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 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 May 17, 1999: 3,982,204
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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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
April 3, 1999, April 4, 1998 and December 31, 1998 3
Consolidated Statements of Net Earnings - Three
Months Ended April 3, 1999 and April 4, 1998 4
Consolidated Statements of Cash Flows - Three Months
Ended April 3, 1999 and April 4, 1998 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
Item 4: Submission of Matters to a Vote of Security Holders 12
Item 5: Other Information 12
Item 6: Exhibits and Reports on Form 8-K 12
3
THE DAVEY TREE EXPERT COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(UNAUDITED)
APRIL 3, APRIL 4, DEC. 31,
1999 1998 1998
-------- -------- --------
ASSETS
- ------
CURRENT ASSETS:
Cash and Cash Equivalents $ 166 $ 321 $ 1,264
Accounts Receivable 52,420 44,345 51,490
Refundable Income Taxes 2,774 521 1,248
Operating Supplies 3,139 3,095 2,644
Prepaid Expenses and Other Assets 2,226 2,420 2,940
Deferred Income Taxes 1,829 1,993 1,842
--------- --------- ---------
Total Current Assets 62,554 52,695 61,428
PROPERTY AND EQUIPMENT:
Land and Land Improvements 6,331 6,196 6,325
Buildings and Leasehold Improvements 18,382 15,992 18,269
Equipment 196,129 176,602 187,084
--------- --------- ---------
220,842 198,790 211,678
Less Accumulated Depreciation 135,751 126,634 132,245
--------- --------- ---------
Net Property and Equipment 85,091 72,156 79,433
--------- --------- ---------
OTHER ASSETS AND INTANGIBLES 8,140 9,591 8,225
--------- --------- ---------
TOTAL ASSETS $ 155,785 $ 134,442 $ 149,086
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts Payable $ 14,138 $ 11,393 $ 15,191
Accrued Liabilities 11,985 11,956 11,413
Insurance Liabilities 8,692 8,302 5,797
Income Taxes Payable --- --- ---
Notes Payable, Bank 241 750 ---
Current Maturities of Long-Term Debt 11,159 10,147 855
--------- --------- ---------
Total Current Liabilities 46,215 42,548 33,256
LONG-TERM DEBT 42,605 25,332 42,893
DEFERRED INCOME TAXES 3,579 1,344 3,588
INSURANCE LIABILITIES 7,172 9,086 10,969
OTHER LIABILITIES 1,098 833 1,112
--------- --------- ---------
TOTAL LIABILITIES 100,669 79,143 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 8,728,440 Shares at
April 3, 1999, April 4, 1998 and
December 31, 1998 8,728 8,728 8,728
Additional Paid-in Capital 5,922 4,681 5,893
Retained Earnings 92,379 83,851 94,547
Accumulated Other Comprehensive
Income (Loss) (694) (448) (745)
--------- --------- ---------
106,335 96,812 108,423
LESS:
Treasury Shares at cost:
4,730,129 Shares at April 3, 1999;
4,453,110 Shares at April 4, 1998;
and 4,736,785 Shares at
December 31, 1998 (51,219) (41,513) (51,155)
--------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY 55,116 55,299 57,268
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 155,785 $ 134,442 $ 149,086
========= ========= =========
See Notes to Consolidated Financial Statements
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THE DAVEY TREE EXPERT COMPANY
CONSOLIDATED STATEMENTS OF NET EARNINGS
THREE MONTHS ENDED APRIL 3, 1999 AND APRIL 4, 1998
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
(UNAUDITED)
APRIL 3, 1999 APRIL 4, 1998
----------------- ------------------
REVENUES $ 68,266 100.0% $ 65,068 100.0%
--------- ------ --------- ------
COSTS AND EXPENSES:
Operating 50,557 74.1 47,780 73.4
Selling 9,861 14.4 9,021 13.9
General and Administrative 5,293 7.8 5,541 8.5
Depreciation and Amortization 4,849 7.1 4,522 6.9
--------- ------ --------- ------
TOTAL COSTS AND EXPENSES 70,560 103.4 66,864 102.7
--------- ------ --------- ------
EARNINGS FROM OPERATIONS (2,294) (3.4) (1,796) (2.7)
INTEREST EXPENSE (795) (1.2) (551) (0.8)
OTHER INCOME/(EXPENSE) - NET 114 0.2 219 0.3
--------- ------ --------- ------
LOSS BEFORE INCOME TAXES (2,975) (4.4) (2,128) (3.2)
INCOME TAXES (1,208) (1.8) (860) (1.3)
--------- ------ --------- ------
NET LOSS $ (1,767) (2.6)% $ (1,268) (1.9)%
========= ====== ========= ======
LOSS PER COMMON SHARE $ (0.44) $ (0.30)
========= =========
LOSS PER COMMON SHARE -
ASSUMING DILUTION $ (0.44) $ (0.30)
========= =========
BASIC EARNINGS SHARES 3,996,217 4,296,470
========= =========
DILUTED EARNINGS SHARES 3,996,217 4,296,470
========= =========
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 3, 1999 AND APRIL 4, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
APRIL 3, APRIL 4,
1999 1998
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) Earnings $ (1,767) $ (1,268)
Adjustments to Reconcile Net Earnings to
Net Cash Provided by Operating Activities:
Depreciation 4,764 4,696
Amortization 85 83
Deferred Income Taxes 4 2
Other (169) (70)
--------- ---------
2,917 3,443
Change in Operating Assets and Liabilities:
Accounts Receivable (930) (449)
Other Assets 219 (288)
Refundable Income Taxes (1,526) (521)
Accounts Payable and Accrued Liabilities (481) 2,340
Insurance Liabilities (902) (263)
Income Tax Liabilities --- (1,647)
Other Liabilities (14) 135
--------- ---------
Net Cash (Used In) Provided By Operating Activities (717) 2,750
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Sales of Property and Equipment 73 505
Capital Expenditures:
Land and Buildings (128) (354)
Equipment (10,148) (10,555)
--------- ---------
Net Cash Used In Investing Activities (10,203) (10,404)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Borrowings Under Notes Payable, Bank 241 450
Principal Payments of Long-Term Debt (284) (873)
Proceeds from Issuance of Long-Term Debt 10,300 9,100
Sales of Treasury Shares 220 156
Dividends Paid (400) (408)
Repurchase of Common Shares (255) (1,172)
--------- ---------
Net Cash Provided By Financing Activities 9,822 7,253
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,098) (401)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,264 722
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 166 $ 321
========= =========
See Notes to Consolidated Financial Statements
6
THE DAVEY TREE EXPERT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Three Months Ended April 3, 1999
UNAUDITED
---------
NOTE 1 - BASIS OF PRESENTATION
- ------------------------------
The accompanying unaudited Consolidated Financial Statements as of April 3, 1999
and April 4, 1998 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.
Loss 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. Antidilutive options not included in the
calculation of diluted earnings per share were 474,413 and 435,622 in 1999 and
1998, respectively.
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 3, 1999 and April 4, 1998 are not
necessarily indicative of the results to be expected for the full year.
NOTE 3 - DIVIDENDS
- ------------------
On March 10, 1999, the Registrant paid a $.10 per share dividend to all
shareholders of record at March 1, 1999. This compares to an $.095 per share
dividend paid in the first quarter of 1998.
NOTE 4 - ACCRUED LIABILITIES
- ----------------------------
Accrued liabilities consisted of:
APRIL 3, APRIL 4, DEC. 31,
1999 1998 1998
-------- -------- --------
(Dollars In Thousands)
Compensation $ 5,192 $ 4,356 $ 6,666
Vacation 2,443 2,482 1,927
Medical Claims 1,252 1,953 1,420
Taxes, other than taxes on income 2,461 1,708 779
Other 637 1,457 621
-------- -------- --------
$ 11,985 $ 11,956 $ 11,413
======== ======== ========
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NOTE 5 - LONG-TERM DEBT
- ----------------------------
Long-term debt consisted of:
APRIL 3, APRIL 4, DEC. 31,
1999 1998 1998
-------- -------- -------
(DOLLARS IN THOUSANDS)
Revolving Credit Agreement:
Prime rate borrowings $ 12,200 $ 4,900 $ 2,900
London Interbank Offered Rate
(LIBOR) borrowings 29,000 25,000 28,000
Term note agreement 10,000 4,200 10,000
-------- -------- --------
51,200 34,100 40,900
Subordinated notes - stock
redemption 2,062 238 2,181
Term loans and others 502 1,141 667
-------- -------- --------
53,764 35,479 43,748
Less current maturities 11,159 10,147 855
-------- -------- --------
$ 42,605 $ 25,332 $ 42,893
======== ======== ========
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.
NOTE 7 - OTHER COMPREHENSIVE INCOME (LOSS)
- ------------------------------------------
Total comprehensive loss for the three month period ended April 3, 1999 and
April 4, 1998 was as follows:
THREE MONTHS ENDED
---------------------
APRIL 3, APRIL 4,
1999 1998
-------- --------
Net loss $ (1,767) $ (1,268)
Foreign currency translation adjustments,
net of related tax effects 51 87
-------- --------
Total comprehensive loss $ (1,716) $ (1,181)
======== ========
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NOTE 8 - 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:
UTILITY RESIDENTIAL OTHER TOTAL
------- ----------- ----- -----
(DOLLARS IN THOUSANDS)
1999
Net sales $ 43,797 $ 21,394 $ 3,075 $ 68,266
Earnings (loss) from
operations 1,687 (2,692) (1,289) (2,294)
Depreciation 2,830 1,446 488 4,764
Segment assets 69,737 37,892 48,156 155,785
Expenditure for segment
assets 4,397 2,978 2,901 10,276
1998
Net sales $ 43,136 $ 20,107 $ 1,825 $ 65,068
Earnings (loss) from
operations 1,798 (1,390) (2,204) (1,796)
Depreciation 2,683 1,284 729 4,696
Segment assets 63,415 33,740 37,287 134,442
Expenditure for segment
assets 6,279 2,374 2,256 10,909
Profit or Loss 1999 1998
---------- ---------
Operating profit reportable segments $ (1,005) $ 408
Other profit/loss (1,289) (2,204)
Unallocated amounts:
Interest expense (795) (551)
Other corporate expense 114 219
-------- --------
Earnings before tax credits $ (2,975) $ (2,128)
======== ========
NOTE 9 - 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, 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.
9
THE DAVEY TREE EXPERT COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
Three Months Ended April 3, 1999
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Operating activities used $717,000 in the first quarter of 1999, $3,467,000 more
than the $2,750,000 provided in 1998. This increased use of cash is primarily
attributable to a higher net loss, an increase in accounts receivable and the
Registrant's refundable income taxes, a reduction in accounts payable and
accrued liabilities, and a decrease in insurance liabilities.
The Registrant's seasonal net losses of $1,767,000 increased $499,000 from the
previous year's first quarter net loss of $1,268,000. The increased losses
resulted primarily from higher seasonal losses sustained by the Registrant's
Residential service line. Insomuch as the Registrant's services are highly
seasonal, and that the prime sales season does not commence until the second
quarter, it is difficult to draw conclusions regarding annual performance from
first quarter results.
Accounts receivable increased $930,000 and the Registrant's days outstanding of
68.1 days represent an increase of 4.4 days from year end 1998. 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. 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.
Refundable taxes increased by $1,526,000, primarily due to the increased
seasonal net losses.
Accounts payable and accrued liabilities decreased $481,000, a $2,821,000 change
when compared to the $2,340,000 provided in 1998. This decrease is primarily
attributable to a reduced level of advance payments from clients.
Insurance liabilities declined by $902,000, $639,000 more than in 1998. This
reduction continues to occur as a function of relatively stable levels of
estimated ultimate costs associated with the Registrant's generally mature self-
insurance program, coupled with an acceleration in claims payments. These
accelerated payments have continued from last year and are due to the
Registrant's excess insurer and claims administrator "catching up" in its claims
processing.
Investing activities used $10,203,000, $201,000 less than last year and
consistent with its reduced budget for capital expenditures for 1999 of
approximately $22,000,000.
Financing activities provided $9,822,000, a $2,569,000 increase over the amount
provided in the first quarter of 1998. The increase resulted from a slightly
higher level of borrowings and lower share repurchases.
At April 3, 1999, the Registrant's principal source of liquidity consisted of
$166,000 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
$70,000,000, of which $41,200,000 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 $84,600,000.
The Registrant is currently working with its principal banks to temporarily
increase its line of credit by $15,000,000. This increase has been requested
due to anticipated temporary delays in billing to the Registrant's Residential
customers, a result of "going live" with its enterprise-wide information system
on April 4, 1999. Additional discussion regarding the system implementation
follows under Results of Operations. With the requested increase, the
Registrant believes its available credit will exceed credit requirements, and
that its liquidity is adequate.
10
RESULTS OF OPERATIONS
- ---------------------
Revenues of $68,266,000 for the first quarter of 1999 increased $3,198,000 or
4.9% when compared to last year, and are higher in both Utility and Residential
services. Utility services has been positively influenced by increased demand
for its services generally, and Residential services continues to benefit from
heightened sales efforts coupled with good economic conditions.
Operating costs increased in both dollars and as a percentage of revenues when
compared to 1998. At $50,557,000, they increased $2,777,000 from the
$47,780,000 incurred in 1998, and as a percentage of revenues they increased .7%
to 74.1%. The increase is largely attributable to relatively higher labor and
equipment costs in Residential services.
Selling costs of $9,861,000 increased $840,000 in the quarter, and as a
percentage of revenues they increased .5% to 14.4%. The increase continues to
result from higher expenditures for commissions and branch office expenses
associated with higher Residential service revenues.
General and administrative costs decreased by $248,000 to $5,293,000, and as a
percentage of revenues they declined .7% to 7.8%. The decrease was mainly due
to a lower level of costs incurred with respect to the Registrant's
implementation of its enterprise-wide information system.
In 1997, the Registrant completed development of its information technology plan
for the purpose of replacing its existing legacy systems with this new system.
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.
The Registrant acquired and commenced implementation of this 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 $14,000,000. Of this total, $3,000,000 had
been expensed in 1998 and through April 3, 1999, $9,000,000 had been
capitalized. The remaining amount of approximately $2,000,000 will be expensed
during 1999, of which $700,000 had been incurred during the first quarter.
These costs are slightly higher than the amount anticipated for 1999, and result
from required enhancements detected after commencement of going live with the
new system. In a related sense, the Registrant has had to delay billing its
Residential customers until approximately May 15, 1999, primarily due to certain
errors in converting customer data from the legacy system. Accordingly, it
expects a temporary increase in accounts receivable and for that reason, is
working with its principal banks to obtain a temporary increase in its available
lines of credit.
The Registrant has not fully addressed the year 2000 readiness of its non-IT
systems, those systems with embedded technology, but will do so by June 1999.
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. It is anticipated that
substantially all of these assessments will be completed by June 1999.
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 $4,849,000 increased $327,000 or .2% as a
percentage of revenues. The increases are 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.
11
Interest expense of $795,000 was $244,000 higher than in 1998, and as a
percentage of revenues it increased .4% to 1.2%. The increase is a result of
higher debt levels.
The Registrant's loss before income tax credits increased $847,000 to
$2,975,000, and as a percentage of revenues it increased 1.2% to 4.4%.
Effective income tax rates of 40.6% and 40.4% were used to compute income tax
credits in 1999 and 1998, respectively.
12
THE DAVEY TREE EXPERT COMPANY
PART II: OTHER INFORMATION
---------------------------
ITEM 4: NONE
ITEM 5: NONE
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
May 17, 1999