Business Context and Reporting Period
Dycom Industries, Inc. provides telecommunications infrastructure contracting, including engineering, construction, maintenance and installation, as well as utility locating and other utility services. The filing covers the fiscal third quarter and nine months ended April 29, 2017, compared with periods ended April 23, 2016. Although the request labels the period “2016 Q3,” the filing is for fiscal 2017 Q3.
Financial Highlights
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $786.3 million | $664.6 million | $2,286.7 million | $1,883.4 million |
| Operating income, calculated | $66.1 million | $56.1 million | $201.5 million | $161.8 million |
| Net income | $38.8 million | $33.1 million | $113.5 million | $79.4 million |
| Diluted EPS | $1.22 | $1.00 | $3.54 | $2.37 |
| Operating cash flow | Not separately provided for Q3 | $106.5 million | $79.0 million | |
| Capital expenditures | Not separately provided for Q3 | $135.2 million | $138.7 million |
Q3 revenue increased about 18% year over year; nine-month revenue increased about 21%. Operating margin was approximately 8.4% in Q3 in both years and 8.8% for the nine months, compared with 8.6%. Net margin was 4.9% in Q3 versus 5.0%, and 5.0% for the nine months versus 4.2%. The nine-month effective tax rate was 37.1%, compared with 37.7%.
Nine-month operating cash flow rose to $106.5 million, but working-capital and other balance-sheet changes used $136.1 million. Capital spending exceeded operating cash flow, resulting in approximately $28.7 million of negative free cash flow using operating cash flow less capital expenditures; the comparable amount was approximately $59.7 million negative. Cash declined to $19.4 million from $33.8 million at July 30, 2016.
At April 29, 2017, total debt was $826.0 million, including $71.0 million drawn on the revolving facility, versus $719.3 million at July 30, 2016. Cash less total debt was approximately $806.7 million. The company reported $321.4 million of additional revolver availability under its most restrictive covenant and compliance with its credit agreement covenants. Working capital, excluding current debt, was $675.8 million.
Material Changes Versus Comparable Period
- Revenue growth reflected 1-gigabit network deployments, new customer awards and acquired businesses. Management attributed much of the organic increase to a cable operator and major telecommunications customers; some customer projects declined.
- Q3 cost of earned revenues rose to 79.0% of revenue from 78.3%, primarily due to a work mix with more materials and other direct costs. Nine-month cost ratio was broadly stable at 78.6% versus 78.5%. G&A improved as a share of revenue, to 7.8% from 8.5% in Q3 and 7.9% from 8.2% for the nine months.
- Nine-month net income increased 43%, and diluted EPS rose to $3.54 from $2.37. The prior-year comparison included a $16.3 million debt-extinguishment loss; its absence benefited the current-period comparison.
- Acquisitions included Texstar in March 2017 for $26.4 million, net of cash acquired. The company also reported that activity on contracts acquired from Goodman had fallen considerably below expectations, reducing near-term revenue expectations; management said the contracts remained in effect and customer relations had not deteriorated.
- The company repurchased $62.9 million of shares during the nine months, versus $170.0 million in the prior-year period. The board extended and increased its authorization; $112.1 million remained available at quarter-end.
Outlook, Risks and Unusual Items
- No specific revenue or earnings guidance is provided. Backlog was $5.470 billion at April 29, 2017, down from $6.031 billion at July 30, 2016; the company expected to complete 44.1% of quarter-end backlog within twelve months. Backlog is not a GAAP measure, and customers may cancel or change work volumes.
- Management said cash, operating resources and credit availability should be sufficient for obligations and normal equipment replacement for at least the next twelve months. It intends to retain earnings and does not anticipate cash dividends in the foreseeable future.
- Customer concentration is significant: the top five customers generated 76.3% of nine-month revenue, up from 68.8%. AT&T represented 28.1%, Comcast 17.1% and CenturyLink 16.6% of nine-month revenue.
- A subsidiary is disputing a pension plan’s approximately $13.0 million withdrawal-liability demand, asserting a possible construction-industry exemption; it is making monthly payments of about $0.1 million while the dispute proceeds.
- Goodman-related exposure includes a Texas sales-tax dispute of approximately $31.7 million. Goodman retained responsibility under the purchase agreement, and $20.0 million was held in escrow for indemnification; the state could nevertheless assert successor liability against Dycom.
- Other risks include weather and seasonality, customer capital-spending changes, project delays, competition, variable-rate debt, insurance claims and possible goodwill or intangible-asset impairment. The company reported no impairment as of April 29, 2017. It also disclosed a pending patent appeal and labor-related lawsuits agreed to settle for immaterial amounts, subject to court approval.
Important Facts for Investors to Verify
- Whether backlog converts to revenue as expected, given cancellation rights, project timing and the decline from the prior fiscal year-end.
- Trends in customer concentration and spending, particularly among AT&T, Comcast and CenturyLink.
- Working-capital conversion and collection of costs and estimated earnings in excess of billings, which increased to $440.9 million from $377.0 million at fiscal year-end.
- Debt, variable-rate exposure and covenant headroom; the company estimated that a 50-basis-point rate change would affect annual interest expense by about $2.2 million on current variable-rate borrowings.
- Resolution of the pension withdrawal-liability dispute and Goodman-related Texas tax matter, including the availability of escrow indemnification.