Dycom Industries, Inc. — Form 10-Q Summary
Reporting period: Three months ended April 30, 2022, Dycom’s fiscal first quarter of fiscal 2023. Comparisons are with the three months ended May 1, 2021 unless stated otherwise. Dycom provides specialty contracting, construction, maintenance, engineering and locating services, principally for telecommunications and utility customers.
Financial performance
| Metric | Quarter ended April 30, 2022 | Prior-year quarter |
|---|---|---|
| Contract revenue | $876.3 million | $727.5 million |
| Net income | $19.5 million; diluted EPS $0.65 | $0.9 million; diluted EPS $0.03 |
| Adjusted EBITDA (non-GAAP) | $63.7 million; 7.3% of revenue | $44.1 million; 6.1% of revenue |
| Operating cash flow | $(64.9) million | $41.5 million |
| Capital expenditures | $38.4 million | $31.6 million |
Revenue increased 20.5%. Management attributed growth mainly to fiber deployment and network improvement work for telecommunications customers. Costs of earned revenues were 85.1% of revenue, versus 85.2%; general and administrative expense declined to 7.9% of revenue from 9.2%. Net income also benefited from a 3.4% effective tax rate, including tax credits and share-based award benefits, and $5.4 million of gains on fixed-asset sales.
Financial position and liquidity
- At April 30, 2022, cash and equivalents were $185.6 million, down from $310.8 million at January 29, 2022. Total debt carrying value was $836.8 million, including $345.6 million under the term loan and $500 million principal amount of 4.50% notes due 2029. No revolving-facility borrowings were outstanding.
- Revolver availability, as limited by the most restrictive covenant, was $284.3 million. The company reported compliance with its leverage and interest-coverage covenants. Working capital was $991.8 million.
- Operating cash use reflected working-capital investment, including a $99.1 million increase in receivables, $28.9 million in other current assets and inventories, and $11.6 million in contract assets. DSO was 105 days, down from 128 days a year earlier.
- Cash used in investing was $33.0 million; cash used in financing was $27.2 million, including $18.5 million of share repurchases and $4.4 million of term-loan repayments.
Material changes and outlook
- Revenue growth was led by higher work for AT&T and other telecommunications customers, partly offset by declines at certain cable and telecom customers. The five largest customers generated 67.3% of revenue, down from 68.2%; AT&T alone accounted for 27.1%.
- Backlog was $5.593 billion at April 30, compared with $5.822 billion at January 29. The company estimated that 52.9% of quarter-end backlog would be completed in the next 12 months. Backlog is an estimate, and many customer agreements do not commit customers to specified work volumes.
- Management cited growing fiber deployment opportunities, including rural broadband and public funding, and expected wireless construction activity to increase. It also warned that supply constraints, inflation, higher fuel and equipment costs, labor tightness, and permitting or project delays could affect execution. No specific revenue or earnings guidance is provided in the filing text.
- The board authorized a new $150 million share-repurchase program through August 2023. The company repurchased 200,000 shares for $18.5 million in the quarter, leaving $131.5 million authorized.
Risks, contingencies and unusual items
- Customer concentration creates exposure to changes in major customers’ spending, project timing and capital budgets. The filing says customer agreements may be terminable and often do not guarantee volumes.
- Management identified COVID-19-related disruption, inflation, supplier and equipment availability, labor constraints, weather, customer spending shifts and interest-rate changes as risks. A 50-basis-point rate change would alter annual interest expense on variable-rate debt by approximately $1.7 million.
- A California wage-and-hour class action and related representative action are in early stages; the company says a potential loss range cannot be estimated. A subsidiary also disputes a pension-plan withdrawal-liability demand of approximately $13 million and makes monthly payments of about $0.1 million while the matter proceeds.
- The IRS selected fiscal 2016 and fiscal 2020 returns for examination. The filing states that the effect of any assessment could affect results and cash flows.
- Approximately $17.0 million of deferred employer payroll taxes was due by December 31, 2022. Outstanding performance and other surety contract bonds were $289.7 million; estimated costs to complete the related projects were $132.2 million.
Investor verification points
- Assess whether revenue and backlog growth convert into cash, given the quarter’s negative operating cash flow and working-capital use.
- Track major-customer spending and concentration, especially AT&T, and whether backlog estimates are realized on schedule.
- Monitor labor, fuel, materials, fleet costs and equipment availability against margins and project execution.
- Review debt-service capacity, covenant headroom, variable-rate exposure and the pace of repurchases relative to liquidity needs.
- Follow the California litigation, pension withdrawal-liability arbitration, IRS examinations and the scheduled payroll-tax payment.