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 October 2, 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 November 16, 1999: 7,858,367
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
October 2, 1999, October 3, 1998 and December 31, 1998 3
Consolidated Statements of Net Earnings - Three
Months Ended October 2, 1999 and October 3, 1998 4
Consolidated Statements of Net Earnings - Nine Months
Ended October 2, 1999 and October 3, 1998 5
Consolidated Statements of Cash Flows - Nine Months
Ended October 2, 1999 and October 3, 1998 6
Notes to Consolidated Financial Statements 7
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
PART II: OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders 15
Item 5: Other Information 15
Item 6: Exhibits and Reports on Form 8-K 15
3
THE DAVEY TREE EXPERT COMPANY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
-----------
OCT. 2, OCT. 3, DEC. 31,
1999 1998 1998
--------- --------- ---------
ASSETS
- ------
CURRENT ASSETS:
Cash and Cash Equivalents $ 774 $ 286 $ 1,264
Accounts Receivable 88,631 59,747 51,490
Refundable Income Taxes --- --- 1,248
Operating Supplies 3,326 2,973 2,644
Prepaid Expenses and Other Assets 2,638 2,011 2,940
Deferred Income Taxes 1,829 1,993 1,842
--------- --------- ---------
Total Current Assets 97,198 67,010 61,428
PROPERTY AND EQUIPMENT:
Land and Land Improvements 6,443 6,325 6,325
Buildings and Leasehold Improvements 18,363 16,449 18,269
Equipment 197,124 182,505 187,084
--------- --------- ---------
221,930 205,279 211,678
Less Accumulated Depreciation 139,425 128,311 132,245
--------- --------- ---------
Net Property and Equipment 82,505 76,968 79,433
--------- --------- ---------
OTHER ASSETS AND INTANGIBLES 9,363 9,540 8,225
--------- --------- ---------
TOTAL ASSETS $ 189,066 $ 153,518 $ 149,086
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts Payable $ 16,073 $ 11,693 $ 15,191
Accrued Liabilities 15,827 17,356 11,413
Insurance Liabilities 5,794 7,025 5,797
Income Taxes Payable 1,901 1,587 ---
Notes Payable, Bank --- 525 ---
Current Maturities of Long-Term Debt 30,672 15,478 855
--------- --------- ---------
Total Current Liabilities 70,267 53,664 33,256
LONG-TERM DEBT 43,399 32,310 42,893
DEFERRED INCOME TAXES 3,579 1,344 3,588
INSURANCE LIABILITIES 11,487 9,727 10,969
OTHER LIABILITIES 1,078 1,024 1,112
--------- --------- ---------
TOTAL LIABILITIES 129,810 98,069 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 October 2, 1999;
8,728,440 at October 3, 1998 and
December 31, 1998 10,728 8,728 8,728
Additional Paid-in Capital 2,397 5,400 5,893
Retained Earnings 78,922 90,856 94,547
Accumulated Other Comprehensive
Earnings (Loss) (571) (853) (745)
--------- --------- ---------
91,476 104,131 108,423
LESS:
Treasury Shares at cost:
2,787,761 Shares at October 2, 1999;
4,672,109 Shares at October 3, 1998;
and 4,736,785 Shares at
December 31, 1998 (32,220) (48,682) (51,155)
--------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY 59,256 55,449 57,268
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 189,066 $ 153,518 $ 149,086
========= ========= =========
See Notes to Consolidated Financial Statements
4
THE DAVEY TREE EXPERT COMPANY
CONSOLIDATED STATEMENTS OF NET EARNINGS
THREE MONTHS ENDED OCTOBER 2, 1999 AND OCTOBER 3, 1998
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
(UNAUDITED)
-----------
OCTOBER 2, 1999 OCTOBER 3, 1998
----------------- -----------------
REVENUES $ 84,910 100.0% $ 86,457 100.0%
--------- ------ --------- ------
COSTS AND EXPENSES:
Operating 56,677 66.7 57,634 66.6
Selling 11,774 13.9 11,939 13.8
General and Administrative 6,454 7.6 5,160 6.0
Depreciation and Amortization 5,120 6.0 5,161 6.0
--------- ------ --------- ------
TOTAL COSTS AND EXPENSES 80,025 94.2 79,894 92.4
--------- ------ --------- ------
EARNINGS FROM OPERATIONS 4,885 5.8 6,563 7.6
INTEREST EXPENSE (1,064) (1.3) (787) (0.9)
OTHER INCOME - NET 87 0.1 123 0.1
--------- ------ --------- ------
EARNINGS BEFORE INCOME TAXES 3,908 4.6 5,899 6.8
INCOME TAXES 1,597 1.9 2,441 2.8
--------- ------ --------- ------
NET EARNINGS $ 2,311 2.7% $ 3,458 4.0%
========= ====== ========= ======
EARNINGS PER COMMON SHARE $ 0.29 $ 0.42
========= =========
EARNINGS PER COMMON SHARE -
ASSUMING DILUTION $ 0.26 $ 0.36
========= =========
BASIC EARNINGS SHARES 8,007,488 8,236,804
========= =========
DILUTED EARNINGS SHARES 8,918,065 9,659,398
========= =========
See Notes to Consolidated Financial Statements
5
THE DAVEY TREE EXPERT COMPANY
CONSOLIDATED STATEMENTS OF NET EARNINGS
NINE MONTHS ENDED OCTOBER 2, 1999 AND OCTOBER 3, 1998
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
(UNAUDITED)
-----------
October 2, 1999 October 3, 1998
----------------- ------------------
REVENUES $ 238,762 100.0% $ 237,443 100.0%
--------- ------ --------- ------
COSTS AND EXPENSES:
Operating 160,705 67.3 161,781 68.1
Selling 34,772 14.6 32,135 13.5
General and Administrative 17,399 7.3 15,969 6.7
Depreciation and Amortization 15,048 6.3 14,593 6.2
--------- ------ --------- ------
TOTAL COSTS AND EXPENSES 227,924 95.5 224,478 94.5
--------- ------ --------- ------
EARNINGS FROM OPERATIONS 10,838 4.5 12,965 5.5
INTEREST EXPENSE (2,882) (1.2) (2,180) (0.9)
OTHER INCOME - NET 1,047 0.4 350 0.1
--------- ------ --------- ------
EARNINGS BEFORE INCOME TAXES 9,003 3.7 11,135 4.7
INCOME TAXES 3,665 1.5 4,609 1.9
--------- ------ --------- ------
NET EARNINGS $ 5,338 2.2% $ 6,526 2.8%
========= ====== ========= ======
EARNINGS PER COMMON SHARE $ 0.78 $ 0.78
========= =========
EARNINGS PER COMMON SHARE -
ASSUMING DILUTION $ 0.68 $ 0.70
========= =========
BASIC EARNINGS SHARES 6,884,140 8,333,392
========= =========
DILUTED EARNINGS SHARES 7,814,323 9,376,946
========= =========
See Notes to Consolidated Financial Statements
6
THE DAVEY TREE EXPERT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR NINE MONTHS ENDED OCTOBER 2, 1999 AND OCTOBER 3, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
-----------
OCT. 2, OCT. 3,
1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings $ 5,338 $ 6,526
Adjustments to Reconcile Net Earnings to
Net Cash (Used In) Provided by Operating Activities:
Depreciation 14,764 14,336
Amortization 284 257
Deferred Income Taxes 4 2
Other (1,576) (697)
--------- ---------
18,814 20,424
Change in Operating Assets and Liabilities:
Accounts Receivable (37,141) (15,851)
Other Assets (1,053) 415
Income Taxes 3,149 (60)
Accounts Payable and Accrued Liabilities 5,296 8,040
Insurance Liabilities 515 (899)
Other Liabilities (34) 326
--------- ---------
Net Cash (Used In) Provided By Operating Activities (10,454) 12,395
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Sales of Property and Equipment 1,435 1,220
Acquisitions (856) (361)
Capital Expenditures:
Land and Buildings (241) (790)
Equipment (17,179) (25,014)
--------- ---------
Net Cash Used In Investing Activities (16,841) (24,945)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Borrowings Under Notes Payable, Bank --- 225
Principal Payments of Long-Term Debt (924) (5,387)
Proceeds from Issuance of Long-Term Debt 31,247 25,923
Sales of Treasury Shares 1,380 1,828
Dividends Paid (1,198) (1,181)
Repurchase of Common Shares (3,700) (9,294)
--------- ---------
Net Cash Provided By Financing Activities 26,805 12,114
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS (490) (436)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,264 722
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 774 $ 286
========= =========
See Notes to Consolidated Financial Statements
7
THE DAVEY TREE EXPERT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Nine Months Ended October 2, 1999
UNAUDITED
---------
NOTE 1 - BASIS OF PRESENTATION
- ------------------------------
The accompanying unaudited Consolidated Financial Statements as of October 2,
1999 and October 3, 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.
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 October 2, 1999 and October 3, 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 September 10, 1999, the Registrant paid a $.05 per share dividend to all
shareholders of record at September 1, 1999. This compares to a $.0475 per
share dividend paid in the third quarter of 1998. For the nine months ended
October 2, 1999, the Registrant paid cumulative dividends of $.15 per share to
all shareholders of record. This compared to a $.1425 cumulative per share
dividend paid in the first nine months of 1998.
NOTE 5 - ACCRUED LIABILITIES
- ----------------------------
Accrued liabilities consisted of:
OCT. 2, OCT. 3, DEC. 31,
1999 1998 1998
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Compensation $ 8,122 $ 8,904 $ 6,666
Vacation 3,793 3,235 1,927
Medical Claims 1,298 1,703 1,420
Taxes, other than taxes on income 2,495 933 779
Other 119 2,581 621
--------- --------- ---------
$ 15,827 $ 17,356 $ 11,413
========= ========= =========
8
NOTE 6 - LONG-TERM DEBT
- -----------------------
Long-term debt consisted of:
OCTOBER 2, OCTOBER 3, DEC. 31,
1999 1998 1998
--------- --------- --------
(DOLLARS IN THOUSANDS)
Revolving Credit Agreement:
Prime rate borrowings $ 3,100 $ 7,200 $ 2,900
London Interbank Offered Rate
(LIBOR) borrowings 57,613 28,000 28,000
Term note agreement 10,000 10,000 10,000
--------- --------- ---------
70,713 45,200 40,900
Subordinated notes - stock redemption 1,758 1,761 2,181
Term loans and others 1,600 827 667
--------- --------- ---------
74,071 47,788 43,748
Less current maturities 30,672 15,478 855
--------- --------- ---------
$ 43,399 $ 32,310 $ 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 three- and nine-month periods ended October
2, 1999 and October 3, 1998, respectively, was as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ ------------------
OCT. 2, OCT. 3, OCT. 2, OCT. 3,
1999 1998 1999 1998
-------- -------- -------- --------
Net earnings $ 2,311 $ 3,458 $ 5,338 $ 6,526
Foreign currency translation
adjustments, net of related
tax effects (16) (262) 174 (318)
-------- -------- -------- --------
Total comprehensive earnings $ 2,295 $ 3,196 $ 5,512 $ 6,208
======== ======== ======== ========
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:
NINE MONTHS ENDED OCTOBER 2, 1999 AND OCTOBER 3, 1998
-----------------------------------------------------------
UTILITY RESIDENTIAL OTHER TOTAL
---------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS)
1999
Net sales $ 133,075 $ 94,957 $ 10,730 $ 238,762
Earnings (loss) from operations 8,350 9,244 (208) 17,386
Depreciation 7,955 4,201 536 12,692
Segment assets 67,460 68,729 6,398 142,587
Expenditure for segment assets 7,612 5,905 378 13,895
1998
Net sales $ 139,502 $ 87,980 $ 9,961 $ 237,443
Earnings (loss) from operations 8,188 8,689 414 17,291
Depreciation 8,162 3,921 462 12,545
Segment assets 73,028 42,603 4,895 120,526
Expenditure for segment assets 13,739 6,323 301 20,363
PROFIT OR LOSS 1999 1998
--------- ---------
Operating profit reportable segments $ 17,594 $ 16,877
Other profit/loss (208) 414
Unallocated amounts:
Other corporate expense (6,548) (4,326)
Interest expense (2,882) (2,180)
Other income - net 1,047 350
--------- ---------
Earnings before income taxes $ 9,003 $ 11,135
========= =========
ASSETS 1999 1998
--------- ---------
Total assets for reportable segments $ 136,189 $ 115,631
Assets for other 6,398 4,895
Unallocated assets 46,479 32,992
--------- ---------
Consolidated total $ 189,066 $ 153,518
========= =========
10
EXPENDITURES FOR ASSETS 1999 1998
--------- ---------
Segment expenditures for assets $ 13,517 $ 20,062
Expenditures for other 378 301
Unallocated expenditures 3,525 5,441
--------- ---------
Consolidated total $ 17,420 $ 25,804
DEPRECIATION 1999 1998
--------- ---------
Total depreciation for reportable segments $ 12,156 $ 12,083
Depreciation for other 536 462
Unallocated depreciation 2,072 1,791
--------- ---------
Consolidated total $ 14,764 $ 14,336
========= =========
THREE MONTHS ENDED OCTOBER 2, 1999 AND OCTOBER 3, 1998
-----------------------------------------------------------
UTILITY RESIDENTIAL OTHER TOTAL
---------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS)
1999
Net sales $ 45,884 $ 34,921 $ 4,105 $ 84,910
Earnings (loss) from operations 4,074 4,024 914 9,012
Depreciation 2,494 1,386 362 4,242
Expenditure for segment assets 2,210 1,038 (87) 3,161
1998
Net sales $ 50,576 32,052 $ 3,829 $ 86,457
Earnings (loss) from operations 4,198 3,859 (30) 8,027
Depreciation 2,679 1,290 292 4,261
Expenditure for segment assets 2,364 942 (533) 2,773
PROFIT OR LOSS 1999 1998
-------- --------
Operating profit reportable segments $ 8,098 $ 8,057
Other profit/loss 914 (30)
Unallocated amounts:
Other corporate expense (4,127) (1,464)
Interest expense (1,064) (787)
Other income - net 87 123
-------- --------
Earnings before income taxes $ 3,908 $ 5,899
======== ========
EXPENDITURES FOR ASSETS 1999 1998
-------- --------
Segment expenditures for assets $ 3,248 $ 3,306
Expenditures for other (87) (533)
Unallocated expenditures (977) 1,460
-------- --------
Consolidated total $ 2,184 $ 4,233
======== ========
11
DEPRECIATION 1999 1998
-------- --------
Total depreciation for reportable segments $ 3,880 3,969
Depreciation for other 362 292
Unallocated depreciation 594 643
-------- --------
Consolidated total $ 4,836 $ 4,904
======== ========
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.
12
THE DAVEY TREE EXPERT COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
NINE MONTHS ENDED OCTOBER 2, 1999
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Operating activities used $10,454,000 in cash during the first nine months of
1999, $22,849,000 more than the $12,395,000 provided during the same period in
1998. This net increase is principally due to a significant increase in
accounts receivable and to a lesser extent increases in other assets and a lower
increase in accounts payable and accrued liabilities; these items were partially
offset by an overall net increase in income tax liabilities, as well as a small
net increase in the Registrant's insurance liabilities.
Accounts receivable increased $37,141,000, $21,290,000 more than the increase
experienced last year. Similarly, days outstanding increased to a level of 96.5
days, 33.2 days higher than the 63.3 days outstanding as of October 3, 1998.
Several factors have contributed to these significant increases. First, upon
"going live" with its new enterprise-wide software system on April 4, 1999, the
Registrant temporarily postponed billing its Residential customers until
approximately May 15, 1999, an overall delay of about 40 days. This initial lag
was attributable to errors in converting data from the Registrant's legacy
systems. Second, beyond this initial delay, the Registrant continued to
experience a lag in billing to its Residential customers during some of its
prime sales months. This lag in billing, the difference between the date
services had been performed versus the date an invoice was actually prepared and
sent to the customers, was attributable to the learning curve associated with
the new system. Despite this learning curve, revenues were accrued and
recognized as services were performed. Third, even though the Registrant is now
"current" in its billings, their frequency has been reduced to a monthly basis
in 1999 compared essentially with as services were performed in prior years.
This latter issue, a function of system configuration, is being changed to
billing all Residential customers weekly. It is anticipated that this change
will be effective before the end of 1999.
The Registrant is not pleased with the significant increase in both the level of
accounts receivable and days outstanding; however, considering the initial
billing delay of approximately 40 days coupled with the other factors mentioned,
it believes that some progress has been made. Nevertheless, it is accelerating
efforts to effect meaningful reductions in both dollars and days outstanding;
however, at this time it is uncertain insofar as the extent to which it will be
able to effect such reductions. While generally not concerned as to the overall
collectibility of accounts, the Registrant recognizes the unusual circumstances
caused by its conversion to the new system, and has accordingly increased its
allowance for doubtful accounts to $1,314,000. It also performs ongoing credit
evaluations of its customers' financial condition for collection purposes, and
when determined necessary, may provide for further increases to its allowance
for doubtful accounts.
Accounts payable and accrued liabilities increased $5,296,000 from December 31,
1998, $2,744,000 less than the increase experienced last year. The increase
from year end is primarily due to a higher level of accruals for vacation
resulting from a decline in vacations taken during the first nine months of
1999, and higher accruals for payroll taxes associated with increased operations
incentives coupled with conversion to the new enterprise-wide system.
In the aggregate, the reduction in refundable income taxes and increase in
income tax liabilities provided $3,149,000 in cash.
Insurance liabilities increased only $515,000 during the first nine months of
1999, a function of the Registrant's continued favorable claims experience and a
generally stable level of estimated ultimate costs in the context of a
relatively mature self-insurance program. This increase is $1,414,000 higher
than the reduction of $899,000 experienced last year. Last year's decrease was
due to an anticipated "catching up" in processing by the Registrant's excess
insurer and claims administrator; payments had generally lagged during the
transition to this insurer since 1996.
Investing activities used $16,841,000 in cash, a decrease of $8,104,000 from
last year. The reduction results from lower capital expenditures consistent
with the Registrant's capital budget of approximately $25,000,000.
13
Financing activities provided $26,805,000 in cash, a $14,691,000 increase over
the $12,114,000 provided last year. The current year increase continues to
result from a higher level of borrowings, net of principal repayments, as well
as a reduced level of share repurchases.
As a consequence of the delays associated with billing the Registrant's
residential customers and the resulting increase in its accounts receivable, on
September 27, 1999, it further amended the revolving credit agreement with its
principal banks to extend the $15,000,000 increase to its credit line from
September 30, 1999 to March 31, 2000.
At October 2, 1999, the Registrant's principal source of liquidity consisted of
$774,000 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 $727,000 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 $60,700,000 was drawn and $11,610,000 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.
RESULTS OF OPERATIONS
- ---------------------
Revenues of $238,762,000 for the first nine months of 1999 increased $1,319,000
or .6% when compared to 1998. Third quarter revenues of $84,910,000 declined
$1,547,000 or 1.8%. Residential revenues increased 7.9% and 9.0% in the quarter
and year to date respectively, and continue to benefit from a focus on sales
coupled with good economic conditions. The continued strength of Residential
service revenues was dampened year to date and more than offset in the quarter
by reductions in utility service revenues. The Registrant has experienced
reductions in utility service revenues of 4.6% and 9.3% in the year to date and
quarter respectively. These reductions continue to be a function of primarily
three factors. First, at the beginning of 1999, it completed negotiations with
a major western customer to extend the term of its contract with somewhat lower
pricing. Second, also in early 1999, the Registrant 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
Midwest.
For the first nine months of 1999, operating costs of $160,705,000 declined
$1,076,000 or .8% as a percentage of sales. In the quarter, these costs
declined $957,000 and increased .1% as a percentage of sales. The year to date
dollar and percentage reductions continue to be due mainly 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 other services.
Selling costs of $34,772,000 for the first nine months of 1999 increased
$2,637,000 over last year, or 1.1% as a percentage of revenues. At 13.9% of
revenues, they increased only .1% in the quarter. The increases continue to
result from increased expenditures for commissions and branch office expenses
associated with higher Residential service revenues.
General and administrative costs in the quarter of $6,454,000 increased
$1,294,000 and 1.6% as a percentage of revenues. Year to date these costs
increased $1,430,000 or .6% as a percentage of revenues. The increase in the
quarter and year to date is primarily due to costs incurred for consultants
required to provide post implementation system modifications to the Registrant's
new enterprise-wide information system. To a lesser extent, the increase is
also due to additional temporary and full time personnel retained upon "going
live" with the new system to perform data entry.
The Registrant acquired and commenced implementation of this new system in
January 1998, completing the blueprint, configuration, data conversion, and
testing phases through April 3, 1999. On April 4, 1999, the Registrant
commenced live operation of the new system and discontinued use of the legacy
system. The Registrant's current estimate for the ultimate cost of this new
system is approximately $18,000,000. Of this total, $3,000,000 had been
expensed in 1998 and through October 2, 1999, $11,000,000 had been capitalized.
The remaining amount of approximately $4,000,000 will be expensed during 1999,
of which approximately $3,000,000 had been incurred during the first nine
months. These costs are higher than the amount originally anticipated, and
continue to result from required modifications identified after commencement of
going live with the new system.
14
The Registrant has substantially completed its assessment of the year 2000
readiness of its non-IT systems, those systems with embedded technology. The
Registrant has also substantially completed its assessment of 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.
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 $15,048,000 for the first nine months increased
$455,000 or .1% 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, 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 $2,882,000 for the first nine months of 1999 was $702,000
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 delays in billing the Registrant's residential customers and the attendant
increase in accounts receivable.
Other income of $1,047,000 for the year to date has increased $697,000 over 1998
due primarily to the sale in June 1999 of the Registrant's Troy, Michigan
property.
The Registrant's earnings before income taxes of $9,003,000 decreased $2,132,000
year to date and as a percentage of revenues they declined 1.0% to 3.7%.
Effective income tax rates of 40.6% and 41.4% were used to compute tax
provisions for 1999 and 1998, respectively.
15
THE DAVEY TREE EXPERT COMPANY
-----------------------------
PART II: OTHER INFORMATION
---------------------------
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5: OTHER INFORMATION
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
November 16, 1999