Dycom Industries, Inc. — Form 10-Q Summary
Business context and period: Dycom provides specialty contracting, construction, maintenance and locating services, principally to telecommunications customers. The filing covers the three months ended April 25, 2020 (fiscal 2021 first quarter), compared with the three months ended April 27, 2019. The company operates as one reportable segment.
Financial results and liquidity
| Metric | Quarter ended Apr. 25, 2020 | Comparable 2019 quarter |
|---|---|---|
| Contract revenue | $814.3 million | $833.7 million |
| Net income (loss) | $(32.4) million | $14.3 million |
| Diluted earnings (loss) per share | $(1.03) | $0.45 |
| Adjusted EBITDA (non-GAAP) | $69.9 million; 8.6% of revenue | $73.6 million; 8.8% of revenue |
| Cash from operating activities | $85.2 million | $(56.1) million |
| Capital expenditures | $20.7 million | $45.8 million |
Margins and unusual items: Costs of earned revenues were 83.5% of revenue versus 84.2% a year earlier; management cited improved labor productivity and work mix, partly offset by higher materials and other direct costs. General and administrative expense rose to $65.9 million, or 8.1% of revenue, from $58.6 million, or 7.0%; the prior-year quarter included a $10.3 million bad-debt recovery. A $53.3 million goodwill impairment at the Broadband reporting unit drove the reported net loss. A $12.5 million gain on debt extinguishment partially offset the impact. Adjusted EBITDA excludes these and certain other items; it is a non-GAAP measure.
Cash, debt and liquidity: Cash and equivalents were $643.9 million at April 25, 2020, versus $54.6 million at January 25, 2020. Total debt was $1.386 billion, including $675.0 million of revolver borrowings, $438.8 million of term loans and $293.0 million principal of convertible notes due 2021. Debt increased substantially during the quarter as Dycom drew on its credit facility; financing activities provided $522.3 million. The filing reports $22.8 million of undrawn revolver capacity after borrowings and letters of credit, and states the company was in compliance with credit-agreement covenants. Operating cash flow benefited from working-capital timing, including higher payables and accrued liabilities. DSO increased to 125 days from 108 days a year earlier.
Material changes and operating trends
- Revenue declined $19.4 million, or about 2.3%, year over year. Excluding $4.7 million of prior-year storm-restoration revenue, the decrease was $14.7 million. Customer-level changes were mixed; revenue from AT&T declined while CenturyLink revenue increased.
- The top five customers generated 78.5% of revenue, down from 80.4%; Verizon, AT&T, CenturyLink and Comcast each represented more than 10% of current-quarter revenue. Telecommunications accounted for 89.2% of revenue.
- Backlog was $6.442 billion at April 25, 2020, down from $7.314 billion at January 25, 2020. Dycom estimated 39.0% would be completed in the next 12 months. Backlog is not a GAAP measure and may change, including through cancellations or schedule changes.
- Net contract assets increased to $250.4 million from $236.7 million at January 25, 2020. Verizon represented 41.9% of combined receivables and contract assets at quarter-end.
Outlook, risks and contingencies
- COVID-19: Management said services had generally been considered essential and were not materially interrupted as of the filing, but the ultimate effect remained uncertain. Some customers restricted technicians’ access to third-party premises and shifted toward subscriber self-installation, weakening demand for Broadband’s in-home installation work. Dycom warned that further disruption could materially adversely affect operations, cash flows and financial condition.
- Goodwill and assumptions: The impairment test used a 1.5% terminal growth rate and 12% discount rate, versus 3.0% and 10% in the prior assessment. Broadband had $10.1 million of goodwill remaining after the charge. Management said a 100-basis-point higher discount rate would have added about $4.0 million to the impairment; a 25% decline in estimated fair value would have added about $10.1 million.
- Debt tender offer: On May 5, 2020, Dycom announced an offer to purchase all outstanding 0.75% convertible notes due 2021, with $293.0 million principal outstanding as of May 4. The offer was subject to customary conditions and scheduled to expire June 2, 2020, unless extended or terminated. Management stated capital resources were sufficient for at least the next 12 months, while emphasizing cost and capital-expenditure discipline.
- Other exposures: Frontier Communications entered Chapter 11; Dycom reported approximately $16.7 million of receivables and contract assets and expected payment as a critical vendor. A securities class action had an agreement in principle to settle, subject to final documentation and court approval; the company expected insurance to cover the settlement. A disputed, approximately $13.0 million multiemployer pension withdrawal-liability claim was in arbitration, with a hearing expected in 2020. The amount of potential loss for derivative actions was not estimable.
Important facts for investors to verify
- Subsequent COVID-19 effects on customer work, particularly Broadband installations, and whether they cause additional impairment or revenue and cash-flow pressure.
- Completion and terms of the convertible-note tender offer, remaining 2021 maturity exposure, and revolver availability and covenant headroom.
- Backlog conversion, customer project cancellations or delays, and continued customer concentration.
- Collectability and billing timing for receivables and contract assets, including Frontier exposure, as DSO increased.
- Cash-flow sustainability apart from working-capital timing, and the impact of reduced capital spending and future equipment needs.
- Resolution of the securities litigation and pension withdrawal-liability arbitration.