Dycom Industries, Inc. — Q2 FY2022 Form 10-Q
Business and period: Dycom provides specialty contracting, construction, maintenance, engineering and locating services, primarily for telecommunications customers. The quarter ended July 31, 2021; comparisons are with the quarter ended July 25, 2020. The company reports one operating segment.
Financial performance
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Contract revenues | $787.6 million | $823.9 million | $1,515.1 million | $1,638.2 million |
| Net income | $18.2 million | $37.0 million | $19.1 million | $4.6 million |
| Diluted EPS | $0.59 | $1.15 | $0.61 | $0.14 |
| Adjusted EBITDA (non-GAAP) | $73.8 million | $102.7 million | $117.9 million | $172.5 million |
| Adjusted EBITDA margin | 9.4% | 12.5% | 7.8% | 10.5% |
| Cash from operations | — | $58.8 million | $167.5 million |
- Quarterly revenue declined 4.4% year over year; quarterly net income fell about 51%, and Adjusted EBITDA fell about 28%.
- For the six months, revenue declined about 7.5% and Adjusted EBITDA about 32%. Net income increased from the prior-year period, which included a $53.3 million goodwill impairment charge and a $12.0 million gain on debt extinguishment; prior-period tax effects also affected comparability.
- Costs of earned revenues were 82.7% of quarterly revenue, up from 79.9%; for the six-month period, they were 83.9%, up from 81.7%. Management cited work mix, higher labor and subcontractor costs as a share of revenue, and higher fuel prices.
- Six-month capital expenditures were $68.4 million, versus $26.7 million. Operating cash flow less capital expenditures was approximately negative $9.5 million, compared with positive $140.8 million in the prior-year period.
Liquidity, debt and capital allocation
- At July 31, cash and equivalents were $261.9 million; cash, equivalents and restricted cash totaled $263.8 million. Working capital, excluding current debt, was $1.097 billion.
- Debt carrying value was $897.8 million, including $831.2 million long-term debt and $66.6 million current debt. This included the $500 million 4.50% senior notes due 2029, a $350 million term loan, and $58.3 million principal amount of 0.75% convertible notes due September 15, 2021.
- The April 2021 issuance of the 2029 notes helped fund repayment of revolving and term-loan borrowings. The credit facility matures in April 2026; revolver availability was $273.9 million at quarter-end. Dycom reported compliance with its financial covenants.
- Dycom repurchased 631,638 shares for $50.0 million in the quarter at an average $79.16 per share; $100 million remained under its $150 million authorization. Management stated it expects no cash dividends in the foreseeable future.
Changes, outlook and risks
- Quarterly revenue decreases at certain large telecommunications customers were partly offset by growth at other customers. AT&T represented 22.5% of quarterly revenue; Comcast, Verizon and Lumen represented 15.5%, 11.5% and 12.1%, respectively. The top five customers generated 66.5% of six-month revenue.
- Backlog was $5.895 billion at July 31, down from $6.810 billion at January 30, 2021. The company estimated that 45% of quarter-end backlog would be completed in the next 12 months. Many customer agreements do not guarantee purchase volumes and may be cancelled.
- Management expected fiscal 2022 capital expenditures, net of disposals, of $105 million to $125 million. It described opportunities in fiber deployments, rural broadband, 5G-related wireless construction and network maintenance, but provided no revenue or earnings guidance in the supplied filing text.
- Management said services had generally been treated as essential during COVID-19 and had not been materially interrupted, while warning that the pandemic, variants, workforce availability and permitting delays could affect operations. The filing also identifies inflation and the availability and cost of labor, materials and equipment as risks, alongside cyclical customer spending and customer concentration.
- Contingencies include preliminary court approval of settlements in shareholder derivative litigation and a California wage-and-hour class action settlement valued at $2.2 million, both subject to final approval. A subsidiary also disputes a claimed approximately $13 million multiemployer pension withdrawal liability; the ultimate outcome cannot be estimated from the filing.
- The IRS selected Dycom’s fiscal 2020 federal income tax return for examination. Management considers its tax provision adequate but notes an assessment could affect results and cash flows.
Investor verification priorities
- Track revenue and margin trends at major customers, particularly whether customer spending shifts offset declines in other programs.
- Monitor backlog conversion, cancellations and timing, given that much of the backlog is under agreements without committed purchase volumes.
- Review the settlement or repayment of the $58.3 million convertible notes due September 2021 and the resulting debt, interest and liquidity position.
- Compare operating cash flow and capital spending with the stated fiscal 2022 capex range; assess receivables and contract assets, including 125-day DSO.
- Follow customer concentration, the pending litigation settlements, the pension withdrawal-liability arbitration and the IRS examination.