DY Q2 2013 10-Q

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 26, 2013
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________

Commission File Number 001-10613
DYCOM INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Florida
 
59-1277135
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
11770 US Highway 1, Suite 101,
Palm Beach Gardens, Florida
 
33408
(Address of principal executive offices)
 
(Zip Code)

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

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 ¨
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

There were 33,017,415 shares of common stock with a par value of $0.33 1/3 outstanding at March 1, 2013.


DYCOM INDUSTRIES, INC.
TABLE OF CONTENTS
 
 
 
PART I - FINANCIAL INFORMATION
 
 
 
 
 
 
PART II - OTHER INFORMATION
 
 
 
 

2
Table of Contents

PART I - FINANCIAL INFORMATION


Item 1. Financial Statements.

DYCOM INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
January 26, 2013
 
July 28, 2012
 
(Dollars in thousands)
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and equivalents
$
22,590

 
$
52,581

Accounts receivable, net
227,413

 
141,788

Costs and estimated earnings in excess of billings
148,502

 
127,321

Inventories
34,909

 
26,274

Deferred tax assets, net
15,422

 
15,633

Income taxes receivable
6,925

 
4,884

Other current assets
13,923

 
8,466

Total current assets
469,684

 
376,947

 
 
 
 
PROPERTY AND EQUIPMENT, NET
187,242

 
158,247

GOODWILL
262,989

 
174,849

INTANGIBLE ASSETS, NET
134,306

 
49,773

OTHER
18,588

 
12,377

TOTAL NON-CURRENT ASSETS
603,125

 
395,246

TOTAL ASSETS
$
1,072,809

 
$
772,193

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

CURRENT LIABILITIES:
 

 
 

Accounts payable
$
64,166

 
$
36,823

Current portion of debt
6,250

 
74

Billings in excess of costs and estimated earnings
11,386

 
1,522

Accrued insurance claims
26,313

 
25,218

Other accrued liabilities
69,959

 
50,926

Total current liabilities
178,074

 
114,563

 
 
 
 
LONG-TERM DEBT (including debt premium of $3.8 million at January 26, 2013)
420,033

 
187,500

ACCRUED INSURANCE CLAIMS
23,693

 
23,591

DEFERRED TAX LIABILITIES, NET NON-CURRENT
48,100

 
49,537

OTHER LIABILITIES
4,537

 
4,071

Total liabilities
674,437

 
379,262

 
 
 
 
COMMITMENTS AND CONTINGENCIES, Notes 10, 11, and 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: 32,993,267 and 33,587,744 issued and outstanding, respectively
10,998

 
11,196

Additional paid-in capital
107,121

 
114,820

Accumulated other comprehensive income
151

 
138

Retained earnings
280,102

 
266,777

Total stockholders' equity
398,372

 
392,931

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
1,072,809

 
$
772,193

 
 
 
 
See notes to the condensed consolidated financial statements.

3
Table of Contents

DYCOM INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
For the Three Months Ended
 
January 26, 2013
 
January 28, 2012
 
(Dollars in thousands, except per share amounts)
REVENUES:
 
 
 
Contract revenues
$
369,326

 
$
267,407

 
 
 
 
EXPENSES:
 

 
 

Costs of earned revenues, excluding depreciation and amortization
301,516

 
220,239

General and administrative (including stock-based compensation expense of $2.5 million and $1.6 million, respectively)
38,827

 
24,275

Depreciation and amortization
20,819

 
15,528

Total
361,162

 
260,042

 
 
 
 
Interest expense, net
(5,748
)
 
(4,177
)
Other income, net
428

 
2,357

INCOME BEFORE INCOME TAXES
2,844

 
5,545

 
 
 
 
PROVISION (BENEFIT) FOR INCOME TAXES:
 

 
 

Current
1,485

 
2,082

Deferred
(104
)
 
(22
)
Total
1,381

 
2,060

 
 
 
 
NET INCOME
$
1,463

 
$
3,485

 
 
 
 
EARNINGS PER COMMON SHARE:
 

 
 

Basic earnings per common share
$
0.04

 
$
0.10

 
 
 
 
Diluted earnings per common share
$
0.04

 
$
0.10

 
 
 
 
SHARES USED IN COMPUTING EARNINGS PER COMMON SHARE:
 
 

Basic
32,780,667

 
33,759,015

 
 
 
 
Diluted
33,514,416

 
34,636,520

 
 
 
 
See notes to the condensed consolidated financial statements.











4
Table of Contents


DYCOM INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

For the Six Months Ended
 
January 26, 2013
 
January 28, 2012
 
(Dollars in thousands, except per share amounts)
REVENUES:
 
 
 
Contract revenues
$
692,613

 
$
586,981

 
 
 
 
EXPENSES:
 
 
 

Costs of earned revenues, excluding depreciation and amortization
558,582

 
475,426

General and administrative (including stock-based compensation expense of $4.8 million and $3.0 million, respectively)
67,652

 
49,633

Depreciation and amortization
36,130

 
31,486

Total
662,364

 
556,545

 
 
 
 
Interest expense, net
(9,946
)
 
(8,350
)
Other income, net
2,042

 
5,317

INCOME BEFORE INCOME TAXES
22,345

 
27,403

 
 
 
 
PROVISION (BENEFIT) FOR INCOME TAXES:
 
 
 

Current
10,342

 
7,454

Deferred
(1,320
)
 
3,498

Total
9,022

 
10,952

 
 
 
 
NET INCOME
$
13,323

 
$
16,451

 
 
 
 
EARNINGS PER COMMON SHARE:
 
 
 

Basic earnings per common share
$
0.40

 
$
0.49

 
 
 
 
Diluted earnings per common share
$
0.40

 
$
0.48

 
 
 
 
SHARES USED IN COMPUTING EARNINGS PER COMMON SHARE:
 
 

Basic
32,935,305

 
33,633,596

 
 
 
 
Diluted
33,607,180

 
34,431,419

 
 
 
 
See notes to the condensed consolidated financial statements.




5
Table of Contents

DYCOM INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
 
 
 
 
 
 
 
For the Three Months Ended
 
For the Six Months Ended
 
January 26, 2013
 
January 28, 2012
 
January 26, 2013
 
January 28, 2012
 
(Dollars in thousands)
NET INCOME
$
1,463

 
$
3,485

 
$
13,323

 
$
16,451

Foreign currency translation gains (losses)
11

 
(58
)
 
13

 
(144
)
COMPREHENSIVE INCOME
$
1,474

 
$
3,427

 
$
13,336

 
$
16,307

 
 
 
 
 
 
 
 
See notes to the condensed consolidated financial statements.



6
Table of Contents

DYCOM INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
For the Six Months Ended
 
January 26,
2013
 
January 28,
2012
 
(Dollars in thousands)
OPERATING ACTIVITIES:
 
 
 
Net income
$
13,323

 
$
16,451

Adjustments to reconcile net income to net cash provided by operating activities, net of acquisition:
  

 
 

Depreciation and amortization
36,130

 
31,486

Bad debt expense, net
32

 
68

Gain on sale of fixed assets
(2,407
)
 
(5,139
)
Deferred income tax provision (benefit)
(1,320
)
 
3,498

Stock-based compensation
4,762

 
2,968

Write-off of deferred financing costs
321

 
—

Amortization of premium on long-term debt
(42
)
 
—

Amortization of debt issuance costs and other
734

 
646

Excess tax benefit from share-based awards
(610
)
 
(979
)
Change in operating assets and liabilities:
 
 
 
Accounts receivable, net
27,528

 
35,257

Costs and estimated earnings in excess of billings, net
39,753

 
7,919

Other current assets and inventory
(3,518
)
 
(13,927
)
Other assets
(187
)
 
239

Income taxes receivable/payable
(906
)
 
5,332

Accounts payable
(11,897
)
 
(799
)
Accrued liabilities, insurance claims, and other liabilities
(10,455
)
 
(12,169
)
Net cash provided by operating activities
91,241

 
70,851

 
 
 
 
INVESTING ACTIVITIES:
 
 
 

Cash paid for acquisition, net of cash acquired
(314,771
)
 
—

Capital expenditures
(29,029
)
 
(43,438
)
Proceeds from sale of assets
2,845

 
8,942

Changes in restricted cash
(31
)
 
550

Net cash used in investing activities
(340,986
)
 
(33,946
)
 
 
 
 
FINANCING ACTIVITIES:
 
 
 

Proceeds from issuance of 7.125% senior subordinated notes due 2021 (including $3.8 million premium)
93,825

 
—

Proceeds from borrowings on Senior Credit Agreement
180,500

 
—

Proceeds from Term Loan on Senior Credit Agreement
125,000

 
—

Principal payments on Senior Credit Agreement
(160,500
)
 
—

Debt issuance costs
(6,409
)
 
—

Repurchases of common stock
(15,203
)
 
—

Exercise of stock options and other
2,890

 
4,013

Restricted stock tax withholdings
(885
)
 
(328
)
Excess tax benefit from share-based awards
610

 
979

Principal payments on capital lease obligations
(74
)
 
(140
)
Net cash provided by financing activities
219,754

 
4,524

 
 
 
 
Net (decrease) increase in cash and equivalents
(29,991
)
 
41,429

 
 
 
 
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD
52,581

 
44,766

 
 
 
 
CASH AND EQUIVALENTS AT END OF PERIOD
$
22,590

 
$
86,195

 
 
 
 

7
Table of Contents

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

SUPPLEMENTAL DISCLOSURE OF OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND FINANCING ACTIVITIES:
 

 
 

Cash paid during the period for:
 

 
 

Interest
$
8,854

 
$
7,727

Income taxes
$
11,239

 
$
2,486

 
 
 
 
Purchases of capital assets included in accounts payable or other accrued liabilities at period end
$
2,471

 
$
3,066

Accrued costs for debt issuance included in accounts payable and accrued liabilities at period end
$
130

 
$
—

Accrued remaining purchase price of acquisition included in accrued liabilities at period end
$
4,710

 
$
—

 
 
 
 
See notes to the condensed consolidated financial statements.

8
Table of Contents

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
1. Accounting Policies
 
Basis of Presentation - Dycom Industries, Inc. (“Dycom” or the “Company”) is a leading provider of specialty contracting services. These services, which are provided throughout the United States and in Canada, include engineering, construction, maintenance and installation services to telecommunications providers, underground facility locating services to various utilities, including telecommunications providers, and other construction and maintenance services to electric and gas utilities and others.
 
The condensed consolidated financial statements include the results of Dycom and its subsidiaries, all of which are wholly-owned. All intercompany accounts and transactions have been eliminated and the financial statements reflect all adjustments, consisting of only normal recurring accruals that are, in the opinion of management, necessary for a fair presentation of such statements. These financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to the Quarterly Report on Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”). The results of operations for the three and six months ended January 26, 2013 are not necessarily indicative of the results that may be expected for any other interim period or for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited financial statements for the entire year ended July 28, 2012 included in the Company's 2012 Annual Report on Form 10-K, filed with the SEC on September 4, 2012.

On December 3, 2012, the Company acquired substantially all of the telecommunications infrastructure service subsidiaries of Quanta Services, Inc. The results of operations of the businesses acquired by the Company are included in the accompanying condensed consolidated financial statements from their acquisition date.

Accounting Period - The Company uses a fiscal year ending on the last Saturday in July.

Use of Estimates - The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. For the Company, key estimates include: recognition of revenue for costs and estimated earnings in excess of billings, the fair value of reporting units for goodwill impairment analysis, the assessment of impairment of intangibles and other long-lived assets, preliminary purchase price allocations of businesses acquired in fiscal 2013, income taxes, accrued insurance claims, asset lives used in computing depreciation and amortization, allowance for doubtful accounts, stock-based compensation expense for performance-based stock awards, and accruals for contingencies, including legal matters. At the time they are made, the Company believes that such estimates are fair when considered in conjunction with the consolidated financial position and results of operations taken as a whole. However, actual results could differ from those estimates and such differences may be material to the financial statements.

Restricted Cash – As of January 26, 2013 and July 28, 2012, the Company had approximately $3.8 million and $3.7 million, respectively, in restricted cash which is held as collateral in support of the Company's insurance obligations. Restricted cash is included in other current assets and other assets in the condensed consolidated balance sheets and changes in restricted cash are reported in cash flows used in investing activities in the condensed consolidated statements of cash flows.

Fair Value of Financial Instruments - Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures (“ASC Topic 820”) defines and establishes a measurement framework for fair value and expands disclosure requirements. ASC Topic 820 requires that assets and liabilities carried at fair value are classified and disclosed in one of the following three categories: (1) Level 1 - Quoted market prices in active markets for identical assets or liabilities; (2) Level 2 - Observable market-based inputs or unobservable inputs that are corroborated by market data; and (3) Level 3 - Unobservable inputs not corroborated by market data which require the reporting entity's own assumptions. The Company's financial instruments consist primarily of cash and equivalents, restricted cash, accounts and other receivables, income taxes receivable and payable, accounts payable and certain accrued expenses, and long-term debt. The carrying amounts of these items approximate fair value due to their short maturity, except for the Company's outstanding 7.125% senior subordinated notes due 2021 (the "2021 Notes") which are categorized as Level 2 as of January 26, 2013 and July 28, 2012, based on observable market-based inputs. See Note 10, Debt, for further information regarding the fair value of the 2021 Notes. The Company's cash and equivalents are categorized as Level 1 as of January 26, 2013 and July 28, 2012, based on quoted market prices in active markets for identical assets. During the three and six months ended January 26, 2013 and January 28, 2012, the Company had no non-recurring fair value measurements of assets or liabilities subsequent to their initial recognition.


9
Table of Contents

Segment Information - The Company operates in one reportable segment as a specialty contractor, providing engineering, construction, maintenance and installation services to telecommunications providers, underground facility locating services to various utilities including telecommunications providers, and other construction and maintenance services to electric and gas utilities and others. All of the Company's operating segments have been aggregated into one reporting segment due to their similar economic characteristics, nature of services and production processes, type of customers, and service distribution methods. The Company's services are provided by its various subsidiaries throughout the United States and in Canada. Revenues from services provided in Canada were approximately $2.5 million and $6.4 million during the three and six months ended January 26, 2013, respectively, and $2.5 million and $6.2 million during the three and six months ended January 28, 2012, respectively. The Company had no material long-lived assets in the Canadian operations at January 26, 2013 or July 28, 2012.

Recently Issued Accounting Pronouncements
 
Adoption of New Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 requires the total of comprehensive income, the components of net income, and the components of other comprehensive income to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 also requires entities to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income. In December 2011, the FASB issued Accounting Standards Update No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Other Comprehensive Income in ASU 2011-05 (“ASU 2011-12”). ASU 2011-12 defers only those provisions in ASU 2011-05 relating to the presentation of the reclassification adjustments. ASU 2011-12 and the remaining provisions of ASU 2011-05 are effective retrospectively for annual periods, and interim periods within those years, beginning after December 15, 2011. The Company adopted ASU 2011-05 in fiscal 2013.

In September 2011, the FASB issued Accounting Standards Update No. 2011-08, Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment (“ASU 2011-08”). ASU 2011-08 permits entities testing for goodwill impairment to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC Topic 350. ASU 2011-08 does not change how goodwill is determined or assigned to reporting units, nor does it revise the requirement to assess goodwill at least annually for impairment. ASU 2011-08 is effective for goodwill impairment tests performed in interim and annual periods for fiscal years beginning after December 15, 2011. The adoption of this guidance did not have a material effect on the Company's condensed consolidated financial statements.

Accounting Standards Not Yet Adopted

In July 2012, FASB issued Accounting Standards Update No. 2012-02, Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment ("ASU 2012-02"). ASU 2012-02 amends Topic 350 by establishing an optional two-step analysis for impairment testing of indefinite-lived intangibles other than goodwill. This update allows an entity the option to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. Under that option, an entity no longer would be required to calculate the fair value of the intangible asset unless the entity determines, based on that qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012 and early adoption is permitted. The adoption of this guidance is not expected to have a material effect on the Company's condensed consolidated financial statements.

In February 2013, the FASB issued Accounting Standards Update No. 2013-02, Comprehensive Income (Topic 220) ("ASU 2013-02"), which established the effective date for the requirement to present components of reclassifications out of accumulated other comprehensive income on the face of the income statement. ASU 2013-02 is effective for interim and annual periods beginning after December 15, 2012. The adoption of this guidance is not expected to have a material effect on the Company's condensed consolidated financial statements.




10
Table of Contents

2. Computation of Earnings Per Common Share

The following is a reconciliation of the numerator and denominator of the basic and diluted earnings per common share computation as required by ASC Topic 260, Earnings Per Share.

 
For the Three Months Ended
 
For the Six Months Ended
 
January 26, 2013
 
January 28, 2012
 
January 26, 2013
 
January 28, 2012
 
(Dollars in thousands, except per share amounts)
Net income available to common stockholders (numerator)
$
1,463

 
$
3,485

 
$
13,323

 
$
16,451

 
 
 
 
 
 
 
 
Weighted-average number of common shares (denominator)
32,780,667

 
33,759,015

 
32,935,305

 
33,633,596

 
 
 
 
 
 
 
 
Basic earnings per common share
$
0.04

 
$
0.10

 
$
0.40

 
$
0.49

 
 
 
 
 
 
 
 
Weighted-average number of common shares
32,780,667

 
33,759,015

 
32,935,305

 
33,633,596

Potential common stock arising from stock options, and unvested restricted share units
733,749

 
877,505

 
671,875

 
797,823

Total shares-diluted (denominator)
33,514,416

 
34,636,520

 
33,607,180

 
34,431,419

 
 
 
 
 
 
 
 
Diluted earnings per common share
$
0.04

 
$
0.10

 
$
0.40

 
$
0.48

 
 
 
 
 
 
 
 
Anti-dilutive weighted shares excluded from the calculation of earnings per share
1,289,661

 
1,220,534

 
1,483,241

 
2,011,358

 
3. Acquisitions

On December 3, 2012, Dycom acquired substantially all of the telecommunications infrastructure services subsidiaries (the “Acquired Subsidiaries”) of Quanta Services, Inc. for $275.0 million in cash plus an adjustment estimated to be approximately $41.0 million for working capital received in excess of a target amount and approximately $3.7 million for other specified items. As of January 26, 2013, the Company had paid approximately $315 million of the purchase price and accrued the remaining amount, estimated at $4.7 million, which is expected to be paid in the Company's third fiscal quarter. The acquisition was funded through a combination of borrowings under a new $400 million credit facility and cash on hand. On December 12, 2012, Dycom's wholly-owned subsidiary, Dycom Investments, Inc., issued $90.0 million of 7.125% senior subordinated notes due 2021 and used the net proceeds to repay credit facility borrowings. See Note 10, Debt, for further information regarding the Company's debt financing.

The Company recognized approximately $5.8 million and $6.5 million of acquisition costs during the three and six months ended January 26, 2013, respectively, which are included within general and administrative expenses in the Company's condensed consolidated statements of operations. Additionally, the Company incurred approximately $0.9 million in integration costs during the second quarter of fiscal 2013 which are also included within general and administrative expenses.

The Acquired Subsidiaries provide specialty contracting services, including engineering, construction, maintenance and installation services to telecommunications providers, and other construction and maintenance services to electric and gas utilities and others. Principal business facilities are located in Arizona, California, Florida, Georgia, Minnesota, New York, Pennsylvania, and Washington. On a combined basis, the businesses operate in 49 states serving over 300 individual customers. As of January 26, 2013, the Acquired Subsidiaries employed 2,157 persons. The Company believes that the acquisition strengthens its customer base, geographic scope and technical services offerings. In addition, it reinforces the Company's rural engineering and construction capabilities, wireless construction resources, and broadband construction competencies. The acquisition also enhances the efficiency of the Company's operating scale.

The Company accounted for the acquisition using the acquisition 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. Purchase price in excess of fair value of the net tangible and identifiable intangible assets

11
Table of Contents

acquired has been allocated to goodwill. The purchase price allocation is based on information regarding the fair value of assets acquired and liabilities assumed as of the date of acquisition and is preliminary. Management has determined the fair values used in the purchase price allocation for intangible assets with the assistance of an independent valuation specialist based on historical data, estimated discounted future cash flows, contract backlog amounts and expected royalty rates for trademarks and trade names among other information. The valuation of assets acquired and liabilities assumed requires a number of judgments and is subject to revision as additional information about the fair value of assets and liabilities becomes available. Additional information, which existed as of the acquisition date but at that time was unknown to the Company, may become known to the Company during the remainder of the measurement period, a period not to exceed 12 months from the acquisition date. Adjustments in the purchase price allocation may require a recasting of the amounts allocated to goodwill. The allocation of the purchase price is expected to be completed during fiscal 2013 when the valuations for intangible assets, property and equipment and other amounts are finalized.

The purchase price of the Acquired Subsidiaries is allocated on a preliminary basis as follows and reflects the elimination of intercompany balances (dollars in millions):
Assets
 
Cash and equivalents
$
0.2

Accounts receivable, net
113.2

Costs and estimated earnings in excess of billings
61.4

Inventories
9.0

Other current assets
1.7

Property and equipment
31.9

Goodwill
88.1

Intangibles - customer relationships
71.5

Intangibles - backlog
14.4

Intangibles - trade names
5.2

Other assets
0.6

Total assets
397.2

 
 
Liabilities
 
Accounts payable
41.4

Billings in excess of costs and estimated earnings
10.3

Accrued and other liabilities
25.8

Total liabilities
77.5

 
 
Net Assets Acquired
$
319.7


Goodwill and amortizing intangible assets of approximately $88.1 million and $91.1 million, respectively, related to the acquisition is expected to be deductible for tax purposes. See Note 7, Goodwill and Intangible Assets, for further information on amortization and estimated useful lives of intangible assets acquired.

The results of operations of the Acquired Subsidiaries have been included in the condensed consolidated statements of operations since the date of acquisition. The Acquired Subsidiaries generated revenues of $75.9 million since the date of acquisition through January 26, 2013 and their net income was immaterial.


12
Table of Contents

The following unaudited pro forma information presents the Company's condensed consolidated results of operations as if the acquisition had occurred on July 31, 2011, the first day of the Company's 2012 fiscal year. The pro forma results include certain adjustments, including depreciation and amortization expense based on the estimated fair value of the assets acquired, interest and debt amortization expense related to the Company's debt financing of the transaction, elimination of expenses charged by the Seller to the businesses which will not continue after the acquisition date, and the income tax impact of these adjustments. Pro forma earnings for the three and six months ended January 28, 2012 were adjusted to include $5.8 million and $6.5 million, respectively, of acquisition related costs as the pro forma information presents the condensed consolidated results of operations as if the acquisition had occurred on July 31, 2011. Accordingly, the pro forma earnings for the three and six months ended January 26, 2013 were adjusted to exclude these acquisition related costs. The unaudited pro forma information is not necessarily indicative of the results of operations of the combined companies had the acquisition occurred at the beginning of the periods presented nor is it indicative of future results.

 
For the Three Months Ended
 
For the Six Months Ended
 
January 26, 2013
 
January 28, 2012
 
January 26, 2013
 
January 28, 2012
 
(Dollars in thousands, except per share amounts)
Revenue
$
421,588

 
$
383,316

 
$
921,254

 
$
857,143

Income (loss) before income taxes
$
7,546

 
$
(339
)
 
$
44,049

 
$
15,140

Net income (loss)
$
4,528

 
$
(203
)
 
$
26,430

 
$
9,084

 
 
 
 
 
 
 
 
Earnings (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.14

 
$
(0.01
)
 
$
0.80

 
$
0.27

Diluted
$
0.14

 
$
(0.01
)
 
$
0.79

 
$
0.26


4. Accounts Receivable
 
Accounts receivable consists of the following:
 
January 26,
2013
 
July 28,
2012
 
(Dollars in thousands)
Contract billings
$
214,372

 
$
136,610

Retainage and other receivables
13,320

 
5,448

Total
227,692

 
142,058

Less: allowance for doubtful accounts
(279
)
 
(270
)
Accounts receivable, net
$
227,413

 
$
141,788

 
As of January 26, 2013, the Company expected to collect all retainage balances within the next twelve months.

The allowance for doubtful accounts changed as follows:
 
For the Three Months Ended
 
For the Six Months Ended
 
January 26,
2013
 
January 28,
2012
 
January 26,
2013
 
January 28,
2012
 
(Dollars in thousands)
Allowance for doubtful accounts at beginning of period
$
278

 
$
376

 
$
270

 
$
368

Bad debt expense, net
23

 
32

 
32

 
68

Amounts recovered (charged) against the allowance
(22
)
 
1

 
(23
)
 
(27
)
Allowance for doubtful accounts at end of period
$
279

 
$
409

 
$
279

 
$
409



13
Table of Contents

5. Costs and Estimated Earnings in Excess of Billings
 
Costs and estimated earnings in excess of billings, net, consists of the following:
 
 
January 26,
2013
 
July 28,
2012
 
(Dollars in thousands)
Costs incurred on contracts in progress
$
121,468

 
$
100,766

Estimated to date earnings
27,034

 
26,555

Total costs and estimated earnings
148,502

 
127,321

Less: billings to date
(11,386
)
 
(1,522
)
 
$
137,116

 
$
125,799

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

 
 

Costs and estimated earnings in excess of billings
$
148,502

 
$
127,321

Billings in excess of costs and estimated earnings
(11,386
)
 
(1,522
)
 
$
137,116

 
$
125,799

 
The above amounts include revenue for services from contracts based both on the units-of-delivery and the cost-to-cost measures of the percentage of completion method.  Additionally, costs and estimated earnings in excess of billings and billings in excess of costs and estimated earnings include amounts acquired on December 3, 2012 related to the Acquired Subsidiaries.

6. Property and Equipment
 
Property and equipment consists of the following:
 
 
January 26,
2013
 
July 28,
2012
 
 
(Dollars in thousands)
Land
 
$
3,479

 
$
2,915

Buildings
 
11,411

 
10,630

Leasehold improvements
 
5,039

 
4,674

Vehicles
 
235,496

 
220,669

Computer hardware and software
 
62,156

 
57,965

Office furniture and equipment
 
7,203

 
5,552

Equipment and machinery
 
158,333

 
133,467

Total
 
483,117

 
435,872

Less: accumulated depreciation
 
(295,875
)
 
(277,625
)
Property and equipment, net
 
$
187,242

 
$
158,247

 
Depreciation expense and repairs and maintenance were as follows:
 
For the Three Months Ended
 
For the Six Months Ended
 
January 26, 2013
 
January 28, 2012
 
January 26, 2013
 
January 28, 2012
 
(Dollars in thousands)
Depreciation expense
$
15,868

 
$
13,911

 
$
29,588

 
$
28,179

Repairs and maintenance expense
$
4,376

 
$
3,704

 
$
8,188

 
$
8,237



14
Table of Contents

7. Goodwill and Intangible Assets

Goodwill

The Company's goodwill balance was $263.0 million and $174.8 million as of January 26, 2013 and July 28, 2012, respectively. Changes in the carrying amount of goodwill for fiscal 2013 are as follows:

 
 
 
 
Six Months Ended January 26, 2013
 
 
 
 
As of
 
Impairment
 
 
 
As of
 
 
July 28, 2012
 
 Losses
 
Acquisitions
 
January 26, 2013
 
 
(Dollars in thousands)
Goodwill
 
$
370,616

 
$
—

 
$
88,140

 
$
458,756

Accumulated impairment losses
 
(195,767
)
 
—

 
—

 
(195,767
)
 
 
$
174,849

 
$
—

 
$
88,140

 
$
262,989


The carrying value of the goodwill increased due to the goodwill resulting from the December 3, 2012 acquisition of substantially all of the telecommunications infrastructure service subsidiaries of Quanta Services, Inc. The Company's goodwill resides in multiple reporting units. The reporting units and related indefinite-lived intangible assets are tested annually during the fourth fiscal quarter of each year in accordance with ASC Topic 350, Intangibles - Goodwill and Other, in order to determine whether their carrying value exceeds their fair value. The inputs used for fair value measurements of the reporting units and related indefinite-lived intangible assets are the lowest level (Level 3) inputs.

The profitability of individual reporting units may periodically suffer from downturns in customer demand and other factors resulting from the cyclical nature of the Company's business, the high level of competition existing within the Company's industry, the concentration of the Company's revenues from a limited number of customers, and the level of overall economic activity. During times of slowing economic conditions, the Company's customers may reduce capital expenditures and defer or cancel pending projects. Individual reporting units may be relatively more impacted by these factors than the Company as a whole. As a result, demand for the services of one or more of the Company's reporting units could decline resulting in an impairment of goodwill or intangible assets.

 As a result of the fiscal 2012 annual impairment analysis, the Company concluded that no impairment of goodwill or the indefinite-lived intangible asset was indicated at any reporting unit. However, the UtiliQuest reporting unit, having a goodwill balance of approximately $35.6 million and an indefinite-lived trade name of $4.7 million, has recently been at lower operating levels as compared to historical levels. During the fiscal 2012 annual impairment analysis, the estimated fair value of the UtiliQuest reporting unit exceeded its carrying value but the margin of excess had declined to less than 30%. The UtiliQuest reporting unit provides services to a broad range of customers including utilities and telecommunication providers. These services are required prior to underground excavation and are influenced by overall economic activity, including construction activity. The goodwill balance of this reporting unit may have an increased likelihood of impairment if a downturn in customer demand were to occur, or if the reporting unit were not able to execute against customer opportunities, and the long-term outlook for their cash flows were adversely impacted. Furthermore, changes in the long-term outlook may result in changes to other valuation assumptions.

As of January 26, 2013, the Company believes the goodwill and the indefinite-lived intangible asset is recoverable for all of the reporting units; however, there can be no assurances that goodwill and the indefinite-lived intangible asset will not be impaired in future periods.

15
Table of Contents


Intangible Assets

The Company's intangible assets consist of the following:
 
Weighted Average Remaining Useful Lives
 
January 26,
2013
 
July 28,
2012
 
(Years)
 
(Dollars in thousands)
Carrying amount:
 
 
 
 
 
Customer relationships
12.7
 
$
160,645

 
$
89,145

Contract backlog
2.7
 
14,410

 
—

Trade names
5.5
 
8,025

 
2,860

UtiliQuest trade name
—
 
4,700

 
4,700

Non-compete agreements
2.9
 
150

 
150

 
 
 
187,930

 
96,855

Accumulated amortization:
 
 
 

 
 

Customer relationships
 
 
50,019

 
45,852

Contract backlog
 
 
2,087

 
—

Trade names
 
 
1,455

 
1,182

Non-compete agreements
 
 
63

 
48

Net Intangible Assets
 
 
$
134,306

 
$
49,773


Amortization for the Company's intangible assets of customer relationships and contract backlog is recognized on an accelerated basis related to the expected economic benefit. As a result, the weighted average remaining useful lives for these intangible assets is not representative of the average period in which the amortization expense will be recognized. Amortization for the Company's other finite-lived intangibles is recognized on a straight-line basis over the estimated useful life of the intangible assets.

The carrying amount of customer relationships, contract backlog, and trade names increased $71.5 million, $14.4 million, and $5.2 million, respectively, during fiscal 2013 as a result of the preliminary allocation of the purchase price of the Acquired Subsidiaries. The acquired customer relationships, contract backlog, and trade names have been assigned a preliminary estimated useful life of 15 years, 1-4 years (based on remaining contract values), and 5 years, respectively. Amortization expense for finite-lived intangible assets for the three months ended January 26, 2013 and January 28, 2012 was $5.0 million and $1.6 million, respectively. Amortization expense for finite-lived intangible assets for the six months ended January 26, 2013 and January 28, 2012 was $6.5 million and $3.3 million, respectively.

Estimated total amortization expense for the remainder of fiscal 2013 and each of the five succeeding fiscal years is as follows (including amortization for the newly acquired subsidiaries based on the preliminary purchase allocation as of January 26, 2013):
Period
 
Amount
 
 
(Dollars in thousands)
Six months ending July 27, 2013
 
$14,220
Fiscal 2014
 
$18,080
Fiscal 2015
 
$15,222
Fiscal 2016
 
$14,373
Fiscal 2017
 
$13,106
Fiscal 2018
 
$10,794
Thereafter
 
$43,811

As of January 26, 2013, the Company believes that the carrying amounts of the intangible assets are recoverable. However, if adverse events were to occur or circumstances were to change indicating that the carrying amount of such assets may not be fully recoverable, the assets would be reviewed for impairment and the assets could be impaired.


16
Table of Contents

8. Accrued Insurance Claims
 
The Company retains the risk of loss, up to certain limits, for claims relating to automobile liability, general liability (including locate damages), workers’ compensation, and employee group health. With regard to losses occurring in fiscal 2013, the Company has retained the risk of loss up to $1.0 million on a per occurrence basis for automobile liability, general liability and workers’ compensation. These retention amounts are applicable to all of the states in which the Company operates, except with respect to workers’ compensation insurance in three states in which the Company participates in a state-sponsored insurance fund. Aggregate stop loss coverage for automobile liability, general liability and workers’ compensation claims increased to $52.5 million from $41.8 million for fiscal 2013 as a result of additional coverage obtained on the Acquired Subsidiaries. In connection with the acquisition of the Acquired Subsidiaries, Quanta Services, Inc. has agreed to retain the risk of loss for insured claims of the Acquired Subsidiaries outstanding, or arising out of events, facts or circumstances existing, as of the closing date of the acquisition.

For losses under the Company's employee health plan, the Company is party to a stop-loss agreement under which it retains the risk of loss, on an annual basis, of the first $250,000 of claims per participant. In addition, the Company retains the risk of loss for the first $550,000 of claim amounts that aggregate across all health plan participants that exceed $250,000.

Accrued insurance claims consist of the following:
 
January 26,
2013
 
July 28,
2012
 
(Dollars in thousands)
Amounts expected to be paid within one year:
 
 
 
Accrued auto, general liability and workers' compensation
$
17,017

 
$
16,514

Accrued employee group health
3,901

 
2,867

Accrued damage claims
5,395

 
5,837

 
26,313

 
25,218

Amounts expected to be paid beyond one year:
 

 
 

Accrued auto, general liability and workers' compensation
21,502

 
21,423

Accrued damage claims
2,191

 
2,168

 
23,693

 
23,591

Total accrued insurance claims
$
50,006

 
$
48,809

 
9. Other Accrued Liabilities
 
Other accrued liabilities consist of the following:
 
January 26,
2013
 
July 28,
2012
 
(Dollars in thousands)
Accrued payroll and related taxes
$
19,529

 
$
19,248

Accrued employee benefit and incentive plan costs
17,001

 
12,488

Accrued construction costs
16,949

 
11,515

Accrued interest and related bank fees
990

 
—

Other current liabilities
15,490

 
7,675

Total other accrued liabilities
$
69,959

 
$
50,926

 
Included in accrued employee benefit and incentive plan costs at January 26, 2013 is $9.2 million of acquired accrued bonus costs from the Acquired Subsidiaries that will be paid in the third quarter of fiscal 2013. Additionally, other current liabilities at January 26, 2013 includes $4.7 million for the remaining purchase price for the Acquired Subsidiaries expected to be paid during the third quarter of fiscal 2013.


17
Table of Contents

10. Debt
 
The Company’s outstanding indebtedness consists of the following:
 
January 26,
2013
 
July 28,
2012
 
(Dollars in thousands)
Borrowings on Senior Credit Agreement (matures December 2017)
$
20,000

 
$
—

Senior Credit Agreement Term Loan
125,000

 
—

7.125% senior subordinated notes due 2021
277,500

 
187,500

Long-term debt premium on 7.125% senior subordinated notes due 2021
3,783

 
—

Capital leases
—

 
74

 
426,283

 
187,574

Less: current portion
(6,250
)
 
(74
)
Long-term debt
$
420,033

 
$
187,500


Senior Subordinated Notes Due 2021

On July 28, 2012, Dycom Investments, Inc. (the “Issuer”), a wholly-owned subsidiary of the Company, had outstanding an aggregate principal amount of $187.5 million of 7.125% senior subordinated notes due 2021 that were issued under an indenture governing the notes dated January 21, 2011 (the "Indenture"). On December 12, 2012, an additional $90.0 million in aggregate principal amount of 7.125% senior subordinated notes due 2021 were issued under the Indenture at 104.25% of the principal amount. The resulting debt premium of $3.8 million will be amortized to interest expense over the remaining term of the notes. The net proceeds of this issuance were used to repay a portion of the borrowings under the Company's new credit facility. Holders of all $277.5 million aggregate principal amount of the senior subordinated notes (the "2021 Notes") will vote as one series under the Indenture.

The 2021 Notes are guaranteed by Dycom and substantially all of the Company's subsidiaries. The Indenture contains covenants that limit, among other things, the ability of the Company and its subsidiaries to incur additional debt and issue preferred stock, make certain restricted payments, consummate specified asset sales, enter into transactions with affiliates, incur liens, impose restrictions on the ability of the Company's subsidiaries to pay dividends or make payments to the Company and its restricted subsidiaries, merge or consolidate with another person, and dispose of all or substantially all of its assets.

The Company determined that the fair value of the 2021 Notes as of January 26, 2013 was $299.9 million as compared to their carrying value of $281.3 million As of July 28, 2012, the fair value of the 2021 Notes was $192.0 million as compared to their carrying value of $187.5 million.

Senior Credit Agreement

On December 3, 2012 Dycom Industries, Inc. and certain of its subsidiaries entered into a new, five-year credit agreement (the "Credit Agreement") with various lenders. The Credit Agreement matures in December 2017 and provides for a $125 million term loan (the "Term Loan") and a $275 million revolving facility. The Credit Agreement contains a sublimit of $150 million for the issuance of letters of credit. Subject to certain conditions, the Credit Agreement provides for the ability to enter into one or more incremental facilities, either by increasing the revolving commitments under the Credit Agreement and/or in the form of term loans, in an aggregate amount not to exceed $100 million. Borrowings under the Credit Agreement can be used to refinance certain indebtedness, to provide general working capital, and for other general corporate purposes. The Company used borrowings under the Credit Agreement to finance a portion of the purchase price of the Acquired Subsidiaries.

The Credit Agreement replaces Dycom's prior credit agreement, dated as of June 4, 2010 (the “Prior Credit Agreement”), which was due to expire in June 2015.  At the time of termination, there were no outstanding borrowings and all outstanding letters of credit were transferred to the Credit Agreement. Dycom did not incur any material early termination penalties in connection with the termination of the Prior Credit Agreement. The Company recognized $0.3 million in write-off of deferred financing costs during the three months ended January 26, 2013 in connection with the replacement of the Prior Credit Agreement.

Borrowings under the Credit Agreement (other than Swingline Loans (as defined in the Credit Agreement)) bear interest at a rate equal to either (a) the administrative agent's base rate, described in the Credit Agreement as the highest of (i) the administrative agent's prime rate, (ii) the Federal Funds Rate plus 0.50%, and (iii) a floating rate of interest equal to one month LIBOR plus 1.00%, or (b) the Eurodollar Rate, plus, in each case, an applicable margin based upon Dycom's consolidated

18
Table of Contents

leverage ratio. Swingline loans bear interest at a rate equal to the administrative agent's base rate plus a margin based upon Dycom's consolidated leverage ratio. Until the delivery of an initial compliance certificate, borrowings are eligible for a margin of 1.0% for borrowings based on the administrative agent's base rate and 2.0% for borrowings based on the Eurodollar Rate. The payments under the Credit Agreement are guaranteed by substantially all of Dycom's subsidiaries and secured by the stock of each wholly-owned, domestic subsidiary (subject to specified exceptions). The Company incurs fees under the Credit Agreement for the unutilized commitments at rates that range from 0.25% to 0.40% per annum, fees for outstanding standby letters of credit at rates that range from 1.50% to 2.25% per annum and fees for outstanding commercial letters of credit at rates that range from 0.75% to 1.125% per annum, in each case based on the Company's consolidated leverage ratio. As of January 26, 2013, outstanding borrowings under the Credit Agreement (including the Term Loan) were at a rate per annum of 2.21% and unutilized commitments and outstanding standby letters of credit were at rates per annum of 0.35% and 2.0%, respectively.

The Term Loan is subject to annual amortization payable in equal quarterly installments of principal, with the first installment due and payable on March 31, 2013. The scheduled annual amortization is as follows: 5.0%, or $6.3 million, in year one of the term loan; 7.5%, or $9.4 million, in year two; 10.0%, or $12.5 million, in year three; 12.5%, or $15.6 million, in year four; and 11.3%, or $14.1 million, in year five. Any remaining principal amounts outstanding are due in full on the maturity date.

The Credit Agreement contains affirmative and negative covenants which are customary for similar credit agreements, including, without limitation, limitations on Dycom and its subsidiaries with respect to indebtedness, liens, investments, distributions, mergers and acquisitions, disposition of assets, sale-leaseback transactions, transactions with affiliates and capital expenditures. The Credit Agreement contains financial covenants which require Dycom to (i) maintain a consolidated leverage ratio of not greater than (1) 3.50 to 1.00 for fiscal quarters ending January 26, 2013 through April 26, 2014, (2) 3.25 to 1.00 for fiscal quarters ending July 26, 2014 through April 25, 2015 and (3) 3.00 to 1.00 for fiscal quarters ending July 25, 2015 and each fiscal quarter thereafter, as measured on a trailing four quarter basis at the end of each fiscal quarter, and (ii) maintain a consolidated interest coverage ratio of not less than 3.00 to 1.00, as measured at the end of each fiscal quarter.

Contractual maturities on the Company's outstanding indebtedness (excluding issue premium) during each of the five years subsequent to January 26, 2013 are as follows:

Period
 
Amount
 
 
(Dollars in thousands)
Year 1
 
$
6,250

Year 2
 
$
9,375

Year 3
 
$
12,500

Year 4
 
$
15,625

Year 5
 
$
101,250

Thereafter
 
$
277,500


On January 26, 2013 and July 28, 2012, the Company had $44.1 million and $38.5 million, respectively, of outstanding letters of credit issued under the Credit Agreement and Prior Credit Agreement, respectively. The outstanding letters of credit are issued as part of the Company's insurance program. At January 26, 2013 and July 28, 2012, the Company was in compliance with the financial covenants and had additional borrowing availability of $210.9 million and $186.5 million, respectively, as determined by the most restrictive covenants of the applicable agreement.

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 basis 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 certain aspects of the Company’s tax positions are based on interpretations of tax regulations, federal and state case law and the applicable statutes.

The Company files income tax returns in the U.S. federal jurisdiction, multiple state jurisdictions and in Canada. With limited exceptions, the Company is no longer subject to U.S. federal and most state and local income tax examinations for

19
Table of Contents

fiscal years ended 2008 and prior. During fiscal 2012 the Company was notified by the Internal Revenue Service that its federal income tax return for a recent period was selected for examination. The Company believes its provision for income taxes is adequate; however, any significant assessment could affect the Company’s results of operations and cash flows.

As of both January 26, 2013 and July 28, 2012, the Company had total unrecognized tax benefits of $2.2 million which would reduce the Company’s effective tax rate during future periods if it is subsequently determined that those liabilities were not required. The Company had approximately $0.6 million for the payment of interest and penalties accrued at both January 26, 2013 and July 28, 2012. The Company recognizes interest related to unrecognized tax benefits in interest expense and penalties in general and administrative expenses. Interest expense related to unrecognized tax benefits was immaterial for each of the three and six months ended January 26, 2013 and January 28, 2012.

12. Other Income, Net

The components of other income, net, are as follows:
 
For the Three Months Ended
 
For the Six Months Ended
 
January 26, 2013
 
January 28, 2012
 
January 26, 2013
 
January 28, 2012
 
(Dollars in thousands)
Gain on sale of fixed assets
$
826

 
$
2,220

 
$
2,407

 
$
5,139

Miscellaneous income (expense), net
(77
)
 
137

 
(44
)
 
178

Write-off of deferred financing costs
(321
)
 
—

 
(321
)
 
—

Total other income, net
$
428

 
$
2,357

 
$
2,042

 
$
5,317


The Company recognized $0.3 million in write-off of deferred financing costs during the three months ended January 26, 2013 in connection with the replacement of its Prior Credit Agreement. See Note 10, Debt, for further information regarding the Company's debt financing.

13. Capital Stock

On March 15, 2012, the Board of Directors authorized $40.0 million to repurchase shares of the Company’s outstanding common stock to be made over eighteen months in open market or private transactions. During fiscal 2011, fiscal 2012 and for the quarter ended October 27, 2012, the Company made the following repurchases under its current and previously authorized share repurchase programs:
 
Period
 
Number of Shares Repurchased
 
Total Consideration
(Dollars in thousands)
 
Average Price Per Share
Fiscal 2011
 
5,389,500

 
$
64,548

 
$
11.98

Fiscal 2012
 
597,700

 
$
12,960

 
$
21.68

Quarter Ended October 27, 2012
 
1,047,000

 
$
15,203

 
$
14.52

 
All shares repurchased have been subsequently cancelled. No shares were repurchased during the second quarter of fiscal 2013. As of January 26, 2013, approximately $22.8 million remained authorized for repurchases through September 15, 2013. 
 
14. Stock-Based Awards

The Company has certain stock-based compensation plans which provide for the grants of stock options, time based restricted share units (“RSUs”), and performance based restricted share units (“Performance RSUs”).

On November 20, 2012, the shareholders of the Company approved the Dycom Industries, Inc. 2012 Long-Term Incentive Plan (the "2012 Plan"). The 2012 Plan authorizes 3,000,000 shares of common stock for grants of stock options, RSUs and Performance RSUs to key employees and officers of the Company. No new awards will be made under the Company's previous 2003 Long-Term Incentive Plan. As of January 26, 2013, the number of shares available for grant under the 2012 Plan was 1,845,244.


20
Table of Contents

Compensation expense for stock-based awards is based on the fair value at the measurement date and is included in general and administrative expenses in the condensed consolidated statements of operations. Stock-based compensation expense and the related tax benefit recognized related to stock options and restricted share units during the three and six months ended January 26, 2013 and January 28, 2012 were as follows:
 
For the Three Months Ended
 
For the Six Months Ended
 
January 26, 2013
 
January 28, 2012
 
January 26, 2013
 
January 28, 2012
 
(Dollars in thousands)
Stock-based compensation
$
2,496

 
$
1,642

 
$
4,762

 
$
2,968

Tax benefit recognized
$
(1,063
)
 
$
(729
)
 
$
(1,827
)
 
$
(1,101
)

As of January 26, 2013, unrecognized compensation expense related to stock options, RSUs and target Performance RSUs was $7.1 million, $7.7 million and $10.9 million, respectively. The Company may recognize an additional $12.2 million in compensation expense related to Performance RSUs if the maximum amount of restricted share units are earned based on certain performance goals being met. Any compensation expense previously recognized with respect to Performance RSUs will be reversed to the extent the performance goals are not met. Unrecognized compensation expense related to stock options, RSUs and Performance RSUs will be recognized over a weighted-average period of 2.4, 3.4 and 1.7 years, respectively, which is the weighted average remaining contractual term for RSUs and Performance RSUs.

 Stock Options - The following table summarizes stock option award activity during the six months ended January 26, 2013:
 
 
Stock Options
 
Shares
 
Weighted Average Exercise Price
 
 
 
 
Outstanding as of July 28, 2012
3,298,747

 
$17.08
Granted
144,155

 
$18.47
Options exercised
(276,106
)
 
$10.47
Forfeited or cancelled
(108,545
)
 
$23.86
Outstanding as of January 26, 2013
3,058,251

 
$17.51
 
 
 
 
Exercisable options as of January 26, 2013
2,161,871

 
$19.00

RSUs and Performance RSUs - The following table summarizes RSU and Performance RSU activity during the six months ended January 26, 2013:

 
Restricted Stock
 
RSUs
Performance RSUs
 
Share Units
 
Weighted Average Grant Price
 
Share Units
 
Weighted Average Grant Price
 
 
 
 
 
 
 
 
 
 
Outstanding as of July 28, 2012
222,760

 
$14.49
 
774,264

 
$18.76
 
Granted
327,603

 
$18.36
 
831,390

 
$18.08
 
Share units vested
(88,619
)
 
$12.79
 
(137,432
)
 
$18.23
 
Forfeited or cancelled
(4,281
)
 
$10.14
 
(149,854
)
 
$18.34
 
Outstanding as of January 26, 2013
457,463

 
$17.60
 
1,318,368

 
$18.44
 
 
Included in the RSU shares granted during the six months ended January 26, 2013 was approximately 219,000 shares at an average grant price of $18.29 to employees of the Acquired Subsidiaries as of the date of acquisition. The Performance RSUs in the above table represent the maximum number of awards that could vest, which is two hundred percent of the target awards. Accordingly, the target amount of Performance RSUs outstanding as of January 26, 2013 was 659,184. During the six months

21
Table of Contents

ended January 26, 2013, 137,432 Performance RSUs outstanding as of July 28, 2012 were cancelled due to certain fiscal 2012 performance criteria not being met.

15. Related Party Transactions

The Company leases administrative offices from entities related to officers of certain of the Company’s subsidiaries. The total expense under these arrangements was $0.4 million for each of the three months ended January 26, 2013 and January 28, 2012, and $0.8 million for each of the six months ended January 26, 2013 and January 28, 2012. Additionally, there was a minimal amount paid in subcontracting services to entities related to officers of certain of the Company’s subsidiaries during the three and six months ended January 26, 2013 and January 28, 2012.

16. Commitments and Contingencies
 
As part of the Company’s insurance program, it retains the risk of loss, up to certain limits, for claims related to automobile liability, general liability, workers’ compensation, employee group health, and locate damages, and 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 its insurance deductibles or retentions.

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

Employee Benefit Plans

Certain of the Company's subsidiaries, including the Acquired Subsidiaries, participate in multiemployer benefit pension plans under the terms of collective-bargaining agreements. The Company's contributions were $0.8 million and $1.8 million during the three and six months ended January 26, 2013, respectively.
The risks of participating in a multiemployer defined benefit pension plan are different from single-employer plans in the following aspects:

•
assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers;

•
if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be inherited by the remaining participating employers; and

•
if the Company chooses to stop participating in the Multi-Employer Plan, the Company may be required to pay the plan an amount based on the underfunded status of the plan, referred to as a withdrawal liability.
 
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 the Company’s customer with the right to obtain payment and/or performance from the issuer of the bond if the Company fails to perform its contractual obligations. As of January 26, 2013, the Company had $432.8 million of outstanding performance and other surety contract bonds. The estimated cost to complete projects secured by the Company's outstanding performance and other surety contract bonds was approximately $149.3 million as of January 26, 2013. No events have occurred in which the customers have exercised their rights under the bonds.

The Company has periodically guaranteed certain obligations of its subsidiaries, including obligations in connection with obtaining state contractor licenses and leasing real property 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 January 26, 2013 and July 28, 2012, the Company had $44.1 million and $38.5 million, respectively, of outstanding standby letters of credit issued under the Credit Agreement.

22
Table of Contents


17. Concentration of Credit Risk

The Company’s customer base is highly concentrated. The top five customers accounted for approximately 58.2% and 59.1% of its total revenues for the six months ended January 26, 2013 and January 28, 2012, respectively. CenturyLink, Inc. (“CenturyLink”), AT&T Inc. (“AT&T”), Comcast Corporation (“Comcast”), and Verizon Communications, Inc. ("Verizon") represent a significant portion of the Company’s customer base and each were over 10% of total revenue during the three or six months ended January 26, 2013 or January 28, 2012 as reflected in the following table:
 
For the Three Months Ended
For the Six Months Ended
 
January 26, 2013
 
January 28, 2012
 
January 26, 2013
 
January 28, 2012
CenturyLink
14.7%
 
14.5%
 
14.2%
 
13.9%
AT&T
13.6%
 
13.5%
 
13.5%
 
14.4%
Comcast
11.0%
 
12.5%
 
11.8%
 
12.7%
Verizon
9.1%
 
9.9%
 
9.6%
 
11.0%

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 26, 2013. Customers representing 10% or more of combined amounts of trade accounts receivable and costs and estimated earnings in excess of billings as of January 26, 2013 or July 28, 2012 had the following outstanding balances and the related percentage of the Company’s total outstanding balances:

 
January 26, 2013
 
July 28, 2012
 
Amount
 
% of Total
 
Amount
 
% of Total
 
 
 
(Dollars in millions)
 
 
Windstream Corporation
$
54.0

 
14.3
%
 
$
35.4

 
13.2
%
CenturyLink
$
48.1

 
12.8
%
 
$
47.6

 
17.7
%
Verizon
$
26.6

 
7.1
%
 
$
30.5

 
11.3
%
 
18. Supplemental Condensed Consolidating Financial Statements

As of January 26, 2013, the outstanding aggregate principal amount of the Company’s 2021 Notes was $277.5 million, comprised of $187.5 million and $90.0 million in principal amount issued in fiscal 2011 and the second quarter of fiscal 2013, respectively. The 2021 Notes were issued by Dycom Investments, Inc., a wholly-owned subsidiary of the Company. See Note 10, Debt, for further information regarding the Company's debt financing. The following condensed consolidating financial statements present, in separate columns, financial information for (i) Dycom Industries, Inc. (“Parent”) on a parent only basis, (ii) Dycom Investments, Inc. ("the Issuer"), (iii) the guarantor subsidiaries for the 2021 Notes on a combined basis, (iv) other non-guarantor subsidiaries on a combined basis, (v) the eliminations and reclassifications necessary to arrive at the information for the Company on a consolidated basis, and (vi) the Company on a consolidated basis. The condensed consolidating financial statements are presented in accordance with the equity method. Under this method, the investments in subsidiaries are recorded at cost and adjusted for the Company’s share of subsidiaries’ cumulative results of operations, capital contributions, distributions and other equity changes. Intercompany charges (income) between the Parent and subsidiaries are recognized in the condensed consolidating financial statements during the period incurred and the settlement of intercompany balances is reflected in the condensed consolidating statement of cash flows based on the nature of the underlying transactions.

Each guarantor and non-guarantor subsidiary is wholly-owned, directly or indirectly, by the Issuer and the Parent. The Notes are fully and unconditionally guaranteed on a joint and several basis by each guarantor subsidiary and Parent. There are no contractual restrictions limiting transfers of cash from guarantor and non-guarantor subsidiaries to Issuer or Parent, within the meaning of Rule 3-10 of Regulation S-X.

23
Table of Contents

DYCOM INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
JANUARY 26, 2013
 
Parent
 
Issuer
 
Subsidiary Guarantors
 
Non- Guarantor Subsidiaries
 
Eliminations and Reclassifications
 
Dycom Consolidated
 
(Dollars in thousands)
ASSETS
 
 
 
 
 
 
 
 
 
 
 
CURRENT ASSETS:
 
 
 
 
 
 
 
 
 
 
 
Cash and equivalents
$
—

 
$
—

 
$
21,528

 
$
1,062

 
$
—

 
$
22,590

Accounts receivable, net
—

 
—

 
226,569

 
844

 
—

 
227,413

Costs and estimated earnings in excess of billings
—

 
—

 
147,537

 
965

 
—

 
148,502

Inventories
—

 
—

 
34,909

 
—

 
—

 
34,909

Deferred tax assets, net
2,604

 
—

 
13,161

 
69

 
(412
)
 
15,422

Income taxes receivable
6,925

 
—

 
—

 
—

 
—

 
6,925

Other current assets
7,258

 
39

 
6,038

 
588

 
—

 
13,923

Total current assets
16,787

 
39

 
449,742

 
3,528

 
(412
)
 
469,684

 
 
 
 
 
 
 
 
 
 
 
 
PROPERTY AND EQUIPMENT, NET
12,850

 
—

 
158,945

 
15,447

 
—

 
187,242

GOODWILL
—

 
—

 
262,989

 
—

 
—

 
262,989

INTANGIBLE ASSETS, NET
—

 
—

 
134,306

 
—

 
—

 
134,306

DEFERRED TAX ASSETS, NET NON-CURRENT
—

 
65

 
5,531

 
815

 
(6,411
)
 
—

INVESTMENT IN SUBSIDIARIES
747,775

 
1,441,693

 
—

 
—

 
(2,189,468
)
 
—

INTERCOMPANY RECEIVABLES
—

 
—

 
650,826

 
—

 
(650,826
)
 
—

OTHER
9,232

 
6,503

 
2,698

 
155

 
—

 
18,588

TOTAL NON-CURRENT ASSETS
769,857

 
1,448,261

 
1,215,295

 
16,417

 
(2,846,705
)
 
603,125

TOTAL ASSETS
$
786,644

 
$
1,448,300

 
$
1,665,037

 
$
19,945

 
$
(2,847,117
)
 
$
1,072,809

 
 
 
 
 
 
 
 
 
 
 
 
 LIABILITIES AND STOCKHOLDERS' EQUITY
 
 

 
 

 
 

CURRENT LIABILITIES:
 

 
 

 
 

 
 

 
 

 
 

Accounts payable
$
3,715

 
$
—

 
$
58,619

 
$
1,832

 
$
—

 
$
64,166

Current portion of debt
6,250

 
—

 
—

 
—

 
—

 
6,250

Billings in excess of costs and estimated earnings
—

 
—

 
11,386

 
—

 
—

 
11,386

Accrued insurance claims
587

 
—

 
25,625

 
101

 
—

 
26,313

Deferred tax liabilities
—

 
248

 
86

 
78

 
(412
)
 
—

Other accrued liabilities
5,471

 
1,055

 
62,647

 
786

 
—

 
69,959

Total current liabilities
16,023

 
1,303

 
158,363

 
2,797

 
(412
)
 
178,074

 
 
 
 
 
 
 
 
 
 
 
 
LONG-TERM DEBT
138,750

 
281,283

 
—

 
—

 
—

 
420,033

ACCRUED INSURANCE CLAIMS
719

 
—

 
22,873

 
101

 
—

 
23,693

DEFERRED TAX LIABILITIES, NET NON-CURRENT
908

 
—

 
52,355

 
1,248

 
(6,411
)
 
48,100

INTERCOMPANY PAYABLES
228,940

 
417,939

 
—

 
3,947

 
(650,826
)
 
—

OTHER LIABILITIES
2,932

 
—

 
1,603

 
2

 
—

 
4,537

Total liabilities
388,272

 
700,525

 
235,194

 
8,095

 
(657,649
)
 
674,437

Total stockholders' equity
398,372

 
747,775

 
1,429,843

 
11,850

 
(2,189,468
)
 
398,372

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
786,644

 
$
1,448,300

 
$
1,665,037

 
$
19,945

 
$
(2,847,117
)
 
$
1,072,809


24
Table of Contents

DYCOM INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
JULY 28, 2012
 
Parent
 
Issuer
 
Subsidiary Guarantors
 
Non- Guarantor Subsidiaries
 
Eliminations and Reclassifications
 
Dycom Consolidated
 
(Dollars in thousands)
ASSETS
 
 
 
 
 
 
 
 
 
 
 
CURRENT ASSETS:
 
 
 
 
 
 
 
 
 
 
 
Cash and equivalents
$
—

 
$
—

 
$
51,563

 
$
1,018

 
$
—

 
$
52,581

Accounts receivable, net
—

 
—

 
140,426

 
1,362

 
—

 
141,788

Costs and estimated earnings in excess of billings
—

 
—

 
125,869

 
1,452

 
—

 
127,321

Inventories
—

 
—

 
26,274

 
—

 
—

 
26,274

Deferred tax assets, net
2,390

 
—

 
13,566

 
80

 
(403
)
 
15,633

Income taxes receivable
4,884

 
—

 
—

 
—

 
—

 
4,884

Other current assets
2,211

 
10

 
5,458

 
787

 
—

 
8,466

Total current assets
9,485

 
10

 
363,156

 
4,699

 
(403
)
 
376,947

 
 
 
 
 
 
 
 
 
 
 
 
PROPERTY AND EQUIPMENT, NET
9,671

 
—

 
133,145

 
15,431

 
—

 
158,247

GOODWILL
—

 
—

 
174,849

 
—

 
—

 
174,849

INTANGIBLE ASSETS, NET
—

 
—

 
49,773

 
—

 
—

 
49,773

DEFERRED TAX ASSETS, NET NON-CURRENT
—

 
65

 
9,341

 
1,085

 
(10,491
)
 
—

INVESTMENT IN SUBSIDIARIES
734,451

 
1,425,451

 
—

 
—

 
(2,159,902
)
 
—

INTERCOMPANY RECEIVABLES
—

 
—

 
860,758

 
54

 
(860,812
)
 
—

OTHER
6,075

 
4,338

 
1,731

 
233

 
—

 
12,377

TOTAL NON-CURRENT ASSETS
750,197

 
1,429,854

 
1,229,597

 
16,803

 
(3,031,205
)
 
395,246

TOTAL ASSETS
$
759,682

 
$
1,429,864

 
$
1,592,753

 
$
21,502

 
$
(3,031,608
)
 
$
772,193

 
 
 
 
 
 
 
 
 
 
 
 
 LIABILITIES AND STOCKHOLDERS' EQUITY
 
 

 
 

 
 

CURRENT LIABILITIES:
 

 
 

 
 

 
 

 
 

 
 

Accounts payable
$
2,785

 
$
—

 
$
33,441

 
$
597

 
$
—

 
$
36,823

Current portion of debt
—

 
—

 
74

 
—

 
—

 
74

Billings in excess of costs and estimated earnings
—

 
—

 
1,522

 
—

 
—

 
1,522

Accrued insurance claims
588

 
—

 
24,551

 
79

 
—

 
25,218

Deferred tax liabilities
—

 
249

 
84

 
70

 
(403
)
 
—

Other accrued liabilities
5,054

 
565

 
43,772

 
1,535

 
—

 
50,926

Total current liabilities
8,427

 
814

 
103,444

 
2,281

 
(403
)
 
114,563

 
 
 
 
 
 
 
 
 
 
 
 
LONG-TERM DEBT
—

 
187,500

 
—

 
—

 
—

 
187,500

ACCRUED INSURANCE CLAIMS
708

 
—

 
22,815

 
68

 
—