Dycom Industries, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended July 25, 2020, compared with the periods ended July 27, 2019. Dycom provides specialty contracting services, primarily for telecommunications networks, alongside utility locating and construction services. The company reports one operating segment.
Financial performance and position
| Metric | Three months ended July 25, 2020 | Three months ended July 27, 2019 | Six months ended July 25, 2020 | Six months ended July 27, 2019 |
|---|---|---|---|---|
| Revenue | $823.9 million | $884.2 million | $1,638.2 million | $1,718.0 million |
| Net income | $37.0 million | $29.9 million | $4.6 million | $44.2 million |
| Diluted EPS | $1.15 | $0.94 | $0.14 | $1.39 |
| Net income margin | 4.5% | 3.4% | 0.3% | 2.6% |
| Adjusted EBITDA, non-GAAP | $102.7 million | $100.2 million | $172.5 million | $173.8 million |
| Adjusted EBITDA margin, non-GAAP | 12.5% | 11.3% | 10.5% | 10.1% |
Second-quarter costs of earned revenues were 79.9% of revenue, down from 81.5%; general and administrative expense rose to 8.2% of revenue from 7.4%. Six-month income included a $53.3 million goodwill impairment charge, mostly nondeductible for tax purposes, and a $12.0 million gain on extinguishment of debt. The six-month effective tax rate was 76.4%, versus 30.0% a year earlier; the company also recognized a $2.6 million CARES Act tax benefit.
- Cash flow: For the six months, operating activities provided $167.5 million, versus $109.7 million used in the prior-year period. Investing activities used $20.8 million, including $26.7 million of capital expenditures; financing activities used $178.9 million. Cash and equivalents were $22.5 million at July 25, 2020, down from $54.6 million at January 25, 2020.
- Liquidity: Working capital, excluding current debt, was $917.8 million, compared with $957.8 million at fiscal year-end. Revolver availability was $451.5 million. The company reported compliance with its credit agreement covenants.
- Debt: Debt carrying value totaled $688.0 million, including $200.0 million drawn on the revolving facility, $433.1 million of term loans, and $54.9 million carrying value of convertible notes. During the six months, Dycom repurchased $401.7 million principal amount of its 0.75% notes for $371.4 million, including interest and fees. The remaining principal was $58.3 million.
- Backlog and working capital: Backlog was $6.441 billion, down from $7.314 billion at January 25, 2020; the company estimated 38.1% would be completed within twelve months. Days sales outstanding increased to 126 from 117 a year earlier.
Material changes and management commentary
- Second-quarter revenue declined $60.3 million, or about 6.8%. Management attributed the principal decreases to lower work for two large telecommunications customers, partly offset by growth in other customer programs. For the six-month period, revenue declined about 4.6%.
- Despite lower quarterly revenue, the second-quarter net income and Adjusted EBITDA margins improved year over year. Management cited higher labor productivity and work mix, as well as lower fuel costs; higher insurance costs partly offset those benefits.
- The $53.3 million impairment followed reduced expected demand for Broadband’s in-home installation work: customers restricted technician access to third-party premises and encouraged subscriber self-installation. Broadband represented less than 4% of fiscal 2020 consolidated revenue. The charge left $10.1 million of goodwill in that reporting unit and did not affect credit covenant compliance.
- Management said services were generally considered essential and had not been materially interrupted, but warned that the pandemic’s duration and effects on customers, workers, suppliers, permitting and project activity remained uncertain. Dycom reduced capital expenditures amid pandemic uncertainty.
- No quantitative financial guidance is provided. Management said existing cash and credit availability were expected to cover obligations and normal equipment replacement for at least the next 12 months, while emphasizing cost and capital-spending controls. It did not anticipate cash dividends in the foreseeable future.
- On August 24, 2020, the board authorized a new $100 million share repurchase program through February 2022. No shares were repurchased during the quarter.
Risks, contingencies and unusual items
- COVID-19 could further affect demand, especially in-home installation work, and cause labor, supplier, equipment-delivery, permitting or construction delays. Management warned these effects could materially adversely affect results, cash flows or financial condition.
- Customer concentration is significant: the top five customers generated 77.5% of six-month revenue. Verizon accounted for 40.7% of accounts receivable and contract assets, net, at July 25, 2020. The company reported approximately $23.1 million of receivables and contract assets with bankrupt Frontier Communications and expected payment as a critical vendor.
- A consolidated shareholder derivative action remains pending; the company said it could not estimate a possible loss range. A separate securities class action settlement was subject to court approval and was fully funded by insurance carriers.
- A subsidiary disputes a claimed $13.0 million multiemployer pension withdrawal liability. Arbitration was expected in early 2021; the subsidiary was making payments of approximately $0.1 million per month pending resolution.
- Accrued insurance claims totaled $111.0 million. Outstanding performance and other surety contract bonds were $180.6 million; estimated costs to complete the bonded projects were $74.5 million.
Key facts for investors to verify
- Whether broadband installation demand and the assumptions underlying the $53.3 million goodwill impairment stabilize or worsen.
- Backlog conversion, customer work-order levels and spending, given that many agreements do not commit customers to specific service volumes.
- Collections and working-capital trends, including DSO, unbilled receivables and customer concentration.
- Cash generation and available borrowing capacity relative to variable-rate debt, upcoming debt maturities and capital needs.
- Developments in the Frontier receivable exposure, shareholder litigation and pension withdrawal-liability arbitration.
- Execution and funding of the newly authorized $100 million share repurchase program.