Dycom Industries, Inc. — Form 10-Q Summary
Reporting period: Three months ended April 28, 2018. This is fiscal 2019’s first quarter; the company changed its fiscal year-end to January. Comparisons are with the three months ended April 29, 2017. Dycom provides specialty contracting services, primarily for telecommunications networks, in the United States and Canada.
Financial performance
| Metric | Three months ended Apr. 28, 2018 | Prior comparable period |
|---|---|---|
| Contract revenue | $731.4 million | $786.3 million |
| Net income | $17.2 million | $38.8 million |
| Diluted EPS | $0.53 | $1.22 |
| Adjusted EBITDA (non-GAAP) | $73.7 million; 10.1% of revenue | $108.2 million; 13.8% of revenue |
| Operating cash flow | $24.6 million | $42.3 million |
- Revenue declined approximately 7.0%; net income declined approximately 55.6%. Cost of earned revenue rose to 82.0% of revenue from 79.0%, while G&A rose to 8.5% from 7.8%. Net margin was 2.4%, versus 4.9%.
- Interest expense was $10.2 million, including $4.7 million of noncash convertible-note discount amortization. The effective tax rate was 27.3%, down from 37.0%, primarily reflecting the lower federal corporate tax rate under the 2017 Tax Cuts and Jobs Act.
- Cash and equivalents were $57.9 million at quarter-end; cash, equivalents and restricted cash totaled $64.1 million. Working capital, excluding current debt, was $689.1 million.
- Debt had a $760.6 million carrying amount: $353.3 million of term loans and $407.4 million carrying value of 0.75% convertible notes. The $450 million revolving facility had no borrowings; availability was $401.4 million. The term loans mature in April 2020 and notes in September 2021. Dycom reported compliance with credit covenants.
- Investing activities used $45.8 million, including $34.5 million in capital expenditures and $20.9 million for an acquisition, partly offset by asset-sale proceeds. The company made $4.8 million of term-loan principal payments.
Material changes and management commentary
- Revenue excluding storm-restoration work and businesses not owned for the full comparison periods declined approximately $78.1 million. Management cited lower work for major telecommunications customers and spending moderation; gains from another large customer’s recent awards partly offset the declines.
- Management attributed margin pressure to under-absorption on large customer programs and prolonged winter weather that hurt productivity, alongside lower operating leverage. Depreciation increased with fleet and equipment additions.
- Other income included an $8.4 million gain on fixed-asset sales, versus $5.0 million a year earlier. Adjusted EBITDA excludes this gain and certain other items.
- Customer concentration is significant: the top five customers accounted for 78.8% of revenue. AT&T, Comcast, Verizon and CenturyLink represented 24.2%, 21.8%, 16.7% and 12.3%, respectively.
- Backlog was $5.877 billion, compared with $5.847 billion at January 27, 2018; the company expected to perform 50.6% within the next 12 months. Backlog is an estimate, and many customer agreements do not commit customers to minimum volumes and may be terminated on notice.
- Dycom adopted the new revenue-recognition standard using the modified retrospective method. Adoption did not change revenue timing or opening retained earnings; it reclassified $311.7 million of unbilled receivables from contract assets to accounts receivable. The filing also retrospectively adopted the restricted-cash cash-flow presentation standard.
Outlook, risks and contingencies
- The filing provides no specific revenue, earnings or cash-flow guidance. Management said cash and available credit were sufficient for obligations and expected operations for at least the next 12 months.
- Management described continuing opportunities from fiber deployment, wireless network upgrades, small cells and 5G-related infrastructure. Results remain sensitive to customer capital spending, contract awards, seasonality, weather and economic conditions.
- Other key risks include customer concentration, competition, project delays or cancellations, labor and cost absorption, insurance claims, and potential goodwill or intangible-asset impairment. Management reported no impairment at the latest assessment and believed carrying amounts remained recoverable.
- A subsidiary is disputing a multiemployer pension plan’s approximately $13.0 million withdrawal-liability demand; arbitration was expected in 2018. Monthly payments of approximately $0.1 million were being made pending resolution.
- Accrued insurance claims totaled $100.0 million. Outstanding performance and surety bonds were $110.2 million, and standby letters of credit were $48.6 million. Management stated ordinary-course legal matters were not expected to have a material effect.
Important facts for investors to verify
- Whether customer spending and awards recover, particularly among the largest telecommunications customers, and whether backlog converts to revenue as estimated.
- Whether labor utilization, weather-related productivity and operating margins improve after the quarter’s decline.
- Cash conversion and working-capital trends, including receivables, contract assets and collection timing; reported days sales outstanding was 92 days versus 90 days a year earlier.
- Debt service, covenant headroom and refinancing or repayment plans ahead of the April 2020 credit-agreement maturity.
- Outcome of the pension withdrawal-liability arbitration and developments in insurance claims and other contingencies.