The following discussion and analysis should be read in conjunction with our
condensed consolidated financial statements and the accompanying notes thereto
included elsewhere in this Quarterly Report on Form 10-Q and with our Annual
Report on Form 10-K for fiscal 2022. Our Annual Report on Form 10-K for fiscal
2022 was filed with the SEC on March 4, 2022, and is available on the SEC’s
website at www.sec.gov and on our website at www.dycomind.com.
Introduction
We are a leading provider of specialty contracting services throughout the
United States. These services include program management; planning; engineering
and design; aerial, underground, and wireless construction; maintenance; and
fulfillment services for telecommunications providers. Additionally, we provide
underground facility locating services for various utilities, including
telecommunications providers, and other construction and maintenance services
for electric and gas utilities. We supply the labor, tools, and equipment
necessary to provide these services to our customers.
Significant demand for broadband is driven by applications that require high
speed connections as well as the everyday use of mobile data devices. To respond
to this demand and other advances in technology, major industry participants are
constructing or upgrading significant wireline networks across broad sections of
the country. These wireline networks are generally designed to provision gigabit
network speeds to individual consumers and businesses, either directly or
wirelessly using 5G technologies. Industry participants have stated their belief
that a single high capacity fiber network can most cost effectively deliver
services to both consumers and businesses, enabling multiple revenue streams
from a single investment. We believe this view is increasing the appetite for
fiber deployments and that the industry effort to deploy high capacity fiber
networks continues to meaningfully broaden the set of opportunities for our
industry. Increasing access to high-capacity telecommunications continues to be
crucial to society, especially in rural America. The Infrastructure Investment
and Jobs Act (“Infrastructure Act”) includes over $40 billion for the
construction of rural communications networks in unserved and underserved areas
across the country. This represents an unprecedented level of support. In
addition, an increasing number of states are commencing programs that will
provide funding for telecommunications networks even prior to the initiation of
funding under the Infrastructure Act.
We are providing program management, planning, engineering and design, aerial,
underground, and wireless construction and fulfillment services for gigabit
deployments. These services are being provided across the country in numerous
geographic areas to multiple customers. These deployments include networks
consisting entirely of wired network elements and converged wireless/wireline
multi-use networks. Fiber network deployment opportunities are increasing in
rural America as new industry
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participants respond to emerging societal initiatives. We continue to provide
integrated planning, engineering and design, procurement and construction and
maintenance services to several industry participants.
Macro-economic effects and supply constraints may influence the near-term
execution of some customer plans. Broad increases in demand for fiber optic
cable and related equipment may cause delivery volatility in the short to
intermediate term. In addition, the market for labor remains tight in many
regions around the country. It remains to be seen how long this condition
persists. Furthermore, the automotive and equipment supply chain remains
challenged, particularly for the large truck chassis required for specialty
equipment. Prices for capital equipment are increasing. As we contend with these
factors, we remain confident that our scale and financial strength position us
well to deliver valuable service to our customers.
Telephone companies are deploying fiber-to-the-home to enable gigabit high-speed
connections. Increasingly, rural electric utilities are doing the same.
Dramatically increased speeds to consumers are being provisioned and consumer
data usage is growing, particularly upstream. Wireless construction activity in
support of newly available spectrum bands is expected to increase this year.
Federal and state support for rural deployments of communications networks is
dramatically increasing in scale and duration. Cable operators are deploying
fiber to small and medium businesses and enterprises. A portion of these
deployments are in anticipation of the customer sales process. Deployments to
expand capacity as well as new build opportunities are underway. Customers are
consolidating supply chains creating opportunities for market share growth and
increasing the long-term value of our maintenance and operations business.
The cyclical nature of the industry we serve affects demand for our services.
The capital expenditure and maintenance budgets of our customers, and the
related timing of approvals and seasonal spending patterns, influence our
contract revenues and results of operations. Factors affecting our customers and
their capital expenditure budgets include, but are not limited to, overall
economic conditions, the introduction of new technologies, our customers’ debt
levels and capital structures, our customers’ financial performance, our
customers’ positioning and strategic plans, and any potential effects from the
COVID-19 pandemic. Other factors that may affect our customers and their capital
expenditure budgets include new regulations or regulatory actions impacting our
customers’ businesses, merger or acquisition activity involving our customers,
and the physical maintenance needs of our customers’ infrastructure.
Our operations expose us to risks associated with pandemics, epidemics or other
public health emergencies, such as the COVID-19 pandemic. Since March 2020, the
economy of the United States has been severely impacted by the COVID-19 pandemic
and by the nation’s response to it. Measures mandated by governmental agencies
have included vaccination and masking requirements, travel and large gathering
restrictions, social distancing requirements, quarantines, and shelter in place
orders. Even as efforts to contain the pandemic have made progress and some
restrictions have been relaxed, new variants of COVID-19 have resulted in, and
may continue to result in, additional outbreaks. As a result, certain
business-related activities have been curtailed or modified.
During the COVID-19 pandemic, our services have generally been considered
essential in nature and have not been materially interrupted by governmental
mandates. As the situation continues to evolve, we are closely monitoring the
impact of the COVID-19 pandemic on all aspects of our business, our customers,
subcontractors, suppliers, vendors and employees, in addition to how the
COVID-19 pandemic impacts our ability to provide services to our customers. We
believe the full extent of the impact of the COVID-19 pandemic on our operating
results, cash flows and financial condition will be determined by factors which
are uncertain, unpredictable and outside of our control. These factors include
the duration and severity of the pandemic, including any new variants, any
worsening of the pandemic, the vaccination rates in the areas we operate and
among our employees and subcontractors, the nature and duration of containment
and mitigation actions taken by federal, state and local governments, and the
protocols and contractual requirements implemented by our customers, and the
resulting impact on the demand for our services from our customers. The
situation surrounding COVID-19 remains fluid, and if disruptions do arise, they
could materially adversely impact our business.
In addition, the ability of our employees and our suppliers’ and customers’
employees to work may be significantly impacted by individuals contracting or
being exposed to COVID-19, or as a result of the control measures noted above.
Our customers may be directly impacted by business curtailments or weak market
conditions and may not be willing to continue investments in the services we
provide. Furthermore, the COVID-19 pandemic has caused delays, and increases the
risk of further delays, in our provision of construction services due to delays
in our ability to obtain permits from government agencies or as a result of
constraints to the availability of labor, supplies, and equipment. For further
discussion of this matter, refer to Part I. Item 1A of our Annual Report on Form
10-K for fiscal 2022.
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Customer Relationships and Contractual Arrangements
We have established relationships with many leading telecommunications
providers, including telephone companies, cable multiple system operators,
wireless carriers, telecommunications equipment and infrastructure providers, as
well as electric and gas utilities. Our customer base is highly concentrated,
with our top five customers during the three months ended April 30, 2022 and May
1, 2021 accounting for approximately 67.3% and 68.2%, respectively, of our total
contract revenues.
The following reflects the percentage of total contract revenues from customers
who contributed at least 2.5% to our total contract revenues during the three
months ended April 30, 2022 or May 1, 2021:
For the Three Months Ended
April 30, 2022 May 1, 2021
AT&T Inc. 27.1% 21.4%
Comcast Corporation 12.7% 18.0%
Lumen Technologies 11.7% 11.8%
Verizon Communications Inc. 9.2% 12.6%
Frontier Communications Corporation 6.5% 3.5%
Windstream Corporation 2.7% 4.4%
In addition, another customer contributed 3.9% and 3.4% to our total contract
revenues during the three months ended April 30, 2022 and May 1, 2021,
respectively.
We perform a majority of our services under master service agreements and other
contracts that contain customer-specified service requirements. These agreements
include discrete pricing for individual tasks. We generally possess multiple
agreements with each of our significant customers. To the extent that such
agreements specify exclusivity, there are often exceptions, including the
ability of the customer to issue work orders valued above a specified dollar
amount to other service providers, the performance of work with the customer’s
own employees, and the use of other service providers when jointly placing
facilities with another utility. In many cases, a customer may terminate an
agreement for convenience. Historically, multi-year master service agreements
have been awarded primarily through a competitive bidding process; however, we
occasionally are able to negotiate extensions to these agreements. We provide
the remainder of our services pursuant to contracts for specific projects. These
contracts may be long-term (with terms greater than one year) or short-term
(with terms less than one year) and often include customary retainage provisions
under which the customer may withhold 5% to 10% of the invoiced amounts pending
project completion and closeout.
The following table summarizes our contract revenues from multi-year master
service agreements and other long-term contracts, as a percentage of contract
revenues:
For the Three Months Ended
April 30, 2022 May 1, 2021
Multi-year master service agreements 80.0 % 76.9 %
Other long-term contracts 11.9 15.1
Total long-term contracts 91.9 % 92.0 %
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. These statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America (“GAAP”). In conformity with GAAP, the
preparation of financial statements requires management to make estimates and
assumptions that affect the amounts reported in these condensed consolidated
financial statements and accompanying notes. 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 significant accounting policies and
critical accounting estimates described in our Annual Report on Form 10-K for
fiscal 2022.
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Understanding Our Results of Operations
The following information is presented so that the reader may better understand
certain factors impacting our results of operations and should be read in
conjunction with our condensed consolidated financial statements and the
accompanying notes thereto included elsewhere in this Quarterly Report on Form
10-Q and Critical Accounting Policies and Estimates within Item 7, Management’s
Discussion and Analysis of Financial Condition and Results of Operations, as
well as Note 2, Significant Accounting Policies and Estimates, in the Notes to
the Consolidated Financial Statements included in our Annual Report on Form 10-K
for fiscal 2022.
The Company uses a 52/53 week fiscal year ending on the last Saturday in
January. Fiscal 2022 and fiscal 2023 each consist of 52 weeks of operations. The
next 53 week fiscal period will occur in the fiscal year ending January 31,
2026.
Contract Revenues. We perform the majority of our services under master service
agreements and other contracts that contain customer-specified service
requirements. These agreements include discrete pricing for individual tasks
including, for example, the placement of underground or aerial fiber,
directional boring, and fiber splicing, each based on a specific unit of
measure. A contractual agreement exists when each party involved approves and
commits to the agreement, the rights of the parties and payment terms are
identified, the agreement has commercial substance, and collectability of
consideration is probable. Our services are performed for the sole benefit of
our customers, whereby the assets being created or maintained are controlled by
the customer and the services we perform do not have alternative benefits for
us. Contract revenue is recognized over time as services are performed and
customers simultaneously receive and consume the benefits we provide. Output
measures such as units delivered are utilized to assess progress against
specific contractual performance obligations for the majority of our services.
The selection of the method to measure progress towards completion requires
judgment and is based on the nature of the services to be provided. For us, the
output method using units delivered best represents the measure of progress
against the performance obligations incorporated within the contractual
agreements. This method captures the amount of units delivered pursuant to
contracts and is used only when our performance does not produce significant
amounts of work in process prior to complete satisfaction of the performance
obligation. For a portion of contract items, units to be completed consist of
multiple tasks. For these items, the transaction price is allocated to each task
based on relative standalone measurements, such as selling prices for similar
tasks, or in the alternative, the cost to perform the tasks. Contract revenue is
recognized as these tasks are completed as a measurement of progress in the
satisfaction of the corresponding performance obligation, and represented
approximately 3% and 5% of contract revenues during the three months ended April
30, 2022 and May 1, 2021, respectively.
For certain contracts, representing less than 5% of contract revenues during
each of the three months ended April 30, 2022 and May 1, 2021, we use the
cost-to-cost measure of progress. These contracts are generally projects that
are completed over a period of less than twelve months. Under the cost-to-cost
measure of progress, the extent of progress toward completion is measured based
on the ratio of costs incurred to date to the total estimated costs. Contract
costs include direct labor, direct materials, and subcontractor costs, as well
as an allocation of indirect costs. Contract revenues are recorded as costs are
incurred. We accrue the entire amount of a contract loss, if any, at the time
the loss is determined to be probable and can be reasonably estimated.
Costs of Earned Revenues. Costs 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), direct materials, costs of insuring
our risks, and other direct costs. Under our insurance program, we retain the
risk of loss, up to certain limits, for matters related to automobile liability,
general liability (including damages associated with underground facility
locating services), workers’ compensation, and employee group health.
General and Administrative Expenses. General and administrative expenses
primarily consist of employee compensation and related expenses, including
performance-based compensation and 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 not directly related to the provision of
our services under customer contracts. Our provision for bad debt expense is
determined by evaluating specific accounts receivable and contract asset
balances based on historical collection trends, the age of outstanding
receivables, and the creditworthiness of our customers. We incur information
technology and development costs primarily to support and enhance our operating
efficiency. Our executive management team and the senior management of our
subsidiaries perform substantially all of our sales and marketing functions as
part of their management responsibilities.
Depreciation and Amortization. Our property and equipment primarily consist of
vehicles, equipment and machinery, and computer hardware and software. We
depreciate property and equipment on a straight-line basis over the estimated
useful lives of the assets. In addition, we have intangible assets, including
customer relationships and trade names, which we amortize over
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their estimated useful lives. We recognize amortization of customer relationship
intangibles on an accelerated basis as a function of the expected economic
benefit and amortization of other finite-lived intangibles on a straight-line
basis over their estimated useful life.
Interest Expense, Net. Interest expense, net, consists of interest incurred on
outstanding variable rate and fixed rate debt and certain other obligations.
Interest expense also includes the non-cash amortization of our convertible
senior notes debt discount and amortization of debt issuance costs. See Note 13,
Debt, in the notes to the condensed consolidated financial statements for
information on the non-cash amortization of the debt discount and debt issuance
costs.
Other Income, Net. Other income, net, primarily consists of gains or losses from
sales of fixed assets. Other income, net also includes discount fee expense
associated with the collection of accounts receivable under a customer-sponsored
vendor payment program.
Seasonality and Fluctuations in Operating Results. Our contract revenues and
results of operations exhibit seasonality as we perform a significant portion of
our work outdoors. Consequently, adverse weather, which is more likely to occur
with greater frequency, severity, and duration during the winter, as well as
reduced daylight hours, impact our operations during the fiscal quarters ending
in January and April. In addition, a disproportionate number of holidays fall
within the fiscal quarter ending in January, which decreases the number of
available workdays. Because of these factors, we are most likely to experience
reduced revenue and profitability during the fiscal quarters ending in January
and April compared to the fiscal quarters ending in July and October.
We may also experience variations in our profitability driven by a number of
factors. These factors include variations and fluctuations in contract revenues,
job specific costs, insurance claims, the allowance for doubtful accounts,
accruals for contingencies, stock-based compensation expense for
performance-based stock awards, the fair value of reporting units for the
goodwill impairment analysis, the valuation of intangibles and other long-lived
assets, gains or losses on the sale of fixed assets from the timing and levels
of capital assets sold, the employer portion of payroll taxes as a result of
reaching statutory limits, and our effective tax rate.
Accordingly, operating results for any fiscal period are not necessarily
indicative of results we may achieve for any subsequent fiscal period.
Results of Operations
The following table sets forth our condensed consolidated statements of
operations for the periods indicated. Percentages represent the result of
dividing each item by contract revenues (totals may not add due to rounding)
(dollars in millions):
For the Three Months Ended
April 30, 2022 May 1, 2021
Contract revenues $ 876.3 100.0 % $ 727.5 100.0 %
Expenses:
Costs of earned revenues, excluding depreciation and
amortization 745.7 85.1 620.0 85.2
General and administrative 69.4 7.9 67.0 9.2
Depreciation and amortization 36.6 4.2 39.1 5.4
Total 851.7 97.2 726.1 99.8
Interest expense, net (9.1) (1.0) (5.9) (0.8)
Loss on debt extinguishment – – (0.1) –
Other income, net 4.8 0.5 2.7 0.4
Income (loss) before income taxes 20.2 2.3 (1.8) (0.3)
Provision for income taxes 0.7 0.1 (2.7) (0.4)
Net income $ 19.5 2.2 % $ 0.9 0.1 %
Contract Revenues. Contract revenues were $876.3 million during the three months
ended April 30, 2022 compared to $727.5 million during the three months ended
May 1, 2021. There were no acquired revenues or significant revenues from storm
restoration services during the three months ended April 30, 2022. We earned
$3.9 million of contract revenues from storm restoration services during the
three months ended May 1, 2021.
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Excluding amounts generated from storm restoration services, contract revenues
increased by $152.7 million during the three months ended April 30, 2022
compared to the three months ended May 1, 2021. Contract revenues increased by
$81.9 million for a large telecommunications customer for fiber deployments and
improvements to its network and by $32.0 million for a telecommunications
customer for fiber deployments. In addition, contract revenues increased by
$17.3 million for a large telecommunications customer for services performed
under existing contracts. Contract revenues decreased by $19.4 million from a
leading cable multiple system operator for construction and maintenance services
and by $10.5 million for a large telecommunications customer. In addition,
contract revenues decreased by $5.2 million for a telecommunications customer in
connection with rural services. All other customers had net increases in
contract revenues of $56.6 million on a combined basis during the three months
ended April 30, 2022 compared to the three months ended May 1, 2021.
The percentage of our contract revenues by customer type from
telecommunications, underground facility locating, and electric and gas
utilities and other customers, was 88.9%, 8.1%, and 3.0%, respectively, for the
three months ended April 30, 2022 compared to 87.9%, 8.9%, and 3.2%,
respectively, for the three months ended May 1, 2021.
Costs of Earned Revenues. Costs of earned revenues increased to $745.7 million,
or 85.1% of contract revenues, during the three months ended April 30, 2022
compared to $620.0 million, or 85.2% of contract revenues, during the three
months ended May 1, 2021. The primary components of the increase were a $99.1
million aggregate increase in direct labor and subcontractor costs, a
$11.6 million increase in equipment and fuel costs combined, a $8.4 million
increase in direct materials expense, and a $6.6 million increase in other
direct costs, including travel cost, permits and other operating expenses.
Costs of earned revenues as a percentage of contract revenues decreased 0.1%
during the three months ended April 30, 2022 compared to the three months ended
May 1, 2021. Other direct costs decreased 0.6% and direct materials decreased
0.3%, primarily as a result of our mix of work in which we provide materials for
our customers during the three months ended April 30, 2022. Equipment and fuel
costs combined increased 0.5% as a percentage of contract revenues primarily
resulting from an increase in fuel prices. As a percentage of contract revenues,
labor and subcontracted labor costs increased 0.2% primarily due to the mix of
work performed.
General and Administrative Expenses. General and administrative expenses
increased to $69.4 million, or 7.9% of contract revenues, during the three
months ended April 30, 2022 compared to $67.0 million, or 9.2% of contract
revenues, during the three months ended May 1, 2021. The increase in total
general and administrative expenses during the three months ended April 30, 2022
primarily resulted from an increase in performance compensation, payroll,
administrative and other costs, partially offset by decreased stock based
compensation and lower bad debt expense.
Depreciation and Amortization. Depreciation expense was $32.7 million, or 3.7%
of contract revenues, during the three months ended April 30, 2022 compared to
$34.4 million, or 4.7% of contract revenues, during the three months ended May
1, 2021. The decrease in depreciation expense during the three months ended
April 30, 2022 is primarily due to certain assets becoming fully depreciated or
sold and reduced capital expenditures.
Amortization expense was $3.9 million and $4.7 million during the three months
ended April 30, 2022 and May 1, 2021, respectively.
Interest Expense, Net. Interest expense, net was $9.1 million and $5.9 million
during the three months ended April 30, 2022 and May 1, 2021, respectively.
Prior year interest expense included $0.7 million for the non-cash amortization
of the debt discount associated with 0.75% convertible senior notes, which
matured on September 15, 2021 (the “2021 Convertible Notes”). Excluding this
amortization, interest expense, net increased to $9.1 million during the three
months ended April 30, 2022 from $5.2 million during the three months ended May
1, 2021 as a result of higher interest rates on funded debt balances and higher
outstanding borrowings during the current period.
Other Income, Net. Other income, net was $4.8 million and $2.7 million during
the three months ended April 30, 2022 and May 1, 2021, respectively. Gain on
sale of fixed assets was $5.4 million and $2.9 million during the three months
ended April 30, 2022 and May 1, 2021, respectively. The change in other income,
net is primarily a function of the number of assets sold and prices obtained for
those assets during each respective period. Other income, net also reflects
$1.1 million and $0.5 million of expense during the three months ended April 30,
2022 and May 1, 2021 respectively, associated with the non-recourse sale of
accounts receivable under a customer-sponsored vendor payment program.
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Income Taxes. The following table presents our income tax provision and
effective income tax rate for the three months ended April 30, 2022 and May 1,
2021 (dollars in millions):
For the Three Months Ended
April 30, 2022 May 1, 2021
Income tax provision $ 0.7 $ (2.7)
Effective income tax rate 3.4 % 149.1 %
Our effective income tax rate was 3.4% and 149.1% for the three months ended
April 30, 2022 and May 1, 2021, respectively. The effective tax rate differs
from the statutory rate primarily due to tax credits recognized, the impact of
the vesting and exercise of share-based awards, and the difference in income tax
rates from state to state where work was performed. During the three months
ended April 30, 2022 and May 1, 2021, the Company realized approximately
$2.5 million and $2.6 million of net excess tax benefits, respectively, related
to the vesting and exercise of share-based awards. Additionally, the three
months ended April 30, 2022 includes approximately $1.7 million of incremental
tax benefit for credits related to a tax filing for a prior period. Other
fluctuations in our effective income tax rate from the statutory rate each
period are mainly attributable to changes in unrecognized tax benefits, tax law
changes, and variances in non-deductible and non-taxable items.
During the first quarter of fiscal 2023, we were notified by the Internal
Revenue Service that our federal income tax return for fiscal 2016 was selected
for examination due to the net operating loss carryback claim filed in fiscal
2021. In addition, fiscal year 2020 was selected for examination in the second
quarter of fiscal 2022. We believe our provision for income taxes is adequate;
however, any assessment may affect our results of operations and cash flows.
Net Income. Net income was $19.5 million for the three months ended April 30,
2022 compared to $0.9 million for the three months ended May 1, 2021.
Non-GAAP Adjusted EBITDA. Adjusted EBITDA is a Non-GAAP measure, as defined by
Regulation G of the SEC. We define Adjusted EBITDA as net income before
interest, taxes, depreciation and amortization, gain on sale of fixed assets,
stock-based compensation expense, and certain non-recurring items. Management
believes Adjusted EBITDA is a helpful measure for comparing the Company’s
operating performance with prior periods as well as with the performance of
other companies with different capital structures or tax rates. The following
table provides a reconciliation of net income to Non-GAAP Adjusted EBITDA
(dollars in thousands):
For the Three Months Ended
April 30, 2022 May 1, 2021
Net income $ 19,536 $ 898
Interest expense, net 9,118 5,877
Provision (benefit) for income taxes 694 (2,724)
Depreciation and amortization 36,637 39,079
Earnings Before Interest, Taxes, Depreciation & Amortization
(“EBITDA”)
65,985 43,130
Gain on sale of fixed assets (5,389) (2,852)
Stock-based compensation expense 3,128 3,740
Loss on debt extinguishment – 62
Non-GAAP Adjusted EBITDA $ 63,724 $ 44,080
Non-GAAP Adjusted EBITDA % of contract revenues 7.3 % 6.1 %
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Liquidity and Capital Resources
We are subject to concentrations of credit risk relating primarily to our cash
and equivalents, accounts receivable, and contract assets. Cash and equivalents
primarily include balances on deposit with banks and totaled $185.6 million as
of April 30, 2022 compared to $310.8 million as of January 29, 2022. We maintain
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.
Sources of Cash. Our sources of cash are operating activities, long-term debt,
equity offerings, bank borrowings, proceeds from the sale of idle and surplus
equipment and real property, and stock option proceeds. Cash flow from
operations is primarily influenced by demand for our services and operating
margins, but can also be influenced by working capital needs associated with the
services that we provide. In particular, working capital needs may increase when
we have growth in operations and where project costs, primarily associated with
labor, subcontractors, equipment, and materials, are required to be paid before
the related customer balances owed to us are invoiced and collected. Our working
capital (total current assets less total current liabilities, excluding the
current portion of debt) was $991.8 million as of April 30, 2022 and January 29,
2022.
Capital resources are used primarily to purchase equipment and maintain
sufficient levels of working capital to support our contractual commitments to
customers. We periodically borrow from and repay our revolving credit facility
depending on our cash requirements. We currently intend to retain any earnings
for use in the business and other capital allocation strategies which may
include share repurchases, investment in acquisitions, and extinguishment of
debt. Consequently, we do not anticipate paying any cash dividends on our common
stock in the foreseeable future.
Our level of capital expenditures can vary depending on the customer demand for
our services, the replacement cycle we select for our equipment, and overall
growth. We intend to fund these expenditures primarily from operating cash
flows, availability under our credit agreement and cash on hand.
Sufficiency of Capital Resources. We believe that our capital resources,
including existing cash balances and amounts available under our Credit
Agreement, are sufficient to meet our financial obligations. These obligations
include interest payments required on the $500 million aggregate principal
amount of 4.50% senior notes due 2029 (the “2029 Notes”) and outstanding term
loan facility and revolver borrowings, if any, under our Credit Agreement,
working capital requirements, and the normal replacement of equipment at our
expected level of operations for at least the next 12 months. Our capital
requirements may increase to the extent we seek to grow by acquisitions that
involve consideration other than our stock, experience difficulty or delays in
collecting amounts owed to us by our customers, increase our working capital in
connection with new or existing customer programs, or to the extent we
repurchase our common stock, or repay credit agreement borrowings. Changes in
financial markets or other components of the economy could adversely impact our
ability to access the capital markets, in which case we would expect to rely on
a combination of available cash and our credit agreement to provide short-term
funding. Management regularly monitors the financial markets and assesses
general economic conditions for possible impact on our financial position. We
believe our cash investment policies are prudent and expect that any volatility
in the capital markets would not have a material impact on our cash investments.
Net Cash Flows. The following table presents our net cash flows for the three
months ended April 30, 2022 and May 1, 2021 (dollars in millions):
For the Three Months Ended
April 30, 2022 May 1, 2021
Net cash flows:
(Used in) provided by operating activities $ (64.9) $ 41.5
Used in investing activities $ (33.0) $ (28.6)
(Used in) provided by financing activities $
(27.2) $ 305.9
Cash (Used in) Provided by Operating Activities. Depreciation and amortization,
non-cash lease expense, stock-based compensation, amortization of debt discount
and debt issuance costs, deferred income taxes, gain on sale of fixed assets and
provision for bad debt were the primary non-cash items in cash flows from
operating activities during the current and prior periods.
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During the three months ended April 30, 2022, net cash used in operating
activities was $64.9 million. Changes in working capital (excluding cash) and
changes in other long-term assets and liabilities used $129.6 million of
operating cash flow during the three months ended April 30, 2022. Changes that
used operating cash flow during the three months ended April 30, 2022
included an increase in accounts receivable, other current assets and
inventories, and contract assets, net of $99.1 million, $28.9 million, and
$11.6 million respectively. In addition, changes that used operating cash flow
included a decrease in accrued liabilities of $10.4 million and a net increase
in income tax receivable of $2.0 million, respectively. Changes that provided
operating cash flow during the three months ended April 30, 2022 included an
increase in accounts payable of $21.6 million and a decrease in other assets of
$0.8 million.
Days sales outstanding (“DSO”) is calculated based on the ending balance of
total current accounts receivable (including unbilled accounts receivable), net
of the allowance for doubtful accounts, and current contract assets, net of
contract liabilities, divided by the average daily revenue for the most recently
completed quarter. Long-term contract assets are excluded from the calculation
of DSO, as these amounts represent payments made to customers pursuant to
long-term agreements and are recognized as a reduction of contract revenues over
the period for which the related services are provided to the customers.
Including these balances in DSO is not meaningful to the average time to collect
accounts receivable and current contract asset balances. Our DSO was 105 days as
of April 30, 2022 compared to 128 as of May 1, 2021. The decrease in our DSO was
primarily a result of a decrease in outstanding balances for a large customer
program. This program consists of multiple tasks which will be billed as the
tasks are completed.
See Note 5, Accounts Receivable, Contract Assets, and Contract Liabilities, for
further information on our customer credit concentration as of April 30, 2022
and January 29, 2022 and Note 18, Customer Concentration and Revenue
Information, for further information on our significant customers. We believe
that none of our significant customers were experiencing financial difficulties
that would materially impact the collectability of our total accounts receivable
and contract assets, net as of April 30, 2022 or January 29, 2022.
During the three months ended May 1, 2021, net cash generated from operating
activities was $41.5 million. Changes in working capital (excluding cash) and
changes in other long-term assets and liabilities used $15.2 million of
operating cash flow during the three months ended May 1, 2021. Working capital
changes that used operating cash flow during the three months ended May 1, 2021
included a decrease in accrued liabilities of $11.1 million primarily resulting
from amounts paid for annual incentive compensation during April 2021 and
increases in other current assets and inventories, accounts receivable, and
income tax receivable of $19.1 million, $12.2 million and $7.3 million, each
primarily as a result of the timing of payments. Changes that provided operating
cash flow during the three months ended May 1, 2021 included a decrease in
contract assets, net of $24.6 million and other assets of $2.2 million and an
increase in accounts payable of $7.7 million.
Cash Used in Investing Activities. Net cash used in investing activities was
$33.0 million during the three months ended April 30, 2022 compared to
$28.6 million during the three months ended May 1, 2021. During the three months
ended April 30, 2022 and May 1, 2021, capital expenditures were $38.4 million
and $31.6 million, respectively. Capital expenditures increased during the three
months ended April 30, 2022, primarily as a result of spending for new work
opportunities and the replacement of certain fleet assets. These expenditures
were offset in part by proceeds from the sale of assets of $5.4 million and
$3.0 million during the three months ended April 30, 2022 and May 1, 2021,
respectively.
Cash (Used in) Provided by Financing Activities. Net cash used in financing
activities was $27.2 million during the three months ended April 30, 2022. In
the first quarter of fiscal 2023 we repurchased 200,000 shares of our common
stock in open market transactions, at an average price of $92.70 per share, for
$18.5 million. We also paid $5.5 million to tax authorities in order to meet the
payroll tax withholding obligations on restricted share units that vested during
the three months ended April 30, 2022. In addition, we used approximately
$4.4 million to repay term loan borrowings under our Credit Agreement. This was
partially offset by the exercise of stock options, which provided $1.2 million
during the three months ended April 30, 2022.
Net cash provided by financing activities was $305.9 million during the three
months ended May 1, 2021. The primary source of cash provided by financing
activities during the three months ended May 1, 2021 was the $500.0 million
principal amount of 4.50% senior notes due 2029 (the “2029 Notes”) issued in a
private placement in April 2021. During the three months ended May 1, 2021 we
paid approximately $11.2 million in issuance costs and third party fees and
expenses related to our financing transactions. We used $105.0 million to repay
outstanding borrowings under the revolving portion of our credit agreement and
approximately $71.9 million to repay term loan borrowings. The exercise of stock
options provided $0.4 million during the three months ended May 1, 2021 and we
paid $6.4 million to tax authorities in order to meet the payroll tax
withholding obligations on restricted share units that vested during the three
months ended May 1, 2021.
Compliance with Credit Agreement. On April 1, 2021, the Company and certain of
its subsidiaries amended its credit agreement, dated as of October 19, 2018,
with the various lenders party thereto and Bank of America, N.A., as
administrative
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agent (the “Credit Agreement”) to among other things, decrease the maximum
revolver commitment to $650.0 million from $750.0 million and decrease the term
loan facility to $350.0 million from $416.3 million. The Credit Agreement
includes a $200.0 million sublimit for the issuance of letters of credit and a
$50.0 million sublimit for swingline loans. As part of the amendment, the
maturity date of the Credit Agreement was extended to April 1, 2026.
Subject to certain conditions, the Credit Agreement provides us with the
ability to enter into one or more incremental facilities either by increasing
the revolving commitments under the Credit Agreement and/or by establishing one
or more additional term loans, up to the sum of (i) $350.0 million and (ii) an
aggregate amount such that, after giving effect to such incremental facilities
on a pro forma basis (assuming that the amount of the incremental commitments
are fully drawn and funded), the consolidated senior secured net leverage ratio
does not exceed 2.25 to 1.00. The consolidated senior secured net leverage ratio
is the ratio of our consolidated senior secured indebtedness reduced by
unrestricted cash and equivalents in excess of $25.0 million to our trailing
twelve-month consolidated earnings before interest, taxes, depreciation, and
amortization, as defined by the Credit Agreement (“EBITDA”). Borrowings under
the Credit Agreement are guaranteed by substantially all of our domestic
subsidiaries and secured by 100% of the equity interests of our direct and
indirect domestic subsidiaries and 65% of the voting equity interests and 100%
of the non-voting interests of our first-tier foreign subsidiaries (subject to
customary exceptions).
Under our Credit Agreement, borrowings bear interest at the rates described
below based upon our consolidated net leverage ratio, which is the ratio of our
consolidated total funded debt reduced by unrestricted cash and equivalents in
excess of $25.0 million to our trailing twelve-month consolidated EBITDA, as
defined by our Credit Agreement. In addition, we incur certain fees for unused
balances and letters of credit at the rates described below, also based upon our
consolidated net leverage ratio.
Borrowings – Eurodollar Rate Loans 1.25% – 2.00% plus LIBOR(1)
Borrowings – Base Rate Loans
0.25% – 1.00% plus Base rate(2)
Unused Revolver Commitment 0.20% – 0.40%
Standby Letters of Credit 1.25% – 2.00%
Commercial Letters of Credit 0.625% – 1.000%
(1) To address the transition in financial markets away from LIBOR, the Credit
Agreement includes provisions related to the replacement of LIBOR with a LIBOR
Successor Rate (as defined in the Credit Agreement), which may be a rate based
on the secured overnight financing rate published by the Federal Reserve Bank of
New York.
(2) Base rate is described in our Credit Agreement as the highest of (i) the
Federal Funds Rate plus 0.50%, (ii) the administrative agent’s prime rate, and
(iii) the Eurodollar rate plus 1.00% and, if such rate is less than zero, such
rate shall be deemed zero.
Standby letters of credit of approximately $47.5 million and $46.3 million,
issued as part of our insurance program, were outstanding under the Credit
Agreement as of April 30, 2022 and January 29, 2022, respectively.
The weighted average interest rates and fees for balances under our Credit
Agreement as of April 30, 2022 and January 29, 2022 were as follows:
Weighted Average Rate End of
Period
April 30, 2022 January 29, 2022
Borrowings – Term loan facility 2.30%
1.86%
Borrowings – Revolving facility(1) -% -%
Standby Letters of Credit 1.75% 1.63%
Unused Revolver Commitment 0.35% 0.30%
(1) There were no outstanding borrowings under our revolving facility as of of
April 30, 2022 and January 29, 2022.
The Credit Agreement contains a financial covenant that requires us to maintain
a consolidated net leverage ratio of not greater than 3.50 to 1.00, as measured
at the end of each fiscal quarter, and provides for certain increases to this
ratio in connection with permitted acquisitions. The agreement also contains a
financial covenant that requires us to maintain a consolidated interest coverage
ratio, which is the ratio of our trailing twelve-month consolidated EBITDA to
our consolidated
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interest expense, each as defined by the Credit Agreement, of not less than 3.00
to 1.00, as measured at the end of each fiscal quarter. At April 30, 2022 and
January 29, 2022, we were in compliance with the financial covenants of our
Credit Agreement and had borrowing availability under the revolving facility of
$284.3 million and $326.3 million, respectively, as determined by the most
restrictive covenant. For calculation purposes, applicable cash on hand is
netted against the funded debt amount as permitted in the Credit Agreement.
The indenture governing the 2029 Notes contains certain covenants that limit,
among other things, our ability and the ability of certain of our subsidiaries
to (i) incur additional debt and issue certain preferred stock, (ii) pay certain
dividends on, repurchase, or make distributions in respect of, our and our
Subsidiaries’ capital stock or make other payments restricted by the indenture,
(iii) enter into agreements that place limitations on distributions made from
certain of our subsidiaries, (iv) guarantee certain debt, (v) make certain
investments, (vi) sell or exchange certain assets, (vii) enter into transactions
with affiliates, (viii) create certain liens, and (ix) consolidate, merge or
transfer all or substantially all of our or our Subsidiaries’ assets. These
covenants are subject to a number of exceptions, limitations and qualifications
as set forth in the indenture governing the 2029 Notes.
Contractual Obligations. The following table sets forth our outstanding
contractual obligations as of April 30, 2022 (dollars in thousands):
Less than 1 Greater than 5
Year Years 1 – 3 Years 3 – 5 Years Total
2029 Notes $ – $
– $ – $ 500,000 $ 500,000
Credit agreement – revolving facility
– – – – –
Credit agreement – term loan facility 17,500 35,000 293,125 – 345,625
Fixed interest payments on long-term debt(1) 22,500 45,000 45,000 45,000 157,500
Obligations under long-term operating
leases(2) 26,674 30,374 8,455 1,173 66,676
Obligations under short-term operating
leases(3) 1,556 – – – 1,556
Employment agreements 23,955 6,693 – – 30,648
Deferral of tax payments(4) 17,047 – – – 17,047
Purchase and other contractual obligations(5) 82,387 5,073 1,444 – 88,904
Total $ 191,619 $ 122,140 $ 348,024 $ 546,173 $ 1,207,956
(1) Includes interest payments on our $500.0 million principal amount of 2029
Notes outstanding, and excludes interest payments on our variable rate debt.
Variable rate debt as of April 30, 2022 consisted of $345.6 million outstanding
under our term loan facility.
(2)Amounts represent undiscounted lease obligations under long-term operating
leases and exclude long-term operating leases that have not yet commenced of
$1.0 million as of April 30, 2022.
(3)Amounts represent lease obligations under short-term operating leases that
are not recorded on our condensed consolidated balance sheet as of April 30,
2022.
(4) During 2020, the U.S. federal government enacted the Coronavirus Aid,
Relief, and Economic Security Act (the CARES Act), which provided for various
tax relief and tax incentive measures. These measures did not have a material
impact on our results of operations. However, pursuant to the CARES Act, we
deferred the payment of $37.4 million of employer payroll taxes during the year
ended December 31, 2020, 50% of which was paid by December 31, 2021 and the
remainder is due by December 31, 2022.
(5) We have committed capital for the expansion of our vehicle fleet in order to
accommodate manufacturer lead times. As of April 30, 2022, purchase and other
contractual obligations includes approximately $76.9 million for issued orders
with delivery dates scheduled to occur over the next 12 months.
We have excluded contractual obligations under the multi-employer defined
pension plans that cover certain of our employees, as these obligations are
determined based on our future union employee payrolls, which cannot be reliably
determined as of April 30, 2022.
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Our condensed consolidated balance sheet as of April 30, 2022 includes a
long-term liability of approximately $48.6 million for accrued insurance claims.
This liability has been excluded from the table above as the timing of payments
is uncertain.
The liability for unrecognized tax benefits for uncertain tax positions was
approximately $12.6 million and $11.9 million as of April 30, 2022 and January
29, 2022, respectively, and is included in other liabilities in the condensed
consolidated balance sheets. This amount has been excluded from the contractual
obligations table because we are unable to reasonably estimate the timing of the
resolution of the underlying tax positions with the relevant tax authorities.
Performance and Payment Bonds and Guarantees. We have obligations under
performance and other surety contract bonds related to certain of our customer
contracts. Performance bonds generally provide a customer with the right to
obtain payment and/or performance from the issuer of the bond if we fail to
perform our contractual obligations. As of April 30, 2022 and January 29, 2022
we had $289.7 million and $296.4 million of outstanding performance and other
surety contract bonds, respectively. The estimated cost to complete projects
secured by our outstanding performance and other surety contract bonds was
approximately $132.2 million as of April 30, 2022. In addition to performance
and other surety contract bonds, as part of our insurance program we also
provide surety bonds that collateralize our obligations to our insurance
carriers. As of April 30, 2022 and January 29, 2022, we had $20.3 million of
outstanding surety bonds related to our insurance obligations. Additionally, we
periodically guarantee certain obligations of our subsidiaries, including
obligations in connection with obtaining state contractor licenses and leasing
real property and equipment.
Letters of Credit. We have standby letters of credit issued under our Credit
Agreement as part of our insurance program. These letters of credit
collateralize obligations to our insurance carriers in connection with the
settlement of potential claims. In connection with these collateral obligations,
we had $47.5 million and $46.3 million outstanding standby letters of credit
issued under our Credit Agreement as of April 30, 2022 and January 29, 2022,
respectively.
Backlog. Our backlog is an estimate of the uncompleted portion of services to be
performed under contractual agreements with our customers and totaled $5.593
billion and $5.822 billion at April 30, 2022 and January 29, 2022, respectively.
We expect to complete 52.9% of the April 30, 2022 total backlog during the next
twelve months. Our backlog represents an estimate of services to be performed
pursuant to master service agreements and other contractual agreements over the
terms of those contracts. These estimates are based on contract terms and
evaluations regarding the timing of the services to be provided. In the case of
master service agreements, backlog is estimated based on the work performed in
the preceding twelve month period, when available. When estimating backlog for
newly initiated master service agreements and other long and short-term
contracts, we also consider the anticipated scope of the contract and
information received from the customer during the procurement process. A
significant majority of our backlog comprises services under master service
agreements and other long-term contracts.
In many instances, our customers are not contractually committed to procure
specific volumes of services under a contract. Contract revenue estimates
reflected in our backlog can be subject to change due to a number of factors,
including contract cancellations or changes in the amount of work we expect to
be performed at the time the estimate of backlog is developed. In addition,
contract revenues reflected in our backlog may be realized in different periods
from those previously reported due to these factors as well as project
accelerations or delays due to various reasons, including, but not limited to,
changes in customer spending priorities, scheduling changes, commercial issues
such as permitting, engineering revisions, job site conditions, adverse weather,
and the potential adverse effects of the COVID-19 pandemic. The amount or timing
of our backlog can also be impacted by the merger or acquisition activity of our
customers. Many of our contracts may be cancelled by our customers, or work
previously awarded to us pursuant to these contracts may be cancelled,
regardless of whether or not we are in default. The amount of backlog related to
uncompleted projects in which a provision for estimated losses was recorded is
not material.
Backlog is not a measure defined by GAAP; however, it is a common measurement
used in our industry. Our methodology for determining backlog may not be
comparable to the methodologies used by others.
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