Comfort Systems USA, Inc. (FIX) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Comfort Systems USA's Second Quarter 2026 Earnings Conference Call. [Operator Instructions] 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.

Thank you, 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 securities laws and regulations. But what we will say today is based upon the current plans and expectations of Comfort Systems USA. So 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 comfortsystemsusa.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 entered 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 1. 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 of free cash flow and EBITDA that was higher than last year by 80%. And 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 6 months same-store revenue has grown 47% and we estimate the 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 the year ago. Our gross profit percentage grew to a noteworthy 25.9% this quarter compared to 23.5% and 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 an 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 in 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 backlog 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 colocation providers. Institutional markets, which include education, health care and government remain strong and represents 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 the 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 than we had at this time last year, and we have a superb team working hard for our customers every single day. Thanks to the dedication and hard work of our employees across the country, we are optimistic about our future. I want to close by joining Brian and Bill and thanking our over 25,000 employees for their hard work and dedication. And with that, I will now turn it back over to Jonathan for questions.

And our first question for today comes from the line of Adam Thalhimer from Thompson Davis.

Congrats on another amazing quarter. Bill, maybe you can help us understand the puts and takes to cash flow, how we should be looking at $1 billion of free cash flow in a single quarter -- and what that tells us about your cash flow prospects?

Yes. That is a really extraordinary number, like our earnings, right? And over time, our cash flow will match our net income plus a little because we do have some noncash expenses. The interesting thing about this, there is definitely an element of advanced cash. People who know us what we're calling a year or 2 ago, we received a lot of orders and we were able to fill 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 told you that we would spend about 5% of our increasing revenues on essentially it boils out 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 bought some year-to-date, but after the big purchases of last year, we've been a little slower in the first part of the year. And of course, a patient commitment to acquisitions is still a part of our 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.

Yes. We've been having some success with some pilot contracts, just small contracts with both Frontier labs and also with colocation providers. And the hope is that those will lead to future programs. .

And our next question comes from the line of Adam Bubes from Goldman Sachs.

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 million incremental square foot of capacity? And is that tied to an existing customer or the new customers -- potential customers you were referencing? And lastly, just -- 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 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, we -- every time -- and these are big buildings, a, they're -- we bought 1 recently for $100 million. We really take a hard look at the pros and cons of leasing or ownership. We've been intending 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 we don't know what decisions we're making as time passes, we'll try to make what's best for the business. .

Yes. And as far as out into the future, 1 thing -- we're not going to invest in buildings just on speculation. We expand -- when customers provide us meaningful multiyear 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. We're bullish long term about what the opportunities are. in the industry we're in. .

Great. And then I think your 10-Q shows changes in estimates on projects positively impacted Q2 revenues by around at 7.7%. I think that's close to double the impact year ago. Two-part question. What's driving that level of favorable revision? Is it change orders or conservative initial estimating? And how should we just think about the underlying margin rate given that could be reflective of in-process work running through the portfolio at conservative margins?

So just 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 the construction company to have that because when you're -- as you progress on 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, People who are not accruing for or considering the risks of what they're doing as they go to last long in this industry. They're bigger this quarter than usual. They're bigger -- they've been just trending bigger because of things like you mentioned like excellent pricing that we're getting. And in some ways, the risk is bigger, right? The number of jobs we have over 40 million or 100 million counsels us to 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 what -- 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 did -- does that answer your question?

I'd like to just add on one thing. When you look at an estimate and how well we do in the field, we are really fortunate to have elite trades people that are doing this work, who get up 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.

And our next question comes from the line of Sangita Jain from KeyBanc.

Bill and Brian and Trent. Can I ask if you guys are evaluating your projects any differently or with greatest routing given the environment out there with the public sentiment turning against data centers and then maybe 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.

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 let down 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 the current customers. .

For current customers.

Okay. So even that expansion from 4% to 5% is still for the existing customers, you're saying?

Yes.

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

Your full year same-store sales guidance of mid- to high 30s for the year implies second half, I think, about high 20s range or even in the low 30s. How should we think about I'm really curious to kind of 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. When we give this guidance and understanding we've been wrong in the conservative direction quite a bit. We don't -- we don't just make it up, right? We have people in the field who are sort of workforce loading.

We build it from the bottom up.

And I will say also is really -- it's an extraordinary level of growth. But we do have, in particular, in the fourth quarter, but some really, really heavy comparables coming up. So we will we will show a lot of growth. We'll continue to show a lot of growth. But it's this level of growth against the comparables for the next 2 quarters and then particularly in the fourth quarter is a whole different like proposition than what you just saw.