Document


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 January 28, 2017
¨
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.)
 
 
 
11780 US Highway 1, Suite 600, Palm Beach Gardens, FL
 
33408
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code: (561) 627-7171

 
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 x 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 x
Accelerated filer ¨
Non-accelerated filer ¨
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 31,421,972 shares of common stock with a par value of $0.33 1/3 outstanding at February 28, 2017.
 




Dycom Industries, Inc.
Table of Contents
 
 
 
PART I - FINANCIAL INFORMATION
 
 
 
 
 
 
PART II - OTHER INFORMATION
 
 
 
 
 
 
SIGNATURES
 


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Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.
DYCOM INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
 
January 28, 2017
 
July 30, 2016
ASSETS
 
 
 
 Current assets:
 
 
 
 Cash and equivalents
$
29,491

 
$
33,787

 Accounts receivable, net
308,867

 
328,030

 Costs and estimated earnings in excess of billings
397,048

 
376,972

 Inventories
84,535

 
73,606

 Deferred tax assets, net
20,886

 
22,733

 Income tax receivable
26,639

 

 Other current assets
20,863

 
16,106

 Total current assets
888,329

 
851,234

 
 
 
 
 Property and equipment, net
344,120

 
326,670

 Goodwill
312,658

 
310,157

 Intangible assets, net
185,568

 
197,879

 Other
35,768

 
33,776

 Total non-current assets
878,114

 
868,482

 Total assets
$
1,766,443

 
$
1,719,716

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

 Current liabilities:
 

 
 

 Accounts payable
$
99,318

 
$
115,492

 Current portion of debt
18,813

 
13,125

 Billings in excess of costs and estimated earnings
18,004

 
19,557

 Accrued insurance claims
39,428

 
36,844

 Income taxes payable
452

 
15,307

 Other accrued liabilities
87,137

 
122,302

 Total current liabilities
263,152

 
322,627

 
 
 
 
 Long-term debt
740,575

 
706,202

 Accrued insurance claims
59,693

 
52,835

 Deferred tax liabilities, net non-current
83,352

 
76,587

 Other liabilities
4,599

 
4,178

 Total liabilities
1,151,371

 
1,162,429

 
 
 
 
 COMMITMENTS AND CONTINGENCIES, Note 16


 


 
 
 
 
 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: 31,420,593 and 31,420,310 issued and outstanding, respectively
10,474

 
10,473

 Additional paid-in capital
5,332

 
10,208

 Accumulated other comprehensive loss
(1,254
)
 
(1,274
)
 Retained earnings
600,520

 
537,880

 Total stockholders’ equity
615,072

 
557,287

 Total liabilities and stockholders’ equity
$
1,766,443

 
$
1,719,716

 
 
 
 
See notes to the condensed consolidated financial statements.

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Table of Contents

DYCOM INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share amounts)
(Unaudited)
 
For the Three Months Ended
 
January 28, 2017
 
January 23, 2016
 REVENUES:
 
 
 
 Contract revenues
$
701,131

 
$
559,470

 
 
 
 
 EXPENSES:
 
 
 
 Costs of earned revenues, excluding depreciation and amortization
561,371

 
450,284

 General and administrative (including stock-based compensation expense of $5.3 million and $4.2 million, respectively)
58,191

 
47,020

 Depreciation and amortization
35,705

 
29,898

 Total
655,267

 
527,202

 
 
 
 
 Interest expense, net
(9,181
)
 
(7,872
)
 Other income, net
1,006

 
1,072

 Income before income taxes
37,689

 
25,468

 
 
 
 
 Provision (benefit) for income taxes:
 
 
 
 Current
6,952

 
(17,418
)
 Deferred
7,074

 
27,413

 Total provision for income taxes
14,026

 
9,995

 
 
 
 
 Net income
$
23,663

 
$
15,473

 
 
 
 
 Earnings per common share:
 
 
 
 Basic earnings per common share
$
0.75

 
$
0.47

 
 
 
 
 Diluted earnings per common share
$
0.74

 
$
0.46

 
 
 
 
 Shares used in computing earnings per common share:
 
 
 
Basic
31,531,834

 
32,662,942

 
 
 
 
Diluted
32,161,566

 
33,520,136

 
 
 
 
See notes to the condensed consolidated financial statements.

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DYCOM INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share amounts)
(Unaudited)
 
For the Six Months Ended
 
January 28, 2017
 
January 23, 2016
 REVENUES:
 
 
 
 Contract revenues
$
1,500,355

 
$
1,218,738

 
 
 
 
 EXPENSES:
 
 
 
 Costs of earned revenues, excluding depreciation and amortization
1,176,361

 
957,263

 General and administrative (including stock-based compensation expense of $11.0 million and $8.7 million, respectively)
118,395

 
98,484

 Depreciation and amortization
70,252

 
57,347

 Total
1,365,008

 
1,113,094

 
 
 
 
 Interest expense, net
(18,248
)
 
(17,003
)
 Loss on debt extinguishment

 
(16,260
)
 Other income, net
1,946

 
2,542

 Income before income taxes
119,045

 
74,923

 
 
 
 
 Provision for income taxes:
 
 
 
 Current
35,645

 
5,184

 Deferred
8,687

 
23,442

 Total provision for income taxes
44,332

 
28,626

 
 
 
 
 Net income
$
74,713

 
$
46,297

 
 
 
 
 Earnings per common share:
 
 
 
 Basic earnings per common share
$
2.37

 
$
1.41

 
 
 
 
 Diluted earnings per common share
$
2.32

 
$
1.37

 
 
 
 
 Shares used in computing earnings per common share:
 
 
 
Basic
31,480,660

 
32,767,088

 
 
 
 
Diluted
32,180,923

 
33,703,438

 
 
 
 
See notes to the condensed consolidated financial statements.


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Table of Contents

DYCOM INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)
 
For the Three Months Ended
 
For the Six Months Ended
 
January 28, 2017
 
January 23, 2016
 
January 28, 2017
 
January 23, 2016
 Net income
$
23,663

 
$
15,473

 
$
74,713

 
$
46,297

 Foreign currency translation gains (losses), net of tax
46

 
(316
)
 
20

 
(357
)
 Comprehensive income
$
23,709

 
$
15,157

 
$
74,733

 
$
45,940

 
 
 
 
 
 
 
 
See notes to the condensed consolidated financial statements.


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DYCOM INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 
For the Six Months Ended
 
January 28, 2017
 
January 23, 2016
OPERATING ACTIVITIES:
 
 
 
Net income
$
74,713

 
$
46,297

Adjustments to reconcile net income to net cash provided by operating activities, net of acquisitions:
 
 
 
Depreciation and amortization
70,252

 
57,347

Deferred income tax provision
8,687

 
23,442

Stock-based compensation
11,015

 
8,708

Bad debt expense, net
141

 
471

Gain on sale of fixed assets
(3,172
)
 
(2,152
)
Write-off of deferred financing fees and premium on long-term debt

 
2,017

Amortization of debt discount
8,686

 
5,928

Amortization of debt issuance costs and other
1,634

 
1,285

Excess tax benefit from share-based awards
(6,773
)
 
(11,323
)
Change in operating assets and liabilities:
 
 
 
Accounts receivable, net
19,108

 
7,797

Costs and estimated earnings in excess of billings, net
(30,369
)
 
(18,221
)
Other current assets and inventory
(17,659
)
 
(9,194
)
Other assets
753

 
(3,827
)
Income taxes receivable/payable
(33,341
)
 
(24,438
)
Accounts payable
(14,694
)
 
(15,299
)
Accrued liabilities, insurance claims, and other liabilities
(24,790
)
 
(22,309
)
Net cash provided by operating activities
64,191

 
46,529

 
 
 
 
INVESTING ACTIVITIES:
 
 
 
Capital expenditures
(76,874
)
 
(90,878
)
Proceeds from sale of assets
4,334

 
2,748

Changes in restricted cash
(363
)
 
(479
)
Cash paid for acquisitions, net of cash acquired

 
(48,804
)
Proceeds from acquisition working capital adjustment
1,825

 

Net cash used in investing activities
(71,078
)
 
(137,413
)
 
 
 
 
FINANCING ACTIVITIES:
 
 
 
Proceeds from borrowings on senior credit agreement, including term loans
432,000

 
449,000

Principal payments on senior credit agreement, including term loans
(401,375
)
 
(441,000
)
Repurchases of common stock
(25,000
)
 
(69,997
)
Proceeds from issuance of 0.75% convertible senior notes due 2021

 
485,000

Proceeds from sale of warrants

 
74,690

Purchase of convertible note hedges

 
(115,818
)
Principal payments for satisfaction and discharge of 7.125% senior subordinated notes

 
(277,500
)
Debt issuance costs
(70
)
 
(15,542
)
Exercise of stock options
488

 
1,751

Restricted stock tax withholdings
(10,225
)
 
(12,146
)
Excess tax benefit from share-based awards
6,773

 
11,323

Net cash provided by financing activities
2,591

 
89,761

Net decrease in cash and equivalents
(4,296
)
 
(1,123
)
 
 
 
 
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD
33,787

 
21,289

 
 
 
 
CASH AND EQUIVALENTS AT END OF PERIOD
$
29,491

 
$
20,166

 
 
 
 

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DYCOM INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
(Unaudited)
 
For the Six Months Ended
 
January 28, 2017
 
January 23, 2016
SUPPLEMENTAL DISCLOSURE OF OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND FINANCING ACTIVITIES:
 

 
 

Cash paid for interest
$
8,108

 
$
8,927

Cash paid for taxes, net
$
69,539

 
$
30,198

Purchases of capital assets included in accounts payable or other accrued liabilities at period end
$
6,302

 
$
8,310

 
 
 
 
See notes to the condensed consolidated financial statements.


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Table of Contents


NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation and Accounting Policies

Basis of Presentation

Dycom Industries, Inc. (“Dycom” or the “Company”) is a leading provider of specialty contracting services throughout the United States and in Canada. The Company provides program management, engineering, construction, maintenance and installation services for telecommunications providers, underground facility locating services for various utilities, including telecommunications providers, and other construction and maintenance services for electric and gas utilities.

The accompanying unaudited condensed consolidated financial statements include the results of Dycom and its subsidiaries, all of which are wholly-owned. All intercompany accounts and transactions have been eliminated. In the opinion of management, all adjustments (consisting of normal and recurring adjustments) considered necessary for a fair statement of the results for the interim periods presented have been included. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. Operating results for the interim period are not necessarily indicative of the results expected for any other interim period or for the full fiscal year. These condensed consolidated financial statements and accompanying notes should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in this report and the Company’s audited financial statements for the year ended July 30, 2016 included in the Company’s Annual Report on Form 10-K for the year ended July 30, 2016, filed with the SEC on August 31, 2016.

Segment Information – The Company operates in one reportable segment. Its services are provided by its operating segments on a decentralized basis. Each operating segment consists of a subsidiary (or in certain instances, the combination of two or more subsidiaries). Management of the operating segments report to the Company’s Chief Operating Officer who reports to the Chief Executive Officer, the chief operating decision maker. All of the Company’s operating segments have been aggregated into one reportable segment based on their similar economic characteristics, nature of services and production processes, type of customers, and service distribution methods. The Company’s operating segments provide services throughout the United States and in Canada. Revenues from services provided in Canada were not material during the three or six months ended January 28, 2017 and January 23, 2016. Additionally, the Company had no material long-lived assets in Canada as of January 28, 2017 or July 30, 2016.

Accounting Period – The Company’s fiscal year ends on the last Saturday in July. As a result, each fiscal year consists of either 52 weeks or 53 weeks of operations (with the additional week of operations occurring in the fourth quarter). Fiscal 2016 consisted of 53 weeks of operations and fiscal 2017 will consist of 52 weeks of operations.

Significant Accounting Policies & Estimates

Use of Estimates – The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the amounts reported in these condensed consolidated financial statements and accompanying notes. These estimates are based on the Company’s historical experience and management’s understanding of current facts and circumstances. At the time they are made, the Company believes that such estimates are fair when considered in conjunction with the consolidated financial position and results of operations taken as a whole. However, actual results could differ materially from those estimates. There have been no material changes to the Company’s significant accounting policies and critical accounting estimates described in the Company’s Annual Report on Form 10-K for the year ended July 30, 2016.

Revenue Recognition – The Company performs a majority of its services under master service agreements and other agreements that contain customer-specified service requirements, such as discrete pricing for individual tasks. Revenue is recognized under these arrangements based on units-of-delivery as each unit is completed. The remainder of the Company’s services, representing less than 5% of its contract revenues during the six months ended January 28, 2017, and less than 10% of its contract revenues during the six months ended January 23, 2016, are performed under contracts using the cost-to-cost measure of the percentage of completion method of accounting. Revenue is recognized under these arrangements based on the ratio of contract costs incurred to date to total estimated contract costs. For contracts using the cost-to-cost measure of the percentage of completion method of accounting, the Company accrues the entire amount of a contract loss at the time the loss is determined to be probable and can be reasonably estimated. During the six months ended January 28, 2017 and January 23, 2016, there were no material impacts to the Company’s results of operations due to changes in contract estimates.

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There were no material amounts of unapproved change orders or claims recognized during the six months ended January 28, 2017 or January 23, 2016. The current asset “Costs and estimated earnings in excess of billings” represents revenues recognized in excess of amounts billed. The current liability “Billings in excess of costs and estimated earnings” represents billings in excess of revenues recognized.

Goodwill and Intangible Assets The Company accounts for goodwill and other intangibles in accordance with ASC Topic 350, Intangibles - Goodwill and Other (“ASC Topic 350”). Goodwill and other indefinite-lived intangible assets are assessed annually for impairment as of the first day of the fourth fiscal quarter of each year, or more frequently if events occur that would indicate a potential reduction in the fair value of a reporting unit below its carrying value. The Company performs its annual impairment review of goodwill at the reporting unit level. Each of the Company’s operating segments with goodwill represents a reporting unit for the purpose of assessing impairment. If the Company determines the fair value of the reporting unit’s goodwill or other indefinite-lived intangible assets is less than their carrying value as a result of the tests, an impairment loss is recognized and reflected in operating income or loss in the consolidated statements of operations during the period incurred.

In accordance with ASC Topic 360, Impairment or Disposal of Long-Lived Assets, the Company reviews finite-lived intangible assets for impairment whenever an event occurs or circumstances change that indicates that the carrying amount of such assets may not be fully recoverable. Recoverability is determined based on an estimate of undiscounted future cash flows resulting from the use of an asset and its eventual disposition. Should an asset not be recoverable, an impairment loss is measured by comparing the fair value of the asset to its carrying value. If the Company determines the fair value of an asset is less than the carrying value, an impairment loss is recognized in operating income or loss in the consolidated statements of operations during the period incurred.

The Company uses judgment in assessing whether goodwill and intangible assets are impaired. Estimates of fair value are based on the Company’s projection of revenues, operating costs, and cash flows taking into consideration historical and anticipated future results, general economic and market conditions, as well as the impact of planned business or operational strategies. The Company determines the fair value of its reporting units using a weighting of fair values derived equally from the income approach and the market approach valuation methodologies. The income approach uses the discounted cash flow method and the market approach uses the guideline company method. Changes in the Company’s judgments and projections could result in significantly different estimates of fair value, potentially resulting in impairments of goodwill and other intangible assets. The inputs used for fair value measurements of the reporting units and other related indefinite-lived intangible assets are the lowest level (Level 3) inputs. See Note 7, Goodwill and Intangible Assets, for additional information regarding the Company’s annual assessment of goodwill and other indefinite-lived intangible assets and additional disclosure regarding recently acquired operations.

Other Assets As of January 28, 2017 and July 30, 2016, other non-current assets consist of deferred financing costs related to the Company’s revolving credit facility of $5.6 million and $6.4 million, respectively, insurance recoveries/receivables related to accrued claims of $8.9 million and $5.7 million, respectively, as well as other long-term deposits, prepaid discounts, and other non-current assets totaling $11.8 million and $12.7 million, respectively. Additionally, other non-current assets include $5.4 million and $5.0 million of restricted cash held as collateral in support of the Company’s insurance obligations as of January 28, 2017 and July 30, 2016, respectively. Changes in restricted cash are reported in cash flows used in investing activities in the condensed consolidated statements of cash flows. As of January 28, 2017 and July 30, 2016, other non-current assets also included $4.0 million for an investment in nonvoting senior units of a former customer, which is accounted for using the cost method.

Fair Value of Financial Instruments – The Company’s financial instruments primarily consist of cash and equivalents, restricted cash, accounts receivable, income taxes receivable and payable, accounts payable, certain accrued expenses, and long-term debt. The carrying amounts of these items approximate fair value due to their short maturity, except for certain of the Company’s outstanding long-term debt which is based on observable market-based inputs (Level 2). See Note 10, Debt, for further information regarding the fair value of such financial instruments. The Company’s cash and equivalents are based on quoted market prices in active markets for identical assets (Level 1) as of January 28, 2017 and July 30, 2016. During the six months ended January 28, 2017 and January 23, 2016, the Company had no material nonrecurring fair value measurements of assets or liabilities subsequent to their initial recognition.
 
Recently Issued Accounting Pronouncements

There have been no changes in the expected dates of adoption or estimated effects on the Company’s consolidated financial statements of recently issued accounting pronouncements from those disclosed in the Company’s Annual Report on Form 10-K

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for the year ended July 30, 2016 filed with the SEC on August 31, 2016. Accounting standards adopted during the period covered in this Quarterly Report on Form 10-Q and recently issued accounting pronouncements are discussed below.
Recently Adopted Accounting Standards

Business Combinations - In September 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments (“ASU 2015-16”). ASU 2015-16 replaces the requirement for an acquirer in a business combination to retrospectively adjust provisional amounts recognized at the acquisition date with a corresponding adjustment to goodwill when measurement period adjustments are identified. The new guidance requires an acquirer to recognize adjustments in the reporting period in which the adjustment amounts are determined. The acquirer must record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. Additionally, the acquirer must present separately on the face of the income statement, or disclose in the notes, the portion of the amount recorded in current period earnings by line item that would have been recorded in previous reporting periods if the adjustments had been recognized as of the acquisition date. The Company adopted ASU 2015-16 during the first quarter of fiscal 2017 and it did not have a material effect on the Company’s consolidated financial statements.
Accounting Standards Not Yet Adopted

Goodwill - In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment testing. An entity will no longer determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Instead, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU 2017-04 will be effective for the Company in fiscal 2021 and interim reporting periods within that year. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company expects the adoption of this guidance will not have a material effect on the Company’s consolidated financial statements.

Business Combinations - In January 2017, the FASB issued Accounting Standards Update No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”). The amendments in this update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. ASU 2017-01 will be effective for the Company in fiscal 2019 and interim reporting periods within that year. Early adoption is permitted for transactions that have not been reported in financial statements that have been issued or made available for issuance. The Company expects the adoption of this guidance will not have a material effect on the Company’s consolidated financial statements.

Revenue Recognition - In December 2016, the FASB issued Accounting Standards Update No. 2016-20, Technical Corrections and Improvements to Topic 606: Revenue from Contracts with Customers (“ASU 2016-20”). The amendments in this update affect certain aspects of the guidance issued in ASU 2014-09, including impairment testing of contract costs, contract loss provisions, and performance obligation disclosure. ASU 2016-08, 2016-10, ASU 2016-12, and 2016-20 must be adopted concurrently with ASU 2014-09. ASU 2014-09 will be effective for the Company beginning in fiscal 2019 and interim reporting periods within that year, using either the retrospective or cumulative effect transition method. The Company is currently evaluating the transition methods and the effect of the adoption of this guidance on the Company’s consolidated financial statements.

Restricted Cash - In November 2016, the FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”). ASU 2016-18 is intended to reduce the diversity in practice regarding the classification and presentation of changes in restricted cash within the statement of cash flows. The amendments in this update require that amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 will be effective for the Company in fiscal 2019 and interim reporting periods within that year. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company expects the adoption of this guidance will not have a material effect on the Company’s consolidated financial statements.

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Income Taxes - In October 2016, the FASB issued Accounting Standards Update No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”). ASU 2016-16 amends the current GAAP prohibition of recognizing current and deferred income taxes for intra-entity asset transfers until the asset has been sold to an outside party. The update requires an entity to recognize the income tax consequences of an intra-entity transfer for assets other than inventory when the transfer occurs. ASU 2016-16 will be effective for the Company in fiscal 2019 and interim reporting periods within that year. Early adoption is permitted as of the beginning of an interim or annual reporting period. The Company expects the adoption of this guidance will not have a material effect on the Company’s consolidated financial statements.

Statement of Cash Flows - In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”)ASU 2016-15 is intended to reduce the diversity in practice regarding the classification of certain transactions within the statement of cash flows. ASU 2016-15 will be effective for the Company in fiscal 2019 and interim reporting periods within that year. Early adoption is permitted as of the beginning of an interim or annual reporting period. The Company expects the adoption of this guidance will not have a material effect on the Company’s consolidated financial statements.

2. Computation of Earnings per Common Share

The following table sets forth the computation of basic and diluted earnings per common share (dollars in thousands, except per share amounts):
 
 
For the Three Months Ended
 
For the Six Months Ended
 
 
January 28, 2017
 
January 23, 2016
 
January 28, 2017
 
January 23, 2016
Net income available to common stockholders (numerator)
 
$
23,663

 
$
15,473

 
$
74,713

 
$
46,297

 
 
 
 
 
 
 
 
 
Weighted-average number of common shares (denominator)
 
31,531,834

 
32,662,942

 
31,480,660

 
32,767,088

 
 
 
 
 
 
 
 
 
Basic earnings per common share
 
$
0.75

 
$
0.47

 
$
2.37

 
$
1.41

 
 
 
 
 
 
 
 
 
Weighted-average number of common shares

31,531,834


32,662,942

 
31,480,660

 
32,767,088

Potential shares of common stock arising from stock options, and unvested restricted share units

629,732


857,194

 
700,263

 
936,350

Total shares-diluted (denominator)
 
32,161,566

 
33,520,136

 
32,180,923

 
33,703,438

 
 
 
 
 
 
 
 
 
Diluted earnings per common share
 
$
0.74

 
$
0.46

 
$
2.32

 
$
1.37


The weighted-average number of common shares outstanding used in the computation of diluted earnings per common share does not include the effect of the following instruments because their inclusion would have been anti-dilutive:
 
 
For the Three Months Ended
 
For the Six Months Ended
 
 
January 28, 2017
 
January 23, 2016
 
January 28, 2017
 
January 23, 2016
Stock-based awards
 
58,750

 
63,357

 
50,355

 
61,481

0.75% convertible senior notes due 2021
 
5,005,734

 
5,005,734

 
5,005,734

 
5,005,734

Warrants
 
5,005,734

 
5,005,734

 
5,005,734

 
5,005,734

Total anti-dilutive weighted shares excluded from the calculation of earnings per common share

10,070,218


10,074,825

 
10,061,823

 
10,072,949


Under the treasury stock method, the convertible senior notes will have a dilutive impact on earnings per common share if the Company’s average stock price for the period exceeds the conversion price for the convertible senior notes of $96.89 per share. The warrants will have a dilutive impact on earnings per common share if the Company’s average stock price for the

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period exceeds the warrant strike price of $130.43 per share. As the Company’s average stock price for the three and six months ended January 28, 2017 was below the conversion price for the convertible senior notes and the strike price for the warrants, the underlying common shares were anti-dilutive as reflected above. See Note 10, Debt, for additional information related to the Company’s convertible senior notes and warrant transactions.

In connection with the offering of the convertible senior notes, the Company entered into convertible note hedge transactions with counterparties for the purpose of reducing the potential dilution to common stockholders from the conversion of the notes and offsetting any potential cash payments in excess of the principal amount of the notes. Prior to conversion, the convertible note hedge is not included for purposes of the calculation of earnings per common share as its effect would be anti-dilutive. Upon conversion, the convertible note hedge is expected to offset the dilutive effect of the convertible senior notes when the average stock price for the period is above $96.89 per share. See Note 10, Debt, for additional information related to the Company’s convertible note hedge.

3. Acquisitions

Fiscal 2016 - During August 2015, the Company acquired TelCom Construction, Inc. and an affiliate (together, “TelCom”). The purchase price was $48.8 million paid in cash. TelCom, based in Clearwater, Minnesota, provides construction and maintenance services for telecommunications providers throughout the United States. This acquisition expands the Company’s geographic presence within its existing customer base. During the fourth quarter of fiscal 2016, the Company acquired NextGen Telecom Services Group, Inc. (“NextGen”) for $5.6 million, net of cash acquired. NextGen provides construction and maintenance services for telecommunications providers in the Northeastern United States. Additionally, during July 2016, the Company acquired certain assets and assumed certain liabilities associated with the wireless network deployment and wireline operations of Goodman Networks Incorporated (“Goodman”) for a cash purchase price of $107.5 million, less an adjustment of approximately $6.6 million for working capital received below a target amount. The acquired operations provide wireless construction services in a number of markets, including Texas, Georgia, and Southern California. The acquisition reinforces the Company’s wireless construction resources and expands the Company’s geographic presence within its existing customer base.

Fiscal 2016 Purchase Price Allocations

The purchase price allocation of TelCom was completed during the fourth quarter of fiscal 2016. Purchase price allocations of the Goodman and NextGen acquisitions are preliminary and will be completed during fiscal 2017 when valuations for intangible assets and other amounts are finalized. In accordance with ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments, the Company will recognize any adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustments are determined. Additionally, the Company will record, in the same period’s financial statements in which adjustments are recorded, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of any change to the provisional amounts, calculated as if the accounting adjustment had been completed at the acquisition date.

During the six months ended January 28, 2017, the Company recorded adjustments to the fair values assigned to working capital items in connection with the purchase price allocation of the Goodman acquisition and increased the value assigned to goodwill by approximately $2.5 million, net of $1.8 million of proceeds received during the second quarter of fiscal 2017 for a working capital adjustment. The income statement impact during the three and six months ended January 28, 2017 related to these fair value adjustments was not significant and has been recorded in the current period.


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The following table summarizes the aggregate consideration paid for businesses acquired in fiscal 2016 and presents the allocation of these amounts to the net tangible and identifiable intangible assets based on their estimated fair values as of the respective dates of acquisition (dollars in millions):
 
2016
Assets
 
Accounts receivable
$
16.9

Costs and estimated earnings in excess of billings
24.0

Inventories and other current assets
11.9

Property and equipment
11.5

Goodwill
40.9

Intangible assets - customer relationships
94.5

Intangible assets - trade names and other
1.8

Total assets
201.5

 
 
Liabilities
 
Accounts payable
23.7

Accrued and other liabilities
22.4

Total liabilities
46.1

 
 
Net Assets Acquired
$
155.4


With respect to the acquisition from Goodman, $20.0 million is escrowed as of January 28, 2017 and is available to the Company for the indemnification obligations of the seller. Of the amount escrowed, $10.0 million will be released to the seller upon the occurrence of certain conditions or the twelve-month anniversary of the closing date. The remaining $10.0 million will be released to the seller when the seller satisfies certain conditions with respect to a dispute with the state of Texas over a sales tax liability of approximately $31.7 million (the “Sales Tax Liability”). Under the asset purchase agreement, Goodman has retained responsibility for this Sales Tax Liability. Should Goodman not resolve this matter, the state may assert that the Company is a successor to the operations and seek to recover from the Company. In such event the Company would seek indemnification for recovery from Goodman, including from the funds contained in the escrow account, for any amount the Company pays.

Results of businesses acquired during fiscal 2016 are included in the condensed consolidated financial statements from their respective dates of acquisition. The revenues and net income of TelCom and NextGen were not material during the three or six months ended January 28, 2017 or January 23, 2016. The acquired operations of Goodman were immediately integrated within the operations of an existing subsidiary. See Note 7, Goodwill and Intangible Assets, for information regarding the goodwill and intangible assets of businesses acquired.

4. Accounts Receivable
 
Accounts receivable consisted of the following (dollars in thousands):
 
January 28, 2017
 
July 30, 2016
Contract billings
$
279,441

 
$
297,532

Retainage
30,733

 
32,101

Total
310,174

 
329,633

Less: allowance for doubtful accounts
(1,307
)
 
(1,603
)
Accounts receivable, net
$
308,867

 
$
328,030

 
The Company grants credit under normal payment terms, generally without collateral, to its customers. The Company expects to collect the outstanding balance of accounts receivable, net (including retainage) within the next twelve months. The Company maintains an allowance for doubtful accounts for estimated losses on uncollected balances. During the three and six months ended January 28, 2017 and January 23, 2016, write-offs to the allowance for doubtful accounts, net of recoveries, were not material. There were no material accounts receivable amounts representing claims or other similar items subject to uncertainty as of January 28, 2017 or July 30, 2016.


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During the fourth quarter of fiscal 2016, the Company entered into a customer-sponsored vendor payment program. All eligible accounts receivables from this customer are included in the program and payment is received pursuant to a non-recourse sale to a bank partner of the customer. This program effectively reduces the time to collect these receivables as compared to that customer’s standard payment terms. The Company incurs a discount fee to the bank on the payments received that is reflected as an expense component in other income, net, in the condensed consolidated statements of operations. The program has not changed since its inception during the fourth quarter of fiscal 2016.

5. Costs and Estimated Earnings in Excess of Billings
 
Costs and estimated earnings in excess of billings (“CIEB”) includes revenue for services performed under contracts using the units-of-delivery method of accounting and the cost-to-cost measure of the percentage of completion method of accounting. Amounts consisted of the following (dollars in thousands):
 
January 28, 2017
 
July 30, 2016
Costs incurred on contracts in progress
$
348,933

 
$
307,826

Estimated to date earnings
86,999

 
92,226

Total costs and estimated earnings
435,932

 
400,052

Less: billings to date
(56,888
)
 
(42,637
)
 
$
379,044

 
$
357,415

Included in the accompanying condensed consolidated balance sheets under the captions:
 

 
 

 Costs and estimated earnings in excess of billings
$
397,048

 
$
376,972

 Billings in excess of costs and estimated earnings
(18,004
)
 
(19,557
)
 
$
379,044

 
$
357,415


As of January 28, 2017, the Company expects that substantially all of its CIEB will be billed to customers and collected in the normal course of business within the next twelve months. Additionally, there were no material CIEB amounts representing claims or other similar items subject to uncertainty as of January 28, 2017 or July 30, 2016.

6. Property and Equipment
 
Property and equipment consisted of the following (dollars in thousands):
 
Estimated Useful Lives (Years)
 
January 28, 2017
 
July 30, 2016
Land
 
$
3,475

 
$
3,475

Buildings
10-35
 
12,021

 
11,969

Leasehold improvements
1-10
 
15,118

 
13,753

Vehicles
1-5
 
439,263

 
404,273

Computer hardware and software
1-7
 
99,129

 
95,570

Office furniture and equipment
1-10
 
11,699

 
10,374

Equipment and machinery
1-10
 
257,900

 
242,079

Total
 
 
838,605

 
781,493

Less: accumulated depreciation
 
 
(494,485
)
 
(454,823
)
Property and equipment, net
 
 
$
344,120

 
$
326,670

 
Depreciation expense was $29.6 million and $25.2 million for the three months ended January 28, 2017 and January 23, 2016, respectively, and $58.0 million and $47.9 million for the six months ended January 28, 2017 and January 23, 2016, respectively.


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7. Goodwill and Intangible Assets

Goodwill

The Company’s goodwill balance was $312.7 million and $310.2 million as of January 28, 2017 and July 30, 2016, respectively. Changes in the carrying amount of goodwill for fiscal 2017 were as follows (dollars in thousands):
 
Goodwill
 
Accumulated Impairment Losses
 
Total
Balance as of July 30, 2016
$
505,924

 
$
(195,767
)
 
$
310,157

Purchase price allocation adjustments
2,501

 

 
2,501

Balance as of January 28, 2017
$
508,425

 
$
(195,767
)
 
$
312,658


The Company’s goodwill resides in multiple reporting units. Goodwill and other indefinite-lived intangible assets are assessed annually for impairment as of the first day of the fourth fiscal quarter of each year, or more frequently if events occur that would indicate a potential reduction in the fair value of a reporting unit below its carrying value. The profitability of individual reporting units may suffer periodically due to downturns in customer demand and the level of overall economic activity including, in particular, construction and housing activity. The Company’s customers may reduce capital expenditures and defer or cancel pending projects during times of slowing economic conditions. Additionally, adverse conditions in the economy and future volatility in the equity and credit markets could impact the valuation of the Company’s reporting units. The cyclical nature of the Company’s business, the high level of competition existing within its industry, and the concentration of its revenues from a limited number of customers may also cause results to vary. These factors may affect individual reporting units disproportionately, relative to the Company as a whole. As a result, the performance of one or more of the reporting units could decline, resulting in an impairment of goodwill or intangible assets.

The Company evaluates current operating results, including any losses, in the assessment of goodwill and other intangible assets. The estimates and assumptions used in assessing the fair value of the reporting units and the valuation of the underlying assets and liabilities are inherently subject to significant uncertainties. Changes in judgments and estimates could result in significantly different estimates of the fair value of the reporting units and could result in impairments of goodwill or intangible assets of the reporting units. In addition, adverse changes to the key valuation assumptions contributing to the fair value of the Company’s reporting units could result in an impairment of goodwill or intangible assets.

During July 2016, the Company acquired the wireless network deployment and wireline operations of Goodman for $107.5 million, less an adjustment of approximately $6.6 million for working capital received below a target amount. The purchase price was allocated based on the fair value of the assets acquired and the liabilities assumed on the date of acquisition and was primarily allocated to goodwill and other intangible assets. The acquired operations were immediately integrated with the operations of an existing subsidiary which is a larger, well-established provider of services to the same primary customer. Subsequent to the close of this acquisition, activity levels within the contracts of the acquired operations trended considerably below prior expectations and the Company reduced its near term revenue expectations. As a result of the decline, the Company assessed whether it was more likely than not that the fair value of the reporting unit declined below the reporting unit’s carrying amount. With the immediate integration of the Goodman operations into the Company’s existing subsidiary, which is part of an existing reporting unit, the Company believes its ability to effectively perform services for the customer will provide future opportunities. Further, the acquired contracts remain in effect and the Company has not experienced any adverse changes in customer relations. Additionally, the Company believes that the fair value of the reporting unit containing the recently acquired operations remains substantially in excess of its carrying amount as of January 28, 2017. As a result, the Company determined that it was not more likely than not that the fair value of the reporting unit declined below its carrying amount as of January 28, 2017.

The Company performed its annual impairment assessment as of the first day of the fourth quarter of each of fiscal 2016, 2015, and 2014 and concluded that no impairment of goodwill or the indefinite-lived intangible asset was indicated at any reporting unit for any of the years. Qualitative assessments on reporting units that comprise a substantial portion of the Company’s consolidated goodwill balance and on its indefinite-lived intangible asset were performed. A qualitative assessment includes evaluating all identified events and circumstances that could affect the significant inputs used to determine the fair value of a reporting unit or indefinite-lived intangible asset for the purpose of determining whether it is more likely than not that these assets are impaired. The Company considers various factors while performing qualitative assessments, including macroeconomic conditions, industry and market conditions, financial performance of the reporting units, changes in market capitalization, and any other specific reporting unit considerations. These qualitative assessments indicated that it was more

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likely than not that the fair value exceeded carrying value for those reporting units. For the remaining reporting units, the Company performed the first step of the quantitative analysis described in ASC Topic 350. Under the income approach, the key valuation assumptions used in determining the fair value estimates of the Company’s reporting units for each annual test were (a) a discount rate based on the Company’s best estimate of the weighted average cost of capital adjusted for certain risks for the reporting units; (b) terminal value based on terminal growth rates; and (c) seven expected years of cash flow before the terminal value.

The table below outlines certain assumptions in each of the Company’s fiscal 2016, 2015, and 2014 annual quantitative impairment analyses:
 
2016
 
2015
 
2014
Terminal Growth Rate
2.0% - 3.0%
 
1.5% - 2.5%
 
1.5% - 3.0%
Discount Rate
11.5%
 
11.5%
 
11.5%

The discount rate reflects risks inherent within each reporting unit operating individually. These risks are greater than the risks inherent in the Company as a whole. The fiscal 2016, 2015, and 2014 analyses used the same discount rate and included consideration of market inputs such as the risk-free rate, equity risk premium, industry premium, and cost of debt, among other assumptions. The changes in these inputs from fiscal 2016, 2015 and 2014 had offsetting impacts and the discount rate remained at 11.5%. The Company believes the assumptions used in the impairment analysis each year are reflective of the risks inherent in the business models of its reporting units and within its industry. Under the market approach, the guideline company method develops valuation multiples by comparing the Company’s reporting units to similar publicly traded companies. Key valuation assumptions and valuation multiples used in determining the fair value estimates of the Company’s reporting units rely on (a) the selection of similar companies; (b) obtaining estimates of forecast revenue and earnings before interest, taxes, depreciation, and amortization for the similar companies; and (c) selection of valuation multiples as they apply to the reporting unit characteristics.

The Company determined that the fair values of each of the reporting units were substantially in excess of their carrying values in the fiscal 2016 annual assessment. Management determined that significant changes were not likely in the factors considered to estimate fair value, and analyzed the impact of such changes were they to occur. Specifically, if there was a 25% decrease in the fair value of any of the reporting units due to a decline in their discounted cash flows resulting from lower operating performance, the conclusion of the assessment would remain unchanged. Additionally, if the discount rate applied in the fiscal 2016 impairment analysis had been 100 basis points higher than estimated for each of the reporting units, and all other assumptions were held constant, the conclusion of the assessment would remain unchanged and there would be no impairment of goodwill. As of July 30, 2016, the Company believes the goodwill is recoverable for all of the reporting units. As of January 28, 2017, the Company continues to believe that no impairment has occurred. However, significant adverse changes in the projected revenues and cash flows of a reporting unit could result in an impairment of goodwill. There can be no assurances that goodwill may not be impaired in future periods.

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Intangible Assets

The Company’s intangible assets consisted of the following (dollars in thousands):
 
Weighted Average Remaining Useful Lives (Years)
 
January 28, 2017
 
July 30, 2016
Gross carrying amount:
 
 
 
 
 
Customer relationships
12.3
 
$
289,917

 
$
289,955

Contract backlog
 

 
4,780

Trade names
7.6
 
9,650

 
9,800

UtiliQuest trade name
 
4,700

 
4,700

Non-compete agreements
2.4
 
685

 
685

 
 
 
304,952

 
309,920

Accumulated amortization:
 
 
 

 
 

Customer relationships
 
 
112,395

 
101,012

Contract backlog
 
 

 
4,666

Trade names
 
 
6,556

 
6,034

Non-compete agreements
 
 
433

 
329

 
 
 
119,384

 
112,041

Intangible assets, net
 
 
$
185,568

 
$
197,879

During the second quarter of fiscal 2017, certain contract backlog intangible assets became fully amortized. As a result, the gross carrying amount and the associated accumulated amortization each decreased $4.8 million. This decrease had no effect on the net carrying value of intangible assets as of January 28, 2017.

Amortization of the Company’s customer relationship intangibles and contract backlog intangibles is recognized on an accelerated basis as a function of the expected economic benefit. Amortization for the Company’s other finite-lived intangibles is recognized on a straight-line basis over the estimated useful life. Amortization expense for finite-lived intangible assets was $6.1 million and $4.7 million for the three months ended January 28, 2017 and January 23, 2016, respectively, and $12.3 million and $9.5 million for the six months ended January 28, 2017 and January 23, 2016, respectively.

As of January 28, 2017, the Company believes that the carrying amounts of its intangible assets are recoverable. However, if adverse events were to occur or circumstances were to change indicating that the carrying amount of such assets may not be fully recoverable, the assets would be reviewed for impairment and the assets could be impaired.

8. Accrued Insurance Claims
 
For claims within its insurance program, the Company retains the risk of loss, up to certain limits, for matters related to automobile liability, general liability (including damages associated with underground facility locating services), workers’ compensation, and employee group health. With regard to losses occurring in fiscal 2017, the Company retains the risk of loss up to $1.0 million on a per occurrence basis for automobile liability, general liability, and workers’ compensation. These retention amounts are applicable to all of the states in which the Company operates, except with respect to workers’ compensation insurance in two states in which the Company participates in state-sponsored insurance funds. Aggregate stop-loss coverage for automobile liability, general liability, and workers’ compensation claims is $103.7 million for fiscal 2017.

The Company is party to a stop-loss agreement for losses under its employee group health plan. For calendar year 2017, the Company retains the risk of loss up to the first $400,000 of claims per participant as well as an annual aggregate amount.

The liability for total accrued insurance claims and related processing costs was $99.1 million and $89.7 million as of January 28, 2017 and July 30, 2016, respectively, of which $59.7 million and $52.8 million, respectively, was long-term and reflected in non-current liabilities in the condensed consolidated balance sheets. Insurance recoveries/receivables related to accrued claims as of January 28, 2017 and July 30, 2016 were $8.9 million and $5.7 million, respectively, which were included in non-current other assets in the accompanying condensed consolidated balance sheets.

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9. Other Accrued Liabilities
 
Other accrued liabilities consisted of the following (dollars in thousands):
 
January 28, 2017
 
July 30, 2016
Accrued payroll and related taxes
$
20,327

 
$
23,908

Accrued employee benefit and incentive plan costs
25,307

 
40,943

Accrued construction costs
26,093

 
41,123

Other current liabilities
15,410

 
16,328

Total other accrued liabilities
$
87,137

 
$
122,302


10. Debt
 
The Company’s outstanding indebtedness consisted of the following (dollars in thousands):
 
January 28, 2017
 
July 30, 2016
Credit Agreement - Revolving facility (matures April 2020)
$

 
$

Credit Agreement - Term loan facilities (mature April 2020)
376,875

 
346,250

0.75% convertible senior notes, net (mature September 2021)
382,513

 
373,077

 
759,388

 
719,327

Less: current portion
(18,813
)
 
(13,125
)
Long-term debt
$
740,575

 
$
706,202


Senior Credit Agreement

The Company and certain of its subsidiaries are party to a credit agreement with the various lenders named therein, dated as of December 3, 2012 (as amended as of June 17, 2016, May 20, 2016, April 24, 2015 and September 9, 2015), that matures on April 24, 2020 (as amended, the “Credit Agreement”). The Credit Agreement provides for a $450.0 million revolving facility, $385.0 million in aggregate term loan facilities, and contains a sublimit of $200.0 million for the issuance of letters of credit. During the second quarter of fiscal 2017, the Company entered into an incremental term loan facility under the Credit Agreement in the aggregate principal amount of $35.0 million. The additional term loan is subject to terms and conditions substantially similar to those applicable to the existing term loan facilities. The proceeds are available for general corporate purposes.

Subject to certain conditions, the Credit Agreement provides the Company the ability to enter into one or more incremental facilities, either by increasing the revolving commitments under the Credit Agreement and/or in the form of term loans, up to the greater of (i) $150.0 million and (ii) an amount such that, after giving effect to such incremental facility on a pro forma basis (assuming that the amount of the incremental commitments are fully drawn and funded), the consolidated senior secured leverage ratio does not exceed 2.25 to 1.00. The consolidated senior secured leverage ratio is the ratio of the Company’s consolidated senior secured indebtedness to its trailing twelve month consolidated earnings before interest, taxes, depreciation, and amortization (“EBITDA”), as defined by the Credit Agreement. Payments under the Credit Agreement are guaranteed by substantially all of the Company’s subsidiaries and secured by the equity interests of the substantial majority of the Company’s subsidiaries.


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Borrowings under the Credit Agreement bear interest at rates described below based upon the Company’s consolidated leverage ratio, which is the ratio of the Company’s consolidated total funded debt to its trailing twelve month consolidated EBITDA, as defined by the Credit Agreement. In addition, the Company incurs certain fees for unused balances and letters of credit at the rates described below, also based upon the Company’s consolidated leverage ratio:
Borrowings - Eurodollar Rate Loans
1.25% - 2.00% plus LIBOR
Borrowings - Base Rate Loans
0.25% - 1.00% plus administrative agent’s base rate(1)
Unused Revolver Commitment
0.25% - 0.40%
Standby Letters of Credit
1.25% - 2.00%
Commercial Letters of Credit
0.625% - 1.00%

(1) The agent’s base rate is described in the Credit Agreement as the highest of (i) the administrative agent’s prime rate, (ii) the Federal Funds Rate plus 0.50%, and (iii) the Eurodollar rate plus 1.00%, plus an applicable margin.

Standby letters of credit of approximately $57.6 million, issued as part of the Company’s insurance program, were outstanding under the Credit Agreement as of both January 28, 2017 and July 30, 2016.

The weighted average interest rates and fees for balances under the Credit Agreement as of January 28, 2017 and July 30, 2016 were as follows:
 
Weighted Average Rate End of Period
 
January 28, 2017
 
July 30, 2016
Borrowings - Term loan facilities
2.53%
 
2.49%
Borrowings - Revolving facility(1)
—%
 
—%
Standby Letters of Credit
1.75%
 
2.00%
Unused Revolver
0.35%
 
0.40%

(1) There were no outstanding borrowings under the revolving facility as of January 28, 2017 or July 30, 2016.

The Credit Agreement contains a financial covenant that requires the Company to maintain a consolidated leverage ratio of not greater than 3.50 to 1.00, as measured at the end of each fiscal quarter. It provides for certain increases to this ratio in connection with permitted acquisitions on the terms and conditions specified in the Credit Agreement. In addition, the Credit Agreement contains a financial covenant that requires the Company to maintain a consolidated interest coverage ratio, which is the ratio of the Company’s trailing twelve month consolidated EBITDA to its consolidated interest expense, 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 both January 28, 2017 and July 30, 2016, the Company was in compliance with the financial covenants of the Credit Agreement and had additional borrowing availability in the revolving facility of $392.4 million as determined by the most restrictive covenant.

0.75% Convertible Senior Notes Due 2021

On September 15, 2015, the Company issued $485.0 million principal amount of 0.75% convertible senior notes due September 2021 (the “Notes”) in a private placement. The Company received net proceeds of approximately $471.7 million after deducting the initial purchasers’ discount of approximately $13.3 million. The Company used approximately $60.0 million of the net proceeds to repurchase 805,000 shares of its common stock from the initial purchasers of the Notes in privately negotiated transactions. In addition, the Company used approximately $296.6 million of the net proceeds to fund the redemption of all of its 7.125% senior subordinated notes due 2021 and approximately $41.1 million for the net cost of convertible note hedge transactions and warrant transactions as further described below. The remainder of the proceeds of approximately $73.9 million is available for general corporate purposes.

The Notes, governed by the terms of an indenture between the Company and a bank trustee are unsecured obligations and do not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by the Company. The Notes bear interest at a rate of 0.75% per year, payable in cash semiannually in March and September, and will mature on September 15, 2021, unless earlier purchased by the Company or converted. In the event the Company fails to perform certain obligations under the indenture, the Notes will accrue additional interest. Certain events are considered “events of default” under the Notes, which may result in the acceleration of the maturity of the Notes, as described in the indenture.

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Each $1,000 of principal of the Notes is convertible into 10.3211 shares of the Company’s common stock, which is equivalent to an initial conversion price of approximately $96.89 per share. The conversion rate is subject to adjustment in certain circumstances, including in connection with specified fundamental changes (as defined in the indenture). In addition, holders of the Notes have the right to require the Company to repurchase all or a portion of their notes on the occurrence of a fundamental change at a price of 100% of their principal amount plus accrued and unpaid interest.

Prior to June 15, 2021, the Notes are convertible by the Note holder under the following circumstances: (1) during any fiscal quarter commencing after October 24, 2015 (and only during such fiscal quarter) if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading days period ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the applicable conversion price on such trading day; (2) during the five consecutive business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of Notes for each trading day of such measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the applicable conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. On or after June 15, 2021 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or a portion of their Notes at any time regardless of the foregoing circumstances. Upon conversion, the Notes will be settled, at the Company’s election, in cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock. The Company intends to settle the principal amount of the Notes with cash.

In accordance with ASC Topic 470, Debt (“ASC Topic 470”), certain convertible debt instruments that may be settled in cash upon conversion are required to be separately accounted for as liability and equity components. The carrying amount of the liability component is calculated by measuring the fair value of a similar instrument that does not have an associated convertible feature using an indicative market interest rate (“Comparable Yield”) as of the date of issuance. The difference between the principal amount of the notes and the carrying amount represents a debt discount. The debt discount is amortized to interest expense using the Comparable Yield (5.5% with respect to the Notes) using the effective interest rate method over the term of the notes. The Company incurred $4.4 million and $4.1 million of interest expense during the three months ended January 28, 2017 and January 23, 2016, respectively, and $8.7 million and $5.9 million of interest expense during the six months ended January 28, 2017 and January 23, 2016, respectively, for the non-cash amortization of the debt discount. The equity component represents the difference between the principal amount of the Notes and the debt discount, both measured at issuance. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.

The Notes consist of the following components (dollars in thousands):
 
January 28, 2017
 
July 30, 2016
Liability component
 
 
 
Principal amount of 0.75% convertible senior notes due September 2021
$
485,000

 
$
485,000

Less: Debt discount
(92,993
)
 
(101,679
)
Less: Debt issuance costs(1)
(9,494
)
 
(10,244
)
Net carrying amount of Notes
$
382,513

 
$
373,077

Equity Component(2)
$
112,554

 
$
112,554


(1) Original issuance costs of approximately $15.1 million related to the Notes included the initial purchasers’ discount of approximately $13.3 million and approximately $1.8 million paid to third parties. Approximately $11.5 million of issuance costs of the Notes was allocated to the liability component and recorded as a contra-liability, presented net against the carrying amount for the Notes on the Company’s condensed consolidated balance sheet, of which $9.5 million and $10.2 million remained unamortized as of January 28, 2017 and July 30, 2016, respectively. Debt issuance costs attributable to the liability component are amortized to interest expense on the effective interest rate method over the term of the Notes and the expense was not material in all periods presented.

(2) Approximately $3.6 million of issuance costs paid to the initial purchasers of the Notes and third parties was allocated to the equity component and recorded net against the equity component in stockholders’ equity on the condensed consolidated balance sheets.

The Company determined that the fair value of the Notes as of January 28, 2017 and July 30, 2016 was approximately $425.2 million and $458.7 million, respectively, based on quoted market prices (level 2), compared to a net carrying amount of $382.5 million and $373.1 million, respectively. The fair value and net carrying amounts as of January 28, 2017 and

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July 30, 2016 are both reflected net of the debt discount of $93.0 million and $101.7 million, respectively, and debt issuance costs of $9.5 million and $10.2 million, respectively.

Convertible Note Hedge and Warrant Transactions

In connection with the offering of the Notes, the Company entered into convertible note hedge transactions with counterparties for the purpose of reducing the potential dilution to common stockholders from the conversion of the Notes and offsetting any potential cash payments in excess of the principal amount of the Notes. In the event that shares or cash are deliverable to holders of the Notes upon conversion at limits defined in the indenture, counterparties to the convertible note hedge will be required to deliver up to 5.006 million shares of the Company’s common stock or pay cash to the Company in a similar amount as the value that the Company delivers to the holders of the Notes based on a conversion price of $96.89 per share. The total cost of the convertible note hedge transactions was $115.8 million.

In addition, the Company entered into separately negotiated warrant transactions with the same counterparties as the convertible note hedge transactions whereby the Company sold warrants to purchase, subject to certain anti-dilution adjustments, up to 5.006 million shares of the Company’s common stock at a price of $130.43 per share. The warrants will not have a dilutive effect on the Company’s earnings per share unless the Company’s quarterly average share price exceeds the warrant strike price of $130.43 per share. In this event, the Company expects to settle the warrant transactions on a net share basis whereby it will issue shares of its common stock. The Company received proceeds of approximately $74.7 million from the sale of these warrants.

Upon settlement of the conversion premium of the Notes, convertible note hedge, and warrants, the resulting dilutive impact of these transactions, if any, would be the number of shares necessary to settle the value of the warrant transactions above $130.43 per share. The net amounts incurred in connection with the convertible note hedge and warrant transactions were recorded as a reduction to additional paid-in capital on the condensed consolidated balance sheets during the first quarter of fiscal 2016 and are not expected to be remeasured in subsequent reporting periods.

The Company recorded an initial deferred tax liability of $43.4 million in connection with the debt discount associated with the Notes and recorded an initial deferred tax asset of $43.2 million in connection with the convertible note hedge transactions. Both the deferred tax liability and deferred tax asset are included in non-current deferred tax liabilities in the condensed consolidated balance sheets.

7.125% Senior Subordinated Notes - Loss on Debt Extinguishment

As of July 25, 2015, Dycom Investments, Inc. (the “Issuer”), a wholly-owned subsidiary of the Company, had outstanding an aggregate principal amount of $277.5 million of 7.125% senior subordinated notes due 2021 (the “7.125% Notes”). The outstanding 7.125% Notes were redeemed on October 15, 2015 (the “Redemption Date”) with a portion of the proceeds from the Notes offering described above. The aggregate amount paid in connection with the redemption was $296.6 million and was comprised of the $277.5 million principal amount of the outstanding 7.125% Notes, $4.9 million for accrued and unpaid interest to the Redemption Date, and approximately $14.2 million for the applicable call premium as defined in the indenture governing the 7.125% Notes. The call premium amount consisted of (a) the present value as defined under the indenture of the sum of (i) approximately $4.9 million representing interest for the period from the Redemption Date through January 15, 2016, and (ii) the redemption price of 103.563% (expressed as a percentage of the principal amount) of the 7.125% Notes at January 15, 2016, minus (b) the principal amount of the 7.125% Notes.

In connection with the redemption of the 7.125% Notes, the Company incurred a pre-tax charge for early extinguishment of debt of approximately $16.3 million during the first quarter of fiscal 2016. This charge is comprised of: (i) $4.9 million for the present value of the interest payments for the period from the Redemption Date through January 15, 2016, (ii) $6.5 million for the excess of the present value of the redemption price over the carrying value of the 7.125% Notes, and (iii) $4.9 million for the write-off of deferred financing charges related to the fees incurred in connection with the issuance of the 7.125% Notes.


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11. 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. The Company’s effective income tax rate differs from the statutory rate for the tax jurisdictions where it operates primarily as the result of the impact of non-deductible and non-taxable items and tax credits recognized in relation to pre-tax results. Measurement of the Company’s tax position is based on the applicable statutes, federal and state case law, and its interpretations of tax regulations.

The Company is subject to federal income taxes in the United States and the income taxes of multiple state jurisdictions and in Canada. Amounts of pre-tax earnings related to Canadian operations for the three and six months ended January 28, 2017 and January 23, 2016 were not material. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or Canadian income tax examinations for fiscal years ended 2012 and prior. During fiscal 2016, the Company was notified by the Internal Revenue Service that its federal income tax return for fiscal 2014 was selected for examination. The Company believes its provision for income taxes is adequate; however, any assessment would affect the Company’s results of operations and cash flows. Income taxes receivable totaled $26.6 million and $1.4 million as of January 28, 2017 and July 30, 2016, respectively. Income taxes receivable is included in current assets in the condensed consolidated balance sheets as of July 30, 2016. Income taxes payable totaled $0.5 million and $15.3 million as of January 28, 2017 and July 30, 2016, respectively.

As of both January 28, 2017 and July 30, 2016, the Company had total unrecognized tax benefits of $2.4 million resulting from uncertain tax positions. The Company’s effective tax rate will be reduced during future periods if it is determined these tax benefits are realizable. The Company had approximately $1.1 million and $1.0 million accrued for the payment of interest and penalties as of January 28, 2017 and July 30, 2016, respectively. Interest expense related to unrecognized tax benefits for the Company for the three and six months ended January 28, 2017 and January 23, 2016 was not material.

12. Other Income, Net

The components of other income, net, were as follows (dollars in thousands):
 
For the Three Months Ended
 
For the Six Months Ended
 
January 28, 2017
 
January 23, 2016
 
January 28, 2017
 
January 23, 2016
Gain on sale of fixed assets
$
1,729

 
$
1,016

 
$
3,172

 
$
2,152

Miscellaneous (expense) income, net
(723
)
 
56

 
(1,226
)
 
390

Total other income, net
$
1,006

 
$
1,072

 
$
1,946

 
$
2,542


Other income, net includes approximately $0.9 million and $1.5 million of discount fee expense during the three and six months ended January 28, 2017, respectively, associated with the collection of accounts receivable under a customer-sponsored vendor payment program which the Company began participating in during the fourth quarter of fiscal 2016.

13. Capital Stock

Repurchases of Common Stock - The Company made the following share repurchases during fiscal 2016 and the three months ended January 28, 2017:
Period
 
Number of Shares Repurchased
 
Total Consideration
(In thousands)
 
Average Price Per Share
Fiscal 2016:
 


 


 


Three months ended October 24, 2015
 
954,224

 
$
69,997

 
$
73.35

Three months ended April 23, 2016
 
1,557,354

 
$
100,000

 
$
64.21

Fiscal 2017:
 
 
 
 
 
 
Three months ended January 28, 2017
 
313,006

 
$
25,000

 
$
79.87


In connection with the Notes offering in September 2015, the Company used approximately $60.0 million of the net proceeds from the Notes to repurchase 805,000 shares of its common stock from the initial purchasers of the Notes in privately negotiated transactions at a price of $74.53 per share, the closing price of Dycom’s common stock on September 9, 2015. The additional $110.0 million spent during fiscal 2016 was for shares repurchased under authorized share repurchase programs.

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During the second quarter of fiscal 2017, the Company repurchased 313,006 common shares for $25.0 million at an average price of $79.87. All shares repurchased have been canceled. Upon cancellation, the excess over par value is recorded as a reduction in additional paid-in capital until the balance is reduced to zero, with any additional excess recorded to retained earnings. During the three months ended January 28, 2017, $12.1 million was charged to retained earnings related to the Company’s share repurchases during the period. As of January 28, 2017, $75.0 million remained available for repurchases through October 2017 under the Company’s April 26, 2016 repurchase program authorization. On February 28, 2017, the Company’s Board of Directors extended the term of this repurchase program through August 2018 and authorized an additional $75.0 million to repurchase shares of the Company’s outstanding common stock in open market or private transactions, including through accelerated share repurchase agreements with one or more counterparties from time to time. As of March 2, 2017, the Company has $150.0 million available for repurchases of the Company’s common stock through August 2018.

Restricted Stock Tax Withholdings - During the six months ended January 28, 2017 and January 23, 2016, the Company withheld 128,783 shares and 156,362 shares, respectively, totaling $10.2 million and $12.1 million, respectively, to meet payroll tax withholdings obligations arising from the vesting of restricted share units. All shares withheld have been canceled. Shares of common stock withheld for tax withholdings do not reduce the Company’s total share repurchase authority.
 
14. Stock-Based Awards

The Company has certain stock-based compensation plans under which it grants stock-based awards, including stock options, restricted share units, and performance share units to attract, retain, and reward talented employees, officers and directors, and to align stockholder and employee interests.

Compensation expense for stock-based awards is based on fair value at the measurement date and fluctuates over time as a result of the vesting period of the stock-based awards and the Company’s performance, as measured by criteria set forth in the performance-based awards. This expense is included in general and administrative expenses in the condensed consolidated statements of operations and the amount of expense ultimately recognized depends on the number of awards that actually vest. Accordingly, stock-based compensation expense may vary from fiscal year to fiscal year.

The performance criteria for target awards are based on the Company’s fiscal year operating earnings (adjusted for certain amounts) as a percentage of contract revenues and its fiscal year operating cash flow level. Additionally, certain awards include three-year performance goals that, if met, result in supplemental shares awarded. For performance-based restricted share units (“Performance RSUs”), the Company evaluates compensation expense quarterly and recognizes expense for performance-based awards only if it determines it is probable that performance criteria for the awards will be met. In the event the Company determines it is no longer probable that it will achieve certain performance criteria for the awards, it would reverse the associated stock-based compensation expense that it had previously recognized in the period such determination is made.

Stock-based compensation expense and the related tax benefit during the three and six months ended January 28, 2017 and January 23, 2016 were as follows (dollars in thousands):
 
For the Three Months Ended
 
For the Six Months Ended
 
January 28, 2017
 
January 23, 2016
 
January 28, 2017
 
January 23, 2016
Stock-based compensation
$
5,309

 
$
4,200

 
$
11,015

 
$
8,708

Related tax benefit for stock-based compensation
$
2,000

 
$
1,613

 
$
4,183

 
$
3,342

As of January 28, 2017, the Company had unrecognized compensation expense related to stock options, time-based restricted share units (“RSUs”), and target Performance RSUs (based on the Company’s estimate of performance goal achievement) of $3.6 million, $10.5 million, and $24.1 million, respectively. This expense will be recognized over a weighted-average number of years of 2.9, 2.9, and 2.2, respectively, based on the average remaining service periods for the awards. As of January 28, 2017, the Company may recognize an additional $8.2 million in compensation expense in future periods if the maximum amount of Performance RSUs is earned based on certain performance measures being met.


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Stock Options

The following table summarizes stock option award activity during the six months ended January 28, 2017:
 
Stock Options
 
Shares
 
Weighted Average Exercise Price
Outstanding as of July 30, 2016
737,267

 
$
20.99

Granted
36,914

 
$
78.46

Options exercised
(48,543
)
 
$
10.06

Canceled
(1,000
)
 
$
6.83

Outstanding as of January 28, 2017
724,638

 
$
24.67

 
 
 
 
Exercisable options as of January 28, 2017
593,666

 
$
18.28


RSUs and Performance RSUs

The following table summarizes RSU and Performance RSU award activity during the six months ended January 28, 2017:
 
Restricted Stock
 
RSUs
 
Performance RSUs
 
Share Units
 
Weighted Average Grant Price
 
Share Units
 
Weighted Average Grant Price
Outstanding as of July 30, 2016
251,264

 
$
42.56

 
625,971

 
$
47.66

Granted
60,485

 
$
77.76

 
274,282

 
$
79.29

Share units vested
(107,447
)
 
$
35.20

 
(287,593
)
 
$
40.53

Forfeited or canceled
(1,223
)
 
$
29.84

 
(53,129
)
 
$
41.18

Outstanding as of January 28, 2017
203,079

 
$
57.01

 
559,531

 
$
67.44


The total amount of granted Performance RSUs presented above consists of 198,140 target shares and 76,142 supplemental shares. During the six months ended January 28, 2017, the Company canceled 49,797 supplemental shares of Performance RSUs outstanding as of July 30, 2016, as a result of the fiscal 2016 performance criteria for attaining those supplemental shares not being met. The total amount of Performance RSUs outstanding as of January 28, 2017 consists of 418,939 target shares and 140,592 supplemental shares.

15. Concentration of Credit Risk

The Company’s customer base is highly concentrated, with its top five customers during each of the six months ended January 28, 2017 and January 23, 2016 accounting for approximately 75.5% and 66.7% of its total contract revenues, respectively. Customers whose contract revenues exceeded 10% of total contract revenue during the three or six months ended January 28, 2017 or January 23, 2016 were as follows:
 
For the Three Months Ended
 
For the Six Months Ended
 
January 28, 2017
 
January 23, 2016
 
January 28, 2017
 
January 23, 2016
AT&T Inc.
28.3%
 
22.4%
 
28.7%
 
20.6%
Comcast Corporation
16.7%
 
13.5%
 
15.8%
 
12.7%
CenturyLink, Inc.
16.5%
 
14.9%
 
16.1%
 
15.3%
Verizon Communications Inc.
8.8%
 
11.9%
 
9.1%
 
10.7%


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Customers whose combined amounts of trade accounts receivable and costs and estimated earnings in excess of billings, net (“CIEB, net”) exceeded 10% of total combined trade receivables and CIEB, net as of January 28, 2017 or July 30, 2016 were as follows (dollars in millions):
 
January 28, 2017
 
July 30, 2016
 
Amount
 
% of Total
 
Amount
 
% of Total
Comcast Corporation
$
126.4

 
18.5%
 
$
95.3

 
13.9%
AT&T Inc.
$
118.9

 
17.4%
 
$
138.8

 
20.3%
Windstream Corporation
$
97.6

 
14.3%
 
$
79.0

 
11.5%
CenturyLink, Inc.
$
79.7

 
11.7%
 
$
79.0

 
11.5%
Verizon Communications Inc.
$
63.2

 
9.3%
 
$
69.0

 
10.1%

In addition, another customer had combined amounts of trade accounts receivable and CIEB, net of $75.6 million, or 11.1%, as of January 28, 2017, and $71.5 million, or 10.4%, as of July 30, 2016.

The Company believes that none of its significant customers were experiencing financial difficulties that would materially impact the collectability of the Company’s trade accounts receivable and costs in excess of billings as of January 28, 2017. See Note 4, Accounts Receivable, and Note 5, Costs and Estimated Earnings in Excess of Billings, for additional information regarding the Company’s trade accounts receivable and costs and estimated earnings in excess of billings.

16. Commitments and Contingencies

In May 2013, CertusView Technologies, LLC (“CertusView”), a wholly-owned subsidiary of the Company, filed suit against S & N Communications, Inc. and S&N Locating Services, LLC (together, “S&N”) in the United States District Court for the Eastern District of Virginia alleging infringement of certain United States patents. In January 2015, the District Court granted S&N’s motion for judgment on the pleadings for failure to claim patent-eligible subject matter, and entered final judgment. In May 2015, the District Court reopened the case to allow S&N to proceed with inequitable conduct counterclaims. A bench trial in the District Court on the inequitable conduct counterclaims whereby S&N was seeking additional grounds to find the patents unenforceable took place in March 2016. In August 2016, the District Court ruled against S&N and in favor of CertusView on the inequitable conduct counterclaims and entered final judgment. Subsequent to the judgment being entered, on August 24, 2016, S&N filed a motion requesting the District Court make a finding that the suit was an exceptional case and award S&N recovery of its attorney fees. On September 1, 2016, CertusView appealed to the Federal Circuit Court the January 2015 District Court judgment of patent invalidity. CertusView expects its appeal will be decided during the second half of calendar 2017. Additionally, on November 21, 2016, the District Court denied S&N’s motion for an exceptional case finding while allowing S&N permission to refile after conclusion of CertusView’s appeal to the Federal Circuit Court.

In September 2016, certain former employees of two subcontractors of TESINC, LLC (“TESINC”), a wholly owned subsidiary of the Company, commenced a lawsuit against those subcontractors, TESINC and a customer of TESINC in the United States District Court for the Eastern District of Pennsylvania. The lawsuit alleges that TESINC, its customer and those subcontractors violated the Fair Labor Standards Act, the Pennsylvania Minimum Wage Act of 1968, the Pennsylvania Wage Payment and Collection Law, and the New Jersey Wage and Hour Law by failing to comply with applicable minimum wage and overtime pay requirements as a result of the misclassification of workers as independent contractors. The plaintiffs seek unspecified damages and other relief on behalf of themselves and a putative class of similarly situated workers who had performed work between April 1, 2016 and June 30, 2016. TESINC answered the complaint on November 14, 2016. The parties have commenced early discovery and are scheduled to attend a court-ordered initial settlement conference before a magistrate judge in March 2017. 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 March 2016, the Company filed suit against Quanta Services, Inc. (“Quanta”) in the United States District Court for the Southern District of New York alleging violation of certain restrictive covenants, including noncompetition and non-solicitation of employees and customers in a Stock Purchase Agreement executed by the parties in December 2012 (the “SPA”). The Company is seeking equitable and declaratory relief. The Company filed an amended complaint in April 2016. In May 2016, Quanta answered the amended complaint and brought a separate counterclaim against the Company seeking a declaration regarding the permissible boundaries of customer solicitation. Discovery was completed in February 2017. A bench trial in the District Court was held in late February 2017. Post-trial briefs are due to be filed by the parties with the District Court in March 2017. An unfavorable outcome may result in an award of attorneys’ fees, costs, and expenses. The Company believes the

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counterclaims to be without merit and intends to vigorously advocate its position that Quanta breached the SPA and defend itself against these counterclaims.

In April 2016, a former employee of Prince Telecom, LLC (“Prince”), a wholly owned subsidiary of the Company, commenced a lawsuit against Prince in the Superior Court of California under the California Labor Code Private Attorneys General Act (“PAGA”). The lawsuit alleges that Prince violated the California Labor Code by, among other things, failing to pay the California minimum wage, failing to pay for all hours worked (including overtime), failing to provide meal breaks and failing to provide accurate wage statements. The plaintiff seeks to recover all penalties arising from each alleged PAGA violation on behalf of himself and a putative class of current and former employees of Prince who worked as technicians in the State of California in the year preceding the filing date of the lawsuit. In December 2016, the plaintiff’s attorney and Prince agreed to settle the lawsuit for an immaterial amount. The parties are preparing the agreement and intend to seek court approval of the proposed settlement.

During the fourth quarter of fiscal 2016, one of the Company’s subsidiaries, which previously contributed to the Pension, Hospitalization and Benefit Plan of the Electrical Industry - Pension Trust Fund (the “Plan”), a multiemployer pension plan, ceased operations. In October 2016, the Plan demanded payment for a claimed withdrawal liability of approximately $13.0 million. In December 2016, the Company submitted a formal request to the Plan seeking review of the Plan’s withdrawal liability determination. The Company is disputing the claim of a withdrawal liability demanded by the Plan as it believes there is a statutory exemption available under the Employee Retirement Income Security Act for multiemployer pension plans that primarily cover employees in the building and construction industry. However, there can be no assurance that the Company will be successful in asserting the statutory exemption as a defense. As required by the Employee Retirement Income Security Act, in November 2016, the subsidiary began making monthly payments of the claimed withdrawal liability to the Plan in the amount of approximately $0.1 million. If the Company prevails in disputing the withdrawal liability all such payments will be refunded to the Company.

With respect to the July 2016 acquisition from Goodman, $20.0 million is escrowed as of January 28, 2017 and is available to the Company for the indemnification obligations of the seller. Of the amount escrowed, $10.0 million will be released to the seller upon the occurrence of certain conditions or the twelve-month anniversary of the closing date. The remaining $10.0 million will be released to the seller when the seller satisfies certain conditions with respect to a dispute with the state of Texas over a Sales Tax Liability of approximately $31.7 million. Under the asset purchase agreement, Goodman has retained responsibility for this Sales Tax Liability. Should Goodman not resolve this matter, the state may assert that the Company is a successor to the operations and seek to recover from the Company. In such event the Company would seek indemnification for recovery from Goodman, including from the funds contained in the escrow account, for any amount the Company pays.

From time to time, the Company is party to various other claims and legal proceedings. It is the opinion of management, based on information available at this time, that such other pending claims or proceedings will not have a material effect on its financial statements.

For claims within its insurance program, the Company retains the risk of loss, up to certain limits, for matters related to automobile liability, general liability (including damages associated with underground facility locating services), workers’ compensation, and employee group health. The Company has established reserves that it believes to be adequate based on current evaluations and experience with these types of claims. For these claims, the effect on the Company’s financial statements is generally limited to the amount needed to satisfy insurance deductibles or retentions.

Performance Bonds and Guarantees - The Company has obligations under performance and other surety contract bonds related to certain of its customer contracts. Performance bonds generally provide a customer with the right to obtain payment and/or performance from the issuer of the bond if the Company fails to perform its contractual obligations. As of January 28, 2017 and July 30, 2016, the Company had $133.7 million and $165.8 million of outstanding performance and other surety contract bonds, respectively.

The Company periodically guarantees certain obligations of its subsidiaries, including obligations in connection with obtaining state contractor licenses and leasing real property and equipment.
 
Letters of Credit - The Company has standby letters of credit issued under its Credit Agreement as part of its insurance program. These standby letters of credit collateralize the Company’s obligations to its insurance carriers in connection with the settlement of potential claims. As of both January 28, 2017 and July 30, 2016, the Company had $57.6 million of outstanding standby letters of credit issued under the Credit Agreement.


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17. Subsequent Events

As of January 28, 2017, $75.0 million remained available for repurchases through October 2017 under the Company’s April 26, 2016 repurchase program authorization. On February 28, 2017, the Company’s Board of Directors extended the term of this repurchase program through August 2018 and authorized an additional $75.0 million to repurchase shares of the Company’s outstanding common stock in open market or private transactions, including through accelerated share repurchase agreements with one or more counterparties from time to time. As of March 2, 2017, the Company has $150.0 million available for repurchases of the Company’s common stock through August 2018.


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Cautionary Note Concerning Forward-Looking Statements
 
This Quarterly Report on Form 10-Q, including any documents incorporated by reference or deemed to be incorporated by reference herein, contains forward-looking statements relating to future events, financial performance, strategies, expectations, and the competitive environment. Words such as “outlook,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “forecast,” “may,” “should,” “could,” “project,” “target” and similar expressions, as well as statements written in the future tense, identify forward-looking statements. They will not necessarily be accurate indications of whether or at what time such performance or results will be achieved.

You should not consider forward-looking statements as guarantees of future performance or results. Forward-looking statements are based on information available at the time they are made and/or management’s good faith belief at that time with respect to future events. Such statements are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors, assumptions, uncertainties, and risks that could cause such differences are discussed within Part II, Item 1A, Risk Factors, of this Quarterly Report on Form 10-Q, as well as Item 1, Business, Item 1A, Risk Factors and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K for the year ended July 30, 2016, filed with the Securities and Exchange Commission on August 31, 2016 and other risks outlined in our other periodic filings with the Securities and Exchange Commission. Our forward-looking statements are expressly qualified in their entirety by this cautionary statement. Our forward-looking statements are only made as of the date of this Quarterly Report on Form 10-Q, and we undertake no obligation to update them to reflect new information or events or circumstances arising after such date.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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 the year ended July 30, 2016. Our Annual Report on Form 10-K for the year ended July 30, 2016 was filed with the Securities and Exchange Commission (“SEC”) on August 31, 2016 and is available on the SEC’s website at www.sec.gov and on our website at www.dycomind.com.

Introduction

We are a leading provider of specialty contracting services throughout the United States and in Canada. Our subsidiary companies provide program management, engineering, construction, maintenance, and installation services for telecommunications providers, underground facility locating services for various utilities, including telecommunications providers, and other construction and maintenance services for electric and gas utilities. We provide the labor, tools and equipment necessary to design, engineer, locate, maintain, expand, install and upgrade the telecommunications infrastructure of our customers.

Significant developments in consumer applications within the telecommunications industry, including advanced digital and video service offerings, continue to increase the demand for greater capacity and enhanced reliability from our customers’ wireline and wireless networks. Telecommunications providers outsource a significant portion of their engineering, construction, maintenance, and installation requirements, driving demand for our services.

Telecommunications network operators are increasingly deploying fiber optic cable technology deeper into their networks and closer to consumers and businesses in order to respond to consumer demand, competitive realities, and public policy support. Several large telephone companies have pursued fiber-to-the-premise and fiber-to-the-node initiatives to compete actively with cable operators. Some telephone companies, which have previously deployed fiber-to-the-node architectures, have definitively transitioned to fiber-to-the-home architectures, while others are beginning to provision video over their fiber-to-the-node architectures. Cable companies continue to increase the speeds of their services to residential customers and to deploy fiber to business customers with increasing urgency. Overall cable capital expenditures, new-build opportunities and capacity expansion through fiber-deep deployments are increasing. Many industry participants are deploying networks designed to provision 1 gigabit speeds to individual consumers and some have articulated plans to deploy speeds beyond 1 gigabit.

Opportunities exist to improve rural networks as a result of Phase II of the Connect America Fund. This program, administered by the Federal Communications Commission (the “FCC”), will provide $1.676 billion in funding per year through 2020 to price cap carriers and others to expand and support broadband deployments in rural areas. In aggregate, our current customers, including several of our top ten customers, have accepted over $1.496 billion in funding per year under this program. New projects resulting from the Connect America Fund Phase II are in planning, engineering, and construction. These

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projects are deploying fiber deeper into rural networks, and more are expected as new multi-year opportunities emerge. These opportunities also include fixed wireless deployments. We expect this program to contribute to demand for services in our industry.

Significant demand for wireless broadband is driven by the proliferation of smart phones and other mobile data devices. To respond to this demand and other advances in technology, wireless carriers are upgrading their networks to 4G technologies and contemplating next generation mobile solutions such as small cells and 5G technologies. Wireless carriers are actively spending on their networks to respond to the significant increase in wireless data traffic, to upgrade network technologies to improve performance and efficiency, and to consolidate disparate technology platforms. As the demand for mobile broadband grows, the amount of wireless traffic that must be “backhauled” over customers’ fiber networks increases and, as a result, carriers are accelerating the deployment of fiber optic cables to cellular sites and small cells. Increasing wireless data traffic and newly emerging wireless technologies are prompting further wireline deployments as wireless and wireline networks converge. Fiber deployments in contemplation of newly emerging wireless technologies are being considered in many regions of the country. These trends are driving demand for our services.

Significant consolidation and merger activity among telecommunications providers can also provide increased demand for our services as networks are integrated. As a result of recent merger activity, several of our large customers have committed to the FCC to expand and increase broadband network capabilities. These customer activities may further create a competitive response driving long-term demand for our services.

The cyclical nature of the industry we serve may affect 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 revenues and results of operations. The business demands of our customers and the demands of their consumers, the introduction of new communication technologies, the physical maintenance needs of customer infrastructure, the actions of our government and the FCC, and overall economic conditions may affect the capital expenditures and maintenance budgets of our telecommunications customers. Changes in our mix of customers, contracts, and business activities, as well as changes in the general level of construction activity also drive variations in revenues and results of operations.

Customer Relationships and Contractual Arrangements

We have established relationships with many leading telecommunications providers, including telephone companies, cable television multiple system operators, wireless carriers, telecommunication equipment and infrastructure providers, and electric and gas utilities. Our customer base is highly concentrated, with our top five customers during each of the six months ended January 28, 2017 and January 23, 2016, accounting for approximately 75.5% and 66.7% of our total contract revenues, respectively. Revenues from our largest customer increased to 28.7% as a percentage of total revenue during the six months ended January 28, 2017 from 20.6% during the six months ended January 23, 2016 as a result of growth in services provided for their network deployments.

The following reflects the percentage of total contract revenue from customers who contributed at least 2.5% to our total contract revenue during the three or six months ended January 28, 2017 or January 23, 2016:
 
For the Three Months Ended
 
For the Six Months Ended
 
January 28, 2017
 
January 23, 2016
 
January 28, 2017
 
January 23, 2016
AT&T Inc.
28.3%
 
22.4%
 
28.7%
 
20.6%
Comcast Corporation
16.7%
 
13.5%
 
15.8%
 
12.7%
CenturyLink, Inc.
16.5%
 
14.9%
 
16.1%
 
15.3%
Verizon Communications Inc.
8.8%
 
11.9%
 
9.1%
 
10.7%
Windstream Corporation
6.0%
 
5.5%
 
5.9%
 
6.0%
Charter Communications, Inc.(1)
3.6%
 
6.7%
 
4.0%
 
7.2%

(1) For comparison purposes in the above table, revenues from Charter Communications, Inc., Time Warner Cable Inc., and Bright House Networks, LLC have been combined for periods prior to their May 2016 merger.

In addition, another customer contributed 5.0% and 6.3% to our total revenue during the three months ended January 28, 2017 and January 23, 2016, respectively, and 4.6% and 7.5% during the six months ended January 28, 2017 and January 23, 2016, respectively.


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We generally possess multiple agreements with each of our significant customers. To the extent that such agreements specify exclusivity, there are often a number of exceptions, including the customer’s ability 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 most cases, a customer may terminate an agreement for convenience with written notice. Historically, multi-year master service agreements have been awarded primarily through a competitive bidding process; however, we occasionally are able to extend these agreements through negotiations. Revenues from multi-year master service agreements were approximately 62.3% and 63.4% of total contract revenues during the three months ended January 28, 2017 and January 23, 2016, respectively, and 62.5% and 62.1% during the six months ended January 28, 2017 and January 23, 2016, respectively.

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 generally three to four months in duration) and often include customary retainage provisions under which the customer may withhold 5% to 10% of the invoiced amounts pending project completion. Revenues from long-term contracts were 24.7% and 18.5% of total contract revenues during the three months ended January 28, 2017 and January 23, 2016, respectively, and 23.9% and 17.6% during the six months ended January 28, 2017 and January 23, 2016, respectively.

Acquisitions

As part of our growth strategy, we may acquire companies that expand, complement, or diversify our business. We regularly review opportunities and periodically engage in discussions regarding possible acquisitions. Our ability to sustain our growth and maintain our competitive position may be affected by our ability to identify, acquire, and successfully integrate companies.

Fiscal 2016 - During August 2015, we acquired TelCom Construction, Inc. and an affiliate (together, “TelCom”). The purchase price was $48.8 million paid in cash. TelCom, based in Clearwater, Minnesota, provides construction and maintenance services for telecommunications providers throughout the United States. This acquisition expands our geographic presence within our existing customer base. During the fourth quarter of fiscal 2016, we acquired NextGen Telecom Services Group, Inc. (“NextGen”) for $5.6 million, net of cash acquired. NextGen provides construction and maintenance services for telecommunications providers in the Northeastern United States. Additionally, during July 2016, we acquired certain assets and assumed certain liabilities associated with the wireless network deployment and wireline operations of Goodman Networks Incorporated (“Goodman”) for a cash purchase price of $107.5 million, less an adjustment of approximately $6.6 million for working capital received below a target amount. The acquired operations provide wireless construction services in a number of markets, including Texas, Georgia, and Southern California. The acquired operations were immediately integrated with the operations of an existing subsidiary which is a larger, well-established provider of services to the same primary customer. The acquisition reinforces our wireless construction resources and expands our geographic presence within our existing customer base. Subsequent to the close of this acquisition, activity levels within the contracts of the acquired operations trended considerably below prior expectations and we reduced our near term revenue expectations. The acquired contracts remain in effect and we have not experienced any adverse changes in customer relations. With the immediate integration of the Goodman operations into our existing subsidiary, we believe our ability to effectively perform services for the customer will provide future opportunities.

With respect to the acquisition from Goodman, $20.0 million is escrowed as of January 28, 2017 and is available to us for the indemnification obligations of the seller. Of the amount escrowed, $10.0 million will be released to the seller upon the occurrence of certain conditions or the twelve-month anniversary of the closing date. The remaining $10.0 million will be released to the seller when the seller satisfies certain conditions with respect to a dispute with the state of Texas over a sales tax liability of approximately $31.7 million (the “Sales Tax Liability”). Under the asset purchase agreement, Goodman has retained responsibility for this Sales Tax Liability. Should Goodman not resolve this matter, the state may assert that we are a successor to the operations and seek to recover from us. In such event we would seek indemnification for recovery from Goodman, including from the funds contained in the escrow account, for any amount we pay.

The results of these businesses acquired are included in the condensed consolidated financial statements from their respective dates of acquisition. The purchase price allocation of TelCom was completed during the fourth quarter of fiscal 2016. Purchase price allocations of the Goodman and NextGen acquisitions are preliminary and will be completed during fiscal 2017 when valuations for intangible assets and other amounts are finalized.


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Understanding Our Results of Operations

The following information is presented in order for the reader to better understand certain factors impacting our results of operations and profitability, and should be read in conjunction with Critical Accounting Policies and Estimates within Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as Note 1, Basis of Presentation and Accounting Policies, in the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended July 30, 2016 filed with the SEC on August 31, 2016.

Revenues. We perform a majority of our services under master service agreements and other agreements that contain customer-specified service requirements, such as discrete pricing for individual tasks. We recognize revenue under these arrangements based on units-of-delivery as each unit is completed. The remainder of our services, representing less than 5% of our contract revenues during the six months ended January 28, 2017 and less than 10% of our contract revenues during the six months ended January 23, 2016, are performed under contracts using the cost-to-cost measure of the percentage of completion method of accounting. Revenue is recognized under these arrangements based on the ratio of contract costs incurred to date to total estimated contract costs. For contracts using the cost-to-cost measure of completion, we accrue the entire amount of a contract loss at the time the loss is determined to be probable and can be reasonably estimated. During the six months ended January 28, 2017 and January 23, 2016, there were no material impacts to our results of operations due to changes in contract estimates.

There were no material amounts of unapproved change orders or claims recognized during the six months ended January 28, 2017 or January 23, 2016. The current asset “Costs and estimated earnings in excess of billings” represents revenues recognized in excess of amounts billed. The current liability “Billings in excess of costs and estimated earnings” represents billings in excess of revenues recognized.

Cost of Earned Revenues. Cost of earned revenues includes all direct costs of providing services under our contracts, including costs for direct labor provided by employees, services by independent subcontractors, operation of capital equipment (excluding depreciation), direct materials, insurance costs, and other direct costs. For claims within 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. We incur information technology and development costs primarily to support and enhance our operating efficiency. To protect our rights, we have filed for patents on certain of our innovations. 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, contract backlog, trade names, and non-compete intangibles, which we amortize over the estimated useful lives. We recognize amortization of customer relationship intangibles and acquired contract backlog intangibles on an accelerated basis as a function of the expected economic benefit. We recognize amortization of our other finite-lived intangibles on a straight-line basis over the estimated useful life.

Loss on Debt Extinguishment. Loss on debt extinguishment for the six months ended January 23, 2016 includes pre-tax charges related to the redemption of our 7.125% senior subordinated notes (the “7.125% Notes”), including the write-off of deferred debt issuance costs on the 7.125% Notes.

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 non-cash amortization of our convertible senior notes debt discount and amortization of debt issuance costs. See Note 10, 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 during the six months ended January 28, 2017 also includes discount fee expense associated with the collection of accounts receivable under a customer-sponsored vendor payment program which we began participating in during the fourth quarter of fiscal 2016.

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Seasonality and Quarterly Fluctuations. Our revenues and results of operations exhibit seasonality as we perform a significant portion of our work outdoors. Consequently, extended periods of adverse weather, which are more likely to occur during the winter season, impact our operations during our second and third fiscal quarters. In addition, a disproportionate percentage of paid holidays fall within our second fiscal quarter, which decreases the number of available workdays. Because of these factors, we are most likely to experience reduced revenue and profitability during our second and third fiscal quarters.

We experience quarterly variations in revenues and results of operations as a result of other factors as well. Such factors include fluctuations in insurance expense due to changes in claims experience and actuarial assumptions, variances in incentive pay and stock-based compensation expense as a result of operating performance and vesting provisions, and changes in the employer portion of payroll taxes, including unemployment taxes, as a result of reaching statutory limits. Other factors that may contribute to quarterly variations in results of operations include other income recognized as a result of the timing and levels of capital assets sold during the period, income tax expense attributable to levels of taxable earnings, and the impact of disqualifying dispositions of incentive stock option expenses.

Accordingly, operating results for any fiscal period are not necessarily indicative of results we may achieve for any subsequent fiscal period.

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, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these financial statements in conformity with GAAP 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 critical accounting policies and critical accounting estimates described in our Annual Report on Form 10-K for the year ended July 30, 2016. Our disclosure of critical accounting policies and estimates with respect to goodwill and other intangible assets is included below for the purpose of providing additional disclosure regarding recently acquired operations.

Goodwill and Intangible Assets. As of January 28, 2017, we had approximately $312.7 million of goodwill, $4.7 million of indefinite-lived intangible assets and $180.9 million of finite-lived intangible assets, net of accumulated amortization. As of July 30, 2016, we had $310.2 million of goodwill, $4.7 million of indefinite-lived intangible assets and $193.2 million of finite-lived intangible assets, net of accumulated amortization. As of July 25, 2015, we had $271.7 million of goodwill, $4.7 million of indefinite-lived intangible assets and $116.2 million of finite-lived intangible assets, net of accumulated amortization. The increase in goodwill during fiscal 2016 is primarily the result of preliminary purchase price allocations associated with businesses acquired in fiscal 2016. The increase in net intangible assets is a result of businesses acquired during fiscal 2016, partially offset by amortization of intangibles during fiscal 2016. See Note 7, Goodwill and Intangible Assets, in the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q and in the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended July 30, 2016.

We account for goodwill and other intangibles in accordance with ASC Topic 350, Intangibles - Goodwill and Other (“ASC Topic 350”). Goodwill and other indefinite-lived intangible assets are assessed annually for impairment as of the first day of the fourth fiscal quarter of each year, or more frequently if events occur that would indicate a potential reduction in the fair value of a reporting unit below its carrying value. We perform our annual impairment review of goodwill at the reporting unit level. Each of our operating segments with goodwill represents a reporting unit for the purpose of assessing impairment. If we determine the fair value of the reporting unit’s goodwill or other indefinite-lived intangible assets is less than their carrying value as a result of the tests, an impairment loss is recognized and reflected in operating income or loss in the consolidated statements of operations during the period incurred.

In accordance with ASC Topic 360, Impairment or Disposal of Long-Lived Assets, we review finite-lived intangible assets for impairment whenever an event occurs or circumstances change that indicates that the carrying amount of such assets may not be fully recoverable. Recoverability is determined based on an estimate of undiscounted future cash flows resulting from the use of an asset and its eventual disposition. Should an asset not be recoverable, an impairment loss is measured by comparing the fair value of the asset to its carrying value. If we determine the fair value of an asset is less than the carrying value, an impairment loss is recognized in operating income or loss in the consolidated statements of operations during the period incurred.


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We use judgment in assessing whether goodwill and intangible assets are impaired. Estimates of fair value are based on our projection of revenues, operating costs, and cash flows taking into consideration historical and anticipated future results, general economic and market conditions, as well as the impact of planned business or operational strategies. We determine the fair value of our reporting units using a weighting of fair values derived equally from the income approach and the market approach valuation methodologies. The income approach uses the discounted cash flow method and the market approach uses the guideline company method. Changes in our judgments and projections could result in significantly different estimates of fair value, potentially resulting in impairments of goodwill and other intangible assets. The inputs used for fair value measurements of the reporting units and other related indefinite-lived intangible assets are the lowest level (Level 3) inputs.

Our goodwill resides in multiple reporting units. The profitability of individual reporting units may suffer periodically due to downturns in customer demand and the level of overall economic activity including, in particular, construction and housing activity. Our customers may reduce capital expenditures and defer or cancel pending projects during times of slowing economic conditions. Additionally, adverse conditions in the economy and future volatility in the equity and credit markets could impact the valuation of our reporting units. The cyclical nature of our business, the high level of competition existing within our industry, and the concentration of our revenues from a limited number of customers may also cause results to vary. These factors may affect individual reporting units disproportionately, relative to the Company as a whole. As a result, the performance of one or more of the reporting units could decline, resulting in an impairment of goodwill or intangible assets.

We evaluate current operating results, including any losses, in the assessment of goodwill and other intangible assets. The estimates and assumptions used in assessing the fair value of the reporting units and the valuation of the underlying assets and liabilities are inherently subject to significant uncertainties. Changes in judgments and estimates could result in significantly different estimates of the fair value of the reporting units and could result in impairments of goodwill or intangible assets of the reporting units. In addition, adverse changes to the key valuation assumptions contributing to the fair value of our reporting units could result in an impairment of goodwill or intangible assets.

During July 2016, we acquired the wireless network deployment and wireline operations of Goodman for $107.5 million, less an adjustment of approximately $6.6 million for working capital received below a target amount. The purchase price was allocated based on the fair value of the assets acquired and the liabilities assumed on the date of acquisition and was primarily allocated to goodwill and other intangible assets. The acquired operations were immediately integrated with the operations of an existing subsidiary which is a larger, well-established provider of services to the same primary customer. Subsequent to the close of this acquisition, activity levels within the contracts of the acquired operations trended considerably below prior expectations and we reduced our near term revenue expectations. As a result of the decline, we assessed whether it was more likely than not that the fair value of the reporting unit declined below the reporting unit’s carrying amount. With the immediate integration of the Goodman operations into our existing subsidiary, which is part of an existing reporting unit, we believe our ability to effectively perform services for the customer will provide future opportunities. Further, the acquired contracts remain in effect and we have not experienced any adverse changes in customer relations. Additionally, we believe that the fair value of the reporting unit containing the recently acquired operations remains substantially in excess of its carrying amount as of January 28, 2017. As a result, we determined that it was not more likely than not that the fair value of the reporting unit declined below its carrying amount as of January 28, 2017.

We performed our annual impairment assessment as of the first day of the fourth quarter of each of fiscal 2016, 2015, and 2014 and concluded that no impairment of goodwill or the indefinite-lived intangible asset was indicated at any reporting unit for any of the years. Qualitative assessments on reporting units that comprise a substantial portion of our consolidated goodwill balance and on our indefinite-lived intangible asset were performed. A qualitative assessment includes evaluating all identified events and circumstances that could affect the significant inputs used to determine the fair value of a reporting unit or indefinite-lived intangible asset for the purpose of determining whether it is more likely than not that these assets are impaired. We consider various factors while performing qualitative assessments, including macroeconomic conditions, industry and market conditions, financial performance of the reporting units, changes in market capitalization, and any other specific reporting unit considerations. These qualitative assessments indicated that it was more likely than not that the fair value exceeded carrying value for those reporting units. For the remaining reporting units, we performed the first step of the quantitative analysis described in ASC Topic 350. Under the income approach, the key valuation assumptions used in determining the fair value estimates of our reporting units for each annual test were (a) a discount rate based on our best estimate of the weighted average cost of capital adjusted for certain risks for the reporting units; (b) terminal value based on terminal growth rates; and (c) seven expected years of cash flow before the terminal value.


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The table below outlines certain assumptions in each of our fiscal 2016, 2015, and 2014 annual quantitative impairment analyses:
 
2016
 
2015
 
2014
Terminal Growth Rate
2.0% - 3.0%
 
1.5% - 2.5%
 
1.5% - 3.0%
Discount Rate
11.5%
 
11.5%
 
11.5%

The discount rate reflects risks inherent within each reporting unit operating individually. These risks are greater than the risks inherent in the Company as a whole. The fiscal 2016, 2015, and 2014 analyses used the same discount rate and included consideration of market inputs such as the risk-free rate, equity risk premium, industry premium, and cost of debt, among other assumptions. The changes in these inputs from fiscal 2016, 2015 and 2014 had offsetting impacts and the discount rate remained at 11.5%. We believe the assumptions used in the impairment analysis each year are reflective of the risks inherent in the business models of our reporting units and within our industry. Under the market approach, the guideline company method develops valuation multiples by comparing our reporting units to similar publicly traded companies. Key valuation assumptions and valuation multiples used in determining the fair value estimates of our reporting units rely on (a) the selection of similar companies; (b) obtaining estimates of forecast revenue and earnings before interest, taxes, depreciation, and amortization for the similar companies; and (c) selection of valuation multiples as they apply to the reporting unit characteristics.

We determined that the fair values of each of the reporting units were substantially in excess of their carrying values in the fiscal 2016 annual assessment. Management determined that significant changes were not likely in the factors considered to estimate fair value, and analyzed the impact of such changes were they to occur. Specifically, if there was a 25% decrease in the fair value of any of the reporting units due to a decline in their discounted cash flows resulting from lower operating performance, the conclusion of the assessment would remain unchanged. Additionally, if the discount rate applied in the fiscal 2016 impairment analysis had been 100 basis points higher than estimated for each of the reporting units, and all other assumptions were held constant, the conclusion of the assessment would remain unchanged and there would be no impairment of goodwill. As of July 30, 2016, we believe the goodwill is recoverable for all of the reporting units. As of January 28, 2017, we continue to believe that no impairment has occurred. However, significant adverse changes in the projected revenues and cash flows of a reporting unit could result in an impairment of goodwill. There can be no assurances that goodwill may not be impaired in future periods.

Certain of our reporting units also have other intangible assets, including customer relationships, contract backlog, trade names, and non-compete intangibles. As of January 28, 2017 and July 30, 2016, we believe that the carrying amounts of these intangible assets, including those of the recently acquired operations, are recoverable. However, if adverse events were to occur or circumstances were to change indicating that the carrying amount of such assets may not be fully recoverable, the assets would be reviewed for impairment and the assets could be impaired.


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Results of Operations
 
The results of operations of businesses acquired are included in the condensed consolidated financial statements from their dates of acquisition. The following table sets forth our condensed consolidated statements of operations for the periods indicated and the amounts as a percentage of revenue (totals may not add due to rounding) (dollars in millions):
 
For the Three Months Ended
 
For the Six Months Ended
 
January 28, 2017
 
January 23, 2016
 
January 28, 2017
 
January 23, 2016
Revenues
$
701.1

 
100.0
 %
 
$
559.5

 
100.0
 %
 
$
1,500.4

 
100.0
 %
 
$
1,218.7

 
100.0
 %
Expenses:
 
 
 
 
 
 
 
 
 

 
 

 
 
 
 
Cost of earned revenue, excluding depreciation and amortization
561.4

 
80.1

 
450.3

 
80.5

 
1,176.4

 
78.4

 
957.3

 
78.5

General and administrative
58.2

 
8.3

 
47.0

 
8.4

 
118.4

 
7.9

 
98.5

 
8.1

Depreciation and amortization
35.7

 
5.1

 
29.9

 
5.3

 
70.3

 
4.7

 
57.3

 
4.7

Total
655.3

 
93.5

 
527.2

 
94.2

 
1,365.0

 
91.0

 
1,113.1

 
91.3

Interest expense, net
(9.2
)
 
(1.3
)
 
(7.9
)
 
(1.4
)
 
(18.2
)
 
(1.2
)
 
(17.0
)
 
(1.4
)
Loss on debt extinguishment

 

 

 

 

 

 
(16.3
)
 
(1.3
)
Other income, net
1.0

 
0.1

 
1.1

 
0.2

 
1.9

 
0.1

 
2.5

 
0.2

Income before income taxes
37.7

 
5.4


25.5

 
4.6

 
119.0

 
7.9

 
74.9

 
6.1

Provision for income taxes
14.0

 
2.0

 
10.0

 
1.8

 
44.3

 
3.0

 
28.6

 
2.3

Net income
$
23.7

 
3.4
 %
 
$
15.5

 
2.8
 %
 
$
74.7

 
5.0
 %
 
$
46.3

 
3.8
 %

Our fiscal year ends on the last Saturday in July. As a result, each fiscal year consists of either 52 weeks or 53 weeks of operations (with the additional week of operations occurring in the fourth quarter). Fiscal 2016 consisted of 53 weeks of operations and fiscal 2017 will consist of 52 weeks of operations.

Revenues. Revenues increased to $701.1 million during the three months ended January 28, 2017 from $559.5 million during the three months ended January 23, 2016. Revenues increased in the current period primarily from services for customers deploying 1 gigabit networks, new awards with significant customers, and revenues generated by businesses acquired during fiscal 2016.

During the three months ended January 28, 2017, total revenues of $13.4 million were generated by businesses that were not owned during the second fiscal quarter in the prior year. Excluding this amount, revenues increased by approximately $128.2 million during the three months ended January 28, 2017 as compared to the three months ended January 23, 2016. Revenues increased by approximately $61.0 million for a significant telecommunications customer improving its network and by approximately $41.5 million for a leading cable multiple system operator from installation, maintenance and construction services, including services to provision fiber to small and medium businesses, as well as network improvements. Revenues increased by approximately $32.0 million for a large telecommunications customer primarily reflecting increases in the volume of services performed under existing contracts and new awards. Additionally, revenues increased by approximately $11.5 million for services performed for a telecommunications customer in connection with rural services. Revenues increased approximately $9.1 million for a customer who recently acquired certain wireline operations from another large telecommunications customer. Partially offsetting these increases, revenues declined by approximately $12.2 million for services performed for a cable multiple system operator. All other customers had net decreases in revenues of $14.7 million on a combined basis during the three months ended January 28, 2017, as compared to the three months ended January 23, 2016.

The percentage of our revenue by customer type from telecommunications, underground facility locating, and electric and gas utilities and other customers, was approximately 92.6%, 4.9%, and 2.5%, respectively, for the three months ended January 28, 2017, compared to 90.0%, 6.0%, and 4.0%, respectively, for the three months ended January 23, 2016.

Revenues increased to $1.500 billion during the six months ended January 28, 2017 from $1.219 billion during the six months ended January 23, 2016. Revenues increased in the current period primarily from services for customers deploying 1 gigabit networks, new awards with significant customers, and revenues generated by businesses acquired during fiscal 2016.

During the six months ended January 28, 2017 and January 23, 2016, total revenues of $101.2 million and $55.8 million, respectively, were generated by businesses that were not owned for the entire period in both the current and prior year.

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Excluding these amounts, revenues increased by approximately $236.3 million during the six months ended January 28, 2017 as compared to the six months ended January 23, 2016. Revenues increased by approximately $152.1 million for a significant telecommunications customer improving its network and by approximately $83.0 million for a leading cable multiple system operator from installation, maintenance and construction services, including services to provision fiber to small and medium businesses, as well as network improvements. Revenues increased by approximately $33.9 million for a large telecommunications customer primarily reflecting increases in the volume of services performed under existing contracts and new awards. Additionally, revenues increased by approximately $19.8 million for a customer who recently acquired certain wireline operations from another large telecommunications customer. Revenues also increased approximately $11.2 million for services performed for a telecommunications customer in connection with rural services. Partially offsetting these increases, revenues declined by approximately $29.0 million for services performed for a cable multiple system operator and by approximately $22.3 million for services performed on a customer’s fiber network. All other customers had net decreases in revenues of $12.4 million on a combined basis during the six months ended January 28, 2017, as compared to the six months ended January 23, 2016.

The percentage of our revenue by customer type from telecommunications, underground facility locating, and electric and gas utilities and other customers, was approximately 92.1%, 5.2%, and 2.7%, respectively, for the six months ended January 28, 2017, compared to 90.5%, 5.8%, and 3.7%, respectively, for the six months ended January 23, 2016.

Costs of Earned Revenues. Costs of earned revenues increased to $561.4 million, or 80.1% of contract revenue, during the three months ended January 28, 2017, compared to $450.3 million, or 80.5% of contract revenue, during the three months ended January 23, 2016. The increase in total costs of earned revenues during the three months ended January 28, 2017 was primarily due to a higher level of operations, including the operating costs of businesses acquired during the fourth quarter of fiscal 2016. The primary components of the increase were a $89.3 million aggregate increase in direct labor and subcontractor costs, $10.6 million increase in direct material costs, and $11.2 million net increase in other direct costs.

As a percentage of contract revenue, direct material costs and other direct costs decreased 1.1%, on a combined basis, primarily as a result of operating leverage on our increased level of operations and mix of work during the three months ended January 28, 2017. Partially offsetting this decrease, labor and subcontracted labor costs increased 0.7% of contract revenue during the three months ended January 28, 2017, compared to the three months ended January 23, 2016 primarily resulting from costs incurred as the scale of our operations expanded.

Costs of earned revenues increased to $1.176 billion, or 78.4% of contract revenue, during the six months ended January 28, 2017, compared to $957.3 million, or 78.5% of contract revenue, during the six months ended January 23, 2016. The increase in total costs of earned revenues during the six months ended January 28, 2017 was primarily due to a higher level of operations, including the operating costs of businesses acquired during fiscal 2016. The primary components of the increase were a $184.1 million aggregate increase in direct labor and subcontractor costs and a $16.7 million increase in direct material costs, and $18.3 million net increase in other direct costs.

As a percentage of contract revenue, direct material costs and other direct costs decreased 1.5%, on a combined basis, primarily as a result of operating leverage on our increased level of operations and mix of work during the six months ended January 28, 2017. Partially offsetting this decrease, labor and subcontracted labor costs increased 1.4% of contract revenue for the six months ended January 28, 2017, compared to the six months ended January 23, 2016. The increase in labor and subcontracted labor costs as a percentage of contract revenue primarily resulted from costs incurred as the scale of our operations expanded.

General and Administrative Expenses. General and administrative expenses increased to $58.2 million, or 8.3% of contract revenue, during the three months ended January 28, 2017, compared to $47.0 million, or 8.4% of contract revenue, during the three months ended January 23, 2016. The increase in total general and administrative expenses during the three months ended January 28, 2017 primarily resulted from higher legal fees and increased payroll and performance-based compensation costs. Additionally, stock-based compensation increased to $5.3 million during the three months ended January 28, 2017, compared to $4.2 million during the three months ended January 23, 2016. The decrease in general and administrative expenses as a percentage of contract revenue is due to operating leverage on our increased level of operations.

General and administrative expenses increased to $118.4 million, or 7.9% of contract revenue, during the six months ended January 28, 2017, compared to $98.5 million, or 8.1% of contract revenue, during the six months ended January 23, 2016. The increase in total general and administrative expenses during the six months ended January 28, 2017 primarily resulted from increased payroll and performance-based compensation costs and higher legal fees. Additionally, stock-based compensation increased to $11.0 million during the six months ended January 28, 2017, compared to $8.7 million during the six months

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ended January 23, 2016. The decrease in general and administrative expenses as a percentage of contract revenue is due to operating leverage on our increased level of operations.

Depreciation and Amortization. Depreciation and amortization was $35.7 million and $29.9 million during the three months ended January 28, 2017 and January 23, 2016, respectively, and totaled 5.1% and 5.3% of contract revenue, respectively. Depreciation and amortization was $70.3 million and $57.3 million during the six months ended January 28, 2017 and January 23, 2016, respectively, and totaled 4.7% of contract revenue during each of the six months ended January 28, 2017 and January 23, 2016. The increase in depreciation and amortization expense during the three and six months ended January 28, 2017 is a result of the addition of fixed assets during fiscal 2017 and fiscal 2016 and the incremental expense of businesses acquired during fiscal 2016. Amortization expense was $6.1 million and $4.7 million during the three months ended January 28, 2017 and January 23, 2016, respectively, and was $12.3 million and $9.5 million during the six months ended January 28, 2017 and January 23, 2016, respectively.

Interest Expense, Net. Interest expense, net was $9.2 million and $7.9 million during the three months ended January 28, 2017 and January 23, 2016, respectively. Interest expense includes approximately $4.4 million and $4.1 million during the three months ended January 28, 2017 and January 23, 2016, respectively, for the non-cash amortization of debt discount associated with our convertible senior notes. Excluding this amortization, interest expense, net increased to $4.8 million during the three months ended January 28, 2017, from $3.7 million during the three months ended January 23, 2016, primarily due to higher debt balances outstanding during the current period.

Interest expense, net was $18.2 million and $17.0 million during the six months ended January 28, 2017 and January 23, 2016, respectively. Interest expense includes approximately $8.7 million and $5.9 million during the six months ended January 28, 2017 and January 23, 2016, respectively, for the non-cash amortization of debt discount associated with our convertible senior notes. Excluding this amortization, interest expense, net decreased to $9.6 million during the six months ended January 28, 2017 from $11.1 million during the six months ended January 23, 2016, primarily due to the lower interest coupon rate on the convertible senior notes issued in September 2015 compared to the previously outstanding 7.125% Notes. See Note 10, Debt, in Notes to the Condensed Consolidated Financial Statements for additional information regarding the Company’s debt transactions.

Loss on Debt Extinguishment. In connection with the redemption of our 7.125% Notes, we incurred a pre-tax charge for early extinguishment of debt of approximately $16.3 million during the first quarter of fiscal 2016. See Note 10, Debt, in Notes to the Condensed Consolidated Financial Statements for additional information regarding the Company’s debt transactions.

Other Income, Net. Other income, net was $1.0 million and $1.1 million during the three months ended January 28, 2017 and January 23, 2016, respectively, and $1.9 million and $2.5 million during the six months ended January 28, 2017 and January 23, 2016, respectively. Other income, net reflects approximately $0.9 million and $1.5 million of discount fee expense during the three and six months ended January 28, 2017, respectively, associated with the collection of accounts receivable under a customer-sponsored vendor payment program which we began participating in during the fourth quarter of fiscal 2016. These costs were partially offset by increases in other income based on the number of assets sold and prices obtained for those assets during the three and six months ended January 28, 2017, compared to the prior year periods.
 
Income Taxes. The following table presents our income tax provision and effective income tax rate for the three and six months ended January 28, 2017 and January 23, 2016 (dollars in millions):
 
 
For the Three Months Ended
 
For the Six Months Ended
 
 
January 28, 2017
 
January 23, 2016
 
January 28, 2017
 
January 23, 2016
Income tax provision
 
$
14.0

 
$
10.0

 
$
44.3

 
$
28.6

Effective income tax rate
 
37.2
%
 
39.2
%
 
37.2
%
 
38.2
%
 
Fluctuations in our effective income tax rate were primarily attributable to the difference in income tax rates from state to state, non-deductible and non-taxable items, certain dispositions of incentive stock option exercises, and production-related tax deductions recognized in relation to our pre-tax results during the periods. We had total unrecognized tax benefits of approximately $2.4 million as of both January 28, 2017 and July 30, 2016 which, if recognized, would favorably affect our effective tax rate.
   
Net Income. Net income was $23.7 million for the three months ended January 28, 2017, compared to $15.5 million for the three months ended January 23, 2016. Net income was $74.7 million for the six months ended January 28, 2017, compared to $46.3 million for the six months ended January 23, 2016.

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Liquidity and Capital Resources

We are subject to concentrations of credit risk relating primarily to our cash and equivalents, accounts receivable, and costs and estimated earnings in excess of billings. Cash and equivalents primarily include balances on deposit with banks and totaled $29.5 million as of January 28, 2017, compared to $33.8 million as of July 30, 2016. 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.

In connection with the issuance of the 0.75% convertible senior notes due September 2021, we entered into privately-negotiated convertible note hedge transactions with certain counterparties. We are subject to counterparty risk with respect to these convertible note hedge transactions. The hedge counterparties are financial institutions, and we are subject to the risk that they might default under the convertible note hedge transactions. To mitigate that risk, we contracted with institutional counterparties who met specific requirements under our risk assessment process. Additionally, the transactions are subject to a netting arrangement, which also reduces credit risk.

Sources of Cash. Our sources of cash are operating activities, long-term debt, equity offerings, stock option proceeds, bank borrowings, and proceeds from the sale of idle and surplus equipment and real property. 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, equipment, materials, and subcontractors, 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 $644.0 million as of January 28, 2017, compared to $541.7 million as of July 30, 2016.

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, including for investment in acquisitions, and 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 our convertible senior notes and outstanding borrowings under our credit agreement, working capital requirements, and the normal replacement of equipment at our current level of operations for at least the next twelve months. Our capital requirements may increase to the extent we seek to grow by acquisitions that involve consideration other than our stock, or to the extent we repurchase our common stock, repay credit agreement borrowings, or repurchase or convert our convertible senior notes. 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 six months ended January 28, 2017 and January 23, 2016 (dollars in millions):
 
For the Six Months Ended
 
January 28, 2017
 
January 23, 2016
Net cash flows:
 
 
 
Provided by operating activities
$
64.2

 
$
46.5

Used in investing activities
$
(71.1
)
 
$
(137.4
)
Provided by financing activities
$
2.6

 
$
89.8

 
Cash Provided by Operating Activities. During the six months ended January 28, 2017, net cash provided by operating activities was $64.2 million. Non-cash items in the cash flows from operating activities during the current and prior periods

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were primarily depreciation and amortization, stock-based compensation, amortization of debt discount and debt issuance costs, write-off of deferred financing fees and premium on long-term debt, deferred income taxes, gain on sale of fixed assets, and bad debt expense. Changes in working capital (excluding cash) and changes in other long-term assets and liabilities used $101.0 million of operating cash flow during the six months ended January 28, 2017. Working capital changes that used operating cash flow during the six months ended January 28, 2017 included increases in net costs and estimated earnings in excess of billings of $30.4 million resulting from an increase in the volumes of activity and the related revenue from several of our top customers during fiscal 2017. In addition, there was a net increase in income tax receivable of $33.3 million primarily as a result of the timing of annual estimated tax payments made during the six months ended January 28, 2017. Decreases in accounts payable and accrued liabilities used $14.7 million and $24.8 million, respectively, of operating cash flow primarily resulting from the timing of payments, including for amounts paid for annual incentive compensation during October 2016. Net increases in other current assets and other non-current assets combined used $16.9 million of operating cash flow during the six months ended January 28, 2017 primarily for costs that coincide with the beginning of our fiscal year and increases of inventory. Working capital changes that provided operating cash flow during the six months ended January 28, 2017 were decreases in accounts receivable of $19.1 million from customer collection activity.

Our days sales outstanding (“DSO”) for accounts receivable is calculated based on the ending accounts receivable divided by the average daily revenue for the most recently completed quarter. Contract payment terms vary by customer and primarily range from 30 to 90 days after invoicing. Our DSO for accounts receivable was 40 days as of January 28, 2017, compared to 52 days as of January 23, 2016. During the fourth quarter of fiscal 2016, we began participating in a customer-sponsored vendor payment program. All eligible accounts receivables from this customer are included in the program and payment is received pursuant to a non-recourse sale to a bank partner of the customer. This program effectively reduces the time to collect these receivables as compared to that customer’s standard payment terms. The program has not changed since its inception during the fourth quarter of fiscal 2016. Our DSO for costs and estimated earnings in excess of billings (“CIEB”) was 49 days and 47 days as of January 28, 2017 and January 23, 2016, respectively.

Our CIEB balances are maintained at a detailed task-specific level or project level and are evaluated regularly for realizability. Such amounts are invoiced in the normal course of business according to contract terms that consider the completion of specific tasks and the passage of time. Project delays for commercial issues such as permitting, engineering changes, incremental documentation requirements, or difficult job site conditions can extend the time needed to complete certain work orders, which may delay invoicing to the customer for work performed. We were not experiencing any material project delays or other circumstances that would impact the realizability of the CIEB balance as of January 28, 2017 or July 30, 2016. Additionally, there were no material amounts of CIEB related to claims or unapproved change orders as of January 28, 2017 or July 30, 2016. As of January 28, 2017, we believe that none of our significant customers were experiencing financial difficulties that would impact the realizability of our CIEB or the collectability of our trade accounts receivable
During the six months ended January 23, 2016, net cash provided by operating activities was $46.5 million. Changes in working capital (excluding cash) and changes in other long-term assets and liabilities used $85.5 million of operating cash flow. The primary working capital sources of cash flow were decreases in accounts receivable of $7.8 million. Working capital changes that used operating cash flow during the six months ended January 23, 2016 were increases in costs and estimated earnings in excess of billings of $18.2 million. Additionally, decreases in accrued liabilities used $22.3 million of operating cash flow primarily resulting from amounts paid for annual incentive compensation during October 2015 and working capital changes of businesses acquired in the first quarter of fiscal 2016. In addition, net increases in other current assets and other non-current assets used $13.0 million of operating cash flow during the six months ended January 23, 2016 primarily for inventory and for prepaid costs during the period. Decreases in accounts payable of $15.3 million used operating cash flow during the six months ended January 23, 2016 due to the timing of cash payments. Furthermore, there was a net increase in income tax receivable of $24.4 million primarily as a result of tax payments made during the six months ended January 23, 2016.
Cash Used in Investing Activities. Net cash used in investing activities was $71.1 million during the six months ended January 28, 2017, compared to $137.4 million during the six months ended January 23, 2016. During the six months ended January 28, 2017 and January 23, 2016, capital expenditures of $76.9 million and $90.9 million, respectively, were offset in part by proceeds from the sale of assets of $4.3 million and $2.7 million, respectively, primarily as a result of spending for new work opportunities and the replacement of certain fleet assets. During the second quarter of fiscal 2017, we received $1.8 million in proceeds for working capital adjustments related to the Goodman acquisition. Restricted cash, primarily related to funding provisions of our insurance program, increased approximately $0.4 million and $0.5 million during the six months ended January 28, 2017 and January 23, 2016, respectively. Additionally, during the six months ended January 23, 2016, we paid $48.8 million in connection with the acquisition of TelCom.


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Cash Provided by Financing Activities. Net cash provided by financing activities was $2.6 million during the six months ended January 28, 2017. We received $35.0 million in proceeds from an incremental term loan facility entered into during the period and made principal payments of $4.4 million on our aggregate term loan facilities during the six months ended January 28, 2017. Additionally, we repurchased 313,006 shares of our common stock in open market transactions, at an average price of $79.87, for $25.0 million. Other financing activities during the six months ended January 28, 2017 included $0.5 million received from the exercise of stock options and $6.8 million received for excess tax benefits, primarily from the vesting of restricted share units. We withheld shares and paid $10.2 million to tax authorities in order to meet the payroll tax withholding obligations on restricted share units that vested during the six months ended January 28, 2017.

Net cash provided by financing activities was $89.8 million during the six months ended January 23, 2016. The primary source of cash provided by financing activities during the six months ended January 23, 2016 was the $485.0 million principal amount of 0.75% convertible senior notes due 2021 (the “Notes”) issued in a private placement in September 2015. During the six months ended January 23, 2016, we paid approximately $15.5 million in total issuance costs, including the initial purchasers’ discount on the Notes and third party fees and expenses related to our financing transactions. We used approximately $277.5 million of the net proceeds from the Notes issuance to fund the redemption of our 7.125% senior subordinated notes. Furthermore, in connection with the offering of the Notes, we entered into convertible note hedge transactions with counterparties for a total cost of approximately $115.8 million. We also entered into separately negotiated warrant transactions with the same counterparties as the convertible hedge transactions, and received proceeds of approximately $74.7 million from the sale of these warrants. Refer to Note 10, Debt, in the Notes to the Condensed Consolidated Financial Statements for additional discussion of these debt transactions. Borrowings under our credit agreement, net of repayments, were $8.0 million during the six months ended January 23, 2016.

During the six months ended January 23, 2016, we repurchased 954,224 shares of our common stock in open market transactions, at an average price of $73.35 per share, for approximately $70.0 million. In addition, we received $1.8 million from the exercise of stock options and received excess tax benefits of $11.3 million primarily from the exercises of stock options and vesting of restricted share units during th