Dycom Industries, Inc. — Form 10-Q Summary
Business context and reporting period
Fiscal first quarter ended October 26, 2013; comparable quarter ended October 27, 2012. Dycom provides engineering, construction, maintenance, installation and underground utility-locating services, primarily to telecommunications customers. Results include businesses acquired in fiscal 2013, notably Quanta Services’ telecommunications infrastructure subsidiaries, acquired in December 2012.
Key financial metrics
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Revenue | $512.7 million | $323.3 million |
| Income before taxes | $31.1 million | $19.5 million |
| Net income | $18.7 million | $11.9 million |
| Diluted EPS | $0.54 | $0.35 |
| Operating cash flow | $(18.7) million | $27.7 million |
| Capital expenditures | $30.3 million | $12.5 million |
- Net margin was approximately 3.6%, versus 3.7%. Costs of earned revenues, excluding depreciation and amortization, were 80.0% of revenue, up from 79.5%; G&A was 8.4%, down from 8.9%.
- Cash and equivalents were $14.4 million at quarter-end, down from $18.6 million at July 27, 2013. Working capital was $413.5 million; current ratio was approximately 3.1.
- Total debt was $484.3 million, including $83.0 million in revolver borrowings, $120.3 million on the term loan and $277.5 million of 7.125% notes due 2021. Debt less cash was approximately $469.9 million. Additional borrowing availability under the credit agreement was $142.3 million; the company reported compliance with its financial covenants.
Material changes versus the prior comparable period
- Revenue rose 58.6% ($189.4 million); $157.1 million of the increase came from fiscal 2013 acquisitions. Excluding acquired businesses, revenue increased 10.0%.
- Telecommunications revenue excluding acquisitions grew 10.3%, supported by wireless network work and cable maintenance and upgrades; declines in rural broadband and stimulus-funded work partly offset growth.
- Net income increased 57.3%, while interest expense rose to $6.9 million from $4.2 million, reflecting higher debt associated primarily with the acquisition.
- Operating cash flow swung to an outflow, primarily due to growth-related increases in receivables ($52.4 million) and net contract costs in excess of billings ($17.2 million). Days sales outstanding for receivables increased to 54 days from 43 days year over year.
- Backlog declined to $1.996 billion from $2.197 billion at July 27, 2013. Management expected to complete 55.9% of quarter-end backlog within 12 months.
Outlook, risks, contingencies and unusual items
- No specific revenue or earnings guidance was provided. Management believed cash and available credit were sufficient for obligations and normal equipment replacement for at least the next 12 months, subject to operating performance and other risks.
- Management cautioned that backlog estimates can change; many master service agreements do not guarantee purchase volumes and may be terminated for convenience. Outdoor work is seasonal and weather-sensitive, with potential revenue reductions in the second and third fiscal quarters.
- Customer concentration is significant: the top five customers generated 57.2% of revenue. AT&T and CenturyLink accounted for 17.5% and 15.5%, respectively.
- A putative California class action alleges wage, overtime, meal-break and wage-statement violations by UtiliQuest. The company said it was too early to assess outcome or estimate potential loss and intends to defend the case.
- Outstanding performance and surety bonds totaled $435.3 million; no customers had exercised bond rights. Insurance claims reserves totaled $61.6 million. The company retains specified losses under its insurance programs.
- Goodwill and intangible assets were considered recoverable at quarter-end, but management noted impairment risk if demand or long-term outlook deteriorates. The UtiliQuest reporting unit’s fair value exceeded carrying value by approximately 20% in the latest annual assessment.
- The board authorized up to $40 million of share repurchases through February 2015; none were made under that authorization during the quarter. Separately, 19,468 shares were withheld for restricted-stock tax obligations.
Important facts for investors to verify
- How much of subsequent revenue and earnings growth reflects acquired operations versus organic growth, and whether acquisition integration costs or synergies change.
- Whether receivables, unbilled contract assets and cash conversion improve as the enlarged business operates at higher volumes.
- Backlog conversion, cancellations or delays, customer spending plans, and concentration in major telecommunications customers.
- Debt levels, revolver availability, interest-rate exposure and compliance with credit agreement and note covenants.
- Developments in the UtiliQuest litigation, insurance claims experience, and potential goodwill or intangible-asset impairment.