1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended April 4, 1998 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 May 15, 1998: 4,063,629
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
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THE DAVEY TREE EXPERT COMPANY
INDEX
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Page No.
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PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Balance Sheets - Periods ended
April 4, 1998, March 29, 1997 and
December 31, 1997 3
Consolidated Statements of Earnings - Three
Months Ended April 4, 1998 and March 29, 1997 4
Consolidated Statement of Cash Flows - Three Months
Ended April 4, 1998 and March 29, 1997 5
Notes to Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II: OTHER INFORMATION 11
3
THE DAVEY TREE EXPERT COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(UNAUDITED)
---------
April 4, March 29, Dec. 31,
1998 1997 1997
-------- --------- --------
ASSETS
- ------
CURRENT ASSETS:
Cash and Cash Equivalents $ 321 $ 222 $ 722
Accounts Receivable 44,345 42,336 43,896
Refundable Income Taxes 521 --- ---
Operating Supplies 3,095 2,920 2,662
Prepaid Expenses and Other Assets 2,420 1,990 2,724
Deferred Income Taxes 1,993 1,729 2,032
-------- -------- --------
Total Current Assets 52,695 49,197 52,036
PROPERTY AND EQUIPMENT:
Land and Land Improvements 6,196 6,154 6,283
Buildings and Leasehold Improvements 15,992 16,594 16,142
Equipment 176,602 157,087 166,902
-------- -------- --------
198,790 179,835 189,327
Less Accumulated Depreciation 126,634 116,824 123,053
-------- -------- --------
Net Property and Equipment 72,156 63,011 66,274
-------- -------- --------
OTHER ASSETS AND INTANGIBLES 9,591 7,521 9,515
-------- -------- --------
TOTAL ASSETS $ 134,442 $ 119,729 $ 127,825
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts Payable $ 11,393 $ 12,285 $ 10,187
Accrued Liabilities 11,956 9,114 10,822
Insurance Liabilities 8,302 6,761 6,738
Income Taxes Payable --- 420 1,647
Notes Payable, Bank 750 400 300
Current Maturities of Long-Term Debt 10,147 7,585 3,148
-------- -------- --------
Total Current Liabilities 42,548 36,565 32,842
LONG-TERM DEBT 25,332 18,913 24,104
DEFERRED INCOME TAXES 1,344 1,892 1,381
INSURANCE LIABILITIES 9,086 9,423 10,913
OTHER LIABILITIES 833 961 698
-------- -------- --------
TOTAL LIABILITIES 79,143 67,754 69,938
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 8,728,440 Shares at
April 4, 1998, March 29, 1997
and December 31, 1997 8,728 8,728 8,728
Additional Paid-in Capital 4,681 3,897 4,625
Retained Earnings 83,851 75,620 85,510
Accumulated Other Comprehensive
Income (Loss) (448) (471) (535)
-------- -------- --------
96,812 87,774 98,328
LESS:
Treasury Shares at cost:
4,453,110 Shares at April 4, 1998;
4,233,074 Shares at March 29, 1997;
and 4,429,205 Shares at December 31,
1997 41,513 35,792 40,441
Subscriptions Receivable from Employees 7
-------- -------- --------
TOTAL SHAREHOLDERS' EQUITY 55,299 51,975 57,887
-------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 134,442 $ 119,729 $ 127,825
========= ========= =========
See Notes to Consolidated Financial Statements
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THE DAVEY TREE EXPERT COMPANY
CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended April 4, 1998 and March 29, 1997
(Dollars in Thousands, Except Earnings Per Share Amounts)
(UNAUDITED)
April 4, 1998 March 29, 1997
----------------- ------------------
REVENUES $ 65,068 100.0% $ 60,377 100.0%
--------- ------ --------- ------
COSTS AND EXPENSES:
Operating 47,780 73.4 43,205 71.6
Selling 9,021 13.9 8,040 13.3
General and Administrative 5,541 8.5 4,395 7.3
Depreciation and Amortization 4,522 6.9 3,890 6.4
--------- ------ --------- ------
TOTAL COSTS AND EXPENSES 66,864 102.7 59,530 98.6
--------- ------ --------- ------
EARNINGS FROM OPERATIONS (1,796) (2.7) 847 1.4
INTEREST EXPENSE (551) (0.8) (545) (0.9)
OTHER INCOME (EXPENSE) - NET 219 0.3 172 0.3
--------- ------ --------- ------
(LOSS) EARNINGS BEFORE INCOME TAXES (2,128) (3.2) 474 0.8
INCOME TAXES (860) (1.3) 195 0.3
--------- ------ --------- ------
NET (LOSS)/EARNINGS $ (1,268) (1.9) $ 279 0.5
--------- ------ --------- ------
(LOSS) EARNINGS PER COMMON SHARE $ (0.30) $ 0.06
========= =========
(LOSS) EARNINGS PER COMMON SHARE -
ASSUMING DILUTION $ (0.30) $ 0.06
========= =========
BASIC EARNINGS SHARES 4,296,470 4,573,232
========= =========
DILUTED EARNINGS SHARES 4,732,092 4,821,887
========= =========
See Notes to Consolidated Financial Statements
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THE DAVEY TREE EXPERT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Three Months Ended April 4, 1998 and March 29, 1997
(Dollars in Thousands)
(UNAUDITED)
April 4 March 29,
1998 1997
-------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) Earnings $ (1,268) $ 279
Adjustments to Reconcile Net Earnings to
Net Cash Provided by Operating Activities:
Depreciation 4,696 3,797
Amortization 83 93
Deferred Income Taxes 2 (3)
Other (70) (22)
-------- --------
3,443 4,144
Change in Operating Assets and Liabilities:
Accounts Receivable (449) (2,531)
Other Assets (288) (291)
Refundable Income Taxes (521)
Accounts Payable and Accrued Liabilities 2,340 3,568
Insurance Liabilities (263) 500
Income Tax Liabilities (1,647) 202
Other Liabilities 135 79
--------- ---------
Net Cash Provided by Operating Activities 2,750 5,671
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Sales of Property and Equipment 505 225
Acquisitions (149)
Capital Expenditures:
Land and Buildings (354) (25)
Equipment (10,555) (9,972)
--------- ---------
Net Cash Used In Investing Activities (10,404) (9,921)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Borrowings Under Notes Payable, Bank 450 325
Principal Payments of Long-Term Debt (873) (758)
Proceeds from Issuance of Long-Term Debt 9,100 4,982
Sales of Treasury Shares 156 75
Dividends Paid (408) (384)
Repurchase of Common Shares (1,172) (395)
--------- ---------
Net Cash Provided By Financing Activities 7,253 3,845
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS (401) (405)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 722 627
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 321 $ 222
========= =========
See Notes to Consolidated Financial Statements
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THE DAVEY TREE EXPERT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Three Months Ended April 4, 1998
UNAUDITED
---------
NOTE 1 - BASIS OF PRESENTATION
- ------------------------------
The accompanying unaudited Consolidated Financial Statements as of April 4, 1998
and March 29, 1997 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.
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 common stock
equivalents, 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 April 4, 1998 and March 29, 1997 are not
necessarily indicative of the results to be expected for the full year.
NOTE 3 - DIVIDENDS
- ------------------
On March 10, 1998, the Registrant paid a $.095 per share dividend to all
shareholders of record at March 1, 1998. This compares to a $.085 per share
dividend paid in the first quarter of 1997.
NOTE 4 - ACCRUED LIABILITIES
- ----------------------------
Accrued liabilities consisted of:
April 4, March 29, Dec. 31,
1998 1997 1997
-------- --------- --------
(Dollars In Thousands)
Compensation $ 4,356 $ 3,525 $ 5,648
Vacation 2,482 1,866 1,848
Medical Claims 1,953 1,578 1,948
Taxes, other than taxes on income 1,708 1,601 657
Other 1,457 544 721
------- ------- --------
$ 11,956 $ 9,114 $ 10,822
======= ======= ========
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NOTE 5 - LONG-TERM DEBT
- -----------------------
Long-term debt consisted of:
April 4, March 29, Dec. 31,
1998 1997 1997
-------- --------- --------
(Dollars In Thousands)
Revolving Credit Agreement:
Prime rate borrowings $ 4,900 $ 3,100 $ 2,800
London Interbank Offered Rate
(LIBOR) borrowings 25,000 16,000 18,000
Term note agreement 4,200 6,600 4,800
-------- -------- -------
34,100 25,700 25,600
Subordinated notes - stock
redemption 238 396 357
Term loans and others 1,141 402 1,295
-------- -------- -------
35,479 26,498 27,252
Less current maturities 10,147 7,585 3,148
-------- -------- -------
$ 25,332 $ 18,913 $24,104
======== ========= ========
On May 14, 1998, the Registrant entered into a new credit facility with its
principal banks, comprised of a $10,000,000 temporary line of credit,
$40,000,000 revolving credit, and $10,000,000 term note. In addition to
providing more favorable pricing, the agreement expanded the Registrant's
borrowing capacity by $15,800,000.
NOTE 6 - 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.
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NOTE 7 - OTHER COMPREHENSIVE INCOME (LOSS)
- ------------------------------------------
The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130
"Reporting Comprehensive Income", in the first quarter of 1998. SFAS No. 130
requires presentation of comprehensive income (net income plus all other changes
in net assets from non-owner sources) and its components in the financial
statements.
Total comprehensive income for the three month periods ended April 4, 1998 and
March 29, 1997 were as follows:
April 4, March 29,
1998 1997
-------- ---------
Net (loss) earnings $ (1,268) $ 279
Foreign currency translation
adjustments, net of related
tax effects 87 (70)
-------- --------
Other comprehensive (loss) earnings $ (1,181) $ 209
======== ========
NOTE 8 - RECENTLY ISSUED ACCOUNTING STANDARDS
- ---------------------------------------------
In June 1997, the Financial Accounting Standards Board issued Statement No. 131,
Disclosures about Segments of an Enterprise and Related Information. It becomes
effective for fiscal years beginning after December 15, 1997 and requires that
public business enterprises report certain information about operating segments
in complete sets of financial statements of the enterprise and in condensed
financial statements of interim periods issued to shareholders, as well as other
information regarding products and services, geographic information, and major
customers. The Company has not yet completed its analysis of SFAS No. 131 and
accordingly has yet to determine the effect, if any, it will have on future
financial statement disclosures.
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THE DAVEY TREE EXPERT COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
Three Months Ended April 4, 1998
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Operating activities provided $2,750,000 in the first quarter of 1998, a net
decrease of $2,921,000 when compared to the $5,671,000 provided last year. The
net decline was primarily attributable to a net loss in the current year as well
as reductions in the Registrant's income tax and insurance liabilities, and a
lower increase in accounts payable and accrued liabilities. These factors were
partially offset by an increase in depreciation expense and a lower increase in
accounts receivable.
In contrast with the profitable first quarters of 1997 and 1996, the Registrant
realized a net loss in 1998 of $1,268,000. Given the seasonal nature of its
business, the Registrant has historically incurred significant losses in the
first quarter of each year. However, in 1998 this seasonal factor was further
exacerbated when compared to 1997 by two factors. First, the Registrant
completed a major Consulting service contract during the third quarter of last
year. Second, it has incurred anticipated costs associated with the
implementation of its new enterprise-wide information system, a process which
commenced in January 1998.
In addition to the increase in refundable income taxes of $521,000 calculated on
the Registrant's first quarter losses, income tax liabilities were reduced by
$1,647,000 resulting from the payment of amounts due on 1997 results.
The Registrant's self-insured liabilities declined by $263,000, a net change of
$763,000 when compared to last year. This is due to a relatively stable level
of estimated ultimate costs resulting from a generally mature self-insurance
program, coupled with an acceleration in claims payments. The recent
acceleration in these payments is due to an anticipated "catching up" in
processing by the Registrant's excess insurer and claims administrator; these
payments had generally lagged during the transition to this insurer since
September, 1996.
The current year increase in accounts payable and accrued liabilities resulted
primarily from accruals associated with implementation of the Registrant's
enterprise-wide information system.
The Registrant's depreciation expense of $4,696,000 represented an increase of
$899,000 when compared to 1997. This increase has resulted from a higher level
of capital expenditures in the current and immediately preceding two years.
While accounts receivable increased $449,000 to $44,345,000, it was $2,082,000
lower than the increase experienced in 1997. Although the Registrant's days
outstanding increased to 60.2 days compared to 58.8 days last year, they have in
fact declined 2.3 days when compared to year end 1997. Further, in most service
lines they have remained stable or in fact declined when compared to the first
quarter of last year. The primary exception to this latter point regards
Eastern Canada, which experienced a significant increase in both accounts
receivable dollars and days outstanding due to extra work obtained as a result
of ice storm damage in the Province of Quebec. While the Registrant is not
concerned as to the overall collectibility of its accounts, it still considers
the current level of accounts receivable and days outstanding as unacceptable
and will continue its work to reduce both. The Registrant also performs ongoing
credit evaluations of its customers' financial condition for collection
purposes, and when determined necessary, it provides an allowance for doubtful
accounts.
Investing activities used $10,404,000, an increase of $483,000 over 1997.
Expenditures for equipment increased $583,000, consistent with the Registrant's
capital budget of approximately $26,000,000. The increased expenditures were
partially offset by proceeds from the sale of the Registrant's Bayport, New York
Residential facility.
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Financing activities provided $7,253,000, $3,408,000 more than in 1997. The
increase was attributable to a higher level of borrowings necessitated by the
relatively higher capital expenditures, seasonal working capital requirements,
and increased common share repurchases.
At April 4, 1998, the Registrant's principal source of liquidity consisted of
$321,000 in cash and cash equivalents; short term lines of credit and amounts
available to be borrowed from banks via notes payable totaling $4,578,000 of
which $750,000 had been drawn and $560,000 was considered drawn to cover
outstanding letters of credit; and a revolving credit agreement in the amount of
$35,000,000 of which $28,000,000 had been drawn and $7,000,000 was considered
drawn to cover outstanding letters of credit. Including a temporary line of
credit of $5,000,000 of which $1,900,000 had been drawn, and the outstanding
term note agreement, at that date the Registrant's credit facilities totaled
$48,778,000. Subsequent to April 4, 1998, the Registrant renegotiated with its
principal banks to provide for an additional $15,800,000 under a new credit
facility and temporary line of credit as well as to allow for more favorable
pricing. Accordingly, with these new agreements, the Registrant believes its
available credit will exceed credit requirements, and that its liquidity is
adequate.
RESULTS OF OPERATIONS
- ---------------------
Revenues of $65,068,000 increased $4,691,000 or 7.8 % when compared to the
$60,377,000 generated in 1997. Revenues were improved in the Registrant's
Utility and Residential Services. Utility services continue to be positively
influenced by the additional work performed by the Registrant's western utility
operations, while Residential services continue to benefit from heightened sales
efforts coupled with generally good economic conditions. Revenues were also
strengthened by virtue of the additional work obtained in Quebec and Maine as a
result of an ice storm in January.
Operating costs increased in both dollars and as a percentage of revenues when
compared to 1997. At $47,780,000, they increased $4,575,000 from last year's
level of $43,205,000 and as a percentage of revenues they increased 1.8% to
73.4%. The percentage increase was largely attributable to higher operating
costs associated with a relatively higher level of Utility service revenues, and
a decline in the level of Consulting service revenues due to completion of the
major contract in September of 1997. Unlike Utility services, Consulting
services favorably influence operating costs because they are generally higher
priced services with inherently higher gross margins and attendant lower
operating costs; they are also far less capital intensive than Utility services.
Accordingly, any increase in Utility revenues relative to the Registrant's
Consulting and Residential revenues will be detrimental to its cost structure.
Selling costs of $9,021,000 increased $981,000 in the quarter, and as a
percentage of revenues increased .6% to 13.9%. The increase was mainly
attributable to higher Residential field management wages associated with its
heightened sales efforts, as well as increased sales commissions.
General and Administrative costs increased by $1,146,000 to $5,541,000, and 1.2%
as a percentage of revenues when compared to 1997. The increase was primarily
attributable to costs associated with the Registrant's implementation of an
enterprise-wide information system.
Depreciation and amortization expense of $4,522,000 increased $632,000 or .5%
when compared to last year. These increases have resulted from the higher level
of capital expenditures in the current and two preceding years, primarily for
Utility, Residential and Commercial services. The Registrant anticipates that
depreciation expense will approximate $18,000,000 in 1997.
As a result of the above factors, the Registrant's loss before income taxes
totaled $2,128,000, $2,602,000 higher than last year's earnings of $474,000.
Effective income tax rates of 40.4% and 41.1% were used to compute income taxes
in 1998 and 1997, respectively.
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THE DAVEY TREE EXPERT COMPANY
PART II: OTHER INFORMATION
---------------------------
All Items of Part II were either inapplicable or would have been answered
in the negative; therefore, no reference thereto is required to be made in this
report.
SIGNATURES
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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
/s/ Bradley L. Comport
-------------------------
Bradley L. Comport
Corporate Controller
May 18, 1998