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 of the Company and its subsidiaries, all of which are wholly-owned, 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 annual financial statements and 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 fiscal year ended
July 29, 2017
included in the Company’s Annual Report on Form 10-K for the fiscal year ended
July 29, 2017
, filed with the SEC on September 1, 2017. In the opinion of management, all adjustments considered necessary for a fair statement of the results for the interim periods presented have been included. This includes all normal and recurring adjustments and elimination of intercompany accounts and transactions. Operating results for the interim period are not necessarily indicative of the results expected for any subsequent interim or annual period.
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 months ended
October 28, 2017
and
October 29, 2016
. Additionally, the Company had no material long-lived assets in Canada as of
October 28, 2017
or
July 29, 2017
.
Accounting Period.
The Company’s fiscal 2017 year ended on the last Saturday in July. In September 2017, the Company’s Board of Directors approved a change in the Company’s fiscal year end from July to January. Beginning with a six-month transition period ending January 27, 2018, the Company’s fiscal year will end on the last Saturday of January. The Company will file a transition report on Form 10-K containing audited financial statements for the six month period from July 30, 2017 to January 27, 2018. After the transition period, each fiscal year will consist of either 52 or 53 weeks of operations (with the additional week of operations occurring in the fourth fiscal quarter). The Company’s 2019 fiscal year will commence on January 28, 2018.
Significant Accounting Policies & 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 29, 2017
.
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.
Revenue Recognition.
The Company performs a substantial majority of its services under master service agreements and other agreements that contain customer-specified service requirements, having 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 three months ended
October 28, 2017
and
October 29, 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 three months ended
October 28, 2017
and
October 29, 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 three months ended
October 28, 2017
or
October 29, 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.
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 the Company’s long-term debt, which is based on observable market-based inputs (Level 2). See Note 11,
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
October 28, 2017
and
July 29, 2017
. During
the three months ended
October 28, 2017
and
October 29, 2016
, the Company had no material nonrecurring fair value measurements of assets or liabilities subsequent to their initial recognition.
Recently Issued Accounting Pronouncements
Recently Adopted Accounting Standards
Income Taxes.
In November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-17,
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
(“ASU 2015-17”). ASU 2015-17 simplifies the presentation of deferred income taxes by requiring that deferred tax liabilities and assets are solely classified as non-current in a consolidated statement of financial position. The Company adopted ASU 2015-17 on a prospective basis effective July 30, 2017, the first day of the fiscal quarter ended
October 28, 2017
. As a result of this adoption, Deferred tax liabilities, net non-current is presented net of approximately
$28.2 million
of deferred tax assets within the condensed consolidated balance sheets as of
October 28, 2017
. Under the previous guidance, these deferred tax assets would have been classified as current. No prior periods have been retrospectively adjusted.
Stock Compensation.
In March 2016, the FASB issued ASU No. 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
(“ASU 2016-09”) with the intention of simplifying accounting for share-based payment transactions. The Company adopted ASU 2016-09 effective July 30, 2017, the first day of the fiscal quarter ended
October 28, 2017
. Under the amended guidance, excess tax benefits (“windfalls”) or tax deficiencies (“shortfalls”) are recognized in the Company’s provision for income taxes in the consolidated statements of operations rather than as additional paid-in capital in the consolidated balance sheets. Additionally, windfalls and shortfalls are presented as operating cash flows rather than financing activities. As a result of the amended guidance, the Company recognized approximately
$0.9 million
of windfalls as a reduction to income tax expense in the condensed consolidated statements of operations during the fiscal quarter ended
October 28, 2017
. Additionally, this amount was presented as operating cash flows rather than as financing activities during the fiscal quarter ended
October 28, 2017
.
Because windfalls are no longer recognized in additional paid-in capital, the amount is excluded from the hypothetical proceeds used to repurchase shares when computing diluted earnings per common share under the treasury stock method. As a result of the amended guidance, diluted shares increased by approximately
169,000
shares during the fiscal quarter ended
October 28, 2017
. The inclusion of windfalls and shortfalls as a component of income tax expense or benefit during the period in which they occur will increase the volatility of the Company’s provision for income taxes. The amount of windfalls and shortfalls recognized will be dependent on the volume of share-based award vesting or exercise activity as well as the Company’s stock price at the dates on which stock-based awards vest or are exercised. In accordance with ASU 2016-09, these changes have been applied prospectively and prior periods have not been adjusted.
The other components of ASU 2016-09 did not have a material effect on the Company’s condensed consolidated financial statements. See Note 2,
Computation of Earnings Per Share
, Note 12,
Income Taxes
, and Note 15,
Stock-Based Awards
for additional disclosure related to the effects of ASU 2016-09.
The Company also adopted the following Accounting Standards Updates during the fiscal quarter ended
October 28, 2017
, neither of which had a material effect on the Company’s condensed consolidated financial statements:
|
|
|
|
|
Standard
|
|
Adoption Date
|
2015-11
|
Inventory (Topic 330): Simplifying the Measurement of Inventory
|
|
July 30, 2017
|
2017-09
|
Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting
|
|
July 30, 2017
|
Accounting Standards Not Yet Adopted
There were no accounting pronouncements issued during the fiscal quarter ended
October 28, 2017
that are significant or potentially significant to the Company. In addition, 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 fiscal year ended
July 29, 2017
filed with the SEC on
September 1, 2017
.
Revenue Recognition.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606),
requiring entities to recognize revenue to depict the transfer of control of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to receive in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
(“ASU 2015-14”), which defers the effective date of the new revenue standard. In 2016, the FASB issued several updates to clarify certain topics within the standard. ASU No. 2014-09 and the related updates are referred to herein as “ASU 2014-09”.
The Company continues to evaluate the effect of ASU 2014-09 on its systems, business processes, controls, disclosures, and consolidated financial statements. This assessment involves the comparison of representative contracts with customers with requirements of the new standard and historical accounting practices. Based on the results of the contract reviews performed to date, the Company is expecting to recognize the substantial majority of its revenue from master service agreements and other agreements that contain customer-specified service requirements, recognized over time, using the units-of-delivery input method under ASU 2014-09. For the remainder of the Company’s contracts, representing less than 5% of its contract revenues during the fiscal quarter ended October 28, 2017, the Company is expecting to use a cost-to-cost measurement of revenue, recognized over time, based on the ratio of contract costs incurred to date to total estimated contract costs. The Company expects that the amount and timing of revenue recognition under ASU 2014-09 will not materially differ from the Company’s historic accounting practices.
ASU 2014-09 must be applied using either a full retrospective approach or a modified (cumulative effect) retrospective approach. The Company anticipates adopting ASU 2014-09 under the modified (cumulative effect) retrospective approach. Under this approach, ASU 2014-09 would apply to all new contracts initiated on or after January 28, 2018. For existing contracts with remaining performance obligations as of January 28, 2018, a cumulative effect adjustment to the opening retained earnings balance would be recognized for those contracts, as the difference between the current revenue recognition practices and the criteria required by ASU 2014-09. ASU 2014-09 is effective for fiscal years beginning after December 15, 2017. The Company will adopt ASU 2014-09 as of January 28, 2018, the first day of fiscal 2019. The Company has not yet quantified the potential impact of adopting ASU 2014-09; however, based on contracts evaluated to date, the adoption is not expected to have a material impact on the timing or amount of revenue recognized under contracts with customers, as compared to current revenue recognition practices. The Company expects the cumulative impact adjustment to opening retained earnings to be immaterial, with an immaterial impact to the Company’s net income on an ongoing basis. Prior periods will not be retrospectively adjusted. This expectation may change as the process to assess the impact is still ongoing. The Company expects to complete the assessment of the impact of ASU 2014-09 during the fiscal quarter ending January 27, 2018.
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
|
|
October 28, 2017
|
|
October 29, 2016
|
Net income available to common stockholders (numerator)
|
$
|
28,776
|
|
|
$
|
51,050
|
|
|
|
|
|
Weighted-average number of common shares (denominator)
|
31,061,448
|
|
|
31,429,493
|
|
|
|
|
|
Basic earnings per common share
|
$
|
0.93
|
|
|
$
|
1.62
|
|
|
|
|
|
Weighted-average number of common shares
|
31,061,448
|
|
|
31,429,493
|
|
Potential shares of common stock arising from stock options, and unvested restricted share units
(1)
|
830,126
|
|
|
770,794
|
|
Total shares-diluted (denominator)
|
31,891,574
|
|
|
32,200,287
|
|
|
|
|
|
Diluted earnings per common share
|
$
|
0.90
|
|
|
$
|
1.59
|
|
(1)
As discussed in Note 1,
Basis of Presentation and Accounting Policies
, the Company has adopted ASU 2016-09. Under the amended guidance, windfalls or shortfalls are recognized in the Company’s provision for income taxes in the consolidated statements of operations rather than as additional paid-in capital in the consolidated balance sheets. Because windfalls are no longer recognized in additional paid-in capital, the amount is excluded from the hypothetical proceeds used to repurchase shares when computing diluted earnings per common share under the treasury stock method. As a result of the amended guidance, diluted shares increased by approximately
169,000
shares during the fiscal quarter ended
October 28, 2017
. ASU 2016-09’s effect on the calculation of diluted earnings per common share may result in significant volatility in earnings based on the timing and extent of share-based award vesting and exercise events.
The weighted-average number of common shares outstanding used in the computation of diluted earnings per common share excludes the effect of the following instruments because their inclusion would have been anti-dilutive:
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
October 28, 2017
|
|
October 29, 2016
|
Stock-based awards
|
125,074
|
|
|
41,302
|
|
0.75% convertible senior notes due 2021
|
5,005,734
|
|
|
5,005,734
|
|
Warrants
|
5,005,734
|
|
|
5,005,734
|
|
Total anti-dilutive weighted shares excluded from the calculation of earnings per common share
|
10,136,542
|
|
|
10,052,770
|
|
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 months ended
October 28, 2017
was below the conversion price for the convertible senior notes and the strike price for the warrants, the underlying common shares were anti-dilutive as reflected in the table above.
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 11,
Debt
, for additional information related to the Company’s convertible senior notes, warrant transactions, and hedge transactions.
3. Acquisitions
Fiscal 2017.
During March 2017, the Company acquired Texstar Enterprises, Inc. (“Texstar”) for
$26.1 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 expanded the Company’s geographic presence within its existing customer base.
The purchase price allocation of Texstar is preliminary and will be completed when valuations for intangible assets and other amounts are finalized within the 12-month measurement period from the 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.
The preliminary purchase price allocation of Texstar is as follows (dollars in millions):
|
|
|
|
|
Assets
|
|
Accounts receivable
|
$
|
8.8
|
|
Costs and estimated earnings in excess of billings
|
2.4
|
|
Inventories and other current assets
|
0.3
|
|
Property and equipment
|
5.6
|
|
Goodwill
|
10.1
|
|
Intangible assets - customer relationships
|
9.8
|
|
Intangible assets - trade names and other
|
0.7
|
|
Total assets
|
37.7
|
|
|
|
Liabilities
|
|
Accounts payable
|
3.2
|
|
Accrued and other current liabilities
|
3.4
|
|
Deferred tax liabilities, net non-current
|
5.0
|
|
Total liabilities
|
11.6
|
|
|
|
Net Assets Acquired
|
$
|
26.1
|
|
The goodwill associated with the stock purchase of Texstar is not deductible for tax purposes. Results of this acquisition are included in the condensed consolidated financial statements from the date of acquisition and were not material during
the three months ended
October 28, 2017
.
4. Accounts Receivable
Accounts receivable consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
October 28, 2017
|
|
July 29, 2017
|
Contract billings
|
$
|
326,666
|
|
|
$
|
348,990
|
|
Retainage
|
22,056
|
|
|
21,645
|
|
Total
|
348,722
|
|
|
370,635
|
|
Less: allowance for doubtful accounts
|
(995
|
)
|
|
(835
|
)
|
Accounts receivable, net
|
$
|
347,727
|
|
|
$
|
369,800
|
|
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 months ended
October 28, 2017
and
October 29, 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
October 28, 2017
or
July 29, 2017
.
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):
|
|
|
|
|
|
|
|
|
|
October 28, 2017
|
|
July 29, 2017
|
Costs incurred on contracts in progress
|
$
|
351,361
|
|
|
$
|
327,312
|
|
Estimated to date earnings
|
92,523
|
|
|
92,781
|
|
Total costs and estimated earnings
|
443,884
|
|
|
420,093
|
|
Less: billings to date
|
(43,966
|
)
|
|
(40,091
|
)
|
|
$
|
399,918
|
|
|
$
|
380,002
|
|
Included in the accompanying condensed consolidated balance sheets under the captions:
|
|
|
|
|
|
Costs and estimated earnings in excess of billings
|
$
|
406,517
|
|
|
$
|
389,286
|
|
Billings in excess of costs and estimated earnings
|
(6,599
|
)
|
|
(9,284
|
)
|
|
$
|
399,918
|
|
|
$
|
380,002
|
|
As of
October 28, 2017
, the Company expects that substantially all of its CIEB will be billed to customers and collected in the normal course of business within the next twelve months. There were no material CIEB amounts representing claims or other similar items subject to uncertainty as of
October 28, 2017
or
July 29, 2017
.
6. Other Current Assets and Other Assets
Other current assets consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
October 28, 2017
|
|
July 29, 2017
|
Prepaid expenses
|
$
|
17,488
|
|
|
$
|
10,588
|
|
Receivables on equipment sales
|
908
|
|
|
2,761
|
|
Deposits and other current assets
|
11,314
|
|
|
10,254
|
|
Total other current assets
|
$
|
29,710
|
|
|
$
|
23,603
|
|
Other assets (long-term) consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
October 28, 2017
|
|
July 29, 2017
|
Deferred financing costs
|
$
|
4,319
|
|
|
$
|
4,797
|
|
Restricted cash
|
5,408
|
|
|
5,408
|
|
Insurance recoveries for accrued insurance claims
|
14,135
|
|
|
9,243
|
|
Other non-current deposits and assets
|
12,891
|
|
|
13,925
|
|
Total other assets
|
$
|
36,753
|
|
|
$
|
33,373
|
|
7. Property and Equipment
Property and equipment consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Useful Lives (Years)
|
|
October 28, 2017
|
|
July 29, 2017
|
Land
|
—
|
|
$
|
3,470
|
|
|
$
|
3,470
|
|
Buildings
|
10-35
|
|
12,255
|
|
|
12,073
|
|
Leasehold improvements
|
1-10
|
|
13,985
|
|
|
13,912
|
|
Vehicles
|
1-5
|
|
505,327
|
|
|
496,820
|
|
Computer hardware and software
|
1-7
|
|
111,388
|
|
|
107,779
|
|
Office furniture and equipment
|
1-10
|
|
13,190
|
|
|
12,226
|
|
Equipment and machinery
|
1-10
|
|
291,454
|
|
|
288,993
|
|
Total
|
|
|
951,069
|
|
|
935,273
|
|
Less: accumulated depreciation
|
|
|
(527,739
|
)
|
|
(513,166
|
)
|
Property and equipment, net
|
|
|
$
|
423,330
|
|
|
$
|
422,107
|
|
Depreciation expense was
$36.4 million
and
$28.4 million
for the three months ended
October 28, 2017
and
October 29, 2016
, respectively.
8. Goodwill and Intangible Assets
Goodwill
The Company’s goodwill balance was
$321.8 million
and
$321.7 million
as of
October 28, 2017
and
July 29, 2017
, respectively.
Changes in the carrying amount of goodwill during the three months ended
October 28, 2017
were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
Accumulated Impairment Losses
|
|
Total
|
Balance as of July 29, 2017
|
$
|
517,515
|
|
|
$
|
(195,767
|
)
|
|
$
|
321,748
|
|
Purchase price allocation adjustments
|
35
|
|
|
—
|
|
|
35
|
|
Balance as of October 28, 2017
|
$
|
517,550
|
|
|
$
|
(195,767
|
)
|
|
$
|
321,783
|
|
The Company’s goodwill resides in multiple reporting units and primarily consists of expected synergies resulting from acquisitions, including the expansion of the Company’s geographic presence and strengthening of its customer base. Goodwill and other indefinite-lived intangible assets are assessed annually for impairment, 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 has historically completed its annual goodwill impairment assessment as of the first day of the fourth fiscal quarter of each year. As a result of the Company’s fiscal 2017 annual assessment, the Company determined that the fair values of each of the reporting units and the indefinite-lived intangible asset were substantially in excess of their carrying values and no impairment had occurred. As of
October 28, 2017
, the Company continues to believe the goodwill
and the indefinite-lived intangible asset are
recoverable for all of its reporting units; however, significant adverse changes in the projected revenues and cash flows of a reporting unit could result in an impairment of goodwill or
the indefinite-lived intangible asset
. There can be no assurances that goodwill or
the indefinite-lived intangible asset
may not be impaired in future periods.
Intangible Assets
The Company’s intangible assets consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 28, 2017
|
|
July 29, 2017
|
|
Weighted Average Remaining Useful Lives (Years)
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Intangible Assets, Net
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Intangible Assets, Net
|
Customer relationships
|
11.8
|
|
$
|
299,717
|
|
|
$
|
129,966
|
|
|
$
|
169,751
|
|
|
$
|
299,717
|
|
|
$
|
124,084
|
|
|
$
|
175,633
|
|
Trade names
|
8.2
|
|
10,350
|
|
|
7,656
|
|
|
2,694
|
|
|
10,350
|
|
|
7,285
|
|
|
3,065
|
|
UtiliQuest trade name
|
—
|
|
4,700
|
|
|
—
|
|
|
4,700
|
|
|
4,700
|
|
|
—
|
|
|
4,700
|
|
Non-compete agreements
|
2.3
|
|
450
|
|
|
309
|
|
|
141
|
|
|
450
|
|
|
287
|
|
|
163
|
|
|
|
|
$
|
315,217
|
|
|
$
|
137,931
|
|
|
$
|
177,286
|
|
|
$
|
315,217
|
|
|
$
|
131,656
|
|
|
$
|
183,561
|
|
Amortization of the Company’s customer relationship 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
$6.3 million
and
$6.2 million
for
the three months ended
October 28, 2017
and
October 29, 2016
, respectively.
As of
October 28, 2017
, the Company believes that the carrying amounts of its intangible assets are recoverable. However, if adverse events were to occur or circumstances were to change indicating that the carrying amount of such assets may not be fully recoverable, the assets would be reviewed for impairment and the assets could be impaired.
9. 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 the twelve month policy period ending July 31, 2018, 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
$67.1 million
for the twelve
month policy period
ending July 31, 2018.
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, on an annual basis, 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
$109.2 million
and
$101.9 million
as of
October 28, 2017
and
July 29, 2017
, respectively, of which
$60.8 million
and
$62.0 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
October 28, 2017
and
July 29, 2017
were
$14.1 million
and
$9.2 million
, respectively, which were included in non-current other assets in the condensed consolidated balance sheets.
10. Other Accrued Liabilities
Other accrued liabilities consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
October 28, 2017
|
|
July 29, 2017
|
Accrued payroll and related taxes
|
$
|
26,006
|
|
|
$
|
24,554
|
|
Accrued employee benefit and incentive plan costs
|
12,430
|
|
|
42,135
|
|
Accrued construction costs
|
29,316
|
|
|
29,942
|
|
Other current liabilities
|
16,339
|
|
|
16,972
|
|
Total other accrued liabilities
|
$
|
84,091
|
|
|
$
|
113,603
|
|
11. Debt
The Company’s outstanding indebtedness consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
October 28, 2017
|
|
July 29, 2017
|
Credit Agreement - Revolving facility (matures April 2020)
|
$
|
—
|
|
|
$
|
—
|
|
Credit Agreement - Term loan facilities (mature April 2020)
|
362,875
|
|
|
367,688
|
|
0.75% convertible senior notes, net (mature September 2021)
|
397,196
|
|
|
392,233
|
|
|
760,071
|
|
|
759,921
|
|
Less: current portion
|
(24,063
|
)
|
|
(21,656
|
)
|
Long-term debt
|
$
|
736,008
|
|
|
$
|
738,265
|
|
Senior Credit Agreement
The Company and certain of its subsidiaries are party to a credit agreement with various lenders, dated as of December 3, 2012 (as amended as of June 17, 2016, May 20, 2016, April 24, 2015 and September 9, 2015), that matures on April 24, 2020 (as amended, the “Credit Agreement”). The Credit Agreement provides for a
$450.0 million
revolving facility,
$385.0 million
in aggregate term loan facilities, and contains a sublimit of
$200.0 million
for the issuance of letters of credit.
Subject to certain conditions the Credit Agreement provides the Company with 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 facilities 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. Borrowings 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
$48.7 million
, issued as part of the Company’s insurance program, were outstanding under the Credit Agreement as of both
October 28, 2017
and
July 29, 2017
.
The weighted average interest rates and fees for balances under the Credit Agreement as of
October 28, 2017
and
July 29, 2017
were as follows:
|
|
|
|
|
|
Weighted Average Rate End of Period
|
|
October 28, 2017
|
|
July 29, 2017
|
Borrowings - Term loan facilities
|
2.99%
|
|
2.98%
|
Borrowings - Revolving facility
(1)
|
—%
|
|
—%
|
Standby Letters of Credit
|
1.75%
|
|
1.75%
|
Unused Revolver Commitment
|
0.35%
|
|
0.35%
|
(1)
There were
no
outstanding borrowings under the revolving facility as of
October 28, 2017
or
July 29, 2017
.
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 as specified in the Credit Agreement in connection with permitted acquisitions. In addition, the Credit Agreement contains a financial covenant that requires the Company to maintain a consolidated interest coverage ratio, which is the ratio of the Company’s trailing twelve month consolidated EBITDA to its consolidated interest expense, as defined by the Credit Agreement, of not less than
3.00
to
1.00
, as measured at the end of each fiscal quarter. At both
October 28, 2017
and
July 29, 2017
, the Company was in compliance with the financial covenants of the Credit Agreement and had borrowing availability in the revolving facility of
$401.3 million
as determined by the most restrictive covenant.
0.75%
Convertible Senior Notes Due 2021
On September 15, 2015, the Company issued
0.75%
convertible senior notes due September 2021 (the “Notes”) in a private placement in the principal amount of
$485.0 million
. 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
, certain convertible debt instruments that may be settled in cash upon conversion are required to be accounted for as separate 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
$4.5 million
and
$4.3 million
of interest expense during
the three months ended
October 28, 2017
and
October 29, 2016
, respectively, for the non-cash amortization of the debt discount. The liability component of the Notes consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
October 28, 2017
|
|
July 29, 2017
|
Liability component
|
|
|
|
Principal amount of 0.75% convertible senior notes due September 2021
|
$
|
485,000
|
|
|
$
|
485,000
|
|
Less: Debt discount
|
(79,522
|
)
|
|
(84,069
|
)
|
Less: Debt issuance costs
|
(8,282
|
)
|
|
(8,698
|
)
|
Net carrying amount of Notes
|
$
|
397,196
|
|
|
$
|
392,233
|
|
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.
The Company determined that the fair value of the Notes as of
October 28, 2017
and
July 29, 2017
was approximately
$481.8 million
and
$474.5 million
, respectively, based on quoted market prices (Level 2), compared to a net carrying amount of
$397.2 million
and
$392.2 million
, respectively. The fair value and net carrying amounts as of
October 28, 2017
and
July 29, 2017
are both reflected net of the debt discount of
$79.5 million
and
$84.1 million
, respectively, and debt issuance costs of
$8.3 million
and
$8.7 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 to reduce 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.
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.
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 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 consolidated balance sheets.
12. 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. As discussed in Note 1,
Basis of Presentation and Accounting Policies
, the Company has adopted ASU 2015-17 on a prospective basis effective July 30, 2017. Under the amended guidance of ASU 2015-17, deferred tax liabilities and assets are solely classified as non-current in a consolidated statement of financial position. Under the prior guidance, approximately
$28.2 million
of deferred tax assets, net would have been classified as current within the condensed consolidated balance sheets as of
October 28, 2017
.
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, tax credits recognized in relation to pre-tax results, and the recognition of certain tax benefits from share-based award activities upon the adoption of ASU 2016-09, which reduced income tax expense by approximately
$0.9 million
for
the three months ended
October 28, 2017
.
Measurement of the Company’s tax position is based on 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 months ended
October 28, 2017
and
October 29, 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 2013 and prior. The Company believes its provision for income taxes is adequate; however, any assessment would affect the Company’s results of operations and cash flows. During fiscal 2016, the Company was notified by the Internal Revenue Service (“IRS”) that its federal income tax return for fiscal 2014 was selected for examination. The IRS completed its examination during 2017 with no proposed adjustments to the Company’s tax return.
As of
October 28, 2017
and
July 29, 2017
, the Company had total unrecognized tax benefits of
$3.1 million
resulting from uncertain tax positions. The Company’s effective tax rate will be reduced during future periods if it is determined these unrecognized tax benefits are realizable. The Company had approximately
$1.2 million
accrued for the payment of interest and penalties as of both
October 28, 2017
and
July 29, 2017
. Interest expense related to unrecognized tax benefits for the Company for
the three months ended
October 28, 2017
and
October 29, 2016
was not material.
13. Other Income, Net
The components of other income, net, were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
October 28, 2017
|
|
October 29, 2016
|
Gain on sale of fixed assets
|
$
|
6,495
|
|
|
$
|
1,443
|
|
Miscellaneous expense, net
|
(564
|
)
|
|
(503
|
)
|
Total other income, net
|
$
|
5,931
|
|
|
$
|
940
|
|
The Company participates in 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 the customer’s bank partner. 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. During
the three months ended
October 28, 2017
and
October 29, 2016
, miscellaneous expense, net includes approximately
$0.7 million
and
$0.6 million
, respectively, of discount fee expense incurred in connection with the non-recourse sale of accounts receivable under this program. The program has not changed since its inception during fiscal 2016.
14. Capital Stock
Repurchases of Common Stock.
The Company made the following share repurchases during fiscal 2017 and the three months ended
October 28, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Number of Shares Repurchased
|
|
Total Consideration
(In thousands)
|
|
Average Price Per Share
|
Fiscal 2017
|
|
713,006
|
|
|
$
|
62,909
|
|
|
$
|
88.23
|
|
Three months ended October 28, 2017
|
|
200,000
|
|
|
$
|
16,875
|
|
|
$
|
84.38
|
|
As of
October 28, 2017
,
$95.2 million
remained available for repurchases through August 2018 under the Company’s share repurchase program. All shares repurchased have been canceled. Upon cancellation, the excess paid over par value is recorded as a reduction of additional paid-in capital. Once additional paid-in capital is exhausted, any additional excess is recorded as a reduction of retained earnings. Accordingly, retained earnings was reduced by
$42.8 million
and
$6.9 million
during fiscal 2017 and
the three months ended
October 28, 2017
, respectively, related to the Company’s share repurchases.
Restricted Stock Tax Withholdings.
During
the three months ended
October 28, 2017
and
October 29, 2016
, the Company withheld
15,918
shares and
16,290
shares, respectively, totaling
$1.3 million
and
$1.4 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.
15. Stock-Based Awards
The Company has certain stock-based compensation plans under which it grants stock-based awards, including common stock, stock options, restricted share units, and performance-based restricted share units (“Performance RSUs”) 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. It fluctuates over time as a function of the duration of vesting periods of the stock-based awards and the Company’s performance, as measured by criteria set forth in 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 quantity of awards that actually vest. Accordingly, stock-based compensation expense may vary from period to period.
The performance criteria for the Company’s performance-based equity awards utilize 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 (adjusted for certain amounts). Additionally, certain awards include three-year performance goals that, if met, result in supplemental shares awarded. For 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 recognized related to stock options and restricted share units during
the three months ended
October 28, 2017
and
October 29, 2016
were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
October 28, 2017
|
|
October 29, 2016
|
Stock-based compensation
|
$
|
7,380
|
|
|
$
|
5,707
|
|
Related tax benefit for stock-based compensation
|
$
|
2,882
|
|
|
$
|
2,183
|
|
In addition, as a result of the Company’s adoption of ASU 2016-09, the Company recognized approximately
$0.9 million
of certain tax benefits from share-based award activities during
the three months ended
October 28, 2017
.
As of
October 28, 2017
, the Company had unrecognized compensation expense related to stock options, time-based restricted share units (“RSUs”), and target Performance RSUs (based on the Company’s estimate of performance goal achievement) of
$3.2 million
,
$9.5 million
, and
$22.1 million
, respectively. This expense will be recognized over a weighted-average number of years of
2.5
,
2.7
, and
2.1
, respectively, based on the average remaining service periods for the awards. As of
October 28, 2017
, the Company may recognize an additional
$8.7 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 three months ended
October 28, 2017
:
|
|
|
|
|
|
|
|
|
Stock Options
|
|
Shares
|
|
Weighted Average Exercise Price
|
Outstanding as of July 29, 2017
|
670,350
|
|
|
$
|
25.24
|
|
Granted
|
18,933
|
|
|
$
|
85.15
|
|
Options exercised
|
(21,325
|
)
|
|
$
|
9.57
|
|
Canceled
|
—
|
|
|
$
|
—
|
|
Outstanding as of October 28, 2017
|
667,958
|
|
|
$
|
27.44
|
|
|
|
|
|
Exercisable options as of October 28, 2017
|
518,053
|
|
|
$
|
18.70
|
|
RSUs and Performance RSUs
The following table summarizes RSU and Performance RSU award activity during
the three months ended
October 28, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
|
|
RSUs
|
|
Performance RSUs
|
|
Share Units
|
|
Weighted Average Grant Price
|
|
Share Units
|
|
Weighted Average Grant Price
|
Outstanding as of July 29, 2017
|
187,465
|
|
|
$
|
60.71
|
|
|
553,882
|
|
|
$
|
67.46
|
|
Granted
|
25,227
|
|
|
$
|
85.31
|
|
|
138,261
|
|
|
$
|
84.13
|
|
Share units vested
|
(9,218
|
)
|
|
$
|
62.66
|
|
|
(36,121
|
)
|
|
$
|
56.08
|
|
Forfeited or canceled
|
—
|
|
|
$
|
—
|
|
|
(24,753
|
)
|
|
$
|
57.32
|
|
Outstanding as of October 28, 2017
|
203,474
|
|
|
$
|
63.67
|
|
|
631,269
|
|
|
$
|
72.16
|
|
The total amount of granted Performance RSUs presented above consists of
99,627
target shares and
38,634
supplemental shares. During
the three months ended
October 28, 2017
, the Company canceled
21,139
supplemental shares of Performance RSUs, as a result of the fiscal 2017 performance criteria for attaining those supplemental shares being partially met. The total amount of Performance RSUs outstanding as of
October 28, 2017
consists of
487,635
target shares and
143,634
supplemental shares.
16. Concentration of Credit Risk
The Company’s customer base is highly concentrated, with its top
five
customers accounting for approximately
74.9%
of its total contract revenues during each of
the three months ended
October 28, 2017
and
October 29, 2016
. Customers whose contract revenues exceeded
10%
of total contract revenues during
the three months ended
October 28, 2017
or
October 29, 2016
were as follows:
|
|
|
|
|
|
For the Three Months Ended
|
|
October 28, 2017
|
|
October 29, 2016
|
Comcast Corporation
|
21.8%
|
|
15.1%
|
AT&T Inc.
|
19.0%
|
|
29.0%
|
CenturyLink, Inc.
|
18.9%
|
|
15.7%
|
Verizon Communications Inc.
(1)
|
10.7%
|
|
9.4%
|
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
October 28, 2017
or
July 29, 2017
were as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 28, 2017
|
|
July 29, 2017
|
|
Amount
|
|
% of Total
|
|
Amount
|
|
% of Total
|
Comcast Corporation
|
$
|
170.8
|
|
|
22.9%
|
|
$
|
159.7
|
|
|
21.3%
|
CenturyLink, Inc.
|
$
|
130.1
|
|
|
17.4%
|
|
$
|
136.1
|
|
|
18.1%
|
Verizon Communications Inc.
(1)
|
$
|
84.3
|
|
|
11.3%
|
|
$
|
73.7
|
|
|
9.8%
|
AT&T Inc.
|
$
|
83.7
|
|
|
11.2%
|
|
$
|
87.1
|
|
|
11.6%
|
Windstream Corporation
|
$
|
72.0
|
|
|
9.6%
|
|
$
|
84.7
|
|
|
11.3%
|
(1)
For comparison purposes in the tables above, 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.
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
October 28, 2017
. See Note 4,
Accounts Receivable
, and Note 5,
Costs and Estimated Earnings in Excess of Billings
,
for additional information regarding the Company’s trade accounts receivable and costs and estimated earnings in excess of billings.
17. 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. CertusView appealed to the Federal Circuit Court the District Court judgment of patent invalidity. On August 11, 2017, the Federal Circuit Court affirmed the District Court’s decision. In October 2017, S&N filed a motion requesting that the District Court make a finding that the suit was an exceptional case and award S&N recovery of
$3.8 million
in attorney fees. CertusView has filed an opposition to this motion vigorously opposing an exceptional case finding or award of attorney fees. No decision has been made by the District Court to date on this motion.
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. In November 2017, the District Court approved the 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. The Plan has taken the position that the work at issue does not qualify for the statutory exemption. The Company has submitted this dispute to arbitration, as required by ERISA, with a hearing expected sometime in 2018. There can be no assurance that the Company will be successful in asserting the statutory exemption as a defense in the arbitration proceeding. As required by ERISA, in November 2016, the subsidiary began making monthly payments of a 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.
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 net cash purchase price of
$100.9
million
after an adjustment of approximately
$6.6 million
for working capital received below a target amount.
$22.5 million
of the purchase price was placed into escrow to cover indemnification claims and working capital adjustments. During fiscal 2017,
$2.5 million
of escrowed funds were released following resolution of closing working capital and
$10.0 million
of escrowed funds were released as a result of Goodman’s resolution of a sales tax liability with the State of Texas. As of
October 28, 2017
,
$10.0 million
remains in escrow pending resolution of certain post-closing indemnification claims.
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.
Commitments
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
October 28, 2017
and
July 29, 2017
, the Company had
$119.6 million
and
$118.2 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 obligations to the Company’s insurance carriers in connection with the settlement of potential claims. As of both
October 28, 2017
and
July 29, 2017
, the Company had
$48.7 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 fiscal year ended
July 29, 2017
, filed with the Securities and Exchange Commission on
September 1, 2017
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.