Business context and reporting period
Dycom Industries, Inc. provides telecommunications engineering, construction, maintenance and installation services, as well as utility locating and other utility services. This Form 10-Q covers the three months ended October 24, 2015, the first quarter of fiscal 2016; the comparable quarter ended October 25, 2014. The company operates as one reportable segment.
Financial performance and liquidity
| Metric | Quarter ended Oct. 24, 2015 | Comparable prior-year quarter |
|---|---|---|
| Revenue | $659.3 million | $510.4 million |
| Income before taxes | $49.5 million | $34.3 million |
| Net income | $30.8 million | $20.8 million |
| Diluted EPS | $0.91 | $0.59 |
| Operating cash flow | $(28.9) million | $10.9 million |
- Revenue grew approximately 29%; net income increased approximately 48%. The company reported a 23.1% gross margin before depreciation and amortization, versus 20.9%, and a 4.7% net margin, versus 4.1%.
- Operating cash flow was negative despite higher earnings, principally reflecting working-capital investment: increases in receivables and net costs and estimated earnings in excess of billings used $35.5 million and $51.3 million, respectively.
- Investing cash outflow was $88.5 million, including $48.6 million for the TelCom acquisition and $40.8 million of capital expenditures. Financing cash inflow was $117.9 million; cash ended at $21.8 million.
- At October 24, 2015, total debt carrying value was $641.6 million, compared with $525.6 million at July 25, 2015. Principal debt comprised $485 million of 0.75% convertible notes, $150 million under the term loan and $131.3 million drawn on the revolver. Revolver and term-loan borrowings are variable-rate.
- Working capital was $565.3 million. The company reported $260.8 million of additional borrowing availability under its credit agreement and compliance with its financial covenants.
- Backlog was $3.967 billion, up from $3.680 billion at fiscal year-end; management expected to complete 40.9% within 12 months.
Material changes versus the prior comparable period
- Revenue gains reflected network investment, including 1-gigabit and fiber deployments, new customer awards and acquired businesses. Acquisitions contributed $39.5 million of current-quarter revenue; management also cited approximately $111.2 million of revenue growth excluding businesses not owned for the full comparable periods.
- Costs of earned revenue fell to 76.9% of revenue from 79.1%, while general and administrative expense declined to 7.8% from 8.8%, reflecting operating leverage. Depreciation and amortization was 4.2% of revenue versus 4.5%.
- Interest expense rose to $9.1 million from $6.7 million. Results included a $16.3 million pretax loss on extinguishment of the 7.125% notes, redeemed in October using proceeds from the new convertible-note offering.
- The company repurchased 954,224 shares for approximately $70.0 million during the quarter. Shares outstanding at October 24 were 32.5 million, down from 33.4 million at July 25.
- The top five customers accounted for 64.9% of revenue, up from 59.4%; AT&T, CenturyLink and Comcast contributed 19.1%, 15.6% and 12.0%, respectively.
Outlook, commentary, risks and unusual items
- Management cited fiber, wireless-data and rural broadband deployments as demand drivers, including Connect America Fund activity. It did not provide specific revenue or earnings guidance in the supplied filing text.
- Fiscal 2016 capital expenditures, net of disposals, were expected to be approximately $150 million, funded primarily through operating cash flow, credit availability and cash on hand. Management believed available capital resources were sufficient for obligations and normal equipment replacement for at least the next 12 months.
- Management noted outdoor-work seasonality: adverse winter weather and fewer workdays can reduce revenue and profitability in the second and third fiscal quarters. Fiscal 2016 contains 53 weeks.
- Customer concentration, discretionary customer work orders and contract termination rights expose results to changes in customer spending, awards and project timing. Backlog is not a GAAP measure and may change through cancellations, delays or accelerations.
- Other risks include working-capital demands, variable interest rates, acquisition integration, insurance claims, and potential impairment of goodwill or intangibles. The company retained $88.0 million in accrued insurance claims; $314.9 million of performance and other surety bonds were outstanding.
- A patent-related dispute includes defendants’ inequitable-conduct counterclaims, with a bench trial scheduled for March 2016. The company said it was too early to evaluate the outcome; an adverse result could lead to attorneys’ fees, costs and expenses.
- The convertible financing involved $485 million of 0.75% notes due 2021, a $115.8 million note-hedge purchase and $74.7 million of warrant proceeds. The notes’ initial conversion price is $96.89 per share; warrants have a $130.43 strike price. Potential dilution, hedge-counterparty exposure and share-price effects are disclosed risks.
Important facts for investors to verify
- Whether revenue and backlog growth convert into cash, given negative operating cash flow and the increase in unbilled contract assets.
- Customer capital-spending plans and concentration, particularly the dependence on a small number of telecom and cable customers.
- Debt service, covenant headroom, revolver availability and potential dilution or settlement obligations under the convertible notes and warrants.
- Delivery against the approximately $150 million fiscal 2016 capital-expenditure outlook and integration of the TelCom acquisition.
- Developments in the patent litigation, insurance claims and other contingencies, and whether seasonality or project delays affect expected backlog conversion.