Business context and reporting period
Dycom Industries, Inc. provides telecommunications engineering, construction, maintenance, installation and locating services, plus construction and maintenance for electric and gas utilities. This Form 10-K covers the fiscal year ended July 25, 2015 (52 weeks), not fiscal 2014 Q4; fiscal 2015 fourth-quarter data are also summarized below. The company operates in one reportable segment.
Key financial metrics
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $2.022 billion | $1.812 billion |
| Net income | $84.3 million | $40.0 million |
| Diluted EPS | $2.41 | $1.15 |
| Operating cash flow | $141.9 million | $84.2 million |
| Capital expenditures | $103.0 million | $89.1 million |
| Cash and equivalents at year-end | $21.3 million | $20.7 million |
| Working capital at year-end | $469.9 million | $409.2 million |
FY2015 cost of earned revenues was 78.8% of revenue, versus 81.4% in FY2014; net margin was 4.2%, versus 2.2%. Interest expense was $27.0 million. Total debt carrying value was $525.6 million, comprising $277.5 million of 7.125% notes due 2021, a $150.0 million term loan and $95.3 million of revolver borrowings. The company reported $300.3 million of additional borrowing availability and compliance with credit covenants.
FY2015 Q4 revenue was $578.5 million and net income was $33.8 million, with diluted EPS of $0.97. FY2014 Q4 revenue was $482.1 million, net income $16.5 million and diluted EPS $0.47.
Material changes versus prior comparable period
- Annual revenue grew 11.6%; management attributed growth to new customer awards and 1-gigabit network work, with less adverse weather than in FY2014. Excluding acquired businesses not owned for the full year in both periods, revenue rose approximately $173.1 million.
- Higher productivity, improved work mix and better weather reduced costs as a share of revenue. Net income more than doubled, while the effective tax rate declined to 37.8% from 39.7%.
- Operating cash flow rose to $141.9 million from $84.2 million, despite $81.4 million of net increases in accounts receivable and costs/estimated earnings in excess of billings.
- Backlog increased to $3.680 billion from $2.331 billion; management expected to complete 44.0% within the next 12 months. Backlog is not a GAAP measure, and customer work volumes are often not guaranteed.
- FY2015 acquisitions included Hewitt, Moll’s, Venture and two cable-installation contractors, for aggregate disclosed consideration of approximately $31.6 million. After year-end, Dycom acquired TelCom for approximately $48.6 million in cash.
- Share repurchases totaled $87.1 million in FY2015. The board authorized an additional $50 million program in August 2015; no cash dividend was anticipated.
Outlook, risks and contingencies
Management cited fiber expansion, higher broadband demand, wireless network upgrades and the Connect America Fund rural broadband program as industry opportunities. It did not provide specific revenue or earnings guidance. FY2016 was expected to include 53 weeks, and net capital expenditures were projected at approximately $125 million, funded primarily through operating cash flow, cash on hand and credit availability.
Key risks include concentrated customer exposure (top five customers generated 61.1% of FY2015 revenue; AT&T alone 20.8%), cancellable agreements without guaranteed work volumes, competitive bidding and margin pressure, cyclical customer spending, weather and seasonality, labor availability, and uncertainty in estimating contract costs and insurance claims. Accrued insurance claims increased to $87.3 million from $66.0 million. Accounts receivable were $315.1 million and costs and estimated earnings in excess of billings were $274.7 million. A rural-project customer still owed $6.8 million; Dycom expected collection and had construction liens securing a significant portion.
Legal matters included a patent dispute with unresolved counterclaims and a proposed $0.6 million settlement of a workplace-death lawsuit, subject to court approval. The company reported no goodwill impairment in FY2015. Debt agreements restrict certain payments and other actions; variable-rate borrowings create interest-rate exposure. Management believed available capital was sufficient for obligations and normal operations for at least the next 12 months.
Important facts for investors to verify
- Confirm the reporting-period match: this is FY2015, ended July 25, 2015, rather than a standalone FY2014 Q4 filing.
- Assess the durability and profitability of backlog, given cancellable contracts and non-guaranteed work orders.
- Track major-customer spending and concentration, particularly AT&T, CenturyLink and Comcast.
- Monitor receivables, unbilled contract assets, collection of the remaining $6.8 million rural-project balance, and operating cash conversion.
- Review debt balances, covenant headroom, share repurchases and post-year-end acquisition funding needs.
- Follow insurance reserve development, litigation outcomes and FY2016 capital spending against the approximately $125 million projection.