Dycom Industries, Inc. — Fiscal 2020 Second-Quarter 10-Q
Reporting period: Three and six months ended July 27, 2019, compared with the periods ended July 28, 2018. Dycom provides specialty contracting services, primarily for telecommunications networks. The company reports one segment.
Financial performance
| Metric | Quarter ended July 27, 2019 | Prior-year quarter | Six months ended July 27, 2019 | Prior-year six months |
|---|---|---|---|---|
| Contract revenue | $884.2 million | $799.5 million | $1,718.0 million | $1,530.8 million |
| Net income | $29.9 million | $29.9 million | $44.2 million | $47.1 million |
| Diluted EPS | $0.94 | $0.94 | $1.39 | $1.46 |
| Net margin | 3.4% | 3.7% | 2.6% | 3.1% |
| Adjusted EBITDA and margin | $100.2 million; 11.3% | $97.8 million; 12.2% | $173.8 million; 10.1% | $171.5 million; 11.2% |
| Operating cash flow | Not separately presented for the quarter | $(109.7) million | $37.2 million |
Quarter revenue rose about 10.6%; six-month revenue rose about 12.2%. Costs of earned revenues increased to 81.5% of quarterly revenue from 80.4%, and to 82.8% for the six months from 81.1%. Quarterly net income was essentially unchanged; six-month net income declined about 6.3%.
Balance sheet, debt and liquidity
- At July 27, cash and equivalents were $12.6 million, down from $128.3 million at fiscal year-end; cash plus restricted cash was $17.9 million.
- Total debt was $949.2 million, including $450 million of term loans, $65 million drawn on the revolver and $485 million principal amount of 0.75% convertible notes due September 2021. Long-term debt carrying value was $932.3 million.
- Revolving-credit borrowing availability was $276.5 million, compared with $412.9 million at January 26, 2019. The company reported compliance with its credit covenants. Working capital, excluding current debt, was $967.8 million.
- Operating cash flow was negative $109.7 million, principally reflecting growth in receivables and contract assets. Capital expenditures were $83.9 million. The company attributed the cash-flow shift from the prior-year period to working-capital needs, including increased work performed ahead of billing and collection.
- Net contract assets increased to $344.3 million from $200.7 million at fiscal year-end. Days sales outstanding was 117 days, versus 96 days a year earlier.
Material changes and notable items
- Revenue growth reflected higher work for several large telecommunications customers, including fiber deployments and network improvements. These increases were partly offset by lower construction and maintenance revenue from a leading cable operator.
- Quarterly revenue included $11.8 million from a contract modification for work performed in earlier periods. For the six months, the comparable prior-period work included in revenue was $8.9 million.
- Six-month results included a $10.3 million recovery of previously reserved receivables and contract assets, and an $8.2 million adjusted EBITDA add-back for warranty costs. The filing reports estimated warranty costs of $10.5 million for prior-period customer work, recorded in the first quarter.
- Six-month operating cash flow fell from positive $37.2 million to negative $109.7 million. Accounts receivable and contract assets used $171.5 million and $143.6 million of cash, respectively.
- Backlog declined to $6.691 billion from $7.330 billion at January 26, 2019. Dycom estimated that 39.4% of period-end backlog would be completed in the next 12 months; many customer agreements do not guarantee work volumes and may be cancelled.
Outlook, risks and contingencies
- The filing provides no specific quantitative revenue or earnings guidance. Management said available cash and credit resources were sufficient for obligations and expected operations for at least the next 12 months.
- Management described demand opportunities from fiber-network expansion and wireless construction, including 5G-related deployments. Results remain sensitive to customer budgets, project timing, permitting, weather and seasonality.
- Customer concentration is significant: the top five customers represented 79.4% of six-month revenue. Verizon represented 22.4%, AT&T 22.8%, CenturyLink 14.5% and Comcast 15.7%. Verizon also accounted for 42.3% of receivables and contract assets at period-end.
- Two securities-related lawsuits allege misleading statements, including concerning permitting risks; the company disputes the claims and cannot estimate potential loss. A related shareholder derivative suit was stayed. A separate disputed multiemployer pension withdrawal-liability claim is approximately $13 million; arbitration was expected in 2019, and the subsidiary was making payments of about $0.1 million per month.
- Other commitments include $156.1 million of performance and other surety contract bonds, $52.3 million of standby letters of credit, and $79.3 million of undiscounted long-term operating-lease obligations. The company also reported a $10.5 million warranty estimate for prior-period work.
Important facts for investors to verify
- Whether elevated receivables, contract assets and DSO convert to cash as planned, particularly given major-customer concentration.
- Whether cost pressures and the warranty estimate continue to weigh on margins, and how much reported performance benefited from the receivable recovery.
- Backlog quality, conversion timing and exposure to customer cancellations, permitting delays and changing customer capital budgets.
- Debt repayment and refinancing plans for the $485 million convertible notes due in 2021, alongside revolver availability and covenant headroom.
- Developments in the securities litigation and pension withdrawal-liability arbitration, including any changes to estimated exposure.