Dycom Industries, Inc. — Form 10-Q Summary
Business context and period. Dycom provides specialty contracting services, primarily engineering, construction, maintenance and installation for telecommunications customers, alongside underground utility locating and electric and gas utility services. This unaudited report covers the three months ended October 27, 2012 (fiscal 2013 first quarter); comparisons are with the three months ended October 29, 2011. Amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Q1 FY2013 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $323.3 | $319.6 | Up 1.2% |
| Operating income, derived | $22.1 | $23.1 | Down about 4.3% |
| Operating margin, derived | 6.8% | 7.2% | Down about 0.4 percentage points |
| Income before taxes | $19.5 | $21.9 | Down 10.8% |
| Net income | $11.9 | $13.0 | Down 8.5% |
| Diluted EPS | $0.35 | $0.38 | Down 7.9% |
| Operating cash flow | $27.7 | $19.4 | Up $8.3 |
| Capital expenditures | $12.5 | $20.9 | Down $8.3 |
Costs of earned revenues were 79.5% of revenue versus 79.9%, a modest improvement in the direct-cost ratio. General and administrative expense rose to $28.8 million from $25.4 million, or 8.9% of revenue versus 7.9%; higher stock-based compensation, acquisition-related costs and professional fees contributed. Other income fell to $1.6 million from $3.0 million, mainly because of asset-sale activity. The effective tax rate was 39.2%, compared with 40.7%.
Financial position and liquidity
- Cash and equivalents were $54.7 million at October 27, 2012, up from $52.6 million at fiscal year-end. Working capital was $265.3 million, versus $262.4 million; the current ratio was approximately 3.3.
- Total debt was $187.6 million, principally $187.5 million of 7.125% senior subordinated notes due 2021. The company had no revolver borrowings and reported $180.9 million of additional borrowing availability after covenant limitations; $44.1 million of standby letters of credit were outstanding.
- Operating cash flow of $27.7 million, less $12.5 million of capital expenditures and $15.2 million of share repurchases, resulted in a $2.1 million increase in cash. Share repurchases covered 1.047 million shares at an average $14.52; approximately $22.8 million remained authorized.
- Accounts receivable were $153.8 million. Days sales outstanding for receivables increased to 43 days from 40 a year earlier; unbilled contract assets, net of billings in excess, were $117.0 million.
Material changes and operating trends
- Telecommunications revenue increased 5.6% to $279.0 million and rose to 86.3% of total revenue, driven by broadband, rural access and cable-related work. Underground locating revenue declined 3.9% to $32.9 million, in part following the end of a contract. Electric, gas and other revenue fell 46.2% to $11.4 million.
- Five largest customers generated 59.6% of revenue, compared with 59.9% a year earlier. CenturyLink, AT&T, Comcast and Verizon each represented at least 10% of current- or prior-period revenue.
- Backlog declined to $1.376 billion from $1.565 billion at July 28, 2012. Management expected to complete 59.7% of the quarter-end backlog within 12 months; some master-service and requirements-contract work is not a firm customer commitment.
Outlook, risks and notable items
- The filing provides no specific revenue or earnings guidance. Management said existing cash and credit availability should cover financial obligations, working capital and normal equipment replacement for at least the next 12 months, at current operating levels.
- On November 19, 2012, after quarter-end, Dycom agreed to acquire substantially all of Quanta Services’ domestic telecommunications infrastructure services subsidiaries for approximately $275 million in cash, subject to adjustments and customary closing conditions. The expected financing is a new five-year, $400 million secured credit facility; closing was expected by December 31, 2012.
- Key risks include customer concentration, changes in customer capital budgets and project timing, seasonality and weather, competition, collection and contract-estimate risks, and self-insured claims. The company retained $47.1 million in accrued insurance claims and had $237.6 million of performance and surety bonds outstanding; no customers had exercised bond rights.
- Management reported no material developments in legal proceedings and no material change in the risk factors from its 2012 Form 10-K. It noted potential goodwill impairment sensitivity at UtiliQuest: fiscal 2012 testing showed estimated fair value less than 30% above carrying value, although management considered goodwill recoverable at October 27, 2012.
- The company was in compliance with credit-agreement financial covenants. Its fixed-rate notes had a reported fair value of $200.9 million versus $187.5 million carrying value. The quarter also included approximately $0.7 million of acquisition-related costs.
Important facts for investors to verify
- Whether the Quanta acquisition closed on the expected terms and how the new $400 million facility affects debt, interest expense, covenants and liquidity.
- Whether backlog converts to revenue as expected, given the $189 million sequential decline and the nonbinding nature of some customer requirements.
- Whether operating-margin pressure, higher G&A and stock-based compensation persist, and whether telecommunications growth offsets declines in other customer categories.
- Developments in customer spending and concentration, receivable collection metrics, and the company’s retained insurance claims and UtiliQuest impairment exposure.