Dycom Industries, Inc. — Q3 FY2020 Form 10-Q
Business context and period. Dycom provides specialty contracting, construction, maintenance and facility-locating services, primarily for telecommunications customers. The quarter ended October 26, 2019; comparative periods ended October 27, 2018. The company reports one operating segment. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q3 FY2020 | Q3 FY2019 | Nine months FY2020 | Nine months FY2019 |
|---|---|---|---|---|
| Contract revenue | $884.1 | $848.2 | $2,602.1 | $2,379.1 |
| Net income | $24.2 | $27.8 | $68.4 | $75.0 |
| Diluted EPS | $0.76 | $0.87 | $2.15 | $2.34 |
| Adjusted EBITDA (non-GAAP) | $91.7 | $98.6 | $265.6 | $270.1 |
| Adjusted EBITDA margin | 10.4% | 11.6% | 10.2% | 11.4% |
| Net income margin | 2.7% | 3.3% | 2.6% | 3.2% |
- Revenue rose 4.2% in Q3 and 9.4% for the nine-month period, while net income fell about 13% and 9%, respectively. Adjusted EBITDA declined in both comparisons.
- Costs of earned revenues increased to 81.9% of revenue in Q3 from 81.0%, and to 82.5% for nine months from 81.1%. Management cited project mix and higher materials costs; nine-month costs also included estimated warranty costs for prior-period work.
- Interest expense rose to $13.1 million in Q3 and $38.2 million year to date, primarily reflecting higher borrowings. Nine-month results included an $8.2 million warranty charge and a $10.3 million recovery of previously reserved receivables and contract assets in adjusted EBITDA reconciliation. Q3 also included $1.8 million of tax credits; the prior quarter included $1.1 million of tax expense related to a prior-year filing.
Cash flow, debt and liquidity
- For the nine months, operating cash flow was negative $133.8 million, versus negative $18.3 million a year earlier. Investing cash outflow was $85.4 million (including $101.9 million of capital expenditures); financing provided $102.1 million.
- Working-capital demands were substantial: accounts receivable used $297.6 million and net contract assets used $122.5 million of operating cash. DSO increased to 128 days from 106 days a year earlier. Management attributed the increase partly to work under a large customer program that is billed as tasks are completed.
- Cash and equivalents were $11.8 million at October 26, 2019, compared with $128.3 million at January 26, 2019; cash, cash equivalents and restricted cash totaled $17.1 million. Net contract assets increased to $323.3 million from $200.7 million.
- Debt carrying value was $992.7 million, versus $873.2 million at fiscal year-end: $450 million of term loans, $103 million drawn on the revolver and $439.7 million carrying value for $485 million principal of convertible notes due September 2021. The credit agreement matures in October 2023.
- Revolver availability under the most restrictive covenant was $207.7 million, down from $412.9 million at fiscal year-end. Dycom reported compliance with its covenants. Management said available capital and credit resources should cover obligations and expected operating needs for at least 12 months.
Changes, outlook and risks
- Q3 revenue growth was driven by increases from telecommunications customers, partly offset by a $43.5 million decline from a large cable operator. For nine months, growth excluding acquired-business and storm-restoration revenue was $243.5 million, partly offset by a $101.6 million decline from that cable operator.
- Backlog was $6.349 billion at October 26, down from $7.330 billion at January 26; the company expected to complete 39.8% of current backlog in the following 12 months. Backlog is an estimate, and many master service agreements do not commit customers to minimum work volumes and may be cancelled.
- No specific revenue or earnings guidance is provided in the supplied filing text. Management described broadband, fiber and 5G network deployment as sources of opportunity, while noting that customer budgets, project timing, permitting, weather and seasonality can affect results. The January and April fiscal quarters are typically weaker.
- Customer concentration is high: the top five customers generated 78.7% of nine-month revenue. Verizon, AT&T, CenturyLink and Comcast together represented about 69% of nine-month revenue. Verizon accounted for 41.1% of accounts receivable and contract assets, net, at quarter-end.
- Contingencies include a securities class action and a stayed shareholder derivative action; Dycom disputes the allegations and cannot estimate potential losses. A multiemployer pension plan has asserted approximately $13 million of withdrawal liability; arbitration was expected in 2020, with monthly payments of about $0.1 million continuing. The company also reported $157.1 million of performance and other contract surety bonds outstanding.
- Other risk factors include variable-rate debt exposure (a 50-basis-point rate change would affect annual interest expense by approximately $2.8 million at current variable borrowings), insurance claims, customer spending changes, contract cancellations and possible impairment of goodwill or intangible assets.
Key facts for investors to verify
- Whether revenue growth converts into improved margins, given rising direct costs and lower adjusted EBITDA margins.
- Collections and billing progress on receivables and contract assets, especially the large customer program; monitor DSO and operating cash flow.
- Customer spending, work awards and cancellations, with particular attention to concentration and the decline in reported backlog.
- Debt, revolver availability, covenant compliance and refinancing or repayment plans for the $485 million convertible notes due in 2021.
- Developments and potential financial exposure from the securities litigation and pension withdrawal-liability arbitration.