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DY > SEC Filings for DY > Form 10-Q on 5-Mar-2014All Recent SEC Filings

Show all filings for DYCOM INDUSTRIES INC

Form 10-Q for DYCOM INDUSTRIES INC


5-Mar-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and accompanying notes included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended July 27, 2013. Our Annual Report on Form 10-K for the year ended July 27, 2013 was filed with the Securities and Exchange Commission ("SEC") on September 13, 2013 and is available on the SEC's website at www.sec.gov and on our website at www.dycomind.com.

Overview

We are a leading provider of specialty contracting services throughout the United States and in Canada. These services include engineering, construction, maintenance and installation services to telecommunications providers, underground facility locating services to various utilities, including telecommunications providers, and other construction and maintenance services to electric and gas utilities and others. For the six months ended January 25, 2014, the percentage of our revenue by customer type from telecommunications, underground facility locating, and electric and gas utilities and other customers, was approximately 87.4%, 7.3%, and 5.3%, respectively.

Our revenues and results of operations exhibit seasonality as a significant portion of the work we perform is outdoors. Consequently, our operations are impacted by extended periods of adverse weather which are more likely to occur during the winter season, impacting our second and third fiscal quarters. Variations influenced by seasonality may be further impacted as a result of businesses acquired during fiscal 2013 based on some of the cold weather geographies where they perform work. Also, a disproportionate percentage of total paid holidays fall within our second quarter, which decreases the number of available workdays. Additionally, our customer premise equipment installation activities for cable providers historically decrease around calendar year end holidays as their customers generally require less activity during this period. As a result, we may experience reduced revenue and profitability in the second and/or third quarters of our fiscal year.

Our revenues and results of operations are influenced by the capital expenditure and maintenance budgets of our customers, changes in the general level of construction activity, as well as overall economic conditions. The capital expenditures and maintenance budgets of our telecommunications customers may be impacted by consumer and business demands on telecommunications providers, the introduction of new communication technologies, the physical maintenance needs of their infrastructure, the actions of our government and the Federal Communications Commission, and general economic conditions.

A significant portion of our services are performed under multi-year master service agreements and other arrangements with customers that extend for periods of one or more years. We are party to numerous master service agreements and generally maintain multiple agreements with each of our customers. Master service agreements generally contain customer-specified service requirements, such as discrete pricing for individual tasks. To the extent that such contracts specify exclusivity, there are often a number of exceptions, including the ability of the customer to issue work orders valued above a specified dollar amount


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to other service providers, perform work with the customer's own employees, and use other service providers when jointly placing facilities with another utility. In most cases, a customer may terminate an agreement for convenience with written notice. The remainder of our services are provided pursuant to contracts for specific projects. Long-term contracts relate to specific projects with terms in excess of one year from the contract date. Short-term contracts for specific projects are generally of three to four months in duration. A portion of our contracts include retainage provisions by which 5% to 10% of the contract invoicing may be withheld by the customer pending project completion.

We recognize revenues under the percentage of completion method of accounting using the units-of-delivery or cost-to-cost measures. A majority of our contracts are based on units-of-delivery and revenue is recognized as each unit is completed. Revenues from contracts using the cost-to-cost measures are recognized based on the ratio of contract costs incurred to date to total estimated contract costs. Revenues from services provided under time and materials based contracts are recognized as the services are performed. For a majority of the contract services we perform, our customers provide all required materials while we provide the necessary personnel, tools, and equipment. Materials supplied by our customers, for which the customer retains financial and performance risk, are not included in our revenue or costs of sales.

The following table summarizes our revenues from multi-year master service agreements and other long-term contracts, as a percentage of contract revenues:

                                  For the Three Months Ended                   For the Six Months Ended
                           January 25, 2014       January 26, 2013     January 25, 2014       January 26, 2013
Multi-year master service
agreements                          66.8 %                  62.3 %             65.3 %                   65.0 %
Other long-term contracts           12.8                    12.0               13.4                     11.5
Total long-term contracts           79.6 %                  74.3 %             78.7 %                   76.5 %

The percentage of revenue from long-term contracts varies from period to period depending on the mix of work performed under our contracts.

A significant portion of our revenue is derived from several large customers. The following table reflects the percentage of total revenue from those customers who contributed at least 2.5% to our total revenue in the three or six months ended January 25, 2014 or January 26, 2013:

                                 For the Three Months Ended             For the Six Months Ended
                             January 25, 2014   January 26, 2013   January 25, 2014   January 26, 2013
AT&T Inc.                         18.7%              13.6%              18.0%              13.5%
CenturyLink, Inc.                 14.4%              14.7%              15.0%              14.2%
Comcast Corporation               12.0%              11.0%              11.2%              11.8%
Verizon Communications Inc.        8.3%               9.1%               8.4%               9.6%
Time Warner Cable Inc.             6.0%               4.3%               5.6%               4.6%
Windstream Corporation             4.6%               8.8%               4.8%               9.0%
Charter Communications, Inc.       4.4%               6.2%               4.4%               6.4%
Frontier Communications Corp       1.6%               2.7%               1.5%               2.3%
Cablevision Systems Corp           0.2%               3.0%               0.3%               2.2%

Cost of earned revenues includes all direct costs of providing services under our contracts, including costs for direct labor provided by employees, services by independent subcontractors, operation of capital equipment (excluding depreciation and amortization), direct materials, other direct costs and insurance claims. For insurance claims, we retain the risk of loss, up to certain limits, related to automobile liability, general liability, workers' compensation, employee group health, and locate damages. Locate damage claims result from property and other damages arising in connection with our underground facility locating services. A change in claims experience or actuarial assumptions related to these risks could materially affect our results of operations.

General and administrative expenses primarily consist of employee compensation and related expenses, including stock-based compensation, legal, consulting and professional fees, information technology and development costs, provision for or recoveries of bad debt expense, acquisition and integration costs of businesses acquired, and other costs that are not directly related to the provision of our services under customer contracts.


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Information technology and development costs included in general and administrative expenses are primarily incurred to support and to enhance our operating efficiency. To protect our rights, we have filed for patents on certain of our innovations.

We are subject to concentrations of credit risk relating primarily to our cash and equivalents, accounts receivable, and costs and estimated earnings in excess of billings. Cash and equivalents primarily include balances on deposit with banks. We maintain substantially all of our cash and equivalents at financial institutions we believe to be of high credit quality. To date we have not experienced any loss or lack of access to cash in our operating accounts.

We grant credit under normal payment terms, generally without collateral, to our customers. These customers primarily consist of telephone companies, cable television multiple system operators and electric and gas utilities that we believe are credit worthy. With respect to a portion of the services provided to these customers, we have certain statutory lien rights which may, in certain circumstances, enhance our collection efforts. Adverse changes in overall business and economic factors may impact our customers and increase potential credit risks. These risks may be heightened as a result of economic uncertainty and market volatility. In the past, some of our customers have experienced significant financial difficulties and likewise, some may experience financial difficulties in the future. These difficulties expose us to increased risks related to the collectability of amounts due for services performed. As of January 25, 2014, we believe that none of our significant customers was experiencing financial difficulties that would impact the realizability of our costs and estimated earnings in excess of billings or the collectability of our trade accounts receivable.

Acquisitions

As part of our growth strategy, we may acquire companies that expand, complement or diversify our business. We regularly review opportunities and periodically engage in discussions regarding possible acquisitions. Our ability to sustain our growth and maintain our competitive position may be affected by our ability to identify, acquire, and successfully integrate companies.

On December 3, 2012, we acquired substantially all of the telecommunications infrastructure services subsidiaries (the "Acquired Subsidiaries") of Quanta Services, Inc. for the sum of $275.0 million in cash, an adjustment of approximately $40.4 million for working capital received in excess of a target amount, and approximately $3.7 million for other specified items.

We recognized approximately $5.8 million and $6.5 million of acquisition costs during the three and six months ended January 26, 2013, respectively, related to the acquisition of the Acquired Subsidiaries, which are included within general and administrative expenses. Additionally, we incurred integration costs of approximately $0.7 million and $2.2 million during the three and six months ended January 25, 2014, respectively, and $0.9 million during the three and six months ended January 26, 2013, which are also included within general and administrative expenses.

The Acquired Subsidiaries provide specialty contracting services, including engineering, construction, maintenance and installation services to telecommunications providers, and other construction and maintenance services to electric and gas utilities and others. Principal business facilities are located in Arizona, California, Florida, Georgia, Minnesota, New York, Pennsylvania, and Washington.

During the fourth quarter of fiscal 2013, we acquired Sage Telecommunications Corp of Colorado, LLC ("Sage"). Sage provides telecommunications construction and project management services primarily for cable operators in the Western United States. Additionally, during the fourth quarter of fiscal 2013 we acquired certain assets of a tower construction and maintenance company.

Legal Proceedings

In October 2012, a former employee of UtiliQuest, LLC ("UtiliQuest"), a wholly-owned subsidiary of the Company, commenced a lawsuit against UtiliQuest in the Superior Court of California. The lawsuit alleges that UtiliQuest violated the California Labor Code, the California Business & Professions Code and the Labor Code Private Attorneys General Act of 2004 by failing to pay for all hours worked (including overtime) and failing to provide meal breaks and accurate wage statements. The plaintiff seeks unspecified damages and other relief on behalf of himself and a putative class of current and former employees of UtiliQuest who worked as locators in the State of California in the four years preceding the filing date of the lawsuit. In January 2013, UtiliQuest removed the case to the United States District Court for the Northern District of California and the plaintiff subsequently filed a Motion to Remand the case back to the California Superior Court. In April 2013, the parties exchanged initial disclosures and in July 2013, the District Court granted plaintiff's Motion to Remand. UtiliQuest filed its second removal of the case to the District Court in October 2013. On January 8, 2014, the District Court remanded the


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matter back to the California Superior Court. It is too early to evaluate the likelihood of an outcome to this matter or estimate the amount or range of potential loss, if any. We intend to vigorously defend ourselves against this lawsuit.

From time to time, we are party to various other claims and legal proceedings. It is the opinion of management, based on information available at this time, that such other pending claims or proceedings will not have a material effect on our financial statements.

As part of our insurance program, we retain the risk of loss, up to certain limits, for claims related to automobile liability, general liability, workers' compensation, employee group health, and locate damages, and we have established reserves that we believe to be adequate based on current evaluations and our experience with these types of claims. For these claims, the effect on our financial statements is generally limited to the amount needed to satisfy our insurance deductibles or retentions.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in these condensed consolidated financial statements and accompanying notes. On an ongoing basis, we evaluate these estimates and assumptions, including those related to revenue recognition of long-term contracts, including estimates of costs to complete, accruals for self-insurance claims, provision for income taxes, accruals for legal matters and other contingencies, the fair value of reporting units for goodwill impairment analysis, the assessment of impairment of intangibles and other long-lived assets, preliminary purchase price allocations of businesses acquired, stock-based compensation expense for performance-based stock awards, asset lives used in computing depreciation and amortization, and allowance for doubtful accounts. These estimates and assumptions require the use of judgment as to the likelihood of various future outcomes and, as a result, actual results could differ materially from these estimates. There have been no material changes to our critical accounting policies and critical accounting estimates described in our Annual Report on Form 10-K for the year ended July 27, 2013.

Results of Operations

The Company uses a fiscal year ending on the last Saturday in July. On December 3, 2012, we acquired substantially all of the telecommunications infrastructure services subsidiaries of Quanta Services, Inc. Additionally, during the fourth quarter of fiscal 2013, the Company acquired Sage and certain assets of a tower construction and maintenance company. The results of operations of businesses acquired are included in the accompanying condensed consolidated financial statements from their dates of acquisition. The following table sets forth, as a percentage of revenues earned, our condensed consolidated statements of operations for the periods indicated (totals may not add due to rounding):

                                 For the Three Months Ended                       For the Six Months Ended
                          January 25, 2014        January 26, 2013        January 25, 2014        January 26, 2013
                                                            (Dollars in millions)
Revenues                $  390.5     100.0  %   $  369.3     100.0  %   $  903.2     100.0  %   $  692.6     100.0  %
Expenses:
Cost of earned revenue,
excluding depreciation     327.4      83.8  %      301.5      81.6  %      737.5      81.6  %      558.6      80.6  %
and amortization
General and                 38.6       9.9  %       38.8      10.5  %       81.6       9.0  %       67.7       9.8  %
administrative
Depreciation and            23.4       6.0  %       20.8       5.6  %       47.0       5.2  %       36.1       5.2  %
amortization
Total                      389.4      99.7  %      361.2      97.8  %      866.1      95.9  %      662.4      95.6  %
Interest expense, net       (6.8 )    (1.7 )%       (5.7 )    (1.6 )%      (13.7 )    (1.5 )%       (9.9 )    (1.4 )%
Other income, net            0.6       0.2  %        0.4       0.1  %        2.6       0.3  %        2.0       0.3  %
Income (loss) before        (5.0 )    (1.3 )%        2.8       0.8  %       26.1       2.9  %       22.3       3.2  %
income taxes
Provision (benefit) for     (2.0 )    (0.5 )%        1.4       0.4  %       10.5       1.2  %        9.0       1.3  %
income taxes
Net income (loss)       $   (3.1 )    (0.8 )%   $    1.5       0.4  %   $   15.6       1.7  %   $   13.3       1.9  %


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Revenues. The following table presents information regarding total revenues by type of customer for the three months ended January 25, 2014 and January 26, 2013 (totals may not add due to rounding):

                                           For the Three Months Ended
                                  January 25, 2014             January 26, 2013
                               Revenue      % of Total      Revenue      % of Total      Increase     % Increase
                                                            (Dollars in millions)
Telecommunications           $    339.6          87.0 %   $    324.2          87.8 %   $     15.4          4.7 %
Underground facility
locating                           29.3           7.5           27.6           7.5            1.7          6.1 %
Electric and gas utilities
and other customers                21.6           5.5           17.5           4.7            4.1         23.4 %
Total contract revenues      $    390.5         100.0 %   $    369.3         100.0 %   $     21.2          5.7 %

Revenues increased $21.2 million, or 5.7%, to $390.5 million during the three months ended January 25, 2014 as compared to the three months ended January 26, 2013. During the three months ended January 25, 2014, $111.5 million of revenue was generated by businesses acquired in fiscal 2013.

The following table presents total revenues by type of customer for the three months ended January 25, 2014 and January 26, 2013, excluding the amounts attributed to the businesses acquired.

                                         For the Three Months Ended
                                   January 25, 2014     January 26, 2013
                                                                                 Increase          % Increase
                                       Revenue              Revenue             (decrease)         (decrease)
                                                               (Dollars in millions)
Telecommunications                 $        239.0     $            255.8     $      (16.8 )         (6.6 )%
Underground facility locating                28.8                   27.4              1.4            5.0  %
Electric and gas utilities and
other customers                              11.2                   10.2              1.0           10.2  %
                                            279.0                  293.4            (14.4 )         (4.9 )%
Revenues from businesses acquired
in fiscal 2013                              111.5                   75.9             35.6           46.8  %
Total contract revenues            $        390.5     $            369.3     $       21.2            5.7  %

Revenues from specialty construction services provided to telecommunications companies, excluding amounts attributed to businesses acquired in fiscal 2013, decreased 6.6%, or $16.8 million, to $239.0 million during the three months ended January 25, 2014 compared to $255.8 million during the three months ended January 26, 2013. During the three months ended January 25, 2014, revenues increased approximately $20.5 million for a significant customer, including revenues derived from improvements to its wireless network. Additionally, revenues increased $6.9 million for services on a customer's network and $7.5 million for two leading cable multiple system operators for maintenance and construction services, including services to provision fiber to small and medium businesses as well as network upgrades. Partially offsetting these increases were decreases of storm restoration revenues. During the three months ended January 26, 2013, storm restoration revenues were $16.7 million while there were no significant revenues for storm restoration services in the current period. Additionally, there was a $8.8 million decline in revenue from services provided for a telephone company, including rural broadband services. Other telecommunications customers had net decreases in revenue of $26.2 million for the three months ended January 25, 2014 as compared to the three months ended January 26, 2013, from lower rural broadband services and adverse weather conditions during the second fiscal quarter of 2014. A portion of these declines was due to a $9.3 million reduction in revenues for customers with stimulus work which is comprised of projects funded in part by the American Recovery and Reinvestment Act of 2009.

Revenues from underground facility locating customers, excluding amounts attributed to businesses acquired in fiscal 2013, increased 5.0%, to $28.8 million during the three months ended January 25, 2014 compared to $27.4 million during the three months ended January 26, 2013. The increase is primarily due to new contracts entered into during fiscal 2014 and fiscal 2013. These increases were partially offset by contracts that ended during the second quarter of fiscal 2014.


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Revenues from electric and gas utilities and other construction and maintenance customers, excluding amounts attributed to businesses acquired in fiscal 2013, increased to $11.2 million during the three months ended January 25, 2014 compared to $10.2 million during the three months ended January 26, 2013. The increase was primarily attributable to increases in work performed for several electric utilities.

The following table presents information regarding total revenues by type of customer for the six months ended January 25, 2014 and January 26, 2013 (totals may not add due to rounding):

                                           For the Six Months Ended
                                 January 25, 2014             January 26, 2013
                              Revenue      % of Total      Revenue      % of Total      Increase     % Increase
                                                           (Dollars in millions)
Telecommunications          $    789.7          87.4 %   $    603.2          87.1 %   $    186.6         30.9 %
Underground facility
locating                          65.8           7.3           60.5           8.7            5.4          8.9 %
Electric and gas utilities
and other customers               47.7           5.3           29.0           4.2           18.7         64.6 %
Total contract revenues     $    903.2         100.0 %   $    692.6         100.0 %   $    210.6         30.4 %

Revenues increased $210.6 million, or 30.4%, to $903.2 million during the six months ended January 25, 2014 as compared to the six months ended January 26, 2013. Of this increase, $192.6 million was generated by businesses acquired in fiscal 2013.

The following table presents total revenues by type of customer for the six months ended January 25, 2014 and January 26, 2013, excluding the amounts attributed to the businesses acquired.

                                           For the Six Months Ended
                                    January 25, 2014     January 26, 2013
                                        Revenue              Revenue            Increase     % Increase
                                                           (Dollars in millions)
Telecommunications                  $        546.7     $            534.8     $     12.0           2.2 %
Underground facility locating                 64.6                   60.2            4.4           7.3 %
Electric and gas utilities and
other customers                               23.3                   21.6            1.7           7.7 %
                                             634.6                  616.7           18.0           2.9 %
Revenues from businesses acquired
in fiscal 2013                               268.6                   75.9          192.6         253.6 %
Total contract revenues             $        903.2     $            692.6     $    210.6          30.4 %

Revenues from specialty construction services provided to telecommunications companies, excluding amounts attributed to businesses acquired in fiscal 2013, increased 2.2%, or $12.0 million, to $546.7 million during the six months ended January 25, 2014 compared to $534.8 million during the six months ended January 26, 2013. During the six months ended January 25, 2014, revenues increased approximately $58.8 million for a significant customer, including revenues derived from improvements to its wireless network. Additionally, revenues increased $17.1 million for services on a customer's network and $13.3 million for two leading cable multiple system operators for maintenance and construction services, including services to provision fiber to small and medium businesses as well as network upgrades. Partially offsetting these increases were decreases of storm restoration revenues. During the six months ended January 26, 2013, storm restoration revenues were $16.7 million while there were no significant revenues for storm restoration services in the current year . . .

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