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 July 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 August 14, 1998: 4,079,940
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
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PAGE NO.
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PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Balance Sheets - Periods ended July 4, 1998,
June 28, 1997 and December 31, 1997 3
Consolidated Statements of Net Earnings - Three
Months Ended July 4, 1998 and June 28, 1997 4
Consolidated Statements of Net Earnings - Six Months Ended
July 4, 1998 and June 28, 1997 5
Consolidated Statements of Cash Flows - Six Months
Ended July 4, 1998 and June 28, 1997 6
Notes to Consolidated Financial Statements 7
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II: OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders 13
Item 5: Other Information 13
Item 6: Exhibits and Reports on Form 8-K 13
3
THE DAVEY TREE EXPERT COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(UNAUDITED)
-----------
July 4, June 28, Dec. 31,
1998 1997 1997
--------- --------- ---------
ASSETS
- ------
CURRENT ASSETS:
Cash and Cash Equivalents $ 516 $ 155 $ 722
Accounts Receivable 57,366 50,123 43,896
Operating Supplies 3,260 2,936 2,662
Prepaid Expenses and Other Assets 2,287 1,802 2,724
Deferred Income Taxes 1,993 1,729 2,032
--------- --------- ---------
Total Current Assets 65,422 56,745 52,036
PROPERTY AND EQUIPMENT:
Land and Land Improvements 6,349 6,154 6,283
Buildings and Leasehold Improvements 16,486 16,605 16,142
Equipment 184,817 162,953 166,902
--------- --------- ---------
207,652 185,712 189,327
Less Accumulated Depreciation 129,861 120,387 123,053
--------- --------- ---------
Net Property and Equipment 77,791 65,325 66,274
--------- --------- ---------
OTHER ASSETS AND INTANGIBLES 9,570 7,217 9,515
--------- --------- ---------
TOTAL ASSETS $ 152,783 $ 129,287 $ 127,825
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts Payable $ 12,213 $ 13,226 $ 10,187
Accrued Liabilities 15,310 12,766 10,822
Insurance Liabilities 6,318 6,562 6,738
Income Taxes Payable 1,650 2,364 1,647
Notes Payable, Bank 1,925 550 300
Current Maturities of Long-Term Debt 16,074 9,496 3,148
--------- --------- ---------
Total Current Liabilities 53,490 44,964 32,842
LONG-TERM DEBT 32,472 18,256 24,104
DEFERRED INCOME TAXES 1,344 1,892 1,381
INSURANCE LIABILITIES 11,125 10,349 10,913
OTHER LIABILITIES 928 558 698
--------- --------- ---------
TOTAL LIABILITIES 99,359 76,019 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
July 4, 1998, June 28, 1997
and December 31, 1997 8,728 8,728 8,728
Additional Paid-in Capital 5,374 4,154 4,625
Retained Earnings 87,783 79,836 85,510
Accumulated Other Comprehensive
Income (Loss) (591) (544) (535)
--------- --------- ---------
101,294 92,174 98,328
LESS:
Treasury Shares at cost:
4,649,300 Shares at July 4, 1998;
4,357,820 Shares at June 28, 1997;
and 4,429,205 Shares at
December 31, 1997 (47,870) (38,899) (40,441)
Subscriptions Receivable from Employees (7)
--------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY 53,424 53,268 57,887
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 152,783 $ 129,287 $ 127,825
========= ========= =========
See Notes to Consolidated Financial Statements
4
THE DAVEY TREE EXPERT COMPANY
CONSOLIDATED STATEMENTS OF NET EARNINGS
THREE MONTHS ENDED JULY 4, 1998 AND JUNE 28, 1997
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
(UNAUDITED)
July 4, 1998 June 28, 1997
----------------- ------------------
REVENUES $ 85,918 100.0% $ 82,331 100.0%
--------- ------ --------- ------
COSTS AND EXPENSES:
Operating 56,367 65.6 54,449 66.1
Selling 11,175 13.0 9,947 12.1
General and Administrative 5,268 6.1 5,188 6.3
Depreciation and Amortization 4,910 5.7 4,290 5.2
--------- ------ --------- ------
TOTAL COSTS AND EXPENSES 77,720 90.4 73,874 89.7
--------- ------ --------- ------
EARNINGS FROM OPERATIONS 8,198 9.6 8,457 10.3
INTEREST EXPENSE (842) (1.0) (610) (0.8)
OTHER INCOME/(EXPENSE) - NET 8 (182) (0.2)
--------- ------ --------- ------
EARNINGS BEFORE INCOME TAXES 7,364 8.6 7,665 9.3
INCOME TAXES 3,028 3.5 3,142 3.8
--------- ------ --------- ------
NET EARNINGS $ 4,336 5.1% $ 4,523 5.5%
========= ====== ========= ======
EARNINGS PER COMMON SHARE $ 1.05 $ 1.03
========= =========
EARNINGS PER COMMON SHARE -
ASSUMING DILUTION $ 0.95 $ 0.98
========= =========
BASIC EARNINGS SHARES 4,132,430 4,375,751
========= =========
DILUTED EARNINGS SHARES 4,555,629 4,594,885
========= =========
See Notes to Consolidated Financial Statements
5
THE DAVEY TREE EXPERT COMPANY
CONSOLIDATED STATEMENTS OF NET EARNINGS
SIX MONTHS ENDED JULY 4, 1998 AND JUNE 28, 1997
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
(UNAUDITED)
July 4, 1998 June 28, 1997
----------------- ------------------
REVENUES $ 150,986 100.0% $ 142,708 100.0%
COSTS AND EXPENSES:
Operating 104,147 69.0 97,654 68.5
Selling 20,196 13.4 17,987 12.6
General and Administrative 10,809 7.2 9,583 6.7
Depreciation and Amortization 9,432 6.2 8,180 5.7
--------- ------ --------- ------
TOTAL COSTS AND EXPENSES 144,584 95.8 133,404 93.5
--------- ------ --------- ------
EARNINGS FROM OPERATIONS 6,402 4.2 9,304 6.5
INTEREST EXPENSE (1,393) (0.9) (1,155) (0.8)
OTHER INCOME/(EXPENSE) - NET 227 0.2 (10)
--------- ------ --------- ------
EARNINGS BEFORE INCOME TAXES 5,236 3.5 8,139 5.7
INCOME TAXES 2,168 1.4 3,337 2.3
--------- ------ --------- ------
NET EARNINGS $ 3,068 2.1% $ 4,802 3.4%
========= ====== ========= ======
EARNINGS PER COMMON SHARE $ 0.73 $ 1.07
========= =========
EARNINGS PER COMMON SHARE -
ASSUMING DILUTION $ 0.66 $ 1.02
========= =========
BASIC EARNINGS SHARES 4,213,997 4,473,946
========= =========
DILUTED EARNINGS SHARES 4,643,373 4,707,759
========= =========
See Notes to Consolidated Financial Statements
6
THE DAVEY TREE EXPERT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR SIX MONTHS ENDED JULY 4, 1998 AND JUNE 28, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
JULY 4, JUNE 28,
1998 1997
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings $ 3,068 $ 4,802
Adjustments to Reconcile Net Earnings to
Net Cash Provided by Operating Activities:
Depreciation 9,260 7,999
Amortization 172 181
Deferred Income Taxes 2 (3)
Other (247) (109)
--------- ---------
12,255 12,870
Change in Operating Assets and Liabilities:
Accounts Receivable (13,470) (10,318)
Other Assets (93) 97
Accounts Payable and Accrued Liabilities 6,514 7,589
Insurance Liabilities (208) 1,799
Income Tax Liabilities 3 2,146
Other Liabilities 230 (324)
--------- ---------
Net Cash Provided by Operating Activities 5,231 13,859
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Sales of Property and Equipment 689 508
Acquisitions (361) (149)
Capital Expenditures:
Land and Buildings (747) (53)
Equipment (20,463) (16,659)
--------- ---------
Net Cash Used In Investing Activities (20,882) (16,353)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Borrowings Under Notes Payable, Bank 1,625 475
Principal Payments of Long-Term Debt (5,229) (1,417)
Proceeds from Issuance of Long-Term Debt 26,523 6,895
Sales of Treasury Shares 1,722 686
Dividends Paid (794) (761)
Repurchase of Common Shares (8,402) (3,856)
--------- ---------
Net Cash Provided By Financing Activities 15,445 2,022
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS (206) (472)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 722 627
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 516 $ 155
========= =========
See Notes to Consolidated Financial Statements
7
THE DAVEY TREE EXPERT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
SIX MONTHS ENDED JULY 4, 1998
UNAUDITED
---------
NOTE 1 - BASIS OF PRESENTATION
- ------------------------------
The accompanying unaudited Consolidated Financial Statements as of July 4, 1998
and June 28, 1997 and for the 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. 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 4, 1998 and June 28, 1997 are not
necessarily indicative of the results to be expected for the full year.
NOTE 3 - DIVIDENDS
- ------------------
On June 10, 1998, the Registrant paid a $.095 per share dividend to all
shareholders of record at June 1, 1998. This compares to an $.085 per share
dividend paid in the second quarter of 1997. For the six months ended July 4,
1998, the Registrant paid cumulative dividends of $.19 per share to all
shareholders of record. This compared to a $.17 cumulative per share dividend
paid in the first half of 1997.
NOTE 4 - ACCRUED LIABILITIES
- ----------------------------
Accrued liabilities consisted of:
JULY 4, JUNE 28, DEC. 31,
1998 1997 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
Compensation $ 7,757 $ 5,780 $ 5,648
Vacation 2,664 2,175 1,848
Medical Claims 1,773 1,882 1,948
Taxes, other than taxes on income 1,373 1,431 657
Other 1,743 1,498 721
-------- -------- --------
$ 15,310 $ 12,766 $ 10,822
======== ======== ========
8
NOTE 5 - LONG-TERM DEBT
- -----------------------
Long-term debt consisted of:
JULY 4, JUNE 28, DEC. 31,
1998 1997 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
Revolving Credit Agreement:
Prime rate borrowings $ 2,800 $ 3,000 $ 2,800
London Interbank Offered Rate
(LIBOR) borrowings 33,000 18,000 18,000
Term note agreement 10,000 6,000 4,800
-------- -------- --------
45,800 27,000 25,600
Subordinated notes - stock redemption 1,761 357 357
Term loans and others 985 395 1,295
-------- -------- --------
48,546 27,752 27,252
Less current maturities 16,074 9,496 3,148
-------- -------- --------
$ 32,472 $ 18,256 $ 24,104
======== ======== ========
NOTE 6 - ACQUISITIONS
- ---------------------
During the first six months of 1998 and 1997, the Registrant acquired assets of
organizations which provide horticultural services for a purchase price of
$361,000 and $149,000, respectively and accounted for the transactions as
purchases. Their results of operations, which were not material, have been
included in the accompanying financial statements from their respective
acquisition dates. Goodwill and other intangibles recognized in connection with
these purchases are being amortized over three to fifteen years.
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.
<PAGE 9>
NOTE 8 - 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 and six-month periods ended July 4,
1998 and June 28, 1997 were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- -------------------
JULY 4, JUNE 28, JULY 4, JUNE 28,
1998 1997 1998 1997
-------- -------- -------- --------
Net earnings $ 4,336 $ 4,523 $ 3,068 $ 4,802
Foreign currency translation
adjustments, net of related
tax effects (143) (73) (56) (143)
-------- -------- -------- --------
Total comprehensive earnings $ 4,193 $ 4,450 $ 3,012 $ 4,659
======== ======== ======== ========
NOTE 9 - RECENTLY ISSUED ACCOUNTING STANDARDS
- ---------------------------------------------
In June, 1997, the Financial Accounting Standards Board (FASB) 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.
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, 1999, 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.
10
THE DAVEY TREE EXPERT COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
SIX MONTHS ENDED JULY 4, 1998
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Operating activities provided only $5,231,000 in the first six months of 1998, a
net decrease of $8,628,000 when compared to the $13,859,000 provided last year.
The net decline was mainly due to lower net earnings, a larger net increase in
accounts receivable, a net reduction in insurance liabilities, and a
significantly lower increase in the Registrant's income tax liabilities. To a
lesser extent, the net decrease also resulted from a slightly lower increase in
accounts payable and accrued liabilties. These factors were partially offset
by an increase in depreciation expense.
The Registrant's net earnings of $3,068,000 represent a decline of $1,734,000
when compared to 1997. As was disclosed in the Registrant's first quarter, this
decrease continues to be largely attributable to two significant items. First,
the Registrant completed a major Consulting service contract during the third
quarter of last year. Second, it continues to incur costs associated with the
implementation of its new enterprise-wide information system, a process which
commenced in January 1998.
Accounts receivable increased $13,470,000 to $57,366,000, a $3,152,000 larger
increase than that experienced in 1997. Even though the Registrant's days
outstanding increased to 59.4 days from 53.9 days last year, they have declined
by .8 days and 3.1 days from the first quarter of 1998 and year end 1997,
respectively. Increases in the level of accounts receivable have generally been
experienced in most service lines, as well as the Registrant's western U.S.
operation, more specifically with its major U.S. customer. As was the case
during 1997, the level of accounts receivable and days outstanding with respect
to the customer have fluctuated. The Registrant is not concerned as to the
collectibility of this account or the overall collectibility of accounts;
however, it continues to view the level of accounts receivable and days
outstanding as higher than acceptable and will persist in its efforts 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.
Insurance liabilities declined by $208,000, a net change of $2,007,000 when
compared with the 1997 increase of $1,799,000. This continues to be
attributable to an environment of relatively stable levels of estimated ultimate
costs resulting from a generally mature self-insurance program, coupled with an
acceleration in claims payments. As disclosed in the first quarter, the recent
acceleration in claims 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.
Income tax liabilities increased only $3,000, $2,143,000 less than in 1997.
This change is due to the Registrant's lower levels of profitability in the
current year.
Depreciation expense of $9,260,000 represented an increase of $1,261,000 from
last year, and has resulted from a higher level of capital expenditures,
particularly in the current and immediately preceding two years.
Investing activities used $20,882,000 in cash, an increase of $4,529,000 over
1997. Expenditures for equipment increased $3,804,000 consistent with the
Registrant's capital budget of approximately $26,000,000.
Financing activities provided $15,445,000, $13,423,000 more than the $2,022,000
provided in 1997. Proceeds from borrowings under notes payable and from
issuance of long term debt, net of principal repayments, totaled $22,919,000, an
increase of $16,966,000 over last year. The increase was necessitated by the
higher level of capital expenditures as well as a substantially higher level of
common share repurchases, a portion of which was attributable to the redemption
of shares held by a retiring director.
11
In May, 1998, the Registrant entered into a new credit agreement with two banks.
It generally provides for an increase in the amounts available to be borrowed, a
slight reduction in rates, and increased participation by the second bank. The
agreement consists of three principal components. The first component is a
$40,000,000 revolving credit agreement that provides for borrowings as defined.
The second component is a new $10,000,000 seven-year term note, the net proceeds
of which were used to fund expenditures for the Registrant's enterprise-wide
information system and other equipment. The third component is represented by a
$10,000,000 temporary line of credit which expires April 30, 1999. Concurrent
with the borrowings under the new $10,000,000 term note, the Registrant entered
into a new interest rate "swap" which effectively fixes the rate over the seven-
year term of the note to approximately 6.99%.
At July 4, 1998, the Registrant's principal source of liquidity consisted of
$516,000 in cash and cash equivalents; short term lines of credit and amounts
available to be borrowed from banks via notes payable totaling $4,643,000, of
which $1,650,000 had been drawn and $800,000 was considered drawn to cover
outstanding letters of credit; and the revolving credit agreement and temporary
line of credit totaling $50,000,000, of which $35,800,000 had been drawn and
$7,000,000 was considered drawn to cover outstanding letters of credit.
Including the outstanding term note agreement, at that date the Registrant's
credit facilities totaled $64,600,000. The Registrant believes its available
credit will exceed credit requirements, and that its liquidity is adequate.
RESULTS OF OPERATIONS
- ---------------------
Revenues of $150,986,000 for the first six months of 1998 increased $8,278,000
or 5.8% when compared to the same period in 1997. Second quarter revenues of
$85,918,000 exceeded last year by $3,587,000 or 4.4%. Revenues were improved in
the Registrant's Utility, Residential, and Commercial services. The additional
work performed by the Registrant's western utility operations continues to
positively influence Utility service revenues. Residential and Commercial
services continue to realize the benefits of heightened sales efforts coupled
with generally good economic conditions. Revenues were also bolstered by virtue
of additional work obtained in Quebec and Maine as a result of an ice storm in
January, as well as further work derived in Michigan as a result of severe
weather that occurred in June.
Even though operating costs declined .5% in the second quarter to 65.6% of
revenues, for the first six months they remain .5% higher at 69.0%. This
increase as a percentage of revenues persists due to higher operating costs
associated with a relatively higher level of Utility service revenues, along
with a lower level of Consulting service revenues attributable to completion of
the major contract in September 1997. As previously stated, 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. For that reason, the Registrant anticipates that as a percentage of
revenues, operating costs will continue to be somewhat higher in 1998 when
compared to the prior year.
Selling costs of $11,175,000 increased $1,228,000 in the second quarter, and as
a percentage of revenues increased .9% to 13.0%. Similarly, for the first six
months these costs increased $2,209,000 and .8% as a percentage of revenues.
The increases continue as a result of higher Residential field management wages
associated with its heightened sales efforts, as well as increased sales
commissions.
Even though as a percentage of revenues general and administrative costs
declined slightly in the second quarter to 6.1% from 6.3% in 1997, at
$10,809,000 for the first six months they are $1,226,000 higher than last year,
and as a percentage of revenues they have increased .5% to 7.2%. This increase
is due to costs associated with the Registrant's implementation of an
enterprise-wide information system. As a result of this implementation, the
Registrant anticipates that general and administrative costs, as a percentage of
revenues, will remain higher throughout 1998.
12
In 1997 the Registrant completed development of its information technology plan
for the purpose of replacing its existing legacy systems with this new system.
Of primary importance and in accord with the information technology plan, the
new system will significantly enhance the Registrant's processes and its ability
to support future growth. The software vendor has also represented that this
new system is year 2000 compliant. In January 1998, the Registrant acquired and
commenced implementation of this new information system. The Registrant
estimates implementation will be completed by June of 1999. Consistent with the
implementation schedule, the blueprint phase of the project had been completed
as of July 4, 1998. Configuration, data conversion, testing, and going live
will follow over the remaining term of the implementation schedule. The
Registrant's current estimate for the ultimate cost of this new system is
approximately $10,000,000, and it is estimated that of this total, $3,500,000
will be expensed in 1998. The Registrant believes the remaining ultimate costs
of $ 6,500,000, consisting of hardware, software license fees, consulting and
internal personnel costs related to design and configuration, will be
capitalizable. It also anticipates that depreciation of these costs will
commence in 1999, as system modules are ready to be placed in service. Through
July 4, 1998, the Registrant has expensed $1,650,000 related to the project.
The Registrant has not fully addressed the year 2000 readiness of its non-IT
systems, those systems with embedded technology, but recognizes the need to do
so over the next several quarters. The exception to this is that concurrent
with implementation of the new enterprise-wide application, the Registrant, with
assistance from outside consultants, is seeking competitive proposals from
several major vendors to provide it with telecommunication services throughout
North America. One critical element that the Registrant will be evaluating in
these proposals is the year 2000 readiness of each vendor. The Registrant
estimates that the telecommunication services provider selection process will be
complete by the end of its third quarter. The Registrant is also in the process
of assessing the year 2000 readiness of its existing phone systems. While this
process is incomplete, it does know that its Corporate headquarters phone
software must be upgraded at an estimated cost of $60,000.
The Registrant is in the early stages of assessing 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. It is
anticipated that the assessment of year 2000 issues with material third party
relationships will be completed over the term of the enterprise wide system
implementation schedule.
The Registrant currently is uncertain with respect to its most reasonably likely
worst case year 2000 scenario, but believes that most issues will have been
identified prior to going live with its enterprise wide information system.
Given 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 what costs will
be incurred. There can be no assurance that these estimates are accurate.
Depreciation and amortization for the first six months of 1998 of $9,432,000
increased $1,252,000 or .5% as a percentage of revenues. The increases are the
result of a higher level of capital expenditures in the current and two
preceding years, primarily for Utility, Residential and Commercial Services.
The Registrant anticipates that depreciation and amortization will approximate
$19,000,000 in 1998.
Interest expense of $1,393,000 increased $238,000 when compared to last year and
as a percentage of revenues increased .1% to .9%. The increases are
attributable to higher debt levels in 1998.
Other income increased $237,000 during the first six months of 1998, and .2% as
a percentage of revenues. The increase resulted from a gain realized upon the
receipt of insurance proceeds on the life of a former President of the
Registrant who passed away in February of 1998.
As a result of the above factors, earnings before income taxes for the first six
months were $5,236,000 or 3.5% as a percentage of revenues, compared to
$8,139,000 or 5.7% in 1997. Effective income tax rates of 41.4% and 41.0% were
used to compute the tax provisions for 1998 and 1997, respectively. The
Registrant's resultant net earnings of $3,068,000 declined $1,734,000 or 1.3% as
a percentage of revenues when compared to last year.
13
THE DAVEY TREE EXPERT COMPANY
PART II: OTHER INFORMATION
---------------------------
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 19, 1998, 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 2001:
R. Cary Blair
Douglas K. Hall
James H. Miller
ITEM 5: As disclosed in the Registrant's 1998 Proxy Statement, the board
of directors elected Russell R. Gifford at their December, 1997
meeting. Mr. Gifford filled the directorship vacated by J
Maurice Struchen, who retired from the board of directors at the
end of his term in 1996. Mr. Gifford's term expires in 1999.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a)Exhibits
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
August 14, 1998