Business context and reporting period
Dycom Industries, Inc. is a specialty contractor providing engineering, construction, maintenance and installation services, principally to telecommunications customers, as well as underground facility locating and utility services. This fiscal first quarter covers the three months ended October 29, 2011; comparisons are with the three months ended October 30, 2010. Unless noted, amounts are in millions of dollars.
Financial performance and liquidity
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Contract revenue | $319.6 | $261.6 | +22.2% |
| Net income | $13.0 | $6.7 | +92.2% |
| Diluted EPS | $0.38 | $0.18 | +$0.20 |
| Net cash from operating activities | $19.4 | $19.1 | +$0.4 |
| Capital expenditures | $20.9 | $13.4 | +$7.4 |
- Costs of earned revenue were 79.9% of revenue versus 80.0%; general and administrative expense was 7.9% versus 8.7%, and depreciation and amortization was 5.0% versus 6.0%. Calculated operating income was approximately $23.1 million (7.2% margin), compared with $13.8 million (5.3%).
- Cash and equivalents were $51.3 million at quarter-end, up from $44.8 million at July 30, 2011. Working capital was $235.9 million. Operating cash flow was largely offset by capital spending; operating cash flow less capital expenditures was approximately negative $1.4 million.
- Total debt was $187.7 million, primarily $187.5 million of 7.125% senior subordinated notes due 2021. Cash less total debt implies net debt of approximately $136.4 million. No revolving-credit borrowings were outstanding; availability was $179.8 million, and the company reported compliance with its covenants.
- The current ratio was approximately 3.1. The fair value of the 2021 Notes was $183.0 million versus $187.5 million carrying value.
Material changes versus the prior comparable period
- Telecommunications revenue rose 28.6% to $264.1 million, supported by acquired operations, new and expanded customer work, and rural broadband activity. The two fiscal 2011 acquisitions contributed $14.5 million of the total revenue increase.
- Underground facility locating revenue declined 21.6% to $34.2 million, reflecting terminated contracts and a planned de-emphasis of technician-intensive work. Electric and gas utility and other revenue increased 69.5% to $21.3 million.
- Revenue from multi-year master service agreements and other long-term contracts fell to 80.6% of revenue from 90.0%; management attributed the shift to more short-term work, including rural broadband projects.
- Net income benefited in part from other income of $3.0 million, including a $2.9 million gain on asset sales, versus $1.8 million of other income and a $1.5 million asset-sale gain in the prior period. The effective tax rate decreased to 40.7% from 43.3%.
- Capital spending increased, principally for fleet replacement, new work opportunities and fuel efficiency. Operating cash flow remained broadly flat despite higher earnings, with working-capital changes using $11.6 million.
Outlook, management commentary, risks and unusual items
- No specific revenue or earnings guidance is provided. Management said existing cash and credit availability were sufficient for expected obligations, working capital and normal equipment replacement for at least the next twelve months.
- Backlog was $1.442 billion at October 29, 2011, compared with $1.412 billion at July 30, 2011; the company expected to complete 54.9% within twelve months. Backlog includes estimated future work under master service agreements, which may not commit customers to specific volumes.
- Management highlighted seasonality, weather, customer budget and project timing, contract terminations, cost control, insurance claims, acquisition integration and economic conditions as factors that can affect results. Revenue is highly concentrated: the top five customers represented 59.9% of quarterly revenue; AT&T, CenturyLink, Comcast and Verizon each contributed at least 10%.
- Outstanding surety and performance bonds were $172.4 million, with no customer claims reported; letters of credit were $41.2 million. Accrued insurance claims totaled $49.9 million. Management did not expect other pending legal matters to have a material financial effect; previously disclosed wage-and-hour settlements had been approved.
- The company reported $2.1 million of unrecognized tax benefits. Goodwill and other indefinite-lived intangibles were considered recoverable by management, but impairment could result if conditions deteriorate. The company reported effective disclosure controls and no material change in internal control over financial reporting.
- The company had no cash dividend and did not anticipate one in the foreseeable future. No shares were repurchased under the public repurchase program during the quarter; 2,181 shares were withheld for taxes on vested restricted stock units.
Important facts for investors to verify
- Whether revenue growth and improved operating margins persist, particularly given the changing mix of short-term versus long-term work and the contribution from acquired businesses.
- Whether customer concentration, contract-volume discretion and backlog conversion create material exposure to spending reductions or project delays.
- Whether working-capital requirements and increased capital expenditures affect cash generation as operations grow.
- Current covenant headroom and the capacity to meet debt service, insurance obligations and contractual commitments; confirm the reported $179.8 million revolver availability and $41.2 million of letters of credit.
- Whether asset-sale gains, insurance claims, goodwill and intangible-asset estimates, and unresolved tax positions materially affect future reported earnings or cash flows.