Dycom Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended October 29, 2016; comparable quarter ended October 24, 2015. Dycom provides telecommunications and utility infrastructure contracting services, primarily in the United States. Results are unaudited and interim results are not necessarily indicative of the full year.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Contract revenue | $799.2 million | $659.3 million | +21.2% |
| Income before taxes | $81.4 million | $49.5 million | +64.5% |
| Net income | $51.1 million | $30.8 million | +65.6% |
| Diluted EPS | $1.59 | $0.91 | +$0.68 |
| Operating margin | 11.2% | 11.1% | +0.1 percentage point |
| Cash used in operations | $41.6 million | $28.9 million | Greater use of cash |
| Capital expenditures | $40.1 million | $40.8 million | Down $0.7 million |
- Revenue growth reflected customer network deployments, new awards, and acquisitions completed in fiscal 2016. Acquired businesses contributed $56.6 million of current-quarter revenue, versus $29.9 million in the prior-year quarter.
- Costs of earned revenue were 76.9% of revenue in both periods. General and administrative expense declined to 7.5% of revenue from 7.8%, while depreciation and amortization increased to 4.3% from 4.2%.
- The effective tax rate was 37.3%, compared with 37.7%. Prior-year results included a $16.3 million debt-extinguishment charge; there was no corresponding charge this quarter.
Cash, debt and liquidity
- Cash and equivalents were $21.7 million at quarter-end, down from $33.8 million at July 30, 2016. Operating and investing activities used $41.6 million and $38.2 million, respectively; financing activities provided $67.7 million, primarily from $68.0 million of revolving-facility borrowings.
- Operating cash use was driven chiefly by a $115.5 million increase in costs and estimated earnings in excess of billings, reflecting higher activity late in the quarter, and by incentive-compensation payments. Working-capital changes and other long-term asset and liability changes used $137.4 million.
- Total debt carrying value was $792.0 million: $346.3 million of term loans, $68.0 million of revolving borrowings, and $377.8 million net carrying value of convertible notes. Cash less debt was approximately $770.3 million.
- Additional revolving-facility availability was $324.4 million after covenant restrictions. Dycom was in compliance with its credit-agreement covenants. Working capital, excluding current debt, was $672.5 million.
- Current assets were $966.9 million and current liabilities were $312.0 million. Costs and estimated earnings in excess of billings increased to $489.0 million from $377.0 million.
Changes, outlook and risks
- Backlog was $5.203 billion at October 29, 2016, down from $6.031 billion at July 30, 2016. The filing attributes $211 million of the decrease to a reduction in estimated services for a recently acquired business and $413 million to a customer modifying its plans. Management expected 42.4% of quarter-end backlog to be completed in the next 12 months. Backlog is an estimate, not a GAAP measure, and may be revised, delayed, or canceled.
- Management cited demand drivers including fiber deployment, 1-gigabit network upgrades, wireless data growth, rural broadband funding, and network integration. It did not provide specific financial guidance. It stated that cash and credit availability should be sufficient for obligations and normal equipment replacement for at least the next 12 months.
- Customer concentration increased: the top five customers generated 74.9% of revenue, versus 64.9% a year earlier; AT&T alone accounted for 29.0%, versus 19.1%. Customer spending decisions, contract cancellations, project timing, weather, and operating conditions can affect results. The business is typically seasonally weaker in the second and third fiscal quarters.
- Dycom reported a disputed approximately $13.0 million multiemployer pension withdrawal-liability demand; the subsidiary began monthly payments of approximately $0.1 million while contesting the claim. The company also disclosed employment-related class or representative lawsuits for which potential losses could not yet be estimated.
- A Goodman Networks acquisition escrow relates in part to a Texas sales-tax dispute of approximately $31.7 million. Goodman retained responsibility, but the state could assert Dycom is a successor; Dycom says it would seek indemnification. The filing also notes performance and surety bonds of $177.6 million and $57.6 million of standby letters of credit.
- Variable-rate debt was $414.3 million; management estimated that a 50-basis-point rate change would affect annual interest expense by approximately $2.1 million. The company also identified potential goodwill and intangible-asset impairment risks if operating or market conditions deteriorate.
Key facts for investors to verify
- Whether the enlarged customer concentration and elevated unbilled costs convert into timely billings and collections; DSO for costs and estimated earnings in excess of billings rose to 54 days from 44 days year over year.
- Whether the $5.203 billion backlog is executed as expected, particularly after the customer plan change and acquired-business estimate reduction.
- Developments in the disputed pension withdrawal liability, employment litigation, and Texas sales-tax matter, including any changes in estimated exposure or escrow protection.
- Debt and liquidity trends, including revolver usage, covenant headroom, and interest-rate sensitivity.