end of the second quarter, our trailing 12-month EBITDA is approximately $2 billion. Free cash flow for the second quarter of 2026 was $999 million. We are continuing to fund expansion of our production facilities and expect to incur additional capital expenditures through the remainder of 2026. We estimate that full-year CapEx expenditures will be approximately 5% of our revenue. Despite funding and acquisition and big capital investments, we are in a net cash position of over $1.8 billion, and with strong ongoing cash prospects, we are better positioned than ever to reward our shareholders and invest in growing and adding to our business. That's what I got, Trent.

Thanks, Bill. I'm going to discuss our operations and our outlook. Our backlog at the end of the second quarter was a record $14.1 billion, a large sequential and year-over-year increase. Since this time last year, our backlog has increased by $5.9 billion, or 73%, and $5.6 billion of the increase was same store. On a sequential basis, backlog increased by $1.6 billion, or 13%, of which $1.4 billion was same store. Second quarter bookings were especially strong in the technology sector, both in our construction business as well as modular offerings. We entered the third quarter with same-store backlogs 69% higher than at this time last year, and our project pipelines continue at historically high levels. Industrial customers accounted for 75% of total revenue in the first half of 2026, and they continue to be major drivers of Pipeline and Backlog. Technology, which is included in industrial, was 58% of our revenue, a substantial increase from 40% in the prior year. Our modular operations continue to grow and thrive, and we are making progress on expanding our customer base, including with frontier labs and co-location providers. In institutional markets, which include education, healthcare, and government, remain strong and represent 17% of our revenue. The commercial sector, now a smaller part of our business, provided 8% of our revenue. Construction accounted for 90% of our revenue with projects for new buildings representing 75% and existing building construction 15%. We include modular in new building construction and year-to-date, modular was 17% of our revenue. We now have over 3.5 million square feet of building capacity dedicated to our modular business, and we are on track to have more than 4 million square feet in production by year-end. With ongoing orders and investments we are making to address that demand, we expect to have approximately 5 million square feet of capacity by late summer 2027. Service revenue was up 7% this year and it represents 10% of our total revenue. Our service remains very profitable and our investments to meet the future demand that will result from this current strong construction activity remains a key element of our overall strategy. As mentioned before, we are entering the second half of 2026 with a backlog that is 69% higher on a same store basis Thank you. Thank you. Thank you.

Thank you. And our first question for today comes from the line of Adam Talhammer from Thompson Davis. Your question, please. Hey, good morning, guys. Congrats on another amazing quarter.

Hey, Bill, maybe you can help us understand the puts and takes to cash flow, you know, how we should be looking at a billion dollars of free cash flow in a single quarter and what that tells us about your cash flow prospects.

Yeah, that is a really extraordinary number, like two and a half times our earnings, right? And over time, our cash flow will match our net income plus a little because we do have some non-cash expenses. The interesting thing about this, there is definitely an element of advanced cash. People who know us will recall a year or two ago, we received a lot of orders and we were able to bill a percentage of those orders Far ahead of when we would actually incur the cost to do the work. So we have begun to build a position of advanced cash as well. We also have extraordinarily good payment terms because we have extraordinarily good negotiating power on our work overall. And then, of course, our jobs are doing very well and customers are happy to pay when they see that the work is getting done on time and well. So it was broad-based. It wasn't any one thing. It is certainly a good sign that our business is healthy and that our customers are happy. But there's no, like, other than some advanced cash, there's no unique item to point out.

And then I guess the flip side of that is how do you think about capital deployment from here?

We've We've told you that we would spend about 5% of our increasing revenues on essentially it boils down to buildings where we're buying them instead of leasing them because we're putting so much capital into these buildings in the form of robots and custom paint booths and turntables and various kinds of cutters. And then we also continue to keep a sharp eye out for opportunities to buy stock. We like our stock better than we've ever liked it. We've bought some year to date, but after the big purchases of last year, we've been a little slower at the first part of the year. And of course, a patient commitment to acquisitions is still a part of our capital allocation conviction.

Okay. Lastly, Trent, I think you made a comment on, I think this was a modular comment, making progress on expanding the customer base. What did you mean by that? And then I'll turn it over. Thanks, guys.

Yeah, we've been having some success with some pilot contracts, just small contracts with both Frontier Labs and also with co-location providers. And the hope is that those will lead to future programs.

Thanks again, guys.

Hey, Adam, thanks.

Thank you. And our next question comes from the line of Adam Bubes from Goldman Sachs. Your question, please.

Hi, good morning. I think you talked about potential for 5 million square foot of modular capacity at around this time next year. How should we think about incremental CapEx associated with a million incremental square foot of capacity? And is that tied to An existing customer or the new potential customers you were referencing? And lastly, how are you thinking about the range of outcomes for modular capacity expansion in 2027? Could it ultimately move higher than that 5 million number?

I'll respond to the first part of that and probably Trent's a better person to respond to the second part of that. The 5% of revenue that we talk about is our guidance on that, and we're comfortable that that's about the right amount of money. I will say when we make new investments, every time, and these are big buildings, right? We bought one recently for $100 million. We really take a hard look at the pros and cons of leasing or ownership. We've been tending towards ownership lately. in order to control our destiny and just liking the product that we're getting involved with. But there is some wiggle room around that because, you know, we don't know what decisions we're making as time passes. We'll try to make what's best for the business.

And, you know, as far as out into the future, you know, one thing, but we're not going to invest in buildings just on speculation. We expand, you know, when customers provide us meaningful multi-year commitments, and so that would justify anything, but we'll be prudent about that going forward as we've always done.

But we do love this industry, you know, we're bullish long-term about what the opportunities are in the industry we're in.

Great. And then I think your 10Q shows changes in estimates on projects positively impacted Q2 revenues by around Thank you for your time.

As sort of historical context, since I became CFO in 2005, and frankly before that, we have had net gain in our jobs every single year ever. We have more, and by the way, you would expect a construction company to have that because when you're, as you progress in these jobs, you don't know what's going to happen when you turn the systems on. You don't know how much it's going to rain. You know, people who are not Thank you for joining us. Not Rush to recognize revenue on things that aren't finished too aggressively. I will also mention that in the first quarter, we called out some incremental gains that were out of the ordinary. One resulted from a big change order where we had a bunch of profit with no cost whatsoever. And so we identified $43 million of gains that were kind of even outside the scope of the ordinary gains that we've had every year since 2005. That's the point I was making about sort of if you want to look at our margin progression over time, you would not be getting a good picture of it if you left that out. So does that answer your question?

Yeah, that's helpful. Appreciate all the color.

I'd like to just add on one thing. When you look at an estimate and how well we do in the field, we're really fortunate. to have elite tradespeople that are doing this work who get off the field and really want to perform at a high level. So we're just very fortunate in this company to have the group of people we have building these buildings.

There's some amazing institutions out there. Yeah, for sure.

Thank you. And our next question comes from the line of Sangeeta Jain from KeyBank. Your question, please.

Good morning. Thank you for taking my questions. Bill and Brian and Trent, can I ask if you guys are evaluating your projects any differently or with greater scrutiny given the environment out there with the public sentiment turning against data centers and the NIMBY issues that are coming up?

I'll take the execution part of that, then Bill probably can take the other part of it. We always spend a lot of time scrutinizing the work at the operating level and here on the larger work. So that really hasn't changed philosophically, how we look at estimates and review the jobs.

But on the front end, you know, because we sell directly to the hyperscalers and to the most important intermediaries, we have really good A really good view on what they're thinking, what they're planning. And there is a very deep and calm certainty among these people that they're going to continue to build, that they absolutely need and have to do this building. And our goal, so we see no letdown whatsoever. And our goal is just to really be a great partner for them in helping them achieve delivered compute. So the answer Absolutely no sign of a letdown.

Got it. And then on the proposed expansion to 5 million square feet by next summer, I'm sorry if I missed this, but is that still for your current major customers or are you branching some capacity out into other industries or maybe reserving some for potential large customers coming up?

For current customers.

Okay, so even that expansion from 4 to 5 is still for the existing customers, you're saying? Yes. Okay, got it. Thank you.

Thank you. Thank you. And our next question comes from the line of Julio Romero from Sidodia & Company. Your question, please.

Thanks. Hey, good morning, gentlemen. Your full-year same-store sales guidance of mid to high 30s for the year implies that I'm really curious about the exit rate embedded in that. In other words, is the high 20s range as a run rate a reasonable jumping off point for how to look at 27?

So it's really, it's our best estimate. You know, when we give this guidance and understanding we've been wrong in the conservative direction quite a bit, we don't just make it up, right? We have people in the field who are, you know, sort of workforce loading.

We build it from the bottom up, Julio. And I will say also, you know,

This really is an extraordinary level of growth. So we do have, in particular in the fourth quarter, but some really, really heavy comparables coming up. So we will show a lot of growth. We'll continue to show a lot of growth. But this level of growth against the comparables for the next two quarters, and particularly in the fourth quarter, is a whole different proposition than what you just saw.

Got it. That's very helpful. And then I wanted to ask you if you could speak a little about how the first couple months of RC Hunt have progressed. Can you maybe speak to the strategic fit with the current mechanical subsidiaries you have out in Utah and how meaningful it is to go to market with that mechanical-electrical pairing and if they're pursuing work jointly?

Yeah, you know, Hunt's exactly the kind of company that we want to be successful in joining Comfort Systems, and they have been fantastic in early stages with the integration. They're already working on some pursuits with our mechanical contractors in that market. That's a great market. We know it really well, and they are the premier electrical provider in that market, so we're really excited to have them on board.

Excellent. I'll pass it on. Thanks very much.

Thank you.

Thank you. And our next question comes from the line of Josh Chan from UBS. Your question, please.

Hi. Good morning, Brian, Trent, Bill, Julie. Congrats on that great quarter. Thanks. Thanks, Josh. I was wondering about the increase in the backlog. I think you called out modular contributing a portion of the increase to backlog, but curious, you know, how much of the backlog increase was modular this quarter? Is it unusual to have a larger modular order in Q2 compared to the historical pattern? Just wanted some color around that.

Thank you. So of that increase, modular had bookings of $510 million. It's in the MD&A ahead of what they burned. So they booked enough to cover their incredible burn rate and net an additional $500 million. I would say Nothing is unusual right now. Or actually, I think what I would say is everything is unusual right now. It's an amazing time. But there wasn't some really special, unexpected thing that happened. It's just that it's the reason we're adding this square footage. There's just a very, very consistent demand from our customers to buy as much of this as we can produce.

Okay, yeah, that makes a lot of sense.

And then on the backlog itself, could you just talk about the duration of the backlog? Are you stretching out the order book? How are you managing the dynamic of the duration as you may be booking a little farther out or maybe not?

Yeah, I'll start with that. It's a tale of two cities with the difference of the best of times and the best of times. But On the modular side, we are getting farther and farther booked out. On the construction side, bigger projects take longer. But, you know, some of these bigger projects move pretty fast. So I would say we still have our sort of most of it burns on the construction side in the next 18 to 24 months.

But, Josh, just to make sure this is clear, we only take work that we know we can perform. We do a lot of time labor planning. We're looking at the extent of jobs, when the men are available. So we don't out-kick our coverage. We're very prudent and disciplined on what work we take and what it is.

Great. Yeah, congrats on the quarter again and come back in the second half. Thanks.

Thank you. And our next question comes from the line of Brian Brophy from Stifel. Your question, please.

Yeah, thanks. Good morning, everybody. Very nice quarter again. Curious, obviously the CapEx number is quite large. You have reiterated that. How are you thinking about returns on that CapEx spending this year relative to your internal hurdles?

So, this would meet any reasonable person's internal hurdle. What we've been experiencing in that world is full paybacks within A year or two. I mean, it's unbelievable. So we don't, you know, we're not we're really not a company that stares at spreadsheets a lot or sits around conference rooms a lot. But if you were to, it's unbelievable. Think about think about look at look at how much CapEx we've spent and then look at how much. Earnings we've incrementally added. You could probably do a one-to-one analysis on the modular part of our business. You have the information to do this to say, okay, how much are they spending and how much is that business providing to them? And it's extraordinary. I mean, the returns are embarrassing.

It's great to hear. And then there was some discussion on the advanced cash earlier today. Curious to what extent this is related to the stick-filled side of the business versus the modular side.

It's all of the above. To get a number like that, everything has to be optimized in that direction for that particular metric. But if you force me to guess, I would say something like a third, a third, a third. I'd say a third of it might be the advanced cash that we've gotten in the past, and the rest of it is You know, it's really good performance, but it's within the range of, if you were to like do a lag 12-month, trailing 12-month comparison of net income to cash, we're ahead, but we've been ahead for years, and I'd say it's not really outside sort of one and a half standard deviations of what might have happened, setting aside the advance cash.

One of the things about the advance cash is I think it reflects the strength of our counterparties and also how much they value locking up our capacity right now. So it's a real good indicator from an operations perspective.

That's great. And just kind of one follow-up on to that. To what extent have you guys seen any competitive changes from a landscape perspective on the modular side recently?

There are a handful of other companies building, in most cases, the product that we co-designed with our customers. We don't really, I'd say some of them are so new at it that I don't think we have feedback. But I can say this, which is Our customers are not inducing other people to build this to replace us. They're inducing other people to build this because they want more than we'll build. And we've never really thought we'd be the only company in the world doing complex modular. We just want to be the best and earn a lead in that.

Understood. Appreciate it. I'll pass it on. Thanks.

Thank you. And our next question comes from the line of Gene Valise from Oppenheimer. Your question, please.

Good morning. Thank you for your time. And congrats to the quarter team.

Thank you.

Looking at the balance sheet, what was associated with the large change in billings and access this quarter? Was that associated with a single customer in modular or a collection of other customers?

I'd say it's all of the factors that contributed to our cash flow. And it's emblematic of our, really it's emblematic of the leverage, I don't want to use the word leverage, of the credibility that we have with our customers and their willingness to be a great partner for us so that we can keep working together.

A lot of questions have been asked about modular capacity, but just for more clarity, just roughly speaking, what percentage of the new capacity is allocated for the legacy customers, new recent customers, and the potential leads based on the conversations you guys are having with all the above?

I agree with Trent. I mean, the capacity we're talking to you about today is overwhelmingly for existing customers and existing orders. So if we were to begin to have serious programmatic revenue from the new customers that we're doing, you know, pilot orders with, we would have to add space to build that. And we're getting more and more confident in our ability in a measured way to add space and successfully.

Thank you. And one last for me. Could you provide us an update on the service opportunities in data centers?

Yeah. So, I mean, you know, right now we're very focused on what every project we build today, right, you know, in the data center world really becomes tomorrow's service opportunity. And we're building, you know, this enormous installed base. of these data centers across the country. And, you know, when you look at what it takes to properly maintain those, you know, there's significant technical depth and the service technicians required for it. We feel like we're very well positioned for that, and that will develop over time. Some of that gets caught up into warranty periods and things like that with the OEMs, so it's not an immediate opportunity, but it's definitely a long-term opportunity for us to continue to grow our service business.

Are you guys having conversations about any pilot programs for the future, or is this just based on what you're seeing right now?

Yeah, we've established ourselves as a provider to one of the hyperscalers. So that provides us an inroads to some of the data centers that they have. And we're focusing on geographies where it makes sense for us. Some of this is You know, at the end of the day, this is being able to deliver service technicians to the location in ways that make us successful. We're not going to take something that we can't perform. So we're being very judicious in how we approach it, but, yeah, we're seeing inroads.

Thank you so much for your time. Appreciate it. I'll pass it on. You're welcome.

Thank you. Thank you. And our next question comes from the line of Tim Mulrooney from William Blair. Your question, please.

Yeah, thanks for squeezing me in here. It's going to shock you, but I have a question about your modular business project. You're adding, you know, you're adding so You're adding square feet. You're going from 4 million to 5 million now. I think it's the most recent update. Like, are you adding projects to your backlog for that capacity today, even though that capacity isn't built out yet? Or do you wait until the expansion is closer to finished? And then, so that's my first question is like, how do we think about that in terms of flowing through the backlog? And then, you know, what kind of terms, I don't know, volume guarantees or otherwise are you getting? to de-risk the investments that you have to make in these expansions.

Some of that was in this quarter. Bill already mentioned the over $500 million of modular backlog that was added in the quarter incrementally. That's already in there to some extent. Some of it will be coming though in future orders as well. And then as far as, you know, de-risking on that stuff, I mean, that's all about making sure that we have the volume commitments with the customer. And, you know, with the two hyperscalers that we work with, they have been willing to continue to provide us volume commitments. That's why we continue to expand.

Okay, that's really helpful. So even today, a part of the, you know, expansion from four to five, you're booking some of that today and you are getting volume commitments. So that's really helpful. Thank you. My other question, you know, it's data center related, but I mean, we saw the, okay, we saw the news about the moratoriums on data centers in New York. So I guess I'm curious, you know, if you, If you have any planned projects there that might get impacted, but also could you just talk more about this broader idea of state moratoriums, where those are cropping up, and, you know, how that compares to the more business-friendly places where you operate in your footprint?

Well, you know, I mean, a lot of what we currently have in our backlog, right, was already planned, permitted. We're late cycle. Right. And then with regard to moratoriums and kind of what you're hearing, you know, with certain data centers really, you know, receiving heavy press coverages to like, you know, we don't want them here, there. Our position on that is these data centers, as many as can be built are going to get built. There might be reasons to move them, etc. With regards to our modular build-out, that doesn't impact it quite as much because that's more of a programmatic towards certain locations that they're trying to hit. And then with regard to the stick-built part of our business, I think these I'm betting on these guys to be able to build the data centers over time. And so, you know, I think that you'll hear a lot. There's going to be some press coverage. There's going to be this, that, and the other. And certainly during election periods, you're going to hear, you know, people say certain things. But I think at the end of the day, these things need to get built so people will figure out a place to put them and a way to get them built. And get the power to do it.

And get the power to do it. Got it. Okay. Hey, thank you very much. Congrats on a nice quarter.

Thanks, Jim. Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Brian Lane for any further remarks.

All right. In closing, I want to reiterate my gratitude for the amazing dedication and excellence of the teams we have across our nation, serving our customers every day. Demand is strong, and our people are rising to the challenge of addressing the unprecedented need for their unique skills. As Trent mentioned, we feel that conditions are good for us to continue to perform, and as Bill indicated, we have the resources and the commitment to lean into delivering for our employees, our customers, and you, our shareholders. Thank you for your confidence, and have a great rest of your summer. Thank you.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day