UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 02, 202101, 2022
OR
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______________ to ______________
Commission file number 000-11917
THE DAVEY TREE EXPERT COMPANY
(Exact name of registrant as specified in its charter)
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Ohio | | | 34-0176110 |
(State or other jurisdiction of incorporation or organization) | | | (I.R.S. Employer Identification Number) |
1500 North Mantua Street
P.O. Box 5193
Kent, OH 44240
(Address of principal executive offices) (Zip code)
(330) 673-9511
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
N/A | | N/A | | N/A |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large Accelerated Filer | ☐ | | Accelerated Filer | ☒☐ | | Emerging Growth Company | ☐ |
Non-Accelerated Filer | ☐☒ | | Smaller Reporting Company | ☐ | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
There were 44,645,64042,921,611 Common Shares, $.50$.50 par value, outstanding as of October 29, 2021. November 4, 2022. The registrant's Common Shares are not traded on a public market.
The Davey Tree Expert Company
Quarterly Report on Form 10-Q
October 2, 20211, 2022
INDEX
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Part I. | Financial Information | |
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Item 1. | Financial Statements (Unaudited) | |
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"We," "us," "our," the "Company," "The Registrant," "Davey" and "Davey Tree," unless the context otherwise requires, means The Davey Tree Expert Company and its subsidiaries. |
THE DAVEY TREE EXPERT COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except per share data dollar amounts)
| | | October 2, 2021 | | December 31, 2020 | | October 1, 2022 | | December 31, 2021 |
Assets | Assets | | | | Assets | | | |
Current assets: | Current assets: | | | | Current assets: | | | |
Cash | Cash | $ | 33,057 | | | $ | 16,201 | | Cash | $ | 22,844 | | | $ | 19,460 | |
Accounts receivable, net | Accounts receivable, net | 283,702 | | | 252,921 | | Accounts receivable, net | 326,291 | | | 278,280 | |
Operating supplies | Operating supplies | 12,395 | | | 10,206 | | Operating supplies | 15,491 | | | 12,662 | |
Other current assets | Other current assets | 47,418 | | | 25,734 | | Other current assets | 46,881 | | | 37,853 | |
Total current assets | Total current assets | 376,572 | | | 305,062 | | Total current assets | 411,507 | | | 348,255 | |
| Property and equipment, net | Property and equipment, net | 229,575 | | | 204,717 | | Property and equipment, net | 262,701 | | | 227,985 | |
Right-of-use assets - operating leases | Right-of-use assets - operating leases | 81,789 | | | 55,893 | | Right-of-use assets - operating leases | 95,350 | | | 86,423 | |
Marketable securities and other investments | | Marketable securities and other investments | 46,473 | | | 25,401 | |
Other assets | Other assets | 20,880 | | | 29,756 | | Other assets | 14,304 | | | 17,264 | |
Intangible assets, net | Intangible assets, net | 11,825 | | | 11,670 | | Intangible assets, net | 10,637 | | | 11,633 | |
Goodwill | Goodwill | 55,072 | | | 48,256 | | Goodwill | 58,999 | | | 55,980 | |
Total assets | Total assets | $ | 775,713 | | | $ | 655,354 | | Total assets | $ | 899,971 | | | $ | 772,941 | |
Liabilities and shareholders' equity | Liabilities and shareholders' equity | | | | Liabilities and shareholders' equity | | | |
Current liabilities: | Current liabilities: | | | | Current liabilities: | | | |
Accounts payable | Accounts payable | $ | 43,013 | | | $ | 42,787 | | Accounts payable | $ | 45,942 | | | $ | 43,021 | |
Accrued expenses | Accrued expenses | 92,665 | | | 98,441 | | Accrued expenses | 85,047 | | | 75,138 | |
Current portion of long-term debt and finance lease liabilities | Current portion of long-term debt and finance lease liabilities | 33,488 | | | 21,813 | | Current portion of long-term debt and finance lease liabilities | 34,088 | | | 25,268 | |
Other current liabilities | Other current liabilities | 61,671 | | | 56,831 | | Other current liabilities | 74,500 | | | 77,549 | |
Total current liabilities | Total current liabilities | 230,837 | | | 219,872 | | Total current liabilities | 239,577 | | | 220,976 | |
Long-term debt | Long-term debt | 111,777 | | | 77,068 | | Long-term debt | 174,579 | | | 123,531 | |
Lease liabilities - finance leases | Lease liabilities - finance leases | 7,886 | | | 6,479 | | Lease liabilities - finance leases | 9,704 | | | 8,646 | |
Lease liabilities - operating leases | Lease liabilities - operating leases | 54,249 | | | 36,612 | | Lease liabilities - operating leases | 62,586 | | | 57,335 | |
Self-insurance accruals | Self-insurance accruals | 88,051 | | | 71,573 | | Self-insurance accruals | 96,487 | | | 77,099 | |
Other noncurrent liabilities | Other noncurrent liabilities | 11,456 | | | 10,689 | | Other noncurrent liabilities | 12,181 | | | 11,583 | |
Total liabilities | Total liabilities | 504,256 | | | 422,293 | | Total liabilities | 595,114 | | | 499,170 | |
Commitments and contingencies (Note O) | | |
Redeemable common shares related to 401KSOP and Employee Stock Ownership Plan (ESOP); 9,762 and 10,226 shares at redemption value as of October 2, 2021 and December 31, 2020* | 160,097 | | | 153,387 | | |
Common shareholders' equity:* | | | | |
Common shares, $0.50 par value, per share; 96,000 shares authorized; 76,066 and 75,602 shares issued and outstanding before deducting treasury shares and which excludes 9,762 and 10,226 shares subject to redemption as of October 2, 2021 and December 31, 2020 | 38,033 | | | 37,801 | | |
Commitments and contingencies (Note P) | | Commitments and contingencies (Note P) | |
Redeemable common shares related to 401KSOP and Employee Stock Ownership Plan (ESOP) 9,288 and 9,392 shares at redemption value as of October 1, 2022 and December 31, 2021 | | Redeemable common shares related to 401KSOP and Employee Stock Ownership Plan (ESOP) 9,288 and 9,392 shares at redemption value as of October 1, 2022 and December 31, 2021 | 168,120 | | | 169,931 | |
Common shareholders' equity: | | Common shareholders' equity: | | | |
Common shares, $.50 par value, per share; 96,000 shares authorized; 76,539 and 76,436 shares issued and outstanding before deducting treasury shares and which excludes 9,288 and 9,392 shares subject to redemption as of October 1, 2022 and December 31, 2021 | | Common shares, $.50 par value, per share; 96,000 shares authorized; 76,539 and 76,436 shares issued and outstanding before deducting treasury shares and which excludes 9,288 and 9,392 shares subject to redemption as of October 1, 2022 and December 31, 2021 | 38,398 | | | 38,379 | |
Additional paid-in capital | Additional paid-in capital | 125,178 | | | 110,069 | | Additional paid-in capital | 154,111 | | | 135,897 | |
| Common shares subscribed, unissued | | Common shares subscribed, unissued | 23,954 | | | — | |
Retained earnings | Retained earnings | 248,853 | | | 206,711 | | Retained earnings | 286,279 | | | 239,979 | |
Accumulated other comprehensive loss | Accumulated other comprehensive loss | (4,330) | | | (4,547) | | Accumulated other comprehensive loss | (6,839) | | | (4,173) | |
| | 407,734 | | | 350,034 | | | 495,903 | | | 410,082 | |
Less: Cost of common shares held in treasury; 41,089 shares at October 2, 2021 and 40,187 shares at December 31, 2020 | 296,374 | | | 270,360 | | |
| Less: Cost of common shares held in treasury; 42,082 shares at October 1, 2022 and 41,325 shares at December 31, 2021 | | Less: Cost of common shares held in treasury; 42,082 shares at October 1, 2022 and 41,325 shares at December 31, 2021 | 338,532 | | | 306,242 | |
Common shares subscription receivable | | Common shares subscription receivable | 20,634 | | | — | |
Total common shareholders' equity | Total common shareholders' equity | 111,360 | | | 79,674 | | Total common shareholders' equity | 136,737 | | | 103,840 | |
Total liabilities and shareholders' equity | Total liabilities and shareholders' equity | $ | 775,713 | | | $ | 655,354 | | Total liabilities and shareholders' equity | $ | 899,971 | | | $ | 772,941 | |
| * Prior period has been adjusted for the 2-for-one stock split. | | |
| | See notes to condensed consolidated financial statements (unaudited). | See notes to condensed consolidated financial statements (unaudited). | | | | See notes to condensed consolidated financial statements (unaudited). | |
THE DAVEY TREE EXPERT COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share dollar amounts)
| | | Three Months Ended | | Nine Months Ended | | | Three Months Ended | | Nine Months Ended | |
| | October 2, 2021 | | September 26, 2020 | | October 2, 2021 | | September 26, 2020 | | | October 1, 2022 | | October 2, 2021 | | October 1, 2022 | | October 2, 2021 | |
Revenues | Revenues | $ | 370,244 | | | $ | 337,453 | | | $ | 1,024,541 | | | $ | 944,980 | | | Revenues | $ | 398,945 | | | $ | 370,244 | | | $ | 1,143,548 | | | $ | 1,024,541 | | |
| Costs and expenses: | Costs and expenses: | | | Costs and expenses: | | |
Operating | Operating | 232,599 | | | 208,638 | | | 650,909 | | | 598,225 | | | Operating | 254,661 | | | 232,599 | | | 740,422 | | | 650,909 | | |
Selling | Selling | 67,353 | | | 60,203 | | | 178,876 | | | 162,287 | | | Selling | 72,364 | | | 67,353 | | | 201,315 | | | 178,876 | | |
General and administrative | General and administrative | 20,739 | | | 19,891 | | | 69,712 | | | 60,477 | | | General and administrative | 27,964 | | | 20,739 | | | 87,014 | | | 69,712 | | |
Depreciation and amortization | Depreciation and amortization | 14,127 | | | 13,825 | | | 41,287 | | | 42,553 | | | Depreciation and amortization | 13,780 | | | 14,127 | | | 41,082 | | | 41,287 | | |
Gain on sale of assets, net | Gain on sale of assets, net | (1,507) | | | (476) | | | (4,174) | | | (2,045) | | | Gain on sale of assets, net | (2,837) | | | (1,507) | | | (5,787) | | | (4,174) | | |
Total costs and expenses | Total costs and expenses | 333,311 | | | 302,081 | | | 936,610 | | | 861,497 | | | Total costs and expenses | 365,932 | | | 333,311 | | | 1,064,046 | | | 936,610 | | |
| Income from operations | Income from operations | 36,933 | | | 35,372 | | | 87,931 | | | 83,483 | | | Income from operations | 33,013 | | | 36,933 | | | 79,502 | | | 87,931 | | |
| Other income (expense): | Other income (expense): | | | Other income (expense): | | |
Interest expense | Interest expense | (1,449) | | | (1,579) | | | (4,093) | | | (5,477) | | | Interest expense | (2,164) | | | (1,449) | | | (5,312) | | | (4,093) | | |
Interest income | Interest income | 39 | | | 1,688 | | | 161 | | | 1,885 | | | Interest income | 303 | | | 39 | | | 489 | | | 161 | | |
Other, net | Other, net | (2,298) | | | (1,499) | | | (5,548) | | | (4,550) | | | Other, net | (3,371) | | | (2,298) | | | (8,241) | | | (5,548) | | |
| Income before income taxes | Income before income taxes | 33,225 | | | 33,982 | | | 78,451 | | | 75,341 | | | Income before income taxes | 27,781 | | | 33,225 | | | 66,438 | | | 78,451 | | |
| Income taxes | Income taxes | 8,298 | | | 9,447 | | | 20,554 | | | 20,945 | | | Income taxes | 7,317 | | | 8,298 | | | 17,407 | | | 20,554 | | |
| Net income | Net income | $ | 24,927 | | | $ | 24,535 | | | $ | 57,897 | | | $ | 54,396 | | | Net income | $ | 20,464 | | | $ | 24,927 | | | $ | 49,031 | | | $ | 57,897 | | |
| Net income per share:* | | | |
Net income per share: | | Net income per share: | | |
| Basic | Basic | $ | .56 | | | $ | .54 | | | $ | 1.28 | | | $ | 1.18 | | | Basic | $ | .46 | | | $ | .56 | | | $ | 1.10 | | | $ | 1.28 | | |
Diluted | Diluted | $ | .52 | | | $ | .51 | | | $ | 1.21 | | | $ | 1.13 | | | Diluted | $ | .44 | | | $ | .52 | | | $ | 1.05 | | | $ | 1.21 | | |
| Weighted-average shares outstanding:* | | | |
Weighted-average shares outstanding: | | Weighted-average shares outstanding: | | |
| Basic | Basic | 44,885 | | | 45,748 | | | 45,257 | | | 45,912 | | | Basic | 44,148 | | | 44,885 | | | 44,422 | | | 45,257 | | |
Diluted | Diluted | 47,951 | | | 47,708 | | | 47,785 | | | 48,005 | | | Diluted | 46,405 | | | 47,951 | | | 46,719 | | | 47,785 | | |
| * Prior period has been adjusted for the 2-for-one stock split. | | | |
| Certain amounts in the prior year have been recast as a result of the change in accounting principle as discussed in Note A. | | |
| See notes to condensed consolidated financial statements (unaudited). | See notes to condensed consolidated financial statements (unaudited). | | See notes to condensed consolidated financial statements (unaudited). | |
THE DAVEY TREE EXPERT COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
(In thousands)
| | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended |
| | October 2, 2021 | | September 26, 2020 | | October 2, 2021 | | September 26, 2020 | | October 1, 2022 | | October 2, 2021 | | October 1, 2022 | | October 2, 2021 |
Net income | Net income | $ | 24,927 | | | $ | 24,535 | | | $ | 57,897 | | | $ | 54,396 | | Net income | $ | 20,464 | | | $ | 24,927 | | | $ | 49,031 | | | $ | 57,897 | |
Components of other comprehensive income (loss), net of tax: | Components of other comprehensive income (loss), net of tax: | | Components of other comprehensive income (loss), net of tax: | |
Foreign currency translation adjustments | Foreign currency translation adjustments | (788) | | | 629 | | | 105 | | | (610) | | Foreign currency translation adjustments | (1,934) | | | (788) | | | (2,455) | | | 105 | |
| Unrealized loss on available-for-sale securities | | Unrealized loss on available-for-sale securities | (98) | | | — | | | (279) | | | — | |
Amortization of defined benefit pension items: | Amortization of defined benefit pension items: | | Amortization of defined benefit pension items: | |
Net actuarial loss | Net actuarial loss | 27 | | | 16 | | | 77 | | | 49 | | Net actuarial loss | 18 | | | 27 | | | 55 | | | 77 | |
Prior service cost | Prior service cost | 11 | | | 13 | | | 35 | | | 36 | | Prior service cost | 4 | | | 11 | | | 13 | | | 35 | |
Defined benefit pension plan adjustments | Defined benefit pension plan adjustments | 38 | | | 29 | | | 112 | | | 85 | | Defined benefit pension plan adjustments | 22 | | | 38 | | | 68 | | | 112 | |
| Other comprehensive income (loss), net of tax | Other comprehensive income (loss), net of tax | (750) | | | 658 | | | 217 | | | (525) | | Other comprehensive income (loss), net of tax | (2,010) | | | (750) | | | (2,666) | | | 217 | |
| Comprehensive income | Comprehensive income | $ | 24,177 | | | $ | 25,193 | | | $ | 58,114 | | | $ | 53,871 | | Comprehensive income | $ | 18,454 | | | $ | 24,177 | | | $ | 46,365 | | | $ | 58,114 | |
| Certain amounts in the prior year have been recast as a result of the change in accounting principle as discussed in Note A. | |
| | See notes to condensed consolidated financial statements (unaudited). | See notes to condensed consolidated financial statements (unaudited). | See notes to condensed consolidated financial statements (unaudited). |
THE DAVEY TREE EXPERT COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
(In thousands, except per share data)
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| Common Shares | | Additional Paid-in Capital | | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss), Net of Tax | | Common Shares Held in Treasury | | | Total Common Shareholders' Equity |
Balances at July 3, 2021 | $ | 38,049 | | | $ | 123,822 | | | | $ | 224,707 | | | $ | (3,580) | | | $ | (290,253) | | | | $ | 92,745 | |
Net income | — | | | — | | | | 24,927 | | | — | | | — | | | | 24,927 | |
Change in 401KSOP and ESOP related shares | (16) | | | (529) | | | | — | | | — | | | — | | | | (545) | |
Shares sold to employees | — | | | 1,655 | | | | — | | | — | | | 1,293 | | | | 2,948 | |
Options exercised | — | | | (228) | | | | — | | | — | | | 1,828 | | | | 1,600 | |
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Stock-based compensation | — | | | 458 | | | — | | | — | | | — | | | | 458 | |
Dividends, $.015 per share * | — | | | — | | | | (781) | | | — | | | — | | | | (781) | |
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Currency translation adjustments | — | | | — | | | | — | | | (788) | | | — | | | | (788) | |
Defined benefit pension plans | — | | | — | | | | — | | | 38 | | | — | | | | 38 | |
Shares purchased | — | | | — | | | | — | | | — | | | (9,242) | | | | (9,242) | |
Balances at October 2, 2021 | $ | 38,033 | | | $ | 125,178 | | | | $ | 248,853 | | | $ | (4,330) | | | $ | (296,374) | | | | $ | 111,360 | |
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Balances at January 1, 2021 | $ | 37,801 | | | $ | 110,069 | | | | $ | 206,711 | | | $ | (4,547) | | | $ | (270,360) | | | | $ | 79,674 | |
Net income | — | | | — | | | | 57,897 | | | — | | | — | | | | 57,897 | |
Change in 401KSOP and ESOP related shares | 232 | | | 6,679 | | | | (13,628) | | | — | | | — | | | | (6,717) | |
Shares sold to employees | — | | | 7,098 | | | | — | | | — | | | 6,645 | | | | 13,743 | |
Options exercised | — | | | (636) | | | | — | | | — | | | 3,849 | | | | 3,213 | |
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Stock-based compensation | — | | | 1,968 | | | | — | | | — | | | — | | | | 1,968 | |
Dividends, $.043 per share * | — | | | — | | | | (2,127) | | | — | | | — | | | | (2,127) | |
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Currency translation adjustments | — | | | — | | | | — | | | 105 | | | — | | | | 105 | |
Defined benefit pension plans | — | | | — | | | | — | | | 112 | | | — | | | | 112 | |
Shares purchased | — | | | — | | | | — | | | — | | | (36,508) | | | | (36,508) | |
Balances at October 2, 2021 | $ | 38,033 | | | $ | 125,178 | | | | $ | 248,853 | | | $ | (4,330) | | | $ | (296,374) | | | | $ | 111,360 | |
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| Common Shares | | Additional Paid-in Capital | | Common Shares Subscribed, Unissued | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss), Net of Tax | | Common Shares Held in Treasury | | Common Shares Subscription Receivable | | Total Common Shareholders' Equity |
Balances at July 2, 2022 | $ | 38,645 | | | $ | 151,752 | | | $ | — | | | $ | 266,745 | | | $ | (4,829) | | | $ | (333,611) | | | $ | 533 | | | $ | 119,235 | |
Net income | — | | | — | | | — | | | 20,464 | | | — | | | — | | | — | | | 20,464 | |
Change in 401KSOP and ESOP related shares | (247) | | | (4,215) | | | — | | | 1 | | | — | | | — | | | — | | | (4,461) | |
Shares sold to employees | — | | | 3,354 | | | — | | | — | | | — | | | 2,623 | | | — | | | 5,977 | |
Options exercised | — | | | 35 | | | — | | | — | | | — | | | 137 | | | — | | | 172 | |
Subscription shares | — | | | 1,554 | | | 23,954 | | | — | | | — | | | 1,212 | | | (21,167) | | | 5,553 | |
Stock-based compensation | — | | | 1,631 | | | — | | | — | | | — | | | — | | | — | | | 1,631 | |
Dividends, $.020 per share | — | | | — | | | — | | | (931) | | | — | | | — | | | — | | | (931) | |
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Currency translation adjustments | — | | | — | | | — | | | — | | | (1,934) | | | — | | | — | | | (1,934) | |
Defined benefit pension plans | — | | | — | | | — | | | — | | | 22 | | | — | | | — | | | 22 | |
Available-for-sale securities | — | | | — | | | — | | | — | | | (98) | | | — | | | — | | | (98) | |
Shares purchased | — | | | — | | | — | | | — | | | — | | | (8,893) | | | — | | | (8,893) | |
Balances at October 1, 2022 | $ | 38,398 | | | $ | 154,111 | | | $ | 23,954 | | | $ | 286,279 | | | $ | (6,839) | | | $ | (338,532) | | | $ | (20,634) | | | $ | 136,737 | |
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Balances at January 1, 2022 | $ | 38,379 | | | $ | 135,897 | | | $ | — | | | $ | 239,979 | | | $ | (4,173) | | | $ | (306,242) | | | $ | — | | | $ | 103,840 | |
Net income | — | | | — | | | — | | | 49,031 | | | — | | | — | | | — | | | 49,031 | |
Change in 401KSOP and ESOP related shares | 19 | | | 1,840 | | | — | | | (49) | | | — | | | — | | | — | | | 1,810 | |
Shares sold to employees | — | | | 11,714 | | | — | | | — | | | — | | | 9,623 | | | — | | | 21,337 | |
Options exercised | — | | | (1,122) | | | — | | | — | | | — | | | 2,742 | | | — | | | 1,620 | |
Subscription shares | — | | | 1,554 | | | 23,954 | | | — | | | — | | | 1,212 | | | (20,634) | | | 6,086 | |
Stock-based compensation | — | | | 4,228 | | | — | | | — | | | — | | | — | | | — | | | 4,228 | |
Dividends, $.058 per share | — | | | — | | | — | | | (2,682) | | | — | | | — | | | — | | | (2,682) | |
| | | | | | | | | | | | | | | |
Currency translation adjustments | — | | | — | | | — | | | — | | | (2,455) | | | — | | | — | | | (2,455) | |
Defined benefit pension plans | — | | | — | | | — | | | — | | | 68 | | | — | | | — | | | 68 | |
Available-for-sale securities | — | | | — | | | | | — | | | (279) | | | — | | | — | | | (279) | |
Shares purchased | — | | | — | | | — | | | — | | | — | | | (45,867) | | | — | | | (45,867) | |
Balances at October 1, 2022 | $ | 38,398 | | | $ | 154,111 | | | $ | 23,954 | | | $ | 286,279 | | | $ | (6,839) | | | $ | (338,532) | | | $ | (20,634) | | | $ | 136,737 | |
| | | | | | | | | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | |
THE DAVEY TREE EXPERT COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
(In thousands, except per share data) (continued)
| | | Common Shares | | Additional Paid-in Capital | | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss), Net of Tax | | Common Shares Held in Treasury | | | Total Common Shareholders' Equity | | Common Shares | | Additional Paid-in Capital | | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss), Net of Tax | | Common Shares Held in Treasury | | | Total Common Shareholders' Equity |
Balances at June 27, 2020 | $ | 37,784 | | | $ | 103,291 | | | | $ | 202,843 | | | $ | (6,586) | | | $ | (262,210) | | | | $ | 75,122 | | |
Balances at July 3, 2021 | | Balances at July 3, 2021 | $ | 38,049 | | | $ | 123,822 | | | | $ | 224,707 | | | $ | (3,580) | | | $ | (290,253) | | | | $ | 92,745 | |
Net income | Net income | — | | | — | | | | 24,535 | | | — | | | — | | | | 24,535 | | Net income | — | | | — | | | | 24,927 | | | — | | | — | | | | 24,927 | |
Change in 401KSOP and ESOP related shares | Change in 401KSOP and ESOP related shares | (44) | | | (1,067) | | | | — | | | — | | | — | | | | (1,111) | | Change in 401KSOP and ESOP related shares | (16) | | | (529) | | | | — | | | — | | | — | | | | (545) | |
Shares sold to employees | Shares sold to employees | — | | | 1,119 | | | | — | | | — | | | 1,058 | | | | 2,177 | | Shares sold to employees | — | | | 1,655 | | | | — | | | — | | | 1,293 | | | | 2,948 | |
Options exercised | Options exercised | — | | | 84 | | | — | | | — | | | 458 | | | | 542 | | Options exercised | — | | | (228) | | | | — | | | — | | | 1,828 | | | | 1,600 | |
| Stock-based compensation | Stock-based compensation | — | | | 796 | | | — | | | — | | | — | | | | 796 | | Stock-based compensation | — | | | 458 | | | — | | | — | | | — | | | | 458 | |
Dividends, $.013 per share * | — | | | — | | | | (569) | | | — | | | — | | | | (569) | | |
Dividends, $.015 per share | | Dividends, $.015 per share | — | | | — | | | | (781) | | | — | | | — | | | | (781) | |
| Currency translation adjustments | Currency translation adjustments | — | | | — | | | | — | | | 629 | | | — | | | | 629 | | Currency translation adjustments | — | | | — | | | | — | | | (788) | | | — | | | | (788) | |
Defined benefit pension plans | Defined benefit pension plans | — | | | — | | | | — | | | 29 | | | — | | | | 29 | | Defined benefit pension plans | — | | | — | | | | — | | | 38 | | | — | | | | 38 | |
Shares purchased | Shares purchased | — | | | — | | | | — | | | — | | | (3,473) | | | | (3,473) | | Shares purchased | — | | | — | | | | — | | | — | | | (9,242) | | | | (9,242) | |
Balances at September 26, 2020 | $ | 37,740 | | | $ | 104,223 | | | | $ | 226,809 | | | $ | (5,928) | | | $ | (264,167) | | | | $ | 98,677 | | |
Balances at October 2, 2021 | | Balances at October 2, 2021 | $ | 38,033 | | | $ | 125,178 | | | | $ | 248,853 | | | $ | (4,330) | | | $ | (296,374) | | | | $ | 111,360 | |
| Balances at January 1, 2020 | $ | 37,767 | | | $ | 96,366 | | | | $ | 177,711 | | | $ | (5,403) | | | $ | (246,595) | | | | $ | 59,846 | | |
Balances at January 1, 2021 | | Balances at January 1, 2021 | $ | 37,801 | | | $ | 110,069 | | | | $ | 206,711 | | | $ | (4,547) | | | $ | (270,360) | | | | $ | 79,674 | |
Net income | Net income | — | | | — | | | | 54,396 | | | — | | | — | | | | 54,396 | | Net income | — | | | — | | | | 57,897 | | | — | | | — | | | | 57,897 | |
Change in 401KSOP and ESOP related shares | Change in 401KSOP and ESOP related shares | (27) | | | (661) | | | | (3,590) | | | — | | | — | | | | (4,278) | | Change in 401KSOP and ESOP related shares | 232 | | | 6,679 | | | | (13,628) | | | — | | | — | | | | (6,717) | |
Shares sold to employees | Shares sold to employees | — | | | 7,269 | | | | — | | | — | | | 8,053 | | | | 15,322 | | Shares sold to employees | — | | | 7,098 | | | | — | | | — | | | 6,645 | | | | 13,743 | |
Options exercised | Options exercised | — | | | (489) | | | | — | | | — | | | 1,864 | | | | 1,375 | | Options exercised | — | | | (636) | | | | — | | | — | | | 3,849 | | | | 3,213 | |
| Stock-based compensation | Stock-based compensation | — | | | 1,738 | | | | — | | | — | | | — | | | | 1,738 | | Stock-based compensation | — | | | 1,968 | | | | — | | | — | | | — | | | | 1,968 | |
| Dividends, $.038 per share * | — | | | — | | | | (1,708) | | | — | | | — | | | | (1,708) | | |
Dividends, $.043 per share | | Dividends, $.043 per share | — | | | — | | | | (2,127) | | | — | | | — | | | | (2,127) | |
| Currency translation adjustments | Currency translation adjustments | — | | | — | | | | — | | | (610) | | | — | | | | (610) | | Currency translation adjustments | — | | | — | | | | — | | | 105 | | | — | | | | 105 | |
Defined benefit pension plans | Defined benefit pension plans | — | | | — | | | | — | | | 85 | | | — | | | | 85 | | Defined benefit pension plans | — | | | — | | | | — | | | 112 | | | — | | | | 112 | |
Shares purchased | Shares purchased | — | | | — | | | | — | | | — | | | (27,489) | | | | (27,489) | | Shares purchased | — | | | — | | | | — | | | — | | | (36,508) | | | | (36,508) | |
Balances at September 26, 2020 | $ | 37,740 | | | $ | 104,223 | | | | $ | 226,809 | | | $ | (5,928) | | | $ | (264,167) | | | | $ | 98,677 | | |
| *Adjusted for the 2-for-one stock split. | | | | |
| Certain amounts in the prior year have been recast as a result of the change in accounting principle as discussed in Note A. | |
Balances at October 2, 2021 | | Balances at October 2, 2021 | $ | 38,033 | | | $ | 125,178 | | | | $ | 248,853 | | | $ | (4,330) | | | $ | (296,374) | | | | $ | 111,360 | |
| See notes to condensed consolidated financial statements (unaudited). | See notes to condensed consolidated financial statements (unaudited). | | | | | | | | | See notes to condensed consolidated financial statements (unaudited). | | | | | | | | |
THE DAVEY TREE EXPERT COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
| | | Nine Months Ended | | Nine Months Ended |
| | October 2, 2021 | | September 26, 2020 | | October 1, 2022 | | October 2, 2021 |
Operating activities | Operating activities | | | | | Operating activities | | | | |
Net income | Net income | | $ | 57,897 | | | $ | 54,396 | | Net income | | $ | 49,031 | | | $ | 57,897 | |
Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | | Adjustments to reconcile net income to net cash provided by operating activities: | |
Depreciation and amortization | Depreciation and amortization | | 41,287 | | | 42,553 | | Depreciation and amortization | | 41,082 | | | 41,287 | |
Other | Other | | (1,242) | | | 35 | | Other | | (683) | | | (1,242) | |
Changes in operating assets and liabilities, net of assets acquired: | Changes in operating assets and liabilities, net of assets acquired: | | Changes in operating assets and liabilities, net of assets acquired: | |
Accounts receivable | Accounts receivable | | (30,268) | | | (34,801) | | Accounts receivable | | (49,451) | | | (30,268) | |
Accounts payable and accrued expenses | Accounts payable and accrued expenses | | (9,471) | | | 28,389 | | Accounts payable and accrued expenses | | 12,709 | | | (9,471) | |
Self-insurance accruals | Self-insurance accruals | | 13,041 | | | 14,686 | | Self-insurance accruals | | 13,306 | | | 13,041 | |
Prepaid expenses | Prepaid expenses | | (13,442) | | | (7,506) | | Prepaid expenses | | (10,724) | | | (13,442) | |
Other, net | Other, net | | (401) | | | 1,676 | | Other, net | | 7,710 | | | (401) | |
|
| | (496) | | | 45,032 | |
| | 13,949 | | | (496) | |
Net cash provided by operating activities | Net cash provided by operating activities | | 57,401 | | | 99,428 | | Net cash provided by operating activities | | 62,980 | | | 57,401 | |
Investing activities | Investing activities | | | | | Investing activities | | | | |
Capital expenditures: | Capital expenditures: | | | | | Capital expenditures: | | | | |
Equipment | Equipment | | (47,907) | | | (38,071) | | Equipment | | (54,829) | | | (47,907) | |
Land and buildings | Land and buildings | | (8,728) | | | (2,408) | | Land and buildings | | (15,916) | | | (8,728) | |
Purchases of businesses, net of cash acquired and debt incurred | Purchases of businesses, net of cash acquired and debt incurred | | (10,227) | | | (3,826) | | Purchases of businesses, net of cash acquired and debt incurred | | (4,453) | | | (10,227) | |
Other | | 7,085 | | | 2,691 | | |
| Proceeds from sales of property and equipment | | Proceeds from sales of property and equipment | | 6,781 | | | 7,085 | |
Purchases of marketable securities | | Purchases of marketable securities | | (41,305) | | | — | |
Proceeds from sale of marketable securities | | Proceeds from sale of marketable securities | | 14,114 | | | — | |
Net cash used in investing activities | Net cash used in investing activities | | (59,777) | | | (41,614) | | Net cash used in investing activities | | (95,608) | | | (59,777) | |
Financing activities | Financing activities | | | | | Financing activities | | | | |
Revolving credit facility borrowings | Revolving credit facility borrowings | | 279,163 | | | 522,500 | | Revolving credit facility borrowings | | 453,885 | | | 279,163 | |
Revolving credit facility payments | Revolving credit facility payments | | (245,685) | | | (554,500) | | Revolving credit facility payments | | (402,618) | | | (245,685) | |
Purchase of common shares for treasury | Purchase of common shares for treasury | | (36,508) | | | (27,489) | | Purchase of common shares for treasury | | (45,867) | | | (36,508) | |
Sale of common shares from treasury | Sale of common shares from treasury | | 16,956 | | | 16,698 | | Sale of common shares from treasury | | 29,043 | | | 16,956 | |
Dividends paid | Dividends paid | | (2,127) | | | (1,708) | | Dividends paid | | (2,682) | | | (2,127) | |
| Proceeds from notes payable | Proceeds from notes payable | | 217,867 | | | 152,128 | | Proceeds from notes payable | | 69,337 | | | 217,867 | |
Payments of notes payable | Payments of notes payable | | (207,786) | | | (149,843) | | Payments of notes payable | | (62,602) | | | (207,786) | |
Payments of finance leases | Payments of finance leases | | (2,688) | | | (1,525) | | Payments of finance leases | | (2,313) | | | (2,688) | |
Net cash provided by (used in) financing activities | | 19,192 | | | (43,739) | | |
Net cash provided by financing activities | | Net cash provided by financing activities | | 36,183 | | | 19,192 | |
Effect of exchange rate changes on cash | Effect of exchange rate changes on cash | | 40 | | | (17) | | Effect of exchange rate changes on cash | | (171) | | | 40 | |
Increase in cash | Increase in cash | | 16,856 | | | 14,058 | | Increase in cash | | 3,384 | | | 16,856 | |
| Cash, beginning of period | Cash, beginning of period | | 16,201 | | | 11,000 | | Cash, beginning of period | | 19,460 | | | 16,201 | |
Cash, end of period | Cash, end of period | | $ | 33,057 | | | $ | 25,058 | | Cash, end of period | | $ | 22,844 | | | $ | 33,057 | |
Supplemental cash flow information follows: | Supplemental cash flow information follows: | | | | | Supplemental cash flow information follows: | | | | |
Interest paid | Interest paid | | $ | 4,715 | | | $ | 6,408 | | Interest paid | | $ | 3,764 | | | $ | 4,715 | |
Income taxes paid | Income taxes paid | | 21,204 | | | 17,055 | | Income taxes paid | | 9,869 | | | 21,204 | |
| Certain amounts in the prior year have been recast as a result of the change in accounting principle as discussed in Note A. | |
| See notes to condensed consolidated financial statements (unaudited). | See notes to condensed consolidated financial statements (unaudited). | | | | | See notes to condensed consolidated financial statements (unaudited). | | | | |
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 2, 20211, 2022
(Amounts in thousands, except share data)
A.Basis of Financial Statement Preparation
The condensed consolidated financial statements present the financial position, results of operations and cash flows of The Davey Tree Expert Company and its subsidiaries. When we refer to “we,” “us,” “our,” the "Company," “Davey,” or “Davey Tree”, we mean The Davey Tree Expert Company and its subsidiaries, unless otherwise expressly stated or the context indicates otherwise.
We have prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), as codified in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”("ASC"), and with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. The condensed consolidated financial statements include all adjustments which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. All such adjustments are of a normal, recurring nature. All intercompany accounts and transactions have been eliminated in consolidation and certain amounts in the three and nine months ended September 26, 2020 have been recast to reflect the retrospective application of the change in accounting principle discussed in the Change in Accounting Method section of this note.consolidation.
Certain information and disclosures required by U.S. GAAP for complete financial statements have been omitted in accordance with the rules and regulations of the SEC. We suggest that these condensed consolidated financial statements be read in conjunction with the financial statements included in our annual report on Form 10-K for the year ended December 31, 20202021 (the “2020“2021 Annual Report”).
Per Common Share Information--All common share and per share data have been retroactively adjusted to recognize a 2-for-one stock split of our common shares effective October 1, 2021. On September 20, 2021, in connection with the stock split, the Company filed a Certificate of Amendment to its 2017 Amended Articles of Incorporation with the Secretary of State of the State of Ohio, which became effective upon filing and (1) proportionately increased the authorized number of common shares from 48,000,000 to 96,000,000 and (2) proportionately decreased the par value of the issued and unissued common shares from $1.00 per share to $.50 per share.
Use of Estimates in Financial Statement Preparation--The preparation of financial statements in accordance with U.S. GAAP requires the use of estimates and assumptions that affect reported amounts. Our condensed consolidated financial statements include amounts that are based on management’s best estimates and judgments. Estimates are used for, but not limited to, accounts receivable valuation, depreciable lives of fixed assets, long-lived asset valuation, self-insurance accruals, income taxes, stock valuation and revenue recognition. Actual results could differ from those estimates.
While the coronavirus ("COVID-19") pandemic did not have a material adverse effect on our reported results for the first nine months of our 2021 fiscal year, the overall extent and duration of the impact of COVID-19 on businesses and economic activity generally remains unclear. The extentOur business continues to which our operations may be impacted by COVID-19 will depend largely on future developments, which are highly uncertain due to its continual evolution and cannot be accurately predicted,a number of macro-economic factors, including new information which may emerge concerning the severitytrailing impact of the outbreakCOVID-19 pandemic. Global supply chains and actions by government authorities to contain the pandemic or treat its impact, including reimposing previously-lifted measuresproduct availability remain highly challenged and implementing vaccine mandates, which could impact ourongoing global events in Eastern Europe have only exacerbated an already difficult operating environment. These factors, combined with higher fuel costs, rising interest rates and a highly competitive labor supplymarket, have created an inflationary environment and future results of operations, as well as the possibility additional measures will be put in place, especially as sporadic outbreaks of COVID-19 continue to occur, and the success of vaccine rollouts and the effectiveness of such vaccines, among other things.
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 2, 2021
(Amounts in thousands, except share data)
cost pressures.The Company’s fiscal quarters each contain thirteen operating weeks, with the exception of the fourth quarter of a 53-week fiscal year, which contains fourteen operating weeks. The Company’s fiscal quarter that ended October 1, 2022 is referred to as the third quarter of 2022, and the fiscal quarter ended October 2, 2021 is referred to as the third quarter of 2021, and the fiscal quarter ended September 26, 2020 is referred to as the third quarter of 2020.
Change in Accounting Method--During the year ended December 31, 2020, we changed our method of accounting for our workers' compensation accruals from measuring the liabilities on a discounted basis to an undiscounted basis. We believe that measuring the workers' compensation accruals on an undiscounted basis is preferable because it simplifies the accounting for the liabilities, provides consistency with our other lines of coverage (vehicle liability and general liability) and results in financial statement presentation consistent with our industry peers.
As a result of this change in method of accounting, our financial statements and corresponding footnotes for the three and nine months ended September 26, 2020 have been recast to reflect the retrospective application of the change in accounting principle. We recorded the cumulative effect for the change in accounting principle as a decrease of $1,693 to retained earnings as of January 1, 2018. This change decreased our retained earnings by $2,059 at December 31, 2019.
The following tables present the effects of the change in accounting principle to our financial statements included herein:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 26, 2020 | | Nine Months Ended September 26, 2020 |
Statement of Operations | | Prior to Change in Accounting Principle | | Effect of Change | | Recast | | Prior to Change in Accounting Principle | | Effect of Change | | Recast |
| | | | | | | | | | | | |
Operating expense | | $ | 208,510 | | | $ | 128 | | | $ | 208,638 | | | $ | 597,963 | | | $ | 262 | | | $ | 598,225 | |
Total costs and expenses | | 301,953 | | | 128 | | | 302,081 | | | 861,235 | | | 262 | | | 861,497 | |
Income from operations | | 35,500 | | | (128) | | | 35,372 | | | 83,745 | | | (262) | | | 83,483 | |
Income before income taxes | | 34,110 | | | (128) | | | 33,982 | | | 75,603 | | | (262) | | | 75,341 | |
Income tax expense (benefit) | | 9,483 | | | (36) | | | 9,447 | | | 21,018 | | | (73) | | | 20,945 | |
Net income | | 24,627 | | | (92) | | | 24,535 | | | 54,585 | | | (189) | | | 54,396 | |
| | | | | | | | | | | | |
Net income per share: | | | | | | | | | | | | |
Basic | | $ | .54 | | | $ | — | | | $ | .54 | | | $ | 1.19 | | | $ | (.01) | | | $ | 1.18 | |
Diluted | | $ | .52 | | | $ | (.01) | | | $ | .51 | | | $ | 1.14 | | | $ | (.01) | | | $ | 1.13 | |
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 2, 2021
(Amounts in thousands, except share data)
| | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 26, 2020 |
Cash Flow | | Prior to Change in Accounting Principle | | Effect of Change | | Recast |
| | | | | | |
Net income | | $ | 54,585 | | | $ | (189) | | | $ | 54,396 | |
Adjustments to reconcile net income to net cash provided by operating activities--other | | 108 | | | (73) | | | 35 | |
Self-insurance accruals | | 14,424 | | | 262 | | | 14,686 | |
Net cash provided by operating activities | | 99,428 | | | — | | | 99,428 | |
2021.Recent Accounting Guidance
Accounting Standards Adopted in 2021
Accounting Standards Update 2019-12, Income Taxes (Topic 740)– Simplifying the Accounting for Income Taxes--In December 2019, the FASB issued Accounting Standards Update ("ASU") No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12)", which simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, including applicable interim periods. The Company adopted ASU 2019-12 beginning January 1, 2021. The adoption of ASU 2019-12 did not have a material effect on the Company's financial statements.
Accounting Standard Not Yet Adopted
Accounting Standards Update 2020-04, Reference Rate Reform (Topic 848)--In March 2020, the FASB issued ASUAccounting Standards Update ("ASU") 2020-04, "Reference Rate Reform (Topic 848)—Facilitation of the Effects of Reference Rate Reform on Financial Reporting". The guidance of this ASU is designed to provide relief from the accounting analysis and impacts that may otherwise be required for modifications to agreements (e.g., loans, debt securities, derivatives, borrowings) necessitated by reference rate reform. It also
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 1, 2022
(Amounts in thousands, except share data)
provides optional expedients to enable companies to continue to apply hedge accounting to certain hedging relationships impacted by reference rate reform. Application of the guidance is optional, is only available in certain situations, and is only available for companies to apply until December 31, 2022. In January 2021, the FASB amended ASU 2020-04 by issuing Accounting Standards Update No. 2021-01, Reference Rate Reform Scope ("ASU 2021-01"). ASU 2021-01 clarifies the scope of optional expedients and exceptions to derivatives that are affected by the discounting transition. The Company is currently reviewing its agreements impacted by the reference rate reform and does not expect this ASUthese ASUs to have a material impact to the Company’s financial statements.
B. Seasonality of Business
Due to the seasonality of our business, our operating results for the three and nine months ended October 2, 20211, 2022 are not indicative of results that may be expected for any other interim period or for the year ending December 31, 2021.2022. Our 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 the methods of accounting for fixed costs, such as depreciation expense, amortization, rent and interest expense, are not significantly impacted by business seasonality.
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 2, 2021
(Amounts in thousands, except share data)
C. Accounts Receivable, Net and Supplemental Balance-Sheet Information
Accounts receivable, net, consisted of the following:
| Accounts receivable, net | Accounts receivable, net | October 2, 2021 | | December 31, 2020 | Accounts receivable, net | October 1, 2022 | | December 31, 2021 |
Accounts receivable | Accounts receivable | $ | 200,895 | | | $ | 214,887 | | Accounts receivable | $ | 236,903 | | | $ | 215,336 | |
Unbilled receivables(1) | Unbilled receivables(1) | 85,064 | | | 42,251 | | Unbilled receivables(1) | 92,732 | | | 65,957 | |
| | 285,959 | | | 257,138 | | | 329,635 | | | 281,293 | |
Less allowances for credit losses | Less allowances for credit losses | 2,257 | | | 4,217 | | Less allowances for credit losses | 3,344 | | | 3,013 | |
Accounts receivable, net | Accounts receivable, net | $ | 283,702 | | | $ | 252,921 | | Accounts receivable, net | $ | 326,291 | | | $ | 278,280 | |
(1) Unbilled receivables consist of work-in-process in accordance with the terms of contracts, primarily with utility services customers.
The following items comprised the amounts included in the balance sheets:
| | | | | | | | | | | |
Other current assets | October 2, 2021 | | December 31, 2020 |
Refundable income taxes | $ | 2,215 | | | $ | — | |
Prepaid expenses | 38,543 | | | 24,956 | |
| | | |
| | | |
Other | 6,660 | | | 778 | |
Total | $ | 47,418 | | | $ | 25,734 | |
| | | | | | | | | | | |
Property and equipment, net | October 2, 2021 | | December 31, 2020 |
Land and land improvements | $ | 19,924 | | | $ | 19,731 | |
Buildings and leasehold improvements | 55,559 | | | 49,460 | |
Equipment | 653,656 | | | 623,847 | |
| 729,139 | | | 693,038 | |
Less accumulated depreciation | 499,564 | | | 488,321 | |
Total | $ | 229,575 | | | $ | 204,717 | |
| Other assets, noncurrent | October 2, 2021 | | December 31, 2020 | |
Other current assets | | Other current assets | October 1, 2022 | | December 31, 2021 |
Refundable income taxes | | Refundable income taxes | $ | 364 | | | $ | 1,346 | |
Prepaid expenses | | Prepaid expenses | 41,619 | | | 30,911 | |
| Assets invested for self-insurance | Assets invested for self-insurance | $ | 11,859 | | | $ | 19,359 | | Assets invested for self-insurance | 4,000 | | | 4,250 | |
Investment--cost-method affiliate | 1,258 | | | 1,258 | | |
Deferred income taxes | 3,194 | | | 4,167 | | |
| Other | Other | 4,569 | | | 4,972 | | Other | 898 | | | 1,346 | |
Total | Total | $ | 20,880 | | | $ | 29,756 | | Total | $ | 46,881 | | | $ | 37,853 | |
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 2, 20211, 2022
(Amounts in thousands, except share data)
| | | | | | | | | | | |
Accrued expenses | October 2, 2021 | | December 31, 2020 |
Employee compensation | $ | 33,163 | | | $ | 36,108 | |
Accrued compensated absences | 12,399 | | | 14,534 | |
Self-insured medical claims | 1,221 | | | 2,065 | |
Income tax payable | 8,978 | | | 6,926 | |
Customer advances, deposits | 3,519 | | | 2,067 | |
Taxes, other than income | 28,681 | | | 30,354 | |
| | | |
Other | 4,704 | | | 6,387 | |
Total | $ | 92,665 | | | $ | 98,441 | |
| | | | | | | | | | | |
Property and equipment, net | October 1, 2022 | | December 31, 2021 |
Land and land improvements | $ | 26,075 | | | $ | 22,129 | |
Buildings and leasehold improvements | 75,097 | | | 63,933 | |
Equipment | 664,518 | | | 646,552 | |
| 765,690 | | | 732,614 | |
Less accumulated depreciation | 502,989 | | | 504,629 | |
Total | $ | 262,701 | | | $ | 227,985 | |
| | | | | | | | | | | |
Other assets, noncurrent | October 1, 2022 | | December 31, 2021 |
Investment--cost-method affiliate | $ | 1,258 | | | $ | 1,258 | |
Deferred income taxes | 5,032 | | | 4,937 | |
Cloud computing arrangements | 3,353 | | | 6,530 | |
Other | 4,661 | | | 4,539 | |
Total | $ | 14,304 | | | $ | 17,264 | |
| | | | | | | | | | | |
Accrued expenses | October 1, 2022 | | December 31, 2021 |
Employee compensation | $ | 34,727 | | | $ | 37,828 | |
Accrued compensated absences | 11,943 | | | 11,007 | |
Self-insured medical claims | 3,088 | | | 2,891 | |
Income tax payable | 6,685 | | | 145 | |
Customer advances, deposits | 6,957 | | | 4,009 | |
Taxes, other than income | 17,876 | | | 13,789 | |
| | | |
Other | 3,771 | | | 5,469 | |
Total | $ | 85,047 | | | $ | 75,138 | |
| | | | | | | | | | | |
Other current liabilities | October 1, 2022 | | December 31, 2021 |
| | | |
Current portion of: | | | |
Lease liability-operating leases | $ | 31,726 | | | $ | 28,682 | |
Self-insurance accruals | 42,774 | | | 48,867 | |
Total | $ | 74,500 | | | $ | 77,549 | |
| | | | | | | | | | | |
Other current liabilities | October 2, 2021 | | December 31, 2020 |
Notes payable | $ | 149 | | | $ | — | |
Current portion of: | | | |
Lease liability-operating leases | 27,253 | | | 19,124 | |
Self-insurance accruals | 34,269 | | | 37,707 | |
Total | $ | 61,671 | | | $ | 56,831 | |
| Other noncurrent liabilities | Other noncurrent liabilities | October 2, 2021 | | December 31, 2020 | Other noncurrent liabilities | October 1, 2022 | | December 31, 2021 |
Non-qualified retirement plans | Non-qualified retirement plans | $ | 8,516 | | | $ | 7,365 | | Non-qualified retirement plans | $ | 9,200 | | | $ | 8,713 | |
| Other | Other | 2,940 | | | 3,324 | | Other | 2,981 | | | 2,870 | |
Total | Total | $ | 11,456 | | | $ | 10,689 | | Total | $ | 12,181 | | | $ | 11,583 | |
D. Business Combinations
Our cash investments in businesses during the first nine months of 20212022 were $16,376, including liabilities assumed of $3,662$4,453 and we issued debt, issued, in the form of notes payable to the sellers, of $2,487, and$1,233 which have been included in our Residential and Commercial and Utility segments. Measurement-periodIn the first nine months of 2022, we also made a payment of $100 for a contingent liability incurred in an acquisition made during the fourth quarter of 2021. Measurement-
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 1, 2022
(Amounts in thousands, except share data)
period adjustments are not complete. The measurement period for purchase price allocations ends as soon as information of the facts and circumstances becomes available, but does not exceed one year from the acquisition date. During the year ended December 31, 2020,2021, our investmentcash investments in businesses was $11,150, including liabilities assumed of $613$11,725 and debt issued, in the form of notes payable to the sellers, of $2,472.
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 2, 2021
(Amounts in thousands, except share data)
was $2,961.The following table summarizes the preliminary purchase price allocation of the estimated fair values of the assets acquired and liabilities assumed:
| | | Nine Months Ended October 2, 2021 | | Year Ended December 31, 2020 | | Nine Months Ended October 1, 2022 | | Year Ended December 31, 2021 |
Detail of acquisitions: | Detail of acquisitions: | | | | Detail of acquisitions: | | | |
Assets acquired: | Assets acquired: | | | | Assets acquired: | | | |
Cash | Cash | $ | 199 | | | $ | — | | Cash | $ | — | | | $ | 292 | |
Receivables | Receivables | 511 | | | 10 | | Receivables | — | | | 509 | |
Operating supplies | Operating supplies | 976 | | | 22 | | Operating supplies | 39 | | | 1,044 | |
Prepaid expense | Prepaid expense | 121 | | | 6 | | Prepaid expense | — | | | 203 | |
Equipment | Equipment | 3,750 | | | 1,932 | | Equipment | 1,186 | | | 4,049 | |
Deposits and other | Deposits and other | 1,574 | | | — | | Deposits and other | 265 | | | 1,574 | |
Intangible assets | Intangible assets | 2,434 | | | 3,545 | | Intangible assets | 1,350 | | | 3,005 | |
Goodwill | Goodwill | 6,811 | | | 5,635 | | Goodwill | 3,175 | | | 7,723 | |
| Liabilities assumed | Liabilities assumed | (3,662) | | | (613) | | Liabilities assumed | (329) | | | (3,713) | |
Debt issued for purchases of businesses | Debt issued for purchases of businesses | (2,487) | | | (2,472) | | Debt issued for purchases of businesses | (1,233) | | | (2,961) | |
Cash paid | Cash paid | $ | 10,227 | | | $ | 8,065 | | Cash paid | $ | 4,453 | | | $ | 11,725 | |
The results of operations of acquired businesses have been included in the condensed consolidated statements of operations beginning as of the effective dates of acquisition. The effect of these acquisitions on our consolidated revenues and results of operations for the periodthree and nine months ended October 2, 20211, 2022 was not significant. Pro forma net sales and results of operations for the acquisitions, had they occurred at the beginning of the nine months ended October 2, 2021,1, 2022, are not material and, accordingly, are not provided.
The acquired intangible assets consist of tradenames, non-competition agreements and customer relationships. The tradenames and customer relationships were assigned an average useful life of seven years and the non-competition agreements were assigned an average useful life of five years.
Subsequent to October 1, 2022 and through November 8, 2022, we acquired one business approximating $1,450 with no liabilities assumed and debt issued of $470. The acquired company is in our Residential and Commercial segment and is located in North Carolina. We do not expect the effect of this acquisition on our consolidated revenues and results of operations to be significant.
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 1, 2022
(Amounts in thousands, except share data)
E. Marketable Securities
The following table summarizes available-for-sale debt securities held at October 1, 2022 by asset type:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Available-For-Sale Debt Securities |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value (Net Carrying Amount) |
October 1, 2022 | | | | | | | | |
Fixed maturity: | | | | | | | | |
United States Government and agency securities | | $ | 20,556 | | | $ | 6 | | | $ | (301) | | | $ | 20,261 | |
Corporate notes and bonds | | 315 | | | — | | | (58) | | | 257 | |
Total available-for-sale debt securities | | $ | 20,871 | | | $ | 6 | | | $ | (359) | | | $ | 20,518 | |
| | | | | | | | |
December 31, 2021 | | | | | | | | |
Fixed maturity: | | | | | | | | |
United States Government and agency securities | | $ | 3,244 | | | $ | 11 | | | $ | (25) | | | $ | 3,230 | |
Corporate notes and bonds | | 174 | | | 2 | | | — | | | 176 | |
Total available-for-sale debt securities | | $ | 3,418 | | | $ | 13 | | | $ | (25) | | | $ | 3,406 | |
Marketable securities are composed of available-for-sale debt securities and marketable equity securities and all marketable securities are held at fair value. We carry a portion of our marketable securities portfolio in long-term assets since they are generally held for the settlement of our insurance claims processed through our wholly owned captive insurance subsidiary.
Available-for-sale debt securities are included in marketable securities and other investments totaling $20,518 and $3,406 at October 1, 2022 and December 31, 2021, respectively. Realized gains and losses on sales of available-for-sale debt securities are recognized in net income on the specific identification basis. Changes in the fair values of available-for-sale debt securities that are determined to be holding gains or losses are recorded through accumulated other comprehensive income (loss) net of applicable taxes, within shareholders' equity. In assessing whether a credit loss exists, we evaluate our ability to hold the investment, the strength of the underlying collateral and the extent to which the investment's amortized cost or cost, as appropriate, exceeds its related fair value.
We held approximately $18,846 and $11,386 in marketable equity securities as of October 1, 2022 and December 31, 2021, respectively. Realized and unrealized gains and losses on marketable equity securities are included in other income (expense) in the Consolidated Statements of Operations.
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 1, 2022
(Amounts in thousands, except share data)
The net carrying values of available-for-sale debt securities at October 1, 2022 by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
| | | | | | | | | | | | | | |
| | Amortized Cost | | Fair Value |
Due: | | | | |
Less than one year | | $ | 12,999 | | | $ | 12,997 | |
One year through five years | | 5,729 | | | 5,568 | |
Five years through ten years | | 234 | | | 191 | |
After ten years | | 1,909 | | | 1,762 | |
Total | | $ | 20,871 | | | $ | 20,518 | |
F. Identified Intangible Assets and Goodwill, Net
The carrying amounts of the identified intangible assets and goodwill acquired in connection with our acquisitions were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| October 2, 2021 | | December 31, 2020 |
| Carrying Amount | | Accumulated Amortization | | Carrying Amount | | Accumulated Amortization |
Amortized intangible assets: | | | | | | | |
Customer lists/relationships | $ | 31,847 | | | $ | 23,576 | | | $ | 30,402 | | | $ | 22,040 | |
Employment-related | 9,822 | | | 8,161 | | | 9,320 | | | 7,755 | |
Tradenames | 8,426 | | | 6,533 | | | 7,938 | | | 6,195 | |
| | | | | | | |
Amortized intangible assets | 50,095 | | | $ | 38,270 | | | 47,660 | | | $ | 35,990 | |
| | | | | | | |
Less accumulated amortization | 38,270 | | | | | 35,990 | | | |
| | | | | | | |
Identified intangible assets, net | $ | 11,825 | | | | | $ | 11,670 | | | |
| | | | | | | |
Goodwill | $ | 55,072 | | | | | $ | 48,256 | | | |
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 2, 2021
(Amounts in thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | |
| October 1, 2022 | | December 31, 2021 |
| Carrying Amount | | Accumulated Amortization | | Carrying Amount | | Accumulated Amortization |
Amortized intangible assets: | | | | | | | |
Customer lists/relationships | $ | 33,498 | | | $ | 26,222 | | | $ | 32,294 | | | $ | 24,090 | |
Employment-related | 10,451 | | | 8,754 | | | 9,946 | | | 8,301 | |
Tradenames | 8,641 | | | 6,977 | | | 8,426 | | | 6,642 | |
| | | | | | | |
Amortized intangible assets | 52,590 | | | $ | 41,953 | | | 50,666 | | | $ | 39,033 | |
| | | | | | | |
Less accumulated amortization | 41,953 | | | | | 39,033 | | | |
| | | | | | | |
Identified intangible assets, net | $ | 10,637 | | | | | $ | 11,633 | | | |
| | | | | | | |
Goodwill | $ | 58,999 | | | | | $ | 55,980 | | | |
The changes in the carrying amounts of goodwill, by segment, for the nine months ended October 2, 20211, 2022 and the year ended December 31, 20202021 were as follows:
| | | Balance at January 1, 2021 | | Acquisitions | | Translation and Other Adjustments | | Balance at October 2, 2021 | | Balance at January 1, 2022 | | Acquisitions | | Translation and Other Adjustments | | Balance at October 1, 2022 |
Utility | Utility | $ | 4,911 | | | $ | — | | | $ | — | | | $ | 4,911 | | Utility | $ | 4,911 | | | $ | 30 | | | $ | — | | | $ | 4,941 | |
Residential and Commercial | Residential and Commercial | 43,345 | | | 6,811 | | | 5 | | | 50,161 | | Residential and Commercial | 51,069 | | | 3,145 | | | (156) | | | 54,058 | |
| Total | Total | $ | 48,256 | | | $ | 6,811 | | | $ | 5 | | | $ | 55,072 | | Total | $ | 55,980 | | | $ | 3,175 | | | $ | (156) | | | $ | 58,999 | |
| | | | Balance at January 1, 2020 | | Acquisitions | | Translation and Other Adjustments | | Balance at December 31, 2020 | | Balance at January 1, 2021 | | Acquisitions | | Translation and Other Adjustments | | Balance at December 31, 2021 |
Utility | Utility | $ | 4,911 | | | $ | — | | | $ | — | | | $ | 4,911 | | Utility | $ | 4,911 | | | $ | — | | | $ | — | | | $ | 4,911 | |
Residential and Commercial | Residential and Commercial | 37,374 | | | 5,635 | | | 336 | | | 43,345 | | Residential and Commercial | 43,345 | | | 7,723 | | | 1 | | | 51,069 | |
| Total | Total | $ | 42,285 | | | $ | 5,635 | | | $ | 336 | | | $ | 48,256 | | Total | $ | 48,256 | | | $ | 7,723 | | | $ | 1 | | | $ | 55,980 | |
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 1, 2022
(Amounts in thousands, except share data)
Estimated future aggregate amortization expense of intangible assets--The estimated future aggregate amortization expense of intangible assets, as of October 2, 2021,1, 2022, was as follows:
| | | | Estimated Future Amortization Expense | | | Estimated Future Amortization Expense |
Remaining three months of 2021 | | $ | 743 | | |
2022 | | 2,884 | | |
Remaining three months of 2022 | | Remaining three months of 2022 | | $ | 820 | |
2023 | 2023 | | 2,714 | | 2023 | | 3,073 | |
2024 | 2024 | | 2,234 | | 2024 | | 2,752 | |
2025 | 2025 | | 1,634 | | 2025 | | 1,970 | |
2026 | 2026 | | 1,060 | | 2026 | | 1,132 | |
2027 | | 2027 | | 648 | |
Thereafter | Thereafter | | 556 | | Thereafter | | 242 | |
| | $ | 11,825 | | | $ | 10,637 | |
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 2, 2021
(Amounts in thousands, except share data)
F.G. Short and Long-Term Debt and Commitments Related to Letters of Credit
We have short-term lines of credit with several banks totaling $11,091. At October 1, 2022, we had $8,971 available under the lines of credit and $2,120 committed through issued letters of credit. Borrowings outstanding generally bear interest at the banks' prime rate or LIBOR plus a margin adjustment of .75% to 1.50%.
Our long-term debt consisted of the following:
| | | October 2, 2021 | | December 31, 2020 | | October 1, 2022 | | December 31, 2021 |
Revolving credit facility: | Revolving credit facility: | | | | Revolving credit facility: | | | |
Swing-line borrowings | Swing-line borrowings | $ | 14,191 | | | $ | — | | Swing-line borrowings | $ | 23,099 | | | $ | 16,832 | |
| LIBOR borrowings | LIBOR borrowings | 20,000 | | | — | | LIBOR borrowings | 75,000 | | | 30,000 | |
| | 34,191 | | | — | | | 98,099 | | | 46,832 | |
Senior unsecured notes: | Senior unsecured notes: | | Senior unsecured notes: | |
| 3.99% Senior unsecured notes | 3.99% Senior unsecured notes | 50,000 | | | 50,000 | | 3.99% Senior unsecured notes | 50,000 | | | 50,000 | |
4.00% Senior unsecured notes | 4.00% Senior unsecured notes | 25,000 | | | 25,000 | | 4.00% Senior unsecured notes | 25,000 | | | 25,000 | |
| | 75,000 | | | 75,000 | | | 75,000 | | | 75,000 | |
Term loans | Term loans | 34,524 | | | 21,864 | | Term loans | 33,128 | | | 25,182 | |
| | 143,715 | | | 96,864 | | | 206,227 | | | 147,014 | |
Less debt issuance costs | Less debt issuance costs | 713 | | | 256 | | Less debt issuance costs | 558 | | | 674 | |
Less current portion | Less current portion | 31,225 | | | 19,540 | | Less current portion | 31,090 | | | 22,809 | |
| | $ | 111,777 | | | $ | 77,068 | | | $ | 174,579 | | | $ | 123,531 | |
Revolving Credit Facility--In August 2021, the Company amended and restated its revolving credit facility with its existing bank group. The amended and restated credit agreement, which expires in August 2026, permits borrowings, as defined, of up to $325,000, including a letter of credit sublimit of $150,000 and a swing-line commitment of $30,000. Under certain circumstances, the amount available under the revolving credit facility may be increased to $425,000. The revolving credit facility contains certain affirmative and negative covenants customary for this type of facility and includes financial covenant ratios with respect to a maximum leverage ratio (not to exceed 3.00 to 1.00 with exceptions in case of material acquisitions) and a minimum interest coverage ratio (not less than 3.00 to 1.00), in each case
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 1, 2022
(Amounts in thousands, except share data)
subject to certain further restrictions as described in the credit agreement. As of October 2, 2021,1, 2022, we had unused commitments under the facility approximating $287,931,224,201, with $37,069$100,799 committed, consisting of borrowings of $34,19198,099 and issued letters of credit of $2,878.2,700.
Borrowings outstanding bear interest, at Davey Tree’s option, of either (a) the base rate or (b) LIBOR plus a margin adjustment ranging from .875% to 1.50%--with the margin adjustments based on the Company's leverage ratio at the time of borrowing. The base rate is 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 .225% is also required based on the average daily unborrowed commitment.
3.99% Senior Unsecured Notes--On September 21, 2018, we issued 3.99% Senior Notes, Series A (the "3.99% Senior Notes"), in the aggregate principal amount of $50,000. The 3.99% Senior Notes are due September 21, 2028.
The 3.99% Senior Notes were issued pursuant to a Note Purchase and Private Shelf Agreement (the “Note Purchase and Shelf Agreement”) between the Company, PGIM, Inc. and the purchasers of the 3.99% Senior Notes, which was amended in September 2021. Among other things, the amendment increased the total facility limit to $150,000 and extended the issuance period for subsequent series of promissory notes to be issued and sold pursuant to the Note Purchase and Shelf Agreement to September 2024. The amendment also amended certain provisions and covenants to generally conform them to the corresponding provisions and covenants in the amended and restated revolving credit agreement. In addition, the amendment and restatement of the revolving credit agreement in August 2021 provided that the Company is permitted to incur indebtedness arising under the Note Purchase and Shelf Agreement in an aggregate
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 2, 2021
(Amounts in thousands, except share data)
principal amount not to exceed $150,000. As the Company has previously issued notes in an aggregate amount of $75,000 under the Note Purchase and Shelf Agreement, it now has capacity to issue subsequent series of promissory notes pursuant to the Note Purchase and Shelf Agreement (the "Shelf Notes") in an aggregate amount of up to $75,000.
The 3.99% 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 5five equal, annual principal payments commence on September 21, 2024 (the 6thsixth anniversary of issuance). The Note Purchase and Shelf Agreement contains customary events of default and covenants related to limitations on indebtedness and transactions with affiliates and the maintenance of certain financial ratios. The Company may prepay at any time all, or from time to time any part of, the outstanding principal amount of the 3.99% Senior Notes, subject to the payment of a make-whole amount.
4.00% Senior Unsecured Notes--On February 5, 2019, we issued 4.00% Senior Notes, Series B (the "4.00% Senior Notes") pursuant to the Note Purchase and Shelf Agreement in the aggregate principal amount of $25,000. The 4.00% Senior Notes are due September 21, 2028. The 4.00% 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 5five equal, annual principal payments commence on September 21, 2024.
The net proceeds of all senior notes were used to pay down borrowings under our revolving credit facility.
Term loans--Periodically, the Company will enter into term loans for the procurement of insurance or to finance acquisitions.
Aggregate Maturities of Long-Term Debt--Aggregate maturities of long-term debt based on the principal amounts outstanding at October 2, 20211, 2022 were as follows: 2021--$9,583; 2022--$22,573;9,885; 2023--$1,472;21,635; 2024--$15,896;16,196; 2025--$15,000;15,411; 2026--$49,191;113,100; 2027--$15,000; and thereafter $30,000.$15,000.
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 1, 2022
(Amounts in thousands, except share data)
Accounts Receivable Securitization Facility--In May 2021,June 2022, the Company amended its Accounts Receivable Securitization Facility (the "AR Securitization program") to extend the scheduled termination date for an additional one year-year period, to June 30, 2022.29, 2023. In addition to extending the termination date for another year, the amendment included a change toreplaced the letter of creditLondon Interbank Offered Rate (LIBOR) interest rate provisions with customary provisions based on the secured overnight financing rate ("LC"SOFR") issuance fee payable under the terms of the agreement, as described below..
The AR Securitization program has a limit of $100,000, of which $89,689 and $83,355 was issued for LCs as of both October 2, 20211, 2022 and December 31, 2020.2021, respectively.
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 LCs as of October 2, 2021--to1, 2022--to the bank in exchange for the bank issuing LCs.
Fees payable to the bank include: (a) an LC issuance fee, payable on each settlement date, in the amount of .90% per annum (1.00% prior to the May 2021 amendment) 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
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 2, 2021
(Amounts in thousands, except share data)
obligation will accrue interest at a per annum rate equal to a reserve-adjusted LIBORthe term SOFR, plus 0.10% or, in certain circumstances, a base rate equal to the highergreatest of (i) the bank’s prime rate, and (ii) the federal funds rate plus .50% and (iii) 1.00% above the Daily one month SOFR plus 0.10% and, following any default, 2.00% plus the greater of (a) adjusted LIBORthe term SOFR plus 0.10% and (b) a base rate equal to the highergreatest of (i) the bank’s prime rate, (ii) and (ii) the federal funds rate plus .50%.(iii) above.
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.
Total Commitments Related to Issued Letters of Credit--As of October 2, 2021,1, 2022, total commitments related to issued LCs were $88,363,$94,509, of which $2,878$2,700 were issued under the revolving credit facility, $83,355$89,689 were issued under the AR Securitization program, and $2,131$2,120 were issued under short-term lines of credit. As of December 31, 2020,2021, total commitments related to issued LCs were $88,242,$88,362, of which $2,877 were issued under the revolving credit facility, $83,355 were issued under the AR Securitization program, and $2,010$2,130 were issued under short-term lines of credit.
As of October 2, 2021,1, 2022, we were in compliance with all debt covenants.
G.
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 1, 2022
(Amounts in thousands, except share data)
H. Leases
We lease certain office and parking facilities, warehouse space, equipment, vehicles and information technology equipment under operating and finance leases. Lease expense for these leases is recognized within the Condensed Consolidated Statements of Operations on a straight-line basis over the lease term, with variable lease payments recognized in the period those payments are incurred. The following table summarizes the amounts recognized in our Condensed Consolidated Balance Sheet related to leases:
| | | | | | | | | | | | | | | | | |
| Condensed Consolidated Balance Sheet Classification | | October 2, 2021 | | December 31, 2020 |
Assets | | | | | |
Operating lease assets | Right-of-use assets - operating leases | | $ | 81,789 | | | $ | 55,893 | |
Finance lease assets | Property and equipment, net | | 10,782 | | | 8,788 | |
Total lease assets | | | $ | 92,571 | | | $ | 64,681 | |
Liabilities | | | | | |
Current operating lease liabilities | Other current liabilities | | $ | 27,253 | | | $ | 19,124 | |
Non-current operating lease liabilities | Lease liabilities - operating leases | | 54,249 | | | 36,612 | |
Total operating lease liabilities | | | 81,502 | | | 55,736 | |
Current portion of finance lease liabilities | Current portion of long-term debt and finance lease liabilities | | 2,263 | | | 2,273 | |
Non-current finance lease liabilities | Lease liabilities - finance leases | | 7,886 | | | 6,479 | |
Total finance lease liabilities | | | 10,149 | | | 8,752 | |
Total lease liabilities | | | $ | 91,651 | | | $ | 64,488 | |
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 2, 2021
(Amounts in thousands, except share data)
| | | | | | | | | | | | | | | | | |
| Condensed Consolidated Balance Sheet Classification | | October 1, 2022 | | December 31, 2021 |
Assets | | | | | |
Operating lease assets | Right-of-use assets - operating leases | | $ | 95,350 | | | $ | 86,423 | |
Finance lease assets | Property and equipment, net | | 13,268 | | | 11,592 | |
Total lease assets | | | $ | 108,618 | | | $ | 98,015 | |
Liabilities | | | | | |
Current operating lease liabilities | Other current liabilities | | $ | 31,726 | | | $ | 28,682 | |
Non-current operating lease liabilities | Lease liabilities - operating leases | | 62,586 | | | 57,335 | |
Total operating lease liabilities | | | 94,312 | | | 86,017 | |
Current portion of finance lease liabilities | Current portion of long-term debt and finance lease liabilities | | 2,998 | | | 2,459 | |
Non-current finance lease liabilities | Lease liabilities - finance leases | | 9,704 | | | 8,646 | |
Total finance lease liabilities | | | 12,702 | | | 11,105 | |
Total lease liabilities | | | $ | 107,014 | | | $ | 97,122 | |
The components of lease cost recognized within our Condensed Consolidated Statements of Operations were as follows:
| | | Three Months Ended | | Nine Months Ended | | | | Three Months Ended | | Nine Months Ended |
| | Condensed Consolidated Statements of Operations Classification | | October 2, 2021 | | September 26, 2020 | | October 2, 2021 | | September 26, 2020 | | Condensed Consolidated Statements of Operations Classification | | | October 1, 2022 | | October 2, 2021 | | October 1, 2022 | | October 2, 2021 |
| Operating lease cost | Operating lease cost | Operating expense | | $ | 4,965 | | | $ | 2,877 | | | $ | 13,065 | | | $ | 7,776 | | Operating lease cost | Operating expense | | | $ | 6,649 | | | $ | 4,965 | | | $ | 19,095 | | | $ | 13,065 | |
Operating lease cost | Operating lease cost | Selling expense | | 2,631 | | | 2,322 | | | 7,718 | | | 7,127 | | Operating lease cost | Selling expense | | | 2,926 | | | 2,631 | | | 8,492 | | | 7,718 | |
Operating lease cost | Operating lease cost | General and administrative expense | | 290 | | | 389 | | | 867 | | | 844 | | Operating lease cost | General and administrative expense | | | 304 | | | 290 | | | 883 | | | 867 | |
Finance lease cost: | Finance lease cost: | | Finance lease cost: | | | |
Amortization of right-of-use assets | Amortization of right-of-use assets | Depreciation and amortization | | 752 | | | 570 | | | 1,985 | | | 1,404 | | Amortization of right-of-use assets | Depreciation and amortization | | | 889 | | | 752 | | | 2,334 | | | 1,985 | |
Interest expense on lease liabilities | Interest expense on lease liabilities | Interest expense | | 52 | | | 45 | | | 134 | | | 103 | | Interest expense on lease liabilities | Interest expense | | | 74 | | | 52 | | | 196 | | | 134 | |
Other lease cost (1) | Other lease cost (1) | Operating expense | | 999 | | | 1,216 | | | 2,839 | | | 3,895 | | Other lease cost (1) | Operating expense | | | 1,271 | | | 999 | | | 3,613 | | | 2,839 | |
Other lease cost (1) | Other lease cost (1) | Selling expense | | 360 | | | 284 | | | 1,013 | | | 953 | | Other lease cost (1) | Selling expense | | | 235 | | | 360 | | | 1,059 | | | 1,013 | |
Other lease cost (1) | Other lease cost (1) | General and administrative expense | | 8 | | | 13 | | | 28 | | | 31 | | Other lease cost (1) | General and administrative expense | | | 27 | | | 8 | | | 59 | | | 28 | |
Total lease cost | Total lease cost | | $ | 10,057 | | | $ | 7,716 | | | $ | 27,649 | | | $ | 22,133 | | Total lease cost | | | | $ | 12,375 | | | $ | 10,057 | | | $ | 35,731 | | | $ | 27,649 | |
(1) Other lease cost includes short-term lease costs and variable lease costs.
We often have options to renew lease terms for buildings and other assets. The exercise of lease renewal options is generally at our sole discretion. In addition, certain lease agreements may be terminated prior to their original expiration date at our discretion. We evaluate each renewal and termination option at the lease commencement date to determine if we are reasonably certain to exercise the option on
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 1, 2022
(Amounts in thousands, except share data)
the basis of economic factors. The weighted average remaining lease terms as of October 2, 20211, 2022 was 3.93.7 years for operating leases and 5.24.7 years for finance leases.
The discount rate implicit within our leases is generally not determinable and therefore the Company determines the discount rate based on its incremental borrowing rate. The incremental borrowing rate for each lease is determined based on its term and the currency in which lease payments are made, adjusted for the impacts of collateral. The weighted average discount rates used to measure our lease liabilities as of October 2, 20211, 2022 was 2.40%2.90% for operating leases and 2.04%2.72% for finance leases.
| Supplemental Cash Flow Information Related to Leases | Supplemental Cash Flow Information Related to Leases | Nine Months Ended | Supplemental Cash Flow Information Related to Leases | Nine Months Ended |
| | October 2, 2021 | | September 26, 2020 | | October 1, 2022 | | October 2, 2021 |
Cash paid for amounts included in the measurement of lease liabilities: | Cash paid for amounts included in the measurement of lease liabilities: | | | | Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows from operating leases | Operating cash flows from operating leases | $ | (21,822) | | | $ | (15,222) | | Operating cash flows from operating leases | $ | (29,194) | | | $ | (21,822) | |
Operating cash flows from finance leases | Operating cash flows from finance leases | (134) | | | (103) | | Operating cash flows from finance leases | (196) | | | (134) | |
Financing cash flows from finance leases | Financing cash flows from finance leases | (2,688) | | | (1,525) | | Financing cash flows from finance leases | (2,313) | | | (2,688) | |
Right-of-use assets obtained in exchange for lease obligations: | Right-of-use assets obtained in exchange for lease obligations: | | Right-of-use assets obtained in exchange for lease obligations: | |
Operating leases | Operating leases | 47,069 | | | 28,246 | | Operating leases | 38,403 | | | 47,069 | |
Finance leases | Finance leases | 4,174 | | | 7,339 | | Finance leases | 3,910 | | | 4,174 | |
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 2, 2021
(Amounts in thousands, except share data)
| | | | | | | | | | | | | | | | | |
Maturity Analysis of Lease Liabilities | As of October 2, 2021 |
| | | Operating Leases | | Finance Leases |
| Remaining three months of 2021 | | $ | 7,706 | | | $ | 554 | |
| 2022 | | 27,259 | | | 2,361 | |
| 2023 | | 20,061 | | | 2,151 | |
| 2024 | | 13,395 | | | 2,029 | |
| 2025 | | 9,607 | | | 1,510 | |
| Thereafter | | 7,313 | | | 2,069 | |
| Total lease payments | | 85,341 | | | 10,674 | |
| Less interest | | 3,839 | | | 525 | |
| Total | | $ | 81,502 | | | $ | 10,149 | |
| | | | | | | | | | | | | | | | | |
Maturity Analysis of Lease Liabilities | As of October 1, 2022 |
| | | Operating Leases | | Finance Leases |
| Remaining three months of 2022 | | $ | 9,301 | | | $ | 747 | |
| 2023 | | 31,878 | | | 3,237 | |
| 2024 | | 24,610 | | | 3,106 | |
| 2025 | | 16,964 | | | 2,472 | |
| 2026 | | 9,277 | | | 2,101 | |
| 2027 | | 3,343 | | | 1,123 | |
| Thereafter | | 4,061 | | | 732 | |
| Total lease payments | | 99,434 | | | 13,518 | |
| Less interest | | 5,122 | | | 816 | |
| Total | | $ | 94,312 | | | $ | 12,702 | |
H.I. Stock-Based Compensation
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 5five 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 10ten percent of the common shares outstanding as of the first day of that fiscal year. Common shares subject to an award
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 1, 2022
(Amounts in thousands, except share data)
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:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| October 2, 2021 | | September 26, 2020 | | October 2, 2021 | | September 26, 2020 |
Compensation expense, all share-based payment plans | $ | 1,167 | | | $ | 858 | | | $ | 3,432 | | | $ | 2,567 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| October 1, 2022 | | October 2, 2021 | | October 1, 2022 | | October 2, 2021 |
Compensation expense, all share-based payment plans | $ | 1,658 | | | $ | 1,167 | | | $ | 5,244 | | | $ | 3,432 | |
Stock-based compensation consisted of the following:
Employee Stock Purchase Plan--Under the Employee Stock Purchase Plan, all full-time employees with one year of service are eligible to purchase, through payroll deduction, common shares. Employee purchases under the Employee Stock Purchase Plan are at 85% of the fair market value of the common shares--a 15% discount. We recognize compensation costs as payroll deductions are made. The 15% discount of total shares purchased under the plan resulted in compensation cost of $1,187$1,380 being recognized for the nine months ended October 2, 20211, 2022 and $1,067$1,187 for the nine months ended September 26, 2020.
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 2, 2021
(Amounts in thousands, except share data)
2021.Stock Option Plans--The stock options outstanding were awarded under a graded vesting schedule, measured at fair value, and have a term of ten years. Compensation costs for stock options are recognized over the requisite service period on the straight-line recognition method. Compensation cost recognized for stock options was $289 for the nine months ended October 1, 2022 and $343 for the nine months ended October 2, 2021 and $398 for the nine months ended September 26, 2020.2021. Beginning in 2021, management and the Compensation Committee replaced the issuance of stock options with performance-based restricted stock units ("PRSUs") for certain employees.
Stock-Settled Stock Appreciation Rights--A SSAR is an award that allows the recipient to receive common shares equal to the appreciation in the fair market value of our common shares between the date the award was granted and the conversion date of the shares vested. Effective January 1, 2019, management and the Compensation Committee replaced the issuance of future SSARs with PRSUs for certain management employees.
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 1, 2022
(Amounts in thousands, except share data)
The following table summarizes our SSARs as of October 2, 2021.1, 2022.
| Stock-Settled Stock Appreciation Rights | Stock-Settled Stock Appreciation Rights | | Number of Rights | | Weighted- Average Award Date Value | | Weighted- Average Remaining Contractual Life | | Unrecognized Compensation Cost | | Aggregate Intrinsic Value | Stock-Settled Stock Appreciation Rights | | Number of Rights | | Weighted- Average Award Date Value | | Weighted- Average Remaining Contractual Life | | Unrecognized Compensation Cost | | Aggregate Intrinsic Value |
Unvested, January 1, 2021 | | 210,472 | | | $ | 1.87 | | | | | | | | |
Unvested, January 1, 2022 | | Unvested, January 1, 2022 | | 87,534 | | | $ | 1.92 | | | | | | | |
Granted | Granted | | — | | | — | | | | | | | | Granted | | — | | | — | | | | | | | |
Forfeited | Forfeited | | — | | | — | | | | | | | | Forfeited | | — | | | — | | | | | | | |
Vested | Vested | | (85,938) | | | 1.86 | | | | | | | | Vested | | (43,752) | | | 1.92 | | | | | | | |
Unvested, October 2, 2021 | | 124,534 | | | $ | 1.88 | | | 0.8 years | | $ | 121 | | | $ | 2,042 | | |
Unvested, October 1, 2022 | | Unvested, October 1, 2022 | | 43,782 | | | $ | 1.92 | | | 0.3 years | | $ | 19 | | | $ | 792 | |
|
Compensation costs for SSARs are determined using a fair-value method and amortized over the requisite service period. “Intrinsic value” is defined as the amount by which the fair market value of a common share exceeds the grant date price of a SSAR. Compensation expense for SSARs was $65 for the nine months ended October 1, 2022 and $120 for the nine months ended October 2, 2021 and $214 for the nine months ended September 26, 2020.2021.
Restricted Stock Units--During the nine months ended October 2, 2021,1, 2022, the Compensation Committee awarded 330,714336,664 PRSUs to certain management employees and 19,20014,693 RSUs to nonemployee directors. The Compensation Committee made similar awards in prior periods. The awards vest over specified periods. The following table summarizes PRSUs and RSUs as of October 2, 2021.1, 2022.
| Restricted Stock Units | Restricted Stock Units | | Number of Stock Units | | Weighted- Average Grant Date Value | | Weighted- Average Remaining Contractual Life | | Unrecognized Compensation Cost | | Aggregate Intrinsic Value | Restricted Stock Units | | Number of Stock Units | | Weighted- Average Grant Date Value | | Weighted- Average Remaining Contractual Life | | Unrecognized Compensation Cost | | Aggregate Intrinsic Value |
Unvested, January 1, 2021 | | 510,614 | | | $ | 10.05 | | | | | | | | |
Unvested, January 1, 2022 | | Unvested, January 1, 2022 | | 740,160 | | | $ | 12.49 | | | | | | | |
Granted | Granted | | 349,914 | | | 14.82 | | | | | | | | Granted | | 351,357 | | | 17.89 | | | | | | | |
Forfeited | Forfeited | | — | | | — | | | | | | | | Forfeited | | (1,000) | | | 17.89 | | | | | | | |
Vested | Vested | | (120,368) | | | 8.86 | | | | | | | | Vested | | (181,176) | | | 11.04 | | | | | | | |
Unvested, October 2, 2021 | | 740,160 | | | $ | 12.49 | | | 2.4 years | | $ | 6,182 | | | $ | 12,139 | | |
Unvested, October 1, 2022 | | Unvested, October 1, 2022 | | 909,341 | | | $ | 14.86 | | | 2.0 years | | $ | 8,315 | | | $ | 13,517 | |
Employee PRSUs | Employee PRSUs | | 673,268 | | | $ | 12.52 | | | 2.5 years | | $ | 5,719 | | | $ | 11,042 | | Employee PRSUs | | 851,640 | | | $ | 14.89 | | | 2.0 years | | $ | 7,863 | | | $ | 12,685 | |
Nonemployee Director RSUs | Nonemployee Director RSUs | | 66,892 | | | $ | 12.20 | | | 1.6 years | | $ | 463 | | | $ | 1,097 | | Nonemployee Director RSUs | | 57,701 | | | $ | 14.42 | | | 2.2 years | | $ | 452 | | | $ | 832 | |
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 2, 2021
(Amounts in thousands, except share data)
Compensation cost for PRSUs and RSUs is determined using a fair-value method and amortized on the straight-line recognition method over the requisite service period. “Intrinsic value” is defined as the amount by which the fair market value of a common share exceeds the grant date price of a PRSU or an RSU. Compensation expense on PRSUs and RSUs totaled $3,510 for the nine months ended October 1, 2022 and $1,782 for the nine months ended October 2, 2021 and $888 for the nine months ended September 26, 2020.2021.
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
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 1, 2022
(Amounts in thousands, except share data)
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 assumptions.
| | | Nine Months Ended | | Nine Months Ended |
| | October 2, 2021 | | September 26, 2020 | | October 1, 2022 | | October 2, 2021 |
Volatility rate | Volatility rate | 9.9 | % | | 9.7 | % | Volatility rate | 9.7 | % | | 9.9 | % |
Risk-free interest rate | Risk-free interest rate | .3 | % | | .7 | % | Risk-free interest rate | 1.7 | % | | .3 | % |
Expected dividend yield | Expected dividend yield | .4 | % | | .4 | % | Expected dividend yield | .4 | % | | .4 | % |
Expected life of awards (years) | Expected life of awards (years) | 3.0 | | 8.1 | Expected life of awards (years) | 3.0 | | 3.0 |
General Stock Option Information--The following table summarizes activity under the stock option plans for the nine months ended October 2, 2021.1, 2022.
| Stock Options | Stock Options | | Number of Options Outstanding | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Life | | Aggregate Intrinsic Value | Stock Options | | Number of Options Outstanding | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Life | | Aggregate Intrinsic Value |
Outstanding, January 1, 2021 | | 2,817,318 | | | $ | 8.34 | | | | | | |
Outstanding, January 1, 2022 | | Outstanding, January 1, 2022 | | 2,350,934 | | | $ | 8.56 | | | | | |
Granted | Granted | | — | | | — | | | | | | Granted | | — | | | — | | | | | |
Exercised | Exercised | | (307,180) | | | 7.11 | | | | | | Exercised | | (219,143) | | | 8.29 | | | | | |
Forfeited | Forfeited | | (37,090) | | | 7.98 | | | | | | Forfeited | | (17,820) | | | 8.01 | | | | | |
Outstanding, October 2, 2021 | | 2,473,048 | | | $ | 8.49 | | | 5.0 years | | $ | 19,562 | | |
Outstanding, October 1, 2022 | | Outstanding, October 1, 2022 | | 2,113,971 | | | $ | 8.59 | | | 4.2 years | | $ | 20,104 | |
| Exercisable, October 2, 2021 | | 1,882,383 | | | $ | 7.71 | | | 4.1 years | | $ | 16,353 | | |
Exercisable, October 1, 2022 | | Exercisable, October 1, 2022 | | 1,725,879 | | | $ | 7.99 | | | 3.5 years | | $ | 17,449 | |
As of October 2, 2021,1, 2022, there was approximately $904$489 of unrecognized compensation cost related to stock options outstanding. The cost is expected to be recognized over a weighted-average period of 3.70.8 years. “Intrinsic value” is defined as the amount by which the market price of a common share exceeds the exercise price of an option.
Common shares are issued from treasury upon the exercise of stock options and SSARs, the vesting of RSUs and PRSUs or purchases under the Employee Stock Purchase Plan.
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 2, 2021
(Amounts in thousands, except share data)
I.J. Income Taxes
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 nine months ended October 2, 20211, 2022 was 26.1%26.6%. Our actual effective tax rate was 25.0%26.3% and 27.8%25.0% for the three months ended October 1, 2022 and October 2, 2021, and September 26, 2020, respectively. Our actual effective tax rate was 26.2% and 27.8%26.2% for the nine months ended October 1, 2022 and October 2, 2021, and September 26, 2020, respectively. 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.items which
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 1, 2022
(Amounts in thousands, except share data)
are a set amount and therefore have a larger impact on the rate based on our net income before tax in the first nine months compared to the impact it will have on the rate for the full year.
As of October 2, 2021,1, 2022, we had unrecognized tax benefits of $754,$666, of which $307$293 would affect our effective rate if recognized, and accrued interest expense related to unrecognized benefits of $46.$45. At December 31, 2020,2021, we had unrecognized tax benefits of $1,183,$700, of which $735$327 would affect our effective rate if recognized, and accrued interest expense related to unrecognized benefits of $72.$56. Unrecognized tax benefits are the differences between a tax position taken, or expected to be taken, in a tax return, and the benefit recognized for financial reporting purposes.
We recognize interest accrued related to unrecognized tax benefits in income tax expense. Penalties, if incurred, would be recognized as a component of income tax expense.
The Company is routinely under audit by U.S. federal, state and local authorities and Canadian authorities in the area of income tax. These audits include questioning the timing and the amount of income and deductions and the allocation of income and deductions among various tax jurisdictions. With the exception of U.S. state jurisdictions and Canada, the Company is no longer subject to examination by tax authorities for the years through 2016.2018. As of October 2, 2021,1, 2022, we believe it is reasonably possible that the total amount of unrecognized tax benefits will not significantly increase or decrease.
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 2, 2021
(Amounts in thousands, except share data)
J.K. Accumulated Other Comprehensive Income (Loss)
Comprehensive income (or loss) is comprised of net income (or net loss) and other components, including foreign currency translation adjustments and defined benefit pension plan adjustments.
The following summarizes the components of other comprehensive income (loss) accumulated in shareholders’ equity for the three and nine months ended October 1, 2022 and October 2, 2021 and September 26, 2020: | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended October 2, 2021 | | Foreign Currency Translation Adjustments | | | | Defined Benefit Pension Plans | | Accumulated Other Comprehensive Income (Loss) |
Balance at July 3, 2021 | | $ | (2,845) | | | | | $ | (735) | | | $ | (3,580) | |
Other comprehensive income (loss) before reclassifications | | | | | | | | |
Unrealized gains (losses) | | $ | (788) | | | | | $ | — | | | $ | (788) | |
| | | | | | | | |
Amounts reclassified from accumulated other comprehensive income (loss) | | — | | | | | 51 | | | 51 | |
Tax effect | | — | | | | | (13) | | | (13) | |
Net of tax amount | | (788) | | | | | 38 | | | (750) | |
Balance at October 2, 2021 | | $ | (3,633) | | | | | $ | (697) | | | $ | (4,330) | |
| | | | | | | | |
Three Months Ended September 26, 2020 | | Foreign Currency Translation Adjustments | | | | Defined Benefit Pension Plans | | Accumulated Other Comprehensive Income (Loss) |
Balance at June 27, 2020 | | $ | (5,872) | | | | | $ | (714) | | | $ | (6,586) | |
Other comprehensive income (loss) before reclassifications | | | | | | | | |
Unrealized gains (losses) | | $ | 629 | | | | | $ | — | | | $ | 629 | |
| | | | | | | | |
Amounts reclassified from accumulated other comprehensive income (loss) | | — | | | | | 38 | | | 38 | |
Tax effect | | — | | | | | (9) | | | (9) | |
Net of tax amount | | 629 | | | | | 29 | | | 658 | |
Balance at September 26, 2020 | | $ | (5,243) | | | | | $ | (685) | | | $ | (5,928) | |
| | | | | | | | |
Nine Months Ended October 2, 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) | | $ | 105 | | | | | $ | — | | | $ | 105 | |
| | | | | | | | |
Amounts reclassified from accumulated other comprehensive income (loss) | | — | | | | | 151 | | | 151 | |
Tax effect | | — | | | | | (39) | | | (39) | |
Net of tax amount | | 105 | | | | | 112 | | | 217 | |
Balance at October 2, 2021 | | $ | (3,633) | | | | | $ | (697) | | | $ | (4,330) | |
| | | | | | | | |
2021: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended October 1, 2022 | | Foreign Currency | | Available for Sale Securities | | Defined Benefit Pension Plans | | Accumulated Other Comprehensive Income (Loss) |
Balance at July 2, 2022 | | $ | (4,175) | | | $ | (181) | | | $ | (473) | | | $ | (4,829) | |
Other comprehensive income (loss) before reclassifications | | | | | | | | |
Translation adjustment | | $ | (1,934) | | | $ | — | | | $ | — | | | $ | (1,934) | |
Unrealized losses | | — | | | (113) | | | — | | | (113) | |
| | | | | | | | |
Amounts reclassified from accumulated other comprehensive income (loss) | | — | | | (11) | | | 30 | | | 19 | |
Tax effect | | — | | | 26 | | | (8) | | | 18 | |
Net of tax amount | | (1,934) | | | (98) | | | 22 | | | (2,010) | |
Balance at October 1, 2022 | | $ | (6,109) | | | $ | (279) | | | $ | (451) | | | $ | (6,839) | |
| | | | | | | | |
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 2, 20211, 2022
(Amounts in thousands, except share data)
| Nine Months Ended September 26, 2020 | | Foreign Currency Translation Adjustments | | | Defined Benefit Pension Plans | | Accumulated Other Comprehensive Income (Loss) | |
Balance at January 1, 2020 | | $ | (4,633) | | | | $ | (770) | | | $ | (5,403) | | |
Three Months Ended October 2, 2021 | | Three Months Ended October 2, 2021 | | Foreign Currency | | Available-for-Sale Securities | | Defined Benefit Pension Plans | | Accumulated Other Comprehensive Income (Loss) |
Balance at July 3, 2021 | | Balance at July 3, 2021 | | $ | (2,845) | | | $ | — | | | $ | (735) | | | $ | (3,580) | |
Other comprehensive income (loss) before reclassifications | Other comprehensive income (loss) before reclassifications | | | | | | | | Other comprehensive income (loss) before reclassifications | | | | | | | | |
Unrealized gains (losses) | | $ | (610) | | | | $ | — | | | $ | (610) | | |
Translation adjustment | | Translation adjustment | | $ | (788) | | | $ | — | | | $ | — | | | $ | (788) | |
| | Amounts reclassified from accumulated other comprehensive income (loss) | Amounts reclassified from accumulated other comprehensive income (loss) | | — | | | | 114 | | | 114 | | Amounts reclassified from accumulated other comprehensive income (loss) | | — | | | — | | | 51 | | | 51 | |
Tax effect | Tax effect | | — | | | | (29) | | | (29) | | Tax effect | | — | | | — | | | (13) | | | (13) | |
Net of tax amount | Net of tax amount | | (610) | | | | 85 | | | (525) | | Net of tax amount | | (788) | | | — | | | 38 | | | (750) | |
Balance at September 26, 2020 | | $ | (5,243) | | | | $ | (685) | | | $ | (5,928) | | |
Balance at October 2, 2021 | | Balance at October 2, 2021 | | $ | (3,633) | | | $ | — | | | $ | (697) | | | $ | (4,330) | |
| Nine Months Ended October 1, 2022 | | Nine Months Ended October 1, 2022 | | Foreign Currency | | Available-for-Sale Securities | | Defined Benefit Pension Plans | | Accumulated Other Comprehensive Income (Loss) |
Balance at January 1, 2022 | | Balance at January 1, 2022 | | $ | (3,654) | | | $ | — | | | $ | (519) | | | $ | (4,173) | |
Other comprehensive income (loss) before reclassifications | | Other comprehensive income (loss) before reclassifications | | | | | | | | |
Translation adjustment | | Translation adjustment | | $ | (2,455) | | | $ | — | | | $ | — | | | $ | (2,455) | |
Unrealized losses | | Unrealized losses | | — | | | (350) | | | — | | | (350) | |
| Amounts reclassified from accumulated other comprehensive income (loss) | | Amounts reclassified from accumulated other comprehensive income (loss) | | — | | | (3) | | | 92 | | | 89 | |
Tax effect | | Tax effect | | — | | | 74 | | | (24) | | | 50 | |
Net of tax amount | | Net of tax amount | | (2,455) | | | (279) | | | 68 | | | (2,666) | |
Balance at October 1, 2022 | | Balance at October 1, 2022 | | $ | (6,109) | | | $ | (279) | | | $ | (451) | | | $ | (6,839) | |
| Nine Months Ended October 2, 2021 | | Nine Months Ended October 2, 2021 | | Foreign Currency | | Available-for-Sale Securities | | Defined Benefit Pension Plans | | Accumulated Other Comprehensive Income (Loss) |
Balance at January 1, 2021 | | Balance at January 1, 2021 | | $ | (3,738) | | | $ | — | | | $ | (809) | | | $ | (4,547) | |
Other comprehensive income (loss) before reclassifications | | Other comprehensive income (loss) before reclassifications | | | | | | | | |
Translation adjustment | | Translation adjustment | | $ | 105 | | | $ | — | | | $ | — | | | $ | 105 | |
| Amounts reclassified from accumulated other comprehensive income (loss) | | Amounts reclassified from accumulated other comprehensive income (loss) | | — | | | — | | | 151 | | | 151 | |
Tax effect | | Tax effect | | — | | | — | | | (39) | | | (39) | |
Net of tax amount | | Net of tax amount | | 105 | | | — | | | 112 | | | 217 | |
Balance at October 2, 2021 | | Balance at October 2, 2021 | | $ | (3,633) | | | $ | — | | | $ | (697) | | | $ | (4,330) | |
The change in defined benefit pension plans of $30 and $92 for the three and nine months ended October 1, 2022, respectively, and $51 and $151 for the three and nine months ended October 2, 2021, respectively and $38 and $114 for the three and nine months ended September 26, 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.
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 1, 2022
(Amounts in thousands, except share data)
L. 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 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 2-for-one stock split of our common shares effective October 1, 2021):follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| October 2, 2021 | | September 26, 2020 | | October 2, 2021 | | September 26, 2020 |
Income available to common shareholders: | | | | | | | |
Net income | $ | 24,927 | | | $ | 24,535 | | | $ | 57,897 | | | $ | 54,396 | |
| | | | | | | |
Weighted-average shares (in thousands): | | | | | | | |
Basic: | | | | | | | |
| | | | | | | |
| | | | | | | |
Basic weighted-average shares | 44,885 | | | 45,748 | | | 45,257 | | | 45,912 | |
| | | | | | | |
Diluted: | | | | | | | |
Basic from above | 44,885 | | | 45,748 | | | 45,257 | | | 45,912 | |
Incremental shares from assumed: | | | | | | | |
| | | | | | | |
Exercise of stock options and awards | 3,066 | | | 1,960 | | | 2,528 | | | 2,093 | |
Diluted weighted-average shares | 47,951 | | | 47,708 | | | 47,785 | | | 48,005 | |
| | | | | | | |
Net income per share: | | | | | | | |
| | | | | | | |
Basic | $ | .56 | | | $ | .54 | | | $ | 1.28 | | | $ | 1.18 | |
| | | | | | | |
Diluted | $ | .52 | | | $ | .51 | | | $ | 1.21 | | | $ | 1.13 | |
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 2, 2021
(Amounts in thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| October 1, 2022 | | October 2, 2021 | | October 1, 2022 | | October 2, 2021 |
Income available to common shareholders: | | | | | | | |
Net income | $ | 20,464 | | | $ | 24,927 | | | $ | 49,031 | | | $ | 57,897 | |
| | | | | | | |
Weighted-average shares (in thousands): | | | | | | | |
Basic: | | | | | | | |
Outstanding | 43,920 | | | 44,885 | | | 44,194 | | | 45,257 | |
Partially-paid share subscriptions | 228 | | | — | | | 228 | | | — | |
Basic weighted-average shares | 44,148 | | | 44,885 | | | 44,422 | | | 45,257 | |
| | | | | | | |
Diluted: | | | | | | | |
Basic from above | 44,148 | | | 44,885 | | | 44,422 | | | 45,257 | |
Incremental shares from assumed: | | | | | | | |
| | | | | | | |
Exercise of stock options and awards | 2,257 | | | 3,066 | | | 2,297 | | | 2,528 | |
Diluted weighted-average shares | 46,405 | | | 47,951 | | | 46,719 | | | 47,785 | |
| | | | | | | |
Net income per share: | | | | | | | |
| | | | | | | |
Basic | $ | .46 | | | $ | .56 | | | $ | 1.10 | | | $ | 1.28 | |
| | | | | | | |
Diluted | $ | .44 | | | $ | .52 | | | $ | 1.05 | | | $ | 1.21 | |
Common and Redeemable Shares Outstanding--A summary of the activity of the common and redeemable shares outstanding for the nine months ended October 2, 20211, 2022 was as follows:
| | | | Common Shares Net of Treasury Shares | | Redeemable Shares | | Total | | Common Shares Net of Treasury Shares | | Redeemable Shares | | Total |
Shares outstanding at January 1, 2021 | 35,414,536 | | | 10,225,768 | | | 45,640,304 | | |
Shares outstanding at January 1, 2022 | | Shares outstanding at January 1, 2022 | 35,110,432 | | | 9,391,790 | | | 44,502,222 | |
Shares purchased | Shares purchased | (1,434,170) | | | (949,838) | | | (2,384,008) | | Shares purchased | (1,646,735) | | | (881,136) | | | (2,527,871) | |
Shares sold | Shares sold | 470,490 | | | 486,112 | | | 956,602 | | Shares sold | 472,110 | | | 777,725 | | | 1,249,835 | |
| Stock subscription offering -- cash purchases | | Stock subscription offering -- cash purchases | 152,800 | | | — | | | 152,800 | |
Options and awards exercised | Options and awards exercised | 526,492 | | | — | | | 526,492 | | Options and awards exercised | 368,402 | | | — | | | 368,402 | |
Shares outstanding at October 2, 2021 | 34,977,348 | | | 9,762,042 | | | 44,739,390 | | |
Shares outstanding at October 1, 2022 | | Shares outstanding at October 1, 2022 | 34,457,009 | | | 9,288,379 | | | 43,745,388 | |
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 1, 2022
(Amounts in thousands, except share data)
On October 2, 2021,1, 2022, we had 44,739,39043,745,388 common and redeemable shares outstanding, and employee options exercisable to purchase 1,882,3831,725,879 common shares, partially-paid subscriptions for 1,318,450 common shares and purchase rights outstanding for 487,488 common shares.
Common Stock Split--On September 17, 2021, our board of directors approved and declared a 2-for-onetwo-for-one stock split in the form of a stock dividend, pursuant to which each of our shareholders of record at the close of business on October 1, 2021 received one additional common share for each then-held common share, which was paid on October 15, 2021. On September 20, 2021, in connection with the stock split, the Company filed a Certificate of Amendment to its 2017 Amended Articles of Incorporation with the Secretary of State of the State of Ohio, which became effective upon filing and (1) proportionately increased the authorized number of common shares from 48,000,000 to 96,000,000 and (2) proportionately decreased the par value of our common shares from $1.00 per share to $.50 per share.
2022 Subscription Offering
L.Beginning April 2022, the Company offered to eligible employees and nonemployee directors the right to subscribe to a maximum of 2,666,667 common shares of the Company (including shares that may be issued upon the exercise of stock rights) at $18.10 per share in accordance with the provisions of The Davey Tree Expert Company 2014 Omnibus Stock Plan and the rules of the Compensation Committee of the Company’s Board of Directors. The offering period ended on August 1, 2022 and resulted in the subscription of 1,476,250 common shares for $26,720 at $18.10 per share.
Participants in the subscription offering who purchased common shares for an aggregate purchase price of less than $5 were required to pay with cash. All participants (excluding Company directors and officers) purchasing common shares for an aggregate purchase price of $5 or more 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 the greater of 2.00% or the applicable federal rate in effect as of August 1, 2022, which was 3.15%. 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 in the offering were 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 who purchased in excess of $5 of common shares were granted a "right" to purchase one additional common share at a price of $18.10 per share for every three common shares purchased in the offering. As a result of the stock subscription, rights to purchase 489,169 common shares were granted. 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. A purchaser may not exercise a right once he or she ceases to be the Company's employee or non-employee director, as applicable.
M. 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 2two reportable operating segments organized by type or class of customer: Residential and Commercial, and Utility.
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
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 1, 2022
(Amounts in thousands, except share data)
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, 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 20202021 Annual Report.
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 2, 20211, 2022
(Amounts in thousands, except share data)
Segment information reconciled to the condensed consolidated financial statements was as follows:
| | | | Utility | | Residential and Commercial | | All Other | | Reconciling Adjustments | | Consolidated |
Three Months Ended October 1, 2022 | | Three Months Ended October 1, 2022 | | | | | | | | | |
Revenues | | Revenues | $ | 217,305 | | | $ | 180,706 | | | $ | 934 | | | $ | — | | | $ | 398,945 | |
Income (loss) from operations | | Income (loss) from operations | 16,790 | | | 21,204 | | | (4,033) | | | (948) | | (a) | | 33,013 | |
Interest expense | | Interest expense | | | | | | | (2,164) | | | (2,164) | |
Interest income | | Interest income | | 303 | | | 303 | |
Other income (expense), net | | Other income (expense), net | | (3,371) | | | (3,371) | |
Income before income taxes | | Income before income taxes | | | | $ | 27,781 | |
Segment assets, total | | Segment assets, total | $ | 331,393 | | | $ | 305,216 | | | $ | — | | | $ | 263,362 | | (b) | | $ | 899,971 | |
| | Utility | | Residential and Commercial | | All Other | | Reconciling Adjustments | | Consolidated | | | | | | | | | | |
Three Months Ended October 2, 2021 | Three Months Ended October 2, 2021 | | | | | | | | | | Three Months Ended October 2, 2021 | |
Revenues | Revenues | $ | 204,960 | | | $ | 164,737 | | | $ | 547 | | | $ | — | | | $ | 370,244 | | Revenues | $ | 204,960 | | | $ | 164,737 | | | $ | 547 | | | $ | — | | | $ | 370,244 | |
Income (loss) from operations | Income (loss) from operations | 23,124 | | | 17,595 | | | (2,701) | | | (1,085) | | (a) | | 36,933 | | Income (loss) from operations | 23,124 | | | 17,595 | | | (2,701) | | | (1,085) | | (a) | | 36,933 | |
Interest expense | Interest expense | | | | | | | (1,449) | | | (1,449) | | Interest expense | | | | | | | (1,449) | | | (1,449) | |
Interest income | Interest income | | 39 | | | 39 | | Interest income | | 39 | | | 39 | |
Other income (expense), net | Other income (expense), net | | (2,298) | | | (2,298) | | Other income (expense), net | | (2,298) | | | (2,298) | |
Income before income taxes | Income before income taxes | | | | $ | 33,225 | | Income before income taxes | | | | $ | 33,225 | |
Segment assets, total | Segment assets, total | $ | 286,157 | | | $ | 278,847 | | | $ | — | | | $ | 210,709 | | (b) | | $ | 775,713 | | Segment assets, total | $ | 286,157 | | | $ | 278,847 | | | $ | — | | | $ | 210,709 | | (b) | | $ | 775,713 | |
| Three Months Ended September 26, 2020 | | |
Nine Months Ended October 1, 2022 | | Nine Months Ended October 1, 2022 | |
Revenues | Revenues | $ | 185,500 | | | $ | 151,435 | | | $ | 518 | | | $ | — | | | $ | 337,453 | | Revenues | $ | 637,900 | | | $ | 504,064 | | | $ | 1,584 | | | $ | — | | | $ | 1,143,548 | |
Income (loss) from operations | Income (loss) from operations | 20,301 | | | 20,273 | | | (2,886) | | | (2,316) | | (a) | | 35,372 | | Income (loss) from operations | 49,260 | | | 50,759 | | | (14,852) | | | (5,665) | | (a) | | 79,502 | |
Interest expense | Interest expense | | | | | | | (1,579) | | | (1,579) | | Interest expense | | | | | | | (5,312) | | | (5,312) | |
Interest income | Interest income | | 1,688 | | | 1,688 | | Interest income | | 489 | | | 489 | |
Other income (expense), net | Other income (expense), net | | (1,499) | | | (1,499) | | Other income (expense), net | | (8,241) | | | (8,241) | |
Income before income taxes | Income before income taxes | | | | $ | 33,982 | | Income before income taxes | | | | $ | 66,438 | |
Segment assets, total | Segment assets, total | $ | 296,519 | | | $ | 227,977 | | | $ | — | | | $ | 147,188 | | (b) | | $ | 671,684 | | Segment assets, total | $ | 331,393 | | | $ | 305,216 | | | $ | — | | | $ | 263,362 | | (b) | | $ | 899,971 | |
| Nine Months Ended October 2, 2021 | Nine Months Ended October 2, 2021 | | Nine Months Ended October 2, 2021 | |
Revenues | Revenues | $ | 557,349 | | | $ | 465,524 | | | $ | 1,668 | | | $ | — | | | $ | 1,024,541 | | Revenues | $ | 557,349 | | | $ | 465,524 | | | $ | 1,668 | | | $ | — | | | $ | 1,024,541 | |
Income (loss) from operations | Income (loss) from operations | 50,015 | | | 51,893 | | | (11,367) | | | (2,610) | | (a) | | 87,931 | | Income (loss) from operations | 50,015 | | | 51,893 | | | (11,367) | | | (2,610) | | (a) | | 87,931 | |
Interest expense | Interest expense | | | | | | | (4,093) | | | (4,093) | | Interest expense | | | | | | | (4,093) | | | (4,093) | |
Interest income | Interest income | | 161 | | | 161 | | Interest income | | 161 | | | 161 | |
Other income (expense), net | Other income (expense), net | | (5,548) | | | (5,548) | | Other income (expense), net | | (5,548) | | | (5,548) | |
Income before income taxes | Income before income taxes | | | | $ | 78,451 | | Income before income taxes | | | | $ | 78,451 | |
Segment assets, total | Segment assets, total | $ | 286,157 | | | $ | 278,847 | | | $ | — | | | $ | 210,709 | | (b) | | $ | 775,713 | | Segment assets, total | $ | 286,157 | | | $ | 278,847 | | | $ | — | | | $ | 210,709 | | (b) | | $ | 775,713 | |
| Nine Months Ended September 26, 2020 | | |
Revenues | $ | 547,984 | | | $ | 396,293 | | | $ | 703 | | | $ | — | | | $ | 944,980 | | |
Income (loss) from operations | 56,817 | | | 42,242 | | | (11,267) | | | (4,309) | | (a) | | 83,483 | | |
Interest expense | | | | | | | (5,477) | | | (5,477) | | |
Interest income | | 1,885 | | | 1,885 | | |
Other income (expense), net | | (4,550) | | | (4,550) | | |
Income before income taxes | | | | $ | 75,341 | | |
Segment assets, total | $ | 296,519 | | | $ | 227,977 | | | $ | — | | | $ | 147,188 | | (b) | | $ | 671,684 | | |
Reconciling adjustments from segment reporting to the condensed consolidated financial statements include unallocated corporate items:
(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.
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 2, 20211, 2022
(Amounts in thousands, except share data)
M.N. Revenue Recognition
We recognize revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers.
Nature of Performance Obligations and Significant Judgments
At contract inception, the Company assesses the goods and services promised in its contracts with customers and identifies a performance obligation for each promised good or service (or bundle of goods and services) that is distinct. To identify the performance obligations, the Company considers each of the goods or services promised in the contract regardless of whether they are explicitly stated or are implied by customary business practices.
Our contracts with our customers generally originate upon the completion of a quote for services for residential and commercial customers or the receipt of a purchase order (or similar work order) for utility customers. In some cases, our contracts are governed by master services agreements, in which case our contract under ASC 606 consists of the combination of the master services agreement and the quote/purchase order. Many of our contracts have a stated duration of one year or less or contain termination clauses that allow the customer to cancel the contract after a specified notice period, which is typically less than 90 days. Due to the fact that many of our arrangements allow the customer to terminate for convenience, the duration of the contract for revenue recognition purposes generally does not extend beyond the services that we have actually transferred. As a result, many of our contracts are, in effect, day-to-day or month-to-month contracts.
Disaggregation of Revenue
The following tables disaggregate our revenue for the three and nine months ended October 1, 2022 and October 2, 2021 and September 26, 2020 by major sources:
| Three Months Ended October 2, 2021 | | Utility | | Residential and Commercial | | All Other | | Consolidated | |
Three Months Ended October 1, 2022 | | Three Months Ended October 1, 2022 | | Utility | | Residential and Commercial | | All Other | | Consolidated |
Type of service: | Type of service: | | | | | | | | | Type of service: | | | | | | | | |
Tree and plant care | Tree and plant care | | $ | 140,039 | | | $ | 96,961 | | | $ | (29) | | | $ | 236,971 | | Tree and plant care | | $ | 138,112 | | | $ | 105,108 | | | $ | (28) | | | $ | 243,192 | |
Grounds maintenance | Grounds maintenance | | — | | | 40,452 | | | — | | | 40,452 | | Grounds maintenance | | — | | | 46,056 | | | — | | | 46,056 | |
Storm damage services | Storm damage services | | 10,052 | | | 2,688 | | | — | | | 12,740 | | Storm damage services | | 7,004 | | | 2,564 | | | — | | | 9,568 | |
Consulting and other | Consulting and other | | 54,869 | | | 24,636 | | | 576 | | | 80,081 | | Consulting and other | | 72,189 | | | 26,978 | | | 962 | | | 100,129 | |
Total revenues | Total revenues | | $ | 204,960 | | | $ | 164,737 | | | $ | 547 | | | $ | 370,244 | | Total revenues | | $ | 217,305 | | | $ | 180,706 | | | $ | 934 | | | $ | 398,945 | |
| Geography: | Geography: | | Geography: | |
United States | United States | | $ | 194,140 | | | $ | 153,009 | | | $ | 547 | | | $ | 347,696 | | United States | | $ | 207,004 | | | $ | 168,405 | | | $ | 934 | | | $ | 376,343 | |
Canada | Canada | | 10,820 | | | 11,728 | | | — | | | 22,548 | | Canada | | 10,301 | | | 12,301 | | | — | | | 22,602 | |
Total revenues | Total revenues | | $ | 204,960 | | | $ | 164,737 | | | $ | 547 | | | $ | 370,244 | | Total revenues | | $ | 217,305 | | | $ | 180,706 | | | $ | 934 | | | $ | 398,945 | |
|
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 2, 20211, 2022
(Amounts in thousands, except share data)
| Three Months Ended September 26, 2020 | | Utility | | Residential and Commercial | | All Other | | Consolidated | |
Three Months Ended October 2, 2021 | | Three Months Ended October 2, 2021 | | Utility | | Residential and Commercial | | All Other | | Consolidated |
Type of service: | | Type of service: | | | | | | | | |
Tree and plant care | | Tree and plant care | | $ | 140,039 | | | $ | 96,961 | | | $ | (29) | | | $ | 236,971 | |
Grounds maintenance | | Grounds maintenance | | — | | | 40,452 | | | — | | | 40,452 | |
Storm damage services | | Storm damage services | | 10,052 | | | 2,688 | | | — | | | 12,740 | |
Consulting and other | | Consulting and other | | 54,869 | | | 24,636 | | | 576 | | | 80,081 | |
Total revenues | | Total revenues | | $ | 204,960 | | | $ | 164,737 | | | $ | 547 | | | $ | 370,244 | |
| Geography: | | Geography: | |
United States | | United States | | $ | 194,140 | | | $ | 153,009 | | | $ | 547 | | | $ | 347,696 | |
Canada | | Canada | | 10,820 | | | 11,728 | | | — | | | 22,548 | |
Total revenues | | Total revenues | | $ | 204,960 | | | $ | 164,737 | | | $ | 547 | | | $ | 370,244 | |
| Nine Months Ended October 1, 2022 | | Nine Months Ended October 1, 2022 | | Utility | | Residential and Commercial | | All Other | | Consolidated |
Type of service: | Type of service: | | | | | | | | | Type of service: | | | | | | | | |
Tree and plant care | Tree and plant care | | $ | 135,021 | | | $ | 90,049 | | | $ | (10) | | | $ | 225,060 | | Tree and plant care | | $ | 420,791 | | | $ | 294,206 | | | $ | (155) | | | $ | 714,842 | |
Grounds maintenance | Grounds maintenance | | — | | | 36,296 | | | — | | | 36,296 | | Grounds maintenance | | — | | | 128,114 | | | — | | | 128,114 | |
Storm damage services | Storm damage services | | 7,061 | | | 4,069 | | | — | | | 11,130 | | Storm damage services | | 10,136 | | | 6,162 | | | — | | | 16,298 | |
Consulting and other | Consulting and other | | 43,418 | | | 21,021 | | | 528 | | | 64,967 | | Consulting and other | | 206,973 | | | 75,582 | | | 1,739 | | | 284,294 | |
Total revenues | Total revenues | | $ | 185,500 | | | $ | 151,435 | | | $ | 518 | | | $ | 337,453 | | Total revenues | | $ | 637,900 | | | $ | 504,064 | | | $ | 1,584 | | | $ | 1,143,548 | |
| Geography: | Geography: | | Geography: | |
United States | United States | | $ | 176,528 | | | $ | 140,571 | | | $ | 518 | | | $ | 317,617 | | United States | | $ | 608,411 | | | $ | 469,042 | | | $ | 1,584 | | | $ | 1,079,037 | |
Canada | Canada | | 8,972 | | | 10,864 | | | — | | | 19,836 | | Canada | | 29,489 | | | 35,022 | | | — | | | 64,511 | |
Total revenues | Total revenues | | $ | 185,500 | | | $ | 151,435 | | | $ | 518 | | | $ | 337,453 | | Total revenues | | $ | 637,900 | | | $ | 504,064 | | | $ | 1,584 | | | $ | 1,143,548 | |
| Nine Months Ended October 2, 2021 | Nine Months Ended October 2, 2021 | | Utility | | Residential and Commercial | | All Other | | Consolidated | Nine Months Ended October 2, 2021 | | Utility | | Residential and Commercial | | All Other | | Consolidated |
Type of service: | Type of service: | | | | | | | | | Type of service: | | | | | | | | |
Tree and plant care | Tree and plant care | | $ | 393,742 | | | $ | 271,682 | | | $ | (224) | | | $ | 665,200 | | Tree and plant care | | $ | 393,742 | | | $ | 271,682 | | | $ | (224) | | | $ | 665,200 | |
Grounds maintenance | Grounds maintenance | | — | | | 116,810 | | | — | | | 116,810 | | Grounds maintenance | | — | | | 116,810 | | | — | | | 116,810 | |
Storm damage services | Storm damage services | | 13,997 | | | 5,486 | | | — | | | 19,483 | | Storm damage services | | 13,997 | | | 5,486 | | | — | | | 19,483 | |
Consulting and other | Consulting and other | | 149,610 | | | 71,546 | | | 1,892 | | | 223,048 | | Consulting and other | | 149,610 | | | 71,546 | | | 1,892 | | | 223,048 | |
Total revenues | Total revenues | | $ | 557,349 | | | $ | 465,524 | | | $ | 1,668 | | | $ | 1,024,541 | | Total revenues | | $ | 557,349 | | | $ | 465,524 | | | $ | 1,668 | | | $ | 1,024,541 | |
| Geography: | Geography: | | Geography: | | | | | |
United States | United States | | $ | 525,818 | | | $ | 432,158 | | | $ | 1,668 | | | $ | 959,644 | | United States | | $ | 525,818 | | | $ | 432,158 | | | $ | 1,668 | | | $ | 959,644 | |
Canada | Canada | | 31,531 | | | 33,366 | | | — | | | 64,897 | | Canada | | 31,531 | | | 33,366 | | | — | | | 64,897 | |
Total revenues | Total revenues | | $ | 557,349 | | | $ | 465,524 | | | $ | 1,668 | | | $ | 1,024,541 | | Total revenues | | $ | 557,349 | | | $ | 465,524 | | | $ | 1,668 | | | $ | 1,024,541 | |
| Nine Months Ended September 26, 2020 | | Utility | | Residential and Commercial | | All Other | | Consolidated | |
Type of service: | | | | | | | | | |
Tree and plant care | | $ | 408,371 | | | $ | 233,810 | | | $ | (121) | | | $ | 642,060 | | |
Grounds maintenance | | — | | | 100,352 | | | — | | | 100,352 | | |
Storm damage services | | 8,087 | | | 6,047 | | | — | | | 14,134 | | |
Consulting and other | | 131,526 | | | 56,084 | | | 824 | | | 188,434 | | |
Total revenues | | $ | 547,984 | | | $ | 396,293 | | | $ | 703 | | | $ | 944,980 | | |
| Geography: | | | | | | |
United States | | $ | 522,094 | | | $ | 369,297 | | | $ | 703 | | | $ | 892,094 | | |
Canada | | 25,890 | | | 26,996 | | | — | | | 52,886 | | |
Total revenues | | $ | 547,984 | | | $ | 396,293 | | | $ | 703 | | | $ | 944,980 | | |
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 2, 20211, 2022
(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 $616 and $1,676 of revenue for the three and nine months ended October 1, 2022, that was included in the contract liability balance at December 31, 2021 and $239 and $1,294 of revenue for the three and nine months ended October 2, 2021, respectively, that was included in the contract liability balance at December 31, 2020 and $150 and $1,411 of revenue for the three and nine months ended September 26, 2020, respectively, that was included in the contract liability balance at December 31, 2019.2020. Net contract liabilities consisted of the following:
| | | October 2, 2021 | | December 31, 2020 | | October 1, 2022 | | December 31, 2021 |
Contract liabilities - current | Contract liabilities - current | $ | 4,006 | | | $ | 3,242 | | Contract liabilities - current | $ | 4,599 | | | $ | 3,888 | |
Contract liabilities - noncurrent | Contract liabilities - noncurrent | 1,879 | | | 1,754 | | Contract liabilities - noncurrent | 1,951 | | | 1,845 | |
Net contract liabilities | Net contract liabilities | $ | 5,885 | | | $ | 4,996 | | Net contract liabilities | $ | 6,550 | | | $ | 5,733 | |
N.O. Fair Value Measurements and Financial Instruments
FASB ASC 820, “Fair Value Measurements and Disclosures" (“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.
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 2, 20211, 2022
(Amounts in thousands, except share data)
Our assets and liabilities measured at fair value on a recurring basis at October 2, 20211, 2022 were as follows:
| | | | | | Fair Value Measurements at October 2, 2021 Using: | | | | | Fair Value Measurements at October 1, 2022 Using: |
Assets and Liabilities Recorded at Fair Value on a Recurring Basis | Assets and Liabilities Recorded at Fair Value on a Recurring Basis | | Total Carrying Value at October 2, 2021 | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | Assets and Liabilities Recorded at Fair Value on a Recurring Basis | | Total Carrying Value at October 1, 2022 | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Assets: | Assets: | | | | | | | | | Assets: | | | | | | | | |
Assets invested for self-insurance, classified as other current assets, current | | $ | 5,500 | | | $ | 5,500 | | | $ | — | | | $ | — | | |
Assets invested for self-insurance, classified as other assets, noncurrent | | 11,859 | | | 11,859 | | | — | | | — | | |
Assets invested for self-insurance | | Assets invested for self-insurance | |
Certificates of deposits, current | | Certificates of deposits, current | | $ | 4,000 | | | $ | 4,000 | | | $ | — | | | $ | — | |
Certificates of deposits, noncurrent | | Certificates of deposits, noncurrent | | 7,109 | | | 7,109 | | | — | | | — | |
| Available-for-sale debt securities: | | Available-for-sale debt securities: | |
United States Government and agency securities | | United States Government and agency securities | | 20,261 | | | 20,261 | | | — | | | — | |
Corporate notes and bonds | | Corporate notes and bonds | | 257 | | | 257 | | | — | | | — | |
Total available-for-sale debt securities | | Total available-for-sale debt securities | | 20,518 | | | 20,518 | | | — | | | — | |
| Marketable equity securities: | | Marketable equity securities: | |
Mutual funds | | Mutual funds | | 14,894 | | | 14,894 | | | — | | | — | |
Corporate stocks | | Corporate stocks | | 2,819 | | | 2,819 | | | — | | | — | |
| Exchange traded funds | | Exchange traded funds | | 1,133 | | | 1,133 | | | — | | | — | |
| Total marketable equity securities | | Total marketable equity securities | | 18,846 | | | 18,846 | | | — | | | — | |
| Liabilities: | Liabilities: | | | | | | | | | Liabilities: | |
| Deferred compensation | Deferred compensation | | $ | 4,299 | | | $ | — | | | $ | 4,299 | | | $ | — | | Deferred compensation | | $ | 4,759 | | | $ | — | | | $ | 4,759 | | | $ | — | |
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 1, 2022
(Amounts in thousands, except share data)
Our assets and liabilities measured at fair value on a recurring basis at December 31, 20202021 were as follows:
| | | | | | Fair Value Measurements at December 31, 2020 Using: | | | | | Fair Value Measurements at December 31, 2021 Using: |
Assets and Liabilities Recorded at Fair Value on a Recurring Basis | 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 and Liabilities Recorded at Fair Value on a Recurring Basis | | Total Carrying Value at December 31, 2021 | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Assets: | Assets: | | | | | | | | | Assets: | | | | | | | | |
Assets invested for self-insurance, classified as other assets, noncurrent | | $ | 19,359 | | | $ | 19,359 | | | $ | — | | | $ | — | | |
Assets invested for self-insurance | | Assets invested for self-insurance | |
Certificates of deposits, current | | Certificates of deposits, current | | $ | 4,250 | | | $ | 4,250 | | | $ | — | | | $ | — | |
Certificates of deposits, noncurrent | | Certificates of deposits, noncurrent | | 10,609 | | | 10,609 | | | — | | | — | |
| | Available-for-sale debt securities: | | Available-for-sale debt securities: | |
United States Government and agency securities | | United States Government and agency securities | | 3,230 | | | 3,230 | | | — | | | — | |
Corporate notes and bonds | | Corporate notes and bonds | | 176 | | | 176 | | | — | | | — | |
Total available-for-sale debt securities | | Total available-for-sale debt securities | | 3,406 | | | 3,406 | | | — | | | — | |
| Marketable equity securities: | | Marketable equity securities: | |
Mutual funds | | Mutual funds | | 7,476 | | | 7,476 | | | — | | | — | |
Corporate stocks | | Corporate stocks | | 1,934 | | | 1,934 | | | — | | | — | |
| Exchange traded funds | | Exchange traded funds | | 1,976 | | | 1,976 | | | — | | | — | |
| Total marketable equity securities | | Total marketable equity securities | | 11,386 | | | 11,386 | | | — | | | — | |
| Liabilities: | Liabilities: | | | | | | | | | Liabilities: | |
Deferred compensation | Deferred compensation | | $ | 3,192 | | | $ | — | | | $ | 3,192 | | | $ | — | | Deferred compensation | | $ | 4,333 | | | $ | — | | | $ | 4,333 | | | $ | — | |
The assets invested for self-insurance are certificates of deposit--classifieddeposit, stocks, bonds, mutual funds and exchange traded funds--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.
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 1, 2022
(Amounts in thousands, except share data)
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 assets and liabilities and their carrying values and fair values were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | October 2, 2021 | | December 31, 2020 |
| | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Revolving credit facility, noncurrent | | $ | 34,191 | | | $ | 34,191 | | | $ | — | | | $ | — | |
Senior unsecured notes, noncurrent | | 75,000 | | | 78,772 | | | 75,000 | | | 81,424 | |
Term loans, noncurrent | | 3,299 | | | 3,447 | | | 2,324 | | | 2,451 | |
Total | | $ | 112,490 | | | $ | 116,410 | | | $ | 77,324 | | | $ | 83,875 | |
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 2, 2021
(Amounts in thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | October 1, 2022 | | December 31, 2021 |
| | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Assets: | | | | | | | | |
Available-for-sale debt securities | | $ | 20,518 | | | $ | 20,518 | | | $ | 3,406 | | | $ | 3,406 | |
Marketable equity securities | | 18,846 | | | 18,846 | | | 11,386 | | | 11,386 | |
| | | | | | | | |
Liabilities: | | | | | | | | |
Revolving credit facility, noncurrent | | $ | 98,099 | | | $ | 98,099 | | | $ | 46,832 | | | $ | 46,832 | |
Senior unsecured notes, noncurrent | | 75,000 | | | 73,396 | | | 75,000 | | | 78,432 | |
Term loans, noncurrent | | 2,038 | | | 1,973 | | | 2,373 | | | 2,431 | |
Total | | $ | 175,137 | | | $ | 173,468 | | | $ | 124,205 | | | $ | 127,695 | |
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.
O.P. Commitments and Contingencies
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”Court") against Davey Tree, its subsidiary, Wolf Tree, Inc. ("Wolf Tree"), a former Davey employee, 2two Wolf Tree employees, and a former Wolf Tree employee alleging various acts of negligence
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 1, 2022
(Amounts in thousands, except share data)
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 4four current and former employees in Savannah, Georgia, which arises out of the same allegations, seeks compensatory and punitive damages and also includes 3three 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”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)
October 2, 2021
(Amounts in thousands, except share data)
indictment was issued charging 2two former Wolf Tree employees and 1 otheranother individual with various crimes, including conspiracy to murder the deceased. OnTwo of the three individually charged defendants have pled guilty to charges related to their involvement with the murder and other illegal activities on March 28, 2022 and April 11, 2022. A third individual criminally charged defendant was scheduled to go to trial on October 25, 2022, and was convicted of charges for his role in the murder, harboring of illegal aliens; and money laundering conspiracy. All three criminal defendants have not yet been sentenced.
Previously, 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,To date, 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.stayed, although Plaintiffs' counsel has submitted a letter to the Court seeking a lift of the stay.
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 1, 2022
(Amounts in thousands, except share data)
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.
Northern California Wildfires
NaNFive lawsuits have been filed that name contractors for PG&E Corporation and its subsidiary, Pacific Gas and Electric Company (together, "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. 19CV001194. 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.
NaNThree 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. On September 22, 2021, the court granted Davey Tree's petition to coordinate all cases, including Walker, as a California Judicial Council Coordination Proceeding, In Re North Bay Fire Cases, JCCP No. 4955. As a result of the coordination order, all five of the individual actions are stayed in their home jurisdictions. The next case management conference in JCCP No. 4955 is scheduledwas held on February 24, 2022. At that case management conference, the Court ordered a mediation between the Plaintiffs and Davey Tree related to Davey Tree's contracts with PG&E. Separately, the court ordered that all parties shall participate in a mediation with the Plaintiffs prior to January 27, 2023. An initial mediation date for December 6, 2021. These actions are currently in preliminary stagesall the Plaintiffs and Davey Tree related to parties on the contractual issues was set for October 17, 2022 but did not resolve at this initial mediation.
The Defendants have also received evidence from the Plaintiff's Trust and PG&E collected by those parties during the PG&E bankruptcy proceedings and Davey Tree's experts have begun their initial inspection of pleadings, butthe evidence. Davey Tree has responded to all claims asserted by the Plaintiffs in these actions, denying all liability in these cases.cases and is vigorously defending against Plaintiffs' alleged claims.
In all cases, the Company denies all liability and will vigorously defend the actions.
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 2, 2021
(Amounts in thousands, except share data)
P.Q. The Davey 401KSOP and Employee Stock Ownership Plan
On March 15, 1979, the Company consummated a plan, which transferred control of the Company to its employees. As a part of this plan, the Company initially sold 120,000 common shares (presently, 46,080,000 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, 2020, we match, in either cash or our common shares, 100% of
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 1, 2022
(Amounts in thousands, except share data)
the first 3three percent and 50% of the next 2two percent of each participant's before-tax contribution, limited to the first 5five 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 determinesassists with the appraisal of 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 2two 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 $1,157$990 and $3,298$1,279 as of October 2, 20211, 2022 and December 31, 2020,2021, respectively. The fair value of the shares held in the Davey 401KSOP and ESOP totaled $158,940$167,130 and $150,089$168,652 as of October 2, 20211, 2022 and December 31, 2020,2021, respectively. Due to the Company’s obligation under the put option, the distributed shares subject to the put option and the shares held in the Davey 401KSOP and ESOP (collectively referred to as 401KSOP and ESOP related shares) are recorded at fair value, classified as temporary equity in the mezzanine section of the consolidated balance sheets and totaled $160,097$168,120 and $153,387$169,931 as of October 2, 20211, 2022 and December 31, 2020,2021, 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 the 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.
(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 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, 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."
On September 17, 2021, our board of directors approved and declared a two-for-one stock split in the form of a stock dividend, pursuant to which each of our shareholders of record at the close of business on October 1, 2021 received one additional common share for each then-held common share, which was paid on October 15, 2021. On September 20, 2021, in connection with the stock split, the Company filed a Certificate of Amendment to its 2017 Amended Articles of Incorporation with the Secretary of State of the State of Ohio, which became effective upon filing and (1) proportionately increased the authorized number of common shares from 48,000,000 to 96,000,000 and (2) proportionately decreased the par value of our common shares from $1.00 per share to $.50 per share.
Impact of COVID-19 and Recent Trends
While the coronavirus ("COVID-19") pandemic did not have a material adverse effect on our reported results for the first nine months of 2021,2022, the overall extent and duration of the impact of COVID-19 has had, and will continue to have, an impact on businesses financial markets and economic activity throughoutgenerally remains unclear due to the world.inherent uncertainty surrounding COVID-19, given its continual evolution.
We continue to takehave taken steps to support our employees and protect their health and safety, while also ensuring that our business can continue to operate and provide services to our customers. 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.indirectly. During the second and third quarters of 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 nine months of 2021,2022, we incurred expenses of $1,058$1,530 as a result of the COVID-19 pandemic mainly for administrative leave and personal protective equipment.
The extentOur business continues 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, includinga number of other macro-economic factors, in addition to the effects of new strainstrailing impact of the virus,COVID-19 pandemic. Global supply chains and product availability remain highly challenged and ongoing global events in Eastern Europe have only exacerbated an already difficult operating environment. These factors, combined with higher fuel costs, increasing interest rates and a highly competitive labor market, have created an inflationary environment and cost pressures.
In regard to consumer demand, since the availabilityonset of the COVID-19 pandemic, our business has experienced an increase in demand and effectiveness of vaccines, supply chain disruptionssales. It remains unclear, however, if these demand trends will remain intact or if they will revert to more historical levels over time, particularly as inflation begins to impact discretionary spending.
Inflation rates in the markets in which we operate have increased and actions by government authoritiesmay continue to containrise. Inflation over the pandemic or treat its impact,last several months has led us to experience higher costs, including reimposinghigher labor costs and costs for materials from suppliers and transportation costs, and, in the
previously-lifted measurescompetitive markets in which we operate, we may not be able to increase our prices correspondingly to preserve our gross margins and implementing vaccine mandates, whichprofitability. If inflation rates continue to rise or remain elevated for a sustained period of time, they could impacthave a material adverse effect on our labor supply and futurebusiness, financial condition, results of operations and liquidity. We have generally been able to offset increases in these costs through various productivity and cost reduction initiatives, as well as adjusting our prices to pass through some of these higher costs to our customers; however, our ability to raise our prices depends on market conditions and competitive dynamics. Given the possibility that additional restrictions willtiming of our actions compared to the timing of these inflationary pressures, there may be putperiods during which we are unable to fully recover the increases in place, especially as sporadic outbreaksour costs.
2022 Subscription Offering
The Company offered to eligible employees and nonemployee directors the right to subscribe to a maximum of COVID-19 continue to occur, among other things.2,666,667 common shares of the Company at $18.10 per share in accordance with the provisions of The situation surrounding COVID-19 remains fluid,Davey Tree Expert Company 2014 Omnibus Stock Plan and the potential for a material impactrules of the Compensation Committee of the Company’s Board of Directors. The offering period ended on our business continues the longer COVID-19 impacts the level of economic activityAugust 1, 2022 and resulted in the U.S.subscription of 1,476,250 common shares for $26,720 at $18.10 per share. For additional information regarding the offering, see Note L, Per Share Amounts 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.Common and Redeemable Shares Outstanding.
RESULTS OF OPERATIONS
The following table sets forth our consolidated results of operations as a percentage of revenues and the change in such percentages for the periods presented.
| | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended |
| | October 2, 2021 | | September 26, 2020 | | Change | | October 2, 2021 | | September 26, 2020 | | Change | | October 1, 2022 | | October 2, 2021 | | Change | | October 1, 2022 | | October 2, 2021 | | Change |
Revenues | Revenues | 100.0 | % | | 100.0 | % | | — | % | | 100.0 | % | | 100.0 | % | | — | % | Revenues | 100.0 | % | | 100.0 | % | | — | % | | 100.0 | % | | 100.0 | % | | — | % |
| Costs and expenses: | Costs and expenses: | | Costs and expenses: | |
Operating | Operating | 62.8 | | | 61.8 | | | 1.0 | | | 63.5 | | | 63.2 | | | .3 | | Operating | 63.8 | | | 62.8 | | | 1.0 | | | 64.7 | | | 63.5 | | | 1.2 | |
Selling | Selling | 18.2 | | | 17.8 | | | .4 | | | 17.5 | | | 17.2 | | | .3 | | Selling | 18.1 | | | 18.2 | | | (.1) | | | 17.6 | | | 17.5 | | | .1 | |
General and administrative | General and administrative | 5.6 | | | 5.9 | | | (.3) | | | 6.8 | | | 6.4 | | | .4 | | General and administrative | 7.0 | | | 5.6 | | | 1.4 | | | 7.6 | | | 6.8 | | | .8 | |
Depreciation and amortization | Depreciation and amortization | 3.8 | | | 4.1 | | | (.3) | | | 4.0 | | | 4.5 | | | (.5) | | Depreciation and amortization | 3.5 | | | 3.8 | | | (.3) | | | 3.6 | | | 4.0 | | | (.4) | |
Gain on sale of assets, net | Gain on sale of assets, net | (.4) | | | (.1) | | | (.3) | | | (.4) | | | (.2) | | | (.2) | | Gain on sale of assets, net | (.7) | | | (.4) | | | (.3) | | | (.5) | | | (.4) | | | (.1) | |
| Income from operations | Income from operations | 10.0 | | | 10.5 | | | (.5) | | | 8.6 | | | 8.9 | | | (.3) | | Income from operations | 8.3 | | | 10.0 | | | (1.7) | | | 7.0 | | | 8.6 | | | (1.6) | |
| Other income (expense): | Other income (expense): | | Other income (expense): | |
Interest expense | Interest expense | (.4) | | | (.5) | | | .1 | | | (.4) | | | (.6) | | | .2 | | Interest expense | (.5) | | | (.4) | | | (.1) | | | (.5) | | | (.4) | | | (.1) | |
Interest income | Interest income | — | | | .5 | | | (.5) | | | — | | | .2 | | | (.2) | | Interest income | .1 | | | — | | | .1 | | | — | | | — | | | — | |
Other, net | Other, net | (.6) | | | (.4) | | | (.2) | | | (.5) | | | (.5) | | | — | | Other, net | (.9) | | | (.6) | | | (.3) | | | (.7) | | | (.5) | | | (.2) | |
| Income before income taxes | Income before income taxes | 9.0 | | | 10.1 | | | (1.1) | | | 7.7 | | | 8.0 | | | (.3) | | Income before income taxes | 7.0 | | | 9.0 | | | (2.0) | | | 5.8 | | | 7.7 | | | (1.9) | |
| Income taxes | Income taxes | 2.3 | | | 2.8 | | | (.5) | | | 2.0 | | | 2.2 | | | (.2) | | Income taxes | 1.9 | | | 2.3 | | | (.4) | | | 1.5 | | | 2.0 | | | (.5) | |
| Net income | Net income | 6.7 | % | | 7.3 | % | | (.6) | % | | 5.7 | % | | 5.8 | % | | (.1) | % | Net income | 5.1 | % | | 6.7 | % | | (1.6) | % | | 4.3 | % | | 5.7 | % | | (1.4) | % |
Third Quarter—Three Months Ended October 2, 20211, 2022 Compared to Three Months Ended September 26, 2020October 2, 2021
Our results of operations for the three months ended October 2, 20211, 2022 compared to the three months ended September 26, 2020October 2, 2021 were as follows:
| | | Three Months Ended | | Three Months Ended |
| | October 2, 2021 | | September 26, 2020 | | Change | | Percentage Change | | October 1, 2022 | | October 2, 2021 | | Change | | Percentage Change |
Revenues | Revenues | $ | 370,244 | | | $ | 337,453 | | | $ | 32,791 | | | 9.7 | % | Revenues | $ | 398,945 | | | $ | 370,244 | | | $ | 28,701 | | | 7.8 | % |
| Costs and expenses: | Costs and expenses: | | | | | Costs and expenses: | | | | |
Operating | Operating | 232,599 | | | 208,638 | | | 23,961 | | | 11.5 | | Operating | 254,661 | | | 232,599 | | | 22,062 | | | 9.5 | |
Selling | Selling | 67,353 | | | 60,203 | | | 7,150 | | | 11.9 | | Selling | 72,364 | | | 67,353 | | | 5,011 | | | 7.4 | |
General and administrative | General and administrative | 20,739 | | | 19,891 | | | 848 | | | 4.3 | | General and administrative | 27,964 | | | 20,739 | | | 7,225 | | | 34.8 | |
Depreciation and amortization | Depreciation and amortization | 14,127 | | | 13,825 | | | 302 | | | 2.2 | | Depreciation and amortization | 13,780 | | | 14,127 | | | (347) | | | (2.5) | |
Gain on sale of assets, net | Gain on sale of assets, net | (1,507) | | | (476) | | | (1,031) | | | 216.6 | | Gain on sale of assets, net | (2,837) | | | (1,507) | | | (1,330) | | | 88.3 | |
| | 333,311 | | | 302,081 | | | 31,230 | | | 10.3 | | | 365,932 | | | 333,311 | | | 32,621 | | | 9.8 | |
| Income from operations | Income from operations | 36,933 | | | 35,372 | | | 1,561 | | | 4.4 | | Income from operations | 33,013 | | | 36,933 | | | (3,920) | | | (10.6) | |
Other income (expense): | Other income (expense): | | | | | Other income (expense): | | | | |
Interest expense | Interest expense | (1,449) | | | (1,579) | | | 130 | | | (8.2) | | Interest expense | (2,164) | | | (1,449) | | | (715) | | | 49.3 | |
Interest income | Interest income | 39 | | | 1,688 | | | (1,649) | | | (97.7) | | Interest income | 303 | | | 39 | | | 264 | | | 676.9 | |
Other, net | Other, net | (2,298) | | | (1,499) | | | (799) | | | 53.3 | | Other, net | (3,371) | | | (2,298) | | | (1,073) | | | 46.7 | |
Income before income taxes | Income before income taxes | 33,225 | | | 33,982 | | | (757) | | | (2.2) | | Income before income taxes | 27,781 | | | 33,225 | | | (5,444) | | | (16.4) | |
| Income taxes | Income taxes | 8,298 | | | 9,447 | | | (1,149) | | | (12.2) | | Income taxes | 7,317 | | | 8,298 | | | (981) | | | (11.8) | |
| Net income | Net income | $ | 24,927 | | | $ | 24,535 | | | $ | 392 | | | 1.6 | % | Net income | $ | 20,464 | | | $ | 24,927 | | | $ | (4,463) | | | (17.9) | % |
Revenues--Revenues of $370,244$398,945 increased $32,791$28,701 compared with $337,453$370,244 in the third quarter of 2020.2021. Utility Services increased $19,460$12,345 or 10.5%6.0% compared with the third quarter of 2020.2021. The increase was attributable to new accounts as well as increased work year-over-year and price increases on existing accounts. Residential and Commercial Services increased $13,302$15,969 or 8.8%9.7% from the third quarter of 2020.2021. Increases were primarily in tree and plant care revenues and grounds maintenance revenue and consulting and other revenue.
Operating Expenses--Operating expenses of $232,599$254,661 increased $23,961$22,062 compared with the third quarter of 2020.2021. Utility Services increased $13,803$14,694 or 10.5%10.0% compared with the third quarter of 2020 but,2021 and, as a percentage of revenue, remained atincreased to 73.7% from 71.0%. The increase was primarily attributable to additional expenses for labor and benefits expenses, fuel expense, crew meals and lodging expenses, subcontractor expense, and tools and parts expense and materials expense, which were partially offset by a decrease in rented equipment expense. Residential and Commercial Services increased $11,167$6,994 or 14.9%8.1% compared with the third quarter of 2020 and,2021 but, as a percentage of revenue, increaseddecreased to 52.4%51.6% from 49.7%52.4%. The increase was primarily attributable to increases in labor and benefits expenses, fuel expense, equipment maintenance expense, subcontractor expense, tools and parts expenses and materials expense.
Operating expenses for the third quarter of 20212022 also included $204$617 of expenses related directly to COVID-19, including $80$608 for additional administrative leave offered to employees who have been unable to work due to COVID-19 imposed restrictions, whether from the virus itself or government imposed restrictions or closures. For the third quarter of 2020,2021, the Company had $953$204 of expenses directly related to COVID-19.
Fuel costs of $11,436$16,243 increased $3,336,$4,807, or 41.2%42.0%, from the $8,100$11,436 incurred in the third quarter of 20202021 and impacted operating expenses within all segments. The $3,336$4,807 increase included usage increases approximating $108$591 and price increases approximating $3,228.$4,216.
Selling Expenses--Selling expenses of $67,353$72,364 increased $7,150$5,011 compared with the third quarter of 2020 and,2021 but, as a percentage of revenues, increasedrevenue, decreased to 18.2%18.1% from 17.8%18.2%. Utility Services increased $2,219$3,517 or 10.9%15.6% compared to the third quarter of 2020 but,2021 and, as a percentage of revenue, remained atincreased to 12.0% from 11.0%. The increase was primarily attributable to increases in field management wages and incentive expense and travel expenses.expense. Residential and Commercial Services increased $4,671$2,052 or 11.4%4.5% from the third quarter of 2020 and,2021 but, as a percentage of revenue, increaseddecreased to 27.7%26.4% from 27.0%27.7%. The increase was primarily attributable to an increaseincreases in field management and sales wage expenses, marketing expenses and office rent.
General and Administrative Expenses--General and administrative expenses of $20,739$27,964 increased $848$7,225 from $19,891$20,739 in the third quarter of 2020.2021. The increase was primarily attributable to increases in professional services,salary expense, and travel and living expenses and office expenses, which werewas partially offset by a decrease in salaryprofessional services expense.
Depreciation and Amortization Expense--Depreciation and amortization expense of $14,127 increased $302$13,780 decreased $347 from $13,825$14,127 incurred in the third quarter of 2020.2021.
Gain on the Sale of Assets, Net--Gain on the sale of assets of $1,507$2,837 for the third quarter of 20212022 increased $1,031$1,330 from the $476$1,507 gain in the third quarter of 2020.2021. We sold more individuala greater number of units of equipment at a higher average gain per unit in the third quarter of 20212022 as compared with the third quarter of 2020.2021.
Interest Expense--Interest expense of $1,449 decreased $130$2,164 increased $715 from the $1,579$1,449 incurred in the third quarter of 2020.2021. The decreaseincrease was attributable to lowerhigher average borrowing and higher interest rates during the third quarter of 2021,2022, as compared with the third quarter of 2020.2021.
Other, Net--Other expense, net, of $2,298$3,371 increased $799$1,073 from the $1,499$2,298 of other expense incurred in the third quarter of 20202021 and consisted of nonoperating income and expense, including losses on marketable securities, pension expense and foreign currency transaction gains/losses on the intercompany account balances of our Canadian operations.
Income Taxes--Income taxes for the third quarter of 20212022 were $8,298,$7,317, as compared to $9,447$8,298 for the third quarter of 2020.2021. 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 third quarter of 20212022 was 25.0%26.3% as compared with the third quarter of 20202021 effective tax rate of 27.8%25.0%.
Net Income--Net income of $24,927$20,464 for the third quarter of 20212022 was $392 more$4,463 less than the $24,535$24,927 net income for the third quarter of 2020.2021.
First Nine Months—Nine Months Ended October 2, 20211, 2022 Compared to Nine Months Ended September 26, 2020October 2, 2021
Our results of operations for the nine months ended October 2, 20211, 2022 compared to the nine months ended September 26, 2020October 2, 2021 were as follows:
| | | Nine Months Ended | | Nine Months Ended |
| | October 2, 2021 | | September 26, 2020 | | Change | | Percentage Change | | October 1, 2022 | | October 2, 2021 | | Change | | Percentage Change |
Revenues | Revenues | $ | 1,024,541 | | | $ | 944,980 | | | $ | 79,561 | | | 8.4 | % | Revenues | $ | 1,143,548 | | | $ | 1,024,541 | | | $ | 119,007 | | | 11.6 | % |
| Costs and expenses: | Costs and expenses: | | | | | | | | Costs and expenses: | | | | | | | |
Operating | Operating | 650,909 | | | 598,225 | | | 52,684 | | | 8.8 | | Operating | 740,422 | | | 650,909 | | | 89,513 | | | 13.8 | |
Selling | Selling | 178,876 | | | 162,287 | | | 16,589 | | | 10.2 | | Selling | 201,315 | | | 178,876 | | | 22,439 | | | 12.5 | |
General and administrative | General and administrative | 69,712 | | | 60,477 | | | 9,235 | | | 15.3 | | General and administrative | 87,014 | | | 69,712 | | | 17,302 | | | 24.8 | |
Depreciation and amortization | Depreciation and amortization | 41,287 | | | 42,553 | | | (1,266) | | | (3.0) | | Depreciation and amortization | 41,082 | | | 41,287 | | | (205) | | | (.5) | |
Gain on sale of assets, net | Gain on sale of assets, net | (4,174) | | | (2,045) | | | (2,129) | | | 104.1 | | Gain on sale of assets, net | (5,787) | | | (4,174) | | | (1,613) | | | 38.6 | |
| | 936,610 | | | 861,497 | | | 75,113 | | | 8.7 | | | 1,064,046 | | | 936,610 | | | 127,436 | | | 13.6 | |
| Income from operations | Income from operations | 87,931 | | | 83,483 | | | 4,448 | | | 5.3 | | Income from operations | 79,502 | | | 87,931 | | | (8,429) | | | (9.6) | |
Other income (expense): | Other income (expense): | | | | | | | Other income (expense): | | | | | | |
Interest expense | Interest expense | (4,093) | | | (5,477) | | | 1,384 | | | (25.3) | | Interest expense | (5,312) | | | (4,093) | | | (1,219) | | | 29.8 | |
Interest income | Interest income | 161 | | | 1,885 | | | (1,724) | | | (91.5) | | Interest income | 489 | | | 161 | | | 328 | | | 203.7 | |
Other, net | Other, net | (5,548) | | | (4,550) | | | (998) | | | 21.9 | | Other, net | (8,241) | | | (5,548) | | | (2,693) | | | 48.5 | |
Income before income taxes | Income before income taxes | 78,451 | | | 75,341 | | | 3,110 | | | 4.1 | | Income before income taxes | 66,438 | | | 78,451 | | | (12,013) | | | (15.3) | |
| Income taxes | Income taxes | 20,554 | | | 20,945 | | | (391) | | | (1.9) | | Income taxes | 17,407 | | | 20,554 | | | (3,147) | | | (15.3) | |
| Net income | Net income | $ | 57,897 | | | $ | 54,396 | | | $ | 3,501 | | | 6.4 | % | Net income | $ | 49,031 | | | $ | 57,897 | | | $ | (8,866) | | | (15.3) | % |
|
Revenues--Revenues of $1,024,541$1,143,548 increased $79,561$119,007 compared with $944,980$1,024,541 in the first nine months of 2020.2021. Utility Services increased $9,365$80,551 or 1.7%14.5% compared with the first nine months of 2020.2021. The increase was primarily attributable to 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, which was partially offset by less emergency work on our PG&E account as compared to the first nine months of 2020.operations. Residential and Commercial Services increased $69,231$38,540 or 17.5%8.3% compared with the first nine months of 2020.2021. 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.maintenance revenue.
Operating Expenses--Operating expenses of $650,909$740,422 increased $52,684$89,513 compared with the first nine months of 2020 and, as a percentage of revenues, increased to 63.5% from 63.2%. Utility Services increased $14,553 or 3.7% compared with the first nine months of 20202021 and, as a percentage of revenue, increased to 72.5%64.7% from 71.0%63.5%. Utility Services increased $65,742 or 16.3% compared with the first nine months of 2021 and, as a percentage of revenue, increased to 73.6% from 72.5%. The increase was attributable to increases in labor and benefits expense, fuel expense, equipment expense, materials expense, crew meals and lodging expenses, and tools and parts expense which were partially offset by decreases in benefits expense, equipment expenses, and subcontractor expense. Residential and Commercial Services increased $40,875$23,107 or 20.1%9.5% compared with the first nine months of 20202021 and, as a percentage of revenue, increased to 52.5%53.0% from 51.3%52.5%. The increase was primarily attributable to increases in labor and benefits expense, fuel expense, subcontractor expense, equipment expense, tool expense, subcontractor expense and materials expense.
Operating expenses for the first nine months of 20212022 also included $1,058$1,530 of expenses related directly to COVID-19, including $362$1,322 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.restrictions. For the first nine months of 2020,2021, the Company had $3,148$1,058 of expenses directly related to COVID-19.
Fuel costs of $29,970$45,379 increased $6,732,$15,409, or 29.0%51.4%, from the $23,238$29,970 incurred in the first nine months of 20202021 and impacted operating expenses within all segments. The $6,732$15,409 increase included usage increases approximating $455$1,609 and price increases approximating $6,277.$13,800.
Selling Expenses--Selling expenses of $178,876$201,315 increased $16,589$22,439 compared with the first nine months of 20202021 and, as a percentage of revenue, increased to 17.5%17.6% from 17.2%17.5%. Utility Services increased $1,996$12,797 or 3.3%20.6% compared to the first nine months of 20202021 and, as a percentage of revenue, increased to 11.2%11.8% from 11.0%11.2%. The increase was primarily attributable to increases in field management wages and field management travel expense. Residential and Commercial Services experienced an increase of $14,885$9,843 or 14.2%8.2% compared to the first nine months of 20202021 but, as a percentage of revenue, decreased toremained at 25.7% from 26.4%. The increase was primarily attributable to increases in field management wages and incentive expense, travel expense, computermarketing expense and rent expense.
General and Administrative Expenses--General and administrative expenses of $69,712$87,014 increased $9,235$17,302 from $60,477$69,712 in the first nine months of 2020.2021. The increase was primarily attributable to increases in salary and incentive expense professional services expense and computer expenses.travel expense.
Depreciation and Amortization Expense--Depreciation and amortization expense of $41,287$41,082 decreased $1,266$205 from $42,553$41,287 incurred in the first nine months of 2020. The decrease was attributable to lower capital expenditures in recent years and an increased use of operating leases for equipment.2021.
Gain on the Sale of Assets, Net--Gain on the sale of assets of $4,174$5,787 for the first nine months of 20212022 increased $2,129$1,613 from the $2,045$4,174 gain in the first nine months of 2020.2021. We sold a comparable number ofmore units of equipment but at a higher average gain per unit during the first nine months of 20212022 as compared with the first nine months of 2020.2021.
Interest Expense--Interest expense of $4,093 decreased $1,384$5,312 increased $1,219 from the $5,477$4,093 incurred in the first nine months of 2020.2021. The decreaseincrease was attributable to lowerhigher average borrowing and increased interest rates during the first nine months of 2021,2022, as compared with the first nine months of 2020.2021.
Other, Net--Other expense, net, of $5,548$8,241 increased $998$2,693 from the $4,550$5,548 expense incurred in the first nine months of 20202021 and consisted of nonoperating income and expense, including losses on marketable securities, pension expense and foreign currency gains/losses on the intercompany account balances of our Canadian operations.
Income Taxes--Income taxes for the first nine months of 20212022 were $20,554,$17,407, as compared to $20,945$20,554 for the first nine months of 2020.2021. 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 first nine months of 20212022 was 26.2%. Our effective tax rate for the first nine months of 20202021 was 27.8%26.2%. 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 $49,031 for the first nine months of 2022 was $8,866 less than the net income of $57,897 for the first nine months of 2021 was $3,501 more than the net income of $54,396 for the first nine months of 2020.2021.
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. We also engaged in a subscription offering of our common shares to eligible employees and nonemployee directors, which closed tn the third quarter of 2022 and resulted in the subscription of 1,476,250 common shares for $26,720 at $18.10 per share.
Cash Flow Summary
Our cash flows from operating, investing and financing activities for the nine months ended October 1, 2022 and October 2, 2021 and September 26, 2020 were as follows:
| | | Nine Months Ended | | Nine Months Ended |
| | October 2, 2021 | | September 26, 2020 | | October 1, 2022 | | October 2, 2021 |
Cash provided by (used in): | Cash provided by (used in): | | | | Cash provided by (used in): | | | |
Operating activities | Operating activities | $ | 57,401 | | | $ | 99,428 | | Operating activities | $ | 62,980 | | | $ | 57,401 | |
Investing activities | Investing activities | (59,777) | | | (41,614) | | Investing activities | (95,608) | | | (59,777) | |
Financing activities | Financing activities | 19,192 | | | (43,739) | | Financing activities | 36,183 | | | 19,192 | |
Effect of exchange rate changes on cash | Effect of exchange rate changes on cash | 40 | | | (17) | | Effect of exchange rate changes on cash | (171) | | | 40 | |
Increase in cash | Increase in cash | $ | 16,856 | | | $ | 14,058 | | Increase in cash | $ | 3,384 | | | $ | 16,856 | |
Cash Provided By Operating Activities--Cash provided by operating activities was $57,401$62,980 for the first nine months of 2021,2022, a $42,027 decrease$5,579 increase when compared to the first nine months of 2020.2021. The $42,027 decrease$5,579 increase in operating cash flow was primarily attributable to thea change of $37,860$22,180 related to accounts payable and accrued expenses, and the change of $5,936$8,111 related to prepaid expenses,other operating assets and liabilities, partially offset by athe change of $4,533$19,183 related to accounts receivable.
Overall, accounts receivable increased $49,451 during the first nine months of 2022, as compared to an increase of $30,268 during the first nine months of 2021, as compared to an increase of $34,801 during the first nine months of 2020.2021. With respect to the change in accounts receivable arising from business levels, the “days-sales-outstanding” in accounts receivable (sometimes referred to as “DSO”) at the end of the first nine months of 2021 decreased2022 increased by twofive days to 7075 days, compared to 7270 days at the end of the first nine months of 2020.2021.
Accounts payable and accrued expenses decreased $9,471increased $12,709 in the first nine months of 2021,2022, a change of $37,860$22,180 compared to the $28,389 increase$9,471 decrease in the first nine months of 2020.2021. 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 Economic Security Act.well as compensated absence accruals. Self-insurance accruals increased $13,041$13,306 in the first nine months of 2021,2022, which was $1,645 less$265 more than the increase of $14,686$13,041 experienced in the first nine months of 2020.2021. The increase was attributable to increased exposures within our workers compensation, general liability and vehicle liability lines of coverage.
Prepaid expensesOther operating assets and liabilities increased $13,442$7,710 in the first nine months of 2021,2022, a change of $5,936$8,111 compared to the $7,506 increase$401 decrease in the first nine months of 2020.2021. The increasechange was primarily attributable to an increase in prepaid insurance premiums.
As we cannot predict the duration or scope of the COVID-19 pandemic and its 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 business to maintain cash flow and we have significant liquidity. We believe that these factors will allow us to meet our anticipated funding requirements.
cloud computing arrangements. Cash Used In Investing Activities--Cash used in investing activities for the first nine months of 20212022 was $59,777,$95,608, a $18,163$35,831 increase when compared to the first nine months of 2020.2021. The increase was primarily the result of increases in purchases of businesses, equipment and land and buildings.buildings and marketable securities, partially offset by a decrease in purchases of businesses.
Cash Provided by (Used In)By Financing Activities--Cash provided by financing activities was $19,192$36,183 during the first nine months of 2021,2022, a change of $62,931$16,991 as compared with the $43,739 used$19,192 provided during the first nine months of 2020.2021. During the first nine months of 2021,2022, our revolving credit facility, net provided $33,478$51,267 in cash as compared with $32,000 used$33,478 provided during the first nine months of 2020.2021. We use the credit facility primarily for capital expenditures, redemptions of shares and payments of notes payable related to acquisitions. Notes payable increased $10,081$6,735 during the first nine months of 2021, an increase2022, a decrease of $7,796$3,346 when compared to the $2,285$10,081 increase in the first nine months of 2020.2021. Treasury share transactions (purchases and sales) used $19,552$16,824 for the first nine months of 2021, $8,7612022, $2,728 more than the $10,791$19,552 used in the first nine months of 2020.2021. Dividends paid of $2,127$2,682 during the first nine months of 20212022 increased $419$555 as
compared with $1,708$2,127 paid in the first nine months of 2020,2021, in part due to the increase in dividend paid per share implemented during the fourth quarter of 2021 and the second quarter of 2021.2022.
The Company currently repurchases common shares at shareholders’ requests 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 the Davey 401KSOP and ESOP Plan, as described in Note P,Q, such purchases are not required, and the Company retains the right to discontinue them at any time. Repurchases of redeemable common shares at shareholders' request approximated $6,860$12,814 and $5,280$6,860 during the nine months ended October 1, 2022 and October 2, 2021, and September 26, 2020, respectively. Share repurchases, other than redeemable common shares, approximated $29,647$33,053 and $22,209$29,647 during the nine months ended October 1, 2022 and October 2, 2021, and September 26, 2020, respectively.
Contractual Obligations Summary and Commercial Commitments
As of October 2, 2021,1, 2022, total commitments related to issued letters of credit were $88,363,$94,509, of which $2,878$2,700 were issued under the revolving credit facility, $83,355$89,689 were issued under the AR Securitization program, and $2,131$2,120 were issued under short-term lines of credit. As of December 31, 2020,2021, total commitments related to issued letters of credit were $88,242,$88,362, of which $2,877 were issued under the revolving credit facility, $83,355 were issued under the AR Securitization program, and $2,010$2,130 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 20212022 through 2023.2026. We intend to renew the surety bonds where appropriate and as necessary.
Capital Resources
Cash generated from operations, 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 continually review our existing sources of financing and evaluate alternatives. At October 2, 2021,1, 2022, we had working capital of $145,735,$171,930, short-term lines of credit approximating $9,052$8,971 and $287,931$224,201 available under our revolving credit facility, which was amended and
restated in August 2021 and now permits up to $325,000 in borrowings. In addition, in September 2021, we amended the Note Purchase and Shelf Agreement, which among other things, increased the total facility limit by $50,000, to $150,000.facility.
For more information regarding our outstanding debt, see Note F,G, Short and 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. However, we cannot predict the full extent of the potential impact resulting from the COVID-19 pandemic on our business, results of operations and sources of capital.
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 2021 annual report, on Form 10-K for the year ended December 31, 2020, we believe that our policies related to revenue recognition, the allowance for credit 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 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. Our critical accounting policies have not changed materially from those discussed in our 2021 Annual Report.
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," "could," "might," "expects," "plans," "anticipates," "believes," "estimates," "seeks," "predicts," "potential," "would," "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.statements, some of which have been, and may further be, exacerbated by the COVID-19 pandemic. Some important factors that could cause actual results to differ materially from those in the forward-looking statements someor materially adversely affect our business, results of which have been, and may further be, exacerbated byoperations or financial condition include: the COVID-19 pandemic, include:
▪The continued impact of the COVID-19 pandemic and the responses thereto could have a material adverse effect onthereto; our business, results of operations, financial position or cash flows.
▪We may be unableinability to attract and retain a sufficient number of qualified employees for our field operations or qualified management personnel and weincreased wage rates that may be unableresult from our need 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, andemployees; 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.
▪The unavailabilitycoverages; inability to obtain, or cancellation of, third-party insurance coverage may have a material adverse effect on our financial condition and resultscoverage; the impact of operations as well as disrupt our operations.
▪We could be materially adversely affected by wildfires in California and other areas, as well as other severe weather events and natural disasters, which events may worsen or increase due to the effects of climate change, including negative impacts to our business, reputation, financial condition, results of operations, liquidity and cash flows.
▪Our business, other than tree services to utility customers, is highly seasonal and weather dependent.
▪Significant customers, particularly utilities, may experience financial difficulties, resulting inchange; payment delays or delinquencies.
▪We are subject todelinquencies resulting from financial difficulties of our significant customers, particularly utilities; the outcome of litigation and third-party and governmental regulatory claims and adverse litigation judgments or settlements resulting from those claims could materially adversely affectagainst us; an increase in our business.
▪Significantoperating expenses due to significant increases in fuel prices for extended periods of time, will increasesuch as the recent increases and volatility arising from the effects of the Russia-Ukraine conflict; disruptions, delays or price increases within our operating expenses.
▪We are subjectsupply chain; our ability to withstand intense competition.
▪Variouscompetition; the effect of various economic factors that may adversely impact our customers’ spending and pricing for our services, including the impact of inflationary pressures, and impede our collection of accounts receivable.
▪Thereceivable; the impact of regulations initiated as a responseglobal climate change and related regulations; fluctuations in our quarterly results due to possible changing climate conditions could have a negative effect on our results of operations or our financial condition.
▪Thethe seasonal nature of our business andor 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 misjudge a competitive bid and befactors; being contractually bound to an unprofitable contract.
▪Acontract; a disruption in our information technology systems, including a disruption related to cybersecurity, or the impact of costs incurred to comply with cybersecurity or data privacy regulations, could adversely affect our financial performance.
▪We are dependent, in part, onregulations; damage to our reputation of quality, integrity and performance. Ifperformance; limitations on our reputation is damaged, we may be adversely affected.shareholders’ ability to sell their common shares due to the lack of public market for such shares; our ability to continue to declare cash dividends; our failure to comply with environmental laws resulting in significant liabilities, fines and/or penalties; difficulties obtaining surety bonds or letters of credit necessary to support our operations; uncertainties in the credit and financial markets, including the negative impacts of COVID-19 and the Russia-Ukraine conflict, supply chain shortages and disruptions, rising interest rates, labor shortages and inflationary cost pressures, among other factors, potentially limiting our access to capital; fluctuations in foreign currency exchange rates; significant
▪IndexOur business could be negatively impacted byincreases in health care costs; the impact of corporate citizenship and environmental, social and governance matters and/or our reporting of such matters.
▪Because no public market exists formatters; our common shares,ability to successfully implement our new enterprise resource planning system in a cost-effective and timely manner; 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 encounter difficulties obtaining surety bonds or letters of credit necessary to support our operations.
▪The uncertainties in the credit and financial markets, including the negative impact of COVID-19, may limit our access to capital.
▪Fluctuations in foreign currency exchange rates may have a material adverse impact on our operating results.
▪Significant increases in health care costs could negatively impact our results of operations 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, public health epidemics or pandemics, such as COVID-19, or other public health concerns, terrorist attacks or other external events.
▪Ourevents; and our inability to properly verify the employment eligibility of our employees could adversely affect our 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.results, except as required by applicable securities laws.
The factors described above, as well as other factors that may adversely impact our actual results, are discussed in "Part I - Item 1A. Risk Factors." of our 2021 annual report on Form 10-K for the year ended December 31, 2020.report.
Item 3.Quantitative and Qualitative Disclosures about Market Risk.
ThereWhile we have experience inflation and higher interest rates during 2022, there have been no material changes in our reported market risks or risk management policies since the filing of our 20202021 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 8, 2021.11, 2022.
Item 4.Controls and Procedures.
(a) Management’s Evaluation of Disclosure Controls and Procedures
As 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, 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 the design and operation of our disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this report 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 Securities 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.
(b) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the fiscal quarter ended October 2, 20211, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II. Other Information
Items 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”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”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 otheranother individual with various crimes, including conspiracy to murder the deceased. OnTwo of the three individually charged defendants have pled guilty to charges related to their involvement with the murder and other illegal activities on March 28, 2022 and April 11, 2022. A third individual criminally charged defendant was scheduled to go to trial on October 25, 2022, and was convicted of charges for his role in the murder, harboring of illegal aliens; and money laundering conspiracy. All three criminal defendants have not yet been sentenced.
Previously, 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,To date, 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.stayed, although Plaintiffs' counsel has submitted a letter to the Court seeking a lift of the stay.
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.
Northern California Wildfires
Five lawsuits have been filed that name contractors for PG&E Corporation and its subsidiary, Pacific Gas and Electric Company (together, "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. 19CV001194. 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.
- 45 -Three 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. On September 22, 2021, the court granted Davey Tree's petition to coordinate all cases, including Walker, as a California Judicial Council Coordination Proceeding, In Re North Bay Fire Cases, JCCP No. 4955. As a result of the coordination order, all five of the individual actions are stayed in their home jurisdictions. The next case management conference in JCCP No. 4955 was held on February 24, 2022. At that case management conference, the Court ordered a mediation between the Plaintiffs and Davey Tree related to Davey Tree's contracts with PG&E. Separately, the court ordered that all parties shall participate in a mediation with the Plaintiffs prior to January 27, 2023. An initial mediation date for all the Plaintiffs and Davey Tree related to parties on the contractual issues was set for October 17, 2022 but did not resolve at this initial mediation.
The Defendants have also received evidence from the Plaintiff's Trust and PG&E collected by those parties during the PG&E bankruptcy proceedings and Davey Tree's experts have begun their initial inspection of the evidence. Davey Tree has responded to all claims asserted by the Plaintiffs in these actions, denying all liability in these cases and is vigorously defending against Plaintiffs' alleged claims.
In all cases, the Company denies all liability and will vigorously defend the actions.
Item 1A.
Item 1A.Risk Factors.
Our Annual Report on Form 10-K for the year ended December 31, 2020,2021, includes a detailed discussion of our risk factors. There have been no material changes to the risk factors described in the 2020 Form 10-K during the nine months ended October 2, 2021, except as set forth below. Disclosure of risks should not be interpreted to imply that the risks have not already materialized.
The proposed new regulation regarding mandatory COVID-19 vaccination of employees could impact our workforce and There have abeen no material adverse effect on our business and results of operations.
On September 9, 2021, President Biden announced a proposed new rule that would require all employers with at least 100 employeeschanges to ensure that their employees are fully vaccinated or require unvaccinated workers to get a negative test at least once a week. The U.S. Department of Labor’s Occupational Safety and Health Administration ("OSHA") is drafting an emergency regulation to carry out this mandate, which may take effectthe risk factors described in the near future. As a company with more than 100 employees, it is anticipated that we would be subject to2021 Annual Report during the OSHA regulation concerning COVID-19 vaccination. At this time, it is not possible to predict with certainty the exact impact that the proposed new regulation will have on us or on our workforce. The proposed new regulation, when implemented, in addition to customer-imposed mandates that have or could be required, could result in increased costs, labor disruptions or employee attrition. If we lose employees, it may be difficult in the current competitive labor market to find replacement employees, and this could have an adverse effect on future revenues and costs, which could be material. In addition, additional uncertainty could be caused by competing and potentially conflicting laws and regulations, such as the recent executive order issued by the governor of Texas prohibiting vaccine mandates. Accordingly, the proposed new OSHA regulation, when implemented, could have a material adverse effect on our business and results of operations.nine months ended October 1, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table provides information on purchases of our common shares outstanding made by us during the first nine months of 2021. The numbers in the following table, as well as the number of shares authorized for repurchase, as described below, have been adjusted for a two-for-one stock split, effected in the form of a 100% stock dividend paid on October 15, 2021 to shareholders of record at the close of business on October 1, 2021.2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | | 3,162 | | | $ | 12.45 | | | — | | 1,381,920 |
January 31 to February 27 | | 340 | | | 12.45 | | | — | | 1,381,920 |
February 28 to April 3 | | 246,842 | | | 15.00 | | | — | | 1,381,920 |
Total First Quarter | | 250,344 | | | 14.96 | | | — | | |
| | | | | | | | |
April 4 to May 1 | | 519,438 | | | 15.00 | | | — | | 1,381,920 |
May 2 to May 29 | | 544,434 | | | 15.00 | | | — | | 1,381,920 |
May 30 to July 3 | | 505,996 | | | 15.00 | | | 353,874 | | 1,028,046 |
Total Second Quarter | | 1,569,868 | | | 15.00 | | | 353,874 | | |
| | | | | | | | |
July 4 to July 31 | | — | | | 16.40 | | | — | | 1,028,046 |
August 1 to August 28 | | 242,088 | | | 16.40 | | | — | | 1,028,046 |
August 29 to October 2 | | 321,708 | | | 16.40 | | | 131,418 | | 3,896,628 |
Total Third Quarter | | 563,796 | | | 16.40 | | | 131,418 | | |
| | | | | | | | |
Total Year-to-Date | | 2,384,008 | | | $ | 15.33 | | | 485,292 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased (1) | | 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 2022 | | | | | | | | |
January 1 to January 29 | | 1,285 | | | $ | 18.10 | | | — | | 3,845,851 |
January 30 to February 26 | | 5,620 | | | 18.10 | | | — | | 3,845,851 |
February 27 to April 2 | | 382,610 | | | 18.10 | | | — | | 3,845,851 |
Total First Quarter | | 389,515 | | | 18.10 | | | — | | |
| | | | | | | | |
April 3 to April 30 | | 321,122 | | | 18.10 | | | — | | 3,845,851 |
May 1 to May 28 | | 927,994 | | | 18.10 | | | — | | 3,845,851 |
May 29 to July 2 | | 397,888 | | | 18.10 | | | — | | 3,845,851 |
Total Second Quarter | | 1,647,004 | | | 18.10 | | | — | | |
| | | | | | | | |
July 3 to July 30 | | 16,083 | | | 18.10 | | | — | | 3,845,851 |
July 31 to August 27 | | 108,358 | | | 18.10 | | | — | | 3,845,851 |
August 28 to October 1 | | 366,911 | | | 18.10 | | | — | | 3,845,851 |
Total Third Quarter | | 491,352 | | | 18.10 | | | — | | |
| | | | | | | | |
Total Year-to-Date | | 2,527,871 | | | $ | 18.10 | | | — | | |
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(1) During the nine months ended October 1, 2022, the Company purchased 2,527,871 shares from shareholders excluding those purchased through publicly announced plans. The Company provides 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). |
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, an independent stock valuation firm assists with the appraisal of the fair market value of ourthe 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 P,Q, The Davey 401KSOP and Employee Stock Ownership Plan). The purchases described above were added to our treasury stock.
At the Annual Meeting of Shareholders of the Company held on May 16, 2017, the shareholders of the Company approved proposals to amend the Company's Articles of Incorporation to (i) expand the Company's 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 rights 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 is the policy of the Company not to exercise its repurchase rights under the amended Articles with respect to shares of the Company's common shares held by current and retired employees and current and former directors of the Company (subject to exceptions set forth in the policy) (collectively, "Active Shareholders"), their spouses, their first-generation descendants and trusts established exclusively for their benefit.
Until further action by the Board, it is also 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.
In 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 400,000 common shares, which authorization was increased by an additional 2,000,000 common shares in May 2018 and increased further by an additional 3,000,000 common shares in September 2021. Of the 5,400,000 total shares authorized, 3,896,6283,845,851 remained available under the program, as of October 2, 2021.1, 2022. 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 from time to time without prior notice. The repurchase program does not have an expiration date.
Item 6.Exhibits.
See the Exhibit Index below.
Exhibit IndexExhibits
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| Fourth Amended and Restated Credit Agreement among The Davey Tree Expert Company, as borrower, various lending institutions party thereto, as banks, KeyBank National Association, as lead arranger, syndication agent and administrative agent, and PNC Bank, National Association and Wells Fargo Bank, N.A., as co-documentation agents, dated as of August 18, 2021 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 23, 2021). | | | |
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101 | The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended October 2, 2021,1, 2022, formatted in iXBRL (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 (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 | |
* Management contracts or compensatory plans or arrangements. | | | | |
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Signatures
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.
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| | | THE DAVEY TREE EXPERT COMPANY |
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Date: | November 3, 20218, 2022 | By: | /s/ Joseph R. Paul | |
| | | Joseph R. Paul | |
| | | Executive Vice President, Chief Financial Officer and Assistant Secretary | |
| | | (Principal Financial Officer) | |
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Date: | November 3, 20218, 2022 | By: | /s/ Thea R. Sears | |
| | | Thea R. Sears | |
| | | Vice President and Controller | |
| | | (Principal Accounting Officer) | |