We calculate our basic earnings per share by dividing net income or net loss by the weighted average number of common shares outstanding during the period. Diluted earnings per share are calculated in a similar manner, but include the effect of dilutive securities. To the extent these securities are antidilutive, they are excluded from the calculation of earnings per share. The per share amounts were computed as follows (adjusted for the two-for-one stock split of our common shares effective June 1, 2017):follows:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30,
2017 | | October 1,
2016 | | September 30,
2017 | | October 1,
2016 |
| Income available to common shareholders: | | | | | | | |
| Net income | $ | 10,237 |
| | $ | 8,141 |
| | $ | 20,573 |
| | $ | 17,262 |
|
| | | | | | | | |
| Weighted-average shares: | | | | | | | |
| Basic: | | | | | | | |
| Outstanding | 24,925 |
| | 25,486 |
| | 24,965 |
| | 25,502 |
|
| Partially-paid share subscriptions | 195 |
| | 211 |
| | 586 |
| | 633 |
|
| Basic weighted-average shares | 25,120 |
| | 25,697 |
| | 25,551 |
| | 26,135 |
|
| | | | | | | | |
| Diluted: | | | | | | | |
| Basic from above | 25,120 |
| | 25,697 |
| | 25,551 |
| | 26,135 |
|
| Incremental shares from assumed: | | | | | | | |
| Exercise of stock subscription purchase rights | 158 |
| | 135 |
| | 148 |
| | 136 |
|
| Exercise of stock options and awards | 1,138 |
| | 813 |
| | 1,015 |
| | 833 |
|
| Diluted weighted-average shares | 26,416 |
| | 26,645 |
| | 26,714 |
| | 27,104 |
|
| | | | | | | | |
| Net income per share: | | | | | | | |
| Basic | $ | .41 |
| | $ | .32 |
| | $ | .81 |
| | $ | .66 |
|
| | | | | | | | |
| Diluted | $ | .39 |
| | $ | .31 |
| | $ | .77 |
| | $ | .64 |
|
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 201726, 2020
(Amounts in thousands, except share data)
| |
K. | Per Share Amounts and Common and Redeemable Shares Outstanding (continued) |
Common and Redeemable Shares Outstanding--A summary of the activity of the common and redeemable shares outstanding for the nine months ended September 30, 201726, 2020 follows:
| | | | | | | | | | | | | | | | | |
| | | | | |
| Common
Shares
Net of Treasury
Shares | | Redeemable
Shares | | Total |
| Shares outstanding at January 1, 2020 | 18,029,921 | | | 5,146,882 | | | 23,176,803 | |
| Shares purchased | (763,901) | | | (368,350) | | | (1,132,251) | |
| Shares sold | 263,212 | | | 395,503 | | | 658,715 | |
| | | | | |
| Options and awards exercised | 145,297 | | | 0 | | | 145,297 | |
| Shares outstanding at September 26, 2020 | 17,674,529 | | | 5,174,035 | | | 22,848,564 | |
|
| | | | | | | | |
| | Common Shares | | Redeemable | | |
| | Net of Treasury Shares | | Shares | | Total |
| Shares outstanding at January 1, 2017 | 17,866,236 |
| | 7,056,904 |
| | 24,923,140 |
|
| Shares purchased | (486,877 | ) | | (592,914 | ) | | (1,079,791 | ) |
| Shares sold | 184,669 |
| | 283,427 |
| | 468,096 |
|
| Stock subscription offering -- cash purchases | 69,227 |
| | — |
| | 69,227 |
|
| Options and awards exercised | 118,370 |
| | — |
| | 118,370 |
|
| Shares outstanding at September 30, 2017 | 17,751,625 |
| | 6,747,417 |
| | 24,499,042 |
|
On September 30, 2017,26, 2020, we had 24,499,04222,848,564 common and redeemable shares outstanding and employee options exercisable to purchase 851,2151,028,683 common shares, partially-paid subscriptions for 781,088 common shares and purchase rights outstanding for 315,057 common shares.
Common Stock Split--On May 10, 2017, our Board of Directors declared a two-for-one stock split of our common shares, paid as a stock dividend to shareholders of record as of June 1, 2017. The par value of each common share remains at $1.00.
Stock Subscription Offering--Beginning May 2012, the Company offered to eligible employees and nonemployee directors the right to subscribe to common shares of the Company at $9.85$9.85 per share in accordance with the provisions of The Davey Tree Expert Company 2004 Omnibus Stock Plan and the rules of the Compensation Committee of the Company's Board of Directors (collectively, the "plan"). The offering period ended on August 1, 2012 and resulted in the subscription of 1,275,428 common shares for $12,563$12,563 at $9.85$9.85 per share.
Under the plan, a participant in the offering purchasing common shares for an aggregate purchase price of less than $5 had$5 was required to pay with cash. All participants (excluding Company directors and officers) purchasing $5$5 or more of the common shares had an option to finance their purchase through a down-payment of at least 10% of the total purchase price and a seven-year promissory note for the balance due with interest at 2%. Payments on the promissory note can bewere made either by payroll deductions or annual lump-sum payments of both principal and interest.
Common shares purchased under the plan have beenwere pledged as security for the payment of the promissory note and the common shares willwere not be issued until the promissory note iswas paid-in-full. Dividends will bewere paid on all subscribed shares, subject to forfeiture to the extent that payment iswas not ultimately made for the shares.
All participants in the offering purchasing in excess of $5$5 of common shares were granted a "right" to purchase one additional common share at a price of $9.85$9.85 per share for every three3 common shares purchased under the plan. As a result of the stock subscription, employees were granted rights to purchase 423,600 common shares. Each right may becould have been exercised at the rate of one-seventh per year and will expire expired seven years after the date that the right was granted. Employees maycould not exercise a right shouldif they ceaseceased to be employed by the Company. All rights expired in August 2019.
The Davey Tree Expert CompanyM. Operations by Business Segment
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017
(Amounts in thousands, except share data)
| |
L. | Operations by Business Segment |
We provide a wide range of arboricultural, horticultural, environmental and consulting services to residential, utility, commercial and government entities throughout the United States and Canada. We have two2 reportable operating segments organized by type or class of customer: Residential and Commercial, and Utility.
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 26, 2020
(Amounts in thousands, except share data)
Residential and Commercial--Residential and Commercial provides services to our residential and commercial customers including: the treatment, preservation, maintenance, removal and planting of trees, shrubs and other plant life; the practice of landscaping, grounds maintenance, tree surgery, tree feeding and tree spraying; the application of fertilizer, herbicides and insecticides; and natural resource management and consulting, forestry research and development, and environmental planning.
Utility--Utility is principally engaged in providing services to our utility customers--investor-owned, municipal utilities, and rural electric cooperatives--including: the practice of line-clearing and vegetation management around power lines and rights-of-way and chemical brush control; and,control, natural resource management and consulting, forestry research and development, and environmental planning.
All other operating activities, including research, technical support and laboratory diagnostic facilities, are included in “All Other.”
Measurement of Segment Profit and Loss and Segment Assets--We evaluate performance and allocate resources based primarily on operating income and also actively manage business unit operating assets. Segment information, including reconciling adjustments, is presented consistent with the basis described in our 20162019 Annual Report.
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 201726, 2020
(Amounts in thousands, except share data)
L. Operations by Business Segment (continued)
Segment information reconciled to the condensed consolidated external reporting informationfinancial statements follows:
| | | | | | | | | | | | | | | | Utility | | Residential
and
Commercial | | All
Other | | Reconciling
Adjustments | | Consolidated |
| | Utility | | Residential and Commercial | | All Other | | Reconciling Adjustments | | Consolidated | |
| Three Months Ended September 30, 2017 | | | | | | | | | | |
| Three Months Ended September 26, 2020 | | Three Months Ended September 26, 2020 | | | | | | | | | |
| Revenues | $ | 124,540 |
| | $ | 124,678 |
| | $ | 370 |
| | $ | — |
| | $ | 249,588 |
| Revenues | $ | 185,500 | | | $ | 151,435 | | | $ | 518 | | | $ | 0 | | | $ | 337,453 | |
| Income (loss) from operations | 6,854 |
| | 14,616 |
| | (838 | ) | | (1,931 | ) | (a) | | 18,701 |
| Income (loss) from operations | 20,301 | | | 20,273 | | | (2,758) | | | (2,316) | | (a) | | 35,500 | |
| Interest expense | | | | | | | (1,278 | ) | | (1,278 | ) | Interest expense | | | | | | | (1,579) | | | (1,579) | |
| Interest income | | | | | | | 67 |
| | 67 |
| Interest income | | 1,688 | | | 1,688 | |
| Other income (expense), net | | | | | | | (1,416 | ) | | (1,416 | ) | Other income (expense), net | | (1,499) | | | (1,499) | |
| Income before income taxes | | | | | | | | | $ | 16,074 |
| Income before income taxes | | | | $ | 34,110 | |
| Segment assets, total | $ | 180,031 |
| | $ | 206,946 |
| | $ | — |
| | $ | 92,632 |
| (b) | | $ | 479,609 |
| Segment assets, total | $ | 296,519 | | | $ | 227,977 | | | $ | 0 | | | $ | 147,188 | | (b) | | $ | 671,684 | |
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended October 1, 2016 | | | | | | | | | | |
| Three Months Ended September 28, 2019 | | Three Months Ended September 28, 2019 | |
| Revenues | $ | 110,700 |
| | $ | 112,211 |
| | $ | 808 |
| | $ | — |
| | $ | 223,719 |
| Revenues | $ | 160,088 | | | $ | 146,769 | | | $ | 616 | | | $ | 0 | | | $ | 307,473 | |
| Income (loss) from operations | 4,337 |
| | 12,156 |
| | (1,012 | ) | | (439 | ) | (a) | | 15,042 |
| Income (loss) from operations | 10,941 | | | 17,667 | | | (3,456) | | | (2,369) | | (a) | | 22,783 | |
| Interest expense | | | | | | | (1,159 | ) | | (1,159 | ) | Interest expense | | | | | | | (2,018) | | | (2,018) | |
| Interest income | | | | | | | 62 |
| | 62 |
| Interest income | | 94 | | | 94 | |
| Other income (expense), net | | | | | | | (1,066 | ) | | (1,066 | ) | Other income (expense), net | | (1,886) | | | (1,886) | |
| Income before income taxes | | | | | | | | | $ | 12,879 |
| Income before income taxes | | | | $ | 18,973 | |
| Segment assets, total | $ | 169,796 |
| | $ | 177,275 |
| | $ | — |
| | $ | 96,814 |
| (b) | | $ | 443,885 |
| Segment assets, total | $ | 247,031 | | | $ | 238,692 | | | $ | 0 | | | $ | 115,475 | | (b) | | $ | 601,198 | |
| | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2017 | | | | | | | | | | |
| Nine Months Ended September 26, 2020 | | Nine Months Ended September 26, 2020 | |
| Revenues | $ | 349,921 |
| | $ | 335,564 |
| | $ | 1,953 |
| | $ | — |
| | $ | 687,438 |
| Revenues | $ | 547,984 | | | $ | 396,293 | | | $ | 703 | | | $ | 0 | | | $ | 944,980 | |
| Income (loss) from operations | 13,782 |
| | 34,871 |
| | (4,725 | ) | | (4,257 | ) | (a) | | 39,671 |
| Income (loss) from operations | 56,817 | | | 42,242 | | | (11,005) | | | (4,309) | | (a) | | 83,745 | |
| Interest expense | | | | | | | (3,607 | ) | | (3,607 | ) | Interest expense | | | | | | | (5,477) | | | (5,477) | |
| Interest income | | | | | | | 210 |
| | 210 |
| Interest income | | 1,885 | | | 1,885 | |
| Other income (expense), net | | | | | | | (3,200 | ) | | (3,200 | ) | Other income (expense), net | | (4,550) | | | (4,550) | |
| Income before income taxes | | | | | | | | | $ | 33,074 |
| Income before income taxes | | | | $ | 75,603 | |
| Segment assets, total | $ | 180,031 |
| | $ | 206,946 |
| | $ | — |
| | $ | 92,632 |
| (b) | | $ | 479,609 |
| Segment assets, total | $ | 296,519 | | | $ | 227,977 | | | $ | 0 | | | $ | 147,188 | | (b) | | $ | 671,684 | |
| | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended October 1, 2016 | | | | | | | | | | |
| Nine Months Ended September 28, 2019 | | Nine Months Ended September 28, 2019 | |
| Revenues | $ | 316,013 |
| | $ | 311,490 |
| | $ | 1,812 |
| | $ | — |
| | $ | 629,315 |
| Revenues | $ | 451,749 | | | $ | 404,134 | | | $ | 913 | | | $ | 0 | | | $ | 856,796 | |
| Income (loss) from operations | 11,398 |
| | 31,946 |
| | (5,098 | ) | | (4,038 | ) | (a) | | 34,208 |
| Income (loss) from operations | 26,816 | | | 44,772 | | | (11,825) | | | (3,732) | | (a) | | 56,031 | |
| Interest expense | | | | | | | (3,186 | ) | | (3,186 | ) | Interest expense | | | | | | | (6,597) | | | (6,597) | |
| Interest income | | | | | | | 190 |
| | 190 |
| Interest income | | 270 | | | 270 | |
| Other income (expense), net | | | | | | | (2,821 | ) | | (2,821 | ) | Other income (expense), net | | (6,694) | | | (6,694) | |
| Income before income taxes | | | | | | | | | $ | 28,391 |
| Income before income taxes | | | | $ | 43,010 | |
| Segment assets, total | $ | 169,796 |
| | $ | 177,275 |
| | $ | — |
| | $ | 96,814 |
| (b) | | $ | 443,885 |
| Segment assets, total | $ | 247,031 | | | $ | 238,692 | | | $ | 0 | | | $ | 115,475 | | (b) | | $ | 601,198 | |
Reconciling adjustments from segment reporting to the condensed consolidated external financial reportingstatements include unallocated corporate items:
(a)Reclassification of depreciation expense and allocation of corporate expenses.
| |
(a) | Reclassification of depreciation expense and allocation of corporate expenses. |
| |
(b) | Corporate assets include cash, prepaid expenses, corporate facilities, enterprise-wide information systems and other nonoperating assets.(b)Corporate assets include cash, prepaid expenses, corporate facilities, enterprise-wide information systems and other nonoperating assets. |
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 201726, 2020
(Amounts in thousands, except share data)
N. Revenue Recognition
We recognize revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers.
Nature of Performance Obligations and Significant Judgments
At contract inception, the Company assesses the goods and services promised in its contracts with customers and identifies a performance obligation for each promised good or service (or bundle of goods and services) that is distinct. To identify the performance obligations, the Company considers each of the goods or services promised in the contract regardless of whether they are explicitly stated or are implied by customary business practices.
Our contracts with our customers generally originate upon the completion of a quote for services for residential and commercial customers or the receipt of a purchase order (or similar work order) for utility customers. In some cases, our contracts are governed by master services agreements, in which case our contract under ASC 606 consists of the combination of the master services agreement and the quote/purchase order. Many of our contracts have a stated duration of one year or less or contain termination clauses that allow the customer to cancel the contract after a specified notice period, which is typically less than 90 days. Due to the fact that many of our arrangements allow the customer to terminate for convenience, the duration of the contract for revenue recognition purposes generally does not extend beyond the services that we have actually transferred. As a result, many of our contracts are, in effect, day-to-day or month-to-month contracts.
Disaggregation of Revenue
The following tables disaggregate our revenue for the three and nine months ended September 26, 2020 and September 28, 2019 by major sources:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 26, 2020 | | Utility | | Residential
and
Commercial | | All Other | | Consolidated |
| Type of service: | | | | | | | | |
| Tree and plant care | | $ | 135,021 | | | $ | 90,049 | | | $ | (10) | | | $ | 225,060 | |
| Grounds maintenance | | 0 | | | 36,296 | | | 0 | | | 36,296 | |
| Storm damage services | | 7,061 | | | 4,069 | | | 0 | | | 11,130 | |
| Consulting and other | | 43,418 | | | 21,021 | | | 528 | | | 64,967 | |
| Total revenues | | $ | 185,500 | | | $ | 151,435 | | | $ | 518 | | | $ | 337,453 | |
| | | | | | | | |
| Geography: | | | | | | | | |
| United States | | $ | 176,528 | | | $ | 140,571 | | | $ | 518 | | | $ | 317,617 | |
| Canada | | 8,972 | | | 10,864 | | | 0 | | | 19,836 | |
| Total revenues | | $ | 185,500 | | | $ | 151,435 | | | $ | 518 | | | $ | 337,453 | |
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 26, 2020
(Amounts in thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 28, 2019 | | Utility | | Residential
and
Commercial | | All Other | | Consolidated |
| Type of service: | | | | | | | | |
| Tree and plant care | | $ | 119,449 | | | $ | 85,112 | | | $ | (86) | | | $ | 204,475 | |
| Grounds maintenance | | 0 | | | 40,721 | | | 0 | | | 40,721 | |
| Storm damage services | | 1,709 | | | 1,550 | | | 0 | | | 3,259 | |
| Consulting and other | | 38,930 | | | 19,386 | | | 702 | | | 59,018 | |
| Total revenues | | $ | 160,088 | | | $ | 146,769 | | | $ | 616 | | | $ | 307,473 | |
| | | | | | | | |
| Geography: | | | | | | | | |
| United States | | $ | 150,118 | | | $ | 135,868 | | | $ | 616 | | | $ | 286,602 | |
| Canada | | 9,970 | | | 10,901 | | | 0 | | | 20,871 | |
| Total revenues | | $ | 160,088 | | | $ | 146,769 | | | $ | 616 | | | $ | 307,473 | |
| |
M. | Fair Value Measurements and Financial Instruments |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 26, 2020 | | Utility | | Residential
and
Commercial | | All Other | | Consolidated |
| Type of service: | | | | | | | | |
| Tree and plant care | | $ | 408,371 | | | $ | 233,810 | | | $ | (121) | | | $ | 642,060 | |
| Grounds maintenance | | 0 | | | 100,352 | | | 0 | | | 100,352 | |
| Storm damage services | | 8,087 | | | 6,047 | | | 0 | | | 14,134 | |
| Consulting and other | | 131,526 | | | 56,084 | | | 824 | | | 188,434 | |
| Total revenues | | $ | 547,984 | | | $ | 396,293 | | | $ | 703 | | | $ | 944,980 | |
| | | | | | | | |
| Geography: | | | | | | | | |
| United States | | $ | 522,094 | | | $ | 369,297 | | | $ | 703 | | | $ | 892,094 | |
| Canada | | 25,890 | | | 26,996 | | | 0 | | | 52,886 | |
| Total revenues | | $ | 547,984 | | | $ | 396,293 | | | $ | 703 | | | $ | 944,980 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 28, 2019 | | Utility | | Residential
and
Commercial | | All Other | | Consolidated |
| Type of service: | | | | | | | | |
| Tree and plant care | | $ | 335,658 | | | $ | 231,988 | | | $ | (90) | | | $ | 567,556 | |
| Grounds maintenance | | 0 | | | 114,320 | | | 0 | | | 114,320 | |
| Storm damage services | | 2,933 | | | 4,163 | | | 0 | | | 7,096 | |
| Consulting and other | | 113,158 | | | 53,663 | | | 1,003 | | | 167,824 | |
| Total revenues | | $ | 451,749 | | | $ | 404,134 | | | $ | 913 | | | $ | 856,796 | |
| | | | | | | | |
| Geography: | | | | | | | | |
| United States | | $ | 420,701 | | | $ | 376,304 | | | $ | 913 | | | $ | 797,918 | |
| Canada | | 31,048 | | | 27,830 | | | 0 | | | 58,878 | |
| Total revenues | | $ | 451,749 | | | $ | 404,134 | | | $ | 913 | | | $ | 856,796 | |
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Accounting Standards Board Accounting Standard CodificationStatements (Unaudited)
September 26, 2020
(Amounts in thousands, except share data)
Contract Balances
Our contract liabilities consist of advance payments and billings in excess of costs incurred and deferred revenue. The Company has recognized $150 and $1,411 of revenue for the three and nine months ended September 26, 2020, respectively, that was included in the contract liability balance at December 31, 2019 and $119 and $1,925 of revenue for the three and nine months ended September 28, 2019, respectively, that was included in the contract liability balance at December 31, 2018. Net contract liabilities consisted of the following:
| | | | | | | | | | | |
| | September 26,
2020 | | December 31,
2019 |
| Contract liabilities - current | $ | 3,558 | | | $ | 3,129 | |
| Contract liabilities - noncurrent | 1,662 | | | 2,705 | |
| Net contract liabilities | $ | 5,220 | | | $ | 5,834 | |
O. Fair Value Measurements and Financial Instruments
FASB ASC 820, “Fair Value of Measurements and DisclosuresDisclosures" (“Topic 820”)” defines fair value based on the price that would be received to sell an asset or the exit price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. Market participants are defined as buyers or sellers in the principal or most advantageous market for the asset or liability that are independent of the reporting entity, knowledgeable and able and willing to transact for the asset or liability.
Valuation Hierarchy--Topic 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value. The hierarchy prioritizes the inputs into three broad levels:
Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
Level 2 inputs are observable inputs other than prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated with observable market data.
Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
Our assets and liabilities measured at fair value on a recurring basis at September 30, 2017 were as follows:
|
| | | | | | | | | | | | | | | | |
| | | | | Fair Value Measurements at September 30, 2017 Using: |
Assets and Liabilities Recorded at
Fair Value on a Recurring Basis | | Total Carrying Value at September 30, 2017 | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Assets: | | | | | | | | |
| Assets invested for self-insurance, classified as other assets, noncurrent | | $ | 17,794 |
| | $ | 17,794 |
| | $ | — |
| | $ | — |
|
| | | | | | | | | |
| Liabilities: | | | | | | | | |
| Deferred compensation | | $ | 2,105 |
| | $ | — |
| | $ | 2,105 |
| | $ | — |
|
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 201726, 2020
(Amounts in thousands, except share data)
| |
M. | Fair Value Measurements and Financial Instruments (continued) |
Our assets and liabilities measured at fair value on a recurring basis at December 31, 2016September 26, 2020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Fair Value Measurements at
September 26, 2020 Using: |
Assets and Liabilities Recorded at
Fair Value on a Recurring Basis | | Total
Carrying
Value at
September 26,
2020 | | Quoted
Prices in
Active
Markets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) |
| Assets: | | | | | | | | |
| Assets invested for self-insurance, classified as other assets, noncurrent | | $ | 15,359 | | | $ | 15,359 | | | $ | 0 | | | $ | 0 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Liabilities: | | | | | | | | |
| | | | | | | | |
| Deferred compensation | | $ | 3,132 | | | $ | 0 | | | $ | 3,132 | | | $ | 0 | |
|
| | | | | | | | | | | | | | | | |
| | | | | Fair Value Measurements at December 31, 2016 Using: |
Assets and Liabilities Recorded at
Fair Value on a Recurring Basis | | Total Carrying Value at December 31, 2016 | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Assets: | | | | | | | | |
| Assets invested for self-insurance, classified as other assets, noncurrent | | $ | 15,492 |
| | $ | 15,492 |
| | $ | — |
| | $ | — |
|
| | | | | | | | | |
| Liabilities: | | | | | | | | |
| Deferred compensation | | $ | 1,837 |
| | $ | — |
| | $ | 1,837 |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Fair Value Measurements at
December 31, 2019 Using: |
Assets and Liabilities Recorded at
Fair Value on a Recurring Basis | | Total
Carrying
Value at
December 31,
2019 | | Quoted
Prices in
Active
Markets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) |
| Assets: | | | | | | | | |
| Assets invested for self-insurance, classified as other assets, noncurrent | | $ | 15,402 | | | $ | 15,402 | | | $ | 0 | | | $ | 0 | |
| | | | | | | | |
| | | | | | | | |
| Liabilities: | | | | | | | | |
| Deferred compensation | | $ | 2,786 | | | $ | 0 | | | $ | 2,786 | | | $ | 0 | |
The assets invested for self-insurance are money market funds--classifiedcertificates of deposit--classified as Level 1--based on quoted market prices of the identical underlying securities in active markets. The estimated fair value of the deferred compensation--classified as Level 2--is based on the value of the Company's common shares, determined by independent valuation.
Fair Value of Financial Instruments--The fair values of our current financial assets and current liabilities, including cash, accounts receivable, accounts payable, and accrued expenses, among others, approximate their reported carrying values because of their short-term nature. Financial instruments classified as noncurrent liabilities and their carrying values and fair values were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 26, 2020 | | December 31, 2019 |
| | Carrying
Value | | Fair
Value | | Carrying
Value | | Fair
Value |
| Revolving credit facility, noncurrent | | $ | 30,000 | | | $ | 30,000 | | | $ | 62,000 | | | $ | 62,000 | |
| Senior unsecured notes, noncurrent | | 75,000 | | | 83,099 | | | 75,000 | | | 79,558 | |
| Term loans, noncurrent | | 1,842 | | | 2,068 | | | 6,774 | | | 7,124 | |
| Total | | $ | 106,842 | | | $ | 115,167 | | | $ | 143,774 | | | $ | 148,682 | |
|
| | | | | | | | | | | | | | | | |
| | | September 30, 2017 | | December 31, 2016 |
| | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| Revolving credit facility, noncurrent | | $ | 97,000 |
| | $ | 97,000 |
| | $ | 67,000 |
| | $ | 67,000 |
|
| Senior unsecured notes | | 12,000 |
| | 12,387 |
| | 18,000 |
| | 18,509 |
|
| Term loans, noncurrent | | 8,258 |
| | 10,353 |
| | 7,623 |
| | 9,854 |
|
| Total | | $ | 117,258 |
| | $ | 119,740 |
| | $ | 92,623 |
| | $ | 95,363 |
|
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 26, 2020
(Amounts in thousands, except share data)
The carrying value of our revolving credit facility approximates fair value--classified as Level 2--as the interest rates on the amounts outstanding are variable. The fair value of our senior unsecured notes and term loans--classified as Level 2--is determined based on expected future weighted-average interest rates with the same remaining maturities.
Market Risk--In the normal course of business, we are exposed to market risk related to changes in foreign currency exchange rates, changes in interest rates and changes in fuel prices. We do not hold or issue derivative financial instruments for trading or speculative purposes. In prior years, we have used derivative financial instruments to manage risk, in part, associated with changes in interest rates and changes in fuel prices. Presently, we are not engaged in any hedging or derivative activities.
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)P. Commitments and Contingencies
September 30, 2017
(Amounts in thousands, except share data)
We are party to a number of lawsuits, threatened lawsuits and other claims arising out of the normal course of business. ManagementOn a quarterly basis, we assess our liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information available. Where it is probable that we will incur a loss and the amount of the opinionloss can be reasonably estimated, we record a liability in our consolidated financial statements. These legal accruals may be increased or decreased to reflect any relevant developments on a quarterly basis. Where a loss is not probable or the amount of the loss is not estimable, we do not record a legal accrual, consistent with applicable accounting guidance. Based on information currently available to us, advice of counsel, and available insurance coverage, we believe that our established accruals are adequate and the liabilities arising from the legal proceedings will not have a material adverse effect on our consolidated financial condition. We note, however, that in light of the inherent uncertainty in legal proceedings there can be no assurance that the ultimate resolution of a matter will not exceed established accruals. As a result, the outcome of a particular matter or a combination of matters may be material to our results of operations for a particular period, depending upon the size of the loss or our income for that particular period.
In November 2017, a suit was filed in Savannah, Georgia state court (“State Court”) against Davey Tree, its subsidiary, Wolf Tree, Inc. ("Wolf Tree"), 1 former Davey employee, 2 Wolf Tree employees, and 1 former Wolf Tree employee alleging various acts of negligence and seeking compensatory and punitive damages for wrongful death and assault and battery of the plaintiff’s husband, a Wolf Tree employee, who was shot and killed in August 2017.
In July 2018, a related survival action was filed by the deceased’s estate against Davey Tree, its subsidiary, Wolf Tree, and 4 current and former employees in Savannah, Georgia, which may resultarises out of the same allegations, seeks compensatory and punitive damages and also includes 3 Racketeer Influenced and Corrupt Organizations Act ("RICO") claims under Georgia law seeking compensatory damages, treble damages, and punitive damages. The 2018 case was removed to the United States District Court for the Southern District of Georgia, Savannah Division (“Federal Court”), on August 2, 2018. The Company filed a motion to dismiss the RICO claims. Plaintiffs filed a motion to remand the case to state court, which the Company has opposed.
The cases were mediated unsuccessfully in December 2018 and the State Court case was originally set for trial on January 22, 2019. However, as discussed below, all of the civil cases were later stayed on December 28, 2018 and currently remain stayed.
On December 6, 2018, a former Wolf Tree employee pled guilty to conspiracy to conceal, harbor, and shield illegal aliens. On December 21, 2018, the United States federal prosecutors filed a motion to stay both actions on the grounds that on December 13, 2018, an
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 26, 2020
(Amounts in thousands, except share data)
indictment was issued charging 2 former Wolf Tree employees and 1 other individual with various crimes, including conspiracy to murder the deceased. On December 17, 2018, the United States Attorney’s Office for the Southern District of Georgia informed the Company and Wolf Tree that they are adequately covered by insurance, or reflectedalso under investigation for potential violations of immigration and other laws relating to the subject matter of the ongoing criminal investigation referenced above. The Company and Wolf Tree are cooperating with the investigation.
On December 28, 2018, the State Court granted the United States’ motion to stay but indicated that it would nonetheless consider certain pending matters, including: (1) Plaintiff and a co-defendant’s motions that Davey Tree be forced to produce privileged documents and testimony, which had been submitted to a Special Master for recommendation; and (2) the Defendants’ motions for summary judgment. On January 11, 2019, the Special Master issued his recommendation that both Plaintiff and the co-defendant’s motions to force Davey to disclose privileged information be denied. The State Court judge has not yet moved on the recommendation. On January 29, 2019, the State Court heard oral argument on Defendants’ motions for summary judgment, and the motions remain pending during the stay of the cases.
On January 28, 2019, the Federal Court also granted the United States’ motion to stay. On January 29, 2019, the State Court ordered the parties to return to mediation, which occurred on April 17, 2019 but was unsuccessful in resolving the matters.
In both cases, the Company has denied all liability and is vigorously defending the action. It also has retained separate counsel for some of the individual defendants, each of whom has denied all liability and also is vigorously defending the action.
PG&E Bankruptcy Filing
On January 29, 2019, Pacific Gas & Electric Company, and its parent company PG&E Corporation, our largest utility customer, filed voluntary bankruptcy petitions under Chapter 11 of the United States Bankruptcy Code in the self-insurance accruals,U.S. Bankruptcy Court for the Northern District of California. PG&E accounted for approximately 12% of revenues during 2019, and would12% in 2018. As a utility company, PG&E serves residential and industrial customers in California and has an ongoing obligation to continue to serve its customers, and we continue to perform under our contracts with PG&E post-petition. As of the date of the bankruptcy filing, we had pre-petition accounts receivable of approximately $15,000.
On June 20, 2020, the Court confirmed PG&E's Plan of Reorganization (the "Plan") filed as part of its Chapter 11 bankruptcy proceeding. On July 1, 2020, PG&E emerged from Chapter 11, successfully completing its restructuring process and implementing the Plan. In the Plan, unsecured creditors, like Davey Tree, will be paid in full with interest accruing on the past amounts due at the federal judgment rate. Davey Tree has received the majority of its pre-petition amounts outstanding and expects to receive the balance before the end of 2020. Further, Davey Tree's primary contracts were assumed by PG&E. Due to PG&E’s implementation of the Plan, we do not beanticipate PG&E's bankruptcy will have a material in relation to the financial positionimpact on our future cash flows or results of operations.operations as we will receive full payment for the amounts owed.
The Davey Tree Expert Company | |
O. | The Davey 401KSOP and Employee Stock Ownership Plan |
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 26, 2020
(Amounts in thousands, except share data)
Northern California Wildfires
On October 7, 2019 and October 8, 2019, 4 lawsuits were filed against multiple vegetation management contractors to PG&E, including Davey Tree, for damages resulting from the Northern California wildfires. The filing dates - exactly two years after the start of the fires - suggest that these lawsuits are intended to preserve any claims that might otherwise have become barred by the applicable statute of limitations. Davey Tree has been served with only 1 of the 4 complaints, in the case of Quinisha Kyree Abram v. ACRT, Inc., et. al, Case No. CGC-19-579861 filed in the Superior Court of the State of California, County of San Francisco (the “Abram case”). The Abram case was initially stayed until July 29, 2020, and later was stayed until September 30, 2020. The Court then vacated the September 30, 2020 case management conference and issued an order to show cause regarding dismissal for failure to serve the first amended complaint, which Plaintiffs had not yet served. The hearing on the order to show cause is November 24, 2020. Davey Tree has filed a demurrer and motion to dismiss in this action to the original complaint. In the PG&E bankruptcy, the Tort Committee, representing wildfire victims from both the 2017 and 2018 Northern California wildfires, served subpoenas related to these wildfires on numerous contractors of PG&E, including Davey Tree Surgery Company, Davey Resource Group, and Davey Tree, to which we responded.
In addition, an action was brought against Davey Tree in Napa County Superior Court, entitled Donna Walker, et al. v. Davey Tree Surgery Company on August 8, 2019. On October 8, 2019, the court issued an order staying that action. The court deferred ruling on Davey’s demurrer and motion to dismiss the complaint based on the absence of PG&E as an indispensable party. The court stayed any activity in the case until until December 15, 2020.
In all cases, the Company has denied all liability and will vigorously defend the actions.
Q. The Davey 401KSOP and Employee Stock Ownership Plan
On March 15, 1979, the Company consummated a plan, which transferred control of the Company to its employees. As a part of this plan, the Company initially sold 120,000 common shares (presently, 23,040,000 common shares adjusted for stock splits) to its Employee Stock Ownership Trust (“ESOT”) for $2,700. The Employee Stock Ownership Plan (“ESOP”), in conjunction with the related ESOT, provided for the grant to certain employees of certain ownership rights in, but not possession of, the common shares held by the trustee of the ESOT. Annual allocations of shares have been made to individual accounts established for the benefit of the participants.
Defined Contribution and Savings Plans--Most employees are eligible to participate in The Davey 401KSOP and ESOP Plan. Effective January 1, 1997, the plan commenced operations and retained the existing ESOP participant accounts and incorporated a deferred savings plan (a “401(k) plan”) feature. Participants in the 401(k) plan are allowed to make before-tax contributions, within Internal Revenue Service established limits, through payroll deductions. Effective January 1, 20092020, we match, in either cash or our common shares, 100% of the first one3 percent and 50% of the next three2 percent of each participant's before-tax contribution, limited to the first four5 percent of the employee’s compensation deferred each year. All nonbargaining domestic employees who attained age 21 and completed one year of service are eligible to participate. In May 2004, we adopted the 401K Match Restoration Plan, a defined contribution plan that supplements the retirement benefits of certain employees that participate in the savings plan feature of The Davey 401KSOP and ESOP Plan, but are limited in contributions because of tax rules and regulations.
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 26, 2020
(Amounts in thousands, except share data)
Our common shares are not listed or traded on an established public trading market, and market prices are, therefore, not available. Semiannually, an independent stock valuation firm determines the fair market value of our common shares based upon our performance and financial condition. The Davey 401KSOP and ESOP Plan includes a put option for shares of the Company’s common stock distributed from the plan. Shares are distributed from the Davey 401KSOP and ESOP Plan to former participants of the plan, their beneficiaries, donees or heirs (each, a “participant”). Since our common stock is not currently traded on an established securities market, if the owners of distributed shares desire to sell their shares, the Company is required to purchase the shares at fair value for two2 60-day periods after distribution of the shares from the Davey 401KSOP and ESOP. The fair value of distributed shares subject to the put option totaled $2,020$2,978 and $1,148$4,749 as of September 30, 201726, 2020 and December 31, 2016,2019, respectively. The fair value of the shares held in the Davey 401KSOP and ESOP totaled $121,458$125,856 and $123,053$119,806 as of September 30, 201726, 2020 and December 31, 2016,2019, respectively. Due to the Company’s obligation under the put option, the distributed shares subject to the put option and the shares held in the Davey 401KSOP and ESOP (collectively referred to as 401KSOP and ESOP related shares) are recorded at fair value, classified as temporary equity in the mezzanine section of the consolidated balance sheets and totaled $123,478$128,834 and $124,201$124,555 as of September 30, 201726, 2020 and December 31, 2016,2019, respectively. Changes in the fair value of the 401KSOP and ESOP Plan related shares are reflected in retained earnings while net share activity associated with 401KSOP and ESOP Plan related shares are first reflected in additional paid-in capital and then retained earnings if additional paid-in capital is insufficient.
| |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations. |
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations.
(Amounts in thousands, except share data)
Management’s Discussion and Analysis of Financial Condition and Results of Operations is provided as a supplement to the accompanying condensed consolidated financial statements and notes to help provide an understanding of our financial condition, cash flows and results of operations.
We provide a wide range of arboricultural, horticultural, environmental and consulting services to residential, utility, commercial and government entities throughout the United States and Canada.
Our Business--Our operating results are reported in two segments:segments organized by type or class of customer: Residential and Commercial, and Utility. Residential and Commercial provides services to our residential and commercial customers including: the treatment, preservation, maintenance, removal and planting of trees, shrubs and other plant life; the practice of landscaping, grounds maintenance, tree surgery, tree feeding and tree spraying; the application of fertilizer, herbicides and insecticides; and natural resource management and consulting, forestry research and development, and environmental planning. Utility is principally engaged in providing services to our utility customers--investor-owned, municipal utilities, and rural electric cooperatives--including: the practice of line-clearing and vegetation management around power lines and rights-of-way and chemical brush control; and,control, natural resource management and consulting, forestry research and development, and environmental planning. All other operating activities, including research, technical support and laboratory diagnostic facilities, are included in "All Other."
Impact of COVID-19
While the coronavirus ("COVID-19") pandemic did not have a material adverse effect on our reported results for the first nine months of 2020, the overall extent and duration of the impact of COVID-19 on businesses and economic activity generally remains unclear due to the inherent uncertainty surrounding COVID-19, given its continual evolution, such as the current resurgence of cases.
We have taken steps to support our employees and protect their health and safety, while also ensuring that our business can continue to operate and provide services to our customers. Where possible, we have transitioned our employees to work from home and implemented measures to ensure social distancing when providing services to our customers, including providing personal protective equipment and limiting contact within vehicles. We have also provided additional administrative leave for employees affected by COVID-19 directly or indirectly and converted our 2020 Annual Meeting of Shareholders to a virtual-only format. We also drew $50,000 from our revolving credit facility to provide us with additional liquidity in light of the uncertainty resulting from COVID-19. The $50,000 additional borrowing from our revolving credit facility was repaid in the second quarter of 2020. In the first nine months of 2020, we incurred expenses of $3,147 as a result of the COVID-19 pandemic mainly for administrative leave and personal protective equipment. We have also experienced a reduction of travel expenses of approximately $3,700 largely related to restrictions imposed as a response to the pandemic.
The extent to which our operations may be impacted by COVID-19 will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including new information which may emerge concerning the severity of the outbreak, the current resurgence of cases in the United States and potential challenges caused by the colder winter months, including the onset of the cold and flu season, and actions by government authorities to contain the pandemic or treat its impact, including reimposing previously-lifted measures and the possibility additional restrictions will be put in place, among other things. The situation surrounding COVID-19 remains fluid, and the potential for a material impact on our business increases the longer the coronavirus impacts the level of economic
activity in the U.S. and globally. Even after the COVID-19 pandemic has subsided, we may experience an impact to our business as a result of the current economic recession and any economic downturn or recession that may occur in the future.
RESULTS OF OPERATIONS
The following table sets forth our consolidated results of operations as a percentage of revenues and the percentage change in dollar amounts of the results of operations for the periods presented.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| September 26,
2020 | | September 28,
2019 | |
Change | | September 26,
2020 | | September 28,
2019 | |
Change |
| Revenues | 100.0 | % | | 100.0 | % | | — | % | | 100.0 | % | | 100.0 | % | | — | % |
| | | | | | | | | | | |
| Costs and expenses: | | | | | | | | | | | |
| Operating | 61.8 | | | 62.8 | | | (1.0) | | | 63.2 | | | 63.8 | | | (.6) | |
| Selling | 17.8 | | | 18.5 | | | (.7) | | | 17.2 | | | 18.0 | | | (.8) | |
| General and administrative | 5.9 | | | 6.5 | | | (.6) | | | 6.4 | | | 6.7 | | | (.3) | |
| Depreciation and amortization | 4.1 | | | 5.0 | | | (.9) | | | 4.5 | | | 5.2 | | | (.7) | |
| Gain on sale of assets, net | (.1) | | | (.2) | | | .1 | | | (.2) | | | (.2) | | | — | |
| | | | | | | | | | | |
| Income from operations | 10.5 | | | 7.4 | | | 3.1 | | | 8.9 | | | 6.5 | | | 2.4 | |
| | | | | | | | | | | |
| Other income (expense): | | | | | | | | | | | |
| Interest expense | (.5) | | | (.7) | | | .2 | | | (.6) | | | (.7) | | | .1 | |
| Interest income | .5 | | | — | | | .5 | | | .2 | | | — | | | .2 | |
| Other, net | (.4) | | | (.6) | | | .2 | | | (.5) | | | (.8) | | | .3 | |
| | | | | | | | | | | |
| Income before income taxes | 10.1 | | | 6.1 | | | 4.0 | | | 8.0 | | | 5.0 | | | 3.0 | |
| | | | | | | | | | | |
| Income taxes | 2.8 | | | 1.8 | | | 1.0 | | | 2.2 | | | 1.2 | | | 1.0 | |
| | | | | | | | | | | |
| Net income | 7.3 | % | | 4.3 | % | | 3.0 | % | | 5.8 | % | | 3.8 | % | | 2.0 | % |
|
| | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30,
2017 | | October 1,
2016 | | Percentage Change | | September 30,
2017 | | October 1,
2016 | | Percentage Change |
| Revenues | 100.0 | % | | 100.0 | % | | — | % | | 100.0 | % | | 100.0 | % | | — | % |
| | | | | | | | | | | | |
| Costs and expenses: | | | | | | | | | | | |
| Operating | 63.2 |
| | 63.6 |
| | (.4 | ) | | 64.4 |
| | 64.0 |
| | .4 |
|
| Selling | 18.2 |
| | 18.1 |
| | .1 |
| | 17.7 |
| | 17.8 |
| | (.1 | ) |
| General and administrative | 5.8 |
| | 6.7 |
| | (.9 | ) | | 6.8 |
| | 7.4 |
| | (.6 | ) |
| Depreciation and amortization | 5.5 |
| | 5.8 |
| | (.3 | ) | | 5.7 |
| | 5.8 |
| | (.1 | ) |
| Gain on sale of assets, net | (.2 | ) | | (.8 | ) | | .6 |
| | (.4 | ) | | (.4 | ) | | — |
|
| | | | | | | | | | | | |
| Income from operations | 7.5 |
| | 6.7 |
| | .8 |
| | 5.8 |
| | 5.4 |
| | .4 |
|
| | | | | | | | | | | | |
| Other income (expense): | | | | | | | | | | | |
| Interest expense | (.5 | ) | | (.5 | ) | | — |
| | (.5 | ) | | (.5 | ) | | — |
|
| Interest income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Other, net | (.6 | ) | | (.5 | ) | | (.1 | ) | | (.5 | ) | | (.4 | ) | | (.1 | ) |
| | | | | | | | | | | | |
| Income before income taxes | 6.4 |
| | 5.7 |
| | .7 |
| | 4.8 |
| | 4.5 |
| | .3 |
|
| | | | | | | | | | | | |
| Income taxes | 2.3 |
| | 2.1 |
| | .2 |
| | 1.8 |
| | 1.8 |
| | — |
|
| | | | | | | | | | | | |
| Net income | 4.1 | % | | 3.6 | % | | .5 | % | | 3.0 | % | | 2.7 | % | | .3 | % |
| | | | | | | | | | | | |
Third Quarter—Three Months EndedSeptember 30, 201726, 2020 Compared to Three Months EndedOctober 1, 2016 September 28, 2019
Our results of operations for the three months endedSeptember 30, 201726, 2020 compared to the three months endedOctober 1, 2016 September 28, 2019 follows: | | | | Three Months Ended | | Three Months Ended |
| | September 30,
2017 | | October 1,
2016 | | Change | | Percentage Change | | September 26,
2020 | | September 28,
2019 | | Change | | Percentage
Change |
| Revenues | $ | 249,588 |
| | $ | 223,719 |
| | $ | 25,869 |
| | 11.6 | % | Revenues | $ | 337,453 | | | $ | 307,473 | | | $ | 29,980 | | | 9.8 | % |
| | | | | | | | | |
| Costs and expenses: | | | | | |
| | |
| Costs and expenses: | | | | |
| Operating | 157,615 |
| | 142,333 |
| | 15,282 |
| | 10.7 |
| Operating | 208,510 | | | 193,137 | | | 15,373 | | | 8.0 | |
| Selling | 45,508 |
| | 40,528 |
| | 4,980 |
| | 12.3 |
| Selling | 60,203 | | | 56,921 | | | 3,282 | | | 5.8 | |
| General and administrative | 14,501 |
| | 14,921 |
| | (420 | ) | | (2.8 | ) | General and administrative | 19,891 | | | 19,895 | | | (4) | | | — | |
| Depreciation and amortization | 13,749 |
| | 12,765 |
| | 984 |
| | 7.7 |
| Depreciation and amortization | 13,825 | | | 15,319 | | | (1,494) | | | (9.8) | |
| Gain on sale of assets, net | (486 | ) | | (1,870 | ) | | 1,384 |
| | (74.0 | ) | Gain on sale of assets, net | (476) | | | (582) | | | 106 | | | (18.2) | |
| | 230,887 |
| | 208,677 |
| | 22,210 |
| | 10.6 |
| | 301,953 | | | 284,690 | | | 17,263 | | | 6.1 | |
| | | | | | | | | | | | | | | | |
| Income from operations | 18,701 |
| | 15,042 |
| | 3,659 |
| | 24.3 |
| Income from operations | 35,500 | | | 22,783 | | | 12,717 | | | 55.8 | |
| Other income (expense): | |
| | |
| | |
| | | Other income (expense): | | | | |
| Interest expense | (1,278 | ) | | (1,159 | ) | | (119 | ) | | 10.3 |
| Interest expense | (1,579) | | | (2,018) | | | 439 | | | (21.8) | |
| Interest income | 67 |
| | 62 |
| | 5 |
| | 8.1 |
| Interest income | 1,688 | | | 94 | | | 1,594 | | | 1,695.7 | |
| Other, net | (1,416 | ) | | (1,066 | ) | | (350 | ) | | 32.8 |
| Other, net | (1,499) | | | (1,886) | | | 387 | | | (20.5) | |
| Income before income taxes | 16,074 |
| | 12,879 |
| | 3,195 |
| | 24.8 |
| Income before income taxes | 34,110 | | | 18,973 | | | 15,137 | | | 79.8 | |
| | | | | | | | | |
| Income taxes | 5,837 |
| | 4,738 |
| | 1,099 |
| | 23.2 |
| Income taxes | 9,483 | | | 5,539 | | | 3,944 | | | 71.2 | |
| | | | | | | | | | | | | | | | |
| Net income | $ | 10,237 |
| | $ | 8,141 |
| | $ | 2,096 |
| | 25.7 | % | Net income | $ | 24,627 | | | $ | 13,434 | | | $ | 11,193 | | | 83.3 | % |
| | | | | | | | | |
| nm--not meaningful | |
| | |
| | |
| | |
| |
Revenues--Revenues of $249,588$337,453 increased $25,869$29,980 compared with $223,719$307,473 in the third quarter 2016.of 2019. Utility Services increased $13,840$25,412 or 12.5%15.9% compared with the third quarter 2016.of 2019. The increase is attributable to new accounts as well as increased storm-relatedwork year-over-year and price increases on existing accounts. Most of our Utility Services segment work has been deemed essential services primarily related to Hurricane Irma in the Southeast United States.and has not been significantly affected by COVID-19. Residential and Commercial Services increased $12,467$4,666 or 11.1% compared with3.2% from the third quarter 2016.of 2019. Increases in storm-related services primarily related to Hurricane Irma in the Southeast United States, tree surgery, spraying and pest managementplant care revenues, storm damage revenue and consulting and other were partially offset by a decrease in mowing and landscape materials. Total revenues of $249,588 include a reduction of production incentive revenue, recognized under the completed-performance method,of $35during the third quarter 2017 compared with a reduction of $56 during the third quarter 2016.grounds maintenance revenue.
Operating Expenses--Operating expenses of $157,615$208,510 increased $15,282$15,373 compared with the third quarter 2016of 2019. Utility Services increased $14,855 or 12.7% compared with the third quarter of 2019 but, as a percentage of revenues,revenue, decreased .4% to 63.2%71.0% from 73.0%. Utility increased $8,369 or 10.0% compared with the third quarter 2016 but, as a percentage of revenues, decreased 1.6%The increase is attributable to 73.9%. Increases inadditional expenses for labor and benefits expenses fuel expense, subcontractor expense, mileage, crew sustenance and insurance expensewhich were partially offset by decreases in equipment maintenance expense.fuel expense, subcontractor expense and crew meals and lodging expenses.Residential and Commercial Services increased $6,603$104 or 11.4%0.1% compared with the third quarter 2016 and,of 2019 but, as a percentage of revenues, increased .1%revenue, decreased to 51.6%49.7% from 51.2%. Increases in labor and benefits expenses were offset by decreases in fuel expense subcontractor expense, material, insurance, fuel, and equipment expense werematerials expense.
Operating expenses for the largest contributorsthird quarter of 2020 also included $953 of expenses related directly to COVID-19, including $447 for additional administrative leave offered to employees who have been unable to work due to COVID-19 imposed restrictions whether from the increase.virus itself or government imposed restrictions or closures.
Fuel costs of $7,148 increased $913,$8,100 decreased $1,620, or 14.6%16.7%, from the $6,235$9,720 incurred in the third quarter 2016of 2019 and impacted operating expenses within all segments. The $913 increase$1,620 decrease included usage decreases approximating $335 and price increasesdecreases approximating $386 and usage increases approximating $527.$1,285.
Selling Expenses--Selling expenses of $45,508$60,203 increased $4,980$3,282 compared with the third quarter 2016 andof 2019 but, as a percentage of revenues, increased .1%decreased to 18.2%17.8% from 18.5%. Utility Services increased $2,588$2,055 or 23.7% over11.2% compared to the third quarter 2016 andof 2019 but, as a percentage of revenues increased 1.0%revenue, decreased to 10.9%11.0% from 11.4%. IncreasesThe increase is attributable to increases in field management wages and incentives, taxes and communicationincentive expense which were partially offset by a decrease in travel expenses.expense. Residential and Commercial Services increased $2,497$1,220 or 8.2% over3.1% from the third quarter 2016of 2019 but, as a percentage of revenuesrevenue, decreased .7% to 26.5%27.0% from 27.1%. IncreasesThe increase was primarily attributable to an increase in field management wages and incentive expense office support wages and benefits,which was partially offset by decreases in travel expense and employee development expenses were partially offset by a decrease in sales and marketing expense.expenses.
General and Administrative Expenses--General and administrative expenses of $14,501$19,891 decreased $420$4 from $14,921$19,895 in the third quarter 2016.of 2019. Decreases in insurancetravel and travelliving expenses and professional fees were partially offset by increasesan increase in professional servicessalary and employee developmentincentive expense.
Depreciation and Amortization Expense--Depreciation and amortization expense of $13,749 increased $984$13,825 decreased $1,494 from $12,765$15,319 incurred in the third quarter of 2016. The increase is attributable2019, primarily due to decreased capital expenditures necessary to support the businessin recent years and purchasesan increase use of businesses.operating leases for equipment.
Gain on the Sale of Assets, Net--Gain on the sale of assets of $486$476 for the third quarter 2017of 2020 decreased $1,384$106 from the $1,870$582 gain in the third quarter 2016 due to fewerof 2019. Our average sales prices on fewer units sold as compared to the third quarter 2016.
Interest Expense--Interest expense of $1,278 increased $119 from the $1,159 incurredgain per unit was lower in the third quarter 2016. Theincrease is attributable to higher interest rates and higher-average debt levels necessary to fund operations, and capital expenditures during the third quarter of 2017,2020 as compared with the third quarter of 2016.2019.
Other, Net--Other, net,Interest Expense--Interest expense of $1,416 increased $350$1,579 decreased $439 from the $1,066$2,018 incurred in the third quarter 2016of 2019.The decrease is attributable to lower interest rates during the third quarter of 2020, as compared with the third quarter of 2019.
Interest Income--Interest income of $1,688 increased $1,594 from the $94 of interest income in the third quarter of 2019.The increase is attributable to interest on PG&E pre-petition receivables which was approved by the United States Bankruptcy Court and received during the third quarter of 2020.
Other, Net--Other expense, net, of $1,499 decreased $387 from the $1,886 of other expense incurred in the third quarter of 2019 and consisted of nonoperating income and expense, including pension expense and foreign currency transaction gains/losses on the intercompany account balances of our Canadian operations.
Income Taxes--Income tax expensetaxes for the third quarter 2017 was $5,837,of 2020 were $9,483, as compared to $4,738$5,539 for the third quarter 2016.of 2019. Our tax provision for interim periods is determined using an estimate of our annual effective tax rate adjusted for discrete items, if any, that are taken into account in the relevant period. The effective tax rate as of the third quarter of 2020 was 27.8%, as compared with the third quarter of 2019 effective tax rate of 29.2%.
Net Income--Net income of $24,627 for the third quarter of 2020 was $11,193 more than the $13,434 net income for the third quarter of 2019.
First Nine Months—Nine Months Ended September 26, 2020 Compared to Nine Months Ended September 28, 2019
Our results of operations for the nine months ended September 26, 2020 compared to the nine months ended September 28, 2019 follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended |
| September 26,
2020 | | September 28,
2019 | | Change | | Percentage
Change |
| Revenues | $ | 944,980 | | | $ | 856,796 | | | $ | 88,184 | | | 10.3 | % |
| | | | | | | |
| Costs and expenses: | | | | | | | |
| Operating | 597,963 | | | 546,931 | | | 51,032 | | | 9.3 | |
| Selling | 162,287 | | | 153,854 | | | 8,433 | | | 5.5 | |
| General and administrative | 60,477 | | | 57,610 | | | 2,867 | | | 5.0 | |
| Depreciation and amortization | 42,553 | | | 44,121 | | | (1,568) | | | (3.6) | |
| Gain on sale of assets, net | (2,045) | | | (1,751) | | | (294) | | | 16.8 | |
| | 861,235 | | | 800,765 | | | 60,470 | | | 7.6 | |
| | | | | | | |
| Income from operations | 83,745 | | | 56,031 | | | 27,714 | | | 49.5 | |
| Other income (expense): | | | | | | | |
| Interest expense | (5,477) | | | (6,597) | | | 1,120 | | | (17.0) | |
| Interest income | 1,885 | | | 270 | | | 1,615 | | | 598.1 | |
| Other, net | (4,550) | | | (6,694) | | | 2,144 | | | (32.0) | |
| Income before income taxes | 75,603 | | | 43,010 | | | 32,593 | | | 75.8 | |
| | | | | | | |
| Income taxes | 21,018 | | | 10,322 | | | 10,696 | | | 103.6 | |
| | | | | | | |
| Net income | $ | 54,585 | | | $ | 32,688 | | | $ | 21,897 | | | 67.0 | % |
| | | | | | | |
Revenues--Revenues of $944,980 increased $88,184 compared with $856,796 in the first nine months of 2019. Utility Services increased $96,235 or 21.3% compared with the first nine months of 2019. The increase is attributable to new accounts, as well as increased work year-over-year and price increases on existing accounts within both our U.S. and Canadian operations. Most of our Utility Services segment work has been deemed essential services and has not been significantly affected by COVID-19. Residential and Commercial Services decreased $7,841 or 1.9% compared with the first nine months of 2019. Decreases in grounds maintenance revenue were partially offset by increases in tree and plant care revenue, storm damage revenue and consulting and other revenue. While our Residential and Commercial Services segment work was deemed essential services in most states, we experienced temporary shutdowns or work restrictions related to COVID-19 in a few states and certain Canadian provinces. Where possible, Residential and Commercial Services employees affected by a shutdown or work restrictions were reassigned to assist with Utility Services operations.
Operating Expenses--Operating expenses of $597,963 increased $51,032 compared with the first nine months of 2019 but, as a percentage of revenues, decreased to 63.2% from 63.8%. Utility Services increased $60,246 or 18.3% compared with the first nine months of 2019 but, as a percentage of revenue, decreased to 71.0% from 73.0%. The increase was attributable to increases in additional labor and benefits expense and subcontractor expense which were partially offset by a decrease in fuel expense.Residential and Commercial Services decreased $9,822 or 4.6% compared with the first nine months of 2019 and, as a percentage of revenue, decreased to 51.3% from 52.7%. The decrease was primarily attributable to decreases in fuel expense, subcontractor expense and materials expense.
Operating expenses for the period also included $3,148 of expenses related directly to COVID-19, including $1,974 for additional administrative leave offered to employees who have been unable to work due to COVID-19 imposed restrictions whether from the virus itself or government imposed restrictions or closures.
Fuel costs of $23,238 decreased $3,483, or 13.0%, from the $26,721 incurred in the first nine months of 2019 and impacted operating expenses within all segments. The $3,483 decrease included usage decreases approximating $6 and price decreases approximating $3,477.
Selling Expenses--Selling expenses of $162,287 increased $8,433 compared with the first nine months of 2019 but, as a percentage of revenue, decreased to 17.2% from 18.0%. Utility Services increased $6,390 or 11.9% compared to the first nine months of 2019 but, as a percentage of revenue, decreased to 11.0% from 11.9%. The increase was primarily attributable to additional field management wages and incentive expense, which were partially offset by a decrease in field management travel expense. Residential and Commercial Services experienced an increase of $1,620 or 1.6% compared to the first nine months of 2019 and, as a percentage of revenue, increased to 26.4% from 25.5%. The increase was attributable to increases in field management wages and incentive expense which were partially offset by a decrease in travel expense.
General and Administrative Expenses--General and administrative expenses of $60,477 increased $2,867 from $57,610 in the first nine months of 2019. The increase was primarily attributable to an increase in salary and incentive expense which were partially offset by a decrease in travel expense.
Depreciation and Amortization Expense--Depreciation and amortization expense of $42,553 decreased $1,568 from $44,121 incurred in the first nine months of 2019. The decrease was attributable to lower capital expenditures in recent years and an increased use of operating leases for equipment.
Gain on the Sale of Assets, Net--Gain on the sale of assets of $2,045 for the first nine months of 2020 increased $294 from the $1,751 gain in the first nine months of 2019. We sold more individual units of equipment during the first nine months of 2020 as compared with the first nine months of 2019.
Interest Expense--Interest expense of $5,477 decreased $1,120 from the $6,597 incurred in the first nine months of 2019.The decrease was attributable to lower interest rates during the first nine months of 2020, as compared with the first nine months of 2019.
Interest Income--Interest income of $1,885 increased $1,615 from the $270 of interest income in the first nine months of 2019.The increase is attributable to interest on PG&E pre-petition receivables which was approved by the United States Bankruptcy Court and received during the third quarter of 2020.
Other, Net--Other expense, net, of $4,550 decreased $2,144 from the $6,694 expense incurred in the first nine months of 2019 and consisted of nonoperating income and expense, including pension expense and foreign currency gains/losses on the intercompany account balances of our Canadian operations.
Income Taxes--Income taxes for the first nine months of 2020 were $21,018, as compared to $10,322 for the first nine months of 2019. Our tax provision for interim periods is determined using an estimate of our annual effective tax rate adjusted for discrete items, if any, that are taken into account in the relevant period. The effective tax rate for the three months ended September 30, 2017 is estimated to approximate 37.8%. Our annual effective tax rate for the three months ended October 1, 2016 was estimated at 39.2%.
Net Income--Net income of $10,237 for the third quarter 2017 was $2,096 more than the $8,141 experienced in the third quarter 2016.
First Nine Months—Nine Months Ended September 30, 2017 Compared to Nine Months Ended October 1, 2016
Our results of operations for the nine months ended September 30, 2017 compared to the nine months ended October 1, 2016 follows:
|
| | | | | | | | | | | | | | |
| | Nine Months Ended |
| | September 30,
2017 | | October 1,
2016 | | Change | | Percentage Change |
| Revenues | $ | 687,438 |
| | $ | 629,315 |
| | $ | 58,123 |
| | 9.2 | % |
| | | | | | | | |
| Costs and expenses: | |
| | |
| | |
| | |
|
| Operating | 442,799 |
| | 402,638 |
| | 40,161 |
| | 10.0 |
|
| Selling | 121,858 |
| | 111,717 |
| | 10,141 |
| | 9.1 |
|
| General and administrative | 46,808 |
| | 46,735 |
| | 73 |
| | .2 |
|
| Depreciation and amortization | 38,939 |
| | 36,396 |
| | 2,543 |
| | 7.0 |
|
| Gain on sale of assets, net | (2,637 | ) | | (2,379 | ) | | (258 | ) | | 10.8 |
|
| | 647,767 |
| | 595,107 |
| | 52,660 |
| | 8.8 |
|
| | | | | | | | |
| Income from operations | 39,671 |
| | 34,208 |
| | 5,463 |
| | 16.0 |
|
| Other income (expense): | |
| | |
| | |
| | |
| Interest expense | (3,607 | ) | | (3,186 | ) | | (421 | ) | | 13.2 |
|
| Interest income | 210 |
| | 190 |
| | 20 |
| | 10.5 |
|
| Other, net | (3,200 | ) | | (2,821 | ) | | (379 | ) | | 13.4 |
|
| Income before income taxes | 33,074 |
| | 28,391 |
| | 4,683 |
| | 16.5 |
|
| | | | | | | | |
| Income taxes | 12,501 |
| | 11,129 |
| | 1,372 |
| | 12.3 |
|
| | | | | | | | |
| Net income | $ | 20,573 |
| | $ | 17,262 |
| | $ | 3,311 |
| | 19.2 | % |
| | | | | | | | |
| nm--not meaningful | | | | | | | |
Revenues--Revenues of $687,438 increased $58,123 compared with $629,315 in the first nine months of 2016. Utility Services increased $33,908 or 10.7% compared with the first nine months of 2016. The increase is attributable to increased storm-related services primarily related to Hurricane Irma in the Southeast United States and increased work year-over-year on existing accounts as well as new accounts. Residential and Commercial Services increased $24,074 or 7.7% from the first nine months of 2016. Increases in tree surgery, spraying, landscaping and pest management were partially offset by decreases in snow removal and mowing revenues. Total revenues of $687,438 include production incentive revenue, recognized under the completed-performance method,of $1,021during the first nine months of 2017 compared with $1,040 during the first nine months of 2016.
Operating Expenses--Operating expenses of $442,799 increased $40,161 compared with the first nine months of 2016 and, as a percentage of revenues, increased .4% to 64.4%. Utility Services increased $26,056 or 11.0% compared with the first nine months of 2016 and, as a percentage of revenue increased .3% to 75.2%. Increases in labor expense, fuel, subcontractor expense, crew expense and insurance were partially offset by decreases in material, equipment maintenance expense and saw expense.Residential and Commercial Services increased $12,310 or 7.5% compared with the first nine months of 2016 but, as a percentage of revenue remained at 52.4%. Increases in labor expense, equipment maintenance expense, materials expense and insurance expense were partially offset by reductions in tools and parts expense.
Fuel costs of $19,471 increased $3,101, or 18.9%, from the $16,370 incurred in the first nine months of 2016 and impacted operating expenses within all segments. The $3,101 increase included price increases approximating $2,212 and usage increases approximating $889.
Selling Expenses--Selling expenses of $121,858 increased $10,141 compared with the first nine months of 2016 but, as a percentage of revenues decreased .1% to 17.7%. Utility Services increased $4,321 or 13.0% over the first nine months of 2016 and, as a percentage of revenue increased .2% to 10.7%. Increases in field management wages and incentive expense, employee development expense and communication expense were partially offset by decreases in field management travel expense and employee development expense. Residential and Commercial Services experienced an increase of $6,356 or 7.8% over the first nine months of 2016 but as a percentage of revenue remained at 26.1%. Increases in field management wages and incentive expense, communication expense and employee development expense were partially offset by decreases in computer expense and sales, promotion and marketing expenses.
General and Administrative Expenses--General and administrative expenses of $46,808 increased $73 from $46,735 in the first nine months of 2016. Increases in salary and incentive expense and professional service expense were partially offset by decreases in insurance expense.
Depreciation and Amortization Expense--Depreciation and amortization expense of $38,939 increased $2,543 from $36,396 incurred in the first nine months of 2016. The increase is attributable to higher capital expenditures necessary to support the business and purchases of businesses.
Gain on the Sale of Assets, Net--Gain on the sale of assets of $2,637 for the first nine months of 2017 increased $258 from the $2,379 gain in the first nine months of 2016due to more units sold in the first nine months of 2017 as compared with the first nine months of 2016.
Interest Expense--Interest expense of $3,607 increased $421 from the $3,186 incurred in the first nine months of 2016.The increase is attributable to higher-average debt levels necessary to fund operations, capital expenditures and purchases of businesses during the first nine months of 2017, as compared with the first nine months of 2016.
Other, Net--Other, net, of $3,200 increased $379 from the $2,821 incurred in the first nine months of 2016 and consisted of nonoperating income and expense, including foreign currency transaction gains/losses on the intercompany account balances of our Canadian operations.
Income Taxes--Income tax expense for the first nine months of 20172020 was $12,501, as compared to $11,129 for the first nine months of 2016. Our tax provision for interim periods is determined using an estimate of our annual effective tax rate adjusted for discrete items, if any, that are taken into account in the relevant period. The 2017 effective tax rate for the first nine months of 2017 is estimated to approximate 37.8%27.8%. Our effective tax rate for the first nine months of 20162019 was 39.2%24.0%. The change in the effective tax rate from statutory tax rates is primarily due to the impact of state and local taxes which are partially offset by favorable discrete items.
Net Income--Net income of $20,573$54,585 for the first nine months of 20172020 was $3,311$21,897 more than the $17,262 experienced innet income of $32,688 for the first nine months of 2016.2019.
LIQUIDITY AND CAPITAL RESOURCES
Our principal financial requirements are for capital spending, working capital and business acquisitions. Cash generated from operations, our revolving credit facility and note issuances are our primary sources of capital.
Cash Flow Summary
Our cash flows from operating, investing and financing activities for the nine months endedSeptember 30, 201726, 2020 and October 1, 2016September 28, 2019 follow:
| | | | | | | | | | | |
| Nine Months Ended |
| | September 26,
2020 | | September 28,
2019 |
| Cash provided by (used in): | | | |
| Operating activities | $ | 99,428 | | | $ | 57,214 | |
| Investing activities | (41,614) | | | (47,554) | |
| Financing activities | (43,739) | | | (18,716) | |
| Effect of exchange rate changes on cash | (17) | | | 97 | |
| Increase (decrease) in cash | $ | 14,058 | | | $ | (8,959) | |
|
| | | | | | | |
| | Nine Months Ended |
| | September 30,
2017 | | October 1,
2016 |
| Cash provided by (used in): | | | |
| Operating activities | $ | 38,429 |
| | $ | 35,543 |
|
| Investing activities | (52,448 | ) | | (49,889 | ) |
| Financing activities | 15,248 |
| | 18,492 |
|
| Increase in cash | $ | 1,229 |
| | $ | 4,146 |
|
Cash Provided By Operating Activities--Cash provided by operating activities was $38,429$99,428 for the first nine months of 2017, or $2,886 more than the $35,543 provided in2020, a $42,214 increase when compared to the first nine months of 2016.2019. The $2,886$42,214 increase in operating cash flow was primarily attributable to an increase of $2,543 in depreciation and amortization, a $3,311the increase in net income of $21,897 resulting from increased revenue and operating margins, a change of $9,698 related to accounts payable and accrued expenses, and a $729 decrease in cash provided by operating assets and liabilities, excluding accounts receivable,change of $8,472 related to self-insurance reserves partially offset by $2,362 more cash used bya change of $1,155 related to accounts receivable.
Overall, accounts receivable increased $23,135$34,801 during the first nine months of 2017,2020, as compared to thean increase of $20,773$35,956 during the first nine months of 2016.2019. With respect to the change in accounts receivable arising from business levels, the “days-sales-outstanding” in accounts receivable (sometimes referred to as “DSO”) at the end of the first nine months of 20172020 increased fiveby three days to 6272 days, aswhen compared to 69 days at the end of the first nine months of 2016. The DSO at October 1, 2016 was 57 days.2019.
Operating liabilitiesAccounts payable and accrued expenses increased $12,139$28,389 in the first nine months of 2017,2020, or $1,867$9,698 more than the $10,272$18,691 increase in the first nine months of 2016. Accounts payable and accrued expenses increased $3,754 during the first nine months of 2017 as compared with a decrease of $46 for the first nine months of 2016. Increases2019. The increase was primarily related to increases in trade payables, self insurance accruals, income taxes payable and employee compensation accruals were partially offset by decreases in advance payments from customers.payroll taxes payable. Self-insurance accrualsreserves increased $8,385$14,424 in the first nine months of 2017,2020, which was $1,933 less$8,472 more than the increase of $10,318$5,952 experienced in the first nine months of 2016.2019. The increase occurredis attributable to increased exposures within our workers'workers compensation, general liability and vehicle liability classificationslines of coverage.
As we cannot predict the duration or scope of the COVID-19 pandemic and resulted primarily from an overall increase in deductible amounts under commercial insuranceits impact on our customers and suppliers (or workforce), the self-insured risk retention.negative financial impact to our results cannot be reasonably estimated, but could be material. We are actively managing the business to maintain cash flow and we have significant liquidity. We believe that these factors will allow us to meet our anticipated funding requirements.
The change in operating assets and liabilities other, net, increased $9,644 for the first nine months of 2017 as compared with an increase of $7,048 for the first nine months of 2016, with the $2,596 net change related primarily to increases in operating supplies, prepaid expenses and a decrease in pension and post-retirement benefits.
Cash Used In Investing Activities--Cash used in investing activities for the first nine months of 20172020 was $52,448, or $2,559 more than$41,614, a $5,940 decrease when compared to the $49,889first nine months of 2019. The decrease was primarily the result of decreases in capital expenditures for equipment of $7,077, which was partially offset by an increase in expenditures for land and buildings of $1,300. Our decrease in capital expenditures is partially the result of our increased use of operating leases for equipment.
Cash Used In Financing Activities--Cash used in financing activities of $43,739 increased $25,023 during the first nine months of 2020 as compared with $18,716 of cash used during the first nine months of 2016. An increase2019. During the first nine months of 2020, our revolving credit facility, net used $32,000 in the purchase of businesses and capital expenditures for equipment, land and buildings was partially offset by an increase in proceeds from sale of assets.
Cash Provided By Financing Activities--Cash provided by financing activities of $15,248 decreased $3,244cash as compared with $28,500 used during the first nine months of 2017 as compared with $18,492 of cash provided during the first nine months of 2016. During the first nine months of 2017, our revolving credit facility provided $30,000 in cash as compared with $28,500 provided during the first nine months of 2016.2019. We use the credit facility primarily for capital expenditures, redemptions of shares and payments of notes payable related to acquisitions. PaymentsIn the first quarter of notes2020, we drew $50,000 from our revolving credit facility to provide additional liquidity as a precaution because of uncertainty resulting from COVID-19. The $50,000 was repaid during the second quarter of 2020. Notes payable used $4,610provided a net $2,285 during the first nine months of 2017, an increase2020, a decrease of $2,704$21,888 when compared to the $1,906$24,173 provided in the first nine months of 2019, including $25,000 provided by the issuance of 4.00% Senior Notes during the first nine months of 2019. Treasury share transactions (purchases and sales) used $10,791 for the first nine months of 2020, $792 more than the $11,583 used in the first nine months of 2016. Treasury share transactions (purchases and sales) used $8,244 for the first nine months of 2017, $2,109 more than the $6,135 used in the first nine months of 2016, and included $1,043 of cash received from our
common share subscriptions.2019. Dividends paid of $1,898$1,708 during the first nine months of 20172020 decreased $69$37 as compared with $1,967$1,745 paid in the first nine months of 2016.
2019.
The Company currently repurchases common shares at the shareholders’ requestrequests in accordance with the terms of the Davey 401KSOP and ESOP Plan and also repurchases common shares from time to time at the Company’s discretion. The amount of common shares offered to the Company for repurchase by the holders of shares distributed from the Davey 401KSOP and ESOP Plan is not within the control of the Company, but is at the discretion of the shareholders. The Company expects to continue to repurchase its common shares, as offered by its shareholders from time to time, at their then current fair value. However, other than for repurchases pursuant to the put option under Thethe Davey 401KSOP and ESOP Plan, as described in Note O,Q, such purchases are not required, and the Company retains the right to discontinue them at any time. Repurchases of redeemable common shares fromat the Davey 401KSOPshareholders' request approximated $5,280 and ESOP approximated $8,778 and $3,808 for$8,761 during the nine months ended September 30, 201726, 2020 and October 1, 2016,September 28, 2019, respectively. Share repurchases, other than redeemable common shares, approximated $10,734$22,209 and $11,524$16,674 during the nine months ended September 30, 2017 and October 1, 2016, respectively.
Revolving Credit Facility--As of September 30, 2017, we had a $175,000 revolving credit facility with a group of banks, which was to expire in November 2018 and permitted borrowings, as defined, up to $175,000, including a letter of credit sublimit of $100,000 and a swing-line commitment of $15,000. Under certain circumstances, the amount available under the revolving credit facility could be increased to $210,000. The revolving credit facility contained certain affirmative and negative covenants customary for this type of facility and included financial covenant ratios with respect to a maximum leverage ratio and a maximum balance-sheet leverage ratio.
As of September 30, 2017, we had unused commitments under the facility approximating$73,929, with $101,071 committed, consisting of borrowings of$97,000 and issued letters of credit of$4,071.
Borrowings outstanding bore interest, at Davey Tree’s option, of either (a) a base rate or (b) LIBOR plus a margin adjustment ranging from .75% to 1.50%--with the margin adjustments in both instances based on the Company's leverage ratio at the time of borrowing. The base rate was the greater of (i) the agent bank’s prime rate, (ii) LIBOR plus 1.50%, or (iii) the federal funds rate plus .50%. A commitment fee ranging from .10% to .25% was also required based on the average daily unborrowed commitment.
On October 6, 2017, we entered into a $250,000 Third Amended and Restated Credit Agreement (the “Credit Agreement”) with a syndicate of financial institutions as lenders and issuing banks, which replaces the $175,000 credit agreement, dated as of November 7, 2013. The Credit Agreement provides for a revolving credit commitment of $250,000, which includes a letter of credit commitment of $100,000 and a swing line commitment of $25,000. Under certain circumstances, we may increase the revolving credit commitment amount to $325,000. The commitments will expire on October 6, 2022, or such earlier date on which the commitments shall have been terminated in accordance with the provisions of the Credit Agreement. Proceeds of borrowings under the Credit Agreement may be used for working capital, capital expenditures and other general corporate purposes.
Borrowings under the Credit Agreement bear interest at a rate per annum equal to, at our election, (a) LIBOR plus a margin of .875% to 1.50% that is adjusted based on the Company's leverage ratio at the time of such borrowings or (b) the base rate. Fees payable by the Company under the Credit Agreement include a letter of credit fee (the margin applicable to LIBOR borrowings), a letter of credit fronting fee with respect to each letter of credit (.10%) and commitment fees on the average daily unused portion of the total revolving credit commitment (a range of .10% to .225%, based on the Company's leverage ratio).
The Credit Agreement contains customary events of default and restrictive covenants (subject to negotiated exceptions and baskets), including restrictions on liens, indebtedness, investments and loans, acquisitions and mergers, sales of assets, and payments of dividends and stock repurchases. In addition, during the term of the Credit Agreement, the Company is required to maintain a maximum leverage ratio (not to exceed 3.00 to 1.00,
with exceptions in case of material acquisitions) and a maximum interest coverage ratio (less than 3.00 to 1.00), in each case subject to certain further restrictions as described in the Credit Agreement.
5.09% Senior Unsecured Notes--The senior unsecured notes are due July 22,26, 2020 and were issued during July 2010 as 5.09% Senior Unsecured Notes, Series A (the "5.09% Senior Notes"), pursuant to a Master Note Purchase Agreement (the “Purchase Agreement”) between the Company and the purchasers of the 5.09% Senior Notes. September 28, 2019, respectively.
The 5.09% Senior Notes are equal in right of payment with our revolving credit facility and all other senior unsecured obligations of the Company. Interest is payable semiannually and five equal, annual principal payments commenced on July 22, 2016 (thesixth anniversary of issuance). The Purchase Agreement contains customary events of default and covenants related to limitations on indebtedness and transactions with affiliates and the maintenance of certain financial ratios.
Accounts Receivable Securitization Facility--On May 8, 2017, the Company amended its accounts receivable securitization facility to extend the scheduled termination date for an additional one-year period and increase the limit of the facility from $60,000 to $100,000.
As of September 30, 2017, we had issued letters of credit of $58,150 under the terms of the AR securitization program.
Under the AR securitization program, Davey Tree transfers by selling or contributing current and future trade receivables to a wholly-owned, bankruptcy-remote financing subsidiary which pledges a perfected first priority security interest in the trade receivables--equal to the issued letters of credit as of September 30, 2017--to the bank in exchange for the bank issuing letters of credit ("LCs").
Fees payable to the bank include: (a) an LC issuance fee, payable on each settlement date, in the amount of .90% per annum on the aggregate amount of all LCs outstanding plus outstanding reimbursement obligations (e.g., arising from drawn LCs), if any, and (b) an unused LC fee, payable monthly, equal to (i) .35% per annum for each day on which the sum of the total LCs outstanding plus any outstanding reimbursement obligations is greater than or equal to 50% of the facility limit and (ii) .45% per annum for each day on which the sum of the total LCs outstanding plus any outstanding reimbursement obligations is less than 50% of the facility limit. If an LC is drawn and the bank is not immediately reimbursed in full for the drawn amount, any outstanding reimbursement obligation will accrue interest at a per annum rate equal to a reserve-adjusted LIBOR or, in certain circumstances, a base rate equal to the higher of (i) the bank’s prime rate and (ii) the federal funds rate plus .50% and, following any default, 2.00% plus the greater of (a) adjusted LIBOR and (b) a base rate equal to the higher of (i) the bank’s prime rate and (ii) the federal funds rate plus .50%.
The agreements underlying the AR securitization program contain various customary representations and warranties, covenants, and default provisions which provide for the termination and acceleration of the commitments under the AR securitization program in circumstances including, but not limited to, failure to make payments when due, breach of a representation, warranty or covenant, certain insolvency events or failure to maintain the security interest in the trade receivables, and defaults under other material indebtedness.
Contractual Obligations Summary and Commercial Commitments
The following summarizes our long-term contractual obligations, as of September 30, 2017, to make future payments for the periods indicated: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Three Months Ending December 31, 2017 | | | | | | |
| | | | | | Year Ending December 31, | | |
| Description | | Total | | | 2018 | | 2019 | | 2020 | | 2021 | | Thereafter |
| Revolving credit facility | | $ | 97,000 |
| | $ | — |
| | $ | 97,000 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Senior unsecured notes | | 18,000 |
| | — |
| | 6,000 |
| | 6,000 |
| | 6,000 |
| | — |
| | — |
|
| Term loans | | 20,410 |
| | 14,039 |
| | 1,141 |
| | 895 |
| | 4,335 |
| | — |
| | — |
|
| Capital lease obligations | | 2,573 |
| | 685 |
| | 694 |
| | 664 |
| | 520 |
| | 10 |
| | — |
|
| Operating lease obligations | | 14,360 |
| | 1,592 |
| | 4,559 |
| | 3,380 |
| | 2,398 |
| | 1,165 |
| | 1,266 |
|
| Self-insurance accruals | | 71,223 |
| | 13,686 |
| | 18,162 |
| | 12,570 |
| | 7,828 |
| | 4,256 |
| | 14,721 |
|
| Purchase obligations | | 11,313 |
| | 11,313 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Other liabilities | | 17,319 |
| | 1,343 |
| | 1,343 |
| | 1,385 |
| | 1,965 |
| | 2,351 |
| | 8,932 |
|
| | | $ | 252,198 |
| | $ | 42,658 |
| | $ | 128,899 |
| | $ | 24,894 |
| | $ | 23,046 |
| | $ | 7,782 |
| | $ | 24,919 |
|
The self-insurance accruals in the summary above reflect the total of the undiscounted amount accrued, for which amounts estimated to be due each year may differ from actual payments required to fund claims. Purchase obligations in the summary above represent open purchase-order amounts that we anticipate will become payable for goods and services that we have negotiated for delivery as of September 30, 2017. Other liabilities include estimates of future expected funding requirements related to retirement plans and other sundry items. Because their future cash outflows are uncertain, accrued income tax liabilities for uncertain tax positions, as of September 30, 2017, have not been included in the summary above. Noncurrent deferred taxes and payments related to defined benefit pension plans are also not included in the summary.
As of September 30, 2017,26, 2020, total commitments related to issued letters of credit were $64,221,$88,242, of which $4,071$2,877 were issued under the revolving credit facility, $58,150$83,355 were issued under the AR securitizationSecuritization program, and $2,000$2,010 were issued under short-term lines of credit. As of December 31, 2016,2019, total commitments related to issued letters of creditLCs were $64,225,$81,619, of which $4,071$2,877 were issued under the revolving credit facility, $58,150$76,732 were issued under the AR securitization facility,Securitization program, and $2,004$2,010 were issued under short-term lines of credit.
Also, as is common in our industry, we have performance obligations that are supported by surety bonds, which expire during 20172020 through 2023.2023. We intend to renew the surety bonds where appropriate and as necessary.
Capital Resources
Cash generated from operations, and our revolving credit facility and note issuances are our primary sources of capital.
Business seasonality traditionally results in higher revenues during the second and third quarters as compared with the first and fourth quarters of the year, while our methods of accounting for fixed costs, such as depreciation and amortization expense, rent and interest expense, are not significantly impacted by business seasonality. Capital resources during these periods are equally affected. We satisfy
seasonal working capital needs and other financing requirements with the revolving credit facility and other short-term lines of credit. We are continually reviewing our existing sources of financing and evaluating alternatives. At September 30, 2017,26, 2020, we had working capital of $82,295,$130,781, and short-term lines of credit approximating $7,204$9,112 and $73,929$217,123 available under our revolving credit facility.
For more information regarding our outstanding debt, see Note F, Long-Term Debt and Commitments Related to Letters of Credit.
We believe our sources of capital, at this time, provide us with the financial flexibility to meet our capital-spending plans and to continue to complete business acquisitions for at least the next twelve months and for the reasonably foreseeable future.
Recent Accounting Guidance
Accounting Standards Adopted in 2017
Accounting Standards Update 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting--In March 2016, However, we cannot predict the FASB issued ASU 2016-09, “Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” with the objective to simplify several aspectsfull extent of the accounting for share-based payment transactions, including:potential impact resulting from the income tax consequences; classification of awards as either equity or liabilities; classification of certain items on the statement of cash flows; and, accounting for forfeitures. ASU 2016-09 became effective for Davey Tree on January 1, 2017 and we elected to make an accounting policy change to recognize forfeitures as they occur. The adoption impact on the consolidated condensed balance sheet was a cumulative-effect adjustment of $162, increasing opening retained earnings and decreasing additional paid-in capital.
Accounting Standards Not Yet Adopted
Accounting Standards Update 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting--In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting,” which provides guidance on which changes in the terms or conditions of a share-based payment award require modification accounting under Topic 718. Modification accounting is required for changes in terms or conditions unless the fair value, vesting condition and classification of the modified award is the same as the original award. The update is effective for annual and interim periods beginning after December 15, 2017, which for Davey Tree would be January 1, 2018. Early adoption is permitted. We do not expect the adoption of ASU 2017-09 to have a material impactCOVID-19 pandemic on our consolidated financial statements.business, results of operations and sources of capital.
Accounting Standards Update 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment--In January 2017, the FASB issued ASU 2017-04, “Intangibles-Goodwill and Other (Topic 350),” which simplifies the subsequent measurement of goodwill by eliminating Step 2 of the goodwill impairment test which required entities to fair value their assets and liabilities using procedures that would be followed in an assumed business combination to arrive at the impairment charge. Under ASU 2017-04, the goodwill impairment test is performed by comparing the fair value of the reporting unit with its carrying amount and an impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The update is effective for annual or interim periods beginning after December 15, 2019, which for Davey Tree is January 1, 2020. Early adoption is permitted for interim or annual goodwill impairment tests performed after January 1, 2017. The Company intends to early adopt ASU 2017-04 during the fourth quarter 2017 and does not expect the adoption to have a material effect on the Company’s consolidated financial statements or related disclosures.
Accounting Standards Update 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force)--In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which provides guidance on how cash receipts and cash payments related to eight specific cash flow issues are presented and classified in the statement of cash flows, with the objective of reducing the existing diversity in practice. The update is effective for annual periods beginning after December 15, 2017, which for Davey Tree would be January 1, 2018. Early adoption is permitted. We do not expect the adoption of ASU 2016-15 to have a material impact on our consolidated financial statements.
Accounting Standards Update 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost--In March 2017, the FASB issued ASU 2017-07, “Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” which changes the presentation of net periodic benefit cost related to employer sponsored defined benefit plans and other postretirement benefits. Under
ASU 2017-07, service costs will be included within the same income statement line item as other compensation costs arising from services rendered by pertinent employees during the period. The other components of net periodic benefit pension cost will be presented separately outside of income from operations. Additionally, only service costs may be capitalized in assets. ASU 2017-07 is effective for fiscal years beginning after December 15, 2017, which for Davey Tree is January 1, 2018. Management has not yet completed its assessment of the impact of the new standard on the Company’s consolidated financial statements.
Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606)--In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which will replace all current U.S. GAAP guidance on revenue recognition and eliminate all industry-specific guidance.
The new revenue recognition guidance provides a unified model to determine when and how revenue is recognized. The underlying principle is that an entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration which the entity expects to receive in exchange for those goods and services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of the time value of money in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The guidance also requires enhanced information to be presented in the financial statements regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers.
Subsequent to the issuance of ASU 2014-09, the FASB has provided additional implementation guidance updates related to ASU 2014-09, including:
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a. | ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (‘Update 2015-14’),” which responded to stakeholders’ requests to defer the effective date of the guidance in ASU 2014-09. |
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b. | ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net ) (‘Update 2016-08’),” which clarifies the implementation guidance on principal versus agent considerations.
|
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c. | ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (‘Update 2016-10’),” which clarifies multiple aspects of Topic 606. |
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d. | ASU 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (‘Update 2016-12’),” which provides clarifying guidance in a few narrow areas and adds some practical expedients to the guidance. |
The effective date and the transition requirements for the Updates are the same as the effective date of Topic 606 ASU 2015-14, which becomes effective for Davey Tree beginning with the first quarter 2018 and can be adopted either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption. Early adoption is permitted. The new revenue guidance will supersede existing revenue guidance affecting our Company, and may also affect our business processes and our information technology systems.
Management has assembled an internal project team and is analyzing contracts with our customers covering the significant streams of the Company’s annual revenues under the provisions of the new standard. The analysis of contracts with customers is time-consuming given the unique nature of the individual contracts with our customers and is expected to be completed in the near future. While the full impact of adopting the standard is not currently known, the Company currently has identified certain impacts related to the recognition of certain variable, incentive-based components of contracts related to the timing of revenue recognition. The Company is continuing to assess all other aspects of the standard and the identification of other accounting impacts is possible. The Company has evaluated the disclosure requirements under the standard and is in the process of implementing
necessary changes to our systems, policies and the related internal controls as a result. We plan to adopt ASU 2014-09 using the modified retrospective approach effective January 1, 2018.
Accounting Standards Update 2016-02, Leases (Topic 842)--In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” ASU 2016-02 establishes a comprehensive new lease accounting model. The new standard: (a) clarifies the definition of a lease; (b) requires a dual approach to lease classification similar to current lease classifications; and, (c) causes lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset for leases with a lease-term of more than twelve months. The new standard is effective for interim and annual periods beginning after December 15, 2018, which for Davey Tree would be January 1, 2019. Early adoption is permitted. The new standard requires a modified retrospective transition for capital or operating leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements, but it does not require transition accounting for leases that expire prior to the date of initial application. We are currently evaluating the impact of the new standard on our consolidated financial statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented.
As discussed in our annual report on Form 10-K/A10-K for the year ended December 31, 2016,2019, we believe that our policies related to revenue recognition, the allowance for doubtful accounts, stock valuation and self-insurance accrualsreserves are our “critical accounting policies and estimates”--those most important to the financial presentations and those that require the most difficult, subjective or complex judgments.
On an ongoing basis, we evaluate our estimates and assumptions, including those related to accounts receivable, specifically those receivables under contractual arrangements primarily with Utility customers; allowance for doubtful accounts; and self-insurance accruals.reserves. We base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. These statements relate to future events or our future financial performance. In some cases, forward-looking statements may be identified by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors that may cause our or our industry's actual results, levels of activity, performance or achievements to differ materially from what is expressed or implied in these forward-looking statements. Some important factors that could cause actual results to differ materially from those in the forward-looking statements, some of which have been, and may further be, exacerbated by the COVID-19 pandemic, include:
▪The coronavirus pandemic (COVID-19) has negatively impacted, and could have a material adverse effect on, our business, results of operations, financial position or cash flows.
▪We may be unable to attract and retain a sufficient number of qualified employees for our field operations, and we may be unable to attract and retain qualified management personnel.
▪We have significant contracts with our utility, commercial and government customers that include liability risk exposure as part of those contracts. Consequently, we have substantial excess-umbrella liability insurance, and increases in the cost of obtaining
adequate insurance, or the inadequacy of our self-insurance reserves or insurance coverages, could negatively impact our liquidity and financial condition.
▪The unavailability or cancellation of third-party insurance coverage may have a material adverse effect on our financial condition and results of operations as well as disrupt our operations.
▪We could be materially adversely affected by wildfires in California and other areas as well as other severe weather events and natural disasters, including negative impacts to our business, reputation, financial condition, results of operations, liquidity and cash flows.
▪Our business, other than tree services to utility customers, is highly seasonal and weather dependent.
▪Significant customers, particularly utilities, may experience financial difficulties, resulting in payment delays or delinquencies.
▪We are subject to litigation and third-party and governmental regulatory claims and adverse litigation judgments or settlements resulting from those claims could materially adversely affect our business.
▪Significant increases in fuel prices for extended periods of time will increase our operating expenses.
▪We are subject to intense competition.
▪Various economic factors may adversely impact our customers’ spending and pricing for our services, and impede our collection of accounts receivable.
▪The impact of regulations initiated as a response to possible changing climate conditions could have a negative effect on our results of operations or our financial condition.
Significant customers, particularly utilities, may experience financial difficulties, resulting in payment delays or delinquencies.
▪The seasonal nature of our business and changes in general and local economic conditions, among other factors, may cause our quarterly results to fluctuate, and our prior performance is not necessarily indicative of future results.
The uncertainties▪We may misjudge a competitive bid and be contractually bound to an unprofitable contract.
▪A disruption in the credit and financial markets may limit our accessinformation technology systems, including a disruption related to capital.
Significant increases in fuel prices for extended periods of time will increase our operating expenses.
Fluctuations in foreign currency exchange rates may have a material adverse impact on our operating results.
We have significant contracts with our utility, commercial and government customers that include liability risk exposure as part of those contracts. Consequently, we have substantial excess-umbrella liability insurance, and increases in the cost of obtaining adequate insurance,cybersecurity, or the inadequacyimpact of our self-insurance accruals or insurance coverages, could negatively impact our liquidity and financial condition.
Because no public market exists for our common shares, the ability of shareholders to sell their common shares is limited.
Significant increases in health care costs could negatively impact our results of operations or financial position.
We are subject to intense competition.
Our failureincurred to comply with environmental lawscybersecurity or data privacy regulations, could result in significant liabilities, fines and/or penalties.
The impact of regulations initiated as a response to possible changing climate conditions could have a negative effect on our results of operations oradversely affect our financial condition.performance.
We may encounter difficulties obtaining surety bonds or letters of credit necessary to support our operations.
▪We are dependent, in part, on our reputation of quality, integrity and performance. If our reputation is damaged, we may be adversely affected.
▪Because no public market exists for our common shares, the ability of shareholders to sell their common shares is limited.
▪Our failure to comply with environmental laws could result in significant liabilities, fines and/or penalties.
▪We may be unableencounter difficulties obtaining surety bonds or letters of credit necessary to attractsupport our operations.
▪The uncertainties in the credit and retainfinancial markets, including the negative impact of COVID-19, may limit our access to capital.
▪Fluctuations in foreign currency exchange rates may have a sufficient numbermaterial adverse impact on our operating results.
▪Significant increases in health care costs could negatively impact our results of qualified employees for our field operations and we may be unable to attract and retain qualified management personnel.or financial position.
▪Our facilities could be damaged or our operations could be disrupted, or our customers or vendors may be adversely affected, by events such as natural disasters, pandemics, such as COVID-19, terrorist attacks or other external events.
A disruption in▪Our inability to properly verify the employment eligibility of our information technology systems, including a disruption related to cybersecurity,employees could adversely affect our financial performance.
We may be subject to third-party and governmental regulatory claims and litigation that may have an adverse effect on us.
We may misjudge a competitive bid and be contractually bound to an unprofitable contract.
We may encounter difficulties maintaining effective disclosure controls and procedures.
business.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after the date of this quarterly report on Form 10-Q to conform these statements to actual future results.
The factors described above, as well as other factors that may adversely impact our actual results, are discussed in "Part III - Item 1A. Risk Factors." of our annual report on Form 10-K for the year ended December 31, 2019, as well as in "Part II-Item 1. Risk Factors" of this quarterly report on Form 10-Q and in our annual report on Form 10-K/A for the year ended December 31, 2016 in “Part I - Item 1A. Risk Factors.”
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Item 3. | Quantitative and Qualitative Disclosures about Market Risk. |
Item 3.Quantitative and Qualitative Disclosures about Market Risk.
DuringWith the quarter ended September 30, 2017,exception of the impacts of COVID-19, which are discussed elsewhere in this document, there have been no material changes in our reported market risks or risk management policies since the market risk previously presented infiling of our annual report2019 Annual Report on Form 10-K, forwhich was filed with the year ended December 31, 2016.Securities and Exchange Commission on March 9, 2020.
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Item 4. | Controls and Procedures. |
Item 4.Controls and Procedures.
(a) Management’s Evaluation of Disclosure Controls and Procedures
UnderAs of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that due to the material weakness described below, the design and operation of our disclosure controls and procedures were not effective at the reasonable assurance level as of the end of the period covered by this Form 10-Qreport in ensuring that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Based upon our initial evaluation, our management concluded that our internal control over financial reporting was effective as of July 1, 2017. Subsequent to filing previously issued quarterly reports on Form 10-Q, including April 1, 2017 and July 1, 2017 financial statements, an error was discovered related to the classification of shares of the Company’s common stock held by the Davey 401KSOP and ESOP Plan which were historically classified as permanent equity rather than temporary equity in the mezzanine section of the balance sheet. This error resulted in a material misstatement of the financial statements and required restatement of the financial statements included in the Company’s Form 10-K for the year ended December 31, 2016 as well as the financial statements included in the Company's Form 10-Q's for the quarters ended April 1, 2017 and July 1, 2017. This error, which was not detected timely by management, was the result of inadequate design, as well as insufficient operating effectiveness, of the control pertaining to the Company’s review of redemption provisions and associated fair value and classification of the common shares held by the Davey 401KSOP and ESOP (the Plan) as well as shares distributed from the Plan, which remain subject to redemption. The deficiency is considered to be indicative of a material weakness in our internal control over financial reporting. The material weakness continued to exist as of September 30, 2017.
(b) Changes in Internal Control over Financial Reporting
WeIn response to the COVID-19 pandemic, we have begun to enhance our controls and proceduresrequired certain employees, some of whom are involved in an effort to remediate the material weakness discussed above, including improving the precisionoperation of our review controls relatinginternal control over financial reporting, to the redemption provisions and associated fair value and classification of our common shares related to the Plan. We expect to fully remediate the above mentioned material weakness before the end of the fiscal year ending December 31, 2017. There werework from home. Despite working remotely, there have been no changes in our internal control over financial reporting during the fourthfiscal quarter 2016ended September 26, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We continue to evaluate the effectiveness of our disclosure controls and procedures and our internal control over financial reporting on an ongoing basis and take action as appropriate.
The Davey Tree Expert Company
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Part II. | Part II. Other Information |
Items 1, 3, 4 and 5 are not applicable.
Item 1. Legal Proceedings.
We are party to a number of lawsuits, threatened lawsuits and other claims arising out of the normal course of business. On a quarterly basis, we assess our liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information available. Where it is probable that we will incur a loss and the amount of the loss can be reasonably estimated, we record a liability in our consolidated financial statements. These legal accruals may be increased or decreased to reflect any relevant developments on a quarterly basis. Where a loss is not probable or the amount of the loss is not estimable, we do not record a legal accrual, consistent with applicable accounting guidance. Based on information currently available to us, advice of counsel, and available insurance coverage, we believe that our established accruals are adequate and the liabilities arising from the legal proceedings will not have a material adverse effect on our consolidated financial condition. We note, however, that in light of the inherent uncertainty in legal proceedings there can be no assurance that the ultimate resolution of a matter will not exceed established accruals. As a result, the outcome of a particular matter or a combination
of matters may be material to our results of operations for a particular period, depending upon the size of the loss or our income for that particular period.
In November 2017, a suit was filed in Savannah, Georgia state court (“State Court”) against Davey Tree, its subsidiary, Wolf Tree, Inc. ("Wolf Tree"), a former Davey employee, two Wolf Tree employees, and a former Wolf Tree employee alleging various acts of negligence and seeking compensatory and punitive damages for wrongful death and assault and battery of the plaintiff’s husband, a Wolf Tree employee, who was shot and killed in August 2017.
In July 2018, a related survival action was filed by the deceased’s estate against Davey Tree, its subsidiary, Wolf Tree, and four current and former employees in Savannah, Georgia, which arises out of the same allegations, seeks compensatory and punitive damages and also includes three Racketeer Influenced and Corrupt Organizations Act ("RICO") claims under Georgia law seeking compensatory damages, treble damages, and punitive damages. The 2018 case was removed to the United States District Court for the Southern District of Georgia, Savannah Division (“Federal Court”), on August 2, 2018. The Company filed a motion to dismiss the RICO claims. Plaintiffs filed a motion to remand the case to state court, which the Company has opposed.
The cases were mediated unsuccessfully in December 2018 and the State Court case was originally set for trial on January 22, 2019. However, as discussed below, all of the civil cases were later stayed on December 28, 2018 and currently remain stayed.
On December 6, 2018, a former Wolf Tree employee pled guilty to conspiracy to conceal, harbor, and shield illegal aliens. On December 21, 2018, the United States federal prosecutors filed a motion to stay both actions on the grounds that on December 13, 2018, an indictment was issued charging two former Wolf Tree employees and one other individual with various crimes, including conspiracy to murder the deceased. On December 17, 2018, the United States Attorney’s Office for the Southern District of Georgia informed the Company and Wolf Tree that they are also under investigation for potential violations of immigration and other laws relating to the subject matter of the ongoing criminal investigation referenced above. The Company and Wolf Tree are cooperating with the investigation.
On December 28, 2018, the State Court granted the United States’ motion to stay but indicated that it would nonetheless consider certain pending matters, including: (1) Plaintiff and a co-defendant’s motions that Davey Tree be forced to produce privileged documents and testimony, which had been submitted to a Special Master for recommendation; and (2) the Defendants’ motions for summary judgment. On January 11, 2019, the Special Master issued his recommendation that both Plaintiff and the co-defendant’s motions to force Davey to disclose privileged information be denied. The State Court judge has not yet moved on the recommendation. On January 29, 2019, the State Court heard oral argument on Defendants’ motions for summary judgment, and the motions remain pending during the stay of the cases.
On January 28, 2019, the Federal Court also granted the United States’ motion to stay. On January 29, 2019, the State Court ordered the parties to return to mediation, which occurred on April 17, 2019 but was unsuccessful in resolving the matters.
In both cases, the Company has denied all liability and is vigorously defending the action. It also has retained separate counsel for some of the individual defendants, each of whom has denied all liability and also is vigorously defending the action.
Item 1A.Risk Factors.
TheOur Annual Report on Form 10-K for the year ended December 31, 2019, includes a detailed discussion of our risk factors. There have been no material changes to the risk factors as previously disclosed other than as described below representbelow. However, some of the principal risks we face. Except as otherwise indicated, theserisk factors may or may not occur
disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019 have been, and we are not in a positionexpect will continue to express a view onfurther be, exacerbated by the likelihoodimpact of any such factor occurring. Other factors may exist that we do not consider to be significant based on information that is currently available or that we are not currently able to anticipate.the COVID-19 pandemic.
Our business, is highly seasonalresults of operations, financial position or cash flow could in the future be materially adversely impacted by the coronavirus pandemic (COVID-19).
The global spread of the coronavirus pandemic (COVID-19) has created significant volatility and weather dependent.
Ouruncertainty and economic disruption. The extent to which COVID-19 impacts our business, other than tree servicesoperations and financial results will depend on numerous evolving factors that we may not be able to utility customers, is highly seasonalaccurately predict including: the duration and weather dependent, primarily duescope of the pandemic, including the current resurgence of cases in the United States and potential challenges caused by the colder winter months, including the onset of the cold and flu season; the impact of the pandemic on economic activity, including the possibility that any future recovery from the COVID-19 pandemic and related impact may also be slowed or reversed by a number of factors, including new or additional resurgences in COVID-19 infections; government imposed restrictions in response to fluctuationsthe pandemic, including the temporary shutdowns and work restrictions related to COVID-19 in horticultural services provided toa few states and certain Canadian provinces impacting our Residential and Commercial customers. We have historically incurred lossesServices segment and the possibility that previously-lifted restrictions will be reimposed, or additional restrictions put in place; the first quarter, while revenueeffect on our customers and operating income are generally highest in the second and third quarters of the calendar year. Inclement weather, such as uncharacteristically low or high (drought) temperatures, in the second and third quarters could dampen thetheir demand for our horticultural services, resulting in reduced revenues that would have an adverse effect on our results of operations.
Economic conditions may adversely impact our customers’ future spending as well as pricingservices; and payment for our services, thus negatively impacting our operations and growth.
Various economic factors may adversely impact the demand for our services and potentially result in depressed prices for our services and the delay or cancellation of projects. That may make it difficult to estimate our customers' requirements for our services and, therefore, add uncertainty to customer demand. Various economic factors and customers' confidence in future economic conditions may cause a reduction in our customers' spending for our services and may also impact the ability of our customers to pay amounts owed,for our services. Clients may slow down decision making, delay planned work or seek to terminate existing agreements. The degree of impact of COVID-19 on our customer sales demand will depend on the extent and duration of the economic contraction.
We have taken steps to support our employees and protect their health and safety, while also ensuring that our business can continue to operate and provide services to our customers. Where possible, we have transitioned our employees to work from home and implemented measures to ensure social distancing when providing services to our customers. The resources available to employees working remotely may not enable them to maintain the same level of productivity and efficiency, and these and other employees may face additional demands on their time, such as increased responsibilities resulting from school closures or the illness of family members. Our increased reliance on remote access to our information systems could also increase our exposure to potential data breaches. There is no certainty that such measures will be sufficient to mitigate the risks posed by COVID-19, in which case our employees may become sick, our ability to perform critical functions could reducebe harmed, and our cash flowbusiness and adversely impact our debt or equity financing. These eventsoperations could be negatively impacted.
While COVID-19 did not have a material adverse effect on our operations and our abilityreported results for the first nine months of 2020, due to grow at historical levels.
Financial difficulties or the bankruptcy of one or more of our major customers could adversely affect our results.
Our ability to collect our accounts receivable and future sales depends,inherent uncertainty surrounding COVID-19 given its continual evolution, such as the current resurgence in part, on the financial strength of our customers. We grant credit, generally without collateral, to our customers. Consequently,cases, we are subjectunable to credit risk related to changes in business and economic factors throughoutpredict the United States and Canada. In the event customers experience financial difficulty, and particularly if bankruptcy results, our profitabilityultimate impact that it may be adversely impacted by our failure to collect our accounts receivable in excess of our estimated allowance for uncollectible accounts. Additionally, our future revenues could be reduced by the loss of a customer due to bankruptcy. Our failure to collect accounts receivable and/or the loss of one or more major customers could have an adverse effect on our net incomebusiness, including how it will impact our customers, employees, supply chain and financial condition.
Our business is dependent upon service to our utility customersliquidity. The situation surrounding COVID-19 remains fluid, and we may be affected by developments in the utility industry.
We derive approximately 51% of our total annual revenues from our Utility segment, including approximately 12% of our total annual revenues from Pacific Gas & Electric Company. Significant adverse developments in the utility industry generally, or specificallypotential for our major utility customers, could result in pressure to reduce costs by utility industry service providers (such as us), delays in payments of our accounts receivable, or increases in uncollectible accounts receivable, among other things. As a result, such developments could have an adverse effect on our results of operations.
Our quarterly results may fluctuate.
We have experienced and expect to continue to experience quarterly variations in revenues and operating income as a result of many factors, including:
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▪ | the seasonality of our business; |
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▪ | the timing and volume of customers' projects; |
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▪ | budgetary spending patterns of customers; |
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▪ | the commencement or termination of service agreements; |
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▪ | costs incurred to support growth internally or through acquisitions; |
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▪ | changes in our mix of customers, contracts and business activities; |
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▪ | fluctuations in insurance expense due to changes in claims experience and actuarial assumptions; and |
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▪ | general and local economic conditions. |
Accordingly, our operating results in any particular quarter may not be indicative of the results that you can expect for any other quarter or for the entire year.
We may not have access to capital in the future due to uncertainties in the financial and credit markets.
We may need new or additional financing in the future to conduct our operations, expand our business or refinance existing indebtedness. Future changes in the general economic conditions and/or financial markets in the United States or globally could affect adversely our ability to raise capital on favorable terms or at all. From time-to-time we have relied, and may also rely in the future, on access to financial markets as a source of liquidity for working capital requirements, acquisitions and general corporate purposes. Our access to funds under our revolving credit facility is dependent on the ability of the financial institutions that are parties to the facility to meet their funding commitments. Those financial institutions may not be able to meet their funding commitments if they experience shortages of capital and liquidity or if they experience excessive volumes of borrowing requests within a short period of time. Economic disruptions and any resulting limitations on future funding, including any restrictions on access to funds under our revolving credit facility, could have a material adverse effect on us.
We are subject to the risk of changes in fuel costs.
The cost of fuel is a major operating expense of our business. Significant increases in fuel prices for extended periods of time will cause our operating expenses to fluctuate. An increase in cost with partial or no corresponding compensation from customers would lead to lower margins that would have an adverse effect on our results of operations.
We are subject to the effect of foreign currency exchange rate fluctuations, which may have a material adverse impact on us.
We are exposed to foreign currency exchange rate risk resulting from our operations in Canada, where we provide a comprehensive range of horticultural services. Fluctuations in foreign currency exchange rates may make our services more expensive for others to purchase or increase our operating costs, affecting our competitiveness and our profitability. Our financial results could be affected by factors such as changes in the foreign currency exchange rate or differing economic conditions in the Canadian markets as compared with the markets for our services in the United States. Our earnings are affected by translation exposures from currency fluctuations in the value of the U.S. dollar as compared to the Canadian dollar.
Revenues from customers in Canada are subject to foreign currency exchange. Thus, certain revenues and expenses have been, and are expected to be, subject to the effect of foreign currency fluctuations, and these fluctuations may have a material adverse impact on our operating results, asset valuesbusiness increases the longer the coronavirus impacts the level of economic activity in the U.S. and could reduce shareholders’ equity. In addition, ifglobally. Even after the COVID-19 pandemic has subsided, we expandmay experience an impact to our Canadian operations, exposures to gains and losses on foreign currency transactions may increase.
We could be negatively impacted if our self-insurance accruals or our insurance coverages prove to be inadequate.
We are generally self-insured for losses and liabilities related to workers' compensation, vehicle liability and general liability claims (including any wildfire-related claims, up to certain retained coverage limits). A liability for unpaid claims and associated expenses, including incurred but not reported losses, is actuarially determined
and reflected in our consolidated balance sheet as an accrued liability. The determination of such claims and expenses, and the extent of the need for accrued liabilities, are continually reviewed and updated. If we were to experience insurance claims or costs above our estimates and were unable to offset such increases with earnings, our business could be adversely affected. Also, where we self-insure, a deterioration in claims management, whether by our management or by a third-party claims administrator, could lead to delays in settling claims, thereby increasing claim costs, particularly as it relates to workers’ compensation. In addition, catastrophic uninsured claims filed against us or the inability of our insurance carriers to pay otherwise-insured claims would have an adverse effect on our financial condition.
Furthermore, many customers, particularly utilities, prefer to do business with contractors with significant financial resources, who can provide substantial insurance coverage. Should we be unable to renew our excess liability insurance and other commercial insurance policies at competitive rates, this loss would have an adverse effect on our financial condition and results of operations.
Increases in our health insurance costs and uncertainty about federal health care policies could adversely affect our results of operations and cash flows.
The costs of employee health care insurance have been increasing in recent years due to rising health care costs, legislative changes, and general economic conditions. We cannot predict what other health care programs and regulations will ultimately be implemented at the federal or state level or the effect of any future legislation or regulations on our business, results of operations and cash flows. In addition, we cannot predict when and if Congress will repeal and/or replace certain health care programs and regulations at the federal level and the impact that such changes would have on our business. A continued increase in health care costs or additional costs incurred as a result of the Patient Protectioncurrent economic recession and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010any economic downturn or other future health care reform laws imposed by Congress or state legislatures could have a negative impact on our financial position, results of operations and cash flows.
The unavailability or cancellation of third-party insurance coveragerecession that may have a material adverse effect on our financial condition and results of operations as well as disrupt our operations.
Any of our existing excess insurance coverage may not be renewed upon the expiration of the coverage period or future coverage may not be available at competitive rates for the required limits. In addition, our third-party insurers could fail, suddenly cancel our coverage or otherwise be unable to provide us with adequate insurance coverage. If any of these events occur they may have a material adverse effect on our financial condition and results of operations as well as disrupt our operations. For example, we have operations in California, which has an environment prone to wildfires. Should our third-party insurers determine to exclude coverage for wildfires in the future, we could be exposed to significant liabilities, having a material adverse effect on our financial condition and results of operations and potentially disrupting our California operations.
Because no public market exists for our common shares, your ability to sell your common shares may be limited.
Our common shares are not traded on any national exchange, market system or over-the-counter bulletin board. Because no public market exists for our common shares, your ability to sell these shares is limited.
We are subject to intense competition.
We believe that each aspect of our business is highly competitive. Principal methods of competition in our operating segments are customer service, marketing, image, performance and reputation. Pricing is not always a critical factor in a customer’s decision with respect to our Residential and Commercial segment; however, pricing is generally the principal method of competition for our Utility segment, although in most instances consideration is given to reputation and past production performance. On a national level, our competition is primarily landscape construction and maintenance companies as well as residential and commercial lawn care companies. At a local and regional level, our competition comes mainly from small, local companies which are engaged
primarily in tree care and lawn services. Our Utility segment competes principally with one major national competitor, as well as several smaller regional firms. Furthermore, competitors may have lower costs because privately-owned companies operating in a limited geographic area may have significantly lower labor and overhead costs. Our competitors may develop the expertise, experience and resources to provide services that are superior in both price and quality to our services. These strong competitive pressures could inhibit our success in bidding for profitable business and may have a material adverse effect on our business, financial condition and results of operations.
Our failure to comply with environmental laws could result in significant liabilities.
Our facilities and operations are subject to governmental regulations designed to protect the environment, particularly with respect to our services regarding insect and tree, shrub and lawn disease management, because these services involve to a considerable degree the blending and application of spray materials, which require formal licensing in most areas. Continual changes in environmental laws, regulations and licensing requirements, environmental conditions, environmental awareness, technology and social attitudes make it necessary for us to maintain a high degree of awareness of the impact such changes have on our compliance programs and the market for our services. We are subject to existing federal, state and local laws, regulations and licensing requirements regulating the use of materials in our spraying operations as well as certain other aspects of our business. If we fail to comply with such laws, regulations or licensing requirements, we may become subject to significant liabilities, fines and/or penalties, which could adversely affect our financial condition and results of operations.
We cannot predict the impact that the policies regarding changing climate conditions, including legal, regulatory and social responses thereto, may have on our business.
Many scientists, environmentalists, international organizations, political activists, regulators and other commentators believe that global climate change has added, and will continue to add, to the unpredictability, frequency and severity of natural disasters in certain parts of the world. In response, a number of legal and regulatory measures and social initiatives have been introduced in an effort to reduce greenhouse gas and other carbon emissions that these parties believe may be contributors to global climate change. These proposals, if enacted, could result in a variety of regulatory programs, including potential new regulations, additional charges and taxes to fund energy efficiency activities, or other regulatory actions. Any of these actions could result in increased costs associated with our operations and impact the prices we charge our customers.
We cannot predict the impact, if any, that changing climate conditions will have on us or our customers. However, it is possible that the legal, regulatory and social responses to real or perceived climate change could have a negative effect on our results of operations or our financial condition.
We may be adversely affected if we are unable to obtain necessary surety bonds or letters of credit.
Surety market conditions are currently difficult as a result of significant losses incurred by many sureties in recent years, both in the construction industry as well as in certain larger corporate bankruptcies. As a result, less bonding capacity is available in the market and terms have become more expensive and restrictive. Further, under standard terms in the surety market, sureties issue or continue bonds on a project-by-project basis and can decline to issue bonds at any time or require the posting of collateral as a condition to issuing or renewing any bonds. If surety providers were to limit or eliminate our access to bonding, we would need to post other forms of collateral for project performance, such as letters of credit or cash. We may be unable to secure sufficient letters of credit on acceptable terms, or at all. Accordingly, if we were to experience an interruption or reduction in the availability of bonding capacity, our liquidity may be adversely affected.
We may be adversely affected if our reputation is damaged.
We are dependent, in part, upon our reputation of quality, integrity and performance. If our reputation were damaged in some way, it may impact our ability to grow or maintain our business.
We may be unable to employ a sufficient workforce for our field operations.
Our industry operates in an environment that requires heavy manual labor. We may experience slower growth in the labor force for this type of work than in the past. As a result, we may experience labor shortages or the need to pay more to attract and retain qualified employees.
We may be unable to attract and retain skilled management.
Our success depends, in part, on our ability to attract and retain key managers. Competition for the best people can be intense and we may not be able to promote, hire or retain skilled managers. The loss of services of one or more of our key managers could have a material adverse impact on our business because of the loss of the manager's skills, knowledge of our industry and years of industry experience, and the difficulty of promptly finding qualified replacement personnel.
Natural disasters, pandemics, terrorist attacks and other external events could adversely affect our business.
Natural disasters, pandemics, terrorist attacks and other adverse external events could materially damage our facilities or disrupt our operations, or damage the facilities or disrupt the operations of our customers or vendors. The occurrence of any such event could adversely affect our business, financial condition and results of operations.
A disruption in our information technology systems, including a disruption related to cybersecurity, could adversely affect our financial performance.
We rely on the accuracy, capacity and security of our information technology systems. Despite the security measures that we have implemented, including those measures related to cybersecurity, our systems could be breached or damaged by computer viruses, natural or man-made incidents or disasters or unauthorized physical or electronic access. A breach could result in business disruption, theft of our intellectual property, trade secrets or customer information and unauthorized access to personnel information. To the extent that our business is interrupted or data is lost, destroyed or inappropriately used or disclosed, such disruptions could adversely affect our competitive position, reputation, relationships with our customers, financial condition, operating results and cash flows. In addition, we may be required to incur significant costs to protect against the damage caused by these disruptions or security breaches in the future.
We may be subject to third-party and governmental regulatory claims and litigation.
From time-to-time, customers, vendors, employees, governmental regulatory authorities and others may make claims and take legal action against us. Whether these claims and legal actions are founded or unfounded, if such claims and legal actions are not resolved in our favor, they may result in significant financial liability. Any such financial liability could have a material adverse effect on our financial condition and results of operations. Any such claims and legal actions may also require significant management attention and may detract from management's focus on our operations.
We may be adversely affected if we enter into a major unprofitable contract.
Our Residential and Commercial segment and our Utility segment frequently operate in a competitive bid contract environment. As a result, we may misjudge a bid and be contractually bound to an unprofitable contract, which could adversely affect our results of operations.
We have identified a material weakness in our internal control over financial reporting that resulted in the restatement of certain of our financial statements.
We are restating our consolidated financial statements for the fiscal year ended December 31, 2016 and for the first and second quarterly periods of 2017 to correct an accounting error in the method historically used by the
Company to classify shares of the Company’s common stock held by The Davey 401KSOP and ESOP Plan on the Company’s consolidated balance sheet. For a discussion of this error and the related adjustment, see Note B to the Consolidated Financial Statements of the Company included in this report. In connection with this restatement, we have identified a material weakness in our internal controls over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. As a result of the material weakness, management has concluded that we did not maintain effective internal control over financial reporting or effective disclosure controls and procedures as of December 31, 2016. The material weakness continued to exist as of April 1, 2017, July 1, 2017 and September 30, 2017.
As further described in Part I, Item 4 “Controls and Procedures,” we have undertaken steps to remediate our internal control over financial reporting. If we are unable to successfully remediate our existing or any future material weaknesses in our internal control over financial reporting, the accuracy and timing of our financial reporting may be adversely affected, our liquidity, access to capital and perceptions of our creditworthiness may be adversely affected, we may be unable to maintain compliance with securities law and debt instruments regarding the timely filing of periodic reports, we may be subject to regulatory investigations and penalties, we may suffer defaults under our debt instruments, and the valuation of our shares may be impacted.
As a result of the restatement and the remediation of our ineffective disclosure controls and procedures and material weakness in our internal control over financial reporting, we have become subject to additional costs and risks, including costs for accounting and legal fees. In addition, the attention of our management team has been diverted by these efforts. We could also be subject to regulatory, shareholder or other actions in connection with the restatement, which would, regardless of the outcome, consume management’s time and attention and may result in additional legal, accounting and other costs. In addition, the restatement and related matters could impair our reputation and could cause our customers, lenders, employees, shareholders, insurers, vendors, and other counterparties to lose confidence in us. Each of these occurrences could have an adverse effect on our business, results of operations, and financial condition.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table provides information on purchases of our common shares outstanding made by us during the first nine months of 2017. The numbers in the following table have been adjusted for a two-for-one stock split, effected in the form of a 100% stock dividend paid on June 15, 2017 to shareholders of record at the close of business on June 1, 2017.2020.
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| | | | | | | | | | | |
| Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs |
| Fiscal 2017 | | | | | | | | |
| January 1 to January 28 | | 610 |
| | $ | 16.95 |
| | n/a | | n/a |
| January 29 to February 25 | | 548 |
| | 16.95 |
| | n/a | | n/a |
| February 26 to April 1 | | 117,878 |
| | 17.60 |
| | n/a | | n/a |
| Total First Quarter | | 119,036 |
| | 17.59 |
| | | | |
| | | | | | | | | |
| April 2 to April 29 | | 270,158 |
| | 17.60 |
| | n/a | | n/a |
| April 30 to May 27 | | 434,290 |
| | 17.60 |
| | — | | 200,000 |
| May 28 to July 1 | | 118,551 |
| | 17.60 |
| | — | | 200,000 |
| Total Second Quarter | | 822,999 |
| | 17.60 |
| | | | |
| | | | | | | | | |
| July 2 to July 29 | | 550 |
| | 17.60 |
| | — | | 200,000 |
| July 30 to August 26 | | 72,969 |
| | 18.30 |
| | — | | 200,000 |
| August 27 to September 30 | | 64,237 |
| | 18.30 |
| | — | | 200,000 |
| Total Third Quarter | | 137,756 |
| | 18.30 |
| | | | |
| | | | | | | | | |
| Total Year-to-Date | | 1,079,791 |
| | $ | 17.69 |
| | | | |
| | | | | | | | | |
| n/a--Not applicable. There are no publicly announced plans or programs to purchase common shares. |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Total
Number of
Shares
Purchased | | Average
Price
Paid per
Share | | Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs | | Maximum Number of
Shares that
May Yet Be Purchased
Under the Plans or
Programs |
| Fiscal 2020 | | | | | | | | |
| January 1 to January 25 | | 1,005 | | | $ | 22.60 | | | — | | 866,570 |
| January 26 to February 22 | | 645 | | | 22.60 | | | — | | 866,570 |
| February 23 to March 28 | | 331,652 | | | 24.20 | | | — | | 866,570 |
| Total First Quarter | | 333,302 | | | 24.19 | | | — | | |
| | | | | | | | |
| March 29 to April 25 | | 297,079 | | | 24.20 | | | — | | 866,570 |
| April 26 to May 23 | | 251,981 | | | 24.20 | | | — | | 866,570 |
| May 24 to June 27 | | 110,488 | | | 24.20 | | | — | | 866,570 |
| Total Second Quarter | | 659,548 | | | 24.20 | | | — | | |
| | | | | | | | |
| June 28 to July 25 | | 1,128 | | | 24.20 | | | — | | 866,570 |
| July 26 to August 22 | | 51,039 | | | 24.90 | | | — | | 866,570 |
| August 23 to September 26 | | 87,434 | | | 24.90 | | | — | | 866,570 |
| Total Third Quarter | | 139,601 | | | 24.89 | | | — | | |
| | | | | | | | |
| Total Year-to-Date | | 1,132,451 | | | $ | 24.28 | | | — | | |
Our common shares are not listed or traded on an established public trading market and market prices are, therefore, not available. Semiannually, for purposes of the Davey 401KSOP and ESOP, the fair market value of our common shares is determined by an independent stock valuation firm, based upon our performance and financial condition, using a peer group of comparable companies selected by that firm. The peer group currently consists of: ABM Industries Incorporated; Comfort Systems USA, Inc.; Dycom Industries, Inc.; FirstService Corporation; MYR Group, Inc.; Quanta Services, Inc.; Rollins, Inc.; and Scotts Miracle-Gro Company. The semiannual valuations are effective for a period of six months and the per-share price established by those valuations is the price at which our Board of Directors has determined our common shares will be bought and sold during that six-month period in transactions involving Davey Tree or one of its employee benefit or stock purchase plans. Since 1979, we have provided a ready market for all shareholders through our direct purchase of their common shares, although we are under no obligation to do so (other than for repurchases pursuant to the put option under The Davey 401KSOP and ESOP Plan, as described in Note O,Q, The Davey 401KSOP and Employee Stock Ownership Plan). The purchases described above were added to our treasury stock.
At the Annual Meeting of Shareholders of the Company held on May 16, 2017, the shareholders of the Company approved proposals to amend the Company's Articles of Incorporation to (i) expand the Company's current right
of first refusal with respect to proposed transfers of shares of the Company's common shares, (ii) clarify provisions regarding when the Company may provide notice of its decision to exercise its right of first refusal with respect to proposed transfers of common shares by the estate or personal representative of a deceased shareholder, and (iii) grant the Company a right to repurchase common shares held by certain shareholders of the Company.
On May 10, 2017, the Board of Directors of the Company adopted a policy regarding the Company's exercise of the repurchase rightrights granted to the Company through amendments to the Company's Articles of Incorporation, as approved by shareholders on May 16, 2017.
Until further action by the Board, it will beis the policy of the Company not to exercise its repurchase rights under the amended Articles with respect to shares of the Company's common shares held by current and retired employees and current and former directors of the Company (subject to exceptions set forth in the policy) (collectively, "Active Shareholders"), their spouses, their first-generation descendants and trusts established exclusively for their benefit.
Until further action by the Board, it willis also be the policy of the Company not to exercise its rights under the amended Articles to repurchase shares of the Company's common shares proposed to be transferred by an Active Shareholder to his or her spouse, a first-generation descendant, or a trust established exclusively for the benefit of one or more of an Active Shareholder, his or her spouse and first-generation descendants of an Active Shareholder, or upon the death of an Active Shareholder, such transfers from the estate or personal representative of a deceased Active Shareholder. The Board may suspend, change or discontinue the policy at any time without prior notice.
On May 17, 2017, inIn accordance with the amendments to the Articles approved by the Company's shareholders at the 2017 Annual Meeting, on May 17, 2017, the Company's Board of Directors authorized the Company to repurchase up to 100,000200,000 common shares, (200,000which authorization was increased by an additional 1,000,000 common shares on a post-split basis).in May 2018. Of the 1,200,000 total shares authorized, 866,570 remain available under the program. Share repurchases may be made from time to time and the timing of any repurchases and the actual number of shares repurchased will depend on a variety of factors. The Company is not obligated to purchase any shares, and repurchases may be commenced, suspended or discontinued formfrom time otto time without prior notice. The repurchase program does not have an expiration date.
Item 6.Exhibits.
See Exhibit Index page below.
Exhibit Index
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| Exhibit No. | Description | | | |
| | | |
Exhibit No. | Description | | |
| | | |
| | | Filed Herewith |
| | | |
| Third Amended and Restated Credit Agreement among The Davey Tree Expert Company, as borrower, various lending institutions party thereto, as banks, KeyBank National Association, as lead arranger, syndication agent and administrative agent, and PNC Bank, National Association and Wells Fargo Bank, N.A., as co-documentation agents, dated as of October 6, 2017 (Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on October 12, 2017). | | |
| | | |
| | | Filed Herewith | |
| | | | |
| | | Filed Herewith | |
| | | | |
| | | Furnished Herewith | |
| | | | |
| | | Furnished Herewith | |
| | | | |
| 101 | The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2017,26, 2020, formatted in XBRL (eXtensibleiXBRL (inline eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets (unaudited), (ii) the Condensed Consolidated Statements of Operations (unaudited), (iii) the Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited), (iv) the Condensed Consolidated Statements of Shareholders' Equity (unaudited), (v) the Condensed Consolidated Statements of Cash Flows (unaudited), and (v)(vi) Notes to Condensed Consolidated Financial Statements (unaudited). The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. | | Filed Herewith | |
| | | | |
| 104 | Cover Page Interactive Data File (embedded within the inline XBRL document) | | Filed Herewith | |
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* Management contract or compensatory plan or arrangement.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
