Dycom Industries, Inc. — Q2 FY2023 Form 10-Q
Reporting period: Quarter and six months ended July 30, 2022; comparisons are with the periods ended July 31, 2021, except balance-sheet comparisons, which are with January 29, 2022. Dycom provides specialty contracting, construction, maintenance, engineering, and locating services, primarily for telecommunications customers. It reports one operating segment.
Financial performance
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Contract revenue | $972.3 million | $787.6 million | $1,848.6 million | $1,515.1 million |
| Net income | $43.9 million | $18.2 million | $63.4 million | $19.1 million |
| Diluted EPS | $1.46 | $0.59 | $2.11 | $0.61 |
| Net margin | 4.5% | 2.3% | 3.4% | 1.3% |
| Adjusted EBITDA (non-GAAP) | $104.7 million | $73.8 million | $168.4 million | $117.9 million |
| Adjusted EBITDA margin (non-GAAP) | 10.8% | 9.4% | 9.1% | 7.8% |
- Revenue and earnings: Quarterly revenue rose 23.4% year over year; six-month revenue increased 22.0%. Quarterly and six-month net income increased substantially. Growth was driven principally by fiber deployments and network improvements for telecommunications customers.
- Margins and costs: Costs of earned revenues were 82.1% of revenue in the quarter versus 82.7% a year earlier, and 83.5% for the six months versus 83.9%. G&A was 7.5% of quarterly revenue versus 8.2%; depreciation and amortization also declined as a share of revenue. Higher fuel costs partly offset cost-ratio improvement.
- Cash flow: Operating activities used $76.9 million in the six months, compared with $58.8 million generated a year earlier. Working-capital and other long-term asset/liability changes used $235.3 million, led by increased receivables, contract assets, inventories, and other current assets. Investing activities used $72.1 million, including $80.9 million of capital expenditures.
- Liquidity: Cash and equivalents were $120.3 million at July 30, down from $310.8 million at January 29. Working capital, excluding current debt, was $1.019 billion. Revolving-credit availability was $341.1 million; the revolver had no borrowings outstanding. Management said available cash and credit resources were sufficient for obligations and expected operations for at least 12 months.
- Debt and interest: Debt carrying value totaled $832.8 million: $341.3 million under the term loan and $493.8 million of 4.50% senior notes due 2029; $17.5 million was classified current. The term-loan weighted-average rate was 3.75%, up from 1.86% at fiscal year-end. The company remained in compliance with credit covenants.
Material changes and outlook
- Six-month operating cash flow shifted from positive $58.8 million to negative $76.9 million, principally reflecting working-capital investment despite higher earnings.
- Backlog increased to $6.028 billion from $5.822 billion at January 29, 2022; the company expected to complete 51.6% within the next 12 months. Backlog is an estimate, and many customer agreements do not commit customers to specific purchase volumes and may be cancelled.
- Management described growing opportunities in fiber-to-the-home, rural broadband, 5G-related wireless construction, and network maintenance. It cited more than $40 billion in federal Infrastructure Act funding for rural communications networks, alongside state programs, as potential industry support.
- No specific financial guidance or quantified forecast is provided in the filing. Management cautioned that near-term execution may be affected by inflation, labor tightness, fiber and equipment supply constraints, and delays in obtaining permits. Vehicle and equipment prices were increasing.
Risks, contingencies, and unusual items
- Customer concentration remains significant: the five largest customers represented 67.3% of six-month revenue. AT&T alone contributed 26.7%; Lumen, Comcast, and Verizon contributed 12.5%, 12.1%, and 8.8%, respectively.
- Accounts receivable and current contract assets were concentrated among four customers, each exceeding 10% of the combined balance. Management said it did not believe these customers had financial difficulties materially affecting collectability. DSO was 107 days, compared with 125 days a year earlier.
- Interest-rate exposure includes $341.3 million of variable-rate term debt; a 50-basis-point rate change would change annual interest expense by approximately $1.7 million. The filing also estimates a $14.1 million fair-value change in the 2029 Notes for a hypothetical 50-basis-point market-rate move.
- Contingencies include California employee wage-and-hour class and representative actions, for which the company could not estimate a loss range, and a disputed multiemployer pension withdrawal-liability claim of approximately $13 million. Monthly payments of about $0.1 million continue pending arbitration; the company says payments are expected to be refunded if it prevails.
- The IRS selected fiscal 2016 and fiscal 2020 federal returns for examination. The company stated its tax provision was adequate, but an assessment could affect results and cash flows. Approximately $12.6 million of unrecognized tax benefits was reported.
- Other notable items: six-month gains on asset sales were $8.9 million; share repurchases totaled $28.5 million. The company also had $17.0 million of deferred employer payroll taxes due within one year and approximately $80.6 million of vehicle-fleet purchase orders scheduled for delivery over the next 12 months.
Important facts for investors to verify
- Whether receivables and contract assets convert to cash and whether working-capital outflows moderate as revenue grows.
- Whether backlog converts to revenue as estimated, given customer cancellation rights and the absence of minimum-volume commitments in many agreements.
- Revenue and margin trends at major customers, particularly AT&T, and the impact of customer concentration on results.
- Variable-rate debt costs, covenant headroom, and liquidity after capital expenditures, payroll-tax payments, and share repurchases.
- Developments in the California litigation, pension arbitration, and IRS examinations, including any change in the ability to estimate potential losses.