Dycom Industries, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended January 25, 2020 (52 weeks), compared with fiscal 2019 ended January 26, 2019. The filing also provides fourth-quarter results; this is an annual report, not a standalone quarterly filing.
Business context
Dycom provides telecommunications engineering, construction, maintenance, installation and facility-locating services, primarily in the United States. Telecommunications accounted for 90.8% of fiscal 2020 revenue. Management cites fiber deployment, broadband demand and emerging 5G-related network investment as longer-term opportunities.
Key financial metrics
| Metric | FY2020 | FY2019 |
|---|---|---|
| Contract revenue | $3.340 billion | $3.128 billion |
| Operating income | $117.8 million | $116.6 million |
| Net income | $57.2 million | $62.9 million |
| Diluted EPS | $1.80 | $1.97 |
| Adjusted EBITDA (non-GAAP) | $310.0 million; 9.3% of revenue | $330.0 million; 10.5% of revenue |
| Operating cash flow | $58.0 million | $124.4 million |
| Capital expenditures | $120.6 million | $165.0 million |
Costs of earned revenue rose to 83.2% of revenue from 81.9%, lowering gross margin (revenue less these costs) to 16.8% from 18.1%. Operating margin was approximately 3.5%, versus 3.7%. Fiscal 2020 cash flow less capital expenditures was negative $62.6 million.
At year-end, cash and equivalents were $54.6 million. Debt principal comprised $444.4 million of term loans and $460.0 million of convertible notes; balance-sheet debt, net of note discount and issuance costs, was $866.9 million. No revolver borrowings were outstanding, and borrowing availability was $287.0 million. Working capital was $957.8 million. DSO increased to 130 days from 103 days.
Material changes and unusual items
- Revenue rose 6.8%, but net income declined 9.0% and adjusted EBITDA declined 6.0% year over year.
- Excluding acquired-business revenue and storm restoration work, revenue increased $253.1 million. Growth from several large telecommunications customers was partly offset by a $135.4 million decline in work for a major cable operator.
- Costs of earned revenue increased, notably due to a greater mix of work where Dycom supplies materials. Fiscal 2020 also included estimated warranty costs for prior-period work; the adjusted EBITDA reconciliation identifies an $8.2 million warranty charge.
- Operating cash flow fell as working capital absorbed cash, particularly from increased accounts receivable and contract assets. DSO growth reflected a large customer program whose tasks are billed as completed.
- Fiscal 2019 included a $17.2 million non-cash reserve for Windstream receivables and contract assets. Dycom recovered $10.3 million of previously reserved amounts in fiscal 2020; Windstream receivables were current at year-end.
- Dycom adopted lease accounting in fiscal 2020, recording approximately $71 million of operating lease right-of-use assets and related liabilities; management reported no material effect on earnings or cash flows.
Outlook, risks and contingencies
Management expressed a positive industry outlook based on fiber, broadband and wireless network investment, but gave no quantified revenue or earnings guidance in the provided filing text. Backlog was $7.314 billion, slightly below $7.330 billion a year earlier; management estimated 37.1% would be completed within 12 months. Backlog is not a GAAP measure and may be cancelled, delayed or changed because customers often do not commit to specific work volumes.
- Customer concentration is high: the top five represented 78.4% of revenue. Verizon, AT&T, CenturyLink and Comcast contributed 21.8%, 20.6%, 16.4% and 15.1%, respectively. Windstream’s bankruptcy remains a customer and collection risk despite the recovery noted above.
- Master service agreements and assigned work may be cancelled or rescheduled; results also depend on customer budgets, competitive bids, permits, weather, labor availability and project execution.
- Variable-rate term debt was $444.4 million; management estimated a 50-basis-point rate change would alter annual interest expense by approximately $2.2 million. The $460 million convertible notes mature in September 2021. Dycom reported compliance with credit covenants.
- Pending matters include a securities class action seeking unspecified damages, a stayed shareholder derivative action, and a disputed approximately $13 million multiemployer pension withdrawal-liability claim proceeding to arbitration. The filing says potential loss for the lawsuits cannot be estimated.
- Insurance claims are substantially self-retained up to policy limits; accrued insurance claims were $94.9 million. Other risks include workplace and environmental incidents, cybersecurity, labor and subcontractor costs, and impairment of goodwill.
Investor verification priorities
- Track conversion of backlog into revenue and confirm customer spending, cancellations and project timing.
- Monitor receivables, contract assets, DSO and operating cash flow, especially large customer programs and Windstream collections.
- Assess whether margins recover from higher material costs and warranty expenses, and reconcile non-GAAP adjusted EBITDA adjustments.
- Review debt repayment and refinancing plans for the September 2021 convertible notes, revolver availability and covenant headroom.
- Follow outcomes of the pension withdrawal-liability arbitration and securities-related litigation, including any change in estimated exposure.
Audit note: The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; goodwill impairment testing was identified as a critical audit matter.