Dycom Industries, Inc. — Q1 FY2020 Form 10-Q
Business context and period. The filing covers the three months ended April 27, 2019, compared with the three months ended April 28, 2018. Dycom provides specialty contracting services, principally for telecommunications networks, as well as utility locating and electric and gas utility services. It reports one operating segment.
Financial performance and position
| Metric | Q1 FY2020 | Prior-year quarter | Change / context |
|---|---|---|---|
| Contract revenue | $833.7 million | $731.4 million | Up 14.0%; growth principally reflected telecommunications work |
| Costs of earned revenue | $701.8 million; 84.2% of revenue | $599.6 million; 82.0% | Cost ratio worsened 2.2 percentage points |
| General and administrative expense | $58.6 million; 7.0% of revenue | $62.3 million; 8.5% | Included a $10.3 million recovery of previously reserved receivables and contract assets |
| Income before taxes | $20.5 million | $23.7 million | Down |
| Net income / diluted EPS | $14.3 million / $0.45 | $17.2 million / $0.53 | Net income down about 17%; EPS down |
| Adjusted EBITDA (non-GAAP) | $73.6 million; 8.8% of revenue | $73.7 million; 10.1% | Approximately flat in dollars; margin down 1.3 percentage points |
| Operating cash flow | $(56.1) million | $24.6 million | Cash use reflected working-capital investment, especially receivables and contract assets |
| Capital expenditures | $45.8 million | $34.5 million | Higher, primarily for new work and fleet replacement |
Balance sheet and liquidity at April 27, 2019. Cash and equivalents were $33.6 million, down from $128.3 million at January 26, 2019. Working capital, excluding current debt, was $848.1 million. Debt had a carrying value of $878.6 million: $450.0 million of term loans and $485.0 million principal amount of 0.75% convertible notes due September 2021, net of discounts and issuance costs. There were no revolver borrowings; stated borrowing availability was $325.4 million. The company reported compliance with credit-agreement covenants.
Material changes and operating trends
- Revenue growth excluding the acquired business and storm restoration was $112.2 million. Management cited increased fiber deployments and network improvement work at major telecommunications customers, partly offset by lower work for a cable operator.
- Telecommunications generated 91.3% of revenue. The top five customers contributed 80.4%, versus 78.8% a year earlier; AT&T, Verizon, Comcast, and CenturyLink each exceeded 10% of revenue.
- Net contract assets rose to $284.8 million from $200.7 million at January 26, largely because certain multi-task work could not yet be billed. DSO increased to 108 days from 92 days a year earlier; management attributed the increase mainly to a large program awaiting completion of tasks before billing.
- Operating cash flow changed from a source to a use of cash year over year. The filing reports $122.1 million of cash use from working-capital changes and other long-term asset and liability changes in the current quarter.
- Backlog was $7.051 billion, down from $7.330 billion at January 26. The company expected to complete 38.6% of quarter-end backlog over the next 12 months, but noted that many customer agreements do not guarantee purchase volumes and work may be delayed or canceled.
Outlook, risks, contingencies, and unusual items
- Outlook and liquidity: Management said available cash and credit resources were sufficient for obligations and expected operating needs for at least the next 12 months. The filing provides no specific revenue or earnings guidance. Management described longer-term opportunities from fiber deployment, network upgrades, small cells, and 5G-related work.
- Margin pressure and unusual charges: Direct costs rose as a share of revenue, partly due to labor and subcontractor costs, work mix, and an $8.2 million estimated warranty charge for prior-period customer work. The quarter also included the $10.3 million receivables recovery and $6.7 million of gains on asset sales; these items affect comparability.
- Seasonality and execution: Outdoor work is affected by weather and available daylight; the January- and April-ending quarters are typically weaker. Permitting, project timing, customer spending, costs, and contract changes can affect results and backlog conversion.
- Customer and collection exposure: Revenue and receivables are concentrated among a small number of telecommunications customers. The company said significant customers were not known to be experiencing financial difficulty that would materially impair collection.
- Legal and pension matters: A consolidated securities class action and a stayed shareholder derivative action allege misleading statements, including about permitting uncertainties; damages are unspecified and losses cannot be estimated. A subsidiary is disputing a pension-plan withdrawal-liability demand of approximately $13 million; arbitration was expected during 2019, and the subsidiary was making payments of about $0.1 million monthly.
- Debt and other obligations: The term loan is variable-rate debt; the company estimated that a 50-basis-point rate change would alter annual interest expense by approximately $2.3 million. Outstanding performance and other surety bonds were $142.8 million, and insurance-related standby letters of credit were $52.3 million.
- Other changes: Dycom adopted lease accounting in fiscal Q1, recognizing approximately $71 million of operating lease assets and liabilities; management reported no material impact on earnings or cash flows. The $150 million share-repurchase authorization remained available, with no program repurchases reported for the quarter.
Key facts for investors to verify
- Whether revenue growth converts into improved margins after the higher labor, subcontractor, and warranty costs.
- Whether unbilled receivables and contract assets are billed and collected as expected, and whether DSO declines from 108 days.
- Backlog conversion and retention, given customer discretion over work volumes and the potential for delays or cancellations.
- Customer concentration, major-customer spending plans, and the collectability of related receivables.
- Developments in the securities litigation and pension withdrawal-liability arbitration, including any change in the company’s ability to estimate exposure.
- Liquidity, covenant headroom, variable-rate interest costs, and plans for the $485 million principal amount of convertible notes due in 2021.