Business context and reporting period
Dycom Industries, Inc. provides telecommunications network engineering, construction, maintenance and installation, underground utility locating, and utility construction services across the United States. This Form 10-K covers fiscal 2019, the 52 weeks ended January 26, 2019. The company changed its year-end to January; the principal income-statement comparison is with the unaudited twelve months ended January 27, 2018, rather than a conventional prior fiscal year. Fiscal 2019 fourth-quarter figures are also noted below.
Financial performance and liquidity
| Metric | Fiscal 2019 | Prior comparable 12 months |
|---|---|---|
| Contract revenue | $3.128 billion | $2.978 billion |
| Costs of earned revenues | $2.562 billion; 81.9% of revenue | $2.370 billion; 79.6% |
| Net income | $62.9 million; diluted EPS $1.97 | $151.3 million; diluted EPS $2.15 |
| Income before taxes | $88.0 million | $177.9 million |
| Adjusted EBITDA (non-GAAP) | $330.0 million; 10.5% of revenue | $383.5 million; 12.9% |
Revenue increased approximately 5.0%, while net income fell approximately 58%. Costs of earned revenues rose faster than revenue, compressing gross margin to 18.1% from 20.4%; operating margin was approximately 3.7%, versus 6.7%. Fiscal 2019 net margin was approximately 2.0%. The prior comparison included about $32.2 million of tax benefit from Tax Reform and $7.8 million of share-award tax benefit, so reported net income comparisons are affected by unusual tax items.
Fiscal 2019 fourth-quarter revenue was $748.6 million, gross profit was $115.3 million, and the company reported a net loss of $12.1 million, or a diluted loss per share of $0.38. The filing attributes year-over-year margin pressure to labor and subcontractor costs, under-absorption on large customer programs, prolonged winter weather, and costs associated with launching customer programs.
Operating cash flow was $124.4 million. Capital expenditures were $165.0 million; cash used in investing activities was $161.4 million and financing activities provided $80.9 million. Cash and equivalents were $128.3 million at year-end, and working capital, excluding current debt, was $817.1 million. Days sales outstanding increased to 103 days from 95 days.
Debt at carrying value totaled $873.2 million, comprising $450.0 million of term loans and $423.2 million carrying value of 0.75% convertible notes; the notes’ principal amount is $485.0 million and they mature in September 2021. The revolving facility had no borrowings, with $412.9 million of availability under the most restrictive covenant; $48.6 million of letters of credit were outstanding. The company reported compliance with credit covenants. Its amended credit agreement extends to October 2023 and provides a $750 million revolver and $450 million term-loan facility.
Material changes versus the prior comparable period
- Revenue growth was driven chiefly by approximately $286.6 million of increased work for a large telecommunications customer and $22.4 million of growth with a cable operator. These gains were partly offset by declines, including approximately $138.4 million at another large telecommunications customer.
- Excluding acquired-business and storm-restoration revenue, revenue increased $104.4 million. Costs of earned revenues increased 2.3 percentage points as a share of revenue, principally reflecting labor/subcontractor costs and weather-related productivity effects.
- General and administrative expense increased to $269.1 million, including a $17.2 million bad-debt charge related to Windstream. Depreciation and amortization increased to $179.6 million, and net interest expense increased to $44.4 million.
- Backlog increased to $7.330 billion from $5.847 billion, approximately 25%; Dycom estimated that 37.4% would be completed in the next twelve months. Backlog is an estimate, and many customer agreements do not commit customers to specific work volumes.
- Fiscal 2019 included a $20.9 million acquisition of telecommunications construction and maintenance assets in the Midwest and Northeast. The company did not repurchase shares during fiscal 2019; $150 million remained authorized for repurchases through February 2020.
Outlook, risks and contingencies
Management cited long-term opportunities from fiber deployment, broadband capacity expansion, wireless network upgrades, small cells and 5G, and network integration following customer mergers. It provided no specific revenue or earnings forecast in the supplied filing text. Fiscal 2020 capital expenditures were expected to be $150 million to $160 million, funded primarily from operating cash flow, available credit, and cash.
Windstream filed for Chapter 11 protection on February 25, 2019, after fiscal year-end. Dycom reported approximately $45.0 million of Windstream receivables and contract assets at January 26, 2019, and recorded a $17.2 million non-cash charge for estimated recoverability. Windstream accounted for $113.6 million of fiscal 2019 revenue; future work could be reduced or eliminated.
Other significant risks include high customer concentration (the top five represented 78.4% of fiscal 2019 revenue), cancellable or reschedulable contracts, competition and customer spending volatility, weather and labor availability, fixed-price execution and permitting risk, self-insured claims, environmental and workplace safety exposure, and potential goodwill impairment. A securities class action alleging misleading statements concerning, among other things, permitting for large projects was pending; the company disputed the allegations and could not estimate potential loss. A related shareholder derivative action was stayed. A disputed multiemployer pension withdrawal-liability claim was approximately $13 million, with arbitration expected in the first half of 2019 and monthly payments of approximately $0.1 million being made.
The filing reported a prior cybersecurity incident involving unauthorized access to certain systems in November 2017; documents containing company financial information were accessed. Management stated those incidents had not materially affected results, financial position, or liquidity. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective.
Most important facts for investors to verify
- Windstream collections, the ultimate recovery on the $45.0 million exposure, and any effect on future revenue, backlog, or goodwill.
- Whether margin pressure from labor, weather, program start-up costs, and under-absorption eases, and how operating cash flow converts from earnings as contract assets and receivables fluctuate.
- Backlog conversion and customer awards, given that much backlog is not a firm minimum purchase commitment and can be delayed or cancelled.
- Debt repayment and refinancing plans for the $485.0 million convertible notes due 2021, covenant headroom, and variable-rate exposure.
- Developments in the securities litigation and the contested pension withdrawal-liability arbitration, including any change in the company’s assessment of potential losses.