1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
Quarterly Report Pursuant to Section 13 or 15(d) of
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended July 3, 1999 Commission File No. 0-11917
THE DAVEY TREE EXPERT COMPANY
(Exact name of Registrant as specified in its charter)
OHIO 34-0176110
(State of Incorporation) (IRS Employer Identification No.)
1500 North Mantua Street
P. O. Box 5193
Kent, OH 44240-5193
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (330) 673-9511
Number of Common Shares Outstanding as of August 17, 1999: 8,001,407
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 and (2) has been subject to such filing requirements for
the past ninety (90) days.
YES X NO
------- -------
2
THE DAVEY TREE EXPERT COMPANY
INDEX
-----
PAGE NO.
--------
PART I: FINANCIAL INFORMATION
This 10-Q/A is being filed to restate the financial
statements as of July 3, 1999 and for the three and
six month periods ended July 3, 1999 to properly accrue
net pension income related to the Registrant's two defined
benefit pension plans, properly account for certain
unbilled revenues and operating expenses related to the
Registrant's conversion to its new enterprise-wide
information system, and give appropriate effect to the
change in shares issued and treasury shares resulting
from the stock split and share retirement.
Item 1: Financial Statements (Unaudited)
Consolidated Balance Sheets - Periods ended July 3, 1999,
July 4, 1998 and December 31, 1998 3
Consolidated Statements of Net Earnings - Three
Months Ended July 3, 1999 and July 4, 1998 4
Consolidated Statements of Net Earnings - Six Months Ended
July 3, 1999 and July 4, 1998 5
Consolidated Statements of Cash Flows - Six Months
Ended July 3, 1999 and July 4, 1998 6
Notes to Consolidated Financial Statements 7
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
PART II: OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders 16
Item 5: Other Information 16
Item 6: Exhibits and Reports on Form 8-K 16
3
THE DAVEY TREE EXPERT COMPANY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
-----------
JULY 3, 1999
(AS RESTATED- JULY 4, DEC. 31,
SEE NOTE 11) 1998 1998
------------- --------- ---------
ASSETS
- ------
CURRENT ASSETS:
Cash and Cash Equivalents $ 261 $ 516 $ 1,264
Accounts Receivable 77,725 57,366 51,490
Refundable Income Taxes 620 --- 1,248
Operating Supplies 4,142 3,260 2,644
Prepaid Expenses and Other Assets 2,158 2,287 2,940
Deferred Income Taxes 1,829 1,993 1,842
--------- --------- ---------
Total Current Assets 86,735 65,422 61,428
PROPERTY AND EQUIPMENT:
Land and Land Improvements 6,300 6,349 6,325
Buildings and Leasehold Improvements 18,347 16,486 18,269
Equipment 200,080 184,817 187,084
--------- --------- ---------
224,727 207,652 211,678
Less Accumulated Depreciation 139,510 129,861 132,245
--------- --------- ---------
Net Property and Equipment 85,217 77,791 79,433
--------- --------- ---------
OTHER ASSETS AND INTANGIBLES 9,036 9,570 8,225
--------- --------- ---------
TOTAL ASSETS $ 180,988 $ 152,783 $ 149,086
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts Payable $ 15,042 $ 12,213 $ 15,191
Accrued Liabilities 14,544 15,310 11,413
Insurance Liabilities 4,831 6,318 5,797
Income Taxes Payable --- 1,650 ---
Notes Payable, Bank --- 1,925 ---
Current Maturities of Long-Term Debt 29,972 16,074 855
--------- --------- ---------
Total Current Liabilities 64,389 53,490 33,256
LONG-TERM DEBT 42,134 32,472 42,893
DEFERRED INCOME TAXES 4,009 1,344 3,588
INSURANCE LIABILITIES 11,716 11,125 10,969
OTHER LIABILITIES 1,089 928 1,112
--------- --------- ---------
TOTAL LIABILITIES 123,337 99,359 91,818
SHAREHOLDERS' EQUITY:
Preferred Shares - No Par Value;
Authorized 4,000,000 Shares;
None Issued
Common Shares - $1.00 Par Value;
Authorized 12,000,000 Shares;
Issued 10,728,440 at July 3, 1999;
8,728,440 at July 4, 1998 and
December 31, 1998 10,728 8,728 8,728
Additional Paid-in Capital 2,387 5,374 5,893
Retained Earnings 75,772 87,783 94,547
Accumulated Other Comprehensive
Earnings (Loss) (555) (591) (745)
--------- --------- ---------
88,332 101,294 108,423
LESS:
Treasury Shares at cost:
2,727,033 Shares at July 3, 1999;
4,649,300 Shares at July 4, 1998; and
4,736,785 Shares at December 31, 1998 (30,681) (47,870) (51,155)
--------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY 57,651 53,424 57,268
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 180,988 $ 152,783 $ 149,086
========= ========= =========
See Notes to Consolidated Financial Statements
4
THE DAVEY TREE EXPERT COMPANY
CONSOLIDATED STATEMENTS OF NET EARNINGS
THREE MONTHS ENDED JULY 3, 1999 AND JULY 4, 1998
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
(UNAUDITED)
JULY 3, 1999
(AS RESTATED-
SEE NOTE 11) JULY 4, 1998
----------------- ------------------
REVENUES $ 82,752 100.0% $ 85,918 100.0%
--------- ------ --------- ------
COSTS AND EXPENSES:
Operating 53,790 65.0 56,367 65.6
Selling 13,137 15.9 11,175 13.0
General and Administrative 5,123 6.2 5,268 6.1
Depreciation and Amortization 5,079 6.1 4,910 5.7
--------- ------ --------- ------
TOTAL COSTS AND EXPENSES 77,129 93.2 77,720 90.4
--------- ------ --------- ------
EARNINGS FROM OPERATIONS 5,623 6.8 8,198 9.6
INTEREST EXPENSE (1,023) (1.2) (842) (1.0)
OTHER INCOME - NET 846 1.0 8
--------- ------ --------- ------
EARNINGS BEFORE INCOME TAXES 5,446 6.6 7,364 8.6
INCOME TAXES 2,211 2.7 3,028 3.5
--------- ------ --------- ------
NET EARNINGS $ 3,235 3.9% $ 4,336 5.1%
========= ====== ========= ======
EARNINGS PER COMMON SHARE $ 0.41 $ 0.52
========= =========
EARNINGS PER COMMON SHARE -
ASSUMING DILUTION $ 0.35 $ 0.48
========= =========
BASIC EARNINGS SHARES 7,973,652 8,264,860
========= =========
DILUTED EARNINGS SHARES 9,374,094 9,111,258
========= =========
See Notes to Consolidated Financial Statements
5
THE DAVEY TREE EXPERT COMPANY
CONSOLIDATED STATEMENTS OF NET EARNINGS
SIX MONTHS ENDED JULY 3, 1999 AND JULY 4, 1998
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
(UNAUDITED)
JULY 3, 1999
(AS RESTATED -
SEE NOTE 11) JULY 4, 1998
----------------- ------------------
REVENUES $ 151,018 100.0% $ 150,986 100.0%
--------- ------ --------- ------
COSTS AND EXPENSES:
Operating 104,347 69.1 104,147 69.0
Selling 22,998 15.2 20,196 13.4
General and Administrative 9,887 6.5 10,809 7.2
Depreciation and Amortization 9,928 6.6 9,432 6.2
--------- ------ --------- ------
TOTAL COSTS AND EXPENSES 147,160 97.4 144,584 95.8
--------- ------ --------- ------
EARNINGS FROM OPERATIONS 3,858 2.6 6,402 4.2
INTEREST EXPENSE (1,818) (1.2) (1,393) (0.9)
OTHER INCOME - NET 960 0.6 227 0.2
--------- ------ --------- ------
EARNINGS BEFORE INCOME TAXES 3,000 2.0 5,236 3.5
INCOME TAXES 1,218 0.8 2,168 1.4
--------- ------ --------- ------
NET EARNINGS $ 1,782 1.2% $ 3,068 2.1%
========= ====== ========= ======
EARNINGS PER COMMON SHARE $ 0.22 $ 0.36
========= =========
EARNINGS PER COMMON SHARE -
ASSUMING DILUTION $ 0.20 $ 0.33
========= =========
BASIC EARNINGS SHARES 7,975,869 8,427,994
========= =========
DILUTED EARNINGS SHARES 8,915,855 9,286,746
========= =========
See Notes to Consolidated Financial Statements
6
THE DAVEY TREE EXPERT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR SIX MONTHS ENDED JULY 3, 1999 AND JULY 4, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
JULY 3,
1999
(AS RESTATED- JULY 4,
SEE NOTE 11) 1998
----------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings $ 1,782 $ 3,068
Adjustments to Reconcile Net Earnings to
Net Cash Provided by (Used in) Operating
Activities:
Depreciation 9,727 9,260
Amortization 201 172
Deferred Income Taxes 434 2
Other (964) (247)
--------- ---------
11,180 12,255
Change in Operating Assets and Liabilities:
Accounts Receivable (26,235) (13,470)
Other Assets (1,638) (93)
Refundable Income Taxes 628 ---
Accounts Payable and Accrued Liabilities 2,982 6,514
Insurance Liabilities (219) (208)
Income Tax Liabilities --- 3
Other Liabilities (23) 230
--------- ---------
Net Cash (Used In) Provided By Operating Activities (13,325) 5,231
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Sales of Property and Equipment 789 689
Acquisitions (115) (361)
Capital Expenditures:
Land and Buildings (99) (747)
Equipment (15,022) (20,463)
--------- ---------
Net Cash Used In Investing Activities (14,447) (20,882)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Borrowings Under Notes Payable, Bank --- 1,625
Principal Payments of Long-Term Debt (755) (5,229)
Proceeds from Issuance of Long-Term Debt 29,113 26,523
Sales of Treasury Shares 1,297 1,722
Dividends Paid (798) (794)
Repurchase of Common Shares (2,088) (8,402)
--------- ---------
Net Cash Provided By Financing Activities 26,769 15,445
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,003) (206)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,264 722
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 261 $ 516
========= =========
See Notes to Consolidated Financial Statements
7
THE DAVEY TREE EXPERT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
SIX MONTHS ENDED JULY 3, 1999
UNAUDITED
---------
NOTE 1 - BASIS OF PRESENTATION
- ------------------------------
The accompanying unaudited Consolidated Financial Statements as of July 3, 1999
and July 4, 1998 and for the three and six month periods then ended have been
prepared in accordance with the instructions to Form 10-Q, but do not include
all the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Certain reclassifications have
been made to the prior-year financial statements to conform to the current
year presentation.
Earnings per common share - assuming dilution was calculated by using the
weighted average number of common shares outstanding, including the dilutive
effect of stock options, during the period.
NOTE 2 - RESULTS OF OPERATIONS
- ------------------------------
Due to the seasonal nature of some of the Company's services, the results of
operations for the periods ended July 3, 1999 and July 4, 1998 are not
necessarily indicative of the results to be expected for the full year.
NOTE 3 - STOCK SPLIT
- --------------------
On May 19, 1999, the Registrant's board of directors declared a 2 for 1 stock
split in the form of a 100% stock dividend on outstanding shares only, to
shareholders of record as of June 1, 1999. To effect the stock split, they
authorized the retirement of 1,981,894 common shares held in treasury. Per
common share amounts have been restated for all periods presented to give
retroactive effect to the stock split. Common shares issued have been increased
to reflect the 2 for 1 stock split, and treasury shares, common shares issued
and retained earnings have been adjusted to reflect the share retirement.
NOTE 4 - DIVIDENDS
- ------------------
On June 10, 1999, the Registrant paid a $.05 per share dividend to all
shareholders of record at June 1, 1999. This compares to a $.0475 per share
dividend paid in the second quarter of 1998. For the six months ended July 3,
1999, the Registrant paid cumulative dividends of $.10 per share to all
shareholders of record. This compared to a $.095 cumulative per share dividend
paid in the first half of 1998.
NOTE 5 - ACCRUED LIABILITIES
- ----------------------------
Accrued liabilities consisted of:
JULY 3, JULY 4, DEC. 31,
1999 1998 1998
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Compensation $ 6,580 $ 7,757 $ 6,666
Vacation 3,126 2,664 1,927
Medical Claims 1,070 1,773 1,420
Taxes, other than taxes on income 2,713 1,373 779
Other 1,055 1,743 621
--------- --------- ---------
$ 14,544 $ 15,310 $ 11,413
========= ========= =========
8
NOTE 6 - LONG-TERM DEBT
- -----------------------
Long-term debt consisted of:
JULY 3, JULY 4, DEC. 31,
1999 1998 1998
--------- -------- ---------
(DOLLARS IN THOUSANDS)
Revolving Credit Agreement:
Prime rate borrowings $ 11,400 $ 2,800 $ 2,900
London Interbank Offered Rate
(LIBOR) borrowings 48,613 33,000 28,000
Term note agreement 10,000 10,000 10,000
--------- --------- ---------
70,013 45,800 40,900
Subordinated notes - stock redemption 1,758 1,761 2,181
Term loans and others 335 985 667
--------- --------- ---------
72,106 48,546 43,748
Less current maturities 29,972 16,074 855
--------- --------- ---------
$ 42,134 $ 32,472 $ 42,893
========= ========= =========
NOTE 7 - INTEREST RATE RISK MANAGEMENT
- --------------------------------------
The Company has entered into an interest rate exchange agreement (swap) to
modify the interest rate characteristics of the Company's long-term variable
interest rate debt. The swap is accounted for using the settlement method or
the "matched swap" method in which the periodic net cash settlements of the swap
agreement are recognized in interest expense when they accrue. An interest rate
swap is considered to be a matched swap if it is linked through designation with
an asset or liability provided that it has the opposite interest rate
characteristics of the asset or liability. Generally, if the asset or liability
that is linked to the swap matures or is extinguished, or if the swap no longer
qualifies for settlement accounting the swap will be marked to market through
income. The swap term is matched with the term of the long-term debt. If the
Company decided to terminate the interest rate swap agreement any resulting gain
or loss would be deferred and amortized over the original life of the swap
contract or recognized with the offsetting gain or loss of the hedged
transaction.
NOTE 8 - OTHER COMPREHENSIVE EARNINGS (LOSS)
- --------------------------------------------
Total comprehensive earnings for the six-month periods ended July 3, 1999 and
July 4, 1998 was as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- -------------------
JULY 3, JULY 4, JULY 3, JULY 4,
1999 1998 1999 1998
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Net earnings $ 3,235 $ 4,336 $ 1,782 $ 3,068
Foreign currency translation
adjustments, net of related
tax effects 139 (143) 190 (56)
-------- -------- -------- --------
Total comprehensive earnings $ 3,374 $ 4,193 $ 1,972 $ 3,012
======== ======== ======== ========
9
NOTE 9 - OPERATING SEGMENTS
- ---------------------------
The Company has two primary operating segments which provide a variety of
horticultural services to their respective customer groups. Residential
services provides for the treatment, preservation, maintenance, cultivation,
planting and removal of trees, shrubs and other plant life; its services also
include the practices of tree surgery, tree feeding, tree spraying and
landscaping, as well as the application of fertilizers, herbicides, and
insecticides. Utility services is principally engaged in the practice of line
clearing for public utilities. The "Other" segment category includes the
Company's services related to natural resource management and consulting,
forestry research and development, environmental planning, and commercial
services.
The Company's primary focus in evaluating segment performance is on operating
earnings. Corporate expenses are substantially allocated among the operating
segments. Identifiable assets are those directly used or generated by each
segment, and include accounts receivable, inventory, and property and equipment.
Unallocated assets consist principally of corporate facilities, enterprise-wide
information systems, cash and cash equivalents, deferred taxes, prepaid
expenses, and other assets and intangibles.
Details to Operating Segments are as follows:
SIX MONTHS ENDED JULY 3, 1999 AND JULY 4, 1998
UTILITY RESIDENTIAL OTHER TOTAL
------- ----------- ----- -----
(DOLLARS IN THOUSANDS)
1999
Net sales $ 87,066 $ 57,327 $ 6,625 $ 151,018
Earnings (loss) from operations 4,104 2,375 (1,265) 5,214
Depreciation 5,461 2,815 174 8,450
Segment assets 64,483 55,719 5,580 125,782
Expenditure for segment assets 5,402 4,867 465 10,734
1998
Net sales $ 88,926 $ 55,928 $ 6,132 $ 150,986
Earnings (loss) from operations 3,990 4,830 444 9,264
Depreciation 5,483 2,631 170 8,284
Segment assets 68,224 42,945 5,908 117,077
Expenditure for segment assets 11,375 5,381 834 17,590
PROFIT OR LOSS 1999 1998
--------- ---------
Operating profit reportable segments $ 6,479 $ 8,820
Other profit/loss (1,265) 444
Unallocated amounts:
Other corporate expense (1,356) (2,862)
Interest expense (1,818) (1,393)
Other income - net 960 227
--------- ---------
Earnings before income taxes $ 3,000 $ 5,236
========= =========
ASSETS 1999 1998
--------- ---------
Total assets for reportable segments $ 120,202 $ 111,169
Assets for other 5,580 5,908
Unallocated assets 55,206 35,706
--------- ---------
Consolidated total $ 180,988 $ 152,783
========= =========
10
EXPENDITURES FOR ASSETS 1999 1998
--------- ---------
Segment expenditures for assets $ 10,269 $ 16,756
Expenditures for other 465 834
Unallocated expenditures 4,502 3,981
--------- ---------
Consolidated total $ 15,236 $ 21,571
========= =========
DEPRECIATION 1999 1998
--------- ---------
Total depreciation for reportable segments $ 8,276 $ 8,114
Depreciation for other 174 170
Unallocated depreciation 1,478 1,148
--------- ---------
Consolidated total $ 9,928 $ 9,432
========= =========
THREE MONTHS ENDED JULY 3, 1999 AND JULY 4, 1998
UTILITY RESIDENTIAL OTHER TOTAL
------- ----------- ----- -----
(DOLLARS IN THOUSANDS)
1999
Net sales $ 43,269 $ 35,933 $ 3,550 $ 82,752
Earnings (loss) from operations 2,417 5,067 (1,079) 6,405
Depreciation 2,631 1,369 4 4,004
Segment assets (5,254) 17,827 1,057 13,630
Expenditure for segment assets 1,005 1,889 167 3,061
1998
Net sales $ 45,790 $ 35,821 $ 4,307 $ 85,918
Earnings (loss) from operations 2,192 6,220 858 9,270
Depreciation 2,800 1,347 29 4,176
Segment assets 4,809 9,205 2,661 16,675
Expenditure for segment assets 5,096 3,007 571 8,674
PROFIT OR LOSS 1999 1998
--------- ---------
Operating profit reportable segments $ 7,484 $ 8,412
Other profit/loss (1,079) 864
Unallocated amounts:
Other corporate expense (782) (1,078)
Interest expense (1,023) (842)
Other income - net 846 8
--------- ---------
Earnings before income taxes $ 5,446 $ 7,364
========= =========
EXPENDITURES FOR ASSETS 1999 1998
--------- ---------
Segment expenditures for reportable segments $ 2,894 $ 8,103
Expenditures for other 167 571
Unallocated expenditures 1,899 1,988
--------- ---------
Consolidated total $ 4,960 $ 10,662
========= =========
11
DEPRECIATION 1999 1998
--------- ---------
Total depreciation for reportable segments $ 4,000 $ 4,147
Depreciation for other 4 29
Unallocated depreciation 1,075 734
--------- ---------
Consolidated total $ 5,079 $ 4,910
========= =========
NOTE 10 - RECENTLY ISSUED ACCOUNTING STANDARDS
- ----------------------------------------------
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. It becomes effective for all fiscal
quarters of fiscal years beginning after June 15, 2000, and establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
The Company has not yet completed its analysis of SFAS No. 133 and accordingly
has yet to determine the effect, if any, it will have on future financial
statement reporting and disclosures.
NOTE 11 - RESTATEMENT OF FINANCIAL STATEMENTS
- ---------------------------------------------
Subsequent to the issuance of the Registrant's financial statements for the
three and six month periods ended July 3, 1999, management determined that:
1. It had not accrued the appropriate amount of net pension income related
to its two defined benefit plans.
2. From and after April 4, 1999, certain unbilled revenues and operating
expenses had not been properly recognized as a result of processing
errors due to the conversion to a new enterprise-wide information system.
3. It incorrectly calculated the number of basic and diluted earnings shares
for the change in shares issued and treasury shares resulting from the
stock split and share retirement.
Accordingly, the accompanying financial statements as of July 3, 1999 and for
the three and six month periods then ended have been restated from the amounts
previously reported to properly account for the transactions identified. A
summary of the significant effects of the restatement is as follows:
AS PREVIOUSLY
REPORTED AS RESTATED
------------- -----------
(DOLLARS IN THOUSANDS)
Consolidated Balance Sheets at July 3, 1999:
Cash and Cash Equivalents $ 788 $ 261
Accounts Receivable 80,560 77,725
Refundable Income Taxes --- 620
Operating Supplies 4,392 4,142
Other Assets and Intangibles 7,978 9,036
Accounts Payable 15,802 15,042
Accrued Liabilities 14,243 14,544
Income Taxes Payable 660 ---
Deferred Income Taxes 3,579 4,009
Retained Earnings 77,017 75,772
12
AS PREVIOUSLY
REPORTED AS RESTATED
------------- -----------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Consolidated Statements of Net Earnings for
the Three Months Ended July 3, 1999:
Revenues $ 85,586 $ 82,752
Costs and Expenses:
Operating 53,471 53,790
General and Administrative 5,652 5,123
Earnings from Operations 8,247 5,623
Income Taxes 3,276 2,211
Net Earnings 4,794 3,235
Earnings Per Common Share .60 .41
Earnings Per Common Share - Assuming Dilution .52 .35
Basic Earnings Shares 7,982,982 7,973,652
Diluted Earnings Shares 9,285,997 9,374,094
AS PREVIOUSLY
REPORTED AS RESTATED
------------- -----------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Consolidated Statements of Net Earnings for
the Six Months Ended July 3, 1999:
Revenues $ 153,852 $ 151,018
Costs and Expenses:
Operating 104,028 104,347
General and Administrative 10,945 9,887
Earnings from Operations 5,953 3,858
Income Taxes 2,068 1,218
Net Earnings 3,027 1,782
Earnings Per Common Share .38 .22
Earnings Per Common Share - Assuming Dilution .33 .20
Basic Earnings Shares 7,987,682 7,975,869
Diluted Earnings Shares 9,114,581 8,915,855
13
THE DAVEY TREE EXPERT COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
SIX MONTHS ENDED JULY 3, 1999
Certain financial data contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations as of July 3, 1999 and for the
three and six month periods ended July 3, 1999 have been restated from amounts
previously reported to properly accrue net pension income related to the
Registrant's two defined benefit pension plans, properly account for certain
unbilled revenues and operating expenses related to the Registrant's conversion
to its new enterprise-wide information system, and give appropriate effect to
the change in shares issued and treasury shares resulting from the stock split
and share retirement. (See Note 11 to the Consolidated Financial Statements.)
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Operating activities used $13,325,000 in cash during the first six months of
1999, $18,566,000 more than the $5,231,000 provided during the same period last
year. The net increase in the use of cash is mainly due to a significant
increase in accounts receivable and a lower increase in accounts payable and
accrued liabilities.
Accounts receivable increased $26,235,000, $12,765,000 more than the increase
experienced in 1998. Days outstanding increased to a level of 87.3 days, 27.9
days higher than the 59.4 days that existed as of July 4, 1998, and 23.6 days
higher than the 63.7 days at December 31, 1998. Since "going live" on April 4,
1999 with its new enterprise wide software system, the Registrant had to delay
billing its Residential customers until approximately May 15, 1999. This delay
was principally the result of certain errors in converting data from the
Registrant's legacy systems; however, coupled with this initial delay, the
Registrant has also continued to experience a lag in billing, that is, the
difference between the date services have been performed versus the date an
invoice has actually been prepared and sent to its customer. This lag has been
primarily attributable to the learning curve associated with the new system, and
it is anticipated that billing will be current on or before August 31, 1999.
Accordingly, the Registrant believes that the existing level of accounts
receivable and days outstanding will decline over the balance of 1999. The
Registrant is not concerned as to the overall collectibility of accounts and
will continue its efforts to reduce both the level of accounts receivable and
days outstanding, beyond that which was driven by the recent lag in billing. It
also performs ongoing credit evaluations of its customers' financial condition
for collection purposes, and when determined necessary, it provides an allowance
for doubtful accounts.
Accounts payable and accrued liabilities increased $2,982,000 from December 31,
1998, $3,532,000 less than the increase realized last year. The increase from
year end is mainly attributable to a higher level of accruals for vacation
resulting from a decline in vacations taken in the first half of 1999, and a
higher level of payroll taxes associated with increased operations incentives as
well as conversion to the new enterprise-wide system.
Investing activities used $14,447,000 in cash, a decrease of $6,435,000 from
last year. The reduction results from lower capital expenditures consistent
with the Registrant's capital budget of approximately $25,000,000.
Financing activities provided $26,769,000 in cash, an $11,324,000 increase when
compared to the amount provided in 1998. The increase resulted from a higher
level of borrowings, net of principal repayments, coupled with a reduced level
of share repurchases.
Because of the delays associated with billing residential customers, on May 25,
1999 the Registrant amended the revolving credit agreement with its principal
banks to provide for an increase to its credit line of $15,000,000 through
September 30, 1999.
At July 3, 1999, the Registrant's principal source of liquidity consisted of
$788,000 in cash and cash equivalents; short term lines of credit and amounts
available to be borrowed from banks via notes payable totaling $4,600,000, of
which $710,000 was considered drawn to cover outstanding letters of credit; and
the revolving credit agreement and temporary line of credit totaling
$85,000,000, of which $60,000,000 was drawn and $9,715,000 was considered drawn
to cover outstanding letters of credit. Including the outstanding term note
agreement at that date the Registrant's credit facilities totaled $99,600,000;
with the amendment to its revolving credit agreement, the Registrant believes
its available credit will exceed credit requirements, and that its liquidity is
adequate.
14
RESULTS OF OPERATIONS
- ---------------------
Revenues of $151,018,000 for the first six months of 1999 increased $32,000
when compared to the same period in 1998. Second quarter revenues of
$82,752,000 declined $3,166,000 or 3.7%. In both the quarter and year to date,
the Registrant's Residential service revenues have increased .3% and 2.5%
respectively, and continue to benefit from good economic conditions as well as a
continued focus on sales. During the quarter, these benefits were partially
offset by service scheduling delays experienced during the conversion to the
Registrant's new enterprise-wide information system. The strength of
Residential service revenues was diminished in the year to date and more than
offset in the quarter by reductions in utility and commercial service revenues.
The Registrant has experienced reductions in utility service revenues of 2.1%
and 5.5% in the year to date and quarter, respectively, attributable primarily
to three factors. First, it completed negotiations with a major western
customer to extend the term of its contract with somewhat lower pricing.
Second, it experienced a reduction in crews on a contract with an eastern U.S.
customer. Third, it lost, in the ordinary course of competitive bidding, a
relatively small contract in the midwestern U.S. Commercial service revenues
were significantly lower in the quarter and year to date when compared to last
year as a result of work it obtained in June of 1998 resulting from severe
weather in Michigan.
In the quarter, operating costs declined in both dollars and as a percentage of
revenues when compared to last year. At $53,790,000, they declined $2,577,000
or .6% as a percentage of revenues. For the first six months operating costs
totaled $104,347,000, $200,000 more than last year, or .1% as a percentage of
revenues. The reductions in the quarter and stable level of costs year to date
are due to the relatively lower level of utility service revenues associated
with the contract reductions previously mentioned. Utility services unfavorably
influence operating costs because they are generally lower priced services with
inherently lower gross margins and attendant higher operating costs; they are
also more capital intensive in comparison to the other services.
Selling costs in both the quarter and first six months of 1999 remain higher
than last year, both in dollars and as a percentage of revenues. They totaled
$13,137,000 in the quarter, an increase of $1,962,000 or 2.9% as a percentage of
revenues. Year to date, they totaled $22,998,000, $2,802,000 higher than in
1998 and 1.8% more as a percentage of revenues. These costs will remain at
higher levels and result from increased expenditures for commissions and branch
office expenses associated with higher Residential service revenues.
General and administrative costs in the quarter of $5,123,000 declined $145,000,
but as a percentage of revenues they increased .1%. Year to date these costs
decreased by $922,000 and as a percentage of revenues they declined .7% to
6.5%. In the quarter additional temporary personnel were retained upon "going
live" with the Registrant's new enterprise-wide information system; they were
required to assist full-time employees in data entry functions during the
"learning curve" period previously discussed. These increased costs were offset
by increased net periodic pension income related to the Registrant's pension
plans, a result of favorable investment performance on plan assets. The
reduction in general and administrative costs year to date is due to somewhat
lower costs incurred with respect to the Registrant's new system, in comparison
to 1998, the year in which implementation commenced, as well as the increased
net periodic pension income.
The Registrant acquired and commenced implementation of its new system in
January 1998, and completed the blueprint phase as of July 4, 1998.
Configuration, data conversion, and testing followed through April 3, 1999. On
April 4, 1999, the Registrant commenced live operation of the new system and
discontinued use of the legacy system, approximately two months earlier than had
been anticipated. The Registrant's current estimate for the ultimate cost of
this new system is approximately $17,000,000. Of this total, $3,000,000 had
been expensed in 1998 and through July 3, 1999, $11,000,000 had been
capitalized. The remaining amount of approximately $3,000,000 will be expensed
during 1999, of which approximately $1,300,000 had been incurred during the
first six months. These costs are higher than the amount originally
anticipated, and continue to result from required enhancements identified after
commencement of going live with the new system.
The Registrant has not completed its assessment of the year 2000 readiness of
its non-IT systems, those systems with embedded technology, but expects this
process will be concluded by the end of the third quarter. The Registrant also
continues to assess the year 2000 readiness of external entities with which it
interfaces. Material relationships include, but are not limited to, those with
existing utility customers in which electronic billing is required as well as
vendors such as the Registrant's principal bank which will provide or already
provides such services as lockbox processing, treasury management services, and
benefit plan administration. These assessments have been completed except that
which pertains to the Registrant's benefit plan administration provider; that
remaining assessment is expected to be complete by the third quarter of 1999.
15
The Registrant remains uncertain with respect to its most reasonably likely
worst case year 2000 scenario, but believes that most issues have already been
identified in conjunction with the implementation of its enterprise-wide
information system. Due to this uncertainty, the Registrant also has no
contingency plans, but will, to the extent considered necessary under the
circumstances, develop such plans as issues are identified.
The preceding comments regarding the year 2000 are forward looking statements
and as such represent the Registrant's best faith estimates of costs that will
be incurred. There can be no assurance that these estimates are accurate.
Depreciation and amortization of $9,928,000 for the first six months increased
$496,000 or .4% as a percentage of revenues. The increase is attributable to a
relatively higher level of capital expenditures for equipment, particularly in
the last two years, and primarily to support Utility and Residential services.
It is also due to commencement of depreciation on the Registrant's new
enterprise-wide information system.
Interest expense of $1,818,000 for the first six months of 1999 was $425,000
higher than last year, and as a percentage of revenues it increased .3%. The
increase has resulted from a higher level of borrowings necessitated mainly by
the temporary delays in billing residential customers.
Other income of $846,000 and $960,000 in the quarter and year to date
respectively, has increased significantly over 1998 due to the sale in June 1999
of the Registrant's Troy, Michigan property.
The Registrant's earnings before income taxes decreased $2,236,000 year to date
and as a percentage of revenues they declined 1.5% to 2.0%. Effective income
tax rates of 40.6% and 41.4% were used to compute tax provisions for 1999 and
1998, respectively.
16
THE DAVEY TREE EXPERT COMPANY
-----------------------------
PART II: OTHER INFORMATION
---------------------------
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 18, 1999, the Registrant held its annual meeting of
shareholders. The shareholders voted to:
a. Elect the following persons to serve as directors for a term
to expire on the date of the annual meeting in 2002:
R. Douglas Cowan
Russell R. Gifford
ITEM 5: OTHER INFORMATION
None
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10(b) 1994 Omnibus Stock Plan
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter
for which this report is filed.
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.
THE DAVEY TREE EXPERT COMPANY
BY: /s/ David E. Adante
-----------------------
David E. Adante
Executive Vice President, CFO and
Secretary-Treasurer
BY: /s/ Bradley L. Comport
-----------------------
Bradley L. Comport
Corporate Controller
March 30, 2000