form10q.htm



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-Q
(Mark One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended October 30, 2010
   
[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________ to ________

Commission File Number 001-10613
 
DYCOM INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
 

Florida
 
59-1277135
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
11770 US Highway 1, Suite 101,
Palm Beach Gardens, Florida
 
33408
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code: (561) 627-7171
 
Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, par value $0.33 1/3 per share
New York Stock Exchange
Series A Preferred Stock Purchase Rights
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]   No [ ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ ] No [ ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [ ]
Accelerated filer [X]
Non-accelerated filer [ ]
Smaller reporting company [ ]
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
     
There were 35,132,465 shares of common stock with a par value of $0.33 1/3 outstanding at November 24, 2010






Dycom Industries, Inc.

Table of Contents

     
 
PART I – FINANCIAL INFORMATION
 
3
     
24
     
34
     
35
     
 
PART II – OTHER INFORMATION
 
     
35
     
35
     
35
     
36
     
 
36
   EX-31.1
   
   EX-31.2
   
   EX-32.1
   
   EX-32.2
   
     
 

 
PART I - FINANCIAL INFORMATION
 
   
 
   
DYCOM INDUSTRIES, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(Unaudited)
 
   
             
   
October 30,
   
July 31,
 
   
2010
   
2010
 
   
(Dollars in thousands)
 
ASSETS
           
CURRENT ASSETS:
           
Cash and equivalents
  $ 79,960     $ 103,320  
Accounts receivable, net
    113,070       110,117  
Costs and estimated earnings in excess of billings
    65,057       66,559  
Deferred tax assets, net
    14,937       14,944  
Income taxes receivable
    1,067       3,626  
Inventories
    15,139       16,058  
Other current assets
    11,851       8,137  
     Total current assets
    301,081       322,761  
                 
PROPERTY AND EQUIPMENT, NET
    134,674       136,028  
GOODWILL
    157,851       157,851  
INTANGIBLE ASSETS, NET
    48,059       49,625  
OTHER
    12,481       13,291  
     TOTAL NON-CURRENT ASSETS
    353,065       356,795  
     TOTAL
  $ 654,146     $ 679,556  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
CURRENT LIABILITIES:
               
Accounts payable
  $ 24,076     $ 25,881  
Current portion of debt
    -       47  
Billings in excess of costs and estimated earnings
    667       376  
Accrued insurance claims
    28,499       28,086  
Other accrued liabilities
    41,507       42,813  
     Total current liabilities
    94,749       97,203  
                 
LONG-TERM DEBT
    135,350       135,350  
ACCRUED INSURANCE CLAIMS
    24,747       24,844  
DEFERRED TAX LIABILITIES, NET NON-CURRENT
    24,702       24,159  
OTHER LIABILITIES
    3,507       3,445  
     Total liabilities
    283,055       285,001  
                 
COMMITMENTS AND CONTINGENCIES, Notes 9, 10, and 15
               
                 
STOCKHOLDERS' EQUITY:
               
Preferred stock, par value $1.00 per share:
               
       1,000,000 shares authorized: no shares issued and outstanding
    -       -  
Common stock, par value $0.33 1/3 per share:
               
       150,000,000 shares authorized: 35,421,065 and 38,656,190
               
       issued and outstanding, respectively
    11,807       12,885  
Additional paid-in capital
    141,061       170,209  
Accumulated other comprehensive income
    183       169  
Retained earnings
    218,040       211,292  
     Total stockholders' equity
    371,091       394,555  
     TOTAL
  $ 654,146     $ 679,556  
                 
See notes to the condensed consolidated financial statements.
 



 
DYCOM INDUSTRIES, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
(Unaudited)
 
             
             
   
For the Three Months Ended
 
   
October 30, 2010
   
October 24, 2009
 
   
(Dollars in thousands, except per share amounts)
 
             
REVENUES:
           
Contract revenues
  $ 261,584     $ 259,116  
                 
EXPENSES:
               
Costs of earned revenues, excluding depreciation and amortization
    209,322       209,971  
General and administrative  (including stock-based compensation expense of $0.8 million and $1.0 million, respectively)
    22,825       23,502  
Depreciation and amortization
    15,616       15,191  
Total
    247,763       248,664  
                 
Interest income
    28       35  
Interest expense
    (3,707 )     (3,544 )
Other income, net
    1,757       1,105  
                 
INCOME BEFORE INCOME TAXES
    11,899       8,048  
                 
PROVISION FOR INCOME TAXES:
               
Current
    4,602       3,149  
Deferred
    550       1,376  
Total
    5,152       4,525  
                 
NET INCOME
  $ 6,747     $ 3,523  
 
               
EARNINGS PER COMMON SHARE:
               
                 
Basic earnings per common share
  $ 0.18     $ 0.09  
                 
Diluted earnings per common share
  $ 0.18     $ 0.09  
                 
SHARES USED IN COMPUTING EARNINGS PER COMMON SHARE:
               
Basic
    37,465,142       38,990,281  
Diluted
    37,567,946       39,281,606  
                 
See notes to the condensed consolidated financial statements.
 


DYCOM INDUSTRIES, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(Unaudited)
 
   
             
   
For the Three Months Ended
 
   
October 30, 2010
   
October 24, 2009
 
   
(Dollars in thousands)
 
OPERATING ACTIVITIES:
           
Net income
  $ 6,747     $ 3,523  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    15,616       15,191  
Bad debt expense, net
    73       24  
Gain on sale of fixed assets
    (1,530 )     (1,026 )
Deferred income tax provision
    550       1,376  
Stock-based compensation
    791       971  
Amortization of debt issuance costs
    311       257  
Change in operating assets and liabilities:
               
Accounts receivable, net
    (2,446 )     3,687  
Costs and estimated earnings in excess of billings, net
    1,793       9,640  
Other current assets and inventory
    (3,522 )     (4,872 )
Other assets
    565       (326 )
Income taxes receivable
    2,559       4,872  
Accounts payable
    (1,653 )     (397 )
   Accrued liabilities and insurance claims     (788      (10,254)  
Income taxes payable   
    -       1,916  
Net cash provided by operating activities
    19,066       24,582  
                 
INVESTING ACTIVITIES:
               
Capital expenditures
    (13,449 )     (9,936 )
Proceeds from sale of assets
    2,073       1,614  
Changes in restricted cash
    25       -  
Net cash used in investing activities
    (11,351 )     (8,322 )
                 
FINANCING ACTIVITIES:
               
Repurchases of common stock
    (31,036 )     -  
Principal payments on long-term debt
    (29 )     (455 )
Debt issuance costs
    (29 )     -  
Exercise of stock options and other
    19       -  
Restricted stock tax withholdings
    -       (29 )
Net cash used in financing activities
    (31,075 )     (484 )
                 
Net (decrease) increase in cash and equivalents
    (23,360 )     15,776  
                 
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD
    103,320       104,707  
                 
CASH AND EQUIVALENTS AT END OF PERIOD
  $ 79,960     $ 120,483  
SUPPLEMENTAL DISCLOSURE OF OTHER CASH FLOW ACTIVITIES
               
AND NON-CASH INVESTING AND FINANCING ACTIVITIES:
               
                 
Cash paid during the period for:
               
Interest
  $ 6,011     $ 6,013  
Income taxes
  $ 85     $ 332  
Purchases of capital assets included in accounts payable or other accrued liabilities at period end
  $ 491     $ 2,531  
                 
See notes to the condensed consolidated financial statements.
 



NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


1. Accounting Policies
 
Basis of Presentation – Dycom Industries, Inc. (“Dycom” or the “Company”) is a leading provider of specialty contracting services. These services are provided throughout the United States and include engineering, construction, maintenance and installation services to telecommunications providers, underground facility locating services to various utilities including telecommunications providers, and other construction and maintenance services to electric and gas utilities and others. Additionally, Dycom provides services on a limited basis in Canada.
 
The condensed consolidated financial statements include the results of Dycom and its subsidiaries, all of which are wholly-owned.  All intercompany accounts and transactions have been eliminated and the financial statements reflect all adjustments, consisting of only normal recurring accruals which are, in the opinion of management, necessary for a fair presentation of such statements. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). However, the financial statements do not include all of the financial information and footnotes required by GAAP for complete financial statements. Additionally, the results of operations for the three months ended October 30, 2010 are not necessarily indicative of the results that may be expected for the entire year. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements for the year ended July 31, 2010 included in the Company’s 2010 Annual Report on Form 10-K, filed with the SEC on September 3, 2010.
 
Accounting Period – The Company uses a fiscal year ending on the last Saturday in July. Fiscal 2011 will consist of 52 weeks, while fiscal 2010 consisted of 53 weeks, with the fourth quarter having 14 weeks of operations.
 
Use of Estimates – The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. For the Company, key estimates include: recognition of revenue for costs and estimated earnings in excess of billings, the fair value of goodwill, the assessment of impairment of intangibles and other long-lived assets, income taxes, accrued insurance claims, asset lives used in computing depreciation and amortization, allowance for doubtful accounts, stock-based compensation expense for performance-based stock awards, and accruals for contingencies, including legal matters. At the time they are made, the Company believes that such estimates are fair when considered in conjunction with the condensed consolidated financial position and results of operations taken as a whole. However, actual results could differ from those estimates and such differences may be material to the financial statements.
 
Restricted Cash — As of October 30, 2010 and July 31, 2010, the Company had approximately $4.9 million in restricted cash, which is held as collateral in support of the Company’s insurance obligations.  Restricted cash is included in other current assets and other assets in the condensed consolidated balance sheets and changes in restricted cash are reported in cash flows used in investing activities in the condensed consolidated statements of cash flows.
 
Comprehensive Income (Loss) – During the three months ended October 30, 2010 and October 24, 2009, the Company did not have any material changes in its equity resulting from non-owner sources.  Accordingly, comprehensive income (loss) approximated the net income amounts presented for the respective period’s operations.
 
Fair Value of Financial Instruments — Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“ASC Topic 820”), defines fair value, establishes a measurement framework and expands disclosure requirements.  The Company adopted ASC Topic 820 for financial assets and liabilities on the first day of fiscal 2009 and adopted non-recurring measurements for  non-financial assets and liabilities on the first day of fiscal 2010. The adoption of ASC Topic 820 did not have an impact on the Company’s condensed consolidated financial statements.  ASC Topic 820 requires that assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories: (1) Level 1 - Quoted market prices in active markets for identical assets or liabilities; (2) Level 2 - Observable market based inputs or unobservable inputs that are corroborated by market data; and (3) Level 3 - Unobservable inputs not corroborated by market data which require the reporting entity’s own assumptions. The Company’s financial instruments consist primarily of cash and equivalents, restricted cash, accounts receivable, income taxes receivable and payable, accounts payable and accrued expenses, and long-term debt. The carrying amounts of these instruments approximate their fair value due to the short maturity of these items, except for the Company’s 8.125% senior subordinated notes due October 2015 (the “Notes”). The Company determined that the fair value of the Notes at October 30, 2010 was $138.2 million based on quoted market prices, which reflect Level 1 inputs, as compared to a carrying value of $135.35 million.



Segment Information — The Company operates in one reportable segment as a specialty contractor, providing engineering, construction, maintenance and installation services to telecommunications providers, underground facility locating services to various utilities including telecommunications providers, and other construction and maintenance services to electric and gas utilities and others. All of the Company’s operating segments have been aggregated into one reporting segment due to their similar economic characteristics, products and production methods, and distribution methods. The Company’s services are provided by its various subsidiaries throughout the United States and, on a limited basis, in Canada. One of the Company’s operating segments earned revenues from contracts in Canada of approximately $1.8 million and $1.6 million during the three months ended October 30, 2010 and October 24, 2009, respectively. The Company had no material long-lived assets in the Canadian operations at October 30, 2010 or July 31, 2010.

Recently Issued Accounting Pronouncements – There have been no recently issued accounting pronouncements that are expected to have a material effect on the Company’s consolidated condensed financial statements.

2.  Computation of Earnings Per Common Share
 
Basic earnings per common share is computed based on the weighted average number of shares outstanding during the period, excluding unvested restricted share units. Diluted earnings per common share includes the weighted average common shares outstanding for the period plus dilutive potential common shares, including unvested time vesting and certain performance vesting restricted share units. Performance vesting restricted share units are only included in diluted earnings per common share calculations for the period if all the necessary performance conditions are satisfied and their impact is not anti-dilutive. Common stock equivalents related to stock options are excluded from diluted earnings per common share calculations if their effect would be anti-dilutive. The following is a reconciliation of the numerator and denominator of the basic and diluted earnings per common share computation as required by FASB ASC Topic 260.


   
For the Three Months Ended
 
   
October 30, 2010
   
October 24, 2009
 
   
(Dollars in thousands, except per share amounts)
 
             
Net income available to common stockholders (numerator)
  $ 6,747     $ 3,523  
                 
Weighted-average number of common shares (denominator)
    37,465,142       38,990,281  
                 
Basic earnings per common share
  $ 0.18     $ 0.09  
                 
Weighted-average number of common shares
    37,465,142       38,990,281  
Potential common stock arising from stock options, and unvested restricted share units
    102,804       291,325  
Total shares-diluted (denominator)
    37,567,946       39,281,606  
                 
Diluted earnings per common share
  $ 0.18     $ 0.09  
                 
Antidilutive weighed shares excluded from the calculation of earnings per share
    2,605,377       2,017,726  
 
  
 
3. Accounts Receivable
 
Accounts receivable consists of the following:


   
October 30, 2010
   
July 31, 2010
 
   
(Dollars in thousands)
 
Contract billings
  $ 111,882     $ 109,537  
Retainage and other receivables
    1,769       1,139  
Total
    113,651       110,676  
Less: allowance for doubtful accounts
    581       559  
Accounts receivable, net
  $ 113,070     $ 110,117  


 


The allowance for doubtful accounts changed as follows:


   
For the Three Months Ended
 
   
October 30, 2010
   
October 24, 2009
 
   
(Dollars in thousands)
 
Allowance for doubtful accounts at beginning of period
  $ 559     $ 808  
Bad debt expense, net
    73       24  
Amounts charged against the allowance
    (51 )     (13 )
Allowance for doubtful accounts at end of period
  $ 581     $ 819  


As of October 30, 2010, the Company expected to collect all retainage balances above within the next twelve months.


4. Costs and Estimated Earnings on Contracts in Excess of Billings
 
Costs and estimated earnings in excess of billings, net, consists of the following:


   
October 30, 2010
   
July 31, 2010
 
   
(Dollars in thousands)
 
Costs incurred on contracts in progress
  $ 52,195     $ 52,601  
Estimated to date earnings
    12,862       13,958  
Total costs and estimated earnings
    65,057       66,559  
Less: billings to date
    667       376  
    $ 64,390     $ 66,183  
                 
Included in the accompanying consolidated balance sheets under the captions:
               
Costs and estimated earnings in excess of billings
  $ 65,057     $ 66,559  
Billings in excess of costs and estimated earnings
    (667 )     (376 )
    $ 64,390     $ 66,183  
 

The above amounts include revenue for services from contracts based both on the units-of-delivery and the cost-to-cost measures of the percentage of completion method.


5. Property and Equipment
 
Property and equipment, including amounts for assets subject to capital leases, consists of the following:


   
October 30, 2010
   
July 31, 2010
 
   
(Dollars in thousands)
 
Land
  $ 3,165     $ 3,165  
Buildings
    11,669       11,630  
Leasehold improvements
    4,575       4,540  
Vehicles
    207,021       203,420  
Computer hardware and software
    53,115       52,506  
Office furniture and equipment
    5,457       5,397  
Equipment and machinery
    120,350       119,285  
Total
    405,352       399,943  
Less: accumulated depreciation
    270,678       263,915  
Property and equipment, net
  $ 134,674     $ 136,028  

 


Depreciation expense and repairs and maintenance, including amounts for assets subject to capital leases, were as follows:


   
For the Three Months Ended
 
   
October 30, 2010
   
October 24, 2009
 
   
(Dollars in thousands)
 
Depreciation expense
  $ 14,050     $ 13,576  
Repairs and maintenance expense
  $ 3,732     $ 3,915  



6. Goodwill and Intangible Assets
 
There were no changes in the carrying amount of goodwill for the three months ended October 30, 2010:


   
October 30, 2010
   
July 31, 2010
 
   
(Dollars in thousands)
 
 Goodwill
  $ 353,618     $ 353,618  
 Accumulated impairment losses
    (195,767 )     (195,767 )
    $ 157,851     $ 157,851  



The Company’s intangible assets consist of the following:


   
Useful Life
             
   
In Years
   
October 30, 2010
   
July 31, 2010
 
         
(Dollars in thousands)
 
                   
 Intangible Assets:
                 
 Carrying amount:
                 
 UtiliQuest tradename
 
Indefinite
    $ 4,700     $ 4,700  
 Tradenames
  4-15       2,600       2,600  
 Customer relationships
  5-15       76,095       76,095  
            83,395       83,395  
 Accumulated amortization:
                     
 Tradenames
          793       750  
 Customer relationships
          34,543       33,020  
            35,336       33,770  
 Net Intangible Assets
        $ 48,059     $ 49,625  
 

Amortization expense for finite-lived intangible assets for each of the three months ended October 30, 2010 and October 24, 2009 was $1.6 million. Amortization of the Company’s customer relationships is recognized on an accelerated basis related to the expected economic benefit of the intangible asset, while amortization of other finite-lived intangibles is recognized on a straight-line basis over the estimated useful life.
 
The Company’s goodwill resides in multiple reporting units. The profitability of individual reporting units may periodically suffer from downturns in customer demand and other factors resulting from the cyclical nature of the Company’s business, the high level of competition existing within the Company’s industry, the concentration of the Company’s revenues within a limited number of customers, and the level of overall economic activity. During times of economic slowdown, the Company’s customers may reduce their capital expenditures and defer or cancel pending projects. Individual reporting units may be relatively more impacted by these factors than the Company as a whole. As a result, demand for the services of one or more of the Company’s reporting units could decline resulting in an impairment of goodwill or intangible assets.
 


As of October 30, 2010, the Company believes the carrying value of its goodwill and other indefinite-lived intangible asset is recoverable; however, there can be no assurances that they will not be impaired in future periods. Certain of the Company’s reporting units also have other intangible assets including tradenames and customer relationship intangibles. As of October 30, 2010, management believes that the carrying amounts of the 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 may become impaired.


7. Accrued Insurance Claims
 
The Company retains the risk of loss, up to certain limits, for claims relating to automobile liability, general liability (including locate damages), workers’ compensation, and employee group health. With regard to losses occurring in fiscal 2011, the Company has retained 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 three states in which the Company participates in a state sponsored insurance fund. Aggregate stop loss coverage for automobile liability, general liability and workers’ compensation claims is $37.3 million for fiscal 2011. For losses under the Company's employee health plan, the Company is party to a stop-loss agreement under which it retains the risk of loss, on an annual basis, of the first $250,000 of claims per participant. The current policy was in place during fiscal 2010 and expires on December 31, 2010.
 
Accrued insurance claims consist of the following:


   
October 30, 2010
   
July 31, 2010
 
   
(Dollars in thousands)
 
Amounts expected to be paid within one year:
           
Accrued auto, general liability and workers' compensation
  $ 16,229     $ 15,596  
Accrued employee group health
    3,232       3,894  
Accrued damage claims
    9,038       8,596  
      28,499       28,086  
Amounts expected to be paid beyond one year:
               
Accrued auto, general liability and workers' compensation
    20,883       21,174  
Accrued damage claims
    3,864       3,670  
      24,747       24,844  
Total accrued insurance claims
  $ 53,246     $ 52,930  



8.  Other Accrued Liabilities
 
Other accrued liabilities consist of the following:


   
October 30, 2010
   
July 31, 2010
 
   
(Dollars in thousands)
 
Accrued payroll and related taxes
  $ 20,199     $ 18,930  
Accrued employee benefit and incentive plan costs
    2,462       5,595  
Accrued construction costs
    8,672       7,892  
Accrued interest and related bank fees
    689       3,347  
Other
    9,485       7,049  
Total other accrued liabilities
  $ 41,507     $ 42,813  





9. Debt
 
The Company’s outstanding indebtedness consists of the following:


   
October 30, 2010
   
July 31, 2010
 
   
(Dollars in thousands)
 
Senior subordinated notes
  $ 135,350     $ 135,350  
Capital leases
    -       47  
      135,350       135,397  
Less: current portion
    -       47  
Long-term debt
  $ 135,350     $ 135,350  

 
On June 4, 2010, the Company entered into a five-year $225.0 million senior secured revolving credit agreement (the “Credit Agreement”) with a syndicate of banks. The Credit Agreement has an expiration date of June 4, 2015 and provides for a maximum borrowing of $225.0 million, including a sublimit of $100.0 million for the issuance of letters of credit. Subject to certain conditions, the Credit Agreement provides for the ability to enter into one or more incremental facilities in an aggregate amount not to exceed $75.0 million, either by increasing the revolving commitments under the Credit Agreement and/or in the form of term loans.

Obligations under the Credit Agreement are guaranteed by certain subsidiaries and secured by a pledge of (i) 100% of the equity of the Company’s material domestic subsidiaries and (ii) 100% of the non-voting equity and 65% of the voting equity of first-tier material foreign subsidiaries, if any, in each case excluding certain unrestricted subsidiaries.  The Credit Agreement replaces the Company’s prior credit facility which was due to expire in September 2011. 
 
Borrowings under the Credit Agreement (other than swingline loans) bear interest at a rate equal to either (a) the administrative agent’s base rate, 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 (described in the Credit Agreement as the British Bankers Association LIBOR Rate, divided by one (1) minus a reserve percentage (as described in the Credit Agreement) plus 1.00%, or (b) the eurodollar rate, plus, in each case, an applicable margin based on the Company’s consolidated leverage ratio.  Swingline loans bear interest at a rate equal to the administrative agent’s base rate plus a margin based on the Company’s consolidated leverage ratio.  Based on the Company’s current consolidated leverage ratio, revolving borrowings would be eligible for a margin of 1.50% for borrowings based on the administrative agent’s base rate and 2.50% for borrowings based on the eurodollar rate.
 
The Company incurs a facility fee, at rates that range from 0.500% to 0.625% of the unutilized commitments depending on its leverage ratio. The Credit Agreement also requires the payment of fees for outstanding letters of credit and unutilized commitments, in each case based on the Company’s consolidated leverage ratio. Based on the Company’s current consolidated leverage ratio, fees for outstanding letters of credit and fees for unutilized commitments would be 1.250% and 0.50% per annum, respectively.
 
The Credit Agreement contains certain affirmative and negative covenants, including limitations with respect to indebtedness, liens, investments, distributions, mergers and acquisitions, dispositions of assets, sale-leaseback transactions, transactions with affiliates and capital expenditures.  The Credit Agreement contains financial covenants that require the Company to (i) maintain a consolidated leverage ratio of not greater than 3.00 to 1.00, as measured on a trailing four quarter basis at the end of each fiscal quarter and (ii) maintain a consolidated interest coverage ratio of not less than 2.75 to 1.00 for fiscal quarters ending July 31, 2010 through April 28, 2012 and not less than 3.00 to 1.00 for the fiscal quarter ending July 28, 2012 and each fiscal quarter thereafter, as measured on a trailing four quarter basis at the end of each fiscal quarter.

As of October 30, 2010 and July 31, 2010, the Company had no outstanding borrowings and $43.5 million and $44.1 million, respectively, of outstanding letters of credit issued under the Credit Agreement. The outstanding letters of credit are issued as part of the Company’s insurance program. At October 30, 2010 and July 31, 2010, the Company was in compliance with the financial covenants and had additional borrowing availability of $137.9 million and $124.1 million, respectively, as determined by the most restrictive covenants of the Credit Agreement.
 


In October 2005, Dycom Investments, Inc., a wholly-owned subsidiary of the Company, issued $150.0 million in aggregate principal amount of 8.125% senior subordinated notes due October 2015. Interest on the Notes is due on April 15th and October 15th of each year. The Company purchased $14.65 million principal amount of the Notes during fiscal 2009 for $11.3 million. As of October 30, 2010 and July 31, 2010, the principal amount outstanding under the Notes was $135.35 million. The indenture governing the Notes contains covenants that restrict the Company’s ability to, among other things:

 
make certain payments, including the payment of dividends;
     
 
redeem or repurchase its capital stock;
     
 
incur additional indebtedness and issue preferred stock;
     
 
make investments or create liens;
     
 
enter into sale and leaseback transactions;
     
 
merge or consolidate with another entity;
     
 
sell certain assets; and
     
 
enter into transactions with affiliates.


10. Income Taxes
 
The Company accounts for income taxes under the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Prior to fiscal 2009, the Company incurred non-cash impairment charges on an investment for financial statement purposes and recorded a deferred tax asset reflecting the tax benefits of those impairment charges. During the first quarter of fiscal 2010, the investment became impaired for tax purposes and the Company determined that it was more likely than not that the associated tax benefit would not be realized prior to its eventual expiration. Accordingly, the Company recognized a non-cash income tax charge of $1.1 million for a valuation allowance of the associated deferred tax asset during the first quarter of fiscal 2010.
 
As of October 30, 2010, the Company has total unrecognized tax benefits of $2.0 million, which would reduce the Company’s effective tax rate during future periods if it is subsequently determined that those liabilities are not required. The Company recognizes interest related to unrecognized tax benefits in interest expense and penalties in general and administrative expenses. The Company recognized less than $0.1 million of interest expense in the accompanying condensed consolidated statements of operations related to unrecognized tax benefits during each of the three months ended October 30, 2010 and October 24, 2009.
 
    
11. Other Income, net
 
The components of other income, net, are as follows:


   
For the Three Months Ended
 
   
October 30, 2010
   
October 24, 2009
 
   
(Dollars in thousands)
 
Gain on sale of fixed assets
  $ 1,530     $ 1,026  
Miscellaneous income
    227       79  
Total other income, net
  $ 1,757     $ 1,105  
 



12. Capital Stock
 
On February 23, 2010, the Board of Directors authorized the repurchase of up to $20.0 million of the Company’s common stock in open market or private transactions through August 2011. During the third quarter of fiscal 2010, the Company used $4.5 million to repurchase 475,602 shares of Company common stock at an average price of $9.44 per share. During the first quarter of fiscal 2011 through September 28, 2010, the Company used substantially all of the remaining $15.5 million available from the February 23, 2010 authorization to repurchase 1,786,300 shares. On September 29, 2010, the Board of Directors increased the amount authorized by an additional $20.0 million for repurchases in open market or private transactions through March 2012. From September 29, 2010 through October 30, 2010, the Company repurchased 1,453,600 shares for $15.5 million, resulting in total repurchases for the quarter ended October 30, 2010 of 3,239,900 shares for $31.0 million, an average price of $9.58 per share.  All shares repurchased were subsequently cancelled. As of October 30, 2010, approximately $4.5 million remained authorized for repurchases through March 2012.
 
                During the second quarter of fiscal 2011 through November 22, 2010, the Company repurchased 291,500 shares for approximately $3.2 million.  On November 22, 2010, the Board of Directors increased the amount authorized by $20.0 million for repurchases in open market or private transactions through May 2012 bringing the total remaining authorization to approximately $21.3 million.


13. Stock-Based Awards
 
Stock-based awards are granted by the Company under its 2003 Long-term Incentive Plan (“2003 Plan”) and the 2007 Non-Employee Directors Equity Plan (“2007 Directors Plan”, together with the 2003 Plan, “the Plans”).  The Company also has several other plans under which no further awards will be granted, including expired plans.  The Company’s policy is to issue new shares to satisfy equity awards under the Plans. Under the terms of the Plans, stock options are granted at the closing price on the date of the grant and are exercisable over a period of up to ten years.  The Plans also provide for the grants of time based restricted share units (“RSUs”), that currently vest ratably over a four year period from the date of grant.  Additionally, the 2003 Plan provides for the grants of performance based restricted share units (“Performance RSUs”).  Outstanding Performance RSUs vest over a three year period from the grant date if certain Company performance goals are achieved.
     
The following table summarizes the stock-based awards activity during the three months ended October 30, 2010:


   
Stock Options
   
RSUs
   
Performance RSUs
 
   
Shares
   
Weighted Average Exercise Price
   
Share Units
   
Weighted Average Grant Price
   
Share Units
   
Weighted Average Grant Price
 
Outstanding as of July 31, 2010
    3,519,383     $ 18.53       190,101     $ 10.95       300,090     $ 19.29  
Granted
    -     $ -       -     $ -       69,720     $ 10.60  
Options Exercised/Share Units Vested
    (2,750 )   $ 6.83       -     $ -       -     $ -  
Forfeited or cancelled
    (283,006 )   $ 42.18       (683 )   $ 24.71       (86,070 )   $ 15.49  
Outstanding as of October 30, 2010
    3,233,627     $ 16.47       189,418     $ 10.90       283,740     $ 18.31  
                                                 
Exercisable options as of October 30, 2010
    1,665,372     $ 24.32                                  


The Performance RSUs in the above table represent the maximum number of awards which may vest under the outstanding grants assuming that all performance criteria are met.  Approximately 134,000 Performance RSUs outstanding as of October 30, 2010 will be cancelled during the second quarter of fiscal 2011 related to fiscal 2010 performance criteria not being met.
 
Compensation expense for stock-based awards is based on the fair value at the measurement date and is included in general and administrative expenses in the condensed consolidated statements of operations. The compensation expense and the related tax benefit recognized related to stock options and restricted share units for the three months ended October 30, 2010 and October 24, 2009 are as follows:


   
For the Three Months Ended
 
   
October 30, 2010
   
October 24, 2009
 
   
(Dollars in thousands)
 
Stock-based compensation expense
  $ 791     $ 971  
Tax benefit recognized
  $ (166 )   $ (314 )





     
The Company evaluates compensation expense quarterly and recognizes expense for performance based awards only if management determines it is probable that the performance criteria for the awards will be met.  The total amount of expense ultimately recognized is based on the number of awards that actually vest.  Accordingly, the amount of compensation expense recognized during current and prior periods may not be representative of future stock-based compensation expense.
 
Under the Plans, the maximum total unrecognized compensation expense and weighted-average period over which the expense would be recognized subsequent to October 30, 2010 is shown below. For performance based awards, the unrecognized compensation cost is based upon the maximum amount of restricted share units that can be earned under outstanding awards. If the performance goals are not met, no compensation expense will be recognized for these share units and compensation expense previously recognized will be reversed.


   
Unrecognized Compensation Expense
   
Weighted-Average Period
 
   
(In thousands)
   
(In years)
 
             
Stock options
  $ 5,549     2.8  
Unvested RSUs
  $ 1,178     2.3  
Unvested Performance RSUs
  $ 1,569     0.4  
 


14. Related Party Transactions
 
The Company leases administrative offices from entities related to officers of the Company’s subsidiaries.  The total expense under these arrangements was $0.3 million for each of the three months ended October 30, 2010 and October 24, 2009, respectively.


15. Commitments and Contingencies

In October 2010, Prince Telecom, LLC (“Prince”), a wholly-owned subsidiary of the Company, was named as a defendant in a lawsuit in the U.S. District Court for the District of Oregon.  The plaintiffs, three former employees of Prince, alleged various wage and hour claims, including that employees were not paid for all hours worked and were subject to improper wage deductions. Plaintiffs sought to certify as a class current and former employees of the subsidiary who worked in the State of Oregon.  In October 2010, the plaintiffs’ attorneys and Prince entered into a memorandum of understanding pursuant to which the parties agreed to the terms of a proposed settlement with respect to the lawsuit.  Approval of the proposed settlement by the Court is currently pending.  As of October 30, 2010, approximately $0.5 million was included in other accrued liabilities with respect to the terms of the proposed settlement.

In September 2010, two former employees of Broadband Express, LLC (“BBX”), a wholly-owned subsidiary of the Company, commenced a lawsuit against BBX in the U.S. District Court for the Southern District of Florida. The lawsuit alleges that BBX violated the Fair Labor Standards Act by failing to comply with applicable overtime pay requirements. The plaintiffs seek unspecified damages and other relief on behalf of themselves and a putative class of similarly situated current and former employees of BBX.  It is too early to evaluate the likelihood of an outcome to this matter or estimate the amount or range of potential loss, if any.  The Company intends to vigorously defend itself against this lawsuit.

In June 2010, a former employee of Prince commenced a lawsuit against Prince, the Company and certain unnamed U.S. affiliates of Prince and the Company (the “Affiliates”) in the U.S. District Court for the Southern District of New York. The lawsuit alleges that Prince, the Company and the Affiliates violated the Fair Labor Standards Act by failing to comply with applicable overtime pay requirements. The plaintiff seeks unspecified damages and other relief on behalf of himself and a putative class of similarly situated current and former employees of Prince, the Company and/or the Affiliates.  It is too early to evaluate the likelihood of an outcome to this matter or estimate the amount or range of potential loss, if any.  The Company intends to vigorously defend itself against this lawsuit.


In May 2009, the Company and Prince were named as defendants in a lawsuit in the U.S. District Court for the Western District of Washington. The plaintiffs, all former employees of the subsidiary, alleged various wage and hour claims, including that employees were not paid for all hours worked and were subject to improper wage deductions. Plaintiffs sought to certify as a class current and former employees of the subsidiary who worked in the State of Washington. The Company estimated the liability of the proposed settlement at $2.0 million and recorded a pre-tax charge for this amount during the quarter ended October 24, 2009. In November 2009, the plaintiffs’ attorneys, the Company and the subsidiary entered into a memorandum of understanding pursuant to which the parties agreed to the terms of a proposed settlement with respect to the lawsuit.  In January 2010, the Court granted preliminary approval of the proposed settlement. Notice of the terms of the proposed settlement and claim forms were mailed to members of the plaintiffs’ class in February 2010. The Court held a hearing regarding the plaintiffs’ Motion for Final Approval of the Class Action Settlement in April 2010, at which time it entered an Order approving the settlement and dismissed the action with prejudice subject to final administration of the terms of the settlement.  Excluding legal expenses of the Company, approximately $1.6 million was incurred pursuant to the settlement and was paid in June 2010.
 
From time to time, the Company and its subsidiaries are also party to various other claims and legal proceedings. Additionally, as part of the Company’s insurance program, the Company retains the risk of loss, up to certain limits, for claims related to automobile liability, general liability, workers’ compensation, employee group health, and locate damages. For these claims, the effect on the Company’s financial statements is generally limited to the amount of the Company’s insurance deductible or insurance retention. It is the opinion of the Company’s management, based on information available at this time, that none of such other pending claims or proceedings will have a material effect on its condensed consolidated financial statements.
 
Performance Bonds and Guarantees
 
The Company has obligations under performance and other surety bonds related to certain of its customer contracts. Performance bonds generally provide the Company’s 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 30, 2010, the Company had $75.8 million of outstanding performance and other surety bonds and no events have occurred in which the customers have exercised their rights under the bonds.
 
The Company has periodically guaranteed certain obligations of its subsidiaries, including obligations in connection with obtaining state contractor licenses and leasing real property.

Letters of Credit

The Company has letters of credit issued under its Credit Agreement as part of its insurance program. As of October 30, 2010, the Company had $43.5 million outstanding letters of credit issued under the Credit Agreement.


16. Concentration of Credit Risk
 

The Company’s customer base is concentrated, with the top five customers accounting for approximately 62.0% and 65.5% for the three month periods ended October 30, 2010 and October 24, 2009, respectively. AT&T Inc. (“AT&T”), Comcast Corporation (“Comcast”), and Verizon Communications Inc. (“Verizon”) represent a significant portion of the Company’s customer base and were over 10% or more of total revenue for the three months ended October 30, 2010 or October 24, 2009 as follows:


 
For the Three Months Ended
 
October 30, 2010
 
October 24, 2009
AT&T
23.2%
 
18.2%
Comcast
15.6%
 
15.7%
Verizon
8.0%
 
14.7%


 


    The Company believes that none of its significant customers were experiencing financial difficulties that would impact the collectability of the Company’s trade accounts receivable and costs in excess of billings as of October 30, 2010. Customers representing 10% or more of revenue had the following combined amounts of trade accounts receivable and costs and estimated earnings in excess of billings outstanding and the related percentage of the Company’s total outstanding balances:
 
 
   
October 30, 2010
   
July 31, 2010
 
   
Amount
   
% of Total
   
Amount
 
% of Total
 
         
(Dollars in millions)
     
AT&T
  $ 33.4     18.7 %   $ 30.9   17.4 %
Comcast
  $ 21.7     12.1 %   $ 19.6   11.1 %
Verizon
  $ 20.5     11.5 %   $ 22.4   12.7 %


 
17. Supplemental Consolidating Financial Statements
 
As of October 30, 2010, the principal amount outstanding of the Company’s Notes was $135.35 million. The Notes were issued in fiscal 2006 by Dycom Investments, Inc. (“Issuer”), a wholly-owned subsidiary of the Company. The following consolidating financial statements present, in separate columns, financial information for (i) Dycom Industries, Inc. (“Parent”) on a parent only basis, (ii) the Issuer, (iii) the guarantor subsidiaries for the Notes on a combined basis, (iv) other non-guarantor subsidiaries on a combined basis, (v) the eliminations and reclassifications necessary to arrive at the information for the Company on a consolidated basis, and (vi) the Company on a consolidated basis. The consolidating financial statements are presented in accordance with the equity method. Under this method, the investments in subsidiaries are recorded at cost and adjusted for the Company’s share of subsidiaries’ cumulative results of operations, capital contributions, distributions and other equity changes. Intercompany charges (income) between the Parent and subsidiaries are recognized in the consolidating financial statements during the period incurred and the settlement of intercompany balances is reflected in the consolidating statement of cash flows based on the nature of the underlying transactions.
 
Each guarantor and non-guarantor subsidiary is wholly-owned, directly or indirectly, by the Issuer and the Parent. The Notes are fully and unconditionally guaranteed on a joint and several basis by each guarantor subsidiary and Parent. There are no contractual restrictions limiting transfers of cash from guarantor and non-guarantor subsidiaries to Issuer or Parent, within the meaning of Rule 3-10 of Regulation S-X.





DYCOM INDUSTRIES, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
 
OCTOBER 30, 2010
 
                                     
   
Parent
   
Issuer
   
Subsidiary Guarantors
   
Non-Guarantor Subsidiaries
   
Eliminations and Reclassifications
   
Dycom Consolidated
 
       (Dollars in thousands)  
ASSETS
                                   
CURRENT ASSETS:
                                   
Cash and equivalents
  $ -     $ -     $ 79,624     $ 336     $ -       79,960  
Accounts receivable, net
    -       -       111,911       1,159       -       113,070  
Costs and estimated earnings in excess of billings
    -       -       64,325       732       -       65,057  
Deferred tax assets, net
    1,055       -       13,953       67       (138 )     14,937  
Income taxes receivable
    1,067       -       -       -       -       1,067  
Inventories
    -       -       15,041       98       -       15,139  
Other current assets
    5,780       -       5,339       732       -       11,851  
Total current assets
    7,902       -       290,193       3,124       (138 )     301,081  
                                                 
PROPERTY AND EQUIPMENT, NET
    9,671       -       105,406       20,171       (574 )     134,674  
GOODWILL
    -       -       157,851       -       -       157,851  
INTANGIBLE ASSETS, NET
    -       -       48,059       -       -       48,059  
INVESTMENT IN SUBSIDIARIES
    685,712       1,267,420       -       -       (1,953,132 )     -  
INTERCOMPANY RECEIVABLES
    -       -       778,920       -       (778,920 )     -  
OTHER
    7,336       2,428       2,263       454       -       12,481  
TOTAL NON-CURRENT ASSETS
    702,719       1,269,848       1,092,499       20,625       (2,732,626 )     353,065  
TOTAL
  $ 710,621     $ 1,269,848     $ 1,382,692     $ 23,749     $ (2,732,764 )   $ 654,146  
                                                 
LIABILITIES AND STOCKHOLDERS' EQUITY
                                               
                                                 
CURRENT LIABILITIES:
                                               
Accounts payable
  $ 155     $ -     $ 23,456     $ 465     $ -     $ 24,076  
Billings in excess of costs and estimated earnings
    -       -       667               -       667  
Accrued insurance claims
    604       -       27,811       84       -       28,499  
Deferred tax liabilities
    -       138       -       -       (138 )     -  
Other accrued liabilities
    5,033       624       34,757       1,093       -       41,507  
Total current liabilities
    5,792       762       86,691       1,642       (138 )     94,749  
                                                 
LONG-TERM DEBT
    -       135,350       -       -       -       135,350  
ACCRUED INSURANCE CLAIMS
    725       -       23,961       61       -       24,747  
DEFERRED TAX LIABILITIES, NET NON-CURRENT
    1,082       341       20,113       3,166       -       24,702  
INTERCOMPANY PAYABLES
    329,309       447,683       -       1,940       (778,932 )     -  
OTHER LIABILITIES
    2,622       -       879       6       -       3,507  
Total liabilities
    339,530       584,136       131,644       6,815       (779,070 )     283,055  
Total stockholders' equity
    371,091       685,712       1,251,048       16,934       (1,953,694 )     371,091  
TOTAL
  $ 710,621     $ 1,269,848     $ 1,382,692     $ 23,749     $ (2,732,764 )   $ 654,146  
                                                 



DYCOM INDUSTRIES, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEET
 
JULY 31, 2010
 
                                     
   
Parent
   
Issuer
   
Subsidiary Guarantors
   
Non-Guarantor Subsidiaries
   
Eliminations and Reclassifications
   
Dycom Consolidated
 
   
(Dollars in thousands)
 
ASSETS
                                   
CURRENT ASSETS:
                                   
Cash and equivalents
  $ -     $ -     $ 102,858     $ 462     $ -     $ 103,320  
Accounts receivable, net
    -       -       109,141       976       -       110,117  
Costs and estimated earnings in excess of billings
    -       -       66,180       379       -       66,559  
Deferred tax assets, net
    1,056       -       13,959       67       (138 )     14,944  
Income taxes receivable
    3,626       -       -       -       -       3,626  
Inventories
    -       -       15,958       100       -       16,058  
Other current assets
    2,395       9       4,761       972       -       8,137  
Total current assets
    7,077       9       312,857       2,956       (138 )     322,761  
                                                 
PROPERTY AND EQUIPMENT, NET
    10,379       -       106,069       20,165       (585 )     136,028  
GOODWILL
    -       -       157,851       -       -       157,851  
INTANGIBLE ASSETS, NET
    -       -       49,625       -       -       49,625  
DEFERRED TAX ASSETS, NET NON-CURRENT
    -       -       13,267       -       (13,267 )     -  
INVESTMENT IN SUBSIDIARIES
    678,966       1,256,518       -       -       (1,935,484 )     -  
INTERCOMPANY RECEIVABLES
    -       -       744,064       -       (744,064 )     -  
OTHER
    7,461       2,527       2,812       491       -       13,291  
TOTAL NON-CURRENT ASSETS
    696,806       1,259,045       1,073,688       20,656       (2,693,400 )     356,795  
TOTAL
  $ 703,883     $ 1,259,054     $ 1,386,545     $ 23,612     $ (2,693,538 )   $ 679,556  
                                                 
LIABILITIES AND STOCKHOLDERS' EQUITY
                                               
                                                 
CURRENT LIABILITIES:
                                               
Accounts payable
  $ 137     $ -     $ 25,548     $ 196     $ -     $ 25,881  
Current portion of debt
    -       -       47       -       -       47  
Billings in excess of costs and estimated earnings
    -       -       376       -       -       376  
Accrued insurance claims
    615       -       27,395       76       -       28,086  
Deferred tax liabilities
    -       138       -       -       (138 )     -  
Other accrued liabilities
    3,317       3,255       34,565       1,676       -       42,813  
Total current liabilities
    4,069       3,393       87,931       1,948       (138 )     97,203  
                                                 
LONG-TERM DEBT
    -       135,350       -       -       -       135,350  
ACCRUED INSURANCE CLAIMS
    739       -       24,046       59       -       24,844  
DEFERRED TAX LIABILITIES, NET NON-CURRENT
    1,059       333       32,938       3,096       (13,267 )     24,159  
INTERCOMPANY PAYABLES
    300,875       441,012       -       2,189       (744,076 )     -  
OTHER LIABILITIES
    2,586       -       853       6       -       3,445  
Total liabilities
    309,328       580,088       145,768       7,298       (757,481 )     285,001  
Total stockholders' equity
    394,555       678,966       1,240,777       16,314       (1,936,057 )     394,555  
TOTAL
  $ 703,883     $ 1,259,054     $ 1,386,545     $ 23,612     $ (2,693,538 )   $ 679,556  




DYCOM INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED OCTOBER 30, 2010
                                     
   
Parent
   
Issuer
   
Subsidiary Guarantors
   
Non-Guarantor Subsidiaries
   
Eliminations and Reclassifications
   
Dycom Consolidated
 
     (Dollars in thousands)  
REVENUES:
                                   
Contract revenues
  $ -     $ -     $ 259,168     $ 2,416     $ -     $ 261,584  
                                                 
EXPENSES:
                                               
Costs of earned revenues, excluding depreciation and amortization
    -       -       207,107       2,215        </