The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the accompanying notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for fiscal 2022. Our Annual Report on Form 10-K for fiscal 2022 was filed with the
SECon March 4, 2022, and is available on the SEC'swebsite at www.sec.gov and on our website at www.dycomind.com.
We are a leading provider of specialty contracting services throughout
the United States. These services include program management; planning; engineering and design; aerial, underground, and wireless construction; maintenance; and fulfillment services for telecommunications providers. Additionally, we provide underground facility locating services for various utilities, including telecommunications providers, and other construction and maintenance services for electric and gas utilities. We supply the labor, tools, and equipment necessary to provide these services to our customers. Significant demand for broadband is driven by applications that require high speed connections as well as the everyday use of mobile data devices. To respond to this demand and other advances in technology, major industry participants are constructing or upgrading significant wireline networks across broad sections of the country. These wireline networks are generally designed to provision gigabit network speeds to individual consumers and businesses, either directly or wirelessly using 5G technologies. Industry participants have stated their belief that a single high capacity fiber network can most cost effectively deliver services to both consumers and businesses, enabling multiple revenue streams from a single investment. We believe this view is increasing the appetite for fiber deployments and that the industry effort to deploy high capacity fiber networks continues to meaningfully broaden the set of opportunities for our industry. Increasing access to high-capacity telecommunications continues to be crucial to society, especially in rural America. The Infrastructure Investmentand Jobs Act ("Infrastructure Act") includes over $40 billionfor the construction of rural communications networks in unserved and underserved areas across the country. This represents an unprecedented level of support. In addition, an increasing number of states are commencing programs that will provide funding for telecommunications networks even prior to the initiation of funding under the Infrastructure Act. We are providing program management, planning, engineering and design, aerial, underground, and wireless construction and fulfillment services for gigabit deployments. These services are being provided across the country in numerous geographic areas to multiple customers. These deployments include networks consisting entirely of wired network elements and converged wireless/wireline multi-use networks. Fiber network deployment opportunities are increasing in rural America as new industry 25 -------------------------------------------------------------------------------- Table of Contents participants respond to emerging societal initiatives. We continue to provide integrated planning, engineering and design, procurement and construction and maintenance services to several industry participants. Macro-economic effects and supply constraints may influence the near-term execution of some customer plans. Broad increases in demand for fiber optic cable and related equipment may cause delivery volatility in the short to intermediate term. In addition, the market for labor remains tight in many regions around the country. It remains to be seen how long this condition persists. Furthermore, the automotive and equipment supply chain remains challenged, particularly for the large truck chassis required for specialty equipment. Prices for capital equipment are increasing. As we contend with these factors, we remain confident that our scale and financial strength position us well to deliver valuable service to our customers. Telephone companies are deploying fiber-to-the-home to enable gigabit high-speed connections. Increasingly, rural electric utilities are doing the same. Dramatically increased speeds to consumers are being provisioned and consumer data usage is growing, particularly upstream. Wireless construction activity in support of newly available spectrum bands is expected to increase this year. Federal and state support for rural deployments of communications networks is dramatically increasing in scale and duration. Cable operators are deploying fiber to small and medium businesses and enterprises. A portion of these deployments are in anticipation of the customer sales process. Deployments to expand capacity as well as new build opportunities are underway. Customers are consolidating supply chains creating opportunities for market share growth and increasing the long-term value of our maintenance and operations business. The cyclical nature of the industry we serve affects demand for our services. The capital expenditure and maintenance budgets of our customers, and the related timing of approvals and seasonal spending patterns, influence our contract revenues and results of operations. Factors affecting our customers and their capital expenditure budgets include, but are not limited to, overall economic conditions, the introduction of new technologies, our customers' debt levels and capital structures, our customers' financial performance, our customers' positioning and strategic plans, and any potential effects from the COVID-19 pandemic. Other factors that may affect our customers and their capital expenditure budgets include new regulations or regulatory actions impacting our customers' businesses, merger or acquisition activity involving our customers, and the physical maintenance needs of our customers' infrastructure. Our operations expose us to risks associated with pandemics, epidemics or other public health emergencies, such as the COVID-19 pandemic. Since March 2020, the economy of the United Stateshas been severely impacted by the COVID-19 pandemic and by the nation's response to it. Measures mandated by governmental agencies have included vaccination and masking requirements, travel and large gathering restrictions, social distancing requirements, quarantines, and shelter in place orders. Even as efforts to contain the pandemic have made progress and some restrictions have been relaxed, new variants of COVID-19 have resulted in, and may continue to result in, additional outbreaks. As a result, certain business-related activities have been curtailed or modified. During the COVID-19 pandemic, our services have generally been considered essential in nature and have not been materially interrupted by governmental mandates. As the situation continues to evolve, we are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business, our customers, subcontractors, suppliers, vendors and employees, in addition to how the COVID-19 pandemic impacts our ability to provide services to our customers. We believe the full extent of the impact of the COVID-19 pandemic on our operating results, cash flows and financial condition will be determined by factors which are uncertain, unpredictable and outside of our control. These factors include the duration and severity of the pandemic, including any new variants, any worsening of the pandemic, the vaccination rates in the areas we operate and among our employees and subcontractors, the nature and duration of containment and mitigation actions taken by federal, state and local governments, and the protocols and contractual requirements implemented by our customers, and the resulting impact on the demand for our services from our customers. The situation surrounding COVID-19 remains fluid, and if disruptions do arise, they could materially adversely impact our business. In addition, the ability of our employees and our suppliers' and customers' employees to work may be significantly impacted by individuals contracting or being exposed to COVID-19, or as a result of the control measures noted above. Our customers may be directly impacted by business curtailments or weak market conditions and may not be willing to continue investments in the services we provide. Furthermore, the COVID-19 pandemic has caused delays, and increases the risk of further delays, in our provision of construction services due to delays in our ability to obtain permits from government agencies or as a result of constraints to the availability of labor, supplies, and equipment. For further discussion of this matter, refer to Part I. Item 1A of our Annual Report on Form 10-K for fiscal 2022. 26 -------------------------------------------------------------------------------- Table of Contents Customer Relationships and Contractual Arrangements We have established relationships with many leading telecommunications providers, including telephone companies, cable multiple system operators, wireless carriers, telecommunications equipment and infrastructure providers, as well as electric and gas utilities. Our customer base is highly concentrated, with our top five customers during the three months ended April 30, 2022and May 1, 2021accounting for approximately 67.3% and 68.2%, respectively, of our total contract revenues. The following reflects the percentage of total contract revenues from customers who contributed at least 2.5% to our total contract revenues during the three months ended April 30, 2022or May 1, 2021: For the Three Months Ended April 30, 2022 May 1, 2021 AT&T Inc. 27.1% 21.4% Comcast Corporation 12.7% 18.0% Lumen Technologies 11.7% 11.8% Verizon Communications Inc. 9.2% 12.6% Frontier Communications Corporation 6.5% 3.5% Windstream Corporation 2.7% 4.4%
In addition, another customer contributed 3.9% and 3.4% to our total contract
revenues during the three months ended
We perform a majority of our services under master service agreements and other contracts that contain customer-specified service requirements. These agreements include discrete pricing for individual tasks. We generally possess multiple agreements with each of our significant customers. To the extent that such agreements specify exclusivity, there are often exceptions, including the ability of the customer to issue work orders valued above a specified dollar amount to other service providers, the performance of work with the customer's own employees, and the use of other service providers when jointly placing facilities with another utility. In many cases, a customer may terminate an agreement for convenience. Historically, multi-year master service agreements have been awarded primarily through a competitive bidding process; however, we occasionally are able to negotiate extensions to these agreements. We provide the remainder of our services pursuant to contracts for specific projects. These contracts may be long-term (with terms greater than one year) or short-term (with terms less than one year) and often include customary retainage provisions under which the customer may withhold 5% to 10% of the invoiced amounts pending project completion and closeout. The following table summarizes our contract revenues from multi-year master service agreements and other long-term contracts, as a percentage of contract revenues: For the Three Months Ended April 30, 2022 May 1, 2021 Multi-year master service agreements 80.0 % 76.9 % Other long-term contracts 11.9 15.1 Total long-term contracts 91.9 % 92.0 %
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements. These statements have been prepared in accordance with accounting principles generally accepted in
the United States of America("GAAP"). In conformity with GAAP, the preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in these condensed consolidated financial statements and accompanying notes. These estimates and assumptions require the use of judgment as to the likelihood of various future outcomes and, as a result, actual results could differ materially from these estimates. There have been no material changes to our significant accounting policies and critical accounting estimates described in our Annual Report on Form 10-K for fiscal 2022. 27 -------------------------------------------------------------------------------- Table of Contents Understanding Our Results of Operations The following information is presented so that the reader may better understand certain factors impacting our results of operations and should be read in conjunction with our condensed consolidated financial statements and the accompanying notes thereto included elsewhere in this Quarterly Report on Form 10-Q and Critical Accounting Policies and Estimates within Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as Note 2, Significant Accounting Policies and Estimates, in the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for fiscal 2022.
The Company uses a 52/53 week fiscal year ending on the last Saturday in
January. Fiscal 2022 and fiscal 2023 each consist of 52 weeks of operations. The
next 53 week fiscal period will occur in the fiscal year ending
Contract Revenues. We perform the majority of our services under master service agreements and other contracts that contain customer-specified service requirements. These agreements include discrete pricing for individual tasks including, for example, the placement of underground or aerial fiber, directional boring, and fiber splicing, each based on a specific unit of measure. A contractual agreement exists when each party involved approves and commits to the agreement, the rights of the parties and payment terms are identified, the agreement has commercial substance, and collectability of consideration is probable. Our services are performed for the sole benefit of our customers, whereby the assets being created or maintained are controlled by the customer and the services we perform do not have alternative benefits for us. Contract revenue is recognized over time as services are performed and customers simultaneously receive and consume the benefits we provide. Output measures such as units delivered are utilized to assess progress against specific contractual performance obligations for the majority of our services. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the services to be provided. For us, the output method using units delivered best represents the measure of progress against the performance obligations incorporated within the contractual agreements. This method captures the amount of units delivered pursuant to contracts and is used only when our performance does not produce significant amounts of work in process prior to complete satisfaction of the performance obligation. For a portion of contract items, units to be completed consist of multiple tasks. For these items, the transaction price is allocated to each task based on relative standalone measurements, such as selling prices for similar tasks, or in the alternative, the cost to perform the tasks. Contract revenue is recognized as these tasks are completed as a measurement of progress in the satisfaction of the corresponding performance obligation, and represented approximately 3% and 5% of contract revenues during the three months ended
April 30, 2022and May 1, 2021, respectively. For certain contracts, representing less than 5% of contract revenues during each of the three months ended April 30, 2022and May 1, 2021, we use the cost-to-cost measure of progress. These contracts are generally projects that are completed over a period of less than twelve months. Under the cost-to-cost measure of progress, the extent of progress toward completion is measured based on the ratio of costs incurred to date to the total estimated costs. Contract costs include direct labor, direct materials, and subcontractor costs, as well as an allocation of indirect costs. Contract revenues are recorded as costs are incurred. We accrue the entire amount of a contract loss, if any, at the time the loss is determined to be probable and can be reasonably estimated. Costs of Earned Revenues. Costs of earned revenues includes all direct costs of providing services under our contracts, including costs for direct labor provided by employees, services by independent subcontractors, operation of capital equipment (excluding depreciation), direct materials, costs of insuring our risks, and other direct costs. Under our insurance program, we retain the risk of loss, up to certain limits, for matters related to automobile liability, general liability (including damages associated with underground facility locating services), workers' compensation, and employee group health. General and Administrative Expenses. General and administrative expenses primarily consist of employee compensation and related expenses, including performance-based compensation and stock-based compensation, legal, consulting and professional fees, information technology and development costs, provision for or recoveries of bad debt expense, acquisition and integration costs of businesses acquired, and other costs not directly related to the provision of our services under customer contracts. Our provision for bad debt expense is determined by evaluating specific accounts receivable and contract asset balances based on historical collection trends, the age of outstanding receivables, and the creditworthiness of our customers. We incur information technology and development costs primarily to support and enhance our operating efficiency. Our executive management team and the senior management of our subsidiaries perform substantially all of our sales and marketing functions as part of their management responsibilities. Depreciation and Amortization. Our property and equipment primarily consist of vehicles, equipment and machinery, and computer hardware and software. We depreciate property and equipment on a straight-line basis over the estimated useful lives of the assets. In addition, we have intangible assets, including customer relationships and trade names, which we amortize over 28 -------------------------------------------------------------------------------- Table of Contents their estimated useful lives. We recognize amortization of customer relationship intangibles on an accelerated basis as a function of the expected economic benefit and amortization of other finite-lived intangibles on a straight-line basis over their estimated useful life. Interest Expense, Net. Interest expense, net, consists of interest incurred on outstanding variable rate and fixed rate debt and certain other obligations. Interest expense also includes the non-cash amortization of our convertible senior notes debt discount and amortization of debt issuance costs. See Note 13, Debt, in the notes to the condensed consolidated financial statements for information on the non-cash amortization of the debt discount and debt issuance costs. Other Income, Net. Other income, net, primarily consists of gains or losses from sales of fixed assets. Other income, net also includes discount fee expense associated with the collection of accounts receivable under a customer-sponsored vendor payment program. Seasonality and Fluctuations in Operating Results. Our contract revenues and results of operations exhibit seasonality as we perform a significant portion of our work outdoors. Consequently, adverse weather, which is more likely to occur with greater frequency, severity, and duration during the winter, as well as reduced daylight hours, impact our operations during the fiscal quarters ending in January and April. In addition, a disproportionate number of holidays fall within the fiscal quarter ending in January, which decreases the number of available workdays. Because of these factors, we are most likely to experience reduced revenue and profitability during the fiscal quarters ending in January and April compared to the fiscal quarters ending in July and October. We may also experience variations in our profitability driven by a number of factors. These factors include variations and fluctuations in contract revenues, job specific costs, insurance claims, the allowance for doubtful accounts, accruals for contingencies, stock-based compensation expense for performance-based stock awards, the fair value of reporting units for the goodwill impairment analysis, the valuation of intangibles and other long-lived assets, gains or losses on the sale of fixed assets from the timing and levels of capital assets sold, the employer portion of payroll taxes as a result of reaching statutory limits, and our effective tax rate.
Accordingly, operating results for any fiscal period are not necessarily
indicative of results we may achieve for any subsequent fiscal period.
Results of Operations
The following table sets forth our condensed consolidated statements of
operations for the periods indicated. Percentages represent the result of
dividing each item by contract revenues (totals may not add due to rounding)
(dollars in millions):
For the Three Months Ended
April 30, 2022 May 1, 2021 Contract revenues
$ 876.3100.0 % $ 727.5100.0 % Expenses: Costs of earned revenues, excluding depreciation and amortization 745.7 85.1 620.0 85.2 General and administrative 69.4 7.9 67.0 9.2 Depreciation and amortization 36.6 4.2 39.1 5.4 Total 851.7 97.2 726.1 99.8 Interest expense, net (9.1) (1.0) (5.9) (0.8) Loss on debt extinguishment - - (0.1) - Other income, net 4.8 0.5 2.7 0.4 Income (loss) before income taxes 20.2 2.3 (1.8) (0.3) Provision for income taxes 0.7 0.1 (2.7) (0.4) Net income $ 19.52.2 % $ 0.90.1 % Contract Revenues. Contract revenues were $876.3 millionduring the three months ended April 30, 2022compared to $727.5 millionduring the three months ended May 1, 2021. There were no acquired revenues or significant revenues from storm restoration services during the three months ended April 30, 2022. We earned $3.9 millionof contract revenues from storm restoration services during the three months ended May 1, 2021. 29 -------------------------------------------------------------------------------- Table of Contents Excluding amounts generated from storm restoration services, contract revenues increased by $152.7 millionduring the three months ended April 30, 2022compared to the three months ended May 1, 2021. Contract revenues increased by $81.9 millionfor a large telecommunications customer for fiber deployments and improvements to its network and by $32.0 millionfor a telecommunications customer for fiber deployments. In addition, contract revenues increased by $17.3 millionfor a large telecommunications customer for services performed under existing contracts. Contract revenues decreased by $19.4 millionfrom a leading cable multiple system operator for construction and maintenance services and by $10.5 millionfor a large telecommunications customer. In addition, contract revenues decreased by $5.2 millionfor a telecommunications customer in connection with rural services. All other customers had net increases in contract revenues of $56.6 millionon a combined basis during the three months ended April 30, 2022compared to the three months ended May 1, 2021.
The percentage of our contract revenues by customer type from
telecommunications, underground facility locating, and electric and gas
utilities and other customers, was 88.9%, 8.1%, and 3.0%, respectively, for the
three months ended
respectively, for the three months ended
Costs of Earned Revenues. Costs of earned revenues increased to
$745.7 million, or 85.1% of contract revenues, during the three months ended April 30, 2022compared to $620.0 million, or 85.2% of contract revenues, during the three months ended May 1, 2021. The primary components of the increase were a $99.1 millionaggregate increase in direct labor and subcontractor costs, a $11.6 millionincrease in equipment and fuel costs combined, a $8.4 millionincrease in direct materials expense, and a $6.6 millionincrease in other direct costs, including travel cost, permits and other operating expenses. Costs of earned revenues as a percentage of contract revenues decreased 0.1% during the three months ended April 30, 2022compared to the three months ended May 1, 2021. Other direct costs decreased 0.6% and direct materials decreased 0.3%, primarily as a result of our mix of work in which we provide materials for our customers during the three months ended April 30, 2022. Equipment and fuel costs combined increased 0.5% as a percentage of contract revenues primarily resulting from an increase in fuel prices. As a percentage of contract revenues, labor and subcontracted labor costs increased 0.2% primarily due to the mix of work performed.
General and Administrative Expenses. General and administrative expenses
revenues, during the three months ended
general and administrative expenses during the three months ended
primarily resulted from an increase in performance compensation, payroll,
administrative and other costs, partially offset by decreased stock based
compensation and lower bad debt expense.
Depreciation and Amortization. Depreciation expense was
$32.7 million, or 3.7% of contract revenues, during the three months ended April 30, 2022compared to $34.4 million, or 4.7% of contract revenues, during the three months ended May 1, 2021. The decrease in depreciation expense during the three months ended April 30, 2022is primarily due to certain assets becoming fully depreciated or sold and reduced capital expenditures.
Amortization expense was
Interest Expense, Net. Interest expense, net was
$9.1 millionand $5.9 millionduring the three months ended April 30, 2022and May 1, 2021, respectively. Prior year interest expense included $0.7 millionfor the non-cash amortization of the debt discount associated with 0.75% convertible senior notes, which matured on September 15, 2021(the "2021 Convertible Notes"). Excluding this amortization, interest expense, net increased to $9.1 millionduring the three months ended April 30, 2022from $5.2 millionduring the three months ended May 1, 2021as a result of higher interest rates on funded debt balances and higher outstanding borrowings during the current period. Other Income, Net. Other income, net was $4.8 millionand $2.7 millionduring the three months ended April 30, 2022and May 1, 2021, respectively. Gain on sale of fixed assets was $5.4 millionand $2.9 millionduring the three months ended April 30, 2022and May 1, 2021, respectively. The change in other income, net is primarily a function of the number of assets sold and prices obtained for those assets during each respective period. Other income, net also reflects $1.1 millionand $0.5 millionof expense during the three months ended April 30, 2022and May 1, 2021respectively, associated with the non-recourse sale of accounts receivable under a customer-sponsored vendor payment program. 30 -------------------------------------------------------------------------------- Table of Contents Income Taxes. The following table presents our income tax provision and effective income tax rate for the three months ended April 30, 2022and May 1, 2021(dollars in millions): For the Three Months Ended April 30, 2022 May 1, 2021 Income tax provision $ 0.7 $ (2.7)Effective income tax rate 3.4 % 149.1 % Our effective income tax rate was 3.4% and 149.1% for the three months ended April 30, 2022and May 1, 2021, respectively. The effective tax rate differs from the statutory rate primarily due to tax credits recognized, the impact of the vesting and exercise of share-based awards, and the difference in income tax rates from state to state where work was performed. During the three months ended April 30, 2022and May 1, 2021, the Company realized approximately $2.5 millionand $2.6 millionof net excess tax benefits, respectively, related to the vesting and exercise of share-based awards. Additionally, the three months ended April 30, 2022includes approximately $1.7 millionof incremental tax benefit for credits related to a tax filing for a prior period. Other fluctuations in our effective income tax rate from the statutory rate each period are mainly attributable to changes in unrecognized tax benefits, tax law changes, and variances in non-deductible and non-taxable items. During the first quarter of fiscal 2023, we were notified by the Internal Revenue Service that our federal income tax return for fiscal 2016 was selected for examination due to the net operating loss carryback claim filed in fiscal 2021. In addition, fiscal year 2020 was selected for examination in the second quarter of fiscal 2022. We believe our provision for income taxes is adequate; however, any assessment may affect our results of operations and cash flows.
Net Income. Net income was
Non-GAAP Adjusted EBITDA. Adjusted EBITDA is a Non-GAAP measure, as defined by Regulation G of the
SEC. We define Adjusted EBITDA as net income before interest, taxes, depreciation and amortization, gain on sale of fixed assets, stock-based compensation expense, and certain non-recurring items. Management believes Adjusted EBITDA is a helpful measure for comparing the Company's operating performance with prior periods as well as with the performance of other companies with different capital structures or tax rates. The following table provides a reconciliation of net income to Non-GAAP Adjusted EBITDA (dollars in thousands): For the Three Months Ended April 30, 2022 May 1, 2021 Net income $ 19,536 $ 898Interest expense, net 9,118 5,877 Provision (benefit) for income taxes 694 (2,724) Depreciation and amortization 36,637 39,079
Earnings Before Interest, Taxes, Depreciation & Amortization
65,985 43,130 Gain on sale of fixed assets (5,389) (2,852) Stock-based compensation expense 3,128 3,740 Loss on debt extinguishment - 62 Non-GAAP Adjusted EBITDA
$ 63,724 $ 44,080Non-GAAP Adjusted EBITDA % of contract revenues 7.3 % 6.1 % 31
-------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources We are subject to concentrations of credit risk relating primarily to our cash and equivalents, accounts receivable, and contract assets. Cash and equivalents primarily include balances on deposit with banks and totaled
$185.6 millionas of April 30, 2022compared to $310.8 millionas of January 29, 2022. We maintain our cash and equivalents at financial institutions we believe to be of high credit quality. To date, we have not experienced any loss or lack of access to cash in our operating accounts. Sources of Cash. Our sources of cash are operating activities, long-term debt, equity offerings, bank borrowings, proceeds from the sale of idle and surplus equipment and real property, and stock option proceeds. Cash flow from operations is primarily influenced by demand for our services and operating margins, but can also be influenced by working capital needs associated with the services that we provide. In particular, working capital needs may increase when we have growth in operations and where project costs, primarily associated with labor, subcontractors, equipment, and materials, are required to be paid before the related customer balances owed to us are invoiced and collected. Our working capital (total current assets less total current liabilities, excluding the current portion of debt) was $991.8 millionas of April 30, 2022and January 29, 2022. Capital resources are used primarily to purchase equipment and maintain sufficient levels of working capital to support our contractual commitments to customers. We periodically borrow from and repay our revolving credit facility depending on our cash requirements. We currently intend to retain any earnings for use in the business and other capital allocation strategies which may include share repurchases, investment in acquisitions, and extinguishment of debt. Consequently, we do not anticipate paying any cash dividends on our common stock in the foreseeable future. Our level of capital expenditures can vary depending on the customer demand for our services, the replacement cycle we select for our equipment, and overall growth. We intend to fund these expenditures primarily from operating cash flows, availability under our credit agreement and cash on hand. Sufficiency of Capital Resources. We believe that our capital resources, including existing cash balances and amounts available under our Credit Agreement, are sufficient to meet our financial obligations. These obligations include interest payments required on the $500 millionaggregate principal amount of 4.50% senior notes due 2029 (the "2029 Notes") and outstanding term loan facility and revolver borrowings, if any, under our Credit Agreement, working capital requirements, and the normal replacement of equipment at our expected level of operations for at least the next 12 months. Our capital requirements may increase to the extent we seek to grow by acquisitions that involve consideration other than our stock, experience difficulty or delays in collecting amounts owed to us by our customers, increase our working capital in connection with new or existing customer programs, or to the extent we repurchase our common stock, or repay credit agreement borrowings. Changes in financial markets or other components of the economy could adversely impact our ability to access the capital markets, in which case we would expect to rely on a combination of available cash and our credit agreement to provide short-term funding. Management regularly monitors the financial markets and assesses general economic conditions for possible impact on our financial position. We believe our cash investment policies are prudent and expect that any volatility in the capital markets would not have a material impact on our cash investments.
Net Cash Flows. The following table presents our net cash flows for the three
For the Three Months Ended April 30, 2022 May 1, 2021 Net cash flows: (Used in) provided by operating activities
$ (64.9)$ 41.5 Used in investing activities $ (33.0) $ (28.6)(Used in) provided by financing activities $
Cash (Used in) Provided by Operating Activities. Depreciation and amortization, non-cash lease expense, stock-based compensation, amortization of debt discount and debt issuance costs, deferred income taxes, gain on sale of fixed assets and provision for bad debt were the primary non-cash items in cash flows from operating activities during the current and prior periods. 32 -------------------------------------------------------------------------------- Table of Contents During the three months ended
April 30, 2022, net cash used in operating activities was $64.9 million. Changes in working capital (excluding cash) and changes in other long-term assets and liabilities used $129.6 millionof operating cash flow during the three months ended April 30, 2022. Changes that used operating cash flow during the three months ended April 30, 2022included an increase in accounts receivable, other current assets and inventories, and contract assets, net of $99.1 million, $28.9 million, and $11.6 millionrespectively. In addition, changes that used operating cash flow included a decrease in accrued liabilities of $10.4 millionand a net increase in income tax receivable of $2.0 million, respectively. Changes that provided operating cash flow during the three months ended April 30, 2022included an increase in accounts payable of $21.6 millionand a decrease in other assets of $0.8 million. Days sales outstanding ("DSO") is calculated based on the ending balance of total current accounts receivable (including unbilled accounts receivable), net of the allowance for doubtful accounts, and current contract assets, net of contract liabilities, divided by the average daily revenue for the most recently completed quarter. Long-term contract assets are excluded from the calculation of DSO, as these amounts represent payments made to customers pursuant to long-term agreements and are recognized as a reduction of contract revenues over the period for which the related services are provided to the customers. Including these balances in DSO is not meaningful to the average time to collect accounts receivable and current contract asset balances. Our DSO was 105 days as of April 30, 2022compared to 128 as of May 1, 2021. The decrease in our DSO was primarily a result of a decrease in outstanding balances for a large customer program. This program consists of multiple tasks which will be billed as the tasks are completed. See Note 5, Accounts Receivable, Contract Assets, and Contract Liabilities, for further information on our customer credit concentration as of April 30, 2022and January 29, 2022and Note 18, Customer Concentration and Revenue Information, for further information on our significant customers. We believe that none of our significant customers were experiencing financial difficulties that would materially impact the collectability of our total accounts receivable and contract assets, net as of April 30, 2022or January 29, 2022. During the three months ended May 1, 2021, net cash generated from operating activities was $41.5 million. Changes in working capital (excluding cash) and changes in other long-term assets and liabilities used $15.2 millionof operating cash flow during the three months ended May 1, 2021. Working capital changes that used operating cash flow during the three months ended May 1, 2021included a decrease in accrued liabilities of $11.1 millionprimarily resulting from amounts paid for annual incentive compensation during April 2021and increases in other current assets and inventories, accounts receivable, and income tax receivable of $19.1 million, $12.2 millionand $7.3 million, each primarily as a result of the timing of payments. Changes that provided operating cash flow during the three months ended May 1, 2021included a decrease in contract assets, net of $24.6 millionand other assets of $2.2 millionand an increase in accounts payable of $7.7 million. Cash Used in Investing Activities. Net cash used in investing activities was $33.0 millionduring the three months ended April 30, 2022compared to $28.6 millionduring the three months ended May 1, 2021. During the three months ended April 30, 2022and May 1, 2021, capital expenditures were $38.4 millionand $31.6 million, respectively. Capital expenditures increased during the three months ended April 30, 2022, primarily as a result of spending for new work opportunities and the replacement of certain fleet assets. These expenditures were offset in part by proceeds from the sale of assets of $5.4 millionand $3.0 millionduring the three months ended April 30, 2022and May 1, 2021, respectively. Cash (Used in) Provided by Financing Activities. Net cash used in financing activities was $27.2 millionduring the three months ended April 30, 2022. In the first quarter of fiscal 2023 we repurchased 200,000 shares of our common stock in open market transactions, at an average price of $92.70per share, for $18.5 million. We also paid $5.5 millionto tax authorities in order to meet the payroll tax withholding obligations on restricted share units that vested during the three months ended April 30, 2022. In addition, we used approximately $4.4 millionto repay term loan borrowings under our Credit Agreement. This was partially offset by the exercise of stock options, which provided $1.2 millionduring the three months ended April 30, 2022. Net cash provided by financing activities was $305.9 millionduring the three months ended May 1, 2021. The primary source of cash provided by financing activities during the three months ended May 1, 2021was the $500.0 millionprincipal amount of 4.50% senior notes due 2029 (the "2029 Notes") issued in a private placement in April 2021. During the three months ended May 1, 2021we paid approximately $11.2 millionin issuance costs and third party fees and expenses related to our financing transactions. We used $105.0 millionto repay outstanding borrowings under the revolving portion of our credit agreement and approximately $71.9 millionto repay term loan borrowings. The exercise of stock options provided $0.4 millionduring the three months ended May 1, 2021and we paid $6.4 millionto tax authorities in order to meet the payroll tax withholding obligations on restricted share units that vested during the three months ended May 1, 2021. Compliance with Credit Agreement. On April 1, 2021, the Company and certain of its subsidiaries amended its credit agreement, dated as of October 19, 2018, with the various lenders party thereto and Bank of America, N.A., as administrative 33 -------------------------------------------------------------------------------- Table of Contents agent (the "Credit Agreement") to among other things, decrease the maximum revolver commitment to $650.0 millionfrom $750.0 millionand decrease the term loan facility to $350.0 millionfrom $416.3 million. The Credit Agreement includes a $200.0 millionsublimit for the issuance of letters of credit and a $50.0 millionsublimit for swingline loans. As part of the amendment, the maturity date of the Credit Agreement was extended to April 1, 2026. Subject to certain conditions, the Credit Agreement provides us with the ability to enter into one or more incremental facilities either by increasing the revolving commitments under the Credit Agreement and/or by establishing one or more additional term loans, up to the sum of (i) $350.0 millionand (ii) an aggregate amount such that, after giving effect to such incremental facilities on a pro forma basis (assuming that the amount of the incremental commitments are fully drawn and funded), the consolidated senior secured net leverage ratio does not exceed 2.25 to 1.00. The consolidated senior secured net leverage ratio is the ratio of our consolidated senior secured indebtedness reduced by unrestricted cash and equivalents in excess of $25.0 millionto our trailing twelve-month consolidated earnings before interest, taxes, depreciation, and amortization, as defined by the Credit Agreement ("EBITDA"). Borrowings under the Credit Agreement are guaranteed by substantially all of our domestic subsidiaries and secured by 100% of the equity interests of our direct and indirect domestic subsidiaries and 65% of the voting equity interests and 100% of the non-voting interests of our first-tier foreign subsidiaries (subject to customary exceptions). Under our Credit Agreement, borrowings bear interest at the rates described below based upon our consolidated net leverage ratio, which is the ratio of our consolidated total funded debt reduced by unrestricted cash and equivalents in excess of $25.0 millionto our trailing twelve-month consolidated EBITDA, as defined by our Credit Agreement. In addition, we incur certain fees for unused balances and letters of credit at the rates described below, also based upon our consolidated net leverage ratio.
Borrowings – Eurodollar Rate Loans 1.25% – 2.00% plus LIBOR(1)
Borrowings – Base Rate Loans
0.25% - 1.00% plus Base rate(2) Unused Revolver Commitment 0.20% - 0.40% Standby Letters of Credit 1.25% - 2.00% Commercial Letters of Credit 0.625% - 1.000% (1) To address the transition in financial markets away from LIBOR, the Credit Agreement includes provisions related to the replacement of LIBOR with a LIBOR Successor Rate (as defined in the Credit Agreement), which may be a rate based on the secured overnight financing rate published by the
Federal Reserve Bank of New York. (2) Base rate is described in our Credit Agreement as the highest of (i) the Federal Funds Rate plus 0.50%, (ii) the administrative agent's prime rate, and (iii) the Eurodollar rate plus 1.00% and, if such rate is less than zero, such rate shall be deemed zero.
Standby letters of credit of approximately
issued as part of our insurance program, were outstanding under the Credit
Agreement as of
The weighted average interest rates and fees for balances under our Credit
Agreement as of
Weighted Average Rate End of
April 30, 2022 January 29, 2022Borrowings - Term loan facility 2.30%
Borrowings - Revolving facility(1) -% -% Standby Letters of Credit 1.75% 1.63% Unused Revolver Commitment 0.35% 0.30%
(1) There were no outstanding borrowings under our revolving facility as of of
The Credit Agreement contains a financial covenant that requires us to maintain a consolidated net leverage ratio of not greater than 3.50 to 1.00, as measured at the end of each fiscal quarter, and provides for certain increases to this ratio in connection with permitted acquisitions. The agreement also contains a financial covenant that requires us to maintain a consolidated interest coverage ratio, which is the ratio of our trailing twelve-month consolidated EBITDA to our consolidated 34 -------------------------------------------------------------------------------- Table of Contents interest expense, each as defined by the Credit Agreement, of not less than 3.00 to 1.00, as measured at the end of each fiscal quarter. At
April 30, 2022and January 29, 2022, we were in compliance with the financial covenants of our Credit Agreement and had borrowing availability under the revolving facility of $284.3 millionand $326.3 million, respectively, as determined by the most restrictive covenant. For calculation purposes, applicable cash on hand is netted against the funded debt amount as permitted in the Credit Agreement. The indenture governing the 2029 Notes contains certain covenants that limit, among other things, our ability and the ability of certain of our subsidiaries to (i) incur additional debt and issue certain preferred stock, (ii) pay certain dividends on, repurchase, or make distributions in respect of, our and our Subsidiaries' capital stock or make other payments restricted by the indenture, (iii) enter into agreements that place limitations on distributions made from certain of our subsidiaries, (iv) guarantee certain debt, (v) make certain investments, (vi) sell or exchange certain assets, (vii) enter into transactions with affiliates, (viii) create certain liens, and (ix) consolidate, merge or transfer all or substantially all of our or our Subsidiaries' assets. These covenants are subject to a number of exceptions, limitations and qualifications as set forth in the indenture governing the 2029 Notes.
Contractual Obligations. The following table sets forth our outstanding
contractual obligations as of
Less than 1 Greater than 5 Year Years 1 - 3 Years 3 - 5 Years Total 2029 Notes $ - $
– $ –
Credit agreement – revolving facility
- - - - - Credit agreement - term loan facility 17,500 35,000 293,125 - 345,625 Fixed interest payments on long-term debt(1) 22,500 45,000 45,000 45,000 157,500 Obligations under long-term operating leases(2) 26,674 30,374 8,455 1,173 66,676 Obligations under short-term operating leases(3) 1,556 - - - 1,556 Employment agreements 23,955 6,693 - - 30,648 Deferral of tax payments(4) 17,047 - - - 17,047 Purchase and other contractual obligations(5) 82,387 5,073 1,444 - 88,904 Total
$ 191,619 $ 122,140 $ 348,024 $ 546,173 $ 1,207,956(1) Includes interest payments on our $500.0 millionprincipal amount of 2029 Notes outstanding, and excludes interest payments on our variable rate debt. Variable rate debt as of April 30, 2022consisted of $345.6 millionoutstanding under our term loan facility. (2)Amounts represent undiscounted lease obligations under long-term operating leases and exclude long-term operating leases that have not yet commenced of $1.0 millionas of April 30, 2022. (3)Amounts represent lease obligations under short-term operating leases that are not recorded on our condensed consolidated balance sheet as of April 30, 2022. (4) During 2020, the U.S.federal government enacted the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), which provided for various tax relief and tax incentive measures. These measures did not have a material impact on our results of operations. However, pursuant to the CARES Act, we deferred the payment of $37.4 millionof employer payroll taxes during the year ended December 31, 2020, 50% of which was paid by December 31, 2021and the remainder is due by December 31, 2022. (5) We have committed capital for the expansion of our vehicle fleet in order to accommodate manufacturer lead times. As of April 30, 2022, purchase and other contractual obligations includes approximately $76.9 millionfor issued orders with delivery dates scheduled to occur over the next 12 months.
We have excluded contractual obligations under the multi-employer defined
pension plans that cover certain of our employees, as these obligations are
determined based on our future union employee payrolls, which cannot be reliably
determined as of
35 -------------------------------------------------------------------------------- Table of Contents Our condensed consolidated balance sheet as of
April 30, 2022includes a long-term liability of approximately $48.6 millionfor accrued insurance claims. This liability has been excluded from the table above as the timing of payments is uncertain. The liability for unrecognized tax benefits for uncertain tax positions was approximately $12.6 millionand $11.9 millionas of April 30, 2022and January 29, 2022, respectively, and is included in other liabilities in the condensed consolidated balance sheets. This amount has been excluded from the contractual obligations table because we are unable to reasonably estimate the timing of the resolution of the underlying tax positions with the relevant tax authorities. Performance and Payment Bonds and Guarantees. We have obligations under performance and other surety contract bonds related to certain of our customer contracts. Performance bonds generally provide a customer with the right to obtain payment and/or performance from the issuer of the bond if we fail to perform our contractual obligations. As of April 30, 2022and January 29, 2022we had $289.7 millionand $296.4 millionof outstanding performance and other surety contract bonds, respectively. The estimated cost to complete projects secured by our outstanding performance and other surety contract bonds was approximately $132.2 millionas of April 30, 2022. In addition to performance and other surety contract bonds, as part of our insurance program we also provide surety bonds that collateralize our obligations to our insurance carriers. As of April 30, 2022and January 29, 2022, we had $20.3 millionof outstanding surety bonds related to our insurance obligations. Additionally, we periodically guarantee certain obligations of our subsidiaries, including obligations in connection with obtaining state contractor licenses and leasing real property and equipment. Letters of Credit. We have standby letters of credit issued under our Credit Agreement as part of our insurance program. These letters of credit collateralize obligations to our insurance carriers in connection with the settlement of potential claims. In connection with these collateral obligations, we had $47.5 millionand $46.3 millionoutstanding standby letters of credit issued under our Credit Agreement as of April 30, 2022and January 29, 2022, respectively. Backlog. Our backlog is an estimate of the uncompleted portion of services to be performed under contractual agreements with our customers and totaled $5.593 billionand $5.822 billionat April 30, 2022and January 29, 2022, respectively. We expect to complete 52.9% of the April 30, 2022total backlog during the next twelve months. Our backlog represents an estimate of services to be performed pursuant to master service agreements and other contractual agreements over the terms of those contracts. These estimates are based on contract terms and evaluations regarding the timing of the services to be provided. In the case of master service agreements, backlog is estimated based on the work performed in the preceding twelve month period, when available. When estimating backlog for newly initiated master service agreements and other long and short-term contracts, we also consider the anticipated scope of the contract and information received from the customer during the procurement process. A significant majority of our backlog comprises services under master service agreements and other long-term contracts. In many instances, our customers are not contractually committed to procure specific volumes of services under a contract. Contract revenue estimates reflected in our backlog can be subject to change due to a number of factors, including contract cancellations or changes in the amount of work we expect to be performed at the time the estimate of backlog is developed. In addition, contract revenues reflected in our backlog may be realized in different periods from those previously reported due to these factors as well as project accelerations or delays due to various reasons, including, but not limited to, changes in customer spending priorities, scheduling changes, commercial issues such as permitting, engineering revisions, job site conditions, adverse weather, and the potential adverse effects of the COVID-19 pandemic. The amount or timing of our backlog can also be impacted by the merger or acquisition activity of our customers. Many of our contracts may be cancelled by our customers, or work previously awarded to us pursuant to these contracts may be cancelled, regardless of whether or not we are in default. The amount of backlog related to uncompleted projects in which a provision for estimated losses was recorded is not material.
Backlog is not a measure defined by GAAP; however, it is a common measurement
used in our industry. Our methodology for determining backlog may not be
comparable to the methodologies used by others.
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