Dycom Industries Inc (DY) 2002 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Dycom Industries third quarter earnings conference call. At this time, all lines are in the listen only mode. Later there will be opportunity for questions and answers and instructions given at that time. If you should require assistance during the conference call, please press zero followed by the star. As reminder, the call today is being recorded. I would now like to turn the conference call over to your host, President and CEO, Mr. Steven Nielson. Please go ahead.

Thank you, Alan. Good morning, everyone. I'd like to thank you for attending our third quarter fiscal 2002 Dycom Industries earnings conference call. With me, we have in attendance Marc Tiller, our general counsel, Richard Dunn, our Chief Financial Officer, and Tim Estes, our chief operating officer. Now I will turn the call over to Marc Tiller. Marc?

Thanks, Steve. Statements made in the course of this conference call that state the company's or management's intentions, hopes, beliefs, expectations or predictions of the future are forward looking statements. It is important to note that the company's actual results could differ materially from those projected in such forward looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward looking statements is contained from time to time in the company's FCC filings, including but not limited to the company's report on Form 10-K for the year ended July 28th, 2001, and the company's reports on form 10-Q for the quarters ended April 28th, 2001, October 27th, 2001 and January 26th, 2002. Copies of these filings may be obtained by contacting the company or the FCC. Steve?

Thanks, Marc. Yesterday, we issued a press release announcing our third quarter fiscal 2002 earnings. Please note that for fiscal 2002 we adopted Maslow 42, which eliminates good will amortization. Consequently, in order to ensure accurate comparisons, all references to prior periods are pro forma as if we had not ammortized good will.

Additionally, during the quarter we recorded a nonrecurring gain due to the settlement of the Federal employment tax issue relating to prior years. That gain has been excluded from the comparisons I will now provide. For the quarter ending April 27, 2002, total contract revenues were $169.8 million versus $201.6 million in the years ago period, a decrease of 16%. That income was 6.8 million versus 14.6 million, a decrease of 53%, while fully diluted earnings per share was 15 cents versus 34 cents, a decrease of 56%.

Backlog at the end of the third quarter was $1,030,000,000, up from $953 million at the end of the second quarter, a sequential increase of $77 million. Of this backlog, approximately $468 million is expected to be completed in the next 12 months. Please note the third quarter backlog includes backlog acquired through our Argus transaction, which was completed on February 21.

Our third quarter results continue to demonstrate the prudent management of our business and our balance sheet during a very challenging period for our industry. During the quarter, we were able to close the Argus transaction on February 21st. Argus significantly expanded our geographic footprint, exposure to AT broadband and our technical services capabilities. It brings to Dycom a group of well-established divisions which enjoys strong customer relationships, long operating histories, well-trained work forces, and which are supported by significant physical assets.

During the quarter, we generated operating cash flow of over $21 million, which exceeded our net income and depreciation and amortization by over $3 million.

Day sale outstanding pro forma for Argus decreased sequentially one day from the second quarter to 74 days, and our net cash position remains strong at over $127 million, despite retiring over $57 million of acquired debt along with the bulk of our transaction-related fees.

Even on a reported basis, which includes the Argus balance sheet at the end of the quarter, but only nine weeks of Argus revenue, day sale outstanding were 82 days, significantly less than our industry peers.

Working capital in our current and quick ratios all remain strong as we were able to significantly improve the efficiency of the acquired Argus balance sheet and total head count remained essentially flat with the second quarter sequentially, reflecting a slight seasonal pickup in business.

During the quarter, we continued to experience the effects of the slow overall economy, reduced capital expenditures by telephone companies, and the relative absence of a major cable operator from the marketplace. Yet, despite these factors, some industry indicators have begun to stabilize or show potential for slight improvement, particularly during the latter half of calendar 2002 and into 2003.

First, the year-long slowing in economic activity showed some signs of moderating during the quarter. For telephone companies, while capital expenditures by customers continued to reduce levels and budgets were executed with less urgency, customers, with the exception of those most heavily indebted appear to have stabilized their internal spending plans for 2002.

For cable operators, some anticipated new projects began to commence and in some instances accelerate. A leading cable operator indicated publicly its return to the market for system upgrade services, and its intention was evidenced to increase bidding opportunities and some project starts and resumptions.

While all of these factors point to a potentially stabilizing environment in the intermediate term, the quarter continued to confront a near term environment which remains challenging. In specific, Adelphia's recent suspension of the bulk of its upgrade program subsequent to the close of our quarter has significantly impacted our near term outlook. Adelphia represented onever 18% of Dycom's revenue for the third quarter. Additionally, work for a customer basic potential merger uncertainty softened toward the end of the quarter.

To manage these challenges, we have continued several initiatives to help offset pressures on operating margins. First, we have eliminated essentially all capital expenditures going forward with two exceptions, continued investments in information technology which will have a direct impact on our costs, and maintenance replacement of limited amounts of equipment.

Capital expenditures netted disposals were just $1 million during the quarter. Generally, our breed of captial equipment is in good condition and significantly reduced investment will have little or no impact on operational expenses.

Secondly, we continue to sell idle assets, and thirdly, we will continue significant reductions in general and administrative expenses to better allign our administrative costs with near term anticipated activity, particularly in light of recent development at Adelphia.

While we sincerely regret the adjustments to our employee headcount that we will be making and will continue to make, they are necessary to maintain our substantial strength and better position Dycom for the current environment.

Backlog was up sequentially from the second quarter inclusive of August, and we maintained a disciplined approach to new business, only booking new work so long as it meets our margin targets. In our industry, in periods of reduced demand, it is extremely important to avoid prolonging reduced margins through low margin backlog.

During the quarter, we received several new projects and a number of contract extensions. For Bell South, extensions of our master contracts in Charlotte, Greensboro and Raleigh, North Carolina, and for Verizon, an outside plant engineering master contract for Hawaii. During the quarter, we received contracts for cable system upgrade from AT and T broadband for Rushing River, California, Comcass for Norwich, Connecticut and West Harvard, Maryland, Insight for Springfield, Illinois, and for Charter, projects in Park Hills, Missouri and Anderson, South Carolina.

Finally, we also received extensions to our locating contracts with Bell South for Louisville, Kentucky and with Puget Sound Energy in the Seattle area. As Dycom continued to respond to a challenging environment this quarter, we amply demonstrated our strengths.

First and foremost, we continued to maintain strong customer relationships throughout our markets. The addition of Arguss reinforced and expanded those customer relationships. Our experience [inaudible] successfully integrated our Arguss acquisition that significantly improved its balance sheet efficiency. Net cash remains strong and day sale outstanding to decreased sequentially at a time where other industry participants have experienced more pronounced working capital issues.

While our pricing environment remains tight, we remain focused on time tested cost controls and productivity improvements as we continually evaluate appropriate staffing and capital equipment levels. In these difficult economic times, we firmly believe that Dycom's superior financial health will increasingly allow us to differentiate ourselves from our competitors in the eyes of our customers, employees and suppliers. Dycom's financial strength is key to our belief that when growth opportunities return to our industry, we will be the first and in the best position to take profitable advantage of them.

We believe that this advantage relevant to other industry participants becomes more pronounced everyday. After weighing all of the factors we have discussed today, we have updated our forecast as follows.

For the fourth quarter of fiscal 2002, we anticipate earnings per share of 7 cents to 12 cents, our revenues of $143 to $158 million. This outlook anticipates a continued slow economy in the U.S, the suspension of approximately 18% of our revenue by Adelphia, which commenced during the month of May, a continued return to the marketplace by a major cable operator and continued softness with the customer basing merger uncertainties.

Looking beyond the fourth quarter, we are not currently in a position to provide specific guidance for the first quarter fiscal 2003. As macroeconomic conditions, capital market volatility and customer plans, which generally remain uncertain in the intermediate return, has reduced visibility. That being said, we have three observations as to what factors will be an important track during the next 12 months.

For telephone companies, it appears that current capital spending run rates are below those necessary to ensure that their net worths operate efficiently in the intermediate and long-term. To the extent that reduced levels of activity are maintained in the near term, we believe that this will ensure a more sustained rebound in the second half of 2002 into 2003, when necessary expenditures can no longer be delayed.

For cable operators, final resolution of the AT Comp. cash marger is key. AT and T [inaudible} continues have to a significant backlog plan to upgrade. Interestingly, AT and T was 6.1% of our revenue this quarter, continuing a pattern of recent sequential increases, and finally, recent developments continue to indicate that substantial competitive capacity may be less able to respond to increased future customer demand due to capital constraints.

This trend may accelerate, particularly as less well-capitalized competitors contend with the consequences of Adelphia's recent suspension of its upgrades. On two final notes, we were pleased to announce yesterday the signing of a $200 million three-year credit facility with a syndicate of banks led by Wachovia. This replaces our previous $175 million credit facility.

Additionally, we announced the appointment of Charles Brennan to our board of directors. Mr. Brennan possesses a wide range of executive and financial management expertise and experience which will greatly benefit Dycom.

At this point, I will turn the call over to Dick Dunn, our CFO.

Thanks, Steve. Before I begin with my review, let me remind everyone that we've adopted Mas. 142, effective in the first quarter of fiscal year 2002.

In accordance with the provisions of this statement, we have not written the three quarters amortization charge for our good will balance during the current year. In order to give a true apples to apples comparison, I will provide you with prior period information on a pro forma basis as if we had adopted Mas. 142 in last year's first quarter.

During the quarter, we recorded a nonrecurring gain of 2 cents per share related to the federal employment tax issue relating to prior years. My discussion will eliminate the impact of this gain, and finally the results of the nine-month period ended April 27th, included aftertax noncash impairment charge to good will of $86.9 million or $1.97 per share.

This good will impairment is the cumulative effect of adopting the current standard 142 and has required thereby the first quarter of the fiscal year to be restated to reflect this charge. Again, for purposes of my discussion of the financial results, I will eliminate these charges.

Going through the income statement, contact revenues for the current quarter were $169.8 million, down 15.8% from last year's Q3 of $201.6 million. Revenues from the quarter on the same store basis were down 30%. Total revenues for the nine-month period ended April 27th declined 24.7% to $475.8 million, versus fiscal year 2001 revenue of $632.1 million.

Organic revenue activity for the nine-month period was down 32.1%. For the quarter, the top five customers accounted for 58.1% of total revenues, versus 58.7 for the prior year's third quarter. For the nine months ended April 27th, sales for the top five customers as a percent of total were 55% versus 51.6 for the prior year.

The top five customers and the respective percentages for Q3 of fiscal year 2002 and 2001 are as follows. Q3 fiscal year 2002: Adelphia, 18.5%; Bell South, 16.6%; Comp. Care, 9.4%; DirecTV, 6.9%; Charter Communications, 6.7%, and Q3 of fiscal year 2001, Comp. Care, 22.3%; Bell South,20.5%; Quest, 7.4%; Charter Communications, 5.9% and Worldcom, 5.7%.

Net income for the third quarter was $6.8 million versus $14.6 million in fiscal year 2001, representing a decrease of 63.4%. Net income for the nine months ended April 27th decreased 61.2% to $19.8 million versus last year's $51.2 million.

Forward year limited earnings for the quarter were 15 cents per share, a 55.9% decrease from last year's 34 cents per share filled. EPS for the nine-month period ended April 27th decreased 62.5% to 45 cents per share versus last year's $1.20 per share.

Operating margins for the third quarter declined 478 basis points coming in at 6.43% versus last year's 11.21%. This decrease was due to a 51 basis point increase of cost of earned revenues, 240 basis point increase in general and administrative costs, and 179 basis point increase in depreciation and amortization.

Operating margins for the nine-month period declined 615 basis points, coming in 6.52% versus last year's 12.67%. This decrease was due to a 215 basis point increase in cost of earned revenues, 208 basis point increase in general administrative costs and 192 basis points increase in depreciation and amortization.

The effect of tax rates for the quarter and nine month periods were 43.4% - I'm sorry 43.3% and 42.5% respectively, versus 40.7 and 44.1% respectively for the prior year's period. This increase was primarily attributable to the mix of income among ourselves and the impact it had on our state tax rate.

Net interest income for the quarter in nine months was $505,000 and $2.1 million respectively, versus $1.1 million and $3.5 million for the prior year. This decrease was primarily a result of declining short-term interest rates partially offset by positive operating cash generation throughout the period.

The interest income is generated to investment in high quality municipal and corporate entities. For the quarter, our cash flow from operating activities was $21.5 million. The primary components of the cash flow were net income of $7.7 million, depreciation and amortization of $10.2 million, and reductions of working capital of approximately $3.6 million.

Offsetting the operating cash flow for the quarter were investing and financing activities of $68.3 million, primarily consisting of the repayment of Arguss's debt of $57.5 million and net capital expenditures of $1 million.

Cash and cash equivalence at the end of the quarter were $135.4 million, down $37.9 million after the repayment of Arguss's $57.5 million in debt.

During the quarter net receivables increased primarily due to the Arguss acquisition from $89.8 million to $118 million, resulting in the DSL of 59 minimal days, versus 59.1 days at end of the first quarter, a decrease of .1 days. On a same store basis, DSL for the historic Dycom subs declined 59.1 days to 54.9 days, a drop of 4.2 days.

Net unbilled revenue balances increased in the quarter from $26 million to $35.2 million, resulting in the DSL of 17.42 days, an increase of 1.3 days from Q2's figure of 16.1. On a same store basis, DSL for the historic Dycom subs increased from 16.1 days to 19.1 days, an increase of 3.0 days.

On a cumulative basis, the combined DSL for trade receivables and unbilled revenues increased 75.2 days to 76.4 days, an increase of 1.2 days. Combined DSL for the historical Dycom subs declined 1.2 days during the quarter, dropping from 75.2 days to 74 days.

On April 27th, the accrual for our self-insured casualty program increased to $18.7 million from $14.4 million at January 26th. Of the $18.7 million, $11 million represents incurred but not reporting claims, an increase of $2.4 million for the second quarter. The majority of the increases relate to the inclusion of Arguss's self-insurance program.

Finally, we are pleased to announce that we've entered into a new three-year revolving credit agreement with a syndicate of banks led by Wachovia Bank. This credit agreement is unsecured and available to us for general corporate purposes. Steve?

Thanks, Dick. Now Alan will open the call up for questions.

Thank you, ladies and gentlemen if you do have any questions, please press the one on your touch tone phone. You will hear a tone indicating you've been placed in queue and you may remove yourself from queue by pressing the pound key. If you happen to be using a speakerphone, we ask that you please pick up your handset before pressing the numbers.

Again, if you have any questions press the one on your touch tone phone at this time. Our first question will come from the line of Toby Summer with Sun Trust. Go ahead, please.

Thank you very much. It's actually Mark Hughes. Good morning, Steve and Dick. How much did Arguss add to the backlog in the quarter?

On a same store basis, Mark, the old Dycom backlog was down a little over 7%, so I don't have the absolute number in front of me, but it was down about 7%, and the balance of the increase was from Arguss.

All right, that's down 7% sequentially?

Yes.

How about the gross margin improvement sequentially in the quarter? You may have touched on this, Dick, but what was that attributable to?

When you're looking at the reported results, Mark, the two-cent gain we mentioned is in the margin number.

It's in the gross?

Yes, and that was a pretext number of about a million six.

Now, that being said, Mark, I think on an adjusted basis, gross margin was still a little bit north of 24% and it was a good solid quarter.

Is that just execution, mix of business, better pricing?

I would say it would be execution and, you know, the mix of the business was positive. We did get a seasonal pickup in some of our telephone businesses. The new budgets came in, and Arguss performed well.

Got you, and then finally, the customer facing merger yesterday, DirecTV, how much had they slowed down?

You know, that's a business that varies based on their advertising campaigns and what we do, and it's proven to be fairly variable. It was solid in the first couple months of the quarter and it slowed in April, and so we're just being cautious.

Okay, thank you very much.

Before you go, I'd like to correct my cumulative total for top five revenues of third quarter prior period to 61.8%, I misspoke.

Okay, thanks, Dick.

Next question, the line of Chris Gotech [phonetic] of Morgan Stanley.

Good morning, Steve and Dick. I think in the last conference call with the Arguss acquisition you mentioned assumed earnings of about $2.5 million per year. Where you are in terms of achieving synergies?

I think we achieved those plus some more.

You're pretty much done with all the all the [inaudible] or is there more still yet to be realized?

No, I think we could always improve, but I would say the improvements that we're looking at now in Arguss are the same things that we're working on in Dycom. As we had talked about a couple of weeks ago, our view is that about 95% of the integration or more is done.

We've got a couple of employee benefit plans to consolidate in the next one and three months and the other one by the end of the year. Other than that, from our perspective, it's all Dycom at this point.

And what's the status of the Conceptronic [phonetic] business?

We did not reflect those results in these numbers, and Dick, why don't you -

Yup, they're included as mandated back in 141 as part of the purchase time because it's a discontinued operation, Chris, so we've resolved and it's being wrapped up in the purchase accounting.

It's rapidly being discontinued.

And then regarding the Adelphia, to what extent have you permanently reduced capacity or taken cost out of the system to get your profit really back to more normalized levels in terms of margins for the company?

We think of it in a two step process. The field level is the cleanup work has been concluded, and for the vast majority of the work that's done, we've surplused the craft folks and we've rotated them to other projects. We still have not made all of the G and A cuts that will be necessary because we've got, you know, an administrative tail to make sure we get all of our billing in order and in.

The work isn't going to go away forever, so I wouldn't say that we've permanently reduced our capacity. I would say that in some sense, we've got to furlough that capacity. When the work comes back, it will be available to us.

Okay. Dick, a couple questions if I could. What was the amount of the good will charge in the first quarter on a pretax basis?

It was about $99 million.

Okay, and then finally, Dick, do you have the revenue by agreement for your three segments?

Yes, we do. Well, we don't like segments but areas.

Okay.

Free customer base.

The Telecom for the quarter was 41%. Cable came in 48.9. Utility locating was 8.3, and electrical was 1.8%.

All right, thank you.

Thanks, Chris.

Next question will go to the line of Ram Kazerdat [phonetic] from Morgan Keegan.

Steve, I have a couple of questions for you. Can you talk about Arguss, how much revenue did Arguss contribute in this quarter and did Arguss contribute to earnings in this quarter?

Yeah, Ram, we don't think about Arguss as a segment because we have integrated some of the operations, but we did pick up, as we had anticipated, a little bit north of $25 million in revenue. That's going to be a number that we're probably not going to break out going forward just because, as we said, we've integrated some of those operations within our own, and it was agreed to earning slightly in the quarter.

What would the - this is for Dick. What would the pro forma have been in Arguss with the purchase acquisition, but the pro forma revenue for last year? Do you have that or not?

I want to make sure I understand your question, Ram. For last year, in other words, pro forma - no, we do not have that available.

You don't have it, okay. Coming to this aftertax charge of $86.9 million, I think you said it was $99 million pretax.

That's correct.

Was the bulk of the charge tagged to Arguss?

None of it was tagged to Arguss. Everything that we valued was, were assets that we owned at the beginning of the fiscal year.

I'm just kind of curious, in the general quarter, it says the good will was 155 [inaudible], and then now it's 152.

The charge is actually taken back in the first quarter, Ram, and then of course as a consequence of the Arguss acquisition, we did establish good will as part of that purchase allocation, and the two numbers were very similar to each other, and that's why you don't see much of a change.

Okay, I might give you a call offline.

Let me just explain so everybody understands it. Basically, the good will that we established for Arguss was roughly equal to the write-down that we took for our older subs.

Okay.

It was just purely coincidental that that's where the analysis came up, and so that's why the intangible assets didn't change a whole lot.

Okay, thanks a lot.

We now go to the line with Evan Smith, Sanders, Morris, Harrison. Go ahead, please.

Good morning. Can you talk about the collections of your Adelphia receivables, what's the outstanding balance you have with Adelphia right now? Also can you talk about the credit facility, was that an expansion or was that a new facility?

Evan, the accounts receivable with Adelphia is right around $41 million. We have, you know, we still had some odds and ends to clean up on billing but, that's a good number. They have - we have had some discussions with them last weekat a subsidiary level system by system and there is indication that there is money on the way to start satisfying that balance, but that's where it stands right now.

As to the credit facility, that was a new facility, Evan. We had a $175 million facility that had been led by a different agent bank that expired, and so this was a new facility that we entered into with Wachovia for a three-year period.

Thanks a lot, Steve.

We have a question in the queue from the line of Richard Dimond, Inman Capital.

Yes, good morning. Steve, could you provide some more color on AT and T spending for Q4 '02 and how it will impact AC- Arguss and Dycom local businesses?

Yeah, you know, we've seen a continued sequential improvement quarter to quarter in the spend that we've seen out of AT and T broadband, and I think we will continue to see that in the fourth quarter.

It's not really a Dycom or our former Arguss issue. It's really the positioning of the various subsidiaries and markets that are served by AT and T that still have substantial upgrades left, and so there is both a significant pickup in the number of RFPs that they had out currently for a quotation and also the amount of work that they're issuing right now.

And could you talk about the competitive color on those RFPs? Is there price cutting that's evident in the marketplace, and to what extent does Dycom stellar balance sheet play in your ability to win business there?

You know, I think there, I don't, we don't expect any customer to pay significant non-market pricing, so we think that you know, AT and T has been responsive to what's being offered up. On the same hand, I think they're also cognizant of the fact that they need to get the work done in a quality manner and have folks meet schedule. So I would not say that we're seeing any, you know, inordinate pricing pressures there, just a customer doing their job to make sure that they are paying a fair price.

I think clearly the balance sheet that we possess is increasingly important to our customers. We've actually had some customers respond to us or on an unsolicited basis bring that up as a consideration, and clearly, we think with kind of the short-term dislocation of Adelphia that that will be even more important as a differentiating factor for the company.

Thank you very much.

Our next question we'll go to the line of Alex Rivel [phonetic] with Freedman, Billings Ramsey.

Thank you. Steve, if we exclude Adelphia from the fiscal third quarter, it would appear the fiscal fourth quarter guidance, it suggests flat to moderately improvement performance going forward, based upon your comment that Telecom spending is at or below meeting levels, it sounds like you're a little bit more optimistic in that you might be what you consider to be the low water mark right now when we exclude Adelphia. Is that the case, and should we expect that on a go-forward basis sequentially as business continues to improve over the next three or four quarters?

I think it's hard after you've had the kind of suspension that we've had with Adelphia to be glowingly optimistically, Alex. I mean, it's 18% of the business. I think when we built the forecast from the bottom up and took a look at the results of the business, there is a slight firming to the tone.

It's not, you know, 1999 and 2000 again, but clearly, there is less downside adjustment available to the customers just because they have commitments that they have to meet, and so, you know, that's impacting, you know, kind of their plans going forward.

Can you update us on the sharing purchase program, did you buy back any shares and what's your anticipation over the next couple of quarters?

We had a $25 million authorization in play, so last fall, we bought back in about $1.1 million worth of shares. We have not used it subsequently and not recently because we follow the same blackout schedule that we have for insiders and so the company is not in a position two weeks from the end of the quarter through two weeks after earnings to do a share buyback.

Can you comment on any future acquisitions, like what types of assets you might be looking for, and/or whether or not there are any available that you're actually even interested in at this point in time?

Yeah. No, I mean, we're continuing to look at the marketplace. We're finding that private multiples are beginning to come in as public multiples. I think that's also kind of a good contrary indicator, and to the extent where we can continue to get good franchise value and sound management teams as the prices come in and as we look to the future, we think that will, those will still be attractive opportunities for us.

Great, thank you.

And next we'll go to the line of Philip Moose with EA Moose [phonetic] and Company. Go ahead, please.

All right, it's [inaudible]. A couple questions on your DSL. You mentioned it was 59 days, but earlier in the call you had given other numbers of 74 days and 82 days, and I was trying to break that out. Was the -

The 74 days and the 82 days are the accounts receivable build along with the work in process or some folks called it unbilled receivables, and the 59 days that went to 55 days was strictly on the billed receivables.

Okay. On the Conceptronics, what are the chances of this thing getting sold this quarter or - can you give us any indication of timing on this?

We're actively involved in a sale of the assets process, and that will either be concluded or we'll pursue our other options to completely discontinue the business.

Do you anticipate more charters from this in terms of good will writedown after the sale or is that pretty much - the charge that you took this quarter, was that pretty much take care of it

The assets have been totally written down at this point so there's no charge going forward associated with them.

Okay, just one other question. I missed the numbers you gave for the customer breakdown as a percentage of sales in the year ago quarter. If you wouldn't mind, could you just give them to us again?

Sure, I just corrected my misstatement. Hold on. It was 61.8%.

No, I mean for the breakdown, how much was - or I can call you offline and get it.

We can provide it by customer. We have it right here.

Comp. care, 22.3; Bell South, 20.5; Quest, 7.4; Charter Communications, 5.9, and Worldcom, 5.7.

Okay, that's all I have. Thank you, sir.

Thank you.

Again, as a reminder, ladies and gentlemen, if you do have questions, please take this opportunity to press the 1 on your touch tone phone at this time. Next we'll go to the line of Eric Warren with Kaufman Brothers. Go ahead.

Good morning.

Good morning.

I need your head count at the end of the quarter.

It was 6701.

Got you, and you're anticipating G and A headcount cuts as well?

Yes, absolutely. As the Adelphia suspension rolls through the system, we will have both cost of sales and G and A folks that unfortunately at least in the short term that we will have to surplus.

Exactly. Okay, if you go into the types of telephone work, especially by the Bells that are being delayed and that you'll see come on, do you see a regulatory pressure being to sperse spending or they doing just the pure minimum amount that they need to do?

You know, we're not an expert in the pressures that the customers face from the regulators. We just know that we still had plenty of projects that had service dates associated with them, meaning we have to get the work done quickly, and so that's usually a good indicator that they're still adjusting customer needs the way they should.

Okay, thank you.

And we will go next to the line of Alan Metrani [phonetic] with Copper Beach Capital. Please go ahead.

Hi, thanks a lot, Steve. Good job so far in a tough environment. Can I understand a little bit about DirecTV and the merger? Could you maybe go into a little more detail on that. ? Do you expect business to pick up a bit if the merger gets approved or if it doesn't get approved, do you expect it to go down? What's your over/under as it relates to them?

I think any comments that we would have there would be speculation, and that's part of the difficulty. I mean, I would think that as they come together as merged entities that there are potentially some technology drivers to get, you know, one of the networks on the other's technology platform or I guess they both could go to a third platform, but so clearly that's a potential outcome of the merger that we're following. It would also seem to me that part of the rationale for the merger was increasing scale and so that they would, in fact, you know, have an interest in doing further deployments.

To speculate what happens if the merger doesn't go through is just pretty difficult from this environment to give you any guidance on.

Okay, how about Worldcom, I was surprised to see them in your top five work list given what's going on in that company.

That was in '01. They still remain a customer, but at a diminished level in '02.

Okay, you know, it's clear that for a few quarters, probably given the environment, the Bells and other companies have been underspending their capital budgets the same way you've been in underspending in your capital budgets in response. What do you think the catalyst is for them to improve or to start increasing the capital budgets or at least spending what their initial budgets have been rather than cutting? Because it seems like the environment in their business is at least going to be tough for the next year.

I think historically what we have always said is it may lag the real economy, and so with that perspective, you know, as the real economy turns around, you know, their businesses get healthy and they have to respond to their customer needs. Tim, do you have something to add?

Plus they worked the fat out of their network if they've accumulated over the good times.

Historically, they always build margin into the plan. As that margin becomes exhausted, incrementally the next service order they've got to fill [inaudible] and that's usually a function of a lag to the real economy.

Okay, and also, excluding AT and T, which I guess is a special situation, it seems as if most of the cable companies we talk to are looking to still cut cap spending over the next 12 to 18 months and going out forever ideally. In their mind the cap.ex. movement is done, and now they're going to generate a lot of free cash flow for the next few years, at least that's what he's told the Capital Mortgage. Do you see that happening? Do you see them underspending their plan potentially creating a boom for you in the next few years?

I think you highlighted AT and T Comp. Cas, where I think both parties have identified that they have significant amounts of spending to do. You know, clearly, the suspension of the Adelphia work doesn't mean that it went away, just means it's been shifted further out. It would be speculation how far out but it does need to get done, and we think that particularly in the case of AT and T comp. cash, given the scale and the technical capabilities of the combined entities that that will open up other areas of investment on their networks, particularly as regards to telephony and other issues.

So we think that the story may be half there, that there's certainly going to be increased cash flow as these new services get deployed but, you know, it seems like inextricably in that industry as you increase the cash flows, that requires that you put more back in the infrastructure to expand its capabilities to handle the new services.

Okay, and one last question. I've taken enough of your time on this. Do you think you guys can get back to double digit - to growth at all in EBITDA over the next, I'll call it two calendar years from '02 to '03, and will we start seeing double digit EBITDA?

We had a good solid quarter and absent the Adelphia impact, I think we'd be having some sequential discussions that are along your lines. Clearly with AT and T coming back to the marketplace, we think that's a significant impact, and you know, we don't see any structural reasons that we can't get back to good double digit cash flow.

Thank you.

We next go to the line of mark Shepner [phonetic] with Quaker Capital Management.

It's actually Matt Teplits [phonetic]. Two questions, one relates to Adelphia, I think you said your AR exposure is I think $41 million. I guess, I wondered, I mean are there any concerns if you reserve those beyond your normal levels? Do you have any special sort of lien, is there a certain mechanics lien that comes with the work you do on these or would you get another unsecured creditor in the amount of a bankruptcy filing?

I think there's three things to keep in mind when you look at the credit. Right now, based on what we know, we have not taken any reserves above and beyond our kind of normal practice. Secondly, the contracts that we entered into with Adelphia at are at the system level. They are not corporate level contracts, and so that puts them, that puts those contracts and their services we performed, we think, in a different position within the capital structure, and thirdly, we do have the ability and have pursued our mechanics liens, our remedies which are in place on the vast majority of that accounts receivables. So I guess we don't think based on all that we can know and research at this point that there is a collectability issue.

We have gone through the trouble of placing the liens to reinforce that view. We do think that given what we can learn about the capital structure that we're working at the entity level where the assets are and the cash flows are.

At this point for the work you completed earlier in the quarter, so we might be within the 60 days, are they, is their payment consistent with your corporate average, faster or slower at this point?

No, they have slower in the month of May. You know, their slowness occurred about the same time they suspended the work, so up through the end of our last quarter there were no, you know, significant changes in their payment practices.

Okay. I think you'll know about it as soon as we will, I guess.

We'll hope to know sooner. We are having discussions with them because in limited instances for locating services and other kind of critical services, we're still there. We're having ongoing discussions about adjusting the open balances with them everyday.

One other question as it relates to the share buyback. Just if you could walk us through your thinking. I think you're still cheaper than any private market deal you can do. Any comments?

Well, I mean, we always look. We've got a matrix that looks at our returns versus what we can get on a private transaction or on a transaction such as Arguss. We're constantly updating that. I mean quarterly, when you look at the tangible net worth of the company and where the shares are trading, one could argue that we're not being, that the potential cash flow generation in the future is not being adequately reflected in the value, because we are more than just the sum of our assets, and we have real assets that are liquid and valuable, so it's something that we are currently evaluating.

I guess it's implicit, those who own the shares do think they're worth more than this, so I guess we would encourage you to go your way. with

Along with my 516,000 shares that I shown, I have the same view.

Good job in a tough environment.

Again, ladies and gentlemen please take this opportunity to press the 1 on your touch tone phone at this time. We have a follow-up question from the line of Ram Kazerdat [phonetic] from Morgan Keegan.

Steve, this is for you, the Telecom, at least I remember seeing the paper the last couple of days, that there is a chance that this AT and T Comp. Cas. merger might not go through, something to do with the bonds are, you know, AT and T going in for a new credit rating. If the Comp. Cas. merger gets delayed or impeded for any reason, what happens you know, in your assessment to the outlook for cable capital spending?

Well, clearly, AT and T has accelerated spending and has gone on record publicly that they have, you know, ambitious goals to get these upgrades done, irrespective of the status of the merger. I think that would be consistent with what we're seeing in the market.

Based on our discussions with the operations management of the system levels for the two companies, we don't see any reason based on what we know to doubt that they're not planning to get this thing done this year.

Okay, thank you.

Followup, line of Alan Metrani [phonetc] with Copper Beach Capital.

Thanks, you guys started to be acquitted after a long time of really not playing in the acquisition market and all of your competitors have. Are you interested at all in expanding into the New York area a little more and maybe buying an infrastructure services company?

We actually have a good presence right now with Cablevision in the metro New York area and they're doing upgrades in the Bronx and seem to be headed to Brooklyn.

There seem to be some pretty attractive companies there in terms of valuation. No interest?

At this point, we're handling it well internally, but that doesn't mean we wouldn't look at opportunity if it were available.

Thank you.

We have a question on the line from John Taylor with Shumway Capital.

Good morning, guys. Could you please comment on the 12-month backlog you stated was $468 million. What was that a quarter ago on the same store basis, break it down between yourself and Arguss, and the next question, if I do quick math and back out the revenue that was associated with Adelphia this past quarter, I get to a number of about 12 cents a share in earnings if you assume that that didn't occur. For the revenue going into the next quarter, you've got it picking up, but the earnings numbers, the guidance was 7 to 12 cents, are you assuming margin deterioration going forward?

Okay, on the backlog to start with that question, backlog, at last quarter, I'm looking for the next twelve months basis, I think was about 440 million, but we'll check that.

Was that Dycom only?

That was on Dycom only, not pro forma Arguss.

The 468 does include Arguss?

That's correct. As to I think the impact we're forecasting on the margins is really the consequences of the shutdown. These things are not costless to stop that much revenue, and so we're trying to be, you know, reasonably conservative or realistic on what it takes to do that. We will redeploy the assets. There is other work to do to, but it goes to, but it's going to have an impact in this quarter.

Do you have the 12-month backlog number for August when you folded it?

The way they calculated backlog and the way they do was slightly different, but approximately the backlog was in the $140 to $145 million range, and to clarify on the next 12 months for Dycom's standalone in the, at the endof the second quarter was $421 million.

The backlog is - you have to understand it, the mix of the backlog of Dycom includes lots of master service agreements that have multiyear terms. The cable industry and some of the customers that are the base of the Arguss backlog have reasonably sure outlooks but different contracting vehicles, and so there doesn't tend to be as much backlog that's associated with those contracts. It doesn't mean that they don't have a good outlook. It just means the way we calculate it, which is looking at, you know, pretty much the uncompleted portion of signed contracts, just means there may be a little bit less.

Okay, thanks guys.

We have no further questions in queue at this time.

We thank everybody for joining on this call. It is a difficult environment. We're working hard to manage through it, and we appreciate your time and attention. Thank you.

Ladies and gentlemen, this does conclude our conference call for today. Thank you for your participation and for using ATandT's economickive teleconference service. You may disconnect.