Dycom Industries, Inc. — Form 10-Q Summary
Business context and reporting period. Dycom provides specialty contracting services, primarily engineering, construction, maintenance and installation for telecommunications providers, along with utility locating and electric and gas utility services. This unaudited filing covers the three months ended October 25, 2014, the first quarter of fiscal 2015; comparisons are with the three months ended October 26, 2013. Dycom reports one operating segment.
Financial performance and position
| Metric | Q1 FY2015 | Prior-year quarter |
|---|---|---|
| Revenue | $510.4 million | $512.7 million |
| Income before taxes | $34.3 million | $31.1 million |
| Net income | $20.8 million | $18.7 million |
| Diluted EPS | $0.59 | $0.54 |
| Operating cash flow | $10.9 million | $(18.7) million |
| Investing cash flow | $(25.2) million | $(28.1) million |
| Financing cash flow | $10.1 million | $42.6 million |
- Revenue declined about 0.5%, while net income increased about 11.5%. Net margin was 4.1%, compared with 3.6%; income before tax was 6.7% of revenue, compared with 6.1%.
- Costs of earned revenue fell to 79.1% of revenue from 80.0%, reflecting improved operating efficiency, lower equipment and fuel costs, and better claims experience; higher material costs partly offset these benefits. General and administrative expense rose to 8.8% of revenue from 8.4%.
- Operating cash flow improved from a use of cash to a source of cash, but working-capital changes used $32.0 million, chiefly from higher receivables and costs and estimated earnings exceeding billings. Cash declined $4.2 million to $16.5 million.
- At October 25, 2014, total debt was $467.4 million, including $75.0 million of revolver borrowings, $111.7 million under the term loan and $277.5 million of 7.125% notes due 2021. Cash less total debt implies net debt of approximately $451 million. Additional borrowing availability was $145.7 million; the company reported compliance with credit-agreement financial covenants.
- Working capital was $440.1 million. Current assets were $652.7 million and current liabilities $212.6 million. Stockholders’ equity was $509.5 million.
Material changes and management commentary
- Revenue excluding businesses acquired in late fiscal 2014 and Q1 FY2015 declined approximately $12.4 million. Acquired businesses contributed $10.1 million of quarterly revenue.
- Dycom acquired Hewitt Power & Communications for $8.0 million, net of cash acquired. The preliminary purchase allocation included $5.8 million for customer relationships.
- Management cited demand drivers including fiber-network investment, wireless data growth, network upgrades and rural deployments. Backlog was $2.359 billion, up from $2.331 billion at July 26, 2014; Dycom expected to complete 59.2% within the next 12 months. Backlog is an estimate, not a GAAP measure, and contracts may be canceled or volumes may not be committed.
- No specific earnings or revenue guidance was provided in the supplied filing text. Management stated that cash and available credit should be sufficient for obligations and normal equipment replacement for at least the next 12 months. It did not anticipate cash dividends in the foreseeable future.
Risks, contingencies and unusual items
- Customer concentration is significant: the top five customers generated 59.4% of revenue, versus 57.2% a year earlier. AT&T contributed 21.2%, CenturyLink 13.1% and Comcast 12.8%.
- Receivables include approximately $20.1 million past due from a customer on a rural project; Dycom stopped work and filed liens covering approximately $17.7 million. Collection depends partly on asset values and lien priority amid other creditors’ claims. A related construction-lien priority lawsuit was unresolved, and management said the outcome could not yet be evaluated.
- A proposed settlement in a California employee wage-and-hour class action received preliminary court approval after quarter-end; $0.6 million was accrued, with a final approval hearing scheduled for February 2015.
- Seasonality, adverse weather, customer spending decisions, project timing and insurance-claim estimates may cause quarterly results to fluctuate. The company also disclosed goodwill impairment sensitivity at certain reporting units if customer demand or expected cash flows deteriorate.
- Other notable items included $1.5 million of gains on fixed-asset sales and a deferred income-tax benefit of $3.5 million. Management reported no material changes in risk factors or internal controls.
Important facts for investors to verify
- Whether the $20.1 million past-due rural-project receivable is collected, and the recovery and lien priority outcomes.
- Whether backlog converts to revenue as expected, given cancellation rights, uncommitted customer volumes and project timing.
- Future operating cash generation and working-capital requirements, particularly receivables and costs in excess of billings.
- Customer concentration, debt levels, borrowing availability and continued covenant compliance.
- Final acquisition purchase allocations and integration results, as well as the outcome of the California settlement approval process.