Our shareholders approved the 2014 Omnibus Stock Plan (the “2014 Stock Plan”) at our annual meeting of shareholders on May 20, 2014. The 2014 Stock Plan replaced the expired 2004 Omnibus Stock Plan (the “2004 plan”) previously approved by the shareholders in 2004. The 2014 Stock Plan is administered by the Compensation Committee of the Board of Directors and has a term of ten years. All directors of the Company and employees of the Company and its subsidiaries are eligible to participate in the 2014 Stock Plan. The 2014 Stock Plan (similar to the 2004 plan) continues the maintenance of the Employee Stock Purchase Plan, as well as provisions for the grant of stock options and other stock-based incentives. The 2014 Stock Plan provides for the grant of five5 percent of the number of the Company’s common shares outstanding as of the first day of each fiscal year plus the number of common shares that were available for grant of awards, but not granted, in prior years. In no event, however, may the number of common shares available for the grant of awards in any fiscal year exceed ten10 percent of the common shares outstanding as of the first day of that fiscal year. Common shares subject to an award
that is forfeited, terminated, or canceled without having been exercised are generally added back to the number of shares available for grant under the 2014 Stock Plan.
Stock-based compensation expense under all share-based payment plans -- our Employee Stock Purchase Plan, stock option plans, stock-settled stock appreciation rights ("SSARs") and restricted stock units ("RSUs") -- was included in the results of operations as follows:
We estimated the fair value of each stock-based award on the date of grant using a binomial option-pricing model. The binomial model considers a range of assumptions related to volatility, risk-free interest rate and employee
exercise behavior. Expected volatilities utilized in the binomial model are based on historical volatility of our stock prices and other factors. Similarly, the dividend yield is based on historical experience and expected future changes. The binomial model also incorporates exercise and forfeiture assumptions based on an
analysis of historical data. The expected life of the stock-based awards is derived from the output of the binomial model and represents the period of time that awards granted are expected to be outstanding.
The fair values of stock-based awards granted were estimated at the dates of grant with the following weighted-average assumption.assumptions.
Our income 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. Each quarter we update our estimate of the annual effective tax rate and, if our estimated annual tax rate changes, we make a cumulative adjustment. The estimated annual effective tax rate for the ninesix months ended September 30, 2017 is estimated to approximate 37.8%July 3, 2021 was 27.7%. Our actual effective tax rate was 27.8% for both the three months ended July 3, 2021 and June 27, 2020. Our actual effective tax rate was 27.1% and 27.8% for the ninesix months ended October 1, 2016July 3, 2021 and June 27, 2020, respectively. The change in the
Comprehensive income (or loss) is comprised of net income (or net loss) and other components, including foreign currency translation adjustments and defined-benefitdefined benefit pension plan adjustments.
The following summarizes the components of other comprehensive income (loss) accumulated in shareholders’ equity for the ninethree and six months ended September 30, 2017July 3, 2021 and nine months ended October 1, 2016:June 27, 2020:
|
| | | | | | | | | | | | |
| | | Foreign Currency Translation Adjustments | | Defined Benefit Pension Plans | | Accumulated Other Comprehensive Income (Loss) |
| Balance at January 1, 2016 | | $ | (6,244 | ) | | $ | (7,150 | ) | | $ | (13,394 | ) |
| Other comprehensive income (loss) before reclassifications | | | | | | |
| Unrealized gains | | $ | 1,487 |
| | $ | — |
| | $ | 1,487 |
|
| Amounts reclassified from accumulated other comprehensive income (loss) | | — |
| | 1,064 |
| | 1,064 |
|
| Tax effect | | — |
| | (410 | ) | | (410 | ) |
| Net of tax amount | | 1,487 |
| | 654 |
| | 2,141 |
|
| Balance at October 1, 2016 | | $ | (4,757 | ) | | $ | (6,496 | ) | | $ | (11,253 | ) |
The change in defined benefit pension plans of $760 for the nine months endedSeptember 30, 2017 and the $1,064 for the nine months ended October 1, 2016 is included in net periodic pension expense and is classified in the condensed statement of operations as costs and expenses, general and administrative.
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017July 3, 2021
(Amounts in thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 27, 2020 | | Foreign
Currency
Translation
Adjustments | | | | Defined
Benefit
Pension
Plans | | Accumulated
Other
Comprehensive
Income (Loss) |
| Balance at March 28, 2020 | | $ | (6,604) | | | | | $ | (742) | | | $ | (7,346) | |
| Other comprehensive income (loss) before reclassifications | | | | | | | | |
| Unrealized gains (losses) | | $ | 732 | | | | | $ | 0 | | | $ | 732 | |
| | | | | | | | |
| Amounts reclassified from accumulated other comprehensive income (loss) | | 0 | | | | | 38 | | | 38 | |
| Tax effect | | 0 | | | | | (10) | | | (10) | |
| Net of tax amount | | 732 | | | | | 28 | | | 760 | |
| Balance at June 27, 2020 | | $ | (5,872) | | | | | $ | (714) | | | $ | (6,586) | |
| | | | | | | | |
| Six Months Ended July 3, 2021 | | Foreign
Currency
Translation
Adjustments | | | | Defined
Benefit
Pension
Plans | | Accumulated
Other
Comprehensive
Income (Loss) |
| Balance at January 1, 2021 | | $ | (3,738) | | | | | $ | (809) | | | $ | (4,547) | |
| Other comprehensive income (loss) before reclassifications | | | | | | | | |
| Unrealized gains (losses) | | $ | 893 | | | | | $ | 0 | | | $ | 893 | |
| | | | | | | | |
| Amounts reclassified from accumulated other comprehensive income (loss) | | 0 | | | | | 100 | | | 100 | |
| Tax effect | | 0 | | | | | (26) | | | (26) | |
| Net of tax amount | | 893 | | | | | 74 | | | 967 | |
| Balance at July 3, 2021 | | $ | (2,845) | | | | | $ | (735) | | | $ | (3,580) | |
| | | | | | | | |
| Six Months Ended June 27, 2020 | | Foreign
Currency
Translation
Adjustments | | | | Defined
Benefit
Pension
Plans | | Accumulated
Other
Comprehensive
Income (Loss) |
| Balance at January 1, 2020 | | $ | (4,633) | | | | | $ | (770) | | | $ | (5,403) | |
| Other comprehensive income (loss) before reclassifications | | | | | | | | |
| Unrealized gains (losses) | | $ | (1,239) | | | | | $ | 0 | | | $ | (1,239) | |
| | | | | | | | |
| Amounts reclassified from accumulated other comprehensive income (loss) | | 0 | | | | | 76 | | | 76 | |
| Tax effect | | 0 | | | | | (20) | | | (20) | |
| Net of tax amount | | (1,239) | | | | | 56 | | | (1,183) | |
| Balance at June 27, 2020 | | $ | (5,872) | | | | | $ | (714) | | | $ | (6,586) | |
| |
K. | Per Share Amounts and Common and Redeemable Shares Outstanding |
The change in defined benefit pension plans of $50 and $100 for the three and six months ended July 3, 2021, respectively and $38 and $76 for the three and six months ended June 27, 2020, respectively, was included in net periodic pension expense classified in the condensed consolidated statement of operations as general and administrative expense or other income (expense).
K. Per Share Amounts and Common and Redeemable Shares Outstanding
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 Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
July 3, 2021
(Amounts in thousands, except share data)
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 | | Six Months Ended |
| July 3,
2021 | | June 27,
2020 | | July 3,
2021 | | June 27,
2020 |
| Income available to common shareholders: | | | | | | | |
| Net income | $ | 28,543 | | | $ | 29,881 | | | $ | 32,970 | | | $ | 29,861 | |
| | | | | | | |
| Weighted-average shares (in thousands): | | | | | | | |
| Basic: | | | | | | | |
| | | | | | | |
| | | | | | | |
| Basic weighted-average shares | 22,602 | | | 22,807 | | | 22,722 | | | 22,997 | |
| | | | | | | |
| Diluted: | | | | | | | |
| Basic from above | 22,602 | | | 22,807 | | | 22,722 | | | 22,997 | |
| Incremental shares from assumed: | | | | | | | |
| | | | | | | |
| Exercise of stock options and awards | 1,142 | | | 1,176 | | | 1,129 | | | 1,080 | |
| Diluted weighted-average shares | 23,744 | | | 23,983 | | | 23,851 | | | 24,077 | |
| | | | | | | |
| Net income per share: | | | | | | | |
| | | | | | | |
| Basic | $ | 1.26 | | | $ | 1.31 | | | $ | 1.45 | | | $ | 1.30 | |
| | | | | | | |
| Diluted | $ | 1.20 | | | $ | 1.25 | | | $ | 1.38 | | | $ | 1.24 | |
|
| | | | | | | | | | | | | | | |
| | 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, 2017
(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 ninesix months ended September 30, 2017July 3, 2021 was as follows:
| | | | | | | | | | | | | | | | | |
| | | | | |
| Common
Shares
Net of Treasury
Shares | | Redeemable
Shares | | Total |
| Shares outstanding at January 1, 2021 | 17,707,268 | | | 5,112,884 | | | 22,820,152 | |
| Shares purchased | (493,051) | | | (417,055) | | | (910,106) | |
| Shares sold | 218,872 | | | 168,766 | | | 387,638 | |
| | | | | |
| Options and awards exercised | 154,115 | | | 0 | | | 154,115 | |
| Shares outstanding at July 3, 2021 | 17,587,204 | | | 4,864,595 | | | 22,451,799 | |
|
| | | | | | | | |
| | 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,July 3, 2021, we had 24,499,04222,451,799 common and redeemable shares outstanding and employee options exercisable to purchase 851,2151,004,258 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 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 at $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 to pay with cash. All participants (excluding Company directors and officers) purchasing $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 be made either by payroll deductions or annual lump-sum payments of both principal and interest.
Common shares purchased under the plan have been pledged as security for the payment of the promissory note and the common shares will not be issued until the promissory note is paid-in-full. Dividends will be paid on all subscribed shares, subject to forfeiture to the extent that payment is not ultimately made for the shares.
All participants in the offering purchasing in excess of $5 of common shares were granted a "right" to purchase one additional common share at a price of $9.85 per share for every three 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 be exercised at the rate of one-seventh per year and will expire seven years after the date that the right was granted. Employees may not exercise a right should they cease to be employedL. Operations by the Company.Business Segment
The Davey Tree Expert Company
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)
July 3, 2021
(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 20162020 Annual Report.
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2017July 3, 2021
(Amounts in thousands, except share data)
L. Operations by Business Segment (continued)
Segment information reconciled to the condensed consolidated external reporting informationfinancial statements was as 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 July 3, 2021 | | Three Months Ended July 3, 2021 | | | | | | | | | |
| Revenues | $ | 124,540 |
| | $ | 124,678 |
| | $ | 370 |
| | $ | — |
| | $ | 249,588 |
| Revenues | $ | 178,536 | | | $ | 176,280 | | | $ | 660 | | | $ | 0 | | | $ | 355,476 | |
| Income (loss) from operations | 6,854 |
| | 14,616 |
| | (838 | ) | | (1,931 | ) | (a) | | 18,701 |
| Income (loss) from operations | 14,433 | | | 30,616 | | | (2,564) | | | (461) | | (a) | | 42,024 | |
| Interest expense | | | | | | | (1,278 | ) | | (1,278 | ) | Interest expense | | | | | | | (1,370) | | | (1,370) | |
| Interest income | | | | | | | 67 |
| | 67 |
| Interest income | | 53 | | | 53 | |
| Other income (expense), net | | | | | | | (1,416 | ) | | (1,416 | ) | Other income (expense), net | | (1,200) | | | (1,200) | |
| Income before income taxes | | | | | | | | | $ | 16,074 |
| Income before income taxes | | | | $ | 39,507 | |
| Segment assets, total | $ | 180,031 |
| | $ | 206,946 |
| | $ | — |
| | $ | 92,632 |
| (b) | | $ | 479,609 |
| Segment assets, total | $ | 254,651 | | | $ | 281,192 | | | $ | 0 | | | $ | 169,678 | | (b) | | $ | 705,521 | |
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended October 1, 2016 | | | | | | | | | | |
| Three Months Ended June 27, 2020 | | Three Months Ended June 27, 2020 | |
| Revenues | $ | 110,700 |
| | $ | 112,211 |
| | $ | 808 |
| | $ | — |
| | $ | 223,719 |
| Revenues | $ | 176,735 | | | $ | 142,905 | | | $ | (393) | | | $ | 0 | | | $ | 319,247 | |
| Income (loss) from operations | 4,337 |
| | 12,156 |
| | (1,012 | ) | | (439 | ) | (a) | | 15,042 |
| Income (loss) from operations | 20,884 | | | 27,630 | | | (3,474) | | | (651) | | (a) | | 44,389 | |
| Interest expense | | | | | | | (1,159 | ) | | (1,159 | ) | Interest expense | | | | | | | (1,952) | | | (1,952) | |
| Interest income | | | | | | | 62 |
| | 62 |
| Interest income | | 96 | | | 96 | |
| Other income (expense), net | | | | | | | (1,066 | ) | | (1,066 | ) | Other income (expense), net | | (1,152) | | | (1,152) | |
| Income before income taxes | | | | | | | | | $ | 12,879 |
| Income before income taxes | | | | $ | 41,381 | |
| Segment assets, total | $ | 169,796 |
| | $ | 177,275 |
| | $ | — |
| | $ | 96,814 |
| (b) | | $ | 443,885 |
| Segment assets, total | $ | 301,477 | | | $ | 231,985 | | | $ | 0 | | | $ | 124,549 | | (b) | | $ | 658,011 | |
| | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2017 | | | | | | | | | | |
| Six Months Ended July 3, 2021 | | Six Months Ended July 3, 2021 | |
| Revenues | $ | 349,921 |
| | $ | 335,564 |
| | $ | 1,953 |
| | $ | — |
| | $ | 687,438 |
| Revenues | $ | 352,389 | | | $ | 300,787 | | | $ | 1,121 | | | $ | 0 | | | $ | 654,297 | |
| Income (loss) from operations | 13,782 |
| | 34,871 |
| | (4,725 | ) | | (4,257 | ) | (a) | | 39,671 |
| Income (loss) from operations | 26,891 | | | 34,298 | | | (8,666) | | | (1,525) | | (a) | | 50,998 | |
| Interest expense | | | | | | | (3,607 | ) | | (3,607 | ) | Interest expense | | | | | | | (2,644) | | | (2,644) | |
| Interest income | | | | | | | 210 |
| | 210 |
| Interest income | | 122 | | | 122 | |
| Other income (expense), net | | | | | | | (3,200 | ) | | (3,200 | ) | Other income (expense), net | | (3,250) | | | (3,250) | |
| Income before income taxes | | | | | | | | | $ | 33,074 |
| Income before income taxes | | | | $ | 45,226 | |
| Segment assets, total | $ | 180,031 |
| | $ | 206,946 |
| | $ | — |
| | $ | 92,632 |
| (b) | | $ | 479,609 |
| Segment assets, total | $ | 254,651 | | | $ | 281,192 | | | $ | 0 | | | $ | 169,678 | | (b) | | $ | 705,521 | |
| | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended October 1, 2016 | | | | | | | | | | |
| Six Months Ended June 27, 2020 | | Six Months Ended June 27, 2020 | |
| Revenues | $ | 316,013 |
| | $ | 311,490 |
| | $ | 1,812 |
| | $ | — |
| | $ | 629,315 |
| Revenues | $ | 362,484 | | | $ | 244,858 | | | $ | 185 | | | $ | 0 | | | $ | 607,527 | |
| Income (loss) from operations | 11,398 |
| | 31,946 |
| | (5,098 | ) | | (4,038 | ) | (a) | | 34,208 |
| Income (loss) from operations | 36,516 | | | 21,969 | | | (8,381) | | | (1,993) | | (a) | | 48,111 | |
| Interest expense | | | | | | | (3,186 | ) | | (3,186 | ) | Interest expense | | | | | | | (3,898) | | | (3,898) | |
| Interest income | | | | | | | 190 |
| | 190 |
| Interest income | | 197 | | | 197 | |
| Other income (expense), net | | | | | | | (2,821 | ) | | (2,821 | ) | Other income (expense), net | | (3,051) | | | (3,051) | |
| Income before income taxes | | | | | | | | | $ | 28,391 |
| Income before income taxes | | | | $ | 41,359 | |
| Segment assets, total | $ | 169,796 |
| | $ | 177,275 |
| | $ | — |
| | $ | 96,814 |
| (b) | | $ | 443,885 |
| Segment assets, total | $ | 301,477 | | | $ | 231,985 | | | $ | 0 | | | $ | 124,549 | | (b) | | $ | 658,011 | |
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, 2017July 3, 2021
(Amounts in thousands, except share data)
M. 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 six months ended July 3, 2021 and June 27, 2020 by major sources:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended July 3, 2021 | | Utility | | Residential
and
Commercial | | All Other | | Consolidated |
| Type of service: | | | | | | | | |
| Tree and plant care | | $ | 129,736 | | | $ | 102,756 | | | $ | (33) | | | $ | 232,459 | |
| Grounds maintenance | | 0 | | | 46,559 | | | 0 | | | 46,559 | |
| Storm damage services | | (168) | | | 1,615 | | | 0 | | | 1,447 | |
| Consulting and other | | 48,968 | | | 25,350 | | | 693 | | | 75,011 | |
| Total revenues | | $ | 178,536 | | | $ | 176,280 | | | $ | 660 | | | $ | 355,476 | |
| | | | | | | | |
| Geography: | | | | | | | | |
| United States | | $ | 167,994 | | | $ | 163,267 | | | $ | 660 | | | $ | 331,921 | |
| Canada | | 10,542 | | | 13,013 | | | 0 | | | 23,555 | |
| Total revenues | | $ | 178,536 | | | $ | 176,280 | | | $ | 660 | | | $ | 355,476 | |
| | | | | | | | |
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
July 3, 2021
(Amounts in thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 27, 2020 | | Utility | | Residential
and
Commercial | | All Other | | Consolidated |
| Type of service: | | | | | | | | |
| Tree and plant care | | $ | 131,607 | | | $ | 83,504 | | | $ | (86) | | | $ | 215,025 | |
| Grounds maintenance | | 0 | | | 40,991 | | | 0 | | | 40,991 | |
| Storm damage services | | 502 | | | 1,341 | | | 0 | | | 1,843 | |
| Consulting and other | | 44,626 | | | 17,069 | | | (307) | | | 61,388 | |
| Total revenues | | $ | 176,735 | | | $ | 142,905 | | | $ | (393) | | | $ | 319,247 | |
| | | | | | | | |
| Geography: | | | | | | | | |
| United States | | $ | 168,479 | | | $ | 133,674 | | | $ | (393) | | | $ | 301,760 | |
| Canada | | 8,256 | | | 9,231 | | | 0 | | | 17,487 | |
| Total revenues | | $ | 176,735 | | | $ | 142,905 | | | $ | (393) | | | $ | 319,247 | |
| | | | | | | | |
| Six Months Ended July 3, 2021 | | Utility | | Residential
and
Commercial | | All Other | | Consolidated |
| Type of service: | | | | | | | | |
| Tree and plant care | | $ | 253,703 | | | $ | 174,721 | | | $ | (196) | | | $ | 428,228 | |
| Grounds maintenance | | 0 | | | 76,358 | | | 0 | | | 76,358 | |
| Storm damage services | | 3,945 | | | 2,798 | | | 0 | | | 6,743 | |
| Consulting and other | | 94,741 | | | 46,910 | | | 1,317 | | | 142,968 | |
| Total revenues | | $ | 352,389 | | | $ | 300,787 | | | $ | 1,121 | | | $ | 654,297 | |
| | | | | | | | |
| Geography: | | | | | | | | |
| United States | | $ | 331,678 | | | $ | 279,149 | | | $ | 1,121 | | | $ | 611,948 | |
| Canada | | 20,711 | | | 21,638 | | | 0 | | | 42,349 | |
| Total revenues | | $ | 352,389 | | | $ | 300,787 | | | $ | 1,121 | | | $ | 654,297 | |
| | | | | | | | |
| Six Months Ended June 27, 2020 | | Utility | | Residential
and
Commercial | | All Other | | Consolidated |
| Type of service: | | | | | | | | |
| Tree and plant care | | $ | 273,350 | | | $ | 143,761 | | | $ | (111) | | | $ | 417,000 | |
| Grounds maintenance | | 0 | | | 64,054 | | | 0 | | | 64,054 | |
| Storm damage services | | 1,026 | | | 1,978 | | | 0 | | | 3,004 | |
| Consulting and other | | 88,108 | | | 35,065 | | | 296 | | | 123,469 | |
| Total revenues | | $ | 362,484 | | | $ | 244,858 | | | $ | 185 | | | $ | 607,527 | |
| | | | | | | | |
| Geography: | | | | | | | | |
| United States | | $ | 345,566 | | | $ | 228,726 | | | $ | 185 | | | $ | 574,477 | |
| Canada | | 16,918 | | | 16,132 | | | 0 | | | 33,050 | |
| Total revenues | | $ | 362,484 | | | $ | 244,858 | | | $ | 185 | | | $ | 607,527 | |
| |
M. | Fair Value Measurements and Financial Instruments |
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Accounting Standards Board Accounting Standard CodificationStatements (Unaudited)
July 3, 2021
(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 recognized $351 and $1,055 of revenue for the three and six months ended July 3, 2021, respectively, that was included in the contract liability balance at December 31, 2020 and $318 and $1,260 of revenue for the three and six months ended June 27, 2020, respectively, that was included in the contract liability balance at December 31, 2019. Net contract liabilities consisted of the following:
| | | | | | | | | | | |
| | July 3,
2021 | | December 31,
2020 |
| Contract liabilities - current | $ | 5,423 | | | $ | 3,242 | |
| Contract liabilities - noncurrent | 1,828 | | | 1,754 | |
| Net contract liabilities | $ | 7,251 | | | $ | 4,996 | |
N. 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, 2017July 3, 2021
(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, 2016July 3, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Fair Value Measurements at July 3, 2021 Using: |
Assets and Liabilities Recorded at
Fair Value on a Recurring Basis | | Total Carrying Value at July 3, 2021 | | 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 current assets, current | | $ | 3,500 | | | $ | 3,500 | | | $ | 0 | | | $ | 0 | |
| Assets invested for self-insurance, classified as other assets, noncurrent | | 14,859 | | | 14,859 | | | 0 | | | 0 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Liabilities: | | | | | | | | |
| | | | | | | | |
| Deferred compensation | | $ | 3,886 | | | $ | 0 | | | $ | 3,886 | | | $ | 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, 2020 Using: |
Assets and Liabilities Recorded at
Fair Value on a Recurring Basis | | Total Carrying Value at December 31, 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 | | $ | 19,359 | | | $ | 19,359 | | | $ | 0 | | | $ | 0 | |
| | | | | | | | |
| | | | | | | | |
| Liabilities: | | | | | | | | |
| Deferred compensation | | $ | 3,192 | | | $ | 0 | | | $ | 3,192 | | | $ | 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:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | July 3, 2021 | | December 31, 2020 |
| | Carrying
Value | | Fair
Value | | Carrying
Value | | Fair
Value |
| Revolving credit facility, noncurrent | | $ | 23,651 | | | $ | 23,651 | | | $ | 0 | | | $ | 0 | |
| Senior unsecured notes, noncurrent | | 75,000 | | | 79,381 | | | 75,000 | | | 81,424 | |
| Term loans, noncurrent | | 3,343 | | | 3,504 | | | 2,324 | | | 2,451 | |
| Total | | $ | 101,994 | | | $ | 106,536 | | | $ | 77,324 | | | $ | 83,875 | |
|
| | | | | | | | | | | | | | | | |
| | | 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)
July 3, 2021
(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)O. 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"), a former Davey employee, 2 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 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)
July 3, 2021
(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 and have met with both the civil and criminal divisions of the Department of Justice ("DOJ") to resolve the matter. Due to pandemic-related issues and delays on the side of the DOJ, the matter currently remains unresolved.
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. All civil cases continue to remain stayed.
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 17% of revenues during 2020, and would not be material12% in relation2019. 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 financial position or resultsdate of operations.the bankruptcy filing, we had pre-petition accounts receivable of approximately $15,000.
On July 1, 2020, PG&E emerged from Chapter 11, successfully completing its restructuring process and implementing its Plan of Reorganization. Davey Tree has been paid in full on all amounts outstanding, including interest accrued on the past amounts due at the federal judgment rate. Further, Davey Tree's primary contracts were assumed by PG&E.
Northern California Wildfires
NaN lawsuits have been filed that name contractors for PG&E, including Davey Tree, with respect to claims arising from wildfires that occurred in Pacific Gas and Electric Company’s service territory in northern California beginning on October 8, 2017. An action was brought on August 8, 2019 in Napa County Superior Court, entitled Donna Walker, et al. v. Davey Tree Surgery Company, et al., Case No.
| |
O. | The Davey 401KSOP and Employee Stock Ownership Plan |
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
July 3, 2021
(Amounts in thousands, except share data)
19CV001194. The action currently is stayed. An action was brought on October 8, 2019 in San Francisco County Superior Court, entitled Quinisha Kyree Abram, et al. v. ACRT, Inc., et. al, Case No. CGC-19-579861. The action currently is stayed.
NaN additional actions were brought on January 28, 2021 in San Francisco County Superior Court, by fire victims represented by a trust, which was assigned contractual rights in the PG&E bankruptcy proceedings. These cases are entitled John K. Trotter, Trustee of the PG&E Fire Victim Trust v. Davey Resource Group, Inc., et al., Case No. CGC-21-589438; John K. Trotter, Trustee of the PG&E Fire Victim Trust v. Davey Resource Group, Inc., et al., Case No. CGC-21-589439; and John K. Trotter, Trustee of the PG&E Fire Victim Trust v. ACRT Pacific, LLC, et al., Case No. CGC-21-589441. These actions are currently in preliminary stages of pleadings, but Davey Tree has responded, denying all liability in these cases.
In all cases, the Company denies all liability and will vigorously defend the actions.
P. 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.
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$2,945 and $1,148$3,298 as of September 30, 2017July 3, 2021 and December 31, 2016,2020, respectively. The fair value of the shares held in the Davey 401KSOP and ESOP totaled $121,458$156,607 and $123,053$150,089 as of September 30, 2017July 3, 2021 and December 31, 2016,2020, 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
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
July 3, 2021
(Amounts in thousands, except share data)
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$159,552 and $124,201$153,387 as of September 30, 2017July 3, 2021 and December 31, 2016,2020, 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 six months of 2021, COVID-19 has had, and will continue to have an impact on businesses, financial markets and economic activity throughout the world.
We continue to take 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. We continue to provide additional administrative leave for employees affected by COVID-19 directly or indirectly and converted our 2021 Annual Meeting of Shareholders to a virtual-only format. During the second quarter 2021, we began to bring employees back to our corporate headquarters on a limited basis with increased safety protocols and in compliance with public health and government guidance and also began to lift travel restrictions in situations where necessary. In the first six months of 2021, we incurred expenses of $854 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 $731 in the first six months of 2021 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 the effects of new strains of the virus, the availability and effectiveness of vaccines, 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, especially as sporadic outbreaks of COVID-19 continue to occur, among other things. The situation surrounding COVID-19 remains fluid, and the potential for a material impact on our business continues 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 any economic downturn or recession that has occurred or 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 | | Six Months Ended |
| July 3,
2021 | | June 27,
2020 | |
Change | | July 3,
2021 | | June 27,
2020 | |
Change |
| Revenues | 100.0 | % | | 100.0 | % | | — | % | | 100.0 | % | | 100.0 | % | | — | % |
| | | | | | | | | | | |
| Costs and expenses: | | | | | | | | | | | |
| Operating | 61.8 | | | 59.8 | | | 2.0 | | | 63.9 | | | 64.1 | | | (.2) | |
| Selling | 16.6 | | | 16.3 | | | .3 | | | 17.0 | | | 16.8 | | | .2 | |
| General and administrative | 6.6 | | | 6.0 | | | .6 | | | 7.5 | | | 6.7 | | | .8 | |
| Depreciation and amortization | 3.9 | | | 4.4 | | | (.5) | | | 4.2 | | | 4.7 | | | (.5) | |
| Gain on sale of assets, net | (.6) | | | (.4) | | | (.2) | | | (.4) | | | (.2) | | | (.2) | |
| | | | | | | | | | | |
| Income from operations | 11.8 | | | 13.9 | | | (2.1) | | | 7.8 | | | 7.9 | | | (.1) | |
| | | | | | | | | | | |
| Other income (expense): | | | | | | | | | | | |
| Interest expense | (.4) | | | (.6) | | | .2 | | | (.4) | | | (.6) | | | .2 | |
| Interest income | — | | | — | | | — | | | — | | | — | | | — | |
| Other, net | (.3) | | | (.4) | | | .1 | | | (.5) | | | (.5) | | | — | |
| | | | | | | | | | | |
| Income before income taxes | 11.1 | | | 13.0 | | | (1.9) | | | 6.9 | | | 6.8 | | | .1 | |
| | | | | | | | | | | |
| Income taxes | 3.1 | | | 3.6 | | | (.5) | | | 1.9 | | | 1.9 | | | — | |
| | | | | | | | | | | |
| Net income | 8.0 | % | | 9.4 | % | | (1.4) | % | | 5.0 | % | | 4.9 | % | | .1 | % |
|
| | | | | | | | | | | | | | | | | |
| | 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 | % |
| | | | | | | | | | | | |
ThirdSecond Quarter—Three Months EndedSeptember 30, 2017 July 3, 2021 Compared to Three Months EndedOctober 1, 2016 June 27, 2020
Our results of operations for the three months endedSeptember 30, 2017 July 3, 2021 compared to the three months endedOctober 1, 2016 June 27, 2020 were as follows: | | | | Three Months Ended | | Three Months Ended |
| | September 30,
2017 | | October 1,
2016 | | Change | | Percentage Change | | July 3,
2021 | | June 27,
2020 | | Change | | Percentage
Change |
| Revenues | $ | 249,588 |
| | $ | 223,719 |
| | $ | 25,869 |
| | 11.6 | % | Revenues | $ | 355,476 | | | $ | 319,247 | | | $ | 36,229 | | | 11.3 | % |
| | | | | | | | | |
| Costs and expenses: | | | | | |
| | |
| Costs and expenses: | | | | |
| Operating | 157,615 |
| | 142,333 |
| | 15,282 |
| | 10.7 |
| Operating | 219,275 | | | 190,982 | | | 28,293 | | | 14.8 | |
| Selling | 45,508 |
| | 40,528 |
| | 4,980 |
| | 12.3 |
| Selling | 58,836 | | | 51,972 | | | 6,864 | | | 13.2 | |
| General and administrative | 14,501 |
| | 14,921 |
| | (420 | ) | | (2.8 | ) | General and administrative | 23,622 | | | 19,044 | | | 4,578 | | | 24.0 | |
| Depreciation and amortization | 13,749 |
| | 12,765 |
| | 984 |
| | 7.7 |
| Depreciation and amortization | 13,702 | | | 14,124 | | | (422) | | | (3.0) | |
| Gain on sale of assets, net | (486 | ) | | (1,870 | ) | | 1,384 |
| | (74.0 | ) | Gain on sale of assets, net | (1,983) | | | (1,264) | | | (719) | | | 56.9 | |
| | 230,887 |
| | 208,677 |
| | 22,210 |
| | 10.6 |
| | 313,452 | | | 274,858 | | | 38,594 | | | 14.0 | |
| | | | | | | | | | | | | | | | |
| Income from operations | 18,701 |
| | 15,042 |
| | 3,659 |
| | 24.3 |
| Income from operations | 42,024 | | | 44,389 | | | (2,365) | | | (5.3) | |
| Other income (expense): | |
| | |
| | |
| | | Other income (expense): | | | | |
| Interest expense | (1,278 | ) | | (1,159 | ) | | (119 | ) | | 10.3 |
| Interest expense | (1,370) | | | (1,952) | | | 582 | | | (29.8) | |
| Interest income | 67 |
| | 62 |
| | 5 |
| | 8.1 |
| Interest income | 53 | | | 96 | | | (43) | | | (44.8) | |
| Other, net | (1,416 | ) | | (1,066 | ) | | (350 | ) | | 32.8 |
| Other, net | (1,200) | | | (1,152) | | | (48) | | | 4.2 | |
| Income before income taxes | 16,074 |
| | 12,879 |
| | 3,195 |
| | 24.8 |
| Income before income taxes | 39,507 | | | 41,381 | | | (1,874) | | | (4.5) | |
| | | | | | | | | |
| Income taxes | 5,837 |
| | 4,738 |
| | 1,099 |
| | 23.2 |
| Income taxes | 10,964 | | | 11,500 | | | (536) | | | (4.7) | |
| | | | | | | | | | | | | | | | |
| Net income | $ | 10,237 |
| | $ | 8,141 |
| | $ | 2,096 |
| | 25.7 | % | Net income | $ | 28,543 | | | $ | 29,881 | | | $ | (1,338) | | | (4.5) | % |
| | | | | | | | | |
| nm--not meaningful | |
| | |
| | |
| | |
| |
Revenues--Revenues of $249,588$355,476 increased $25,869$36,229 compared with $223,719$319,247 in the thirdsecond quarter 2016.of 2020. Utility Services increased $13,840$1,801 or 12.5%1.0% compared with the thirdsecond quarter 2016.of 2020. The increase iswas attributable to new accounts as well as increased storm-related services primarily relatedwork year-over-year and price increases on existing accounts, which was partially offset by less emergency work on our PG&E account as compared to Hurricane Irma in the Southeast United States.second quarter of 2020. Residential and Commercial Services increased $12,467$33,375 or 11.1%23.4% from the second quarter of 2020. Increases were primarily in tree and plant care revenues, grounds maintenance revenue and consulting and other revenue. In 2020, 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.
Operating Expenses--Operating expenses of $219,275 increased $28,293 compared with the thirdsecond quarter 2016. Increases in storm-related services primarily relatedof 2020. Utility Services increased $8,819 or 7.2% compared with the second quarter of 2020 and, as a percentage of revenue, increased to Hurricane Irma in the Southeast United States, tree surgery, spraying73.4% from 69.1%. The increase was attributable to additional expenses for labor and pest managementbenefits expenses, fuel expense and materials expense, which were partially offset by a decrease in mowingsubcontractor expense.Residential 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.
Operating Expenses--Operating expenses of $157,615Commercial Services increased $15,282$19,643 or 29.1% compared with the thirdsecond quarter 2016 but,of 2020 and, as a percentage of revenues, decreased .4%revenue, increased to 63.2%49.5% from 47.3%. Utility increased $8,369 or 10.0% compared with the third quarter 2016 but, as a percentage of revenues, decreased 1.6%The increase was primarily attributable to 73.9%. Increasesincreases in labor and benefits expenses, fuel expense, subcontractor expense mileage, crew sustenance and insurance expense were partially offset by decreases in equipment maintenancematerials expense.Residential and Commercial increased $6,603
Operating expenses for the second quarter of 2021 also included $394 of expenses related directly to COVID-19, including $129 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 11.4% compared withgovernment imposed restrictions or closures. For the thirdsecond quarter 2016 and, as a percentage of revenues, increased .1%2020, the Company had $1,383 of expenses directly related to 51.6%. Increases in labor expense, subcontractor expense, material, insurance, fuel, and equipment expense were the largest contributors to the increase.
COVID-19.
Fuel costs of $7,148$10,296 increased $913,$3,194, or 14.6%45.0%, from the $6,235$7,102 incurred in the thirdsecond quarter 2016of 2020 and impacted operating expenses within all segments. The $913$3,194 increase included usage decreases approximating $99 and price increases approximating $386 and usage increases approximating $527.$2,931.
Selling Expenses--Selling expenses of $45,508$58,836 increased $4,980$6,864 compared with the thirdsecond quarter 2016of 2020 and, as a percentage of revenues, increased .1% to 18.2%16.6% from 16.3%. Utility increased $2,588Services decreased $435 or 23.7% over2.2% compared to the thirdsecond quarter 2016of 2020 and, as a percentage of revenues increased 1.0%revenue, decreased to 10.9% from 11.3%. Increases in field management wages and incentives, taxes and communication expense were partially offset by aThe decrease in travel expenses. Residential and Commercial increased $2,497 or 8.2% over the third quarter 2016 but, as a percentage of revenues decreased .7%was attributable to 26.5%. Increasesdecreases in field management wages and incentive expense office support wages and benefits, and employee development expenseswhich were partially offset by an increase in travel expense. Residential and Commercial Services increased $7,915 or 24.2% from the second quarter of 2020 and, as a decreasepercentage of revenue, increased to 23.0% from 22.9%. The increase was primarily attributable to an increase in field management and sales and marketing expense.wage expenses.
General and Administrative Expenses--General and administrative expenses of $14,501 decreased $420$23,622 increased $4,578 from $14,921$19,044 in the thirdsecond quarter 2016. Decreases in insurance and travel expenses were partially offset byof 2020. The increase was primarily attributable to increases in professional servicessalary expense, travel and employee development expense.living expenses and computer expenses.
Depreciation and Amortization Expense--Depreciation and amortization expense of $13,749 increased $984$13,702 decreased $422 from $12,765$14,124 incurred in the thirdsecond quarter of 2016. The increase is attributable2020, primarily due to decreased capital expenditures necessary to support the businessin recent years and purchasesan increased use of businesses.operating leases for equipment.
Gain on the Sale of Assets, Net--Gain on the sale of assets of $486$1,983 for the thirdsecond quarter 2017 decreased $1,384of 2021 increased $719 from the $1,870$1,264 gain in the thirdsecond quarter 2016 due to fewerof 2020. We sold more individual units of equipment at a comparable 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 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 thirdsecond quarter of 2017,2021 as compared with the thirdsecond quarter of 2016.2020.
Other, Net--Other, net,Interest Expense--Interest expense of $1,416 increased $350$1,370 decreased $582 from the $1,066$1,952 incurred in the thirdsecond quarter 2016of 2020.The decrease was attributable to lower average borrowing during the second quarter of 2021, as compared with the second quarter of 2020.
Other, Net--Other expense, net, of $1,200 increased $48 from the $1,152 of other expense incurred in the second quarter of 2020 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 thirdsecond quarter 2017 was $5,837,of 2021 were $10,964, as compared to $4,738$11,500 for the thirdsecond quarter 2016.of 2020. 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 both the second quarter of 2021 and 2020 was 27.8%.
Net Income--Net income of $28,543 for the second quarter of 2021 was $1,338 less than the $29,881 net income for the second quarter of 2020.
First Half—Six Months Ended July 3, 2021 Compared to Six Months Ended June 27, 2020
Our results of operations for the six months ended July 3, 2021 compared to the six months ended June 27, 2020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended |
| July 3,
2021 | | June 27,
2020 | | Change | | Percentage
Change |
| Revenues | $ | 654,297 | | | $ | 607,527 | | | $ | 46,770 | | | 7.7 | % |
| | | | | | | |
| Costs and expenses: | | | | | | | |
| Operating | 418,310 | | | 389,587 | | | 28,723 | | | 7.4 | |
| Selling | 111,523 | | | 102,084 | | | 9,439 | | | 9.2 | |
| General and administrative | 48,973 | | | 40,586 | | | 8,387 | | | 20.7 | |
| Depreciation and amortization | 27,160 | | | 28,728 | | | (1,568) | | | (5.5) | |
| Gain on sale of assets, net | (2,667) | | | (1,569) | | | (1,098) | | | 70.0 | |
| | 603,299 | | | 559,416 | | | 43,883 | | | 7.8 | |
| | | | | | | |
| Income from operations | 50,998 | | | 48,111 | | | 2,887 | | | 6.0 | |
| Other income (expense): | | | | | | | |
| Interest expense | (2,644) | | | (3,898) | | | 1,254 | | | (32.2) | |
| Interest income | 122 | | | 197 | | | (75) | | | (38.1) | |
| Other, net | (3,250) | | | (3,051) | | | (199) | | | 6.5 | |
| Income before income taxes | 45,226 | | | 41,359 | | | 3,867 | | | 9.3 | |
| | | | | | | |
| Income taxes | 12,256 | | | 11,498 | | | 758 | | | 6.6 | |
| | | | | | | |
| Net income | $ | 32,970 | | | $ | 29,861 | | | $ | 3,109 | | | 10.4 | % |
| | | | | | | |
Revenues--Revenues of $654,297 increased $46,770 compared with $607,527 in the first half of 2020. Utility Services decreased $10,095 or 2.8% compared with the first half of 2020. The decrease was primarily attributable to less emergency work on our PG&E account as compared to the first half of 2020, which was partially offset by new accounts, as well as increased work year-over-year on other accounts and price increases on existing accounts within both our U.S. and Canadian operations. Residential and Commercial Services increased $55,929 or 22.8% compared with the first half of 2020. Increases were primarily in tree and plant care revenue, consulting and other revenue and grounds maintenance. In 2020, 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.
Operating Expenses--Operating expenses of $418,310 increased $28,723 compared with the first half of 2020 but, as a percentage of revenues, decreased to 63.9% from 64.1%. Utility Services increased $750 or .3% compared with the first half of 2020 and, as a percentage of revenue, increased to 73.5% from 71.2%. The increase was attributable to increases in fuel expense, materials expense, crew meals and lodging expenses and tools and parts expense, which were partially offset by decreases in labor and benefits expense and subcontractor expense.Residential and Commercial Services increased $29,708 or 23.1% compared with the first half of 2020 and, as a percentage of revenue, increased to 52.5% from 52.4%. The increase was primarily attributable to increases in labor and benefits expense, fuel expense, subcontractor expense, equipment expense, tool expense and materials expense.
Operating expenses for the first half of 2021 also included $854 of expenses related directly to COVID-19, including $282 for additional administrative leave offered to employees who were unable to work due to COVID-19-related restrictions, whether from the virus itself or government imposed restrictions or closures. For the first half of 2020, the Company had $2,195 of expenses directly related to COVID-19.
Fuel costs of $18,534 increased $3,396, or 22.4%, from the $15,138 incurred in the first half of 2020 and impacted operating expenses within all segments. The $3,396 increase included usage increases approximating $291 and price increases approximating $2,743.
Selling Expenses--Selling expenses of $111,523 increased $9,439 compared with the first half of 2020 and, as a percentage of revenue, increased to 17.0% from 16.8%. Utility Services decreased $223 or .6% compared to the first half of 2020 but, as a percentage of revenue, increased to 11.3% from 11.0%. The decrease was primarily attributable to decreases in field management wages and field management travel expense. Residential and Commercial Services experienced an increase of $10,214 or 16.0% compared to the first half of 2020 but, as a percentage of revenue, decreased to 24.6% from 26.0%. The increase was primarily attributable to increases in field management wages and incentive expense and rent expense.
General and Administrative Expenses--General and administrative expenses of $48,973 increased $8,387 from $40,586 in the first half of 2020. The increase was primarily attributable to increases in salary and incentive expense and computer expenses, which were partially offset by a decrease in travel expense.
Depreciation and Amortization Expense--Depreciation and amortization expense of $27,160 decreased $1,568 from $28,728 incurred in the first half of 2020. 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 $2,667 for the first half of 2021 increased $1,098 from the $1,569 gain in the first half of 2020. We sold fewer individual units of equipment, but at a higher average gain per unit during the first half of 2021 as compared with the first half of 2020.
Interest Expense--Interest expense of $2,644 decreased $1,254 from the $3,898 incurred in the first half of 2020.The decrease was attributable to lower average borrowing during the first six months of 2021, as compared with the first six months of 2020.
Other, Net--Other expense, net, of $3,250 increased $199 from the $3,051 expense incurred in the first half of 2020 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 half of 2021 were $12,256, as compared to $11,498 for the first half of 2020. 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, 2016first half of 2021 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 2017 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%27.1%. Our effective tax rate for the first nine monthshalf of 20162020 was 39.2%27.8%. The change in the effective tax rate from statutory tax rates was primarily due to the impact of state and local taxes, which was partially offset by favorable discrete items.
Net Income--Net income of $20,573$32,970 for the first nine monthshalf of 20172021 was $3,311$3,109 more than the $17,262 experienced innet income of $29,861 for the first nine monthshalf of 2016.2020.
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 ninesix months endedSeptember 30, 2017 July 3, 2021 and October 1, 2016 follow:June 27, 2020 were as follows:
| | | | | | | | | | | |
| Six Months Ended |
| | July 3,
2021 | | June 27,
2020 |
| Cash provided by (used in): | | | |
| Operating activities | $ | 71,900 | | | $ | 57,559 | |
| Investing activities | (44,048) | | | (32,221) | |
| Financing activities | (10,482) | | | (5,098) | |
| Effect of exchange rate changes on cash | 95 | | | (99) | |
| Increase in cash | $ | 17,465 | | | $ | 20,141 | |
|
| | | | | | | |
| | 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$71,900 for the first ninesix months of 2017, or $2,886 more than the $35,543 provided in2021, a $14,341 increase when compared to the first ninesix months of 2016.2020. The $2,886$14,341 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 $3,109 resulting from increased revenue and improved operating margins and a $729 decrease in cash provided by operating assets and liabilities, excludingchange of $45,124 related to accounts receivable, partially offset by $2,362 more cash used bya change of $24,055 related to accounts receivable.
payable and accrued expenses.
Overall, accounts receivable increased $23,135decreased $6,954 during the first ninesix months of 2017,2021, as compared to thean increase of $20,773$38,170 during the first ninesix months of 2016.2020. 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 ninesix months of 2017 increased five2021 decreased by thirteen days to 6263 days, as compared to 76 days at the end of the first ninesix months of 2016. The2020. DSO at October 1, 2016 was 57 days.
Operating liabilities increased $12,139 inthe end of the first ninesix months of 2017, or $1,867 more than2020 included approximately $15,000 of pre-petition receivables from PG&E, which were collected after PG&E emerged from bankruptcy in July 2020. Excluding the $10,272 increase inpre-petition receivables, DSO would have been 73 days at the end of the first ninesix months of 2016. 2020.
Accounts payable and accrued expenses increased $3,754 duringdecreased $13,492 in the first ninesix months of 2017 as2021, a change of $24,055 compared with a decrease of $46 forto the $10,563 increase in the first ninesix months of 2016. Increases in trade payables, self insurance accruals,2020. The change was primarily related to the timing of estimated income tax payments and employer payroll taxes payable deferred in 2020 as a result of the Coronavirus Aid, Relief, and employee compensation accruals were partially offset by decreases in advance payments from customers.Economic Security Act. Self-insurance accruals increased $8,385$7,235 in the first ninesix months of 2017,2021, which was $1,933$1,397 less than the increase of $10,318$8,632 experienced in the first ninesix months of 2016.2020. The increase occurredwas 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), any negative financial impact to our results cannot be reasonably estimated, but could be material. We are actively managing the self-insured risk retention.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 ninesix months of 20172021 was $52,448, or $2,559 more than$44,048, an $11,827 increase when compared to the $49,889first six months of 2020. The increase was primarily the result of increases in purchases of businesses and land and buildings.
Cash Used In Financing Activities--Cash used in financing activities of $10,482 increased $5,384 during the first ninesix months of 2016. An increase 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 $3,2442021 as compared with $5,098 during the first ninesix months of 2017 as compared with $18,492 of cash provided during the first nine months of 2016.2020. During the first ninesix months of 2017,2021, our revolving credit facility, net provided $30,000$23,651 in cash as compared with $28,500$21,000 provided during the first ninesix months of 2016.2020. We use the credit facility primarily for capital expenditures, redemptions of shares and payments of notes payable related to acquisitions. Payments of notesNotes payable used $4,610a net $15,880 during the first ninesix months of 2017,2021, an increase of $2,704$2,020 when compared to the $1,906$13,860 used in the first ninesix months of 2016.2020. Treasury share transactions (purchases and sales) used $8,244$14,858 for the first ninesix months of 2017, $2,1092021, $4,820 more than the $6,135$10,038 used in the first ninesix months of 2016, and included $1,043 of cash received from our
common share subscriptions.2020. Dividends paid of $1,898$1,346 during the first ninesix months of 2017 decreased $692021 increased $208 as compared with $1,967$1,138 paid in the first ninesix months of 2016.
2020, in part due to the increase in dividend paid per share implemented during the second quarter of 2021.
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,P, such purchases are not required, and the Company retains the right to discontinue them at any time. Repurchases of redeemable common shares fromat shareholders' request approximated $6,754 and $5,195 during the Davey 401KSOP and ESOP approximated $8,778 and $3,808 for the ninesix months ended September 30, 2017July 3, 2021 and October 1, 2016,June 27, 2020, respectively. Share repurchases, other than redeemable common shares, approximated $10,734$20,512 and $11,524$18,821 during the ninesix months ended September 30, 2017July 3, 2021 and October 1, 2016,June 27, 2020, 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, 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.
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,July 3, 2021, total commitments related to issued letters of credit were $64,221,$88,366, 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$2,134 were issued under short-term lines of credit. As of December 31, 2016,2020, total commitments related to issued letters of credit were $64,225,$88,242, of which $4,071$2,877 were issued under the revolving credit facility, $58,150$83,355 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 20172021 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 reviewingreview our existing sources of financing and evaluatingevaluate alternatives. At September 30, 2017,July 3, 2021, we had working capital of $82,295, and$112,812, short-term lines of credit approximating $7,204$9,077 and $73,929$223,472 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:
| |
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. |
| |
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.
|
| |
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. |
| |
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, 2016,2020, we believe that our policies related to revenue recognition, the allowance for doubtful accountscredit losses, stock valuation and self-insurance accruals 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;credit losses; and self-insurance accruals. 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:
Our business, other than tree services to utility customers, is highly seasonal▪The continued impact of the COVID-19 pandemic and weather dependent.
Various economic factors may adversely impact our customers’ spending and pricing for our services, and impede our collection of accounts receivable.
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 in the credit and financial markets may limit our access to capital.
Significant increases in fuel prices for extended periods of time will increase our operating expenses.
Fluctuations in foreign currency exchange rates mayresponses thereto could have a material adverse impacteffect on our operating results.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 accruals or insurance coverages, could negatively impact our liquidity and financial condition.
Because no public market exists for▪The unavailability or cancellation of third-party insurance coverage may have a material adverse effect on our common shares, the abilityfinancial condition and results of shareholdersoperations 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 sell their common sharesour business, reputation, financial condition, results of operations, liquidity and cash flows.
▪Our business, other than tree services to utility customers, is limited.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 health care costs could negatively impactfuel prices for extended periods of time will increase our results of operations or financial position.operating expenses.
▪We are subject to intense competition.
Our failure to comply with environmental laws could result in significant liabilities, fines and/or penalties.▪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.
▪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.
▪We may encounter difficulties obtaining surety bondsmisjudge a competitive bid and be contractually bound to an unprofitable contract.
▪A disruption in our information technology systems, including a disruption related to cybersecurity, or lettersthe impact of credit necessarycosts incurred to supportcomply with cybersecurity or data privacy regulations, could adversely affect our operations.financial performance.
▪We are dependent, in part, on our reputation of quality, integrity and performance. If our reputation is damaged, we may be adversely affected.
▪Our business could be negatively impacted by corporate citizenship and environmental, social and governance matters and/or our reporting of such matters.
▪Because no public market exists for our common shares, the ability of shareholders to sell their common shares is limited.
▪There can be no assurance that we will continue to declare cash dividends in the future, in any particular amounts or at all.
▪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, or other public health concerns, 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 this quarterly report on Form 10-Q and in our annual report on Form 10-K/A10-K 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.
During the quarter ended September 30, 2017, thereThere have been no material changes in our reported market risks or risk management policies since the market risk previously presented infiling of our annual report2020 Annual Report on Form 10-K, forwhich was filed with the year ended December 31, 2016.Securities and Exchange Commission on March 8, 2021.
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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’sSecurities and Exchange Commission’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
We have begun to enhance our controls and procedures in an effort to remediate the material weakness discussed above, including improving the precision of our review controls relating 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 were no changes in our internal control over financial reporting during the fourthfiscal quarter 2016ended July 3, 2021 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 and have met with both the civil and criminal divisions of the Department of Justice ("DOJ") to resolve the matter. Due to pandemic-related issues and delays on the side of the DOJ, the matter currently remains unresolved.
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. All civil cases continue to remain stayed.
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.
The factors described below represent the principal risks we face. Except as otherwise indicated, these factors may or may not occur and we are not in a position to express a view on the likelihood 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.
Item 1A.Risk Factors.
Our business is highly seasonal and weather dependent.
Our business, other than tree services to utility customers, is highly seasonal and weather dependent, primarily due to fluctuations in horticultural services provided to Residential and Commercial customers. We have historically incurred losses in the first quarter, while revenue 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 the demand for our horticultural services, resulting in reduced revenues that would have an adverse effectAnnual Report on our results of operations.
Economic conditions may adversely impact our customers’ future spending as well as pricing 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, which could reduce our cash flow and adversely impact our debt or equity financing. These events could have a material adverse effect on our operations and our ability 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, in part, on the financial strength of our customers. We grant credit, generally without collateral, to our customers. Consequently, we are subject to credit risk related to changes in business and economic factors throughout the United States and Canada. In the event customers experience financial difficulty, and particularly if bankruptcy results, our profitability 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 income and financial condition.
Our business is dependent upon service to our utility customers 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 specifically 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 orForm 10-K 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 values and could reduce shareholders’ equity. In addition, if we expand 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 Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 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 coverage 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 for2020, includes a detailed discussion of our risk factors. There have been no material changes to the first and second quarterly periods of 2017 to correct an accounting errorrisk factors described in the method historically used by2020 Form 10-K during the
Company to classify shares six months ended July 3, 2021. Disclosure 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 willrisks should not be prevented or detected on a timely basis. As a result ofinterpreted to imply that the material weakness, management has concluded that we didrisks have 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.already materialized.
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 ninesix 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, 2017.2021.
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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 2021 | | | | | | | | |
| January 1 to January 30 | | 1,581 | | | $ | 24.90 | | | — | | 690,960 |
| January 31 to February 27 | | 170 | | | 24.90 | | | — | | 690,960 |
| February 28 to April 3 | | 123,421 | | | 30.00 | | | — | | 690,960 |
| Total First Quarter | | 125,172 | | | 29.93 | | | — | | |
| | | | | | | | |
| April 4 to May 1 | | 259,719 | | | 30.00 | | | — | | 690,960 |
| May 2 to May 29 | | 272,217 | | | 30.00 | | | — | | 690,960 |
| May 30 to July 3 | | 252,998 | | | 30.00 | | | 176,937 | | 514,023 |
| Total Second Quarter | | 784,934 | | | 30.00 | | | 176,937 | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Total Year-to-Date | | 910,106 | | | $ | 29.99 | | | 176,937 | | |
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,P, 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
(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, 514,023 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 | | | |
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Exhibit No. | Description | | |
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| | | Filed Herewith |
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| 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,Davey Receivables LLC and PNC Bank, National Association and Wells Fargo Bank, N.A., as co-documentation agents, dated as of October 6, 2017 (Incorporated(incorporated by reference to Exhibit 10.1 to the Company'sCompany's Current Report on Form 8-K filed with the Securities and Exchange Commission on October 12, 2017)May 20, 2021). | | | |
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| | | Filed Herewith | |
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| | | Filed Herewith | |
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| | | Furnished Herewith | |
| | | | |
| | | Furnished Herewith | |
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| 101 | The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2017,July 3, 2021, 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 | |
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| 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.
