Dycom Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended April 27, 2013; comparative periods ended April 28, 2012. The filing covers fiscal 2013, notwithstanding the request metadata’s “2012 Q3” label. Amounts below are in U.S. dollars.
Business context and results
Dycom provides specialty contracting services, primarily engineering, construction, maintenance and installation for telecommunications providers, as well as underground facility locating and utility services. It operates as one reportable segment. Results include the telecommunications infrastructure businesses acquired from Quanta Services on December 3, 2012.
| Metric | Three months | Nine months |
|---|---|---|
| Revenue | $437.4 million, up 47.7% | $1,130.0 million, up 28.0% |
| Income before taxes | $11.8 million, versus $15.6 million | $34.2 million, versus $43.1 million |
| Net income | $7.2 million, versus $9.6 million | $20.5 million, versus $26.1 million |
| Diluted EPS | $0.21, versus $0.28 | $0.61, versus $0.76 |
| Operating margin | Approximately 3.9%, versus 4.1% | Approximately 4.2%, versus 4.8% |
| Operating cash flow | Not separately presented | $91.3 million, versus $68.5 million |
Acquired businesses contributed $122.9 million of quarterly revenue and $198.8 million since acquisition; their net income since acquisition was immaterial. Excluding the acquired businesses, revenue increased 6.2% for the quarter and 5.4% year to date. Telecommunications revenue drove most of the organic growth. Lower other income—principally fewer and smaller asset-sale gains—also weighed on comparisons: quarterly other income was $1.5 million versus $7.6 million.
Cash, debt and liquidity
- Cash was $18.2 million at April 27, down from $52.6 million at July 28, 2012. Working capital was $324.7 million, up from $262.4 million; the current ratio was approximately 2.8.
- Operating cash flow of $91.3 million was more than offset by $360.3 million of investing outflows, including $319.0 million for the acquisition and $45.7 million of capital expenditures. Financing provided $234.6 million; cash declined $34.3 million over the nine-month period.
- Debt carrying value was $440.6 million, including $123.4 million on the term loan, $36.0 million in revolver borrowings and $277.5 million principal of 7.125% notes due 2021. Cash-adjusted debt was approximately $422.4 million.
- The five-year credit facility matures in December 2017. The company reported compliance with its financial covenants and $192.3 million of additional borrowing availability. The credit agreement requires leverage not to exceed 3.50x initially, stepping down over time, and interest coverage of at least 3.00x.
Outlook, commentary and risks
- Backlog was $2.003 billion, versus $1.565 billion at July 28, 2012; the company expected to complete 60.3% within the next 12 months. Some master-service-agreement work is not contractually committed to specified volumes. No quantified earnings or revenue guidance was provided.
- Management said the acquisition expands geographic reach, customers and capabilities, and may improve operating scale. Purchase-price allocation remained preliminary; management expected to finalize it in fiscal Q4. Acquisition and integration costs were $6.5 million and $2.3 million, respectively, for the nine months.
- Customer concentration is significant: the top five customers generated 58.6% of nine-month revenue. Demand depends on customer capital and maintenance budgets, project timing, weather, economic conditions and contract awards; quarterly results are seasonal and variable.
- Receivables collection metrics lengthened: days sales outstanding for receivables were 49 days versus 37 a year earlier; net unbilled contract balances were 36 days versus 32. Insurance claims, customer concentration, debt service and covenant restrictions are additional considerations.
- Outstanding performance and surety bonds totaled $434.4 million, covering projects with estimated completion costs of $149.2 million; no customer had exercised bond rights. Accrued insurance claims were $54.6 million. Management considered other pending legal matters not material; multiemployer pension participation may expose the company to withdrawal liability.
Most important facts for investors to verify
- How much reported growth and future backlog convert into profitable work, particularly given the acquisition’s immaterial net income to date.
- Whether organic growth, contract mix and cost control can sustain or improve margins as acquisition amortization and integration effects continue.
- Receivables, unbilled contract balances and cash conversion, including the elevated DSO figures and acquired-business collection patterns.
- Debt repayment capacity, interest-rate exposure on variable-rate borrowings, covenant headroom and the reliability of stated revolver availability.
- Customer spending and concentration trends, backlog conversion, insurance and surety exposures, and the final acquisition purchase-price allocation and expected synergies.