Business context and reporting period
Dycom Industries, Inc. provides specialty contracting services, primarily for telecommunications networks, including engineering, construction, maintenance, installation and underground facility locating. This Form 10-Q covers the three months ended October 28, 2017, the company’s first quarter of fiscal 2018, compared with the three months ended October 29, 2016. Dycom operates in one reportable segment.
The company changed its fiscal year-end from July to January. It will report a six-month transition period ending January 27, 2018; fiscal 2019 begins January 28, 2018.
Financial results and liquidity
| Metric | Three months ended Oct. 28, 2017 | Comparable 2016 period |
|---|---|---|
| Revenue | $756.2 million | $799.2 million |
| Costs of earned revenue, excluding depreciation and amortization | $600.8 million; 79.5% of revenue | $615.0 million; 76.9% of revenue |
| General and administrative expense | $64.6 million; 8.5% of revenue | $60.2 million; 7.5% of revenue |
| Depreciation and amortization | $42.7 million | $34.5 million |
| Income before taxes | $44.4 million | $81.4 million |
| Net income | $28.8 million | $51.1 million |
| Diluted EPS | $0.90 | $1.59 |
| Adjusted EBITDA (non-GAAP) | $97.6 million; 12.9% of revenue | $129.2 million; 16.2% of revenue |
| Cash provided by (used in) operating activities | $56.8 million | $(41.6) million |
| Capital expenditures | $56.0 million | $40.1 million |
Gross profit before depreciation and amortization was approximately $155.4 million, or 20.5% of revenue, versus $184.2 million, or 23.1%, a year earlier. Net income margin was 3.8%, versus 6.4%. The current-quarter tax provision was $15.6 million and the effective tax rate was 35.2%, compared with $30.3 million and 37.3%; adoption of a stock-compensation accounting standard reduced current-quarter tax expense by about $0.9 million.
Cash and equivalents were $24.5 million at October 28, 2017, down from $38.6 million at July 29, 2017. Working capital, excluding current debt, was $634.3 million. Total debt carrying value was $760.1 million: $362.9 million of term loans and $397.2 million carrying value for the convertible notes. The company had no revolver borrowings and reported $401.3 million of revolver availability under its most restrictive covenant. It was in compliance with its credit covenants. The $485 million principal amount of 0.75% convertible notes is due in September 2021; term loans mature in April 2020.
Material changes versus the comparable period
- Revenue fell 5.4%. Excluding $8.6 million from an acquired business and $15.5 million of storm restoration work, revenue declined approximately $67.1 million year over year. Management attributed the largest decrease, approximately $90.9 million, to moderation by a large telecommunications customer. Lower revenue from fiber-network and rural-services work also weighed on results; growth in cable and other telecommunications programs partly offset the declines.
- Operating cost ratios weakened: costs of earned revenue rose 2.5 percentage points as a share of revenue, principally due to lower operating leverage, work mix, fuel and equipment costs, and costs to initiate customer programs. G&A rose as a share of revenue, and depreciation increased with fleet and equipment investment.
- Net income declined about 43.6% and adjusted EBITDA about 24.5%. The quarter included a $6.5 million gain on fixed-asset sales, versus $1.4 million a year earlier; this gain is excluded from adjusted EBITDA.
- Operating cash flow improved substantially from the prior-year use of cash, but capital expenditures exceeded operating cash flow and the company repurchased $16.9 million of shares. It also made $4.8 million of term-loan principal payments.
Outlook, risks and unusual items
- No specific quarterly or annual earnings guidance is provided in the filing. Management described industry demand drivers including fiber deployment, broadband growth, wireless network upgrades and small-cell/5G preparation, while emphasizing that customer spending, approvals, seasonality and economic conditions affect results.
- Backlog was $6.198 billion at October 28, 2017, up from $6.016 billion at July 29, 2017; the company expected to complete 49.0% within the next twelve months. Backlog is not a GAAP measure, and customer work volumes are often not contractually guaranteed; cancellations, delays, weather and project conditions may alter timing or amounts.
- Customer concentration is significant: the top five customers accounted for 74.9% of revenue. Comcast, AT&T and CenturyLink represented 21.8%, 19.0% and 18.9%, respectively, in the quarter.
- In November 2017, the company identified unauthorized access to certain computer systems and said it believed only documents containing company financial information were accessed. The investigation was ongoing, law enforcement had been notified, and security enhancements were being implemented.
- A former subsidiary faces a disputed multiemployer pension withdrawal-liability claim of approximately $13.0 million, with arbitration expected in 2018. A patent-litigation opponent sought $3.8 million in attorney fees after an appellate ruling against the subsidiary; the court had not decided the motion. A separate wage-and-hour lawsuit was settled for an immaterial amount and approved in November 2017.
- Other notable exposures include $109.2 million of accrued insurance claims, $119.6 million of performance and surety bonds, and $48.7 million of standby letters of credit. Management stated that capital resources should be sufficient for obligations and expected operations for at least the next twelve months.
- Management cited outdoor-work seasonality: adverse weather and holidays typically pressure revenue and profitability in the fiscal quarters ending in January and April. It also expected adoption of the new revenue-recognition standard in January 2018 and, based on work to date, did not expect a material effect; the assessment was still ongoing.
Most important facts for investors to verify
- Whether revenue and margins stabilize after the large customer’s spending moderation, and whether the reported backlog converts into work and cash as expected.
- How much of operating cash flow is sustainable after working-capital timing effects, and whether capital spending and repurchases remain consistent with cash generation.
- Current debt, covenant headroom and sensitivity to higher interest rates on the $362.9 million variable-rate term loans.
- Progress and any financial, customer or operational consequences of the unauthorized system access investigation.
- Developments in the $13.0 million pension dispute, the attorney-fee motion, insurance claims and other contingencies.
- The final impact of the January fiscal-year change and adoption of the new revenue-recognition standard.