Dycom Industries, Inc. — Form 10-Q Summary
Period: The filing covers the three and nine months ended April 23, 2016, Dycom’s fiscal 2016 third quarter. This differs from the request metadata, which says “2015 Q3.” Comparisons below are with the periods ended April 25, 2015. Dollar amounts are in millions unless stated otherwise.
Business context
Dycom provides specialty contracting services, principally for telecommunications networks, including program management, engineering, construction, maintenance and installation. It also provides underground utility locating and electric and gas utility services. The company reports one operating segment. Management cited network upgrades, including fiber and 1-gigabit deployments, new customer awards and acquired businesses as drivers of growth.
Financial performance
| Metric | Three months ended Apr. 23, 2016 | Prior-year quarter | Nine months ended Apr. 23, 2016 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $664.6 | $492.4 | $1,883.4 | $1,443.8 |
| Net income | $33.1 | $20.3 | $79.4 | $50.5 |
| Diluted EPS | $1.00 | $0.58 | $2.37 | $1.44 |
| Operating income, calculated as revenue less reported operating expenses | $56.1 | $35.4 | $161.8 | $95.3 |
| Operating margin, calculated | 8.4% | 7.2% | 8.6% | 6.6% |
| Net margin | 5.0% | 4.1% | 4.2% | 3.5% |
Quarterly revenue rose about 35% and nine-month revenue about 30%. Management attributed growth to higher activity for major telecom and cable customers, new awards, network upgrades and acquisitions, partly offset by completion of stimulus-funded work and lower activity for certain customers. Cost of earned revenue fell as a share of revenue by 0.6 percentage points in the quarter and 1.0 point over nine months; management cited operating leverage and lower fuel costs, partly offset by higher labor and subcontractor costs associated with work mix, program expansion and productivity.
Quarterly general and administrative expense decreased to 8.5% of revenue from 9.1%; the nine-month ratio also declined to 8.2% from 9.1%, reflecting operating leverage. Nine-month results included a $16.3 million pre-tax loss on extinguishment of the 7.125% notes. Nine-month interest expense was $25.0 million versus $20.1 million; it included $10.1 million of noncash convertible-debt discount amortization. The nine-month effective tax rate was 37.7%, compared with 38.5%.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $79.0 million, down from $123.6 million. Working capital and other asset/liability changes used $127.4 million, notably increased costs and estimated earnings in excess of billings ($77.2 million) and receivables ($29.7 million).
- Investing cash outflow was $181.6 million, including $138.7 million in capital expenditures and $48.8 million for the TelCom acquisition. Financing provided $100.6 million. Cash declined $2.0 million to $19.3 million.
- At April 23, 2016, current assets were $848.8 million and current liabilities $242.5 million; working capital was $606.2 million. Receivables were $355.3 million, and costs and estimated earnings in excess of billings were $358.2 million. Management expected substantially all of the latter balance to be billed and collected within twelve months.
- Debt was $733.3 million gross, including $214.0 million of revolving borrowings, a $150.0 million term loan and $485.0 million principal of 0.75% convertible notes. Reported debt carrying value was $733.3 million before the current portion; cash was $19.3 million. The notes’ net carrying amount was $369.3 million after discount and issuance costs.
- Revolver availability, after the most restrictive covenant limits, was $178.3 million at quarter-end. Dycom reported compliance with its credit agreement covenants. The agreement required leverage no greater than 3.50:1 and interest coverage of at least 3.00:1.
Outlook, material developments and risks
- Management expected fiscal 2016 capital expenditures, net of disposals, to slightly exceed $175 million, funded primarily by operating cash flow, credit availability and cash. It stated that available capital resources were sufficient for obligations and operating needs for at least the next twelve months.
- Backlog was $5.649 billion at April 23, 2016, up from $3.680 billion at July 25, 2015; the company expected to complete 39.2% within twelve months. Backlog is not a GAAP measure, and customers may cancel, defer or change work; many agreements do not guarantee specific service volumes.
- On May 20, 2016, after quarter-end, Dycom amended its credit agreement to add a $200 million term loan, increasing the term-loan facility to $350 million. It intended to use proceeds to repay revolving borrowings and for general corporate purposes. The amendment also provided greater flexibility for debt and capital expenditures.
- In September 2015, Dycom issued $485 million of 0.75% convertible notes and redeemed its 7.125% subordinated notes, recording the $16.3 million extinguishment charge. It also entered into note-hedge and warrant transactions; conversion or warrant exercise could cause dilution, and hedge-counterparty default could reduce the intended protection.
- Customer concentration increased: the top five customers represented 68.8% of nine-month revenue, versus 60.1% a year earlier. AT&T contributed 22.8%, Comcast 13.3% and CenturyLink 14.7% of nine-month revenue. Significant customer spending changes or collection delays could affect results and cash flow.
- Other risks include weather and seasonal operating fluctuations, labor and subcontractor availability and productivity, customer concentration, variable-rate debt, acquisition integration, insurance claims and potential impairment of goodwill or intangibles. A subsidiary planned to cease operations by June 12, 2016; management believed a statutory exception would avoid multiemployer pension withdrawal liability, but gave no assurance that the plan would not assert a claim or that the defense would succeed.
- A patent-related dispute involving subsidiary CertusView had proceeded through a bench trial on defendants’ inequitable-conduct counterclaims; an unfavorable outcome could result in attorneys’ fees, costs and expenses. Management said it intended to defend the claims and appeal the prior patent-eligibility ruling.
- The board authorized an additional $100 million share-repurchase program on April 26, 2016, after quarter-end; the full amount remained available as of May 26, 2016. The filing states that fiscal 2016 has 53 weeks, versus 52 weeks in fiscal 2015.
Important facts for investors to verify
- Confirm the reporting-period mismatch: the filing is for fiscal 2016 Q3, not 2015 Q3.
- Track whether revenue growth and backlog convert into billings, collections and operating cash flow, given the working-capital use and rising unbilled contract assets.
- Review customer concentration, contract cancellation rights and the sustainability of major customer spending and network awards.
- Assess debt and liquidity after the post-quarter $200 million term loan, including covenant headroom, borrowing costs and the use of proceeds.
- Monitor the outcome and potential cost of the CertusView litigation and any multiemployer pension withdrawal-liability claim.
- Evaluate the effects of share repurchases and the convertible-note hedge and warrant structure on leverage, liquidity and potential dilution.