NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
Dycom Industries, Inc. (“Dycom” or the “Company”) is a leading provider of specialty contracting services throughout the United States. The Company provides program management, engineering, construction, maintenance and installation services for telecommunications providers, underground facility locating services for various utilities, including telecommunications providers, and other construction and maintenance services for electric and gas utilities.
The accompanying unaudited condensed consolidated financial statements of the Company and its subsidiaries, all of which are wholly-owned, have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and notes required by GAAP for annual financial statements and should be read in conjunction with
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
contained in this report and the Company’s audited financial statements included in the Company’s Transition Report on Form 10-K for the six months ended
January 27, 2018
, filed with the SEC on
March 2, 2018
. In the opinion of management, all adjustments considered necessary for a fair statement of the results for the interim periods presented have been included. This includes all normal and recurring adjustments and elimination of intercompany accounts and transactions. Operating results for the interim period are not necessarily indicative of the results expected for any subsequent interim or annual period.
Accounting Period.
In September 2017, the Company’s Board of Directors approved a change in the Company’s fiscal year end from the last Saturday in July to the last Saturday in January. The change in fiscal year end better aligned the Company’s fiscal year with the planning cycles of its customers. For quarterly comparisons, there were no changes to the months in each fiscal quarter. Beginning with fiscal 2019, each fiscal year ends on the last Saturday in January and consists of either 52 or 53 weeks of operations (with the additional week of operations occurring in the fourth fiscal quarter).
The Company refers to the period beginning January 28, 2018 and ending January 26, 2019 as “fiscal 2019”, the period beginning July 30, 2017 and ending January 27, 2018 as the “2018 transition period”, and the period beginning July 31, 2016 and ending July 29, 2017 as “fiscal 2017”.
Segment Information.
The Company operates in one reportable segment. Its services are provided by its operating segments on a decentralized basis. Each operating segment consists of a subsidiary (or in certain instances, the combination of two or more subsidiaries), whose results are regularly reviewed by the Company’s Chief Executive Officer, the chief operating decision maker. All of the Company’s operating segments have been aggregated into
one
reportable segment based on their similar economic characteristics, nature of services and production processes, type of customers, and service distribution methods.
2. Significant Accounting Policies and Estimates
Use of Estimates.
The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the amounts reported in these condensed consolidated financial statements and accompanying notes. These estimates are based on the Company’s historical experience and management’s understanding of current facts and circumstances. At the time they are made, the Company believes that such estimates are fair when considered in conjunction with the Company’s consolidated financial position and results of operations taken as a whole. However, actual results could differ materially from those estimates.
There have been no material changes to the Company’s significant accounting policies and critical accounting estimates described in the Company’s Transition Report on Form 10-K for the six months ended
January 27, 2018
except as described below.
Revenue Recognition.
The Company performs a substantial majority of its 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. Contractual agreements exist 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. The Company’s services are performed for the sole benefit of its customers, whereby the assets being created or maintained are controlled by the customer and the services the Company performs do not have alternative benefits
for the Company. Revenue is recognized over time as services are performed and customers simultaneously receive and consume the benefits provided by the Company. Output measures such as units delivered are utilized to assess progress against specific contractual performance obligations for the majority of the Company’s 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 the Company, 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 the Company’s 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 similar selling prices for similar tasks, or in the alternative, the cost to perform tasks. Revenue is recognized as the tasks are completed as a measurement of progress in the satisfaction of the corresponding performance obligation, and represented less than
10.0%
of contract revenues during
the nine months ended
October 27, 2018
.
For certain contracts, representing approximately
2.5%
of contract revenues during
the nine months ended
October 27, 2018
, the Company uses the cost-to-cost measure of progress. These contracts are generally lump sum 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. For contracts using the cost-to-cost measure of progress, the Company accrues the entire amount of a contract loss, if any, at the time the loss is determined to be probable and can be reasonably estimated.
Accounts Receivable, Net.
The Company grants credit to its customers, generally without collateral, under normal payment terms (typically 30 to 90 days after invoicing). Generally, invoicing occurs within
45 days
after the related services are performed. Accounts receivable represents an unconditional right to consideration arising from the Company’s performance under contracts with customers. Accounts receivable include billed accounts receivable, unbilled accounts receivable, and retainage. The carrying value of such receivables, net of the allowance for doubtful accounts, represents their estimated realizable value. Unbilled accounts receivable represent amounts the Company has an unconditional right to receive payment for although invoicing is subject to the completion of certain process or other requirements. Such requirements may include the passage of time, completion of other items within a statement of work, or other contractual billing requirements. Certain of the Company’s contracts contain retainage provisions whereby a portion of the revenue earned is withheld from payment as a form of security until contractual provisions are satisfied. The collectability of retainage is included in the Company’s overall assessment of the collectability of accounts receivable. The Company expects to collect the outstanding balance of accounts receivable, net (including trade accounts receivable, unbilled accounts receivable, and retainage) within the next twelve months. The Company estimates its allowance for doubtful accounts by evaluating specific accounts receivable balances based on historical collection trends, the age of outstanding receivables, and the credit worthiness of the Company’s customers.
Contract Assets.
Contract assets include unbilled amounts typically resulting from arrangements whereby complete satisfaction of a performance obligation and the right to payment are conditioned on completing additional tasks or services.
Contract Liabilities.
Contract liabilities consist of amounts invoiced to customers in excess of revenue recognized. The Company’s contract asset and liability is reported in a net position on a contract by contract basis at the end of each reporting period. As of
October 27, 2018
and
January 27, 2018
, the contract liabilities balance is classified as current based on the timing of when the Company expects to complete the tasks required for the recognition of revenue.
Fair Value of Financial Instruments.
The Company’s financial instruments primarily consist of cash and equivalents, restricted cash, accounts receivable, income taxes receivable and payable, accounts payable, certain accrued expenses, and long-term debt. The carrying amounts of these items approximate fair value due to their short maturity, except for the fair value of Company’s long-term debt, which is based on observable market-based inputs (Level 2). See Note 13,
Debt
, for further information regarding the fair value of such financial instruments. The Company’s cash and equivalents are based on quoted market prices in active markets for identical assets (Level 1) as of
October 27, 2018
and
January 27, 2018
. During
the nine months ended
October 27, 2018
and
October 28, 2017
, the Company had no material nonrecurring fair value measurements of assets or liabilities subsequent to their initial recognition.
3. Accounting Standards
Recently issued accounting pronouncements are disclosed in the Company’s Transition Report on Form 10-K for the six months ended
January 27, 2018
, filed with the SEC on
March 2, 2018
. As of the date of this Quarterly Report on Form 10-Q, there have been no changes in the expected dates of adoption or estimated effects on the Company’s consolidated financial statements of recently issued accounting pronouncements from those disclosed therein. Further, there have been no additional accounting standards issued as of the date of this Quarterly Report on Form 10-Q that are applicable to the consolidated financial statements of the Company. Accounting standards adopted during
the nine months ended
October 27, 2018
are disclosed in this Quarterly Report on Form 10-Q.
Recently Adopted Accounting Standards
Revenue Recognition
. In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
(“ASU 2014-09”). ASU No. 2014-09 and related updates are referred to herein as “ASU 2014-09”. ASU 2014-09 replaces numerous requirements in GAAP, including industry-specific requirements, and provides companies with a single revenue recognition model for recognizing revenue from contracts with customers. The core principle of the new standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Under the new standard, the two permitted transition methods are the full retrospective method and the modified retrospective method. The full retrospective method requires the standard to be applied to each prior reporting period presented and the cumulative effect of applying the standard to be recognized at the earliest period shown. The modified retrospective method requires the cumulative effect of applying the standard to be recognized at the date of initial application. Effective January 28, 2018, the Company adopted the requirements of ASU 2014-09 using the modified retrospective method. As a practical expedient, the Company adopted the new standard only for existing contracts as of January 28, 2018, the date of adoption. Any contracts that had expired prior to January 28, 2018 were not evaluated against the new standard. The Company believes its application of the new standard to only those contracts existing as of January 28, 2018 did not have a material impact on adoption.
In accordance with the guidance under ASU 2014-09, the Company reclassified
$311.7 million
of unbilled receivables from contract assets (historically referred to as Costs and Estimated Earnings in Excess of Billings) to accounts receivable, net as of January 28, 2018, the date of the Company’s adoption. As a result of the reclassification, accounts receivable, net and contract assets were
$630.4 million
and
$57.8 million
, respectively, as of January 28, 2018. The reclassification was a non-cash activity between contract assets and accounts receivable, net and did not impact net cash (used in) provided by operating activities in the condensed consolidated statement of cash flows. The impact of adoption on the Company’s condensed consolidated balance sheet as of
October 27, 2018
is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 27, 2018
|
|
As reported
|
|
Balances Without Adoption of ASU 2014-09
|
|
Effect of Change
|
Assets
|
|
|
|
|
|
Accounts receivable, net
|
$
|
849,769
|
|
|
$
|
477,418
|
|
|
$
|
372,351
|
|
Contract assets
|
$
|
147,320
|
|
|
$
|
519,671
|
|
|
$
|
(372,351
|
)
|
The adoption of ASU 2014-09 resulted in balance sheet classification changes for amounts that have not been invoiced to customers but for which the Company has satisfied the performance obligation and has an unconditional right to receive payment. Prior to the adoption of ASU 2014-09, amounts not yet invoiced to customers were included in the Company’s contract assets (historically referred to as Costs and Estimated Earnings in Excess of Billings) regardless of rights to payment. These amounts represent unbilled accounts receivable for which the Company has an unconditional right to receive payment although invoicing is subject to the completion of certain process or other requirements. Such requirements may include the passage of time, completion of other items within a statement of work, or other contractual billing requirements.
The standard did not impact the opening retained earnings of the Company’s condensed consolidated balance sheet or the Company’s condensed consolidated statement of operations as timing and amount of revenue recognized under the new standard was unchanged as compared to the Company’s historical revenue recognition practices.
Restricted Cash.
In November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
(“ASU 2016-18”). ASU 2016-18 is intended to reduce the diversity in practice regarding the classification and presentation of changes in restricted cash within the statement of cash flows. The amendments in this update require that
amounts generally described as restricted cash and restricted cash equivalents be included with the beginning-of-period and end-of-period total amounts of cash and cash equivalents in the statement of cash flows. The Company adopted ASU 2016-18 effective January 28, 2018, the first day of fiscal 2019, and applied this change of presentation retrospectively to the Company’s condensed consolidated statement of cash flows for
the nine months ended
October 28, 2017
. As a result of the retrospective adoption, the beginning-of-period and end-of-period total amounts of cash and cash equivalents have been restated to include restricted cash of
$5.4 million
,
$6.3 million
, and
$6.2 million
as of January 28, 2017,
October 28, 2017
, and January 27, 2018, respectively. Restricted cash primarily relates to funding provisions of the Company’s insurance program.
Statement of Cash Flows.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
(“ASU 2016-15”)
.
ASU 2016-15 is intended to reduce diversity in practice regarding the classification of certain transactions within the statement of cash flows and addresses eight specific topics including, among other things, the classification of cash flows related to debt prepayment and debt extinguishment costs. Under the amended guidance, cash payments for debt prepayment and debt extinguishment costs are classified as financing activities, whereas historically the Company has classified such cash flows as operating activities. The Company adopted ASU 2016-15 effective January 28, 2018, the first day of fiscal 2019, on a retrospective basis as required. There was no impact to the Company’s condensed consolidated statement of cash flows for
the nine months ended
October 27, 2018
or
October 28, 2017
as a result of the adoption.
The Company also adopted the following Accounting Standards Updates during
the nine months ended
October 27, 2018
, neither of which had a material effect on the Company’s consolidated financial statements:
|
|
|
|
|
ASU
|
|
Adoption Date
|
2016-16
|
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
|
|
January 28, 2018
|
2017-01
|
Business Combinations (Topic 805): Clarifying the Definition of a Business
|
|
January 28, 2018
|
Accounting Standards Not Yet Adopted
Leases
. In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
(“ASU 2016-02”). ASU No. 2016-02 and related updates are referred to herein as “ASU 2016-02”. ASU 2016-02 is intended to increase transparency and comparability of accounting for lease transactions by requiring lessees to recognize right-of-use assets and corresponding lease liabilities on the balance sheet for all leases with terms greater than twelve months, including those classified as operating leases under current guidance. The new guidance substantially retains the classification for lease transactions as finance or operating and, as a result, the pattern of expense recognition in the income statement is largely unchanged. For finance leases the lessee recognizes interest expense and amortization of the right-of-use asset and for operating leases the lessee recognizes total lease expense on a straight-line basis. ASU 2016-02 is required to be adopted using a modified retrospective approach and provides an option to recognize the cumulative-effect adjustment at the beginning of either the earliest period presented or the period of adoption. The new guidance will be effective for the Company for the fiscal year ended
January 25, 2020
(“fiscal 2020”) and interim reporting periods within that year.
The Company will adopt ASU 2016-02 effective January 27, 2019, the first day of fiscal 2020, using the option of applying the new lease requirements at the date of adoption. Accordingly, comparative financial statements for periods prior to the date of adoption will not be adjusted. The Company expects to elect the practical expedients that allow it to not reassess whether any expired or existing contracts represent leases, the classification of any expired or existing leases, and the initial direct costs for any expired or existing leases. While the Company continues to evaluate the effect of ASU 2016-02 on its consolidated financial statements, it expects to recognize right-of-use assets and corresponding lease liabilities on its consolidated balance sheet for substantially all of its operating leases with terms greater than twelve months. At January 27, 2018, future minimum lease payments with respect to existing lease obligations under non-cancellable operating leases with terms greater than twelve months were
$64.6 million
, of which
$39.7 million
related to fiscal 2020 and subsequent years. The actual amount of lease assets and lease liabilities to be recognized on the Company’s consolidated balance sheet will depend on the Company’s operating lease obligations at the date of adoption. ASU 2016-02 is not expected to have a material effect on the amount of expense recognized in connection with the Company’s current leases as compared to current practice. In addition, the Company is evaluating the effect of ASU 2016-02 on its systems, business processes, and controls, and expects to implement new lease accounting and administration software in connection with the new standard.
4. Computation of Earnings per Common Share
The following table sets forth the computation of basic and diluted earnings per common share (dollars in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Nine Months Ended
|
|
October 27, 2018
|
|
October 28, 2017
|
|
October 27, 2018
|
|
October 28, 2017
|
Net income available to common stockholders (numerator)
|
$
|
27,830
|
|
|
$
|
28,776
|
|
|
$
|
74,961
|
|
|
$
|
111,280
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares (denominator)
|
31,246,591
|
|
|
31,061,448
|
|
|
31,214,172
|
|
|
31,167,753
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
$
|
0.89
|
|
|
$
|
0.93
|
|
|
$
|
2.40
|
|
|
$
|
3.57
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares
|
31,246,591
|
|
|
31,061,448
|
|
|
31,214,172
|
|
|
31,167,753
|
|
Potential shares of common stock arising from stock options, and unvested restricted share units
|
587,951
|
|
|
830,126
|
|
|
605,992
|
|
|
654,353
|
|
Potential shares of common stock issuable on conversion of 0.75% convertible senior notes due 2021
(1)
|
—
|
|
|
—
|
|
|
245,065
|
|
|
—
|
|
Total shares-diluted (denominator)
|
31,834,542
|
|
|
31,891,574
|
|
|
32,065,229
|
|
|
31,822,106
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
$
|
0.87
|
|
|
$
|
0.90
|
|
|
$
|
2.34
|
|
|
$
|
3.50
|
|
|
|
|
|
|
|
|
|
Anti-dilutive weighted shares excluded from the calculation of earnings per common share:
|
Stock-based awards
|
121,722
|
|
|
125,074
|
|
|
68,395
|
|
|
102,268
|
|
0.75% convertible senior notes due 2021
|
5,005,734
|
|
|
5,005,734
|
|
|
4,760,669
|
|
|
5,005,734
|
|
Warrants
|
5,005,734
|
|
|
5,005,734
|
|
|
5,005,734
|
|
|
5,005,734
|
|
Total
|
10,133,190
|
|
|
10,136,542
|
|
|
9,834,798
|
|
|
10,113,736
|
|
(1)
Under the treasury stock method, the convertible senior notes will have a dilutive impact on earnings per common share if the Company’s average stock price for the period exceeds the
$96.89
per share conversion price for the convertible senior notes. The warrants associated with the Company’s convertible senior notes will have a dilutive impact on earnings per common share if the Company’s average stock price for the period exceeds the
$130.43
per share warrant strike price. During the first and second quarters of fiscal 2019, the Company’s average stock price of
$110.46
and
$99.27
, respectively, each exceeded the conversion price for the convertible senior notes. As a result, shares presumed to be issuable under the convertible senior notes that were dilutive during the first and second quarters of fiscal 2019 are included in the calculation of diluted earnings per share for
the nine months ended
October 27, 2018
. As the Company’s average stock price did not exceed the strike price for the warrants, the underlying common shares were anti-dilutive as reflected in the table above.
In connection with the offering of the convertible senior notes, the Company entered into convertible note hedge transactions with counterparties for the purpose of reducing the potential dilution to common stockholders from the conversion of the notes and offsetting any potential cash payments in excess of the principal amount of the notes. Prior to conversion, the convertible note hedge is not included for purposes of the calculation of earnings per common share as its effect would be anti-dilutive. Upon conversion, the convertible note hedge is expected to offset the dilutive effect of the convertible senior notes when the average stock price for the period is above
$96.89
per share. See Note 13,
Debt
, for additional information related to the Company’s convertible senior notes, warrant transactions, and hedge transactions.
5. Acquisitions
Fiscal 2019.
During March 2018, the Company acquired certain assets and assumed certain liabilities of a provider of telecommunications construction and maintenance services in the Midwest and Northeast United States for a cash purchase price of
$20.9 million
, less an adjustment for working capital received below a target amount estimated to be approximately
$0.5 million
. This acquisition expands the Company’s geographic presence within its existing customer base.
Fiscal 2017.
During March 2017, the Company acquired Texstar Enterprises, Inc. (“Texstar”) for
$26.1 million
, net of cash acquired. Texstar provides construction and maintenance services for telecommunications providers in the Southwest and Pacific Northwest United States. This acquisition expands the Company’s geographic presence within its existing customer base.
Purchase Price Allocations
The purchase price allocation of Texstar was completed within the 12-month measurement period from the date of acquisition. Adjustments to provisional amounts were recognized in the reporting period in which the adjustments were determined and were not material. The purchase price allocation of the business acquired in fiscal 2019 is preliminary and will be completed when valuations for intangible assets and other amounts are finalized within the 12-month measurement period from the date of acquisition.
The following table summarizes the aggregate consideration paid for businesses acquired in fiscal 2019 and fiscal 2017 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
2019
|
|
2017
|
Assets
|
|
|
|
Accounts receivable
|
$
|
5.6
|
|
|
$
|
8.9
|
|
Contract assets
|
—
|
|
|
2.4
|
|
Inventories and other current assets
|
0.2
|
|
|
0.2
|
|
Property and equipment
|
0.5
|
|
|
5.6
|
|
Goodwill
|
4.0
|
|
|
10.1
|
|
Intangible assets - customer relationships
|
12.3
|
|
|
9.8
|
|
Intangible assets - trade names and other
|
—
|
|
|
0.7
|
|
Total assets
|
22.6
|
|
|
37.7
|
|
|
|
|
|
Liabilities
|
|
|
|
Accounts payable
|
2.2
|
|
|
3.2
|
|
Accrued and other current liabilities
|
—
|
|
|
3.4
|
|
Deferred tax liabilities, net non-current
|
—
|
|
|
5.0
|
|
Total liabilities
|
2.2
|
|
|
11.6
|
|
|
|
|
|
Net Assets Acquired
|
$
|
20.4
|
|
|
$
|
26.1
|
|
The goodwill associated with the stock purchase of Texstar is not deductible for tax purposes. Results of businesses acquired are included in the condensed consolidated financial statements from their respective dates of acquisition. The revenues and net income of the fiscal 2019 acquisition and Texstar were not material during
the three or nine months ended
October 27, 2018
or
October 28, 2017
.
6. Accounts Receivable, Contract Assets, and Contract Liabilities
The following provides further details on the balance sheet accounts of accounts receivable, net, contract assets, and contract liabilities. See Note 2,
Significant Accounting Policies and Estimates
, for further information on the Company’s policies related to these balance sheet accounts, as well as its revenue recognition policies.
Accounts Receivable
Accounts receivable consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
October 27, 2018
|
|
January 27, 2018
|
Trade accounts receivable
|
$
|
464,332
|
|
|
$
|
300,271
|
|
Unbilled accounts receivable
|
372,351
|
|
|
—
|
|
Retainage
|
14,032
|
|
|
19,411
|
|
Total
|
850,715
|
|
|
319,682
|
|
Less: allowance for doubtful accounts
|
(946
|
)
|
|
(998
|
)
|
Accounts receivable, net
|
$
|
849,769
|
|
|
$
|
318,684
|
|
As of January 27, 2018, the Company’s accounts receivable, net were
$318.7 million
. Subsequently, on January 28, 2018 (the Company’s first day of adoption of ASU 2014-09) the Company reclassified
$311.7 million
of unbilled receivables from contract assets (historically referred to as Costs and Estimated Earnings in Excess of Billings) to accounts receivable, net in accordance with the guidance under ASU 2014-09. As a result of the reclassification, accounts receivable, net were
$630.4 million
as of January 28, 2018. As of
October 27, 2018
, the corresponding balance was
$849.8 million
. The increase is primarily a result of an increased level of operations and an increase in amounts invoiced to customers under large programs during
the nine months ended
October 27, 2018
. See Note 3,
Accounting Standards
, for further information on the adoption of ASU 2014-09.
During
the three and nine months ended
October 27, 2018
and
October 28, 2017
, write-offs to the allowance for doubtful accounts, net of recoveries, were not material.
Contract Assets and Contract Liabilities
Net contract assets consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
October 27, 2018
|
|
January 27, 2018
|
Contract assets
|
$
|
147,320
|
|
|
$
|
369,472
|
|
Contract liabilities
|
7,631
|
|
|
6,480
|
|
Contract assets, net
|
$
|
139,689
|
|
|
$
|
362,992
|
|
As of January 27, 2018, the Company’s contract assets (historically referred to as Costs and Estimated Earnings in Excess of Billings) were
$369.5 million
. Subsequently, on January 28, 2018 (the Company’s first day of adoption of ASU 2014-09) the Company reclassified
$311.7 million
of unbilled receivables from contract assets to accounts receivable, net in accordance with the guidance under ASU 2014-09. As a result of the reclassification, contracts assets were
$57.8 million
as of January 28, 2018. As of
October 27, 2018
, the corresponding balance was
$147.3 million
. The increase primarily resulted from services performed under contracts consisting of multiple tasks, for which billings will be submitted upon completion of the remaining tasks not yet completed. There were no other significant changes in contract assets during the period. During
the nine months ended
October 27, 2018
, the Company performed services and recognized an immaterial amount of revenue related to its contract liabilities that existed at
January 27, 2018
. See Note 3,
Accounting Standards
, for further information on the adoption of ASU 2014-09 and Note 7,
Other Current Assets and Other Assets
, for information on the Company’s long-term contract assets.
Customer Credit Concentration
Customers whose combined amounts of trade accounts receivable and contract assets, net exceeded 10% of total combined accounts receivable and contract assets, net as of
October 27, 2018
or
January 27, 2018
were as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 27, 2018
|
|
January 27, 2018
|
|
Amount
|
|
% of Total
|
|
Amount
|
|
% of Total
|
Verizon Communications Inc.
|
$
|
338.7
|
|
|
34.3%
|
|
$
|
98.2
|
|
|
14.4%
|
Comcast Corporation
|
$
|
166.6
|
|
|
16.9%
|
|
$
|
166.5
|
|
|
24.5%
|
CenturyLink, Inc.
|
$
|
142.8
|
|
|
14.5%
|
|
$
|
126.0
|
|
|
18.5%
|
AT&T Inc.
|
$
|
102.7
|
|
|
10.4%
|
|
$
|
79.2
|
|
|
11.6%
|
The Company believes that none of its significant customers were experiencing financial difficulties that would materially impact the collectability of the Company’s total accounts receivable and contract assets, net as of
October 27, 2018
or
January 27, 2018
.
7. Other Current Assets and Other Assets
Other current assets consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
October 27, 2018
|
|
January 27, 2018
|
Prepaid expenses
|
$
|
16,957
|
|
|
$
|
13,167
|
|
Insurance recoveries/receivables for accrued insurance claims
|
—
|
|
|
13,701
|
|
Receivables on equipment sales
|
672
|
|
|
31
|
|
Deposits and other current assets, including restricted cash
|
16,381
|
|
|
12,811
|
|
Total other current assets
|
$
|
34,010
|
|
|
$
|
39,710
|
|
Other assets (long-term) consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
October 27, 2018
|
|
January 27, 2018
|
Deferred financing costs
|
$
|
9,504
|
|
|
$
|
3,873
|
|
Restricted cash
|
5,253
|
|
|
5,253
|
|
Insurance recoveries/receivables for accrued insurance claims
|
9,776
|
|
|
6,722
|
|
Long-term contract assets
|
32,014
|
|
|
5,486
|
|
Other non-current deposits and assets
|
7,134
|
|
|
6,856
|
|
Total other assets
|
$
|
63,681
|
|
|
$
|
28,190
|
|
Insurance recoveries/receivables represent the amount of accrued insurance claims that are covered by insurance as the amounts exceed the Company’s loss retention. During
the nine months ended
October 27, 2018
, total insurance recoveries/receivables decreased approximately
$10.6 million
primarily due to the settlement of claims.
Long-term contract assets 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. During
the nine months ended
October 27, 2018
, long-term contract assets increased approximately
$26.5 million
primarily due to a long-term customer agreement entered into during fiscal 2019.
8. Cash and Equivalents and Restricted Cash
Amounts of cash and equivalents and restricted cash reported in the condensed consolidated statement of cash flows consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
October 27, 2018
|
|
January 27, 2018
|
Cash and equivalents
|
$
|
21,513
|
|
|
$
|
84,029
|
|
Restricted cash included in:
|
|
|
|
Other current assets
|
1,556
|
|
|
900
|
|
Other assets (long-term)
|
5,253
|
|
|
5,253
|
|
Total cash and equivalents and restricted cash
|
$
|
28,322
|
|
|
$
|
90,182
|
|
9. Property and Equipment
Property and equipment consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Useful Lives (Years)
|
|
October 27, 2018
|
|
January 27, 2018
|
Land
|
—
|
|
$
|
4,359
|
|
|
$
|
3,470
|
|
Buildings
|
10-35
|
|
13,321
|
|
|
12,315
|
|
Leasehold improvements
|
1-10
|
|
16,326
|
|
|
14,202
|
|
Vehicles
|
1-5
|
|
573,751
|
|
|
536,379
|
|
Computer hardware and software
|
1-7
|
|
133,286
|
|
|
117,058
|
|
Office furniture and equipment
|
1-10
|
|
12,604
|
|
|
11,686
|
|
Equipment and machinery
|
1-10
|
|
292,049
|
|
|
273,712
|
|
Total
|
|
|
1,045,696
|
|
|
968,822
|
|
Less: accumulated depreciation
|
|
|
(617,391
|
)
|
|
(554,054
|
)
|
Property and equipment, net
|
|
|
$
|
428,305
|
|
|
$
|
414,768
|
|
Depreciation expense was
$39.8 million
and
$36.4 million
for
the three months ended
October 27, 2018
and
October 28, 2017
, respectively, and
$116.5 million
and
$101.5 million
for
the nine months ended
October 27, 2018
and
October 28, 2017
, respectively.
10. Goodwill and Intangible Assets
Goodwill
The Company’s goodwill balance was
$325.7 million
and
$321.7 million
as of
October 27, 2018
and
January 27, 2018
, respectively. Changes in the carrying amount of goodwill were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
Accumulated Impairment Losses
|
|
Total
|
Balance as of January 27, 2018
|
$
|
517,510
|
|
|
$
|
(195,767
|
)
|
|
$
|
321,743
|
|
Goodwill from fiscal 2019 acquisition
|
4,097
|
|
|
—
|
|
|
4,097
|
|
Purchase price allocation adjustments from fiscal 2019 acquisition
|
(91
|
)
|
|
—
|
|
|
(91
|
)
|
Balance as of October 27, 2018
|
$
|
521,516
|
|
|
$
|
(195,767
|
)
|
|
$
|
325,749
|
|
The Company’s goodwill resides in multiple reporting units and primarily consists of expected synergies, together with the expansion of the Company’s geographic presence and strengthening of its customer base. Goodwill and other indefinite-lived intangible assets are assessed annually for impairment, or more frequently if events occur that would indicate a potential reduction in the fair value of a reporting unit below its carrying value. The profitability of individual reporting units may suffer periodically due to downturns in customer demand and the level of overall economic activity. The Company’s customers may reduce capital expenditures and defer or cancel pending projects due to changes in technology, a slowing or uncertain economy,
merger or acquisition activity, a decision to allocate resources to other areas of their business, or other reasons. Additionally, adverse conditions in the economy and future volatility in the equity and credit markets could impact the valuation of the Company’s reporting units. The cyclical nature of the Company’s business, the high level of competition existing within its industry, and the concentration of its revenues from a limited number of customers may also cause results to vary. These factors may affect individual reporting units disproportionately, relative to the Company as a whole. As a result, the performance of one or more of the reporting units could decline, resulting in an impairment of goodwill or intangible assets.
The Company has historically completed its annual goodwill impairment assessment as of the first day of the fourth fiscal quarter of each year. As a result of the change in the Company’s fiscal year end, the annual goodwill impairment assessment date was changed to the first day of the fiscal quarter ending on the last Saturday in January, as this became the first day of the Company’s fourth fiscal quarter. For the 2018 transition period, the assessment was performed as of October 29, 2017. As a result of the Company’s 2018 transition period assessment, the Company determined that the fair values of each of the reporting units and the indefinite-lived intangible asset were substantially in excess of their carrying values and no impairment had occurred. As of
October 27, 2018
, the Company continues to believe the goodwill
and the indefinite-lived intangible asset are
recoverable for all of its reporting units; however, significant adverse changes in the projected revenues and cash flows of a reporting unit could result in an impairment of goodwill or
the indefinite-lived intangible asset
. There can be no assurances that goodwill or
the indefinite-lived intangible asset
may not be impaired in future periods.
Intangible Assets
The Company’s intangible assets consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 27, 2018
|
|
January 27, 2018
|
|
Weighted Average Remaining Useful Lives (Years)
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Intangible Assets, Net
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Intangible Assets, Net
|
Customer relationships
|
11.3
|
|
$
|
312,017
|
|
|
$
|
152,380
|
|
|
$
|
159,637
|
|
|
$
|
299,717
|
|
|
$
|
135,544
|
|
|
$
|
164,173
|
|
Trade names
|
8.1
|
|
10,350
|
|
|
8,208
|
|
|
2,142
|
|
|
10,350
|
|
|
7,872
|
|
|
2,478
|
|
UtiliQuest trade name
|
—
|
|
4,700
|
|
|
—
|
|
|
4,700
|
|
|
4,700
|
|
|
—
|
|
|
4,700
|
|
Non-compete agreements
|
1.8
|
|
200
|
|
|
129
|
|
|
71
|
|
|
450
|
|
|
332
|
|
|
118
|
|
|
|
|
$
|
327,267
|
|
|
$
|
160,717
|
|
|
$
|
166,550
|
|
|
$
|
315,217
|
|
|
$
|
143,748
|
|
|
$
|
171,469
|
|
Amortization of the Company’s customer relationship intangibles is recognized on an accelerated basis as a function of the expected economic benefit. Amortization for the Company’s other finite-lived intangibles is recognized on a straight-line basis over the estimated useful life. Amortization expense for finite-lived intangible assets was
$5.8 million
and
$6.3 million
for
the three months ended
October 27, 2018
and
October 28, 2017
, respectively, and
$17.2 million
and
$18.8 million
for
the nine months ended
October 27, 2018
and
October 28, 2017
, respectively.
As of
October 27, 2018
, the Company believes that the carrying amounts of its intangible assets are recoverable. However, if adverse events were to occur or circumstances were to change indicating that the carrying amount of such assets may not be fully recoverable, the assets would be reviewed for impairment and the assets could be impaired.
11. Accrued Insurance Claims
For claims within its insurance program, the Company retains 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. With regard to losses occurring in the twelve month policy period ending January 30, 2019, the Company retains the risk of loss up to
$1.0 million
on a per occurrence basis for automobile liability, general liability, and workers’ compensation. These retention amounts are applicable to all of the states in which the Company operates, except with respect to workers’ compensation insurance in
two
states in which the Company participates in state-sponsored insurance funds. Aggregate stop-loss coverage for automobile liability, general liability, and workers’ compensation claims is
$78.9 million
for the twelve month policy period ending January 30, 2019.
The Company is party to a stop-loss agreement for losses under its employee group health plan. For calendar year 2019, the Company retains the risk of loss, on an annual basis, up to the first
$400,000
of claims per participant, as well as an annual aggregate amount for all participants. Amounts for total accrued insurance claims and insurance recoveries/receivables are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
October 27, 2018
|
|
January 27, 2018
|
Accrued insurance claims - current
|
$
|
41,579
|
|
|
$
|
53,890
|
|
Accrued insurance claims - non-current
|
65,981
|
|
|
59,385
|
|
Total accrued insurance claims
|
$
|
107,560
|
|
|
$
|
113,275
|
|
|
|
|
|
Insurance recoveries/receivables:
|
|
|
|
Current (included in Other current assets)
|
$
|
—
|
|
|
$
|
13,701
|
|
Non-current (included in Other assets)
|
9,776
|
|
|
6,722
|
|
Total insurance recoveries/receivables
|
$
|
9,776
|
|
|
$
|
20,423
|
|
Insurance recoveries/receivables represent the amount of accrued insurance claims that are covered by insurance as the amounts exceed the Company’s loss retention. During
the nine months ended
October 27, 2018
, total insurance recoveries/receivables decreased approximately
$10.6 million
primarily due to the settlement of claims. Accrued insurance claims decreased by a corresponding amount.
12. Other Accrued Liabilities
Other accrued liabilities consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
October 27, 2018
|
|
January 27, 2018
|
Accrued payroll and related taxes
|
$
|
29,660
|
|
|
$
|
23,010
|
|
Accrued employee benefit and incentive plan costs
|
24,356
|
|
|
16,097
|
|
Accrued construction costs
|
46,688
|
|
|
24,582
|
|
Other current liabilities
|
18,760
|
|
|
15,968
|
|
Total other accrued liabilities
|
$
|
119,464
|
|
|
$
|
79,657
|
|
13. Debt
The Company’s outstanding indebtedness consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
October 27, 2018
|
|
January 27, 2018
|
Credit Agreement - Revolving facility (matures October 2023)
|
$
|
—
|
|
|
$
|
—
|
|
Credit Agreement - Term loan facility (matures October 2023)
|
450,000
|
|
|
358,063
|
|
0.75% convertible senior notes, net (mature September 2021)
|
417,835
|
|
|
402,249
|
|
|
867,835
|
|
|
760,312
|
|
Less: current portion
|
—
|
|
|
(26,469
|
)
|
Long-term debt
|
$
|
867,835
|
|
|
$
|
733,843
|
|
Senior Credit Agreement
On October 19, 2018, the Company and certain of its subsidiaries amended and restated its existing credit agreement, dated as of December 3, 2012, as amended on April 24, 2015 and as subsequently amended and supplemented (the “Credit Agreement”), with the various lenders party thereto. The maturity date of the Credit Agreement was extended to October 19, 2023 and, among other things, the maximum revolver commitment was increased to
$750.0 million
from
$450.0 million
and the term loan facility was increased to
$450.0 million
. The Credit Agreement includes a
$200.0 million
sublimit for the issuance of letters of credit.
Subject to certain conditions, the Credit Agreement provides the Company with the ability to enter into one or more incremental facilities either by increasing the revolving commitments under the Credit Agreement and/or in the form of term
loans, up to the greater of (i)
$350.0 million
and (ii) an 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 the Company’s consolidated senior secured indebtedness reduced by unrestricted cash and equivalents in excess of
$50.0 million
to its 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 the Company’s subsidiaries and secured by the equity interests of the substantial majority of the Company’s subsidiaries.
Under the Credit Agreement, borrowings bear interest at the rates described below based upon the Company’s consolidated net leverage ratio, which is the ratio of the Company’s consolidated total funded debt reduced by unrestricted cash and equivalents in excess of
$50.0 million
to its trailing twelve month consolidated EBITDA, as defined by the Credit Agreement. In addition, the Company incurs certain fees for unused balances and letters of credit at the rates described below, also based upon the Company’s consolidated net leverage ratio.
|
|
|
Borrowings - Eurodollar Rate Loans
|
1.25% - 2.00% plus LIBOR
|
Borrowings - Base Rate Loans
|
0.25% - 1.00% plus administrative agent’s base rate
(1)
|
Unused Revolver Commitment
|
0.20% - 0.40%
|
Standby Letters of Credit
|
1.25% - 2.00%
|
Commercial Letters of Credit
|
0.625% - 1.00%
|
(1)
The administrative agent’s base rate is described in the 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%
.
Standby letters of credit of approximately
$48.6 million
, issued as part of the Company’s insurance program, were outstanding under the Credit Agreement as of both
October 27, 2018
and
January 27, 2018
.
The weighted average interest rates and fees for balances under the Credit Agreement as of
October 27, 2018
and
January 27, 2018
were as follows:
|
|
|
|
|
|
Weighted Average Rate End of Period
|
|
October 27, 2018
|
|
January 27, 2018
|
Borrowings - Term loan facilities
|
4.28%
|
|
3.30%
|
Borrowings - Revolving facility
(1)
|
—%
|
|
—%
|
Standby Letters of Credit
|
2.00%
|
|
1.75%
|
Unused Revolver Commitment
|
0.40%
|
|
0.35%
|
(1)
There were
no
outstanding borrowings under the revolving facility as of
October 27, 2018
or
January 27, 2018
.
The Credit Agreement contains a financial covenant that requires the Company 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 the Company to maintain a consolidated interest coverage ratio, which is the ratio of the Company’s trailing twelve month consolidated EBITDA to its consolidated 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. In addition, the Credit Agreement contains a minimum liquidity covenant that is applicable beginning 91 days prior to the maturity date of the Company’s 0.75% convertible senior notes due September 2021 (the “Notes”) if the outstanding principal amount of the Notes is greater than
$250.0 million
. In such event, the Company would be required to maintain liquidity, as defined by the Credit Agreement, equal to
$150.0 million
in excess of the outstanding principal amount of the Notes. This covenant terminates at the earliest date of when the outstanding principal amount of the Notes is reduced to
$250.0 million
or less, the Notes are amended pursuant to terms that extend the maturity date to 91 or more days beyond the maturity date of the Credit Agreement, or the Notes are refinanced pursuant to terms that extend the maturity date to 91 or more days beyond the maturity date of the Credit Agreement. At
October 27, 2018
and
January 27, 2018
, the Company was in compliance with the financial covenants of the Credit Agreement and had borrowing availability under the revolving facility of
$328.5 million
and
$401.4 million
, respectively, as determined by the most restrictive covenant.
0.75%
Convertible Senior Notes Due 2021
On September 15, 2015, the Company issued
0.75%
convertible senior notes due September 2021 in a private placement in the principal amount of
$485.0 million
. The Notes, governed by the terms of an indenture between the Company and a bank trustee are unsecured obligations and do not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by the Company. The Notes bear interest at a rate of
0.75%
per year, payable in cash semiannually in March and September, and will mature on September 15, 2021, unless earlier purchased by the Company or converted. In the event the Company fails to perform certain obligations under the indenture, the Notes will accrue additional interest. Certain events are considered “events of default” under the Notes, which may result in the acceleration of the maturity of the Notes, as described in the indenture.
Each
$1,000
of principal of the Notes is convertible into
10.3211
shares of the Company’s common stock, which is equivalent to an initial conversion price of approximately
$96.89
per share. The conversion rate is subject to adjustment in certain circumstances, including in connection with specified fundamental changes (as defined in the indenture). In addition, holders of the Notes have the right to require the Company to repurchase all or a portion of their notes on the occurrence of a fundamental change at a price of 100% of their principal amount plus accrued and unpaid interest.
Prior to June 15, 2021, the Notes are convertible by the Note holder under the following circumstances: (1) during any fiscal quarter commencing after October 24, 2015 (and only during such fiscal quarter) if the last reported sale price of the Company’s common stock for at least
20
trading days (whether or not consecutive) during the
30
consecutive trading days period ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to
130%
of the applicable conversion price on such trading day (
$125.96
assuming an applicable conversion price of
$96.89
); (2) during the five consecutive business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of Notes for each trading day of such measurement period was less than
98%
of the product of the last reported sale price of the Company’s common stock and the applicable conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. On or after June 15, 2021 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or a portion of their Notes at any time regardless of the foregoing circumstances. Upon conversion, the Notes will be settled, at the Company’s election, in cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock. The Company intends to settle the principal amount of the Notes with cash.
During
the three months ended
October 27, 2018
, the closing price of the Company’s common stock did not meet or exceed 130% of the applicable conversion price of the Notes for at least 20 of the last 30 consecutive trading dates of the quarter. Additionally, no other conditions allowing holders of the Notes to convert have been met as of
October 27, 2018
. As a result, the Notes were not convertible during
the three months ended
October 27, 2018
and are classified as long-term debt.
In accordance with ASC Topic 470,
Debt
, certain convertible debt instruments that may be settled in cash upon conversion are required to be accounted for as separate liability and equity components. The carrying amount of the liability component is calculated by measuring the fair value of a similar instrument that does not have an associated convertible feature using an indicative market interest rate (“Comparable Yield”) as of the date of issuance. The difference between the principal amount of the notes and the carrying amount represents a debt discount. The debt discount is amortized to interest expense using the Comparable Yield (
5.5%
with respect to the Notes) using the effective interest rate method over the term of the Notes. The Company incurred
$4.8 million
and
$4.5 million
of interest expense during
the three months ended
October 27, 2018
and
October 28, 2017
, respectively, and
$14.2 million
and
$13.5 million
of interest expense during
the nine months ended
October 27, 2018
and
October 28, 2017
, respectively, for the non-cash amortization of the debt discount. The liability component of the Notes consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
October 27, 2018
|
|
January 27, 2018
|
Liability component
|
|
|
|
Principal amount of 0.75% convertible senior notes due September 2021
|
$
|
485,000
|
|
|
$
|
485,000
|
|
Less: Debt discount
|
(60,676
|
)
|
|
(74,899
|
)
|
Less: Debt issuance costs
|
(6,489
|
)
|
|
(7,852
|
)
|
Net carrying amount of Notes
|
$
|
417,835
|
|
|
$
|
402,249
|
|
The equity component of the Notes was recognized at issuance and represents the difference between the principal amount of the Notes and the fair value of the liability component of the Notes at issuance. The equity component approximated
$112.6 million
at the time of issuance and its fair value is not remeasured as long as it continues to meet the conditions for equity classification.
The following table summarizes the fair value of the Notes, net of the debt discount and debt issuance costs. The fair value of the Notes is based on the closing trading price per $100 of the Notes as of the last day of trading for the respective periods (Level 2), which was
$101.50
and
$136.01
as of
October 27, 2018
and
January 27, 2018
, respectively (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
October 27, 2018
|
|
January 27, 2018
|
Fair value of principal amount of Notes
|
$
|
492,275
|
|
|
$
|
659,649
|
|
Less: Debt discount and debt issuance costs
|
(67,165
|
)
|
|
(82,751
|
)
|
Fair value of Notes
|
$
|
425,110
|
|
|
$
|
576,898
|
|
Convertible Note Hedge and Warrant Transactions
In connection with the offering of the Notes, the Company entered into convertible note hedge transactions with counterparties to reduce the potential dilution to common stockholders from the conversion of the Notes and offsetting any potential cash payments in excess of the principal amount of the Notes. In the event that shares or cash are deliverable to holders of the Notes upon conversion at limits defined in the indenture governing the Notes, counterparties to the convertible note hedge will be required to deliver up to
5.006 million
shares of the Company’s common stock or pay cash to the Company in a similar amount as the value that the Company delivers to the holders of the Notes based on a conversion price of
$96.89
per share.
In addition, the Company entered into separately negotiated warrant transactions with the same counterparties as the convertible note hedge transactions whereby the Company sold warrants to purchase, subject to certain anti-dilution adjustments, up to
5.006 million
shares of the Company’s common stock at a price of
$130.43
per share. The warrants will not have a dilutive effect on the Company’s earnings per share unless the Company’s quarterly average share price exceeds the warrant strike price of
$130.43
per share. In this event, the Company expects to settle the warrant transactions on a net share basis whereby it will issue shares of its common stock.
Upon settlement of the conversion premium of the Notes, convertible note hedge, and warrants, the resulting dilutive impact of these transactions, if any, would be the number of shares necessary to settle the value of the warrant transactions above
$130.43
per share. The net amounts incurred in connection with the convertible note hedge and warrant transactions were recorded as a reduction to additional paid-in capital on the consolidated balance sheets during fiscal 2016 and are not expected to be remeasured in subsequent reporting periods.
The Company recorded an initial deferred tax liability of
$43.4 million
in connection with the debt discount associated with the Notes and recorded an initial deferred tax asset of
$43.2 million
in connection with the convertible note hedge transactions. Both the deferred tax liability and deferred tax asset are included in non-current deferred tax liabilities in the condensed consolidated balance sheets.
See
Note 14,
Income Taxes
,
for additional information regarding the Company’s deferred tax liabilities and assets.
14. Income Taxes
The Company’s interim income tax provisions are based on the effective income tax rate expected to be applicable for the full fiscal year, adjusted for specific items that are required to be recognized in the period in which they occur. Deferred tax assets and liabilities are based on the enacted tax rate that will apply in future periods when such assets and liabilities are expected to be settled or realized.
The Tax Cuts and Jobs Act of 2017 (“Tax Reform”) was enacted in December 2017 and includes significant changes to U.S. income tax law. Tax Reform, among other things, reduced the U.S. federal corporate income tax rate from 35 percent to 21 percent. As a result, the Company’s net deferred tax liabilities as of January 27, 2018 were remeasured to reflect the reduced rate under Tax Reform.
The Company’s effective income tax rate of
27.5%
and
36.7%
for
the nine months ended
October 27, 2018
and
October 28, 2017
, respectively, differs from the applicable U.S. federal corporate income tax rate for each respective period primarily as the result of non-deductible and non-taxable items, tax credits recognized in relation to pre-tax results, and certain impacts from the vesting and exercise of share-based awards.
The Company’s current interpretations of the provisions of Tax Reform could differ from future interpretations and guidance from the U.S. Treasury Department, the IRS and other regulatory agencies, including state taxing authorities in jurisdictions where the Company operates. Any future adjustments resulting from these factors would impact the Company’s provision for income taxes and effective tax rate in the period in which they are made.
15. Other Income, Net
The components of other income, net, were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Nine Months Ended
|
|
October 27, 2018
|
|
October 28, 2017
|
|
October 27, 2018
|
|
October 28, 2017
|
Gain on sale of fixed assets
|
$
|
3,874
|
|
|
$
|
6,495
|
|
|
$
|
17,198
|
|
|
$
|
18,189
|
|
Miscellaneous expense, net
|
(901
|
)
|
|
(564
|
)
|
|
(2,356
|
)
|
|
(1,422
|
)
|
Write-off of deferred financing costs
|
(156
|
)
|
|
—
|
|
|
(156
|
)
|
|
—
|
|
Total other income, net
|
$
|
2,817
|
|
|
$
|
5,931
|
|
|
$
|
14,686
|
|
|
$
|
16,767
|
|
The Company participates in a customer-sponsored vendor payment program. All eligible accounts receivable from this customer are included in the program and payment is received pursuant to a non-recourse sale to the customer’s bank partner. This program effectively reduces the time to collect these receivables as compared to that customer’s standard payment terms. The Company incurs a discount fee to the bank on the payments received that is reflected as an expense component in other income, net, in the condensed consolidated statements of operations. Miscellaneous expense, net includes approximately
$1.0 million
and
$0.7 million
for
the three months ended
October 27, 2018
and
October 28, 2017
, respectively, and
$3.0 million
and
$2.4 million
for
the nine months ended
October 27, 2018
and
October 28, 2017
, respectively, of discount fee expense incurred in connection with the non-recourse sale of accounts receivable under this program. The program has not changed since its inception during fiscal 2016.
The Company recognized
$0.2 million
in write-off of deferred financing costs during
the three months ended
October 27, 2018
in connection with an amendment to the Credit Agreement.
16. Capital Stock
Repurchases of Common Stock.
On August 29, 2018, the Company announced that its Board of Directors had authorized a new
$150.0 million
program to repurchase shares of the Company’s outstanding common stock through February 2020 in open market or private transactions. The repurchase authorization replaced the Company’s previous repurchase authorization which expired in August 2018. At expiration, approximately
$95.2 million
of the previous authorization remained outstanding. As of
October 27, 2018
,
$150.0 million
remained available for repurchases through February 2020 under the Company’s share repurchase program.
During
the nine months ended
October 28, 2017
, the Company repurchased and canceled
600,000
shares of its common stock, at an average price of
$91.31
per share, for
$54.8 million
. The Company did not repurchase any of its common stock during
the nine months ended
October 27, 2018
.
17. Stock-Based Awards
The Company has certain stock-based compensation plans under which it grants stock-based awards, including common stock, stock options, time-based restricted share units (“RSUs”), and performance-based restricted share units (“Performance RSUs”) to attract, retain, and reward talented employees, officers, and directors, and to align the interests of employees, officers, and directors with those of the stockholders.
Compensation expense for stock-based awards is based on fair value at the measurement date. This expense fluctuates over time as a function of the duration of vesting periods of the stock-based awards and the Company’s performance, as measured by criteria set forth in performance-based awards. Stock-based compensation expense is included in general and administrative expenses in the condensed consolidated statements of operations and the amount of expense ultimately recognized depends on the quantity of awards that actually vest. Accordingly, stock-based compensation expense may vary from period to period.
The performance criteria for the Company’s performance-based equity awards utilize the Company’s operating earnings (adjusted for certain amounts) as a percentage of contract revenues for the applicable four-quarter period (a “Performance Year”)
and its Performance Year operating cash flow level (adjusted for certain amounts). Additionally, certain awards include three-year performance goals that, if met, result in supplemental shares awarded. For Performance RSUs, the Company evaluates compensation expense quarterly and recognizes expense for performance-based awards only if it determines it is probable that performance criteria for the awards will be met.
Stock-based compensation expense and the related tax benefit recognized and realized during
the three and nine months ended
October 27, 2018
and
October 28, 2017
were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Nine Months Ended
|
|
October 27, 2018
|
|
October 28, 2017
|
|
October 27, 2018
|
|
October 28, 2017
|
Stock-based compensation
|
$
|
7,366
|
|
|
$
|
7,380
|
|
|
$
|
18,277
|
|
|
$
|
17,169
|
|
Income tax effect of stock-based compensation
|
$
|
2,083
|
|
|
$
|
2,882
|
|
|
$
|
4,572
|
|
|
$
|
6,695
|
|
As of
October 27, 2018
, the Company had unrecognized compensation expense related to stock options, RSUs, and target Performance RSUs (based on the Company’s estimate of performance goal achievement) of
$2.9 million
,
$9.8 million
, and
$22.0 million
, respectively. This expense will be recognized over a weighted-average number of years of
2.4
,
2.5
, and
1.8
, respectively, based on the average remaining service periods for the awards. As of
October 27, 2018
, the Company may recognize an additional
$9.6 million
in compensation expense in future periods if the maximum amount of Performance RSUs is earned based on certain performance criteria being met.
Stock Options
The following table summarizes stock option award activity during
the nine months ended
October 27, 2018
:
|
|
|
|
|
|
|
|
|
Stock Options
|
|
Shares
|
|
Weighted Average Exercise Price
|
Outstanding as of January 27, 2018
|
636,730
|
|
|
$
|
27.93
|
|
Granted
|
28,796
|
|
|
$
|
106.19
|
|
Options exercised
|
(45,217
|
)
|
|
$
|
11.07
|
|
Canceled
|
—
|
|
|
$
|
—
|
|
Outstanding as of October 27, 2018
|
620,309
|
|
|
$
|
32.80
|
|
|
|
|
|
Exercisable options as of October 27, 2018
|
509,023
|
|
|
$
|
23.16
|
|
RSUs and Performance RSUs
The following table summarizes RSU and Performance RSU award activity during
the nine months ended
October 27, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
|
|
RSUs
|
|
Performance RSUs
|
|
Share Units
|
|
Weighted Average Grant Price
|
|
Share Units
|
|
Weighted Average Grant Price
|
Outstanding as of January 27, 2018
|
133,896
|
|
|
$
|
71.81
|
|
|
390,327
|
|
|
$
|
80.52
|
|
Granted
|
54,757
|
|
|
$
|
102.14
|
|
|
218,628
|
|
|
$
|
106.19
|
|
Share units vested
|
(18,713
|
)
|
|
$
|
74.95
|
|
|
(54,704
|
)
|
|
$
|
83.07
|
|
Forfeited or canceled
|
(6,673
|
)
|
|
$
|
70.56
|
|
|
(55,255
|
)
|
|
$
|
74.45
|
|
Outstanding as of October 27, 2018
|
163,267
|
|
|
$
|
81.67
|
|
|
498,996
|
|
|
$
|
92.16
|
|
The total amount of granted Performance RSUs presented above consists of
158,841
target shares and
59,787
supplemental shares. The total amount of Performance RSUs outstanding as of
October 27, 2018
consists of
375,719
target shares and
123,277
supplemental shares. With respect to the Company’s Performance Year ended July 28, 2018, the Company canceled
24,689
supplemental shares of Performance RSUs during the three months ended
October 27, 2018
as a result of the performance criteria for attaining supplemental shares being partially met.
18. Customer Concentration and Revenue Information
Geographic Location
The Company provides services throughout the United States and previously in Canada. Revenues from services provided in Canada were not material during
the three or nine months ended
October 27, 2018
or
October 28, 2017
.
Significant Customers
The Company’s customer base is highly concentrated, with its top
five
customers during
the nine months ended
October 27, 2018
and
October 28, 2017
accounting for approximately
78.3%
and
76.7%
, respectively, of its total contract revenues. Customers whose contract revenues exceeded
10%
of total contract revenues during
the three or nine months ended
October 27, 2018
or
October 28, 2017
, as well as total contract revenues from all other customers combined, were as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Nine Months Ended
|
|
October 27, 2018
|
|
October 28, 2017
|
|
October 27, 2018
|
|
October 28, 2017
|
|
Amount
|
|
% of Total
|
|
Amount
|
|
% of Total
|
|
Amount
|
|
% of Total
|
|
Amount
|
|
% of Total
|
Comcast Corporation
|
$
|
176.3
|
|
|
20.8%
|
|
$
|
165.0
|
|
|
21.8%
|
|
$
|
506.7
|
|
|
21.3
|
%
|
|
$
|
471.0
|
|
|
20.3
|
%
|
Verizon Communications Inc.
|
174.1
|
|
|
20.5
|
|
80.6
|
|
|
10.7
|
|
443.5
|
|
|
18.6
|
|
|
225.7
|
|
|
9.7
|
|
AT&T Inc.
|
164.6
|
|
|
19.4
|
|
143.5
|
|
|
19.0
|
|
506.8
|
|
|
21.3
|
|
|
520.1
|
|
|
22.4
|
|
CenturyLink, Inc.
(1)
|
118.8
|
|
|
14.0
|
|
146.1
|
|
|
19.3
|
|
316.0
|
|
|
13.3
|
|
|
457.6
|
|
|
19.7
|
|
Total other customers combined
|
214.4
|
|
|
25.3
|
|
221.0
|
|
|
29.2
|
|
606.1
|
|
|
25.5
|
|
648.3
|
|
|
27.9
|
Total contract revenues
|
$
|
848.2
|
|
|
100.0%
|
|
$
|
756.2
|
|
|
100.0%
|
|
$
|
2,379.1
|
|
|
100.0
|
%
|
|
$
|
2,322.7
|
|
|
100.0
|
%
|
(1)
For comparison purposes in the table above, amounts from CenturyLink, Inc. and Level 3 Communications, Inc. have been combined for periods prior to their November 2017 merger.
See Note 6,
Accounts Receivable, Contract Assets, and Contract Liabilities
, for information on the Company’s customer credit concentration and collectability of trade accounts receivable and contract assets.
Customer Type
Total contract revenues by customer type during
the three and nine months ended
October 27, 2018
and
October 28, 2017
were as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Nine Months Ended
|
|
October 27, 2018
|
|
October 28, 2017
|
|
October 27, 2018
|
|
October 28, 2017
|
|
Amount
|
|
% of Total
|
|
Amount
|
|
% of Total
|
|
Amount
|
|
% of Total
|
|
Amount
|
|
% of Total
|
Telecommunications
|
$
|
773.2
|
|
|
91.1%
|
|
$
|
687.3
|
|
|
90.9%
|
|
$
|
2,167.1
|
|
|
91.1%
|
|
$
|
2,124.7
|
|
|
91.5%
|
Underground facility locating
|
48.8
|
|
|
5.8
|
|
48.4
|
|
|
6.4
|
|
142.9
|
|
|
6.0
|
|
138.0
|
|
|
5.9
|
Electrical and gas utilities and other
|
26.2
|
|
|
3.1
|
|
20.5
|
|
|
2.7
|
|
69.1
|
|
|
2.9
|
|
60.0
|
|
|
2.6
|
Total contract revenues
|
$
|
848.2
|
|
|
100.0%
|
|
$
|
756.2
|
|
|
100.0%
|
|
$
|
2,379.1
|
|
|
100.0%
|
|
$
|
2,322.7
|
|
|
100.0%
|
Remaining Performance Obligations
Master service agreements and other contractual agreements with customers contain customer-specified service requirements, such as discrete pricing for individual tasks. In most cases, the Company’s customers are not contractually committed to procure specific volumes of services under these agreements.
Services are generally performed pursuant to these agreements in accordance with individual work orders. An individual work order generally is completed within one year or in many cases, less than one week. As a result, the Company’s remaining performance obligations under the work orders not yet completed is not meaningful in relation to the Company’s overall revenue at any given point in time. The Company applies the practical expedient in Accounting Standards Codification Topic 606,
Revenue from Contracts with Customers,
and does not disclose information about remaining performance obligations that have original expected durations of one year or less.
19. Commitments and Contingencies
On October 25, 2018 and October 30, 2018, the Company, its Chief Executive Officer and its Chief Financial Officer were named as defendants in two substantively identical lawsuits alleging violations of the federal securities fraud laws. The lawsuits, which purport to be brought on behalf of a class of all purchasers of the Company’s securities between November 20, 2017 and August 10, 2018, were filed in the United States District Court for the Southern District of Florida. The Company anticipates that these cases and any similar cases filed in the future will be consolidated into a single action. The lawsuits allege that the defendants made materially false and misleading statements or failed to disclose material facts regarding the Company’s financial condition and business operations, including those related to the Company’s dependency on, and uncertainties related to, the permitting necessary for its large projects which, according to the plaintiffs, had the effect of artificially inflating the price of the Company’s common stock. The plaintiffs seek unspecified damages. The Company believes the allegations in the lawsuits are without merit and intends to vigorously defend the lawsuits. Based on the very early stage of this matter, it is not possible to estimate the amount or range of possible loss that might result from an adverse judgment or a settlement of these matters.
During the fourth quarter of fiscal 2016, one of the Company’s subsidiaries ceased operations. This subsidiary contributed to a multiemployer pension plan, the Pension, Hospitalization and Benefit Plan of the Electrical Industry - Pension Trust Fund (the “Plan”). In October 2016, the Plan demanded payment for a claimed withdrawal liability of approximately
$13.0 million
. In December 2016, the Company submitted a formal request to the Plan seeking review of the Plan’s withdrawal liability determination. The Company is disputing the claim of a withdrawal liability demanded by the Plan as it believes there is a statutory exemption available under the Employee Retirement Income Security Act (“ERISA”) for multiemployer pension plans that primarily cover employees in the building and construction industry. The Plan has taken the position that the work at issue does not qualify for the statutory exemption. The Company has submitted this dispute to arbitration, as required by ERISA, with a hearing expected sometime in the first half of calendar 2019. There can be no assurance that the Company will be successful in asserting the statutory exemption as a defense in the arbitration proceeding. As required by ERISA, in November 2016, the subsidiary began making monthly payments of a withdrawal liability to the Plan in the amount of approximately
$0.1 million
. If the Company prevails in disputing the withdrawal liability, all such payments will be refunded to the subsidiary.
With respect to the acquisition of certain assets and the assumption of certain liabilities associated with the wireless network deployment and wireline operations of Goodman Networks Incorporated (“Goodman”) during fiscal 2016,
$22.5 million
of the purchase price was placed into escrow to cover indemnification claims and working capital adjustments. During fiscal 2017,
$2.5 million
of escrowed funds were released following resolution of closing working capital and
$10.0 million
of escrowed funds were released as a result of Goodman’s resolution of a sales tax liability with the State of Texas. In April 2018,
$9.7 million
of escrowed funds were released in connection with the resolution of certain indemnification claims, of which Dycom received
$1.6 million
. There was no impact on the Company’s results of operations related to the escrow release. As of
October 27, 2018
, approximately
$0.3 million
remains in escrow pending resolution of certain post-closing indemnification claims.
From time to time, the Company is party to
various claims and legal proceedings arising in the ordinary course of business. While the resolution of these matters cannot be predicted with certainty, it is the opinion of management, based on information available at this time, that the outcome of any such claims or proceedings will not have a material effect on the Company’s financial statements.
For claims within its insurance program, the Company retains 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. The Company has established reserves that it believes to be adequate based on current evaluations and experience with these types of claims. For these claims, the effect on the Company’s financial statements is generally limited to the amount needed to satisfy insurance deductibles or retentions.
Commitments
Performance and Payment Bonds and Guarantees.
The Company has obligations under performance and other surety contract bonds related to certain of its customer contracts. Performance bonds generally provide a customer with the right to obtain payment and/or performance from the issuer of the bond if the Company fails to perform its contractual obligations. As of
October 27, 2018
and
January 27, 2018
, the Company had
$118.8 million
and
$118.1 million
, respectively, of outstanding performance and other surety contract bonds. As part of its insurance program, the Company provides surety bonds to support obligations to its insurance carriers. As of
October 27, 2018
and
January 27, 2018
, the Company had
$22.1 million
and
$21.9 million
, respectively, of outstanding surety bonds related to its insurance obligations. Additionally, the Company periodically guarantees certain obligations of its subsidiaries, including obligations in connection with obtaining state contractor licenses and leasing real property and equipment.
Letters of Credit.
The Company has standby letters of credit issued under its Credit Agreement as part of its insurance program. These standby letters of credit collateralize obligations to the Company’s insurance carriers in connection with the settlement of potential claims. In connection with these collateral obligations, the Company had
$48.6 million
of outstanding standby letters of credit issued under the Credit Agreement as of both
October 27, 2018
and
January 27, 2018
.
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 relating to future events, financial performance, strategies, expectations, and the competitive environment. Words such as “believe,” “expect,” “anticipate,” “estimate,” “intend,” “project,” “forecast,” “target,” “outlook,” “may,” “should,” “could,” and similar expressions, as well as statements written in the future tense, identify forward-looking statements. They will not necessarily be accurate indications of whether or at what time such performance or results will be achieved.
You should not consider forward-looking statements as guarantees of future performance or results. When made, forward-looking statements are based on information available at the time and/or management’s good faith belief 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, assumptions, uncertainties, and risks that could cause such differences are discussed within Part II, Item 1A,
Risk Factors
, of this Quarterly Report on Form 10‑Q, as well as 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 Transition Report on Form 10-K for the six months ended
January 27, 2018
, filed with the U.S. Securities and Exchange Commission (“SEC”) on
March 2, 2018
and our other periodic filings with the SEC. Our forward-looking statements are expressly qualified in their entirety by this cautionary statement and are only made as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to update them to reflect new information or events or circumstances arising after such date.