FIX — Q3 2026 Financial Report Analysis

Revenue up 54%, backlog up $3.75 billion in one quarter, but margins stopped widening

Comfort Systems USA installs and services the systems inside large buildings: heating, cooling, plumbing and piping (its Mechanical segment) and electrical work (its Electrical segment). In the third quarter of 2026 (July to September), revenue rose 53.7% to $3.77 billion and net income rose 67.7% to $489.0 million, or $13.91 per diluted share against $8.25 a year earlier.

Most of the growth came from businesses the company already owned. Of the 53.7% revenue increase, 46.3 points were "same-store", meaning operations with a full year-ago comparison, and 7.4 points came from acquisitions (Boys Electrical and a Texas modular company, both bought August 1, 2026; R.C. Hunt Electric, bought May 1, 2026; Feyen Zylstra and Meisner Electric, bought October 1, 2025). The 10-Q puts the same-store growth down to "strong market conditions, including the increase in our backlog" and says demand "has been especially strong in the technology sector, particularly for data centers."

Key figures

Gross margin is the share of revenue left after the direct costs of the work (labor, equipment, subcontractors). Operating margin is what is left after overhead as well, before interest and tax.

The margin improvement this quarter came from overhead, not from the jobs themselves. Selling, general and administrative costs (SG&A, the company's overhead) rose 36.8% to $314.2 million, much slower than revenue, so they fell to 8.3% of revenue from 9.4%. The 10-Q attributes the same-store overhead increase mainly to $41.2 million of higher compensation from more staff and higher labor costs.

First nine months of 2026: revenue $9.90 billion (+53.3%), operating income $1.67 billion (16.9% margin vs 13.8%), net income $1.30 billion (+88.1%), diluted EPS $36.94 vs $19.52 (+89.2%).

Segments: Mechanical carried the margin, Electrical's slipped

Mechanical added $772.4 million of revenue, all but $7.5 million of it same-store. The 10-Q names three sources, all technology work: one Texas operation (+$312.0 million), the large Texas modular operation (+$177.8 million; modular means building system components in a factory and shipping them to site) and a North Carolina operation (+$96.2 million). Its gross margin rose to 25.1% from 24.3%.

Electrical added $542.9 million, of which $174.1 million came from the four acquired electrical contractors and $368.8 million was same-store, mostly the Texas electrical operation (+$300.2 million of technology work). Without acquisitions the segment grew about 58%, not 85%. Its gross margin fell to 24.3% from 26.2% (and from 26.4% in Q2), and its operating margin fell 2.2 points. The filing does not explain the segment's margin decline directly, but the acquisition figures point to part of it (see the next section).

Where the revenue comes from

Technology revenue rose by $1.17 billion, about 89% of the company's $1.32 billion revenue increase. Outside technology, growth was in the low-to-mid teens for manufacturing, healthcare and government, low single digits for education, and office work shrank by a fifth.

The work is also tilting further toward new buildings. New construction was 76.2% of revenue ($2.87 billion, +79.6%), up from 65.2%. Work on existing buildings was flat at $528.3 million, and service calls, maintenance and monitoring, the steadier repeat business, grew 1.8% to $179.2 million. Service in total (including service projects) fell to under 10% of revenue from 13% a year ago.

Backlog: $17.81 billion

Backlog is signed or committed project work not yet done. The company says it usually turns into revenue over the next 6 to 12 months, and it leaves out service and short jobs, so it covers only part of future revenue.

Acquisitions explain very little of this. Same-store backlog rose $3.67 billion (26.1%) in the quarter and $8.01 billion (85.4%) over the year. The quarter's jump came mainly from technology bookings at the Texas electrical operation ($1.51 billion), the Texas modular operation ($978.1 million), a Virginia operation ($583.4 million) and another Texas operation ($505.7 million). Electrical backlog more than doubled year over year (+117%) and is now 31.5% of the total, up from 27.6%.

What the headline numbers hide

• Acquisitions grew sales but added almost no profit this quarter. The acquired businesses contributed about $181.6 million of revenue (7.4% growth on last year's base) but only $24.2 million of gross profit, roughly a 13% gross margin against about 25% for the company, and they carried $19.6 million of their own overhead, plus $3.8 million more amortization (the write-down of purchased intangible assets). Since nearly all of that acquired revenue sits in Electrical, this goes a long way to explaining that segment's lower margin. On a same-store basis, gross profit rose 49.7% against 46.3% revenue growth, so the existing business's margin edged up.
• Last year's comparison had a one-off in it. Q3 2025 included $15.5 million of previously unrecognized revenue from a customer that emerged from bankruptcy. Taking it out, last year's gross margin would have been about 24.3%, so the underlying year-on-year margin improved by roughly half a point rather than standing still.
• The quarter's margin is below the first half's. Gross margin was 24.8% versus 25.9% in Q2 and about 26.3% in Q1 (Q1 included about $43.1 million of favorable project close-outs and change orders). The nine-month figure, 25.6%, overstates the current run rate.
• Some of the net income growth came from below the operating line. Other income swung to +$10.5 million from −$8.4 million, an $18.9 million improvement: interest income rose to $16.0 million (larger cash balance, plus $5.3 million of interest on a federal tax refund received in July, a one-off), and the expense for revaluing earn-outs (extra purchase price owed to sellers of acquired firms if targets are met) fell $7.8 million. Against that, the tax rate rose to 23.0% from 21.3%. Net, EPS grew 68.6% against 64.8% for operating income.
• Buybacks barely moved EPS. Diluted shares fell only 0.6% (35.15 million vs 35.37 million). The company bought back $340.9 million of stock in the quarter (about 207,000 shares, roughly $1,650 each), but late enough that most of the effect will show in Q4.
• Cash is coming in well ahead of the work. Nine-month operating cash flow was $2.54 billion against net income of $1.30 billion; free cash flow (operating cash minus routine capital spending, plus asset-sale proceeds) was $2.05 billion. The 10-Q credits $1.13 billion to "billings in excess of costs", largely advance payments from customers, and $876.2 million to higher payables. Billings in excess of costs reached $3.87 billion at September 30, up from $3.23 billion at June 30 and $2.12 billion at year-end. That is cash in hand but also work still owed. Billed receivables rose 48.9% since December to $3.84 billion, a little slower than the 53% revenue growth, so collections are not falling behind.
• Capital spending has jumped. Capex was $499.4 million for nine months (vs $88.8 million), about $211 million of it in Q3, mainly building purchases to support Mechanical growth. The company expects capex "through the end of 2026 and into 2027 to be higher than previous years."

The balance sheet is very liquid: $2.16 billion of cash against about $50 million of debt, with nothing drawn on the $1.10 billion credit line. The quarterly dividend was $0.90 per share, up from $0.50 a year earlier.

Did last time's read hold up?

Our Q2 2026 report named four things to watch. Margin durability: we asked whether gross margin would hold in the 25–26% range; it did not, slipping to 24.8%, with Electrical and the newly acquired businesses accounting for the drop while Mechanical improved. Concentration: technology rose further, to 60.8% of revenue from 58.7% in Q2. Cash reversal: we expected operating cash flow to normalize as prepaid work was built out; instead, prepayments grew another $0.64 billion and Q3 operating cash flow was roughly $1.0 billion (nine-month total less the first half's $1.53 billion). Revenue visibility: stronger than before, with backlog up a further $3.75 billion.

Takeaway: Comfort Systems added $3.75 billion of backlog in one quarter, almost as much as the $3.77 billion of revenue it recognized, and almost all of it was data-center work, so the next year's sales are unusually well covered. The question has shifted from demand to margins: gross margin fell back to 24.8% as lower-margin acquired electrical businesses joined, and the company is now 61% dependent on one customer group.

Outlook

What management says (10-Q): the company describes "an unprecedented demand environment in 2025 and through the first nine months of 2026," says it has "a good pipeline of opportunities and potential backlog," and, given "substantial advance bookings," anticipates "high ongoing demand leading to solid earnings for the remainder of 2026." It expects supportive conditions, "especially for our manufacturing and technology customers," to "continue for the remainder of 2026 and 2027." It also flags higher labor costs and intermittent supply-chain delays, which it is pricing into jobs and handling by ordering materials earlier. The filing gives no numeric revenue or earnings guidance.

Our read:

• Revenue: a $17.81 billion backlog against $3.77 billion of quarterly revenue means growth is likely to stay high into 2027, as long as projects are not delayed or cancelled.
• Margins: watch whether Electrical's gross margin recovers toward 26% as acquired businesses are integrated, and whether Mechanical holds its 25% gross margin as the largest data-center jobs move through.
• Cash: $3.87 billion of customer prepayments flatters this year's cash flow. When bookings slow, that source of cash reverses, and higher capex into 2027 adds to the draw.
• Concentration: with 61% of revenue and most backlog additions tied to technology customers in a handful of Texas, Virginia and North Carolina operations, a pause in data-center spending would hit this company harder than a general construction slowdown.