Dycom Industries, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended July 28, 2018; unaudited. Comparisons are with the periods ended July 29, 2017. Dycom provides specialty contracting services, principally telecommunications network engineering, construction, maintenance and installation. It reports one operating segment.
Financial performance and liquidity
| Metric | Three months ended July 28, 2018 | Prior-year quarter | Six months ended July 28, 2018 | Prior-year six months |
|---|---|---|---|---|
| Contract revenue | $799.5 million | $780.2 million | $1,530.8 million | $1,566.5 million |
| Net income | $29.9 million | $43.7 million | $47.1 million | $82.5 million |
| Diluted EPS | $0.94 | $1.38 | $1.46 | $2.60 |
| Adjusted EBITDA, non-GAAP | $97.8 million | $118.0 million | $171.5 million | $226.2 million |
| Adjusted EBITDA margin | 12.2% | 15.1% | 11.2% | 14.4% |
Quarterly revenue rose about 2.5%, but six-month revenue fell about 2.3%. Net income declined about 32% for the quarter and 43% for the six months. Net margin was 3.7% versus 5.6% in the quarter and 3.1% versus 5.3% year to date.
- Operating costs and margins: Costs of earned revenues were 80.4% of revenue in the quarter and 81.1% year to date, versus 77.8% and 78.4%. Management cited under-absorption on large customer programs, labor and subcontractor costs, lower operating leverage, and prolonged winter weather impacts on first-quarter productivity. G&A and depreciation also rose as a share of revenue.
- Cash flow: Six-month operating cash flow was $37.2 million, down from $192.3 million. Working-capital and other long-term asset/liability changes used $113.9 million, notably increases in receivables and contract assets. Investing used $84.9 million, including $80.5 million of capital expenditures and $20.9 million for an acquisition. Financing used $11.7 million. Cash and equivalents were $23.9 million at period end, versus $84.0 million at January 27, 2018.
- Working capital and collections: Working capital, excluding current debt, was $726.2 million, compared with $671.6 million at January 27. DSO was 96 days versus 87 days a year earlier. Adoption of the new revenue standard reclassified unbilled receivables between balance-sheet accounts; management said it did not change revenue timing, earnings, or opening retained earnings.
- Debt and liquidity: Debt carrying value totaled $758.6 million, including $346.0 million of term loans and $412.6 million net carrying value of convertible notes ($485.0 million principal). The revolving facility had no borrowings; availability was $401.4 million under the most restrictive covenant. Dycom reported compliance with its leverage and interest-coverage covenants. Term-loan rates averaged 3.84% at July 28.
Material changes, outlook and risks
- Drivers of revenue changes: Quarter growth reflected stronger work for a large telecom customer and a cable operator, partly offset by declines at other telecom customers. For the six months, revenue decreased after excluding acquisitions and storm work; reductions in existing customer programs and spending moderation outweighed growth from recent awards. Storm restoration contributed $3.8 million in the quarter and $18.6 million year to date.
- Backlog: Reported backlog was $7.881 billion at July 28, up from $5.847 billion at January 27; Dycom expected to complete 36.9% within the next 12 months. Backlog is a company estimate, largely under master service agreements, and customers often are not committed to minimum volumes and may cancel or delay work.
- Industry outlook and seasonality: Management described ongoing demand opportunities from fiber deployments, network upgrades, wireless capacity, small cells and 5G, and converged wireline/wireless networks. The filing gives no quantified earnings or revenue guidance. Demand depends on customer capital and maintenance budgets, project approvals, technology, economic conditions, and seasonal weather; outdoor work is typically weaker in quarters ending January and April.
- Concentration and execution risks: The top five customers represented 78.3% of six-month revenue. Comcast, AT&T, Verizon, and CenturyLink represented 21.6%, 22.4%, 17.6%, and 12.9%, respectively. Customer spending changes, contract terminations, labor and subcontractor availability, weather, project execution, and acquisition integration could affect results. Four customers each exceeded 10% of receivables and contract assets combined at quarter end.
- Unusual items and contingencies: Gains on fixed-asset sales contributed $4.9 million to quarterly other income and $13.3 million year to date. A disputed multiemployer pension-plan withdrawal claim was approximately $13.0 million; arbitration was pending and monthly payments of about $0.1 million were being made. Management said ordinary-course legal matters were not expected to materially affect the financial statements. Outstanding performance and surety bonds were $134.5 million.
- Capital allocation: No common shares were repurchased during the six-month period. After quarter end, on August 29, 2018, the board authorized a new $150 million repurchase program through February 2020. Management said it believed cash and credit availability were sufficient for obligations over at least the next 12 months and did not anticipate cash dividends in the foreseeable future.
Important facts for investors to verify
- Whether operating margins recover from higher labor, subcontractor and other direct costs, and whether the revenue mix supports improved cost absorption.
- Whether receivables, contract assets and DSO normalize and operating cash flow strengthens after the substantial working-capital use.
- How durable customer awards and spending are, given that the top five customers generated 78.3% of six-month revenue and much backlog is not firm-volume work.
- Progress on the pension withdrawal-liability arbitration and any change in the company’s estimated exposure.
- Capacity to fund capital spending, debt service and the newly authorized buyback while maintaining covenant compliance; also monitor variable-rate debt exposure and the September 2021 convertible-note maturity.