| DYCOM INDUSTRIES INC Item 1A Risk Factors You should carefully consider the risks described below, together with all of the other information in this Form 10-K If any of the following risks actually occur, or other risks not presently known to us or that we do not currently believe to be significant do develop and occur, our financial condition and results of operations could suffer and the trading price of our common stock could decline |
| Demand for our services is cyclical, dependent in large part on the telecommunications industry and could be adversely affected by an economic slowdown |
| Demand for our services has been, and will likely continue to be, cyclical in nature and vulnerable to general downturns in the US economy as well as downturns in the telecommunications industry |
| In fiscal 2006, our telecommunications customers accounted for 72dtta9prca of our revenues |
| In fiscal 2002 and the first half of fiscal 2003, certain segments of the telecommunications industry suffered a severe downturn that resulted in a number of our customers experiencing financial difficulties |
| Several of our customers filed for bankruptcy protection, including Adelphia and WorldCom |
| Additional bankruptcies or financial difficulties of companies in the telecommunications sector could reduce our cash flows and adversely impact our liquidity and profitability |
| During times of economic slowdown, the customers in the industries we serve often reduce their capital expenditures and defer or cancel pending infrastructure projects |
| Such developments occur even among customers that are not experiencing financial difficulties |
| Future economic slowdowns in the industries we serve may impair the financial condition of some of our customers, which may cause them to reduce their capital expenditures and demand for our specialty contracting services and may hinder their ability to pay us on a timely basis or at all |
| We derive a significant portion of our revenues from master service agreements which may be cancelled |
| We may be unsuccessful in replacing these agreements as they are completed or expire |
| We currently derive approximately 64prca of our revenues from master service agreements |
| By their terms, the majority of these contracts may be cancelled by our customers upon short notice, even if we are not in default under these agreements |
| In addition, projected expenditures by customers under these agreements are not assured until such time as a definitive work order is placed and completed |
| If a significant customer cancels its master services agreement with us and we were unable to replace the agreement on substantially similar terms, our results of operations, cash flows and liquidity could be adversely affected |
| Recently we have been able to extend some of these agreements on negotiated terms |
| Market conditions could change, however, and we may not be able to continue to obtain or extend master services agreements through negotiation, and may be underbid by competitors in an ensuing competitive bidding process |
| The loss of work obtained through master service agreements or the inability to replace these agreements could adversely affect our results of operations, cash flows and liquidity |
| The industries we serve are subject to rapid technological and structural changes that could reduce the need for our services and adversely affect our revenues |
| The telecommunications industry is characterized by rapid technological change, evolving industry standards and changing customer needs |
| We generate a significant portion of our revenues from customers in the telecommunications industry |
| New technology or upgrades to existing technology available to our customers or to our customers’ competitors could reduce the need for our services and adversely affect our revenues and profitability |
| New or developing services, such as wireless applications, could displace the wireline systems used by our customers to deliver services to consumers |
| In addition, improvements in existing technology may allow telecommunication companies to improve their networks without physically upgrading them |
| Additionally, consolidations, mergers and acquisitions in the telecommunications industry have occurred in the past and may occur in the future |
| These consolidations, mergers and acquisitions may cause the loss of one or more of our customers |
| Reduced demand for our services or a loss of a significant customer could adversely affect our results of operations, cash flows and liquidity |
| We derive a significant portion of our revenues from a few customers, and the loss of one or more of these customers could adversely impact our revenues and profitability |
| Our customer base is highly concentrated, with our top five customers in fiscal years 2006, 2005, and 2004 accounting for approximately 61prca, 64prca, and 64prca of our total revenues, respectively |
| Our revenue could significantly decline if we lose one or more of our significant customers |
| In addition, revenues under our contracts with significant customers may vary from 8 _________________________________________________________________ [58]Table of Contents period-to-period depending on the timing and volume of work which such customers order in a given period and as a result of competition from the in-house service organizations of our customers |
| We operate in a highly competitive industry |
| The specialty contracting services industry in which we operate is highly competitive |
| We compete with other independent contractors, including several that are large domestic companies that may have financial, technical and marketing resources that exceed our own |
| Our competitors may develop the expertise, experience and resources to provide services that are equal or superior in both price and quality to our services, and we may not be able to maintain or enhance our competitive position |
| We may also face competition from the in-house service organizations of our existing or prospective customers, particularly telecommunications providers, which employ personnel who perform some of the same types of services as we provide |
| Although our customers currently outsource a significant portion of these services to us and our competitors, we can offer no assurance that our existing or prospective customers will continue to outsource specialty contracting services to us in the future |
| In addition, there are relatively few barriers to entry into the markets in which we operate and, as a result, any organization with adequate financial resources and access to technical expertise may become a competitor |
| Our profitability is based on our ability to deliver our services within the costs and estimates used to establish the pricing of our contracts |
| As the price for each of the units is fixed by the contract, our profitability could decline if our actual costs to complete each unit exceeds our original estimates |
| Revenue from other contracts is recognized using cost-to-cost measures of the percentage of completion method and is based on the ratio of contract costs incurred to date to total estimated contract costs |
| Application of the percentage of completion method of accounting requires that our management estimate the costs to be incurred by us in performing the contract |
| Our process for estimating costs is based upon the professional knowledge and experience of our project managers and financial professionals |
| However, any changes in original estimates, or the assumptions underpinning such estimates, may result in revisions to costs and income and their effects would be recognized in the period during which such revisions were determined |
| These changes could result in a reduction or elimination of previously reported profits, which could adversely affect our profitability and the price of our common stock |
| We have a significant amount of accounts receivable and costs and estimated earnings in excess of billings assets |
| We extend credit to our customers, which include telephone companies, cable television multiple system operators, and other gas and electric utilities |
| At July 29, 2006, we had net accounts receivable of dlra146dtta9 million and costs and estimated earnings in excess of billings of dlra79dtta5 million |
| We periodically assess the credit of our customers and continuously monitor the timeliness of payments |
| Our customers may be adversely affected by an economic downturn, which may subject us to potential credit risks |
| In fiscal 2002, we recorded dlra20dtta6 million of bad debt expense attributable to receivables due from Adelphia and WorldCom |
| Adelphia and WorldCom both filed for bankruptcy protection during fiscal 2002 |
| If any of our significant customers file for bankruptcy or experience financial difficulties, we could experience difficulty in collecting what we are owed by them for work already performed or in process, which could lead to reduced cash flows and a decline in our liquidity |
| Additionally, we may incur losses in excess of current allowances provided |
| We self insure against certain potential liabilities, which leaves us potentially exposed to higher than expected liability claims |
| We retain the risk of loss, up to certain limits, for claims related to automobile liability, general liability, workers’ compensation, employee group health, and locate damages |
| We estimate and develop our accrual for self-insured claims based on facts, circumstances and historical evidence |
| However, the calculation of the estimated accrued liability for self-insured claims remains inherently subject to uncertainty |
| Should a greater number of claims occur compared to what we have estimated, or should the dollar amount of actual claims exceed what we anticipated, our recorded reserves may not be sufficient, and we could incur substantial additional unanticipated charges |
| 9 _________________________________________________________________ [59]Table of Contents Our backlog is subject to reduction and/or cancellation |
| Our backlog is comprised of the uncompleted portion of services to be performed under job-specific contracts and the estimated value of future services that we expect to provide under long-term requirements contracts, including master service agreements |
| In many instances our customers are not contractually committed to specific volumes of services under a contract |
| Many of our contracts are multi-year agreements, and we include in our backlog the amount of services projected to be performed over the terms of the contracts based on our historical relationships with customers and our experience in procurements of this nature |
| For certain multi-year projects relating to fiber deployments for one of our significant customers, we have included in the July 29, 2006 backlog amounts relating to anticipated work in calendar years 2006 and 2007 |
| These fiber deployment projects, when initially installed, are not required for the day-to-day provision of services by our customer |
| Consequently, the fiber deployment projects of this customer generally have been subject to more uncertainty, as compared to those of our other customers, with regards to activity levels |
| Our estimates of a customer’s requirements during a particular future period may not be accurate at any point in time |
| If our estimated backlog is significantly inaccurate or does not result in future profits, this could adversely affect our results of operations, cash flows and liquidity |
| We may incur impairment charges on goodwill or other intangible assets in accordance with Statement of Financial Accounting Standards (“SFAS”) Nodtta 142, “Goodwill and Other Intangible Assets” |
| In accordance with SFAS Nodtta 142, we conduct on at least an annual basis a review of our reporting units to determine whether the carrying value of their respective assets exceeds their corresponding fair market value |
| Should this be the case, we would determine that the value of our goodwill is impaired and such goodwill would be written down |
| Any such write-down could adversely affect our results of operations |
| During 2006, as the result of an interim impairment analysis, we recognized a non-cash after tax charge of approximately dlra14dtta8 million in order to reduce the carrying value of goodwill related to our Can-Am Communications, Inc |
| During 2005, we recognized a non-cash after tax charge of approximately dlra29dtta0 million in order to reduce the carrying value of goodwill related to our White Mountain Cable Construction reporting unit as the result of our annual impairment analysis |
| As a result of the purchase price allocations from our prior acquisitions and due to our decentralized structure, our goodwill is included in multiple reporting units |
| Due to the cyclical nature of our business, and the other factors described under other “Risk Factors” herein, the profitability of our individual reporting units may periodically suffer from downturns in customer demand and other factors |
| These factors may have a relatively more pronounced impact on the individual reporting units as compared to the Company as a whole and might adversely affect the fair value of the reporting units |
| If material adverse conditions occur that impact our reporting units, our future determinations of fair value may not support the carrying amount of one or more of our reporting units, and the related goodwill would need to be written down to an amount considered recoverable |
| The loss of certain key managers could adversely affect our business |
| We depend on the performance of our executive officers and the senior management of our subsidiaries |
| Our senior management team has numerous years of experience in our industry, and the loss of any of them could negatively affect our ability to execute our business strategy |
| Although we have entered into employment agreements with our executive officers and certain other key employees, we cannot guarantee that any key management personnel will remain with us for any length of time |
| The loss of key management could adversely affect the management of our operations |
| Our results of operations may fluctuate seasonally |
| Our revenues are affected by seasonality as most of our work is performed outdoors |
| As a result, our operations are impacted by extended periods of inclement weather |
| Generally, inclement weather is more likely to occur during the winter season which falls during the second and third fiscal quarters |
| In addition, a disproportionate percentage of total paid holidays fall within our second quarter, which impacts the number of available workdays and paid holiday expense |
| As a result, we may experience reduced revenues in the second and third fiscal quarters of each year |
| If we fail to integrate future acquisitions successfully, this could adversely affect our business and results of operations |
| As part of our growth strategy, we may acquire companies that expand, complement, or 10 _________________________________________________________________ [60]Table of Contents diversify our business |
| We regularly review various opportunities and periodically engage in discussions regarding such possible acquisitions |
| Future acquisitions may expose us to operational challenges and risks, including the diversion of management’s attention from our existing business, the failure to retain key personnel or customers of an acquired business, the assumption of unknown liabilities of the acquired business for which there are inadequate reserves and the potential impairment of acquired intangible assets |
| Our ability to sustain our growth and maintain our competitive position may be affected by our ability to successfully integrate any businesses acquired |
| Unanticipated changes in our tax rates or exposure to additional income and other tax liabilities could affect our profitability |
| We are subject to income taxes in many different jurisdictions of the United States and our tax liabilities are subject to the apportionment of income to different jurisdictions |
| Our effective tax rates could be adversely affected by changes in the mix of earnings in locations with differing tax rates, in the valuation of deferred tax assets and liabilities or in tax laws or by material audit assessments, which could affect our profitability |
| In particular, the carrying value of deferred tax assets is dependent on our ability to generate future taxable income |
| In addition, the amount of income and other taxes we pay is subject to ongoing audits in various jurisdictions, and a material assessment by a governing tax authority could affect our profitability |
| Our revolving credit facility and senior subordinated notes impose restrictions on us which may prevent us from engaging in transactions that might benefit us |
| At July 29, 2006, we had dlra150 million in senior subordinated notes outstanding due February 2015 |
| The notes were issued under an indenture dated as of October 11, 2005 |
| The indenture contains covenants that limit our ability to make certain payments, including the payment of dividends, incur additional indebtedness and issue preferred stock, create liens, enter into sale and leaseback transactions, merge or consolidate with another entity, sell assets or enter into transactions with affiliates |
| In addition, our credit agreement requires us to (i) maintain a consolidated leverage ratio of not greater than 3dtta00 to 1dtta0, (ii) maintain an interest coverage ratio of not less than 2dtta75 to 1dtta00, as measured at the end of each fiscal quarter and (iii) maintain consolidated tangible net worth, which shall be calculated at the end of each fiscal quarter, of not less than dlra50dtta0 million plus 50prca of consolidated net income (if positive) from September 8, 2005 to the date of computation plus 75prca of the equity issuances made from September 8, 2005 to the date of computation |
| A default could result in the acceleration of either our obligations under the credit agreement or under the indenture relating to the senior subordinated notes, or both |
| In addition, these covenants may prevent us from engaging in transactions that benefit us, including responding to changing business and economic conditions or securing additional financing, if needed |
| Many of our telecommunications customers are highly regulated and the addition of new regulations or changes to existing regulations may adversely impact their demand for our specialty contracting services and the profitability of those services |
| Many of our telecommunications customers are regulated by the FCC The FCC may interpret the application of its regulations to telecommunication companies in a manner that is different than the way such regulations are currently interpreted and may impose additional regulations |
| If existing or new regulations have an adverse affect on our telecommunications customers and adversely impact the profitability of the services they provide, then demand for our specialty contracting services may be reduced |
| Our operations expose us to various safety and environmental regulations |
| We are required to comply with stringent laws and regulations governing environmental protection and workplace safety |
| With respect to safety, our workers frequently operate heavy machinery and, as such, they are subject to potential injury to themselves or others in the vicinity of work being performed |
| If any of our workers or any other persons are injured or killed in the course of our operations, we could be found to have violated relevant safety regulations, which could result in a fine or, in extreme cases, criminal sanction |
| A significant portion of our operations consist of work performed underground |
| As a result, we are potentially subject to material liabilities related to encountering underground objects which may cause the release of hazardous materials or substances |
| The environmental laws and regulations which may relate to our business include those regarding the removal and remediation of hazardous substances and waste |
| These laws and regulations can impose significant fines and criminal sanctions for violations |
| Costs associated with the 11 _________________________________________________________________ [61]Table of Contents discharge of hazardous materials or substances may include clean-up costs and related damages or liabilities |
| These costs could be significant and could adversely affect our results of operations and cash flows |
| Anti-takeover provisions of Florida law, provisions in our articles of incorporation and our shareholder rights plan could make it more difficult to effect a change in our control |
| Certain provisions of our articles of incorporation and bylaws could delay or prevent an acquisition or change in control and the replacement of our incumbent directors and management |
| For example, board of directors is divided into three classes |
| At any annual meeting of our shareholders, our shareholders only have the right to appoint approximately one-third of the directors on our board of directors |
| In addition, our articles of incorporation authorize our board of directors, without further shareholder approval, to issue up to 1cmam000cmam000 shares of preferred stock on such terms and with such rights as our board of directors may determine |
| The issuance of preferred stock could dilute the voting power of the holders of common stock, including by the grant of voting control to others |
| We have also adopted a shareholder rights plan which may make it more difficult to effect a change in control |
| Lastly, we are subject to certain anti-takeover provisions of the Florida Business Corporation Act |
| These anti-takeover provisions could discourage or prevent a change of control even if such change of control would be beneficial to stockholders and could adversely affect the market price of our common stock |