Dycom Industries, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended July 29, 2017 (52 weeks), with comparative FY2016 (53 weeks). The filing includes unaudited fourth-quarter results; it is an annual report, not a standalone Q4 filing.
Business context and financial performance
Dycom provides telecommunications network engineering, construction, maintenance and installation, underground utility locating, and related utility services in the U.S. and Canada. Telecommunications work generated 91.9% of FY2017 revenue. Growth drivers cited include fiber-network expansion, broadband demand, and wireless network upgrades.
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $3.067 billion | $2.673 billion |
| Operating income (revenue less operating expenses) | $275.0 million | $246.9 million |
| Operating margin | 9.0% | 9.2% |
| Net income | $157.2 million | $128.7 million |
| Diluted earnings per share | $4.92 | $3.89 |
| Cash from operating activities | $256.4 million | $261.5 million |
Revenue increased 14.8% and net income rose 22.1%. Cost of earned revenue increased to 78.4% of revenue from 78.0%; general and administrative expense improved to 7.8% from 8.1%. FY2017 effective tax rate was 37.2%, versus 37.6%.
Fourth quarter: Revenue was $780.2 million, compared with $789.2 million in FY2016 Q4; net income was $43.7 million versus $49.4 million. FY2016 included an additional operating week in Q4, limiting direct comparison.
Cash flow, balance sheet and capital allocation
- Cash and equivalents were $38.6 million at year-end. Working capital, as defined by the company excluding current debt, was $641.6 million, up from $541.7 million.
- Capital expenditures were $201.2 million; operating cash flow less capital expenditures was approximately $55.2 million, before acquisitions and financing activity.
- Total debt carrying value was $759.9 million, including $367.7 million of term loans and $392.2 million carrying value for $485.0 million principal amount of 0.75% convertible notes due 2021. No revolver borrowings were outstanding; covenant-based revolver availability was $401.3 million.
- The company repurchased 713,006 shares for $62.9 million. It paid no cash dividends and does not anticipate dividends in the foreseeable future.
Changes, outlook and risks
- Revenue growth reflected customer network deployments, new awards, and acquired operations. The company acquired Texstar for $26.1 million. FY2017 cost pressure included higher labor and subcontractor costs and a greater mix of work requiring company-supplied materials.
- Backlog was $6.016 billion, slightly below $6.031 billion a year earlier; management expected 46.4% to be completed within 12 months. Backlog is not a GAAP measure, may change, and largely reflects contracts without guaranteed work volumes.
- Management described long-term demand prospects positively but provided no specific revenue or earnings guidance. Planned capital expenditures for the 12 months ending July 28, 2018 were $175–$185 million.
- The company changed its fiscal year-end from July to January, with a six-month transition period ending January 27, 2018.
- Customer concentration is substantial: the top five customers generated 76.1% of FY2017 revenue; AT&T accounted for 26.3%. Most master service agreements can be terminated on notice and do not guarantee minimum work.
- Risks include customer spending reductions, competition and pricing pressure, seasonal weather disruptions, labor availability and cost, self-insured claims, receivable and unbilled-work collection, and debt covenant restrictions.
- A subsidiary disputes a multiemployer pension plan’s approximately $13 million withdrawal-liability demand; arbitration was expected in 2018, and monthly payments of about $0.1 million had begun. Separately, an appellate court affirmed the invalidity ruling in a subsidiary’s patent case; the opposing party may renew its request for attorney fees. Goodman acquisition activity levels were below expectations, and $10 million remained in escrow for indemnification claims.
Investor verification points
- Review customer exposure, contract renewal and cancellation terms, and the durability of backlog conversion.
- Assess whether cost ratios and operating margins stabilize as the business grows, and compare Q4 results after adjusting for FY2016’s extra week.
- Monitor working-capital conversion, particularly receivables and $389.3 million of costs and estimated earnings in excess of billings.
- Confirm debt covenant headroom, the cash-versus-share settlement approach for convertible notes, and potential dilution from notes and warrants.
- Track the pension withdrawal-liability arbitration, Goodman escrow resolution, and any developments in the patent matter.