Dycom Industries, Inc. — Form 10-Q Summary
Business context and period: Dycom provides specialty contracting services, primarily for telecommunications networks, including engineering, construction, maintenance and installation. This unaudited report covers the fiscal third quarter ended October 24, 2020, and the nine months then ended; comparable periods ended October 26, 2019. Dycom reports one segment.
Financial performance and position
| Metric | Three months ended Oct. 24, 2020 | Nine months ended Oct. 24, 2020 |
|---|---|---|
| Revenue | $810.3 million, down 8.4% year over year | $2,448.5 million, down 5.9% |
| Net income | $33.9 million vs. $24.2 million | $38.5 million vs. $68.4 million |
| Diluted EPS | $1.05 vs. $0.76 | $1.20 vs. $2.15 |
| Net income margin | 4.2% vs. 2.7% | 1.6% vs. 2.6% |
| Adjusted EBITDA (non-GAAP) | $92.8 million; 11.5% of revenue, vs. $91.7 million; 10.4% | $265.3 million; 10.8% of revenue, vs. $265.6 million; 10.2% |
For the nine-month period, operating cash flow was $279.4 million, compared with cash used of $133.8 million a year earlier. Investing activities used $24.3 million, including $36.1 million of capital expenditures; financing activities used $297.9 million. Cash and equivalents were $12.0 million at quarter-end, down from $54.6 million at fiscal year-end.
At October 24, 2020, total debt was $568.1 million: $427.5 million term loans, $85.0 million revolver borrowings and $58.3 million principal amount of convertible notes. The company had $575.0 million of revolver availability and reported compliance with its credit covenants. Total assets were $2.065 billion and stockholders’ equity was $913.1 million. Backlog was $5.412 billion, down from $7.314 billion at January 25, 2020; Dycom expected to perform 43.2% of quarter-end backlog in the following 12 months.
Material changes versus comparable periods
- Quarterly revenue declined $73.9 million. Management cited lower work for several large telecommunications customers, partly offset by storm restoration revenue and increases from other customers. Nine-month revenue declined $153.6 million, with lower work for large telecom customers the principal factor.
- Quarterly costs of earned revenues fell to 81.3% of revenue from 81.9%, supporting higher quarterly profitability despite lower sales. For nine months, the ratio improved to 81.5% from 82.5%.
- Nine-month results included a $53.3 million goodwill impairment charge, largely nondeductible for tax purposes, and a $12.0 million gain on extinguishment of convertible debt. The company purchased $401.7 million principal amount of notes for $371.4 million, including interest and fees.
- Accounts receivable rose to $938.9 million from $817.2 million at fiscal year-end. Net contract assets declined to $188.1 million from $236.7 million. Quarter-end cash was lower, while debt was substantially reduced from $866.9 million at fiscal year-end.
Outlook, commentary, risks and unusual items
- No specific revenue or earnings guidance is provided. Management said cash resources and credit availability were sufficient for obligations and expected operating needs for at least the next 12 months, while emphasizing cost and capital-expenditure control amid COVID-19 uncertainty.
- Management described services as generally essential and not materially interrupted to date. However, COVID-19 restrictions and customer shifts toward self-installation reduced demand for in-home installation work, contributing to the Broadband reporting unit’s impairment. Its goodwill valuation used a 1.5% terminal growth rate and 12% discount rate, versus 3.0% and 10% in the prior assessment.
- Customer concentration is significant: the top five customers generated 75.6% of nine-month revenue. Verizon represented 19.8%, Lumen 18.0%, AT&T 16.6% and Comcast 16.0%. The company also reported $22.9 million of receivables and contract assets with Frontier Communications, which filed for Chapter 11; Dycom said it expected payment in full.
- Backlog is an estimate, not a GAAP measure, and much of it is under agreements without committed purchase volumes; customers can cancel work or agreements. Permitting delays, project changes, weather, customer spending and COVID-19 may alter backlog and timing.
- A securities class action settlement was approved and dismissed with prejudice; insurance covered the full settlement. A related shareholder derivative action remains pending, and potential loss cannot be estimated. A disputed approximately $13 million multiemployer pension withdrawal-liability claim is in arbitration, with a hearing expected in early 2021.
- The company authorized a $100 million share-repurchase program through February 2022; none had been used by October 24, 2020. A $29.2 million payroll-tax deferral under the CARES Act is payable in 2021 and 2022.
Important facts for investors to verify
- Whether telecom customer spending, project timing and the sharp backlog reduction translate into further revenue or margin pressure.
- Cash conversion and collection trends, particularly the large unbilled receivables balance and customer concentration.
- Debt repayment and refinancing plans for the remaining $58.3 million of convertible notes due September 2021, as well as variable-rate debt exposure.
- Whether Broadband demand recovers and whether additional goodwill or intangible-asset impairments become necessary.
- Developments in the derivative litigation and pension withdrawal-liability arbitration, and any resulting financial exposure.