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
nine months ended
April 29, 2017
and
April 23, 2016
. Additionally, the Company had no material long-lived assets in Canada as of
April 29, 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 each of the
nine months ended
April 29, 2017
and
April 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
nine months ended
April 29, 2017
and
April 23, 2016
, there were no material impacts to the Company’s results of operations due to changes in contract estimates.
There were no material amounts of unapproved change orders or claims recognized during the
nine months ended
April 29, 2017
or
April 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
April 29, 2017
and
July 30, 2016
, other non-current assets consisted of deferred financing costs related to the Company’s revolving credit facility of
$5.2 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
$10.8 million
and
$12.7 million
, respectively. Additionally, other non-current assets included
$5.4 million
and
$5.0 million
of restricted cash held as collateral in support of the Company’s insurance obligations as of
April 29, 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
April 29, 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
April 29, 2017
and
July 30, 2016
. During the
nine months ended
April 29, 2017
and
April 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
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.
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.
Stock Compensation
- In March 2016, the FASB issued Accounting Standards Update No. 2016-09,
Compensation - Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting
(“ASU 2016-09”). ASU 2016-09 includes provisions intended to simplify accounting for share-based payment transactions including income tax consequences, classification of share-based awards as either equity or liabilities, and classification on the statement of cash flows. Under ASU 2016-09, all excess tax benefits (or tax deficiencies) will be recognized as income tax benefit (or expense) in the statement of operations. Additionally, when applying the treasury stock method for computing diluted earnings per share under ASU 2016-09 the assumed proceeds will not include any windfall tax benefits, which may result in a greater number of dilutive shares outstanding. Further, excess tax benefits will be classified along with other income tax cash flows as an operating activity. ASU 2016-09 also permits income tax withholding up to the maximum statutory tax rate in applicable jurisdictions as the threshold to qualify for equity classification. ASU 2016-09 will be effective for the Company in fiscal 2018 and interim reporting periods within that year. Early adoption is permitted as of the beginning of an interim or annual reporting period with all adjustments to be reflected as of the beginning of the fiscal year of adoption. The application of ASU 2016-09 will result in greater volatility in the effective tax rate in future periods.
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 Nine Months Ended
|
|
|
April 29, 2017
|
|
April 23, 2016
|
|
April 29, 2017
|
|
April 23, 2016
|
Net income available to common stockholders (numerator)
|
|
$
|
38,796
|
|
|
$
|
33,083
|
|
|
$
|
113,509
|
|
|
$
|
79,380
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares (denominator)
|
|
31,357,124
|
|
|
32,433,560
|
|
|
31,439,981
|
|
|
32,656,490
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
1.24
|
|
|
$
|
1.02
|
|
|
$
|
3.61
|
|
|
$
|
2.43
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares
|
|
31,357,124
|
|
|
32,433,560
|
|
|
31,439,981
|
|
|
32,656,490
|
|
Potential shares of common stock arising from stock options, and unvested restricted share units
|
|
552,802
|
|
|
617,374
|
|
|
651,110
|
|
|
830,025
|
|
Total shares-diluted (denominator)
|
|
31,909,926
|
|
|
33,050,934
|
|
|
32,091,091
|
|
|
33,486,515
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$
|
1.22
|
|
|
$
|
1.00
|
|
|
$
|
3.54
|
|
|
$
|
2.37
|
|
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 Nine Months Ended
|
|
|
April 29, 2017
|
|
April 23, 2016
|
|
April 29, 2017
|
|
April 23, 2016
|
Stock-based awards
|
|
96,020
|
|
|
116,544
|
|
|
64,632
|
|
|
79,792
|
|
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
|
|
10,107,488
|
|
|
10,128,012
|
|
|
10,076,100
|
|
|
10,091,260
|
|
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 period exceeds the warrant strike price of
$130.43
per share. As the Company’s average stock price for the three and
nine months ended
April 29, 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 2017 -
During March 2017, the Company acquired Texstar Enterprises, Inc. (“Texstar”) for
$26.4 million
, net of cash acquired. Texstar provides construction and maintenance services for telecommunications providers in the Southwest and Pacific Northwest regions of the United States. This acquisition expands the Company’s geographic presence within its existing customer base.
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 2017 and 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, NextGen, and Texstar acquisitions are preliminary and will be completed when valuations for intangible assets and other amounts are finalized within the 12-month measurement period from the respective date of acquisition. 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 nine months ended
April 29, 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
$2.8 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
nine months ended
April 29, 2017
related to these fair value adjustments was not significant.
The following table summarizes the aggregate consideration paid for businesses acquired in fiscal 2017 and 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):
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Assets
|
|
|
|
Accounts receivable
|
$
|
8.9
|
|
|
$
|
16.9
|
|
Costs and estimated earnings in excess of billings
|
2.6
|
|
|
22.3
|
|
Inventories and other current assets
|
0.2
|
|
|
11.9
|
|
Property and equipment
|
5.6
|
|
|
11.5
|
|
Goodwill
|
10.3
|
|
|
41.2
|
|
Intangible assets - customer relationships
|
9.8
|
|
|
94.5
|
|
Intangible assets - trade names and other
|
0.7
|
|
|
1.8
|
|
Total assets
|
38.1
|
|
|
200.1
|
|
|
|
|
|
Liabilities
|
|
|
|
Accounts payable
|
3.3
|
|
|
23.7
|
|
Accrued and other current liabilities
|
3.4
|
|
|
21.0
|
|
Deferred tax liabilities, net non-current
|
5.0
|
|
|
—
|
|
Total liabilities
|
11.7
|
|
|
44.7
|
|
|
|
|
|
Net Assets Acquired
|
$
|
26.4
|
|
|
$
|
155.4
|
|
With respect to the acquisition from Goodman,
$20.0 million
is escrowed as of
April 29, 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 2017 and 2016 are included in the condensed consolidated financial statements from their respective dates of acquisition. The revenues and net income of TelCom, NextGen, and Texstar were not material during the three or
nine months ended
April 29, 2017
or
April 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):
|
|
|
|
|
|
|
|
|
|
April 29, 2017
|
|
July 30, 2016
|
Contract billings
|
$
|
323,743
|
|
|
$
|
297,532
|
|
Retainage
|
26,497
|
|
|
32,101
|
|
Total
|
350,240
|
|
|
329,633
|
|
Less: allowance for doubtful accounts
|
(1,372
|
)
|
|
(1,603
|
)
|
Accounts receivable, net
|
$
|
348,868
|
|
|
$
|
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
nine months ended
April 29, 2017
and the three and
nine months ended
April 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
April 29, 2017
or
July 30, 2016
.
During the fourth quarter of fiscal 2016, the Company entered into a customer-sponsored vendor payment program. All eligible accounts receivable 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):
|
|
|
|
|
|
|
|
|
|
April 29, 2017
|
|
July 30, 2016
|
Costs incurred on contracts in progress
|
$
|
373,504
|
|
|
$
|
307,826
|
|
Estimated to date earnings
|
100,814
|
|
|
92,226
|
|
Total costs and estimated earnings
|
474,318
|
|
|
400,052
|
|
Less: billings to date
|
(48,308
|
)
|
|
(42,637
|
)
|
|
$
|
426,010
|
|
|
$
|
357,415
|
|
Included in the accompanying condensed consolidated balance sheets under the captions:
|
|
|
|
|
|
Costs and estimated earnings in excess of billings
|
$
|
440,895
|
|
|
$
|
376,972
|
|
Billings in excess of costs and estimated earnings
|
(14,885
|
)
|
|
(19,557
|
)
|
|
$
|
426,010
|
|
|
$
|
357,415
|
|
As of
April 29, 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
April 29, 2017
or
July 30, 2016
.
6. Property and Equipment
Property and equipment consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Useful Lives (Years)
|
|
April 29, 2017
|
|
July 30, 2016
|
Land
|
—
|
|
$
|
3,475
|
|
|
$
|
3,475
|
|
Buildings
|
10-35
|
|
12,006
|
|
|
11,969
|
|
Leasehold improvements
|
1-10
|
|
13,959
|
|
|
13,753
|
|
Vehicles
|
1-5
|
|
461,059
|
|
|
404,273
|
|
Computer hardware and software
|
1-7
|
|
104,659
|
|
|
95,570
|
|
Office furniture and equipment
|
1-10
|
|
11,949
|
|
|
10,374
|
|
Equipment and machinery
|
1-10
|
|
274,728
|
|
|
242,079
|
|
Total
|
|
|
881,835
|
|
|
781,493
|
|
Less: accumulated depreciation
|
|
|
(503,427
|
)
|
|
(454,823
|
)
|
Property and equipment, net
|
|
|
$
|
378,408
|
|
|
$
|
326,670
|
|
Depreciation expense was
$31.2 million
and
$27.0 million
for
the three months ended
April 29, 2017
and
April 23, 2016
, respectively, and
$89.2 million
and
$74.9 million
for
the nine months ended
April 29, 2017
and
April 23, 2016
, respectively.
7. Goodwill and Intangible Assets
Goodwill
The Company’s goodwill balance was
$323.2 million
and
$310.2 million
as of
April 29, 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
|
|
Goodwill from fiscal 2017 acquisition
|
10,309
|
|
|
—
|
|
|
10,309
|
|
Purchase price allocation adjustments from fiscal 2016 acquisitions
|
2,769
|
|
|
—
|
|
|
2,769
|
|
Balance as of April 29, 2017
|
$
|
519,002
|
|
|
$
|
(195,767
|
)
|
|
$
|
323,235
|
|
The goodwill associated with the stock purchase of Texstar is not deductible for tax purposes. Goodwill largely consists of expected synergies resulting from acquisitions, including the expansion of the Company’s geographic presence and strengthening of its customer base.
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
April 29, 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
April 29, 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 were performed on reporting units that comprise a substantial portion of the Company’s consolidated goodwill balance and on its indefinite-lived intangible asset. 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 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
April 29, 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.
Intangible Assets
The Company’s intangible assets consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 29, 2017
|
|
July 30, 2016
|
|
Weighted Average Remaining Useful Lives (Years)
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Intangible Assets, Net
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Intangible Assets, Net
|
Customer relationships
|
12.3
|
|
$
|
299,717
|
|
|
$
|
118,203
|
|
|
$
|
181,514
|
|
|
$
|
289,955
|
|
|
$
|
101,012
|
|
|
$
|
188,943
|
|
Trade names
|
7.3
|
|
10,350
|
|
|
6,914
|
|
|
3,436
|
|
|
9,800
|
|
|
6,034
|
|
|
3,766
|
|
UtiliQuest trade name
|
—
|
|
4,700
|
|
|
—
|
|
|
4,700
|
|
|
4,700
|
|
|
—
|
|
|
4,700
|
|
Non-compete agreements
|
2.5
|
|
685
|
|
|
484
|
|
|
201
|
|
|
685
|
|
|
329
|
|
|
356
|
|
Contract backlog
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,780
|
|
|
4,666
|
|
|
114
|
|
|
|
|
$
|
315,452
|
|
|
$
|
125,601
|
|
|
$
|
189,851
|
|
|
$
|
309,920
|
|
|
$
|
112,041
|
|
|
$
|
197,879
|
|
During fiscal 2017, the remaining 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.
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
$6.2 million
and
$4.5 million
for
the three months ended
April 29, 2017
and
April 23, 2016
, respectively, and
$18.5 million
and
$14.0 million
for
the nine months ended
April 29, 2017
and
April 23, 2016
, respectively.
As of
April 29, 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
$101.0 million
and
$89.7 million
as of
April 29, 2017
and
July 30, 2016
, respectively, of which
$60.7 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
April 29, 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.
9. Other Accrued Liabilities
Other accrued liabilities consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
April 29, 2017
|
|
July 30, 2016
|
Accrued payroll and related taxes
|
$
|
23,293
|
|
|
$
|
23,908
|
|
Accrued employee benefit and incentive plan costs
|
33,873
|
|
|
40,943
|
|
Accrued construction costs
|
26,931
|
|
|
41,123
|
|
Other current liabilities
|
15,234
|
|
|
16,328
|
|
Total other accrued liabilities
|
$
|
99,331
|
|
|
$
|
122,302
|
|
10. Debt
The Company’s outstanding indebtedness consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
April 29, 2017
|
|
July 30, 2016
|
Credit Agreement - Revolving facility (matures April 2020)
|
$
|
71,000
|
|
|
$
|
—
|
|
Credit Agreement - Term loan facilities (mature April 2020)
|
367,688
|
|
|
346,250
|
|
0.75% convertible senior notes, net (mature September 2021)
|
387,329
|
|
|
373,077
|
|
|
826,017
|
|
|
719,327
|
|
Less: current portion
|
(14,438
|
)
|
|
(13,125
|
)
|
Long-term debt
|
$
|
811,579
|
|
|
$
|
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 and
$385.0 million
in aggregate term loan facilities, including
$35.0 million
from an incremental term loan facility entered into during the second quarter of fiscal 2017. The additional term loan is subject to terms and conditions substantially similar to those applicable to the existing term loan facilities. The proceeds were used for general corporate purposes. The credit agreement also contains a sublimit of
$200.0 million
for the issuance of letters of credit.
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.
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
April 29, 2017
and
July 30, 2016
.
The weighted average interest rates and fees for balances under the Credit Agreement as of
April 29, 2017
and
July 30, 2016
were as follows:
|
|
|
|
|
|
Weighted Average Rate End of Period
|
|
April 29, 2017
|
|
July 30, 2016
|
Borrowings - Term loan facilities
|
2.74%
|
|
2.49%
|
Borrowings - Revolving facility
(1)
|
3.48%
|
|
—%
|
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
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
April 29, 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
$321.4 million
and
$392.4 million
, respectively, 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
was used 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.
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
$4.2 million
of interest expense during
the three months ended
April 29, 2017
and
April 23, 2016
, respectively, and
$13.1 million
and
$10.1 million
of interest expense during
the nine months ended
April 29, 2017
and
April 23, 2016
, respectively, for the non-cash amortization of the debt discount. The liability component of the Notes consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
April 29, 2017
|
|
July 30, 2016
|
Liability component
|
|
|
|
Principal amount of 0.75% convertible senior notes due September 2021
|
$
|
485,000
|
|
|
$
|
485,000
|
|
Less: Debt discount
|
(88,568
|
)
|
|
(101,679
|
)
|
Less: Debt issuance costs
(1)
|
(9,103
|
)
|
|
(10,244
|
)
|
Net carrying amount of Notes
|
$
|
387,329
|
|
|
$
|
373,077
|
|
(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
$9.1 million
and
$10.2 million
remained unamortized as of
April 29, 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.
The equity component of the Notes was recognized at issuance and represents the difference between the principal amount of the Notes and the debt discount. The equity component approximated
$112.6 million
at the time of issuance and its fair value is not remeasured as long as it continues to meet the conditions for equity classification. 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
April 29, 2017
and
July 30, 2016
was approximately
$515.8 million
and
$458.7 million
, respectively, based on quoted market prices (level 2), compared to a net carrying amount of
$387.3 million
and
$373.1 million
, respectively. The fair value and net carrying amounts as of
April 29, 2017
and
July 30, 2016
are both reflected net of the debt discount of
$88.6 million
and
$101.7 million
, respectively, and debt issuance costs of
$9.1 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.
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
nine months ended
April 29, 2017
and
April 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
$6.3 million
and
$1.4 million
as of
April 29, 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
$0.7 million
and
$15.3 million
as of
April 29, 2017
and
July 30, 2016
, respectively.
As of both
April 29, 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
April 29, 2017
and
July 30, 2016
, respectively. Interest expense related to unrecognized tax benefits for the Company for the three and
nine months ended
April 29, 2017
and
April 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 Nine Months Ended
|
|
April 29, 2017
|
|
April 23, 2016
|
|
April 29, 2017
|
|
April 23, 2016
|
Gain on sale of fixed assets
|
$
|
5,048
|
|
|
$
|
4,061
|
|
|
$
|
8,220
|
|
|
$
|
6,213
|
|
Miscellaneous (expense) income, net
|
(255
|
)
|
|
262
|
|
|
(1,483
|
)
|
|
653
|
|
Total other income, net
|
$
|
4,793
|
|
|
$
|
4,323
|
|
|
$
|
6,737
|
|
|
$
|
6,866
|
|
Other income, net includes approximately
$0.9 million
and
$2.5 million
of discount fee expense incurred during the three and
nine months ended
April 29, 2017
, respectively, associated with the collection of accounts receivable under a customer-sponsored vendor payment program in which the Company began participating 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 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
|
|
Three months ended April 29, 2017
|
|
400,000
|
|
|
$
|
37,909
|
|
|
$
|
94.77
|
|
Fiscal 2016
- 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.
Fiscal 2017
- As of the beginning of fiscal 2017, the Company had
$100.0 million
available for share repurchases through October 2017 under the Company’s April 26, 2016 repurchase authorization. During the second quarter of fiscal 2017, the Company repurchased
313,006
shares of its common stock, at an average price of
$79.87
, for
$25.0 million
. During the third quarter of fiscal 2017, the Company’s Board of Directors extended the term of the
$75.0 million
remaining available under the April 26, 2016 authorization through August 2018. In connection with the extension of this authorization, the Company’s Board of Directors also authorized an additional
$75.0 million
to repurchase shares of the Company’s common stock through August 2018 in open market or private transactions. The Company repurchased
400,000
shares of its common stock, at an average price of
$94.77
per share, for
$37.9 million
during the third quarter of fiscal 2017. As of
April 29, 2017
,
$112.1 million
remained available for repurchases.
All shares repurchased have been canceled. Upon cancellation, the excess over par value is recorded as a reduction of additional paid-in capital until the balance is reduced to zero, with any additional excess recorded as a reduction of retained earnings. During the
nine months ended
April 29, 2017
,
$42.8 million
was charged to retained earnings related to the Company’s share repurchases during the period.
Restricted Stock Tax Withholdings.
During
the nine months ended
April 29, 2017
and
April 23, 2016
, the Company withheld
130,922
shares and
156,362
shares, respectively, totaling
$10.4 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.
Stock-based compensation expense and the related tax benefit during the three and
nine months ended
April 29, 2017
and
April 23, 2016
were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Nine Months Ended
|
|
April 29, 2017
|
|
April 23, 2016
|
|
April 29, 2017
|
|
April 23, 2016
|
Stock-based compensation
|
$
|
4,915
|
|
|
$
|
3,892
|
|
|
$
|
15,930
|
|
|
$
|
12,600
|
|
Related tax benefit for stock-based compensation
|
$
|
1,943
|
|
|
$
|
1,467
|
|
|
$
|
6,126
|
|
|
$
|
4,809
|
|
During the
nine months ended
April 29, 2017
, the Company recognized approximately
$6.2 million
in stock-based compensation expense in connection with certain performance-based target awards related to the fiscal 2017 performance criteria. In addition, during the
nine months ended
April 29, 2017
, the Company recognized approximately
$1.6 million
in stock-based compensation expense in connection with supplemental shares for the three-year performance period ending July 29, 2017. In a period the Company determines it is no longer probable that it will achieve certain performance criteria for the awards, it would reverse the stock-based compensation expense that it had previously recognized associated with the portion of Performance RSUs that will not vest.
As of
April 29, 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
$3.2 million
,
$9.5 million
, and
$21.2 million
, respectively. This expense will be recognized over a weighted-average number of years of
2.7
,
2.7
, and
2.1
, respectively, based on the average remaining service periods for the awards. As of
April 29, 2017
, the Company may recognize an additional
$7.4 million
in compensation expense in future periods if the maximum amount of Performance RSUs is earned based on certain performance measures being met.
Stock Options
The following table summarizes stock option award activity during
the nine months ended
April 29, 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
|
(101,411
|
)
|
|
$
|
14.14
|
|
Canceled
|
(1,000
|
)
|
|
$
|
6.83
|
|
Outstanding as of April 29, 2017
|
671,770
|
|
|
$
|
25.21
|
|
|
|
|
|
Exercisable options as of April 29, 2017
|
540,798
|
|
|
$
|
18.32
|
|
RSUs and Performance RSUs
The following table summarizes RSU and Performance RSU award activity during
the nine months ended
April 29, 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
|
64,546
|
|
|
$
|
78.70
|
|
|
274,282
|
|
|
$
|
79.29
|
|
Share units vested
|
(114,297
|
)
|
|
$
|
35.42
|
|
|
(287,593
|
)
|
|
$
|
40.53
|
|
Forfeited or canceled
|
(3,935
|
)
|
|
$
|
46.63
|
|
|
(56,854
|
)
|
|
$
|
42.67
|
|
Outstanding as of April 29, 2017
|
197,578
|
|
|
$
|
58.42
|
|
|
555,806
|
|
|
$
|
67.46
|
|
The total amount of granted Performance RSUs presented above consists of
198,140
target shares and
76,142
supplemental shares. During
the nine months ended
April 29, 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
April 29, 2017
consists of
415,729
target shares and
140,077
supplemental shares.
15. Concentration of Credit Risk
The Company’s customer base is highly concentrated, with its top
five
customers during each of
the nine months ended
April 29, 2017
and
April 23, 2016
accounting for approximately
76.3%
and
68.8%
of its total contract revenues, respectively. Customers whose contract revenues exceeded
10%
of total contract revenue during the three or
nine months ended
April 29, 2017
or
April 23, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Nine Months Ended
|
|
April 29, 2017
|
|
April 23, 2016
|
|
April 29, 2017
|
|
April 23, 2016
|
AT&T Inc.
|
27.1%
|
|
26.8%
|
|
28.1%
|
|
22.8%
|
Comcast Corporation
|
19.4%
|
|
14.4%
|
|
17.1%
|
|
13.3%
|
CenturyLink, Inc.
|
17.7%
|
|
13.7%
|
|
16.6%
|
|
14.7%
|
Verizon Communications Inc.
(1)
|
8.5%
|
|
10.6%
|
|
8.9%
|
|
10.7%
|
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
April 29, 2017
or
July 30, 2016
were as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 29, 2017
|
|
July 30, 2016
|
|
Amount
|
|
% of Total
|
|
Amount
|
|
% of Total
|
Comcast Corporation
|
$
|
172.5
|
|
|
22.4%
|
|
$
|
95.3
|
|
|
13.9%
|
CenturyLink, Inc.
|
$
|
118.4
|
|
|
15.4%
|
|
$
|
79.0
|
|
|
11.5%
|
AT&T Inc.
|
$
|
109.5
|
|
|
14.2%
|
|
$
|
138.8
|
|
|
20.3%
|
Windstream Corporation
|
$
|
89.5
|
|
|
11.6%
|
|
$
|
79.0
|
|
|
11.5%
|
Verizon Communications Inc.
(1)
|
$
|
63.0
|
|
|
8.2%
|
|
$
|
70.2
|
|
|
10.2%
|
(1)
For comparison purposes in the above tables, amounts from Verizon Communications Inc. and XO Communications LLC’s fiber-optic network business have been combined for periods prior to their February 2017 merger.
In addition, another customer had combined amounts of trade accounts receivable and CIEB, net of
$71.6 million
, or
9.3%
, as of
April 29, 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
April 29, 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 violation of 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 sought 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. The parties agreed to settle the lawsuit in March 2017 for an immaterial amount. The parties are preparing the agreement and intend to seek court approval of the proposed settlement.
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 sought equitable and declaratory relief. In May 2016, Quanta answered the complaint and brought a separate counterclaim against the Company seeking a declaration regarding the permissible boundaries of customer solicitation. In March 2017, the parties reached a confidential settlement that resolved all outstanding claims on terms not material to the Company.
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 ceased operations. This subsidiary contributed to a multiemployer pension plan, the Pension, Hospitalization and Benefit Plan of the Electrical Industry - Pension Trust Fund (the “Plan”). 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
April 29, 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
April 29, 2017
and
July 30, 2016
, the Company had
$130.9 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
April 29, 2017
and
July 30, 2016
, the Company had
$57.6 million
of outstanding standby letters of credit issued under the Credit Agreement.
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.