Comfort Systems USA, Inc.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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The following discussion and analysis should be read in conjunction with our historical Consolidated Financial Statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and the Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2025 (the “Form 10-K”). This discussion contains “forward-looking statements” regarding our business and industry within the meaning of applicable securities laws and regulations. These statements are based on our current plans and expectations and involve risks and uncertainties that could cause our actual future activities and results of operations to be materially different from those set forth in the forward-looking statements. Important factors that could cause actual results to differ include risks set forth in “Item 1A. Risk Factors” included in our Form 10-K. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. The terms “Comfort Systems,” “we,” “us,” “our,” or the “Company,” refer to Comfort Systems USA, Inc. or Comfort Systems USA, Inc. and its consolidated subsidiaries, as appropriate in the context.

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Introduction and Overview

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We are a national provider of comprehensive mechanical and electrical installation, renovation, maintenance, repair and replacement services within the mechanical and electrical services industries. We operate primarily in the commercial, industrial and institutional markets and perform most of our work in technology, manufacturing, healthcare, education, government, office, and retail facilities. We operate our business in two business segments: mechanical and electrical.

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Nature and Economics of Our Business

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In our mechanical business segment, customers hire us to ensure heating, ventilation, and air conditioning (“HVAC”) systems deliver specified or generally expected heating, cooling, conditioning, and circulation of air in a facility. This entails installing core system equipment such as packaged heating and air conditioning units, or in the case of larger facilities, separate core components such as chillers, boilers, air handlers, and cooling towers. We also typically install connecting and distribution elements such as piping and ducting.

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In our electrical business segment, our principal business activity is electrical construction and engineering in the commercial and industrial fields. We also perform electrical contracting services and electrical service work.

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In both our mechanical and electrical business segments, our responsibilities usually require conforming the systems to pre-established engineering drawings and equipment and performance specifications, which we frequently participate in establishing. Our project management responsibilities include staging equipment and materials to project sites, deploying labor to perform the work, and coordinating with other service providers on the project, including any subcontractors we might use to deliver our portion of the work.

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Approximately 94.5% of our revenue is earned on a project basis for installation services in newly constructed facilities or for replacement of systems in existing facilities. When competing for project business, we usually estimate the costs we will incur on a project and then propose a bid to the customer that includes a contract price and other performance and payment terms. Our bid price and terms are intended to cover our estimated costs on the project and provide a profit margin to us commensurate with the value of the installed system to the customer, the risk that project costs or duration will vary from estimate, the schedule on which we will be paid, the opportunities for other work that we might forego by committing capacity to this project, and other costs that we incur to support our operations but which are not specific to the project. Typically, customers will seek pricing from competitors for a given project. While the criteria on which customers select a provider vary widely and include factors such as quality, technical expertise, on-time performance, post-project support and service, and company history and financial strength, we believe that price for value is the most influential factor for most customers in choosing a mechanical or electrical installation and service provider.

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After a customer accepts our bid, we generally enter into a contract with the customer that specifies what we will deliver on the project, what our related responsibilities are, and how much and when we will be paid. Our overall

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price for the project is typically set at a fixed amount in the contract, although changes in project specifications or work conditions that result in unexpected additional work are usually subject to additional payment from the customer via what are commonly known as change orders. Project contracts typically provide for periodic billings to the customer as we meet progress milestones or incur costs on the project. Project contracts in our industry also frequently allow for a small portion of progress billings or contract price to be withheld by the customer until after we have completed the work. Amounts withheld under this practice are known as retention or retainage.

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Labor, materials, and overhead costs account for the majority of our cost of service. Accordingly, labor management and utilization have the most impact on our project performance. Given the fixed price nature of much of our project work, if our initial estimate of project costs is wrong or we incur cost overruns that cannot be recovered in change orders, we can experience reduced profits or even significant losses on fixed price project work. We also perform some project work on a cost-plus or a time and materials basis, under which we are paid our costs incurred plus an agreed-upon profit margin, and such projects are sometimes subject to a guaranteed maximum cost. These margins are frequently less than fixed-price contract margins because there is less risk of unrecoverable cost overruns in cost-plus or time and materials work.

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As of March 31, 2026, we had 8,048 projects in process. Our average project takes six to nine months to complete, with an average contract price of approximately $3.3 million. Our projects generally require working capital funding of equipment and labor costs. Customer payments on periodic billings generally do not recover these costs until late in the job. Our average project duration, together with typical retention terms as discussed above, generally allow us to complete the realization of revenue and earnings in cash within one year. We have what we consider to be a well-diversified distribution of revenue across end-use sectors that we believe reduces our exposure to negative developments in any given sector. Because of the integral nature of our services to most buildings, we have the legal right in almost all cases to attach liens to buildings or related funding sources when we have not been fully paid for installing systems, except with respect to some government buildings. The service work that we do, which is discussed further below, usually does not give rise to lien rights.

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We also perform larger projects. Taken together, projects with contract prices of $2 million or more totaled $24.73 billion of aggregate contract value as of March 31, 2026, or approximately 94% of a total contract value for all projects in progress, totaling $26.39 billion. Generally, projects closer in size to $2 million will be completed in one year or less. It is unusual for us to work on a project that exceeds two years in length.

A stratification of projects in progress as of March 31, 2026, by contract price, is as follows:

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In addition to project work, approximately 5.5% of our revenue represents maintenance and repair service on already installed HVAC, electrical, and controls systems. This kind of work usually takes from a few hours to a few days to perform. Prices to the customer are based on the equipment and materials used in the service as well as technician labor time. We usually bill the customer for service work when it is complete, typically with payment terms of up to 30 days. We also provide maintenance and repair services under ongoing contracts. Under these contracts, we are paid regular monthly or quarterly amounts and provide specified service based on customer requirements. These agreements typically are for one or more years and frequently contain 30- to 60-day cancellation notice periods.

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A relatively small portion of our revenue comes from national and regional account customers. These customers typically have multiple sites and contract with us to perform maintenance and repair service. These contracts may also provide for us to perform new or replacement systems installation. We operate a national call center to dispatch

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technicians to sites requiring service. We perform the majority of this work with our own employees, with the balance being subcontracted to third parties that meet our performance qualifications.

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Profile and Management of Our Operations

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We manage our 50 operating units based on a variety of factors. Financial measures we emphasize include profitability and use of capital as indicated by cash flow and by other measures of working capital principally involving project cost, billings, and receivables. We also monitor selling, general, administrative, and indirect project support expense, backlog, workforce size and mix, growth in revenue and profits, variation of actual project cost from original estimate, and overall financial performance in comparison to budget and updated forecasts. Operational factors we emphasize include project selection, estimating, pricing, safety, management and execution practices, labor utilization, training, and the make-up of both existing backlog as well as new business being pursued, in terms of project size, technical application, facility type, end-use customers and industries, and location of the work.

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Most of our operations compete on a local or regional basis. Attracting and retaining effective operating unit managers is an important factor in our business, particularly in view of the relative uniqueness of each market and operation, the importance of relationships with customers and other market participants, such as architects and consulting engineers, and the high degree of competition and low barriers to entry in most of our markets. Accordingly, we devote considerable attention to operating unit management quality, stability, and contingency planning, including related considerations of compensation and non-competition protection where applicable.

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Economic and Industry Factors

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As a mechanical and electrical services provider, we operate in the broader nonresidential construction services industry and are affected by trends in this sector. While we do not have operations in all major cities of the United States, we believe our national presence is sufficiently large that we experience trends in demand for and pricing of our services that are consistent with trends in the national nonresidential construction sector. As a result, we monitor the views of major construction sector forecasters along with macroeconomic factors they believe drive the sector, including trends in gross domestic product, interest rates, business investment, employment, demographics, and the fiscal condition of federal, state, and local governments.

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Spending decisions for building construction, renovation and system replacement are generally made on a project basis, usually with some degree of discretion as to when and if projects proceed. With larger amounts of capital, time, and discretion involved, spending decisions are affected to a significant degree by uncertainty, particularly concerns about economic and financial conditions and trends. We have experienced periods of time when economic weakness caused a significant slowdown in decisions to proceed with installation and replacement project work.

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Operating Environment and Management Emphasis

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We have experienced increasing demand since 2022, culminating in an unprecedented overall demand environment in 2025 and through the first quarter of 2026. We currently expect that the demand environment, especially for manufacturing and technology customers, will remain at high levels during 2026. Over the last several years, we have also experienced increases in labor costs and delays in delivery of certain materials and equipment. We anticipate that cost pressures and intermittent delays in our supply chain will persist over the next several quarters.

We have a credit facility in place with terms we believe are favorable that does not expire until October 2030. As of March 31, 2026, we had $1.02 billion of credit available to borrow under our credit facility. We have strong surety relationships to support our bonding needs, and we believe our relationships with the surety markets are strong and benefit from our operating history and financial position. We have generated positive free cash flow in each of the last 27 calendar years and will continue our emphasis in this area. We believe that the relative size and strength of our Balance Sheet and surety relationships, as compared to most companies in our industry, represent competitive advantages for us.

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As discussed at greater length in “Results of Operations” below, we expect price competition to continue as local and regional industry participants compete for customers.

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Cyclicality and Seasonality

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The construction industry is subject to business cycle fluctuation. As a result, our volume of business, particularly in new construction projects and renovation, may be adversely affected by declines in new installation and replacement projects in various geographic regions of the United States during periods of economic weakness.

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The mechanical and electrical contracting industries are also subject to seasonal variations. The demand for new installation and replacement is generally lower during the winter months (the first quarter of the year) due to reduced construction activity during inclement weather and less use of air conditioning during the colder months. Demand for our services is generally higher in the second and third calendar quarters due to increased construction activity and increased use of air conditioning during the warmer months. Accordingly, we expect our revenue and operating results will generally be lower in the first calendar quarter.

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Critical Accounting Estimates

Management believes that there have been no significant changes during the three months ended March 31, 2026, to the items that we disclosed as our “Critical Accounting Estimates” in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the fiscal year ended December 31, 2025. A summary of significant accounting policies and a summary of recent accounting pronouncements applicable to our Consolidated Financial Statements are included in Note 2, “Summary of Significant Accounting Policies and Estimates.”

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Results of Operations (dollars in thousands):

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We had 50 operating locations as of December 31, 2025 and March 31, 2026. We did not make any changes to operating locations during the first quarter of 2026. Acquisitions are included in our results of operations from the respective acquisition date. The same-store comparison from 2026 to 2025, as described below, excludes Feyen-Zylstra Holdings, LLC (“Feyen Zylstra”), which was acquired on October 1, 2025, Meisner Electric, Inc. (“Meisner”), which was acquired on October 1, 2025, and Right Way Plumbing & Mechanical LLC (“Right Way”), which was acquired on May 1, 2025. An operating location is included in the same-store comparison on the first day it has comparable prior year operating data, except for immaterial acquisitions that are often absorbed and integrated with existing operations.

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Revenue—Revenue for the first quarter of 2026 increased $1.03 billion, or 56.5%, to $2.87 billion compared to the same period in 2025. The increase included a 5.0% increase related to the Feyen Zylstra, Meisner, and Right Way acquisitions, as well as a 51.5% increase in revenue related to same-store activity. The same-store revenue growth was largely driven by strong market conditions, including the increase in our backlog. The increase in demand has been especially strong in the technology sector, particularly for data centers.

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The following table presents our operating segment revenue (in thousands, except percentages):

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Revenue for our mechanical segment increased $658.4 million, or 47.0%, to $2.06 billion for the first quarter of 2026 compared to the same period in 2025. Of this increase, $20.8 million resulted from the acquisition of Right Way and $637.6 million was attributable to same-store activity. The same-store revenue increase primarily resulted from an increase in activity in the technology sector at one of our Texas operations ($181.4 million), one of our Indiana operations ($137.7 million), and one of our North Carolina operations ($133.1 million).

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Revenue for our electrical segment increased $375.6 million, or 87.5%, to $804.7 million for the first quarter of 2026 compared to the same period in 2025. Of this increase, $70.0 million resulted from the acquisition of Feyen Zylstra and Meisner and $305.6 million was attributable to same-store activity. The same-store revenue increase primarily resulted from an increase in activity in the technology sector at our Texas electrical operation ($200.9 million).

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Backlog reflects revenue still to be recognized under contracted or committed installation and replacement project work. Project work generally lasts less than one year. Service agreement revenue, service work, and short

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duration projects, which are generally billed as performed, do not flow through backlog. Accordingly, backlog represents only a portion of our revenue for any given future period, and it represents revenue that is likely to be reflected in our operating results over the next six to 12 months. As a result, we believe the predictive value of backlog information is limited to indications of general revenue direction over the near term, and should not be interpreted as indicative of ongoing revenue performance over several quarters.

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The following table presents our operating segment backlog (in thousands, except percentages):

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Backlog as of March 31, 2026 was $12.45 billion, a 4.3% increase from December 31, 2025 backlog of $11.94 billion, and an 80.8% increase from March 31, 2025 backlog of $6.89 billion. The sequential backlog was primarily a result of increased project bookings in the technology sector at one of our North Carolina operations ($255.5 million) and one of our Virginia operations ($214.5 million). The sequential backlog increase was partially offset by completion of project work in the technology sector at one of our Indiana operations ($120.1 million). The year-over-year backlog increase included the acquisitions of Right Way ($96.0 million), Feyen Zylstra ($88.3 million), and Meisner ($61.0 million), and, as well as a same-store increase of $5.32 billion, or 77.2%. Same-store year-over-year backlog growth was primarily attributable to increased project bookings in the technology sector at our Texas modular operation ($1.50 billion), one of our North Carolina operations ($1.20 billion), one of our Texas operations ($899.3 million), one of our Indiana operations ($669.5 million), and our Texas electrical operation ($663.8 million).

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Gross Profit—Gross profit increased $351.0 million, or 87.0%, to $754.4 million for the first quarter of 2026 as compared to the same period in 2025. The increase included a $17.5 million, or 4.3%, increase related to the Feyen Zylstra, Meisner, and Right Way acquisitions, as well as a $333.5 million, or 82.7%, increase on a same-store basis. The same-store increase in gross profit was driven by a 51.5% increase in same store revenues in the current year, as well as improved execution in our operations across numerous operating locations. During the first quarter of 2026, we benefited from favorable developments on projects nearing completion, including change orders received on certain jobs during the quarter, of approximately $43.1 million. These favorable developments impacted both our mechanical and electrical segments, with the largest portion benefiting the mechanical segment. As a percentage of revenue, gross profit for the first quarter increased from 22.0% in 2025 to 26.3% in 2026, primarily due to the factors discussed above and improvements in our mechanical segment gross profit margin.

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Selling, General and Administrative Expenses (“SG&A”)—SG&A increased $74.1 million, or 38.0%, to $269.0 million for the first quarter of 2026 as compared to 2025. On a same-store basis, excluding amortization expense, SG&A increased $62.1 million, or 34.4%. The same-store increase was primarily due to higher revenue and increased compensation costs ($54.0 million), largely attributable to increased headcount and increased cost of labor. Amortization expense increased $1.8 million during the period, primarily as a result of the Feyen Zylstra, Meisner, and Right Way acquisitions. As a percentage of revenue, SG&A for the first quarter decreased from 10.6% in 2025 to 9.4% in 2026 due to leverage resulting from the increase in revenue.

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We have included same-store SG&A, excluding amortization expense, because we believe it is an effective measure of comparative results of operations. However, same-store SG&A, excluding amortization, is not considered under generally accepted accounting principles to be a primary measure of an entity’s financial results, and accordingly, should not be considered an alternative to SG&A as shown in our Consolidated Statements of Operations.

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Interest Income—Interest income increased $4.2 million, or 99.5%, to $8.5 million for the first quarter of 2026 as compared to the same period in 2025. The increase in interest income for the first quarter of 2026 was primarily due to an increase in our average cash balance compared to the prior year.

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Changes in the Fair Value of Contingent Earn-out Obligations—The contingent earn-out obligations are measured at fair value each reporting period, and changes in estimates of fair value are recognized in earnings. Expense from changes in the fair value of contingent earn-out obligations for the first quarter of 2026 increased $6.6 million, or 175.9%, as compared to the same period in 2025. The increase in earn-out expense was primarily driven by higher actual and projected earnings at Feyen Zylstra. The increase in earn-out expense was partially offset by lower expenses at one of our Texas operations, as a result of them achieving their maximum cumulative earn-out target in the prior year.

Provision for Income Taxes—Our provision for income taxes for the three months ended March 31, 2026 was $111.8 million with an effective tax rate of 23.2% as compared to a provision for income taxes of $38.7 million with an effective tax rate of 18.6% for the same period in 2025. The effective tax rate for 2026 was higher than the 21% federal statutory rate primarily due to $12.7 million of net state income taxes (2.6%) and $4.2 million of nontaxable or nondeductible items (0.9%), partially offset by a $7.2 million credit for increasing research activities (“R&D tax credit”) (1.5%). The effective tax rate for 2025 was lower than the 21% federal statutory rate primarily due to recognizing $8.9 million of net interest income on our 2022 federal overpayment (4.3%) and a $6.3 million R&D tax credit (3.0%), partially offset by $7.0 million of net state income taxes (3.3%) and $2.5 million of nontaxable or nondeductible items (1.2%).

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Outlook

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We experienced an unprecedented demand environment in 2025 and through the first quarter of 2026, and we continue to experience increased labor costs and intermittent supply chain shortages, including delays in delivery of certain materials and equipment. We are recognizing these challenges in our job planning and pricing, and we are ordering materials on an earlier timeline and seeking to collaborate with customers to share supply risks and to mitigate the effects of these challenges. We have been generally successful in maintaining productivity and in procuring needed materials despite ongoing challenges.

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We have a good pipeline of opportunities and potential backlog. Considering our substantial advance bookings, we anticipate high ongoing demand leading to solid earnings for the remainder of 2026. Although we are preparing for a wide range of challenges and economic circumstances, including a potential recession, we currently expect that supportive conditions for our industry, especially for our manufacturing and technology customers, are likely to continue for the remainder of 2026.

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Liquidity and Capital Resources

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Cash Flow

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Our business does not require significant amounts of investment in long-term fixed assets. The substantial majority of the capital used in our business is working capital that funds our costs of labor and installed equipment deployed in project work until our customer pays us. Customary terms in our industry allow customers to withhold a small portion of the contract price until after we have completed the work, typically for six months. Amounts withheld under this practice are known as retention or retainage. Our average project duration, together with typical retention terms, generally allow us to complete the realization of revenue and earnings in cash within one year.

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Net Cash Provided by (Used in) Operating Activities—Cash flow from operations is primarily influenced by demand for our services and operating margins but can also be influenced by working capital needs associated with the various types of services that we provide. In particular, working capital needs may increase when we commence large volumes of work under circumstances where project costs, primarily associated with labor, equipment, and subcontractors, are required to be paid before the receivables resulting from the work performed are billed and collected. Working capital needs are generally higher during the late winter and spring months as we prepare and plan for the increased project demand when favorable weather conditions exist in the summer and fall months. Conversely, working capital assets are typically converted to cash during the late summer and fall months as project completion is underway. These seasonal trends are sometimes offset by changes in the timing of major projects, which can be impacted by the weather, project delays, or accelerations and other economic factors that may affect customer spending.

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Net cash provided by operating activities was $388.8 million during the first three months of 2026 compared to $88.0 million net cash used in operating activities during the same period in 2025. The $476.8 million increase in net cash provided by operating activities was primarily driven by higher earnings before non-cash expenses such as amortization of intangible assets in the current year and a $317.4 million benefit from increases in accounts payable and other current liabilities driven by the size and timing of payments, including an $80.0 million federal tax payment in the first quarter of 2025 that otherwise would have been paid in the second half of 2024, as a result of tax relief from the Internal Revenue Service due to Hurricane Beryl that did not recur in the current year. We also had a $122.0 million benefit from changes in billings in excess of costs and estimated earnings and deferred revenue driven by timing of customer billings and payments. These increases in cash were partially offset by a $263.0 million increase in receivables, net.

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Net Cash Used in Investing Activities—During the first three months of 2026, net cash used in investing activities was $184.0 million compared to $96.8 million during the same period in 2025. The $87.2 million increase in net cash used in investing activities was primarily attributable to a $103.0 million building purchase during the first quarter of 2026 to support growth in our modular business. We expect capital expenditures for the full year of 2026 to be higher than our recent average as we continue to invest in the growth of our business. The increase in capital expenditures was partially offset by a decrease in cash paid (net of cash acquired) for acquisitions in the current year compared to the same period in 2025.

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Net Cash Used in Financing Activities