<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to________
Commission file number 0-5423
DYCOM INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Florida 59-1277135
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4440 PGA Boulevard, Suite 600
Palm Beach Gardens, Florida 33410
(Address of principal executive office) (Zip Code)
(561) 627-7171
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of December 4, 1998
----- ----------------------------------
Common Stock, par value $0.33 1/3 14,817,948
<PAGE> 2
DYCOM INDUSTRIES, INC.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets-
July 31, 1998 and October 31, 1998 3
Condensed Consolidated Statements of
Operations for the Three Months Ended
October 31, 1997 and 1998 4
Condensed Consolidated Statements of
Cash Flows for the Three Months Ended
October 31, 1997 and 1998 5-6
Notes to Condensed Consolidated
Financial Statements 7-12
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 13-15
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
2
<PAGE> 3
DYCOM INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
July 31, October 31,
1998 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 35,927,307 $ 32,077,475
Accounts receivable, net 62,142,808 62,995,833
Costs and estimated earnings in
excess of billings 14,382,620 14,900,408
Deferred tax assets, net 2,726,348 2,925,294
Other current assets 3,014,199 4,822,289
------------ ------------
Total current assets 118,193,282 117,721,299
------------ ------------
PROPERTY AND EQUIPMENT, net 42,865,197 51,645,856
OTHER ASSETS:
Intangible assets, net 4,529,270 4,549,361
Deferred tax assets 109,520
Other 730,342 3,524,177
------------ ------------
Total other assets 5,259,612 8,183,058
------------ ------------
TOTAL $166,318,091 $177,550,213
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 12,182,699 $ 14,491,117
Notes payable 4,727,782 4,725,685
Accrued self-insured claims 2,440,303 2,546,560
Income taxes payable 2,812,144 5,657,781
Other accrued liabilities 14,819,181 13,180,472
------------ ------------
Total current liabilities 36,982,109 40,601,615
NOTES PAYABLE 13,407,990 12,264,920
ACCRUED SELF-INSURED CLAIMS 7,454,849 7,660,944
OTHER LIABILITIES 10,094,195 11,043,210
------------ ------------
Total liabilities 67,939,143 71,570,689
------------ ------------
COMMITMENTS AND CONTINGENCIES, Note 8
STOCKHOLDERS' EQUITY:
Preferred stock, par value $1.00 per share:
1,000,000 shares authorized; no shares
issued and outstanding
Common stock, par value $.33 1/3 per share:
50,000,000 shares authorized; 14,722,731 and 14,730,626
shares issued and outstanding, respectively 4,907,577 4,910,208
Additional paid-in capital 62,496,252 62,600,054
Retained earnings 30,975,119 38,469,262
------------ ------------
Total stockholders' equity 98,378,948 105,979,524
------------ ------------
TOTAL $166,318,091 $177,550,213
============ ============
</TABLE>
See notes to condensed consolidated financial statements--unaudited.
3
<PAGE> 4
DYCOM INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
-----------------------------
October 31, October 31,
1997 1998
------------ ------------
<S> <C> <C>
REVENUES:
Contract revenues earned $ 91,132,533 $108,613,156
Other, net 299,932 689,094
------------ ------------
Total 91,432,465 109,302,250
------------ ------------
Expenses:
Costs of earned revenues
excluding depreciation 71,320,503 81,180,248
General and administrative 8,601,709 11,537,543
Depreciation and amortization 3,122,734 3,972,738
------------ ------------
Total 83,044,946 96,690,529
------------ ------------
INCOME BEFORE INCOME TAXES 8,387,519 12,611,721
------------ ------------
PROVISION (BENEFIT) FOR INCOME TAXES:
Current 2,836,211 5,426,044
Deferred (186,729) (308,466)
------------ ------------
Total 2,649,482 5,117,578
------------ ------------
NET INCOME $ 5,738,037 $ 7,494,143
============ ============
EARNINGS PER COMMON SHARE:
Basic $ 0.45 $ 0.51
============ ============
Diluted $ 0.45 $ 0.50
============ ============
PRO FORMA NET INCOME AND EARNINGS
PER COMMON SHARE DATA:
Income before income taxes $ 8,387,519
Pro forma provision for
income taxes 3,573,186
------------
PRO FORMA NET INCOME $ 4,814,333
============
PRO FORMA EARNINGS PER COMMON SHARE:
Basic $ 0.38
============
Diluted $ 0.37
============
</TABLE>
See notes to condensed consolidated financial statements--unaudited.
4
<PAGE> 5
DYCOM INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
-----------------------------
October 31, October 31,
1997 1998
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND EQUIVALENTS FROM:
OPERATING ACTIVITIES:
Net income $ 5,738,037 $ 7,494,143
Adjustments to reconcile net cash provided
by operating activities:
Depreciation and amortization 3,122,734 3,972,738
(Gain) on disposal of assets (40,375) (55,208)
Deferred income taxes (186,729) (308,466)
Changes in assets and liabilities:
Accounts receivable, net (2,204,871) (853,025)
Unbilled revenues, net (1,017,859) (517,788)
Other current assets 592,638 (1,808,090)
Other assets 122,278 206,165
Accounts payable (1,922,591) 2,308,418
Accrued self-insured claims and
other liabilities 162,953 (377,344)
Accrued income taxes 1,436,545 2,845,637
------------ ------------
Net cash inflow from operating activities 5,802,760 12,907,180
------------ ------------
INVESTING ACTIVITIES:
Capital expenditures (6,063,115) (12,017,054)
Proceeds from sale of assets 162,489 107,738
Assets of acquired business (750,000)
Investment in unconsolidated affiliate (3,000,000)
------------ ------------
Net cash outflow from investing activities (5,900,626) (15,659,316)
------------ ------------
FINANCING ACTIVITIES:
Borrowings on notes payable
and bank lines-of-credit 7,900,402
Principal payments on notes payable
and bank lines-of-credit (9,696,132) (1,204,129)
Exercise of stock options 23,697 106,433
Distributions to shareholders of pooled
companies (1,060,000)
------------ ------------
Net cash outflow from financing activities (2,832,033) (1,097,696)
------------ ------------
NET CASH OUTFLOW FROM ALL ACTIVITIES (2,929,899) (3,849,832)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 5,276,112 35,927,307
------------ ------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 2,346,213 $ 32,077,475
============ ============
</TABLE>
See notes to condensed consolidated financial statements--unaudited.
5
<PAGE> 6
DYCOM INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
-----------------------------
October 31, October 31,
1997 1998
------------ ------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW AND
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Cash paid during the period for:
Interest $ 691,033 $ 349,937
Income taxes $ 1,401,731 $ 2,580,407
Property and equipment acquired and
financed with:
Capital lease obligation $ 58,962
</TABLE>
See notes to condensed consolidated financial statements--unaudited.
6
<PAGE> 7
DYCOM INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS--Unaudited
1. The accompanying condensed consolidated balance sheets of Dycom Industries,
Inc. ("Dycom" or the "Company") as of July 31, 1998 and October 31, 1998, and
the related condensed consolidated statements of operations and the condensed
consolidated statements of cash flows for the three months ended October 31,
1997 and 1998 reflect all normal recurring adjustments which are, in the
opinion of management, necessary for a fair presentation of such statements.
The results of operations for the three months ended October 31, 1998 are not
necessarily indicative of the results which may be expected for the entire
year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION -- The condensed consolidated financial statements
are unaudited. These statements include Dycom Industries, Inc. and its
subsidiaries, all of which are wholly owned. On April 6, 1998, the Company
consummated the Cable Com Inc. ("CCI") and Installation Technicians, Inc.
("ITI") acquisitions and issued 1.2 million and 600,000 shares of common stock
in exchange for all the outstanding capital stock of CCI and ITI, respectively.
These acquisitions were accounted for as poolings of interests and accordingly,
the Company's condensed consolidated financial statements include the results
of CCI and ITI for all periods presented. Prior to the acquisitions, CCI and
ITI used a fiscal year consisting of a 52/53 week time period and, as a result
of the merger, have adopted Dycom's fiscal year end of July 31. All periods
presented reflect the adoption of such fiscal year end as of the beginning of
the period.
The Company is a leading provider of engineering, construction and
maintenance services to telecommunications providers and also performs
underground utility locating services and electrical construction and
maintenance contracting services. All material intercompany accounts and
transactions have been eliminated.
PRO FORMA ADJUSTMENTS -- Prior to the acquisition by Dycom, CCI and ITI elected
under Subchapter S of the Internal Revenue Code to have the stockholders
recognize their proportionate share of CCI's and ITI's taxable income on their
personal tax returns in lieu of paying corporate income tax. The pro forma net
income and earnings per common share on the condensed consolidated statements
of operations reflects a provision for current and deferred income taxes for
all periods presented as if the corporations were included in Dycom's federal
and state income tax returns. At April 6, 1998, the consummation date of the
acquisition, CCI and ITI recorded deferred taxes on the temporary differences
between the financial reporting basis and the tax basis of their assets and
liabilities. The deferred tax (asset) liability recorded by CCI and ITI was
$616,358 and $(11,035), respectively.
USE OF ESTIMATES -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates and
such differences may be material to the financial statements.
Estimates are used in the Company's revenue recognition of work-in-process,
allowance for doubtful accounts, self-insured claims liability, deferred tax
asset valuation allowance, depreciation and amortization, and in the estimated
lives of assets, including intangibles.
REVENUE -- Income on short-term contracts is recognized as the related work is
completed. Work-in-process on unit contracts is based on management's estimate
of work performed but not billed. Income on long-term contracts is recognized
on the percentage-of-completion method based primarily on the ratio of contract
costs incurred to date to total estimated contract costs. At the time a loss on
a contract becomes known, the entire amount of the estimated ultimate loss is
accrued.
"Costs and estimated earnings in excess of billings" represents the excess of
contract revenues recognized under the percentage-of-completion method of
accounting for long-term contracts and work-in-process on unit contracts over
billings to date. For those contracts in which billings exceed contract
revenues recognized to date, such excesses are included in the caption
"billings in excess of costs and estimated earnings".
CASH AND EQUIVALENTS -- Cash and equivalents include cash balances on deposit
in banks, overnight repurchase agreements, certificates of deposit, commercial
paper, and various other financial instruments having an original maturity of
three months or less. For purposes of the condensed consolidated statements of
cash flows, the Company considers these amounts to be cash equivalents.
PROPERTY AND EQUIPMENT -- Property and equipment is stated at cost.
Depreciation and amortization is computed over the estimated useful life of the
assets utilizing the straight-line method. The estimated useful service lives
of the assets are: buildings--20-31 years; leasehold improvements--the term of
the respective lease or the estimated useful life of the improvements,
whichever is shorter; vehicles--3-7 years; equipment and machinery--2-10 years;
and furniture and fixtures--3-10 years. Maintenance and repairs are expensed as
incurred; expenditures that enhance the value of the property or extend its
useful life are capitalized. When assets are sold or retired, the cost and
related accumulated depreciation are removed from the accounts and the
resulting gain or loss is included in income.
7
<PAGE> 8
INTANGIBLE ASSETS -- The excess of the purchase price over the fair market
value of the tangible net assets of acquired businesses (goodwill) is amortized
on a straight-line basis over 40 years. The appropriateness of the carrying
value of goodwill is reviewed periodically by the Company. An impairment loss
is recognized when the projected future cash flows is less than the carrying
value of goodwill. No impairment loss has been recognized in the periods
presented. Non-compete agreements obtained through the purchase of business
assets are amortized on a straight-line basis over the term of the agreements.
Amortization expense was $38,773 and $41,871 for the three-month periods ended
October 31, 1997 and 1998, respectively. The intangible assets are net of
accumulated amortization of $1,306,446 at July 31, 1998 and $1,348,317 at
October 31, 1998.
SELF-INSURED CLAIMS LIABILITY -- The Company is primarily self-insured, up to
certain limits, for automobile and general liability, workers' compensation,
and employee group health claims. A liability for unpaid claims and the
associated claim expenses, including incurred but not reported losses, is
actuarially determined and reflected in the condensed consolidated financial
statements as an accrued liability. The self-insured claims liability includes
incurred but not reported losses of $5,120,000 and $6,332,000 at July 31, 1998
and October 31, 1998, respectively. The determination of such claims and
expenses and the appropriateness of the related liability is continually
reviewed and updated.
INCOME TAXES -- The Company and its subsidiaries, except for CCI and ITI, file
a consolidated federal income tax return. CCI and ITI were included in the
Company's consolidated federal income tax return effective April 6, 1998.
Deferred income taxes are provided for the temporary differences between the
financial reporting basis and the tax basis of the Company's assets and
liabilities.
PER SHARE DATA -- Earnings per common share-basic is computed using the
weighted-average common shares outstanding during the period. Earnings per
common share-diluted is computed using the weighted-average common shares
outstanding during the period and the dilutive effect of common stock options,
using the treasury stock method. See Note 3.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS -- In June 1997, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 130 "Reporting Comprehensive Income" which establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general purpose
financial statements. This statement requires that an enterprise classify items
of other comprehensive income by their nature in a financial statement and
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. This statement is effective for fiscal years
beginning after December 15, 1997.
In June 1997, the FASB issued SFAS No. 131 "Disclosure about Segments of an
Enterprise and Related Information" which establishes standards for public
business enterprises to report information about operating segments in annual
financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes the standards for related disclosures about
products and services, geographic areas, and major customers. This statement
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. The financial information
is required to be reported on the basis that it is used internally for
evaluating segment performance and deciding how to allocate resources to
segments. Operating segments are components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. This statement is effective for fiscal years beginning
after December 15, 1997.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures about
Pension and Other Postretirement Benefits", which revises certain disclosures
about pension and other postretirement benefit plans. This statement does not
change the measurement and recognition methods for pensions or postretirement
benefit costs reported in financial statements. This statement is effective for
fiscal years beginning after December 15, 1997.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" which establishes standards for the
accounting and reporting of derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred to
as derivatives) and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. This statement
is effective for all fiscal quarters of all fiscal years beginning after June
15, 1999.
Management is currently evaluating the requirements and related disclosures of
SFAS No. 130, 131, 132, and 133.
8
<PAGE> 9
3. EARNINGS PER SHARE
In February 1997, the FASB issued SFAS No. 128 "Earnings per Share" which
changes the method of calculating earnings per share and was effective for the
Company in the quarter ended January 31, 1998. All periods presented have been
restated in accordance with the provisions of SFAS No. 128.
The following is a reconciliation of the numerators and denominators of the
basic and diluted per share computation as required by SFAS No. 128.
<TABLE>
<CAPTION>
For the Three Months Ended
-----------------------------
October 31, October 31,
1997 1998
------------ ------------
<S> <C> <C>
Net income available to common stockholders (numerator) $ 5,738,037 $ 7,494,143
============ ============
Weighted-average number of common shares (denominator) 12,669,871 14,726,446
============ ============
Earnings per common share - basic $ 0.45 $ 0.51
============ ============
Weighed-average number of common shares 12,669,871 14,726,446
Potential common stock arising from stock options 186,682 220,132
------------ ------------
Total shares (denominator) 12,856,553 14,946,578
============ ============
Earnings per common share - diluted $ 0.45 $ 0.50
============ ============
PRO FORMA EARNINGS PER SHARE DATA:
Pro forma net income available to common stockholders
(numerator) $ 4,814,333
============
Pro forma earnings per common share - basic $ 0.38
============
Pro forma earnings per common share - diluted $ 0.37
============
</TABLE>
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
July 31, October 31,
1998 1998
------------ ------------
<S> <C> <C>
Contract billings $ 58,888,421 $ 61,057,972
Retainage 4,133,590 4,722,259
Other receivables 1,331,775 722,309
------------ ------------
Total 64,353,786 66,502,540
Less allowance for doubtful accounts 2,210,978 3,506,707
------------ ------------
Accounts receivable, net $ 62,142,808 $ 62,995,833
============ ============
</TABLE>
9
<PAGE> 10
5. COSTS AND ESTIMATED EARNINGS ON CONTRACTS IN PROGRESS
The accompanying condensed consolidated balance sheets include costs and
estimated earnings on contracts in progress, net of progress billings as
follows:
<TABLE>
<CAPTION>
July 31, October 31,
1998 1998
------------ ------------
<S> <C> <C>
Costs incurred on contracts in progress $ 15,056,642 $ 14,558,444
Estimated earnings thereon 3,387,933 3,694,979
------------ ------------
18,444,575 18,253,423
Less billings to date 4,061,955 3,353,015
------------ ------------
Costs and estimated earnings in excess of billings $ 14,382,620 $ 14,900,408
============ ============
</TABLE>
6. PROPERTY AND EQUIPMENT
The accompanying condensed consolidated balance sheets include the following
property and equipment:
<TABLE>
<CAPTION>
July 31, October 31,
1998 1998
------------ ------------
<S> <C> <C>
Land $ 1,592,958 $ 1,902,968
Buildings 2,497,103 2,805,165
Leasehold improvements 1,459,543 1,496,252
Vehicles 52,287,135 60,298,134
Equipment and machinery 34,319,707 37,599,440
Furniture and fixtures 5,638,326 6,095,088
------------ ------------
Total 97,794,772 110,197,047
Less accumulated depreciation and amortization 54,929,575 58,551,191
------------ ------------
Property and equipment, net $ 42,865,197 $ 51,645,856
============ ============
</TABLE>
10
<PAGE> 11
7. NOTES PAYABLE
Notes payable are summarized by type of borrowings as follows:
<TABLE>
<CAPTION>
July 31, October 31,
1998 1998
------------ ------------
<S> <C> <C>
Bank Credit Agreement:
Term loan $ 14,250,000 $ 13,500,000
Equipment term loans 3,339,218 2,967,352
Capital lease obligations 60,931 99,154
Equipment loans 485,623 424,099
------------ ------------
Total 18,135,772 16,990,605
Less current portion 4,727,782 4,725,685
------------ ------------
Notes payable--non-current $ 13,407,990 $ 12,264,920
============ ============
</TABLE>
On April 29, 1998, the Company signed an amendment to its bank credit agreement
increasing the total facility to $85.0 million. The amended bank credit
agreement provides for (i) a $30.0 million revolving working capital facility;
(ii) a $15.0 million standby letter of credit facility; (iii) a $25.0 million
revolving equipment acquisition and small business purchase facility; and (iv)
a $15.0 million five-year term loan. The revolving working capital facility,
the standby letter of credit facility and the revolving equipment facility are
available for a two-year period.
The revolving working capital facility bears interest, at the option of the
Company, at the bank's prime interest rate minus 1.00% or LIBOR plus 1.50%. As
of October 31, 1998, there was no outstanding balance on this facility
resulting in an available borrowing capacity of $30.0 million.
The Company had outstanding standby letters of credit issued to the Company's
insurance administrators as part of its self-insurance program of $11.4 million
at October 31, 1998.
The outstanding loans under the revolving equipment acquisition and small
business purchase facility bear interest, at the option of the Company, at the
bank's prime interest rate minus 0.75% or LIBOR plus 1.75%. At October 31,
1998, the interest rate on the outstanding revolving equipment and small
business purchase facility were at the LIBOR option of 7.56%. The advances
under the revolving equipment acquisition and small business purchase facility
are converted to term loans with maturities not to exceed 48 months. The
outstanding principal on the equipment term loans is payable in monthly
installments through February 2001. The amount outstanding on the revolving
equipment acquisition and small business purchase facility was $3.0 million at
October 31, 1998, resulting in an available borrowing capacity of $22.0
million.
The outstanding principal under the term loan bears interest at the bank's
prime interest rate minus 0.50% (7.50% at October 31, 1998). Principal and
interest is payable in quarterly installments through April 2003. The amount
outstanding on the term loan was $13.5 million at October 31, 1998.
The amended bank credit agreement contains restrictions which, among other
things, requires maintenance of certain financial ratios and covenants,
restricts encumbrances of assets and creation of indebtedness, and limits the
payment of cash dividends. Cash dividends are limited to 50% of each fiscal
year's after-tax profits. No cash dividends were paid during the three-month
period ended October 31, 1998. The amended bank credit facility is secured by
the Company's assets and guaranteed by each of its subsidiaries. At October 31,
1998, the Company was in compliance with all financial covenants and
conditions.
In addition to the borrowings under the amended bank credit agreement, certain
subsidiaries have outstanding obligations under capital leases and other
equipment financing arrangements. The obligations are payable in monthly
installments expiring at various dates through July 2001.
Interest costs incurred on notes payable, all of which were expensed for the
three-month period ended October 31, 1997 and 1998 were $636,189 and $348,550,
respectively. Such amounts are included in general and administrative expenses
in the accompanying condensed consolidated statements of operations.
11
<PAGE> 12
8. COMMITMENTS AND CONTINGENCIES
In September 1995, the State of New York commenced a sales and use tax audit of
Communications Construction Group, Inc. ("CCG"), a wholly-owned subsidiary, for
the years 1989 through 1995. As a result of the audit, certain additional taxes
were paid by CCG in fiscal 1996. In addition, the State of New York concluded
that cable television service providers are subject to New York State sales
taxes for the construction of cable television distribution systems, and by a
Notice dated January 1997, asserted amounts due from CCG for sales taxes and
interest for the periods through August 31, 1995, aggregating approximately
$1.3 million. Any sales taxes asserted against the Company may be offset by use
taxes already paid by the customers of the Company. The Company intends to
vigorously contest the assertion. The Company is unable to assess the
likelihood of any particular outcome at this time or to quantify the effect a
resolution of this matter may have on the Company's consolidated financial
statements.
In the normal course of business, certain subsidiaries of the Company have
pending and unasserted claims. It is the opinion of the Company's management,
based on the information available at this time, that these claims will not
have a material adverse impact on the Company's consolidated financial
statements.
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's
consolidated financial condition and results of operations. The discussion
should be read in conjunction with the condensed consolidated financial
statements and notes thereto.
Results of Operations
In April 1998, Dycom completed the acquisition of CCI and ITI in transactions
accounted for as poolings of interests. See Note 2 of the Notes to the
Condensed Consolidated Financial Statements. CCI provides construction services
to cable television multiple system operators and ITI provides construction and
engineering services to local and long-distance telephone companies. Dycom's
financial statements and all financial and operating data derived therefrom
have been combined for all periods presented herein to include the financial
condition and results of operations of CCI and ITI.
The following table sets forth, as a percentage of contract revenues earned,
certain items in the Company's Condensed Consolidated Statements of Operations
for the periods indicated:
<TABLE>
<CAPTION>
For the Three Months Ended
-----------------------------
October 31, October 31,
1997 1998
------------ ------------
<S> <C> <C>
Revenues:
Contract revenues earned 100.0% 100.0%
Other, net 0.3 0.6
------------ ------------
Total revenues 100.3 100.6
Expenses:
Cost of earned revenues, excluding depreciation 78.3 74.7
General and administrative 9.4 10.6
Depreciation and amortization 3.4 3.7
------------ ------------
Total expenses 91.1 89.0
------------ ------------
Income before income taxes 9.2 11.6
Provision for income taxes 2.9 4.7
------------ ------------
Historical Net Income 6.3 6.9%
============
Pro forma adjustments to income tax provision 1.0
------------
Pro Forma Net Income 5.3%
============
</TABLE>
Revenues. Contract revenues increased $17.5 million, or 19.2%, to $108.6
million in the quarter ending October 31, 1998 from $91.1 million in the
quarter ended October 31, 1997. Of this increase, $17.0 million was
attributable to the telecommunications services group and $0.5 million was
attributable to the underground utility locating services group, reflecting an
increased market demand for the Company's services.
During the quarter ended October 31, 1998, the Company recognized $98.4 million
of contract revenues from the telecommunications services group as compared to
$81.4 million for the same period last year. The increase in the Company's
telecommunications services group contract revenues reflects increased volume
of projects and activities associated with cable television construction
services which increased by $6.1 million to $43.5 million in the quarter ended
October 31, 1998 from $37.4 million in the same period last year. Also, the
telecommunications services group experienced increased volume of services to
its existing customers and geographically expanded its presence with its
existing customer base by obtaining several new master contracts, which
resulted in a $10.9 million increase in contract revenues. Contract revenues
recognized from the electrical construction and maintenance services group was
$4.9 million for each of the quarters ended October 31, 1998 and 1997. The
Company recognized contract revenues of $5.3 million from the underground
utility locating services group in the quarter ended October 31, 1998 as
compared to $4.8 million in the same period last year, an increase of 11.7%.
Contract revenues from multi-year master service agreements and other long-term
agreements represented 69% and 70% of total contract revenues in the quarter
ended October 31, 1998 and 1997, respectively. Contract revenues from
multi-year master service agreements represented 48% of total contract revenues
in each of the quarters ended October 31, 1998 and 1997.
13
<PAGE> 14
Costs of Earned Revenues. Costs of earned revenues increased $9.9 million to
$81.2 million in the quarter ended October 31, 1998 from $71.3 million in the
quarter ended October 31, 1997, but decreased as a percentage of contract
revenues to 74.7% from 78.3%. Insurance and equipment costs declined as a
percentage of contract revenues as a result of effective management of
insurance claims, positive results of the corporate safety program, and the
buy-out of certain operating leases. Other factors affecting the improved
operating margin include increased productivity of the Company's labor force
combined with the effective utilization of subcontractors to meet labor
demands.
General and Administrative Expenses. General and administrative expenses
increased $2.9 million to $11.5 million in the quarter ended October 31, 1998
from $8.6 million in the quarter ended October 31, 1997. The increase in
general and administrative expenses for the quarter ended October 31, 1998, as
compared to the same period last year, was primarily attributable to increases
in administrative salaries, employee benefits and payroll taxes of $1.3
million, provision for doubtful accounts of $0.9 million, registration costs of
$0.4 million, and other general and administrative expenses of $0.6 million
offset by a reduction in interest costs of $0.3 million associated with the
declining balance of notes payable.
Depreciation and Amortization. Depreciation and amortization increased $0.9
million to $4.0 million in the quarter ending October 31, 1998 as compared to
$3.1 million in the same period last year. The increase in depreciation and
amortization was due to capital expenditures of $12.0 million in the
three-month period ended October 31, 1998 as compared to $6.1 million in the
three-month period ended October 31, 1997, an increase of $5.9 million. The
increased purchases represent capital expenditures in the ordinary course of
business, equipment purchased for the start-up of certain long-term contracts,
and the buy-out of operating leases on terms favorable to the Company.
Income Taxes. The provision for income taxes was $5.1 million in the
three-month period ended October 31, 1998 as compared to $2.6 million in the
same period last year. The Company's effective tax rate was 40.6% in the
three-month period ended October 31, 1998 as compared to 31.6% in the same
period last year. The effective tax rate differs from the statutory rate due to
state income taxes, income of Subchapter S Corporations (CCI and ITI) being
taxed to their shareholders, the amortization of intangible assets that do not
provide a tax benefit, and other non-deductible expenses for tax purposes.
For the three-month period ended October 31, 1997, the provision for income
taxes has been adjusted to reflect a pro forma tax provision for pooled
companies which were previous Subchapter S Corporations. The pro forma
provision for income taxes was $3.6 million and the pro forma effective tax
rate was 42.6% for the three-month period ended October 31, 1997.
Liquidity and Capital Resources
The Company's needs for capital are attributable primarily to its needs for
equipment to support its contractual commitments to customers and its needs for
working capital sufficient for general corporate purposes. Capital expenditures
have been financed by operating and capital leases, bank borrowings and
internal cash flow. The Company regularly reviews various strategic
acquisition opportunities and periodically engages in discussions regarding
possible acquisitions. The Company may require additional debt or equity
financing for future acquisitions which may not be available on terms favorable
to the Company, if at all. The Company's sources of cash have historically been
from operating activities, bank borrowings, proceeds arising from the sale of
idle and surplus equipment and real property, and the public offering of its
common stock.
For the three-month period ended October 31, 1998, net cash provided by
operating activities was $12.9 million compared to $5.8 million for the
three-month period ended October 31, 1997. Net income and non-cash charges are
the primary sources of operating cash flow. Working capital items contributed
$1.8 million to operating cash flow for the three-month period ended October
31, 1998 principally through an increase in accounts payable and income taxes
offset by an increase in other current assets.
In the three-month period ended October 31, 1998, net cash used in investing
activities was $15.7 million as compared to $5.9 million for the same period
last year. For the three-month period ended October 31, 1998, capital
expenditures of $12.0 million were for the normal replacement of equipment in
the ordinary course of business, equipment purchased for the start up of
certain long-term contracts, and the buy-out of operating leases on terms
favorable to the Company.
In August 1998, the Company purchased a 13.0% equity interest in Witten
Technologies, Inc. ("Witten") for $3.0 million. Witten has developed, and is
the owner of, various proprietary technologies and materials relating to
ground-penetrating radar and the use of other electromagnetic frequencies. In
addition to the equity received, the Company has acquired an exclusive license
to market certain technologies within the United States and Canada. Witten is
being accounted for as an unconsolidated affiliate.
14
<PAGE> 15
In August 1998 the Company purchased the assets of a business which included a
non-compete agreement for $750,000 for use in the telecommunications services
group.
In the three-month period ended October 31, 1998, net cash used in financing
activities was $1.1 million which was primarily attributable to normal debt
payments under the terms of the amended bank credit agreement.
On April 29, 1998, the Company signed an amendment to its bank credit
agreement, providing for a total facility of up to $85.0 million. The amended
credit facility provides for (i) a $30.0 million revolving working capital
facility; (ii) a $15.0 million standby letter of credit facility; (iii) a $25.0
million revolving equipment acquisition and small business purchase facility;
and (iv) a $15.0 million five-year term loan.
The five-year term loan facility is payable in quarterly installments through
April 2003. During the three months ended October 31, 1998, the Company repaid
$0.8 million on this facility. The revolving equipment acquisition and small
business purchase facility, the revolving working capital facility and the
standby letter of credit facility are available for a two-year period. At
October 31, 1998 the Company has available borrowing capacity of $22.0 million
under the revolving equipment acquisition and small business purchase facility,
$30.0 million under the revolving working capital facility and $3.6 million
under the standby letter of credit facility.
The amended bank credit agreement requires the Company to maintain certain
financial covenants and conditions, as well as restricting the encumbrances of
assets and the creation of additional indebtedness and limits the payment of
cash dividends. At October 31, 1998, the Company was in compliance with all
covenants and conditions under the credit agreement.
The Company foresees its capital resources together with existing cash balances
to be sufficient to meet its financial obligations, including the scheduled
debt payments under the amended bank credit agreement and operating lease
commitments, and to support the Company's normal replacement of equipment at
its current level of business for at least the next twelve months. The
Company's future operating results and cash flows may be affected by a number
of factors including the Company's success in bidding on future contracts and
the Company's continued ability to effectively manage controllable costs.
Special Note Concerning Forward Looking Statements
This Quarterly Report on Form 10-Q, including the Notes to Condensed
Consolidated Financial Statements and this Management's Discussion and Analysis
of Financial Condition and Results of Operations, contains forward looking
statements. The words "believe", "expect", "anticipate", "intends", "forecast",
"project", and similar expressions identify forward looking statements. Such
statements may include, but may not be limited to, the anticipated outcome of
contingent events, including litigation, projections of revenues, income or
loss, capital expenditures, plans for future operations, growth and
aquisitions, financial needs or plans and the availability of financing, and
plans relating to services of the Company, as well as assumptions relating to
the foregoing. Such forward looking statements are within the meaning of that
term in Section 27A of the Securities Act of 1933, as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended.
Year 2000 Compliance
The Company has reviewed its computer systems to identify those areas that
could be adversely affected by Year 2000 software failures. The Company has
converted approximately 85% of its information systems to be Year 2000
compliant. The Company has incurred approximately $1.2 million through October
31, 1998 and approximately $0.3 million will be incurred in the remainder of
fiscal 1999 to complete the information system conversions. Although the
Company expects that any additional expenditures that may be required in
connection with the Year 2000 conversions will not be material, there can be no
assurance in this regard. The Company believes that certain of its customers,
particularly local exchange and long distance carriers and cable multiple
system operators, may be impacted by the Year 2000 problem, which could in turn
affect the Company. Currently, the Company cannot predict the effect of the
Year 2000 problem on entities with which it transacts business and there can be
no assurance it will not have a material adverse effect on the Company's
business, financial condition, results of operations or cash flows. The Company
will be formulating a contingency plan prior to the end of the current fiscal
year to address the possible effects, if any, of any of its customers
experiencing Year 2000 problems.
15
<PAGE> 16
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company considered the provision of Financial Reporting Release No. 48
"Disclosure of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosure of Quantitative and
Qualitative Information about Market Risk Inherent in Derivative Financial
Instruments, Other Financial Instruments and Derivative Commodity Instruments."
The Company has no holdings of derivative financial or commodity instruments at
October 31, 1998 although it does have exposure to interest rate risk. At
October 31, 1998, the Company performed sensitivity analysis to assess the
potential effect of interest rate risk and concluded that near-term changes in
interest rates should not materially adversely affect the Company's financial
position, results of operations or cash flows.
16
<PAGE> 17
PART II. OTHER INFORMATION
- --------------------------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibits furnished pursuant to the requirements of Form 10-Q:
Number Description
------ -----------
(11) Statement re computation of per share earnings
All information required by Exhibit 11 is presented within
Note 3 of the Company's condensed consolidated financial
statements in accordance with the provisions of SFAS No.
128.
(27) Financial Data Schedule
(b) Reports On Form 8-K
No reports on Form 8-K were filed on behalf of the Registrant during the
quarter ended October 31, 1998.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DYCOM INDUSTRIES, INC.
Registrant
Date: December 9, 1998 /s/ Thomas R. Pledger
----------------- -----------------------------------
Thomas R. Pledger
Chairman and Chief Executive
Officer
Date: December 9, 1998 /s/ Steven Nielsen
----------------- -----------------------------------
Steven Nielsen
President and Chief Operating
Officer
Date: December 9, 1998 /s/ Douglas J. Betlach
----------------- -----------------------------------
Douglas J. Betlach
Vice President, Treasurer, and
Chief Financial Officer
18
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