Dycom Industries, Inc. — FY2013 Form 10-K
Period clarification: This is an annual report for the fiscal year ended July 27, 2013, not a standalone 2012 Q4 filing. It includes unaudited quarterly results for FY2013 and FY2012.
Business context and reporting period
Dycom provides telecommunications engineering, construction, maintenance and installation, underground utility locating, and electric and gas utility services in the U.S. and Canada. Telecommunications generated 87.7% of FY2013 revenue. The December 2012 acquisition of Quanta Services’ telecommunications infrastructure subsidiaries, plus fourth-quarter purchases of Sage and tower-company assets, materially expanded the business; acquired results are included from their respective acquisition dates.
Financial performance
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Revenue | $1,608.6 million | $1,201.1 million | +33.9% |
| Operating income | $76.9 million | $65.5 million | +17.6% |
| Operating margin | 4.8% | 5.4% | Down 0.6 percentage points |
| Net income | $35.2 million | $39.4 million | −10.6% |
| Diluted EPS | $1.04 | $1.14 | −8.8% |
| Operating cash flow | $106.7 million | $65.1 million | +64.0% |
| Capital expenditures | $64.7 million | $77.6 million | −16.7% |
Revenue growth included $337.9 million from FY2013 acquisitions. Excluding acquired businesses, revenue increased 5.8%; telecommunications revenue rose 8.9%, while underground locating and electric/gas/other revenue declined 3.7% and 28.4%, respectively. Cost of earned revenues was 80.8% of revenue, broadly in line with 80.7% a year earlier. Gross margin was approximately 19.2%, versus 19.3%. Lower net income reflected higher interest expense, acquisition-related costs, higher depreciation and amortization, and a substantial reduction in other income, chiefly gains on asset sales.
For the fourth quarter, revenue was $478.6 million versus $318.0 million in FY2012 Q4; net income was $14.7 million versus $13.3 million, and diluted EPS was $0.43 versus $0.39.
Liquidity, debt and balance sheet
Cash and equivalents were $18.6 million at year-end, down from $52.6 million. Working capital was $341.3 million, up from $262.4 million. Operating cash flow of $106.7 million was more than offset by $389.1 million of investing outflows, including $330.3 million for acquisitions, resulting in a $34.0 million decrease in cash.
Year-end debt principal was approximately $448.4 million: $277.5 million of 7.125% senior subordinated notes due 2021, $121.9 million under the term loan, and $49.0 million of revolving borrowings. The balance sheet reports $451.982 million of debt including the notes’ premium, of which $7.813 million was current. Additional borrowing availability under the credit agreement was $179.3 million, with $46.7 million of letters of credit outstanding. The company reported compliance with its financial covenants. Net receivables were $252.2 million and costs and estimated earnings in excess of billings were $204.3 million; days sales outstanding for receivables increased to 48 from 41.
Material changes, outlook and risks
- Backlog rose to $2.197 billion from $1.565 billion; management expected to complete 55.4% within the next 12 months. Backlog includes estimates under agreements that may not guarantee customer work volumes and can be delayed or canceled.
- Management cited demand drivers including fiber deployment, broadband capacity and reliability needs, wireless network upgrades and mobile-data backhaul. It described the economy as slowly growing, but provided no specific revenue or earnings guidance.
- FY2014 capital expenditures, net of disposals, were expected to be $70–$75 million, primarily funded by operating cash flow, credit availability and cash.
- The Quanta-related acquisition added $335.4 million of revenue from its acquisition date, but its post-acquisition net income, including allocated management costs, was not material. FY2013 included approximately $6.8 million of acquisition and integration costs and a $0.3 million deferred-financing-cost write-off.
- Key risks include dependence on a concentrated customer base (top five customers represented 58.5% of revenue), cancellable master service agreements, project and cost-estimation uncertainty, cyclicality and weather, labor and insurance costs, acquisition integration, and debt covenants. A California putative wage-and-hour class action was at an early stage; the company said loss likelihood and amount could not yet be estimated.
- No goodwill or indefinite-lived intangible impairment was recorded. Management flagged UtiliQuest as more exposed to potential impairment if demand or its long-term cash-flow outlook weakens.
Most important facts for investors to verify
- How much of reported growth and backlog converts into profitable organic work, apart from acquired operations.
- Whether margins recover after FY2013 operating-margin compression and the acquisition-related cost burden.
- Receivables collection, unbilled contract balances and cash conversion, particularly given higher receivable days.
- Debt reduction capacity, covenant headroom, variable-rate exposure and the cash demands of planned capital spending and repurchases.
- Acquisition integration, final purchase-price allocations and any subsequent developments in the California wage-and-hour litigation or insurance claims.