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DYCOM INDUSTRIES INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.
(Edgar Glimpses Via Acquire Media NewsEdge)
The following discussion and analysis should be read in conjunction with our
condensed consolidated financial statements and accompanying notes included
elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on
Form 10-K for the year ended July 28, 2012. Our Annual Report on Form 10-K for
the year ended July 28, 2012 was filed with the Securities and Exchange
Commission ("SEC") on September 4, 2012 and is available on the SEC's website at
www.sec.gov and on our website at www.dycomind.com.
Cautionary Note Concerning Forward-Looking Statements
This Quarterly Report on Form 10-Q, including any documents incorporated by
reference or deemed to be incorporated by reference herein, contains
"forward-looking statements," which are statement relating to future events,
future financial performance, strategies, expectations, and competitive
environment. Words such as "believe," "expect," "anticipate," "estimate,"
"intend," "forecast," "may," "should," "could," "project" and similar
expressions, as well as statements in future tense, identify forward-looking
statements.
You should not read forward-looking statements as a guarantee of future
performance or results. They will not necessarily be accurate indications of
whether or at what time such performance or results will be achieved.
Forward-looking statements are based on information available at the time those
statements are made and/or management's good faith belief at that time with
respect to future events. Such statements are subject to risks and uncertainties
that could cause actual performance or results to differ materially from those
expressed in or suggested by the forward-looking statements. Important factors
that could cause such differences include, but are not limited to:
• anticipated outcomes of contingent events, including litigation;
• projections of revenues, income or loss, or capital expenditures;
• whether the carrying value of our assets is impaired;
• plans for future operations, growth and acquisitions, dispositions, or
financial needs;
• availability of financing;
• the outcome of our plans for future operations, growth and services,
including contract backlog;
• restrictions imposed by our credit agreement and the indenture
governing our senior subordinated notes;
• the use of our cash flow to service our debt;
• future economic conditions and trends in the industries we serve;
• assumptions relating to any of the foregoing;
and other factors discussed within Item 1, Business, Item 1A, Risk Factors, and
Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations, included in our Annual Report on Form 10-K, filed with the SEC on
September 4, 2012 and other risks outlined in our periodic filings with the SEC.
Our forward-looking statements are expressly qualified in their entirety by this
cautionary statement. Our forward-looking statements are only made as of the
date of this Quarterly Report on Form 10-Q and we undertake no obligation to
update these forward-looking statements to reflect new information, subsequent
events or otherwise.
Overview
We are a leading provider of specialty contracting services. These services,
which are provided throughout the United States and in Canada, include
engineering, construction, maintenance and installation services to
telecommunications providers, underground facility locating services to various
utilities, including telecommunications providers, and other construction and
maintenance services to electric and gas utilities and others. For the three
months ended October 27, 2012, the percentage of our revenue by customer type
from telecommunications, underground facility locating, and electric and gas
utilities and other customers, was approximately 86.3%, 10.2%, and 3.5%,
respectively.
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We conduct operations through our subsidiaries. Our revenues may fluctuate as a
result of changes in the capital expenditure and maintenance budgets of our
customers, changes in the general level of construction activity, as well as
overall economic conditions. The capital expenditures and maintenance budgets of
our telecommunications customers may be impacted by consumer demands on
telecommunications providers, the introduction of new communication
technologies, the physical maintenance needs of their infrastructure, the
actions of our government and the Federal Communications Commission, and general
economic conditions.
A significant portion of our services are performed under master service
agreements and other arrangements with customers that extend for periods of one
or more years. We are currently party to numerous master service agreements,
generally having multiple agreements with each of our customers. Master service
agreements generally contain customer-specified service requirements, such as
discrete pricing for individual tasks. To the extent that such contracts specify
exclusivity, there are often a number of exceptions, including the ability of
the customer to issue work orders valued above a specified dollar amount to
other service providers, perform work with the customer's own employees, and use
other service providers when jointly placing facilities with another utility. In
most cases, a customer may terminate an agreement for convenience with written
notice. The remainder of our services are provided pursuant to contracts for
specific projects. Long-term contracts relate to specific projects with terms in
excess of one year from the contract date. Short-term contracts for specific
projects are generally of three to four months in duration. A portion of our
contracts include retainage provisions under which 5% to 10% of the contract
invoicing may be withheld by the customer pending project completion.
We recognize revenues under the percentage of completion method of accounting
using the units-of-delivery or cost-to-cost measures. A significant majority of
our contracts are based on units-of-delivery and revenue is recognized as each
unit is completed. Revenues from contracts using the cost-to-cost measures of
completion are recognized based on the ratio of contract costs incurred to date
to total estimated contract costs. Revenues from services provided under time
and materials based contracts are recognized as the services are performed.
The following table summarizes our revenues from multi-year master service
agreements and other long-term contracts, as a percentage of contract revenues:
For the Three Months Ended
October 27, 2012 October 29, 2011
Multi-year master service agreements 69.9 % 70.5 %
Other long-term contracts 9.1 10.1
Total long-term contracts 79.0 % 80.6 %
The percentage of revenue from long-term contracts varies between periods
depending on the mix of work performed under our contracts.
A significant portion of our revenue comes from several large customers. The
following table reflects the percentage of total revenue from those customers
who contributed at least 2.5% of our total revenue in the three months ended
October 27, 2012 or October 29, 2011:
For the Three Months Ended
October 27, 2012 October 29, 2011
CenturyLink, Inc. 13.7% 13.3%
AT&T Inc. 13.5% 15.2%
Comcast Corporation 12.7% 12.9%
Verizon Communications Inc. 10.2% 12.0%
Windstream Corporation 9.4% 6.4%
Charter Communications, Inc. 6.8% 5.6%
Time Warner Cable Inc.* 5.0% 5.1%
*For comparison purposes, Time Warner Cable Inc. and Insight Communications
Company, Inc. have been combined for periods prior to their February 2012
merger.
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Cost of earned revenues includes all direct costs of providing services under
our contracts, including costs for direct labor provided by employees, services
by independent subcontractors, operation of capital equipment (excluding
depreciation and amortization), direct materials, insurance claims and other
direct costs. We retain the risk of loss, up to certain limits, for claims
related to automobile liability, general liability, workers' compensation,
employee group health, and locate damages. Locate damage claims result from
property and other damages arising in connection with our underground facility
locating services. A change in claims experience or actuarial assumptions
related to these risks could materially affect our results of operations. For a
majority of the contract services we perform, our customers provide all required
materials while we provide the necessary personnel, tools, and equipment.
Materials supplied by our customers, for which the customer retains financial
and performance risk, are not included in our revenue or costs of sales.
General and administrative expenses include costs of management personnel and
administrative overhead at our subsidiaries, as well as our corporate costs.
These costs primarily consist of employee compensation and related expenses,
including stock-based compensation, legal, consulting and professional fees,
information technology and development costs, provision for or recoveries of bad
debt expense, and other costs that are not directly related to performance of
our services under customer contracts. Our senior management, including the
senior managers of our subsidiaries, perform substantially all of our sales and
marketing functions as part of their management responsibilities and,
accordingly, we have not incurred material sales and marketing expenses.
Information technology and development costs included in general and
administrative expenses are primarily incurred to support and to enhance our
operating efficiency. To protect our rights, we have filed for patents on
certain of our innovations.
We are subject to concentrations of credit risk relating primarily to our cash
and equivalents, trade accounts receivable, other receivables and costs and
estimated earnings in excess of billings. Cash and equivalents primarily include
balances on deposit in banks. We maintain substantially all of our cash and
equivalents at financial institutions we believe to be of high credit quality.
To date we have not experienced any loss or lack of access to cash in our
operating accounts.
We grant credit under normal payment terms, generally without collateral, to our
customers. These customers primarily consist of telephone companies, cable
television multiple system operators, and electric and gas utilities. With
respect to a portion of the services provided to these customers, we have
certain statutory lien rights which may, in certain circumstances, enhance our
collection efforts. Adverse changes in overall business and economic factors may
impact our customers and increase potential credit risks. These risks may be
heightened as a result of economic uncertainty and market volatility. In the
past, some of our customers have experienced significant financial difficulties
and likewise, some may experience financial difficulties in the future. These
difficulties expose us to increased risks related to the collectability of
amounts due for services performed. We believe that none of our significant
customers were experiencing financial difficulties that would materially impact
the collectability of our trade accounts receivable and costs in excess of
billings as of October 27, 2012.
Legal Proceedings
As part of our insurance program, we retain the risk of loss, up to certain
limits, for claims related to automobile liability, general liability, workers'
compensation, employee group health, and locate damages, and we have established
reserves that we believe to be adequate based on current evaluations and our
experience with these types of claims. For these claims, the effect on our
financial statements is generally limited to the amount needed to satisfy our
insurance deductibles or retentions.
From time to time, we and our subsidiaries are parties to various other claims
and legal proceedings. It is the opinion of our management, based on information
available at this time, that such other pending claims or proceedings will not
have a material effect on our financial statements.
Acquisitions
As part of our growth strategy, we may acquire companies that expand, complement
or diversify our business. We regularly review opportunities and periodically
engage in discussions regarding possible acquisitions. Our ability to sustain
our growth and maintain our competitive position may be affected by our ability
to identify, acquire, and successfully integrate companies.
On November 19, 2012, we entered into a definitive agreement with Quanta
Services, Inc. to acquire substantially all of Quanta's domestic
telecommunications infrastructure services subsidiaries. The acquired
subsidiaries provide specialty contracting services, including engineering,
construction, maintenance and installation services to telecommunications
providers, and other construction and maintenance services to electric and gas
utilities and others. Principal business facilities are located in Arizona,
California, Florida, Georgia, Minnesota, New York, Pennsylvania, and Washington.
The anticipated benefits of this acquisition include significant enhancement of
our geographic scope and rural telecommunications engineering and construction
capabilities, increased construction resources for wireless carriers, and
reinforcement of our competencies in
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broadband construction. The purchase price of approximately $275 million is
subject to adjustments for working capital and other specified items and will be
financed with a new $400 million senior secured credit facility. Subject to
customary closing conditions, the acquisition is expected to be completed by
December 31, 2012.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations
are based on our condensed consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management to make certain estimates and assumptions that affect the amounts
reported therein and accompanying notes. On an ongoing basis, we evaluate these
estimates and assumptions, including those related to recognition of revenue for
costs and estimated earnings in excess of billings, the fair value of reporting
units for goodwill impairment analysis, the assessment of impairment of
intangibles and other long-lived assets, income taxes, accrued insurance claims,
asset lives used in computing depreciation and amortization, allowance for
doubtful accounts, stock-based compensation expense for performance-based stock
awards, and accruals for contingencies, including legal matters. 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 changes to our critical accounting policies
and estimates in the three months ended October 27, 2012. See Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, included in our Annual Report on Form 10-K for the year ended
July 28, 2012 for further information regarding our critical accounting policies
and estimates.
Results of Operations
The Company uses a fiscal year ending on the last Saturday in July. The
following table sets forth, as a percentage of revenues earned, our condensed
consolidated statements of operations for the periods indicated (totals may not
add due to rounding):
For the Three Months Ended
October 27, 2012 October 29, 2011
(Dollars in millions)
Revenues $ 323.3 100.0 % $ 319.6 100.0 %
Expenses:
Cost of earned revenue, excluding
depreciation and amortization 257.1 79.5 255.2 79.9
General and administrative 28.8 8.9 25.4 7.9
Depreciation and amortization 15.3 4.7 16.0 5.0
Total 301.2 93.2 296.5 92.8
Interest expense, net (4.2 ) (1.3 ) (4.2 ) (1.3 )
Other income, net 1.6 0.5 3.0 0.9
Income before income taxes 19.5 6.0 21.9 6.8
Provision for income taxes 7.6 2.4 8.9 2.8
Net income $ 11.9 3.7 % $ 13.0 4.1 %
Revenues. The following table presents information regarding total revenues by
type of customer for the three months ended October 27, 2012 and October 29,
2011 (totals may not add due to rounding):
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For the Three Months Ended
October 27, 2012 October 29, 2011 %
Increase Increase
Revenue % of Total Revenue % of Total (decrease) (decrease)
(Dollars in millions)
Telecommunications $ 279.0 86.3 % $ 264.1 82.6 % $ 14.9 5.6 %
Underground facility
locating 32.9 10.2 34.2 10.7 (1.3 ) (3.9 )
Electric and gas utilities
and other customers 11.4 3.5 21.3 6.7 (9.8 ) (46.2 )
Total contract revenues $ 323.3 100.0 % $ 319.6 100.0 % $ 3.7 1.2 %
Revenues increased $3.7 million, or 1.2%, during the three months ended
October 27, 2012 as compared to the three months ended October 29, 2011.
Revenues from specialty construction services provided to telecommunications
companies increased 5.6%, or $14.9 million, to $279.0 million during the three
months ended October 27, 2012 compared to $264.1 million during the three months
ended October 29, 2011. Revenue increased $9.7 million for a telephone customer
from services provided under existing contracts and for rural broadband
initiatives, and revenue increased $4.6 million for a telephone customer which
is expanding and enhancing its broadband services related to rural access lines
it acquired. Additionally, revenues increased $4.5 million for a cable multiple
system operator for underground fiberoptic and cable installation services and
$3.9 million for a leading cable multiple system operator for installation,
maintenance, and construction services, which included services to provision
fiber to cellular sites. Other telecommunications customers had net increases in
revenue of $4.2 million for the three months ended October 27, 2012, including
services provided under new contracts for rural broadband initiatives. These
increases were partially offset by a decrease in revenue of $6.2 million for a
significant telephone customer, and a $5.8 million decrease for another
significant telephone customer, both as a result of reduced spending by these
customers in the current period as compared to the prior year.
Total revenues from underground facility locating customers during the three
months ended October 27, 2012 decreased 3.9% to $32.9 million compared to $34.2
million during the three months ended October 29, 2011. The decrease primarily
resulted from a contract that ended subsequent to the first quarter of fiscal
2012.
Total revenues from electric and gas utilities and other construction and
maintenance customers during the three months ended October 27, 2012 decreased
to $11.4 million compared to $21.3 million during the three months ended
October 29, 2011. The decrease was primarily attributable to decreases in work
performed for several gas companies and electric utilities during the three
months ended October 27, 2012 as compared to the prior year period.
Costs of Earned Revenues. Costs of earned revenues increased to $257.1 million
during the three months ended October 27, 2012 compared to $255.2 million during
the three months ended October 29, 2011. The increase was primarily due to a
higher level of operations during the three months ended October 27, 2012. The
primary component of the increase was a $3.5 million aggregate increase in
direct labor and independent subcontractor costs, partially offset by a $1.0
million decrease in direct material costs and a $0.6 million decrease in other
direct costs.
Costs of earned revenues as a percentage of contract revenues decreased 0.3% for
the three months ended October 27, 2012 as compared to the three months ended
October 29, 2011. Direct material costs as a percentage of total revenue
decreased 0.4% as compared to the three months ended October 29, 2011 primarily
as a result of less materials provided for customers under contracts during the
three months ended October, 27, 2012 as compared to the prior period. Other
direct costs decreased 0.3% as a percentage of total revenue as compared to the
same period last year primarily as a result of reduced equipment and related
costs. Offsetting these decreases, labor and subcontractor costs increased 0.4%
as a result of mix of work performed.
General and Administrative Expenses. General and administrative expenses
increased $3.5 million to $28.8 million during the three months ended
October 27, 2012 as compared to $25.4 million for the three months ended
October 29, 2011. General and administrative expenses as a percentage of
contract revenues were 8.9% and 7.9% for the three months ended October 27, 2012
and October 29, 2011, respectively. The increase in total general and
administrative expenses for the three month period resulted primarily from
increased stock-based compensation expense. Stock-based compensation expense was
$2.3 million during the three months ended October 27, 2012 as compared to $1.3
million during the three months ended October 29, 2011. Additionally, we
incurred approximately $0.7 million in acquisition related costs during the
three months ended October 27, 2012. Other increases primarily resulted from
higher professional fees for accounting and legal services.
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Depreciation and Amortization. Depreciation and amortization decreased to $15.3
million during the three months ended October 27, 2012 from $16.0 million during
the three months ended October 29, 2011 and totaled 4.7% and 5.0% as a
percentage of contract revenues during the current and prior year quarter,
respectively. The decrease in depreciation and amortization as a percentage of
contract revenues was primarily the result of assets becoming fully depreciated
in fiscal 2012.
Interest Expense, Net. Interest expense, net was $4.2 million during each of the
three months ended October 27, 2012 and October 29, 2011.
Other Income, Net. Other income decreased to $1.6 million during the three
months ended October 27, 2012 from $3.0 million during the three months ended
October 29, 2011. The decrease in other income was primarily a function of the
number of assets sold and prices obtained for those assets during the current
period.
Income Taxes. The following table presents our income tax expense and effective
income tax rate for the three months ended October 27, 2012 and October 29,
2011:
For the Three Months Ended
October 27, 2012 October 29, 2011
(Dollars in millions)
Income tax provision $ 7.6 $ 8.9
Effective income tax rate 39.2 % 40.7 %
Our effective income tax rate differs from the statutory rates for the tax
jurisdictions where we operate. Variations in our effective income tax rate for
the three months ended October 27, 2012 and October 29, 2011 are primarily
attributable to the impact of non-deductible and non-taxable items,
disqualifying dispositions of incentive stock option exercises, and
production-related tax credits recognized in relation to our pre-tax results
during the period. Non-deductible and non-taxable items will generally have a
reduced impact on the effective income tax rate in periods of greater pre-tax
results. As of both October 27, 2012 and July 28, 2012, we had total
unrecognized tax benefits of approximately $2.2 million which would reduce our
effective tax rate during the periods recognized if it is determined that those
liabilities are no longer required.
Net Income. Net income was $11.9 million during the three months ended
October 27, 2012 as compared to $13.0 million during the three months ended
October 29, 2011.
Liquidity and Capital Resources
Capital requirements. Historically, our sources of cash have been operating
activities, long-term debt, equity offerings, bank borrowings, and proceeds from
the sale of idle and surplus equipment and real property. Our working capital
needs vary based on our level of operations and generally increase with higher
levels of revenue. Our working capital requirements are also impacted by the
time it takes us to collect our accounts receivable for work performed for
customers. Cash and equivalents totaled $54.7 million at October 27, 2012
compared to $52.6 million at July 28, 2012. Cash increased during the three
months ended October 27, 2012 as a result of cash provided by operations offset
by capital expenditures, net of the proceeds from the sale of assets, and
repurchases of our common stock. Working capital (total current assets less
total current liabilities) was $265.3 million at October 27, 2012 compared to
$262.4 million at July 28, 2012.
Capital resources are primarily used to purchase equipment and maintain
sufficient levels of working capital in order to support our contractual
commitments to customers. We periodically borrow from and repay our revolving
credit facility depending on our cash requirements. Additionally, our capital
requirements may increase to the extent we make acquisitions that involve
consideration other than our stock, buy back our common stock or repurchase or
call our senior subordinated notes. We have not paid cash dividends since 1982.
Our board of directors regularly evaluates our dividend policy based on our
financial condition, profitability, cash flow, capital requirements, and the
outlook of our business. We currently intend to retain any earnings for use in
the business, including for investment in acquisitions, and consequently we do
not anticipate paying any cash dividends on our common stock in the foreseeable
future. Additionally, the indenture governing our senior subordinated notes
contains covenants that restrict our ability to make certain payments, including
the payment of dividends.
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For the Three Months Ended
October 27, 2012 October 29, 2011
(Dollars in millions)
Net cash flows:
Provided by operating activities $ 27.7 $ 19.4
Used in investing activities $ (10.5 ) $ (13.9 )
(Used in) provided by financing activities $ (15.1 ) $ 1.0
Cash from Operating Activities. During the three months ended October 27, 2012,
net cash provided by operating activities was $27.7 million. Non-cash items
during the three months ended October 27, 2012 were primarily depreciation and
amortization, gain on sale of assets, stock-based compensation, and deferred
income taxes. Changes in working capital (excluding cash) and changes in other
long-term assets and liabilities provided $0.8 million of operating cash flow
during the three months ended October 27, 2012. The primary working capital
sources of cash flow during the three months ended October 27, 2012 were net
income tax receivables used during the period and increases in income tax
payables combined of $8.8 million and increases in accounts payable of $3.9
million. These increases were primarily attributable to higher operating levels
and the timing of payments. Working capital changes that used operating cash
flow during the three months ended October 27, 2012 were increases in other
current and other non-current assets combined of $3.6 million, primarily for
other prepaid costs that coincide with the beginning of our fiscal year.
Additionally, accounts receivables and net costs and estimated earnings in
excess of billings used $3.2 million on a combined basis. We also used $5.1
million related to accrued liabilities and accrued insurance claims primarily as
a result of amounts paid for annual incentive compensation during October 2012.
Based on average daily revenue during the applicable quarter, days sales
outstanding calculated for accounts receivable, net was 43 days as of
October 27, 2012 compared to 40 days as of October 29, 2011. Days sales
outstanding calculated for costs and estimated earnings in excess of billings,
net of billings in excess of costs and estimated earnings, were 33 days as of
October 27, 2012 and 29 days as of October 29, 2011. These changes resulted from
growth in operations during the three months ended October 27, 2012 and changes
to the customer mix compared to fiscal 2012. We believe that none of our major
customers were experiencing financial difficulties which would materially affect
our cash flows or liquidity as of October 27, 2012.
During the three months ended October 29, 2011, net cash provided by operating
activities was $19.4 million. Non-cash items during the three months ended
October 29, 2011 were primarily depreciation and amortization, gain on sale of
assets, stock-based compensation, and deferred income taxes. Changes in working
capital (excluding cash) and changes in other long term assets and liabilities
used $11.6 million of operating cash flow during the three months ended
October 29, 2011. The primary working capital uses during the three months ended
October 29, 2011 were increases in accounts receivable of $2.0 million and
increases in net costs and estimated earnings in excess of billings of $10.9
million. The increases in accounts receivable and costs and estimated earnings
in excess of billings were the result of revenue growth during the three months
ended October 29, 2011 as compared to October 30, 2010. Other uses of working
capital included other current and other non-current assets combined of $8.0
million, primarily for higher levels of inventory. Working capital changes that
increased operating cash flow during the three months ended October 29, 2011
were net income tax receivables of $5.4 million used during the period,
increases in accounts payable of $3.6 million and increases in other accrued
liabilities and accrued insurance claims of $0.4 million. These increases were
primarily attributable to higher operating levels and the timing of payments,
partially offset by amounts paid for annual incentive compensation during
October 2011.
Cash Used in Investing Activities. During the three months ended October 27,
2012 and October 29, 2011, net cash used in investing activities was $10.5
million and $13.9 million, respectively. During the three months ended
October 27, 2012 and October 29, 2011, capital expenditures of $12.5 million and
$20.9 million, respectively, were offset in part by proceeds from the sale of
assets of $2.0 million and $6.4 million, respectively. Restricted cash,
primarily related to funding provisions of our insurance program, decreased $0.6
million during the three months ended October 29, 2011.
Cash Provided by (Used in) Financing Activities. Net cash used in financing
activities was $15.1 million during the three months ended October 27, 2012 as
compared to net cash provided by financing activities of $1.0 million during the
three months ended October 29, 2011. During the three months ended October 27,
2012, we repurchased 1,047,000 shares of our common stock in open market
transactions, at an average price of $14.52 per share, for approximately $15.2
million. We received $0.2 million and $0.9 million from the exercise of stock
options during the three months ended October 27, 2012 and October 29, 2011,
respectively. We received excess tax benefits of $0.1 million and $0.2 million,
primarily from the vesting of restricted stock units and exercises of stock
options, during the three months ended October 27, 2012 and October 29, 2011,
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respectively. Additionally, we paid less than $0.1 million in principal payments
on capital leases during each of the three months ended October 27, 2012 and
October 29, 2011.
Compliance with Notes and Credit Agreement. We have a five-year $225.0 million
senior secured revolving credit agreement (the "Credit Agreement") with a
syndicate of banks. The Credit Agreement has an expiration date of June 4, 2015
and provides for maximum borrowings of $225.0 million, including a sublimit of
$100.0 million for the issuance of standby letters of credit. In connection with
the issuance of the 2021 Notes, we entered into an amendment to the Credit
Agreement (the "Amended Credit Agreement"). Subject to certain conditions, the
Amended Credit Agreement provides for the ability to enter into one or more
incremental facilities, in an aggregate amount not to exceed $75.0 million,
either by increasing the revolving commitments under the Credit Agreement and/or
in the form of term loans.
Our obligations under the Amended Credit Agreement are guaranteed by certain
subsidiaries and secured by a pledge of (i) 100% of the equity of our material
domestic subsidiaries and (ii) 100% of the non-voting equity and 65% of the
voting equity of first-tier material foreign subsidiaries, if any, in each case
excluding certain unrestricted subsidiaries.
Borrowings under the Amended Credit Agreement (other than swingline loans as
defined in the Credit Agreement) bear interest at a rate equal to either (a) the
administrative agent's base rate, described in the Amended Credit Agreement as
the highest of (i) the sum of the federal funds rate and 0.50%; (ii) the
administrative agent's prime rate; and (iii) the eurodollar rate (defined in the
Amended Credit Agreement as the British Bankers' Association LIBOR Rate, divided
by the aggregate of 1.00% and one (1) less a reserve percentage (as defined in
the Amended Credit Agreement), or (b) the eurodollar rate, in addition to an
applicable margin based on our consolidated leverage ratio, in each case.
Swingline loans bear interest at a rate equal to the administrative agent's base
rate and a margin based on our consolidated leverage ratio. Based on our current
consolidated leverage ratio, revolving borrowings would be eligible for a margin
of 1.25% for borrowings based on the administrative agent's base rate and 2.25%
for borrowings based on the eurodollar rate.
We incur fees under the Amended Credit Agreement for the unutilized commitments
at rates that range from 0.50% to 0.625% per annum, fees for outstanding standby
letters of credit at rates that range from 2.00% to 2.75% per annum and fees for
outstanding commercial letters of credit at rates that range from 1.00% to
1.375% per annum, in each case based on our consolidated leverage ratio. As of
October 27, 2012, fees for unutilized commitments and outstanding standby
letters of credit were at rates per annum of 0.50% and 2.25%, respectively.
The Credit Agreement contains certain affirmative and negative covenants,
including limitations with respect to indebtedness, liens, investments,
distributions, mergers and acquisitions, dispositions of assets, sale-leaseback
transactions, transactions with affiliates and capital expenditures. The Credit
Agreement contains financial covenants that require us to (i) maintain a
consolidated leverage ratio of not greater than 3.00 to 1.00, as measured on a
trailing four-quarter basis at the end of each fiscal quarter and (ii) maintain
a consolidated interest coverage ratio of not less than 2.75 to 1.00 for fiscal
quarters ending July 31, 2010 through April 28, 2012 and not less than 3.00 to
1.00 for the fiscal quarter ending July 28, 2012 and each fiscal quarter
thereafter, as measured on a trailing four-quarter basis at the end of each
fiscal quarter. As of October 27, 2012, we had no outstanding borrowings and
$44.1 million of outstanding standby letters of credit issued under the Credit
Agreement. The outstanding standby letters of credit are issued as part of our
insurance program. At October 27, 2012, we were in compliance with the financial
covenants and had additional borrowing availability of up to $180.9 million, as
determined by the most restrictive covenants of the Credit Agreement.
As of October 27, 2012, the principal amount outstanding under the 2012 Notes
was $187.5 million. The 2021 Notes are guaranteed by certain of our
subsidiaries. The indenture governing the 2021 Notes contains covenants that
limit, among other things, the ability of us and our subsidiaries to incur
additional debt and issue preferred stock, make certain restricted payments,
consummate specified asset sales, enter into transactions with affiliates, incur
liens, impose restrictions on the ability of our subsidiaries to pay dividends
or make payments to us and our restricted subsidiaries, merge or consolidate
with another person, and dispose of all or substantially all of its assets.
Contractual Obligations. The following tables set forth our outstanding
contractual obligations, including related party leases, as of October 27, 2012:
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Less than 1 Greater than
Year Years 1-3 Years 3 - 5 5 Years Total
(Dollars in thousands)
7.125% senior subordinated notes
due 2021 $ - $ - $ - $ 187,500 $ 187,500
Interest payments on debt
(excluding capital leases) 13,359 26,719 26,719 46,758 113,555
Capital lease obligations
(including interest and
executory costs) 56 - - - 56
Operating lease obligations 8,069 9,412 4,426 1,851 23,758
Employment agreements 3,302 3,095 1,558 5 7,960
Purchase and other contractual
obligations 8,014 - - - 8,014
Total $ 32,800 $ 39,226 $ 32,703 $ 236,114 $ 340,843
Purchase and other contractual obligations in the above table primarily
represent obligations under agreements to purchase undelivered vehicles and
equipment and amounts under certain other contracts due within one year. We have
excluded contractual obligations under the multiemployer defined pension plan
that covers certain of our employees as these obligations are determined based
on our future union employee payrolls, which cannot be reliably determined as of
October 27, 2012.
Our condensed consolidated balance sheet as of October 27, 2012 includes a
long-term liability of approximately $22.8 million for accrued insurance
claims. This liability has been excluded from the above table as the timing of
any cash payments is uncertain. See Note 7 of the Notes to our Condensed
Consolidated Financial Statements for additional information regarding our
accrued insurance claims liability.
The liability for unrecognized tax benefits for uncertain tax positions at both
October 27, 2012 and July 28, 2012 were $2.2 million, and is included in other
liabilities in our condensed consolidated balance sheet. 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.
Off-Balance Sheet Arrangements.
Performance 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
obligations under a contract. As of October 27, 2012, we had $237.6 million of
outstanding performance and other surety contract bonds and no events have
occurred in which customers have exercised their rights under any such bonds.
Additionally, we have periodically guaranteed certain obligations of our
subsidiaries, including obligations in connection with obtaining state
contractor licenses and leasing real property.
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 our obligations to our insurance carriers in connection with the
settlement of potential claims. As of October 27, 2012, we had $44.1 million
outstanding standby letters of credit issued under the Credit Agreement.
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 our senior subordinated notes and
borrowings, working capital requirements, and the normal replacement of
equipment at our current level of operations for at least the next twelve
months. Our future operating results and cash flows may be affected by a number
of factors including our success in bidding on future contracts and our ability
to manage costs effectively. To the extent we seek to grow by acquisitions that
involve consideration other than our stock, or to the extent we buy back our
common stock or repurchase or call our senior subordinated notes, our capital
requirements may increase. Changes in financial markets or other areas 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 the
Credit Agreement to provide short-term funding.
Management continually monitors the financial markets and assesses general
economic conditions for any impact on our financial position. If changes in
financial markets or other areas of the economy adversely impact our ability to
access capital markets, we would expect to rely on a combination of available
cash and the existing committed credit facility to provide short-term funding.
We believe that our cash investment policies are conservative and we expect that
the current volatility in the capital markets will not have a material impact on
our cash investments.
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Backlog. Our backlog consists of the uncompleted portion of services to be
performed under job-specific contracts and the estimated value of future
services that we expect to provide under master service agreements and other
long-term requirements contracts. Many of our contracts are multi-year
agreements, and we include in our backlog the amount of services projected to be
performed over the terms of the contracts based on our historical experience
with customers and, more generally, our experience in procurements of this type.
In many instances, our customers are not contractually committed to procure
specific volumes of services under a contract. Our estimates of a customer's
requirements during a particular future period may not prove to be accurate.
Our backlog totaled $1.376 billion and $1.565 billion at October 27, 2012 and
July 28, 2012, respectively. We expect to complete 59.7% of the October 27, 2012
backlog during the next twelve months.
Seasonality and Quarterly Fluctuations
Our revenues are affected by seasonality as a significant portion of the work we
perform is outdoors. Consequently, our operations are impacted by extended
periods of inclement weather. Generally, inclement weather is more likely to
occur during the winter season which falls during our second and third fiscal
quarters. Also, a disproportionate percentage of total paid holidays fall within
our second quarter, which decreases the number of available workdays.
Additionally, our customer premise equipment installation activities for cable
providers historically decrease around calendar year end holidays as their
customers generally require less activity during this period. As a result, we
may experience reduced revenue in the second or third quarters of our fiscal
year.
In addition, we have experienced and expect to continue to experience quarterly
variations in revenues and net income as a result of other factors, including:
• our fiscal year which ends on the last Saturday in July, and as a
result, fiscal 2012 and fiscal 2011 consisted of 52 weeks while fiscal
2010 consisted of 53 weeks, with its fourth quarter having 14 weeks of
operations;
• the timing and volume of customers' construction and maintenance
projects, including possible delays as a result of material
procurement;
• seasonal budgetary spending patterns of customers and the timing of
their budget approvals;
• the commencement or termination of master service agreements and other
long-term agreements with customers;
• costs incurred to support growth internally or through acquisitions;
• fluctuations in results of operations caused by acquisitions;
• fluctuations in the employer portion of payroll taxes as a result of
reaching the limitation on payroll withholdings obligations;
• changes in mix of customers, contracts, and business activities;
• fluctuations in insurance expense due to changes in claims experience
and actuarial assumptions;
• fluctuations in stock-based compensation expense as a result of
performance criteria in performance-based share awards, as well as the
timing and vesting period of all stock-based awards;
• fluctuations in incentive pay as a result of operating results;
• fluctuations in interest expense due to levels of debt and related
borrowing costs;
• fluctuations in other income as a result of the timing and levels of
capital assets sold during the period; and
• fluctuations in income tax expense due to levels of taxable earnings,
the impact of non-deductible items and tax credits, and the impact of
disqualifying dispositions of incentive stock option expenses.
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Accordingly, operating results for any fiscal period are not necessarily
indicative of results that may be achieved for any subsequent fiscal period.
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