Dycom Industries, Inc. — Q3 FY2023 Form 10-Q
Reporting period: Three and nine months ended October 29, 2022; comparisons are with the periods ended October 30, 2021. Dycom provides specialty contracting, construction, maintenance, engineering and locating services, principally for telecommunications customers. It reports one operating segment.
Financial performance
| Metric | Quarter | Nine months |
|---|---|---|
| Contract revenue | $1,042.4 million, up 22.1% | $2,891.0 million, up 22.0% |
| Net income | $54.0 million vs. $28.7 million | $117.4 million vs. $47.8 million |
| Diluted EPS | $1.80 vs. $0.94 | $3.91 vs. $1.54 |
| Net margin | 5.2% vs. 3.4% | 4.1% vs. 2.0% |
| Adjusted EBITDA (non-GAAP) | $114.6 million vs. $83.1 million; margin 11.0% vs. 9.7% | $283.0 million vs. $201.0 million; margin 9.8% vs. 8.5% |
Revenue growth primarily reflected increased fiber deployments and network improvements for several telecommunications customers. Costs of earned revenues declined as a share of revenue, supporting margin improvement; management cited work mix, while higher fuel prices pressured costs. G&A rose in dollars but fell as a percentage of revenue. Higher interest rates increased interest expense. Other income included fixed-asset sale gains of $5.1 million for the quarter and $14.0 million for the nine months, partly offset by customer receivables-program fees of $3.3 million and $5.7 million, respectively. The current quarter had no acquired revenue or significant storm-restoration revenue.
Cash flow, liquidity and debt
- Nine-month operating cash flow was negative $81.5 million, versus positive $163.1 million in the prior-year period. Working-capital and other long-term asset/liability changes used $336.4 million, including a $350.7 million increase in accounts receivable and a $32.9 million increase in net contract assets.
- Investing cash outflow was $121.3 million, including $135.8 million of capital expenditures, partly offset by $14.5 million of asset-sale proceeds. Financing cash outflow was $42.7 million.
- Cash and equivalents were $65.3 million at October 29, 2022, down from $310.8 million at January 29, 2022. Working capital, excluding current debt, was $1,059.4 million. Revolver availability was $419.2 million; there were no revolver borrowings.
- Total debt carrying value was $828.9 million: $336.9 million under the term loan and $500.0 million principal of 4.50% senior notes due 2029. Term-loan weighted-average rate was 5.16%, up from 1.86% at fiscal year-end. The company reported compliance with credit-agreement covenants.
- Capital expenditures, net of disposals, are expected to be $165–$175 million for fiscal 2023. The company says available cash and credit resources should cover obligations and expected operating needs for at least 12 months.
Business outlook, risks and contingencies
Management described solid activity and cited demand for fiber-to-the-home, rural network deployments, wireless construction and network capacity expansion. The Infrastructure Act and state programs may support rural communications buildouts. Backlog was $6.116 billion, up from $5.822 billion at January 29, 2022; management expects 53.6% to be completed in the next 12 months. Backlog is an estimate, not a guaranteed or GAAP measure, and customer agreements often do not commit customers to specific service volumes. The filing provides no specific revenue or earnings guidance.
- Management flagged tight labor markets, constrained vehicle and equipment supply chains, rising equipment prices, inflation and cost-of-capital conditions; these may affect execution, costs and customer spending. Weather and seasonal patterns also affect results.
- Customer and revenue concentration is significant: the top five customers generated approximately 67% of nine-month revenue. AT&T accounted for 26.0%, Lumen 12.9%, and Comcast 11.5%. Four customers each represented more than 10% of receivables and contract assets at quarter-end.
- COVID-19-related disruptions, customer capital-budget changes, labor and material availability, permitting, and project timing remain potential risks. Management noted that customer work orders can be delayed or cancelled and backlog may change.
- Contingencies include a California employee wage-and-hour class action and related representative action, for which loss ranges cannot currently be estimated; and a disputed multiemployer pension withdrawal-liability claim of approximately $13 million, with monthly payments continuing during the dispute.
- The IRS is examining fiscal 2016 and fiscal 2020 returns. Management believes the tax provision is adequate, but an assessment could affect results and cash flows. Employer payroll tax deferrals included $17.1 million remaining in contractual obligations, with the principal remainder due by December 31, 2022.
- Performance and other surety bonds outstanding were $289.0 million; estimated costs to complete projects secured by those bonds were $95.1 million. Accrued insurance claims totaled $90.3 million.
Important facts for investors to verify
- Whether strong revenue growth and improved margins persist as customer spending, work mix, labor availability and input costs change.
- Whether receivables and contract assets convert to cash: receivables rose to $1.244 billion, DSO was 112 days, and operating cash flow was negative despite higher earnings.
- How much of the $6.116 billion backlog becomes revenue, given customer discretion over work orders and cancellation or timing risks.
- Exposure to major customers, higher variable-rate borrowing costs, and compliance with debt covenants as rates and cash needs evolve.
- Potential outcomes of the litigation, pension-liability dispute and tax examinations, which the filing does not quantify reliably.