DYCOM INDUSTRIES INC - 10-Q Quarterly Report

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.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


		Page No.
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements — Unaudited Condensed Consolidated Balance Sheets — October 30, 2004 and July 31, 2004		3

	Condensed Consolidated Statements of Operations for the Three Months Ended October 30, 2004 and October 25, 2003		4

	Condensed Consolidated Statements of Cash Flows for the Three Months Ended October 30, 2004 and October 25, 2003		5-6

	Notes to Condensed Consolidated Financial Statements		7-17

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18-24

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		24

Item 4.	Controls and Procedures		24


PART II.	OTHER INFORMATION

Item 6.	Exhibits		25

SIGNATURES			26
Section 302 Certification of CEO
Section 302 Certification of CFO
Section 906 Certification of CEO
Section 906 Certification of CFO


	October 30,			July 31,
	2004			2004
ASSETS

CURRENT ASSETS:
Cash and equivalents	$	37,479,553		$	51,393,109
Accounts receivable, net		158,600,216			131,926,512
Costs and estimated earnings in excess of billings		64,137,515			58,175,272
Deferred tax assets, net		13,005,612			11,922,558
Income tax receivable		-			6,988,164
Inventories		6,246,819			5,352,586
Other current assets		14,215,800			10,275,142

Total current assets		293,685,515			276,033,343


PROPERTY AND EQUIPMENT, net		101,979,439			100,352,913


OTHER ASSETS:
Goodwill		224,033,862			224,140,641
Intangible assets, net		35,702,426			35,178,721
Deferred tax assets, net non-current		2,926,758			5,560,872
Other		9,813,070			10,568,343

Total other assets		272,476,116			275,448,577

TOTAL	$	668,141,070		$	651,834,833


LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:
Accounts payable	$	36,646,575		$	34,347,637
Notes and capital leases payable		3,812,085			4,162,978
Billings in excess of costs and estimated earnings		361,352			141,568
Accrued self-insured claims		26,750,086			22,296,987
Income taxes payable		1,594,288			-
Other accrued liabilities		34,280,628			41,528,467

Total current liabilities		103,445,014			102,477,637

NOTES AND CAPITAL LEASES PAYABLE		6,292,403			7,094,018
ACCRUED SELF-INSURED CLAIMS		22,049,784			22,473,163
OTHER LIABILITIES		744,145			829,058

Total liabilities		132,531,346			132,873,876


COMMITMENTS AND CONTINGENCIES, Note 12

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: 48,621,148 and 48,596,049 issued and outstanding, respectively		16,234,277			16,198,678
Additional paid-in capital		349,387,299			348,570,091
Deferred compensation		(2,215,549	)		(2,390,667	)
Retained earnings		172,203,697			156,582,855

Total stockholders’ equity		535,609,724			518,960,957

TOTAL	$	668,141,070		$	651,834,833


	For the Three Months Ended
	October 30,			October 25,
	2004			2003
REVENUES:
Contract revenues earned	$	263,165,605		$	196,021,442


EXPENSES:
Costs of earned revenues, excluding depreciation		208,669,700			147,049,735
General and administrative		17,982,255			17,507,642
Depreciation and amortization		11,265,132			9,334,410

Total		237,917,087			173,891,787


Interest income		116,290			319,718
Interest expense		(162,466	)		(1,467	)
Other income, net		594,157			845,543


INCOME BEFORE INCOME TAXES		25,796,499			23,293,449

PROVISION (BENEFIT) FOR INCOME TAXES:
Current		8,624,597			9,951,165
Deferred		1,551,060			(584,955	)

Total		10,175,657			9,366,210


NET INCOME	$	15,620,842		$	13,927,239


EARNINGS PER COMMON SHARE:

Basic earnings per share	$	0.32		$	0.29


Diluted earnings per share	$	0.32		$	0.29


SHARES USED IN COMPUTING EARNINGS PER COMMON SHARE
Basic		48,603,969			48,028,895

Diluted		49,169,961			48,486,210


	For the Three Months Ended
	October 30,			October 25,
	2004			2003
Increase (decrease) in cash and equivalents from:
OPERATING ACTIVITIES:
Net income	$	15,620,842		$	13,927,239
Adjustments to reconcile net cash provided by operating activities:
Depreciation and amortization		11,265,132			9,334,410
Bad debts (recovery) expense		(383,803	)		813,411
Gain on disposal of assets		(392,160	)		(594,893	)
Deferred income taxes		1,551,060			(584,955	)
Non-cash compensation expense from the issuance of common and restricted stock		193,968			18,955
Change in operating assets and liabilities, net of acquisitions and divestitures:
(Increase) decrease in operating assets:
Accounts receivable, net		(21,906,162	)		(3,637,156	)
Unbilled revenues, net		(2,007,831	)		(2,487,118	)
Other current assets		(4,796,766	)		(3,582,284	)
Other assets		743,752			755,762
Increase (decrease) in operating liabilities:
Accounts payable		2,298,938			3,624,168
Customer advances		-			(2,273	)
Accrued self-insured claims and other liabilities		(4,488,325	)		528,010
Accrued income taxes payable		8,582,452			3,097,699

Net cash provided by operating activities		6,281,097			21,210,975


INVESTING ACTIVITIES:
Capital expenditures		(11,989,105	)		(3,806,285	)
Acquisition expenditures		(8,682,753	)		-
Proceeds from sale of assets		795,757			1,359,414

Net cash used in investing activities		(19,876,101	)		(2,446,871	)


FINANCING ACTIVITIES:
Principal payments on notes and capital leases payable		(1,152,508	)		(2,456	)
Exercise of stock options and other		833,956			1,180,977

Net cash (used in) provided by financing activities		(318,552	)		1,178,521


Net (decrease)/increase in cash and equivalents		(13,913,556	)		19,942,625

CASH AND EQUIVALENTS AT BEGINNING OF PERIOD		51,393,109			129,851,760


CASH AND EQUIVALENTS AT END OF PERIOD	$	37,479,553		$	149,794,385

DYCOM INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)


	For the Three Months Ended
	October 30,		October 25,
	2004		2003
SUPPLEMENTAL DISCLOSURE OF CASH FLOW AND NON-CASH INVESTING AND FINANCING ACTIVITIES:

Cash paid during the period for:
Interest	$	232,637	$	6,240
Income taxes	$	227,333	$	7,363,014

During the quarter ended October 30, 2004, the Company acquired substantially all of the assets of RJE Telecom, Inc. (“RJE”) and assumed certain liabilities associated with these assets. See Note 3. Fair market value of net assets acquired	$	9,776,635

Acquisition expenditures (including $1.1 million payable to the former owners)	$	9,776,635

Dycom Industries, Inc. (“Dycom” or the “Company”) is a leading provider of specialty contracting services, including engineering, construction, installation and maintenance services, to telecommunications providers throughout the United States. The Company also provides underground locating services to various utilities and other construction and maintenance services to electric utilities and others. The Company uses a fiscal year ending the last Saturday in July. Fiscal year 2005 consists of 52 weeks, while fiscal year 2004 consisted of 53 weeks.

The condensed consolidated financial statements are unaudited and include the results of Dycom and its subsidiaries, all of which are wholly owned. All material intercompany accounts and transactions have been eliminated. The accompanying condensed consolidated balance sheets of the Company as of October 30, 2004 and July 31, 2004, and the related condensed consolidated statements of operations and cash flows for the three months ended October 30, 2004 and October 25, 2003, reflect all normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of such statements. The results of operations for the three months ended October 30, 2004 are not necessarily indicative of the results that may be expected for the entire year. For a better understanding of the Company and its financial statements, we recommend reading these condensed consolidated financial statements in conjunction with the Company’s audited financial statements for the year ended July 31, 2004, which are included in Dycom’s 2004 Annual Report on Form 10-K, filed on October 12, 2004.

Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The more significant estimates relate to the Company’s revenue recognition of work-in-process, the allowance for doubtful accounts, self-insured claims liability, the valuation of goodwill and intangible assets, asset lives used in computing depreciation and amortization, including amortization of intangibles, and accounting for income taxes, contingencies and litigation. While 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, the actual results could differ from those estimates and such differences may be material to the financial statements.

Restricted Cash – At October 30, 2004 and July 31, 2004, the Company had approximately $5.7 million and $4.9 million, respectively, in restricted cash included in other current assets and other assets on the consolidated balance sheets. The amount primarily relates to cash held as collateral to support projected workers’ compensation, automobile and general liability obligations .

Accounting for Stock-Based Compensation – Under Statement of Financial Accounting Standards (“SFAS”) No. 123 and No. 148, companies are permitted to continue to apply Accounting Principles Board (“APB”) Opinion No. 25, which recognizes compensation cost based on the intrinsic value of the equity instrument awarded. The Company continues to apply APB Opinion No. 25 to its stock-based compensation awards. The fair value of the options granted has been estimated at the date of grant using the Black-Scholes option-pricing model. The Black-Scholes option valuation model was developed for estimating the fair value of traded options that have no vesting restrictions and are fully transferable. The Company’s options do not have the characteristics of traded options and the option valuation models do not necessarily provide a reliable measure of the fair value as they require the use of subjective assumptions. Changes in these assumptions can materially impact the fair value of the Company’s options. No stock-based compensation cost for stock option grants is reflected in net income as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. The pro forma weighted average fair value of options granted during the three months ended October 25, 2003 was $18.65 per share based on a risk-free interest rate of 3.7%, an expected life of six years, expected volatility of 59.6% and no expected dividends. No options were granted during the three months ended October 30, 2004. The pro forma disclosures required by SFAS No. 148 are reflected below.


	For the Three Months Ended
	October 30,			October 25,
	2004			2003
Net income, as reported	$	15,620,842		$	13,927,239

Deduct: Total stock-based employee compensation expense determined under fair value based methods for all awards, net of related tax effects*		(1,339,012	)		(936,539	)


Pro forma net income	$	14,281,830		$	12,990,700


Earnings per share:
Basic — as reported	$	0.32		$	0.29

Basic — pro forma	$	0.29		$	0.27

Diluted — as reported	$	0.32		$	0.29

Diluted — pro forma	$	0.29		$	0.27

Comprehensive Income (Loss) — During the first quarter of fiscal 2005 and fiscal 2004 the Company did not have any changes in its equity resulting from non-owner sources and, accordingly, comprehensive income (loss) was equal to the net income amounts presented for the respective periods in the accompanying Consolidated Statements of Operations.

Earnings per common share-basic is computed using the weighted average common shares outstanding during the period. Earnings per common share-diluted is computed using the weighted average number of common shares outstanding during the period plus all potentially dilutive common stock equivalents except in cases where the effect would be anti-dilutive, using the treasury stock method.

The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computation as required by SFAS No. 128.


	For the Three Months Ended
	October 30,		October 25,
	2004		2003
Net income available to common stockholders (numerator)	$	15,620,842	$	13,927,239

Weighted-average number of common shares (denominator)		48,603,969		48,028,895

Basic earnings per common share	$	0.32	$	0.29


Weighted-average number of common shares		48,603,969		48,028,895
Potential common stock arising from stock options		565,992		457,315

Total shares — diluted (denominator)		49,169,961		48,486,210

Diluted earnings per common share	$	0.32	$	0.29


Antidilutive weighted shares excluded from the calculation of earnings per share		777,747		1,426,418

On November 25, 2003, the Company acquired substantially all of the assets and assumed certain liabilities associated with the assets of First South Utility Construction, Inc. (“First South”), for approximately $51.5 million in cash and 175,840 shares of Dycom’s common stock. In conjunction with the acquisition, the Company also paid approximately $9 million for excess working capital consisting primarily of accounts receivable and unbilled revenue. The Company paid the purchase price from cash on hand. First South provides specialty contracting services to telecommunications customers.

On December 3, 2003, the Company acquired UtiliQuest Holdings Corp. (“UtiliQuest”) for a purchase price of approximately $116.1 million. UtiliQuest is a provider of utility locating services. Under the terms of the merger agreement, UtiliQuest merged with a newly-formed subsidiary of the Company with UtiliQuest surviving as a wholly owned subsidiary of the Company. The Company borrowed approximately $85 million under its Credit Agreement in connection with this acquisition and subsequently repaid the borrowed amount during fiscal 2004 .

On September 21, 2004, the Company acquired certain assets and assumed certain liabilities of RJE Telecom, Inc. (“RJE”) for a purchase price of approximately $9.8 million in cash, subject to a working capital adjustment, including transaction fees of approximately $0.1 million. As of October 30, 2004, the Company had paid $8.7 million of the purchase price and the remainder was paid during the second quarter of fiscal 2005. RJE provides specialty contracting services primarily to telephone companies.

The Company accounted for the above acquisitions using the purchase method of accounting. Accordingly, the purchase price has been allocated to the tangible and intangible assets acquired and the liabilities assumed on the basis of their respective fair values on the acquisition date. The purchase price in excess of the fair value of the net tangible and identifiable intangible assets acquired has been allocated to goodwill. Under SFAS No. 142, goodwill associated with these acquisitions will be reviewed at least annually for impairment. The operating results of the companies acquired are included in the accompanying consolidated financial statements from their respective date of purchase. The purchase price of the acquisitions was derived as follows:

Management determined the fair values used in the purchase price allocation for intangible assets with the assistance of independent valuation specialists based on estimated discounted future cash flows, royalty rates and historical data, among other information. Goodwill of approximately $43.6 million and $37.0 million is expected to be deductible for tax purposes related to the acquisitions of First South and UtiliQuest, respectively. The purchase price of the acquisitions, including the preliminary allocation for RJE, was allocated as follows:


	($ in thousands)
	RJE		First South		Utiliquest
Assets:
Cash and equivalents	$	-	$	-	$	1,394
Accounts receivable, net		4,384		7,069		15,652
Costs and estimated earnings in excess of billings		3,735		6,069		-
Deferred tax asset, net		-		-		2,074
Other current assets		-		551		3,277
Property and equipment		395		6,530		15,141
Goodwill		-		43,615		73,910
Trade name		-		155		4,870
Intangibles — customer relationships		1,317		3,300		27,500
Intangibles — covenant not to compete		-		800		-
Deferred tax asset, net		-		-		5,484
Other assets		37		-		5,096

Total assets		9,868		68,089		154,398


Liabilities:
Accounts payable		-		2,094		1,110
Capitalizable leases — short term		-		-		5,110
Accrued self-insured claims		-		-		11,755
Other accrued liabilities		91		1,297		6,053
Capitalizable leases — long term		-		-		5,688
Notes payable — long term		-		-		3,797
Accrued self-insured claims — long term		-		-		4,803

Total liabilities		91		3,391		38,316


Net assets acquired	$	9,777	$	64,698	$	116,082

The following unaudited pro forma summaries present the Company’s consolidated results of operations as if the RJE, First South and UtiliQuest acquisitions had occurred on July 27, 2003, the first day of the company’s fiscal year 2004:


Florida		59-1277135

(State of incorporation)		(IRS Employer Identification No.)


4440 PGA Boulevard, Suite 500 Palm Beach Gardens, Florida		33410

(Address of principal executive offices)		(Zip Code)


Class		Outstanding as of December 6, 2004
Common Stock, par value $0.33 1/3 per share		48,665,367


	October 30,		July 31,
	2004		2004
Contract billings	$	157,674,134	$	131,297,850
Retainage		3,626,049		3,798,657
Other receivables		705,549		617,705

Total		162,005,732		135,714,212
Less allowance for doubtful accounts		3,405,516		3,787,700

Accounts receivable, net	$	158,600,216	$	131,926,512

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x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934