Dycom Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended April 26, 2014, with year-to-date results for the nine months ended that date. Although the request metadata says “2013 Q3,” the filing covers fiscal 2014 Q3. Amounts are in U.S. dollars.
Business context and reporting period
Dycom provides specialty contracting services, including telecommunications network engineering, construction, maintenance and installation, underground utility locating, and utility construction and maintenance. It reports one operating segment. Results include the acquired Quanta subsidiaries for the full comparable quarterly periods; the prior-year nine-month comparison includes them only from their December 2012 acquisition date.
Financial performance and liquidity
| Metric | Three months ended Apr. 26, 2014 | Prior-year quarter | Nine months ended Apr. 26, 2014 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $426.3 million | $437.4 million | $1,329.5 million | $1,130.0 million |
| Operating income | $14.0 million | $17.0 million | $51.2 million | $47.2 million |
| Net income | $7.9 million | $7.2 million | $23.5 million | $20.5 million |
| Diluted EPS | $0.23 | $0.21 | $0.68 | $0.61 |
| Operating cash flow | Not separately stated | Not separately stated | $97.5 million | $91.3 million |
Quarterly operating margin was approximately 3.3%, versus 3.9% a year earlier; year-to-date operating margin was approximately 3.8%, versus 4.2%. Costs of earned revenues were 82.2% of quarterly revenue, up from 81.8%, and 81.8% year to date, up from 81.1%. Net margin was approximately 1.9% for the quarter and 1.8% year to date.
For the nine months, investing activities used $62.2 million, including $70.6 million of capital expenditures, partly offset by asset-sale proceeds. Financing activities used $35.2 million. Cash and equivalents were $18.7 million at April 26, 2014. Working capital was $352.3 million. Total debt carrying value was $413.2 million, including the debt premium; the principal amount was $409.9 million. The company reported $209.4 million of additional borrowing availability and compliance with credit-agreement financial covenants.
Material changes versus the prior comparable period
- Quarterly revenue declined 2.5%; excluding revenue from a fiscal 2013 acquisition, management said it declined 3.8%. Adverse winter weather, lower rural broadband work and lower revenue from some customers contributed.
- Nine-month revenue rose 17.7%, reflecting acquired businesses and higher work for certain network customers. Excluding the acquired subsidiaries, management reported a $25.2 million increase.
- Net income rose in both comparisons, despite weaker quarterly operating income and margins. Other income increased, principally due to gains on asset sales: $5.5 million in the quarter and $7.9 million year to date.
- Year-to-date interest expense rose to $20.2 million from $16.6 million, primarily reflecting higher debt balances associated with the acquisition financing.
- Backlog was $2.046 billion, down from $2.197 billion at July 27, 2013; the company expected to complete 57.6% of the April backlog within twelve months.
Outlook, commentary, risks and unusual items
The filing provides no specific revenue or earnings guidance. Management said available cash and credit capacity should be sufficient for obligations and normal equipment replacement at current operating levels for at least twelve months. Results remain exposed to customer project timing and spending, weather, contract cancellations or delays, cost control and acquisition execution. Backlog is not a GAAP measure, and many customer agreements do not require minimum work volumes and may be terminated on notice.
Customer concentration is substantial: the top five customers generated about 58.5% of nine-month revenue. AT&T, CenturyLink and Comcast represented 18.9%, 14.3% and 11.5%, respectively. The company also highlighted seasonality, longer billing and collection cycles for some rural projects, and the possibility of insurance-claim cost changes. A California putative class action alleges labor-law violations; the company said it was too early to assess the outcome or estimate potential loss. Outstanding performance and surety bonds totaled $415.7 million, with estimated costs to complete secured projects of approximately $173.0 million. No material customer exercise of bond rights was reported.
Other notable items include a $0.7 million Canadian contractor acquisition during the quarter, $10.0 million of share repurchases during the nine months, and $30.0 million remaining under the repurchase authorization. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the customer and project mix, especially major telecommunications customers and rural broadband work, supports backlog conversion and revenue stability.
- Whether weather-related productivity effects and higher direct-cost ratios persist, and how they affect operating margins.
- Cash conversion, receivable and unbilled-work collection trends: DSO was 50 days for receivables and 40 days for costs and estimated earnings in excess of billings.
- Debt repayment, variable-rate exposure, covenant compliance and actual availability under the credit facility, including the effect of letters of credit.
- Developments in the California labor lawsuit, insurance reserves and claims, and the monitoring of goodwill impairment risk, particularly at UtiliQuest.