Dycom Industries, Inc. — Q3 FY2019 Form 10-Q
Business context and period. Dycom provides telecommunications engineering, construction, maintenance and installation, utility locating, and other utility services. The quarter ended October 27, 2018; comparisons are with the quarter ended October 28, 2017. Fiscal 2019 is the first year under the company’s January year-end. Unless otherwise noted, amounts below are in millions.
Financial performance
| Metric | Q3 FY2019 | Q3 FY2018 | Nine months FY2019 | Nine months FY2018 |
|---|---|---|---|---|
| Contract revenue | $848.2 | $756.2 | $2,379.1 | $2,322.7 |
| Income before taxes | $38.3 | $44.4 | $103.4 | $175.8 |
| Net income | $27.8 | $28.8 | $75.0 | $111.3 |
| Diluted EPS | $0.87 | $0.90 | $2.34 | $3.50 |
| Adjusted EBITDA (non-GAAP) | $98.6 | $97.6 | $270.1 | $323.9 |
| Adjusted EBITDA margin | 11.6% | 12.9% | 11.4% | 13.9% |
- Q3 revenue grew 12.2%, but net income declined 3.3%. Nine-month revenue increased 2.4%, while net income fell 32.6%.
- Costs of earned revenues were 81.0% of revenue in Q3 versus 79.5% a year earlier, and 81.1% for the nine months versus 78.8%. Management attributed the pressure principally to labor and subcontractor costs, including early-stage large customer programs and winter-weather productivity effects.
- Operating income, calculated as revenue less reported operating expenses, was $46.8 million in Q3 and $120.7 million for the nine months; corresponding margins were approximately 5.5% and 5.1%.
- Cash from operating activities was negative $18.3 million for the nine months, versus positive $249.1 million a year earlier. Working-capital and other long-term asset/liability changes used $260.1 million, including increases in receivables and contract assets.
- Capital expenditures were $127.8 million; investing cash outflow was $127.5 million. Financing activities provided $84.0 million, primarily reflecting net credit-agreement borrowing.
Balance sheet, debt and liquidity
- At October 27, 2018, cash and equivalents were $21.5 million; total debt was $867.8 million, including a $450.0 million term loan and $485.0 million principal of 0.75% convertible notes due September 2021 (reported net carrying value $417.8 million). Debt was $760.3 million at January 27, 2018.
- The revolving facility had no borrowings outstanding. Availability was $328.5 million, after covenant limitations. The amended credit agreement extends to October 2023, raises the revolver commitment to $750 million and sets the term loan facility at $450 million.
- Dycom reported compliance with its credit covenants. Management said available capital resources were sufficient for obligations and expected operating needs for at least the next 12 months.
- Working capital, excluding current debt as described by the company, was $844.9 million. Cash and equivalents had declined from $84.0 million at January 27, 2018.
Changes, outlook and risks
- Q3 revenue growth reflected increased work for several large telecom and cable customers, partly offset by lower activity for other major customers. For the nine months, growth was modest after excluding acquired-business and storm-restoration revenue; customer-level increases were offset by spending reductions elsewhere.
- Backlog was $7.313 billion at October 27, up from $5.847 billion at January 27; the company expected to complete 35.8% within 12 months. Backlog is an estimate, and many master service agreements do not commit customers to minimum volumes and may be terminated or changed.
- No specific financial guidance was provided in the supplied filing text. Management described fiber, wireless, small-cell and 5G network deployment as potential sources of demand, while noting that customer spending, permitting, weather and project timing affect results.
- Revenue recognition standard adoption reclassified unbilled receivables between contract assets and accounts receivable without changing revenue timing or opening retained earnings. This affects balance-sheet comparisons. DSO was 106 days versus 90 days a year earlier; management linked the increase to large programs with billing dependent on completion of additional tasks.
- Customer concentration is substantial: the top five customers generated 78.3% of nine-month revenue. The company also disclosed securities class-action lawsuits alleging misleading statements, including regarding permitting uncertainties; it disputes the claims and cannot estimate potential loss. A separate disputed pension withdrawal-liability claim is approximately $13 million, with arbitration expected in the first half of calendar 2019.
- Other exposures include seasonal weather and customer-spending volatility, self-insured claims, performance and surety bonds, and $48.6 million of standby letters of credit. The company authorized a new $150 million share-repurchase program through February 2020; none of that authorization had been used for market repurchases by quarter-end.
Important facts for investors to verify
- Whether receivables and contract assets convert to cash as expected, given negative operating cash flow, 106-day DSO and large customer-program balances.
- Whether the higher labor and subcontractor costs on new programs improve as those programs mature, and whether margins recover.
- Actual customer spending, backlog conversion and permitting progress; backlog is not a firm minimum purchase commitment.
- Debt, interest-rate exposure and covenant headroom, including the $450 million variable-rate term loan and the 2021 convertible notes.
- Developments and potential financial effects of the securities litigation and pension withdrawal-liability arbitration.