Dycom Industries, Inc. — FY2016 Form 10-K
Period clarification: The supplied filing is the annual report for the fiscal year ended July 30, 2016, not a standalone 2015 Q4 filing. FY2016 had 53 weeks; FY2015 had 52 weeks. The filing also reports quarterly results.
Business context and reporting period
Dycom provides telecommunications network engineering, construction, maintenance and installation, underground utility locating, and other utility contracting services, primarily in the United States. Telecommunications generated 90.7% of FY2016 revenue. The company reports one aggregated segment.
Growth drivers cited by management include fiber-network expansion, gigabit broadband, wireless network upgrades and rural broadband deployment. FY2016 acquisitions included TelCom, Goodman network operations and NextGen.
Financial performance and position
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $2,672.5 million | $2,022.3 million |
| Operating income, calculated from reported statements | $246.9 million | $154.3 million |
| Operating margin, calculated | 9.2% | 7.6% |
| Net income | $128.7 million | $84.3 million |
| Diluted EPS | $3.89 | $2.41 |
| Cash from operating activities | $261.5 million | $141.9 million |
| Capital expenditures | $186.0 million | $103.0 million |
| Cash and equivalents at year-end | $33.8 million | $21.3 million |
| Total debt, balance-sheet carrying value | $719.3 million | $520.7 million |
Revenue rose 32.2% and net income rose 52.7%. Operating margin improved as earned-revenue costs declined to 78.0% of revenue from 78.8%, while general and administrative expense declined to 8.1% from 8.8%. FY2016 operating cash flow less capital expenditures was approximately $75.5 million. Working capital, excluding current debt, was $541.7 million.
At July 30, 2016, debt included $346.3 million of term loans and $485.0 million principal of 0.75% convertible notes due 2021; the notes’ net carrying amount was $373.1 million. The $450 million revolving facility had no borrowings, with $392.4 million of borrowing availability under the most restrictive covenants. The company reported compliance with its leverage and interest-coverage covenants.
FY2016 fourth-quarter revenue was $789.2 million and net income was $49.4 million; diluted EPS was $1.54. The quarter had 14 weeks, versus 13 weeks in FY2015 Q4, when revenue was $578.5 million, net income $33.8 million and diluted EPS $0.97.
Material changes versus the prior comparable period
- Revenue increased $650.2 million year over year. Management attributed growth to increased customer network spending, new awards, acquisitions and the extra fiscal week. Excluding businesses not owned for the full year in both periods, revenue increased approximately $508.9 million.
- Operating income and net income increased; the effective tax rate was broadly stable at 37.6% versus 37.8%.
- Operating cash flow increased to $261.5 million, while investing cash use rose to $333.1 million, including $157.2 million for acquisitions and $186.0 million of capital expenditures.
- Backlog rose to $6.031 billion from $3.680 billion, primarily from new awards and contract extensions. Management expected 38.5% of year-end backlog to be completed in the next 12 months.
- Customer concentration increased: the top five customers represented 69.7% of revenue versus 61.1%. AT&T was 24.4%; CenturyLink 14.5%; Comcast 13.6%; and Verizon 11.0%.
Outlook, risks and unusual items
- Outlook: Management described industry demand trends as supportive but gave no numerical revenue or earnings guidance in the provided text. It forecast FY2017 capital expenditures of $175 million to $185 million, primarily for growth and fleet replacement.
- Debt refinancing: Dycom issued $485 million of 0.75% convertible notes, redeemed $277.5 million principal of 7.125% notes, and recorded a $16.3 million pretax extinguishment loss. Noncash amortization of the new notes’ debt discount added $14.7 million to FY2016 interest expense. Convertible-note conversion price was $96.89 per share; warrants have a $130.43 strike price.
- Customer and contract exposure: Many master service agreements can be terminated on notice and do not guarantee minimum work. Customer concentration, competitive bidding, customer insourcing and changes in telecom capital spending could materially affect results.
- Receivables and working capital: Year-end net receivables were $328.0 million and costs and estimated earnings in excess of billings were $377.0 million. Dycom sold $95.3 million of receivables through a customer-sponsored, non-recourse payment program during FY2016, which helped reduce receivable collection time.
- Acquisition contingency: Goodman’s seller retained responsibility for an approximately $31.7 million Texas sales-tax liability, but the state could assert successor liability against Dycom. A $20 million escrow component supports seller indemnification obligations, subject to release conditions.
- Other contingencies and risks: A patent-related case resulted in a ruling for Dycom on counterclaims, but the opposing party sought attorney fees; the company said the outcome was too early to assess. A subsidiary ceased operations while participating in a multiemployer pension plan; Dycom believes a statutory withdrawal-liability exemption applies but cannot assure it will prevail. Self-insured claims, weather, labor availability, environmental exposure, litigation, goodwill impairment, and interest-rate changes are additional risks.
- Capital allocation: Dycom repurchased $170.0 million of stock in FY2016 and had $100 million of additional repurchase authorization remaining at year-end. It did not anticipate cash dividends in the foreseeable future.
Important facts for investors to verify
- Whether backlog converts to work and revenue as expected, given cancellation rights and the absence of guaranteed volumes under many agreements.
- Whether revenue growth and margin improvement persist after accounting for the 53rd week, acquisitions, customer mix and productivity costs.
- Receivable and unbilled-work collection, including the continuing availability and economics of the customer-sponsored receivables program.
- Debt levels, covenant headroom, variable-rate exposure and potential dilution or settlement costs under the convertible notes and warrants.
- Resolution of the Goodman-related Texas sales-tax matter, patent-case fee motion and possible pension withdrawal liability.
- Execution of the $175–$185 million FY2017 capital plan and integration of acquired operations.