Dycom Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter ended January 28, 2017; comparable quarter ended January 23, 2016. Fiscal year ends in July. Amounts below are in U.S. dollars.
Business context
Dycom provides telecommunications infrastructure engineering, construction, maintenance and installation services, as well as utility locating and other utility services. It operates as one reportable segment. Management cited demand from fiber and 1-gigabit network deployments, new customer awards, rural broadband projects and wireless network investment. Results are seasonal, with winter weather and fewer workdays often weighing on the second and third fiscal quarters.
Financial performance
| Metric | Three months ended Jan. 28, 2017 | Prior-year quarter | Six months ended Jan. 28, 2017 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $701.1 million | $559.5 million | $1,500.4 million | $1,218.7 million |
| Operating income* | $45.9 million | $32.3 million | $135.3 million | $105.6 million |
| Operating margin* | 6.5% | 5.8% | 9.0% | 8.7% |
| Net income | $23.7 million | $15.5 million | $74.7 million | $46.3 million |
| Diluted EPS | $0.74 | $0.46 | $2.32 | $1.37 |
| Operating cash flow | — | $64.2 million | $46.5 million | |
| Capital expenditures | — | $76.9 million | $90.9 million |
*Operating income and margin are calculated as revenue less costs of earned revenues, general and administrative expense, and depreciation and amortization.
Quarterly revenue increased about 25%, and net income increased about 53% year over year. For the six-month period, revenue rose about 23% and net income about 61%. Management attributed revenue growth primarily to customer network investment, new awards and fiscal 2016 acquisitions. Direct costs were 80.1% of revenue in the quarter versus 80.5% a year earlier; G&A was 8.3% versus 8.4%. For the six months, direct costs were 78.4% versus 78.5%, and G&A was 7.9% versus 8.1%.
Six-month operating cash flow improved, but capital expenditures exceeded it by $12.7 million. Working-capital changes and other long-term asset and liability changes used $101.0 million of operating cash flow, including higher costs and earnings in excess of billings and income-tax receivables. Cash and equivalents were $29.5 million at period-end, down from $33.8 million at July 30, 2016.
Financial position and material changes
- Total debt carrying value was $759.4 million, comprising $376.9 million of term loans and $382.5 million of convertible notes, net of discount and issuance costs. The notes have $485.0 million principal due in 2021 and a 0.75% coupon. Long-term debt was $740.6 million; current debt was $18.8 million.
- The $450 million revolving facility had no borrowings outstanding. The company reported $392.4 million of additional availability under the most restrictive covenant. It was in compliance with its leverage and interest-coverage covenants.
- Current assets were $888.3 million and current liabilities $263.2 million; working capital excluding current debt was $644.0 million, as defined by the company. Income-tax receivable was $26.6 million.
- In the second quarter, Dycom added a $35 million incremental term loan for general corporate purposes and repurchased 313,006 shares for $25 million, at an average $79.87 per share. The February 2017 board action extended the repurchase program and authorized an additional $75 million; $150 million was available as of March 2, 2017.
- Backlog was $5.112 billion, down from $6.031 billion at July 30, 2016; the company expected to complete 46.2% within the next 12 months. Backlog is not a GAAP measure and may change with cancellations, delays or customer demand.
Outlook, risks and contingencies
- The filing provides no quantified revenue or earnings guidance. Management described industry demand opportunities but cautioned that customer spending, project timing, weather and economic conditions affect results.
- Activity on contracts acquired from Goodman was considerably below prior expectations, and Dycom reduced near-term revenue expectations for those operations. Contracts remained in effect, customer relations were not adversely affected, and management reported no impairment trigger at January 28, 2017.
- Customer concentration increased: the top five customers represented 75.5% of six-month revenue versus 66.7% a year earlier; AT&T accounted for 28.7%. Many agreements allow termination for convenience, and customers may not commit to specific service volumes.
- A multiemployer pension plan demanded approximately $13 million in withdrawal liability after a subsidiary ceased operations. Dycom disputes the claim and reported monthly payments of approximately $0.1 million while review proceeds.
- Goodman retained responsibility for a Texas sales-tax dispute of approximately $31.7 million. Dycom said the state could assert successor liability; $20 million remained in escrow for seller indemnification obligations.
- Other disclosed matters include a putative worker misclassification and wage lawsuit with unspecified damages, a patent appeal and related litigation, and a dispute with Quanta following a bench trial. Management said the worker case was too early to assess; the PAGA case was agreed to settle for an immaterial amount, subject to court approval.
- Interest-rate exposure includes $376.9 million of variable-rate term debt; management estimated a 50-basis-point rate change would alter annual interest expense by about $1.9 million.
Most important facts for investors to verify
- Whether customer spending and the reported backlog convert into revenue, particularly given customer concentration and cancellable agreements.
- Whether Goodman contract activity recovers and whether the acquisition’s final purchase-price allocation or future performance indicates impairment.
- Cash conversion and working-capital trends, including costs and earnings in excess of billings, tax receivables and capital spending.
- Debt repayment capacity, covenant headroom and the potential effect of variable interest rates and share repurchases.
- Resolution of the disputed pension withdrawal liability, Goodman-related Texas tax exposure and pending legal matters.