Dycom Industries, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2013, ended January 26, 2013; comparisons are with periods ended January 28, 2012. Unaudited results include the acquired Quanta Services businesses from December 3, 2012.
Business context
Dycom provides specialty contracting services, principally engineering, construction, maintenance and installation for telecommunications providers, as well as underground facility locating and utility services. Telecommunications generated 87.1% of six-month revenue. The December 2012 acquisition expanded the business across 49 states and added 2,157 employees.
Key financial metrics
| Metric | Three months | Six months |
|---|---|---|
| Revenue | $369.3 million, up 38.1% | $692.6 million, up 18.0% |
| Net income | $1.5 million, down from $3.5 million | $13.3 million, down from $16.5 million |
| Diluted EPS | $0.04, versus $0.10 | $0.40, versus $0.48 |
| Net margin | 0.4%, versus 1.3% | 1.9%, versus 2.8% |
| Operating cash flow | $91.2 million for the six months, versus $70.9 million | |
| Cash and equivalents | $22.6 million at January 26, versus $52.6 million at July 28, 2012 | |
| Debt | $426.3 million total carrying amount, including current portion; versus $187.6 million at July 28, 2012 |
Costs of earned revenue were 81.6% of revenue in the quarter (82.4% prior year) and 80.6% for six months (81.0% prior year). Current assets were $469.7 million and current liabilities $178.1 million. Six-month investing cash use was $341.0 million, including $314.8 million for the acquisition; financing provided $219.8 million.
Material changes and drivers
- The acquisition contributed $75.9 million of revenue from its closing through period-end; acquired-business net income was immaterial. Excluding the acquisition, quarterly revenue increased 9.7% and six-month revenue increased 5.0%.
- Quarterly telecom revenue excluding the acquired businesses rose 14.1%, helped by storm restoration, wireless network work, broadband projects and cable network upgrades. Locating and utility/other revenue declined.
- Net income fell despite higher revenue. Higher G&A included $5.8 million of quarterly acquisition costs and $0.9 million of integration costs; interest expense and depreciation/amortization also increased. Lower gains on asset sales reduced other income.
- Six-month accounts receivable and net contract costs in excess of billings provided $27.5 million and $39.8 million of operating cash, respectively. Days sales outstanding for receivables rose to 49 days from 35 days a year earlier.
Outlook, risks and unusual items
- Backlog was $2.019 billion at January 26, including $462.5 million from the acquisition; management expected to complete 61.5% within the next 12 months. Some master-service agreement volumes are estimates and customers may not be committed to buy.
- Management stated that cash resources and credit availability were sufficient for obligations and normal equipment replacement for at least 12 months. No specific earnings or revenue guidance was provided.
- A new five-year credit agreement provides a $125 million term loan and $275 million revolving facility. Outstanding borrowings were $145 million, with $210.9 million additional availability; the company reported covenant compliance. The $277.5 million of 7.125% notes is due 2021. Debt covenants restrict, among other matters, additional borrowing, certain payments and asset transactions.
- Key exposures include customer concentration (top five customers represented 58.2% of six-month revenue), seasonal weather and customer spending, acquisition integration and realization of expected benefits, and multiemployer pension withdrawal liabilities. Management also highlighted potential goodwill/intangible impairment risks, particularly at UtiliQuest, where the prior annual test showed a less-than-30% fair-value cushion.
- Outstanding performance and surety bonds totaled $432.8 million, with estimated costs to complete covered projects of $149.3 million; no customer had exercised bond rights. Accrued insurance claims were $50.0 million. Management considered pending legal matters not material, based on information available.
Important facts for investors to verify
- How much of reported growth and backlog converts to recurring revenue and profit after acquisition-related effects are removed.
- Whether integration delivers expected benefits and whether the preliminary acquisition purchase-price allocation changes materially.
- Working-capital collection trends, particularly the rise in receivable days, and sustainability of operating cash flow.
- Debt repayment capacity, covenant headroom, variable-rate exposure and the effect of future interest costs.
- Customer spending and concentration, backlog conversion assumptions, and developments in insurance, pension and impairment risks.