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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 March 29, 1997 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 9, 1997: 4,432,282
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 March 29,
1997, March 30, 1996 and December 31, 1996 3
Consolidated Statements of Earnings - Three Months
Ended March 29, 1997 and March 30, 1996 4
Consolidated Statements of Cash Flows - Three Months
Ended March 29, 1997 and March 30, 1996 5
Notes to Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II: OTHER INFORMATION 11
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THE DAVEY TREE EXPERT COMPANY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
MARCH 29, MARCH 30, DEC. 31,
1997 1996 1996
-------------- ------------- --------------
ASSETS (UNAUDITED)
- ------ ------------------------------
CURRENT ASSETS:
Cash and Cash Equivalents $ 222 $ 609 $ 627
Accounts Receivable 42,336 37,483 39,805
Operating Supplies 2,920 2,687 2,477
Prepaid Expenses and Other Assets 1,990 1,912 2,023
Deferred Income Taxes 1,729 2,635 1,786
-------------- ------------- --------------
Total Current Assets 49,197 45,326 46,718
PROPERTY AND EQUIPMENT:
Land and Land Improvements 6,154 6,227 6,178
Buildings and Leasehold Improvements 16,594 17,012 16,682
Equipment 157,087 145,446 148,204
-------------- ------------- --------------
179,835 168,685 171,064
Less Accumulated Depreciation 116,824 110,057 113,980
-------------- ------------- --------------
Net Property and Equipment 63,011 58,628 57,084
OTHER ASSETS AND INTANGIBLES 7,521 7,418 7,584
-------------- ------------- --------------
TOTAL ASSETS $ 119,729 $ 111,372 $ 111,386
============== ============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts Payable 13,863 13,457 11,564
Accrued Liabilities 14,213 14,913 12,944
Income Taxes Payable 420 779 218
Notes Payable, Bank 400 226 75
Current Maturities of Long-Term Debt 7,585 9,477 2,634
-------------- ------------- --------------
Total Current Liabilities 36,481 38,852 27,435
LONG-TERM DEBT 18,913 16,275 19,640
DEFERRED INCOME TAXES 1,892 2,977 1,952
INSURANCE LIABILITIES 9,507 6,191 9,007
OTHER LIABILITIES 961 878 882
-------------- ------------- --------------
TOTAL LIABILITIES 67,754 65,173 58,916
-------------- ------------- --------------
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
March 29, 1997, March 30, 1996 and December 31, 1996 8,728 8,728 8,728
Additional Paid-in Capital 3,897 3,472 3,876
Retained Earnings 75,149 68,141 75,324
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87,774 80,341 87,928
LESS:
Treasury Shares at cost: 4,233,074 Shares at
March 29, 1997; 4,150,400 Shares at March 30, 1996;
and 4,209,623 Shares at December 31, 1996 (35,792) (33,785) (35,451)
Subscriptions Receivable from Employees (7) (284) (7)
Future Contributions to ESOT (73)
-------------- ------------- --------------
TOTAL SHAREHOLDERS' EQUITY 51,975 46,199 52,470
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 119,729 $ 111,372 $ 111,386
============== ============= ==============
See Notes to Consolidated Financial Statements
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THE DAVEY TREE EXPERT COMPANY
CONSOLIDATED STATEMENTS OF EARNINGS
THREE MONTHS ENDED MARCH 29, 1997 AND MARCH 30, 1996
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
(UNAUDITED)
MARCH 29, 1997 MARCH 30, 1996
------------------------------- -------------------------------
REVENUES $ 60,377 100.0% $ 60,228 100.0%
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COSTS AND EXPENSES:
Operating 43,205 71.6 43,885 72.9
Selling 8,040 13.3 7,826 13.0
General and Administrative 4,395 7.3 4,170 6.9
Depreciation and Amortization 3,890 6.4 3,377 5.6
------------- ----------- -------------- -----------
TOTAL COSTS AND EXPENSES 59,530 98.6 59,258 98.4
------------- ----------- -------------- -----------
EARNINGS FROM OPERATIONS 847 1.4 970 1.6
INTEREST EXPENSE (545) (0.9) (488) (0.8)
OTHER INCOME - NET 172 0.3 190 0.3
------------- ----------- -------------- -----------
EARNINGS BEFORE INCOME TAXES 474 0.8 672 1.1
INCOME TAXES 195 0.3 264 0.4
------------- ----------- -------------- -----------
NET EARNINGS $ 279 0.5% $ 408 0.7%
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NET EARNINGS PER COMMON SHARE $ 0.06 $ 0.09
============= ==============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING, INCLUDING
COMMON STOCK EQUIVALENTS 4,821,887 4,764,054
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See Notes to Consolidated Financial Statements
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THE DAVEY TREE EXPERT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THREE MONTHS ENDED MARCH 29, 1997 AND MARCH 30, 1996
(DOLLARS IN THOUSANDS)
(UNAUDITED)
MARCH 29, MARCH 30,
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings $ 279 $ 408
Adjustments to Reconcile Net Earnings to
Net Cash Provided by Operating Activities:
Depreciation 3,797 3,260
Amortization 93 117
Deferred Income Taxes (3) (143)
Other (22) 253
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4,144 3,895
Change in Operating Assets and Liabilities:
Accounts Receivable (2,531) (2,861)
Other Assets (291) (664)
Accounts Payable and Accrued Liabilities 3,568 4,499
Insurance Liabilities 500 (189)
Other Liabilities 281 (2,311)
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Net Cash Provided by Operating Activities 5,671 2,369
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Sales of Property and Equipment 225 215
Acquisitions (149) (820)
Capital Expenditures:
Land and Buildings (25) (346)
Equipment (9,972) (7,154)
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Net Cash Used In Investing Activities (9,921) (8,105)
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CASH FLOWS FROM FINANCING ACTIVITIES:
ESOT Payment of Debt Guaranteed by the Company 24
Net Borrowings (Payments) Under Notes Payable, Bank 325 (174)
Principal Payments of Long-Term Debt (758) (885)
Proceeds from Issuance of Long-Term Debt 4,982 6,807
Sales of Treasury Shares 75
Receipts from Stock Subscriptions 13
Dividends Paid (384) (323)
Repurchase of Common Shares (395) (587)
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Net Cash Provided By Financing Activities 3,845 4,875
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NET CHANGE IN CASH AND EQUIVALENTS (405) (861)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 627 1,470
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 222 $ 609
=============== ===============
See Notes to Consolidated Financial Statements
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THE DAVEY TREE EXPERT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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THREE MONTHS ENDED MARCH 29, 1997
UNAUDITED
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NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited Consolidated Financial Statements as of
March 29, 1997 and March 30, 1996 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.
The earnings per common share 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 quarters ended March 29, 1997 and March 30, 1996
are not necessarily indicative of the results to be expected for the full year.
NOTE 3 - DIVIDENDS
On March 10, 1997 the Registrant paid a $.085 per share dividend to all
shareholders of record at March 1, 1997. This compares to a $.07 per share
dividend paid in the first quarter of 1996.
NOTE 4 - ACCRUED LIABILITIES
Accrued liabilities consisted of:
MARCH 29, MARCH 30, DEC. 31,
1997 1996 1996
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(DOLLARS IN THOUSANDS)
Compensation $ 3,525 $ 3,573 $ 4,009
Vacation 1,848 1,807 1,620
Insurance Liabilities 6,677 6,887 6,105
Taxes, other than taxes on income 1,601 1,673 600
Other 562 973 610
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$ 14,213 $ 14,913 $ 12,944
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NOTE 5 - LONG-TERM DEBT
Long-term debt consisted of:
MARCH 29, MARCH 30, DEC. 31,
1997 1996 1996
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(DOLLARS IN THOUSANDS)
Revolving Credit Agreement:
Prime rate borrowings $ 3,100 $ 2,900 $ 3,100
London Interbank Offered Rate
(LIBOR) borrowings 16,000 12,800 11,000
Term note agreement 6,600 9,000 7,200
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25,700 24,700 21,300
Long-term debt of ESOT - - 73 - -
Subordinated notes - stock redemption 396 554 515
Term loans and others 402 425 459
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26,498 25,752 22,274
Less current maturities 7,585 9,477 2,634
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$ 18,913 $ 16,275 $ 19,640
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NOTE 6 - ACQUISITIONS
In the first quarter of 1997 and 1996, the Registrant acquired assets
of organizations which provide horticultural services for a purchase price of
$149,000 and $820,000 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 - STOCK SPLIT
On September 27, 1996, the Registrant's board of directors declared a 2
for 1 stock split. The additional shares as a result of the split were
distributed on October 10, 1996 to shareholders of record as of October 1, 1996.
Common shares issued, treasury shares, and per common share amounts have been
restated for all periods presented to give retroactive effect to the stock
split.
NOTE 8 - RECENTLY ISSUED ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement No. 128, Earnings Per Share. FASB Statement 128 becomes
effective for interim and annual financial statements issued after December 15,
1997. This statement changes the current standard for computing earnings per
share (EPS) found in APB No. 15 and requires the dual presentation of "basic"
and "diluted" EPS on the face of the income statement and requires certain
footnote disclosures. Basic EPS excludes dilution and is computed by dividing
income available to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that share in the earnings of the Company. Since the Company's
outstanding stock options are currently included in the computation of EPS, the
diluted EPS to be reported under the new standard will be substantially the same
amount as is currently reported.
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THE DAVEY TREE EXPERT COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
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THREE MONTHS ENDED MARCH 29, 1997
LIQUIDITY AND CAPITAL RESOURCES
Operating activities provided $5,671,000 in the first quarter of 1997, a net
increase of $3,302,000 when compared to the $2,369,000 provided last year. The
net improvement was mainly due to higher depreciation, a lower increase in
accounts receivable and other assets, increases in insurance and other
liabilities, partially offset by a lower increase in accounts payable and
accrued liabilities.
Net earnings for the first quarter totaled $279,000, and were only $129,000 less
than last year. Given the seasonal nature of its business, the Registrant has
historically incurred significant losses in the first quarter of each year.
Several factors contributed to the deviation from this norm in both 1997 and
1996. In both years, earnings in the Registrant's Utility and Consulting
services were favorably influenced by additional work obtained with its major
Western U.S. customer. Similarly, Residential service revenues were
approximately level with last year, the result of a continued focus on sales and
a generally strong economy. Despite this stable base of revenues, Residential
operating losses in the current year were greater than in 1996 primarily due to
some emergency snow removal work obtained in March of last year in the eastern
U.S. Finally, Commercial service revenues increased over 1996, their first year
of operation, and operating losses were reduced commensurately.
Depreciation expense of $3,797,000 was $537,000 higher than in 1996, due to a
relatively higher level of capital expenditures in the current and prior two
years.
Accounts receivable increased $2,531,000, $330,000 less than that experienced in
1996. Also, even though certain collections were realized in the first quarter,
the Registrant's days outstanding increased 7.2 days to 59.7 days when compared
to the same period last year, and remain at the same level as year end 1996.
This growth in days outstanding is mainly attributable to the increase in
amounts due as a result of additional work obtained with its major Western U.S.
customer; the Registrant anticipates that these amounts, as well as days
outstanding, will be gradually reduced over the balance of 1997. The Registrant
continues to focus its efforts on such reductions, and is not concerned as to
the overall collectibility of accounts.
Other assets used $291,000, a $373,000 decrease when compared to the $664,000
used in the first quarter of last year. The decrease was primarily due to a
smaller increase in operating supplies in the current year.
Accounts payable and accrued liabilities provided $3,568,000 in cash, a net
decrease of $931,000 when compared to last year. This net decline was primarily
attributable to lower required accruals for the Registrant's Western Utility
and Consulting services operations.
The long-term portion of insurance liabilities provided $500,000, a $689,000 net
increase when compared to the first quarter of 1996. When combined with the
current portion of insurance liabilities which are reflected in accrued
liabilities, the Registrant's self insured liabilities have increased
approximately $1,000,000 since year end 1996, primarily due to accruals
associated with the addition of its auto and general liability exposures to the
self insured program in the second half of last year, coupled with a temporary
delay in claims payments resulting from the September 1996 transition to the
Registrant's new excess insurer and claims administrator. Despite this increase,
the Registrant continues to benefit from
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favorable claims experience and stabilization in the level of estimated ultimate
costs resulting from a relatively mature self insurance program.
Other liabilities provided $281,000, a $2,592,000 net increase when compared to
the $2,311,000 used in 1996. The net increase was the result of an acceleration
in estimated income tax payments last year.
Investing activities used $9,921,000, an increase of $1,816,000 when compared to
last year. The increase was attributable to higher capital expenditures
necessitated by growth in the Registrant's Residential and Commercial services,
as well as to sustain existing Utility operations. The Registrant believes its
capital budget of approximately $20,500,000 is consistent with its plan to
expand services, maintain equipment on existing operations, and provide for
suitable branch office facilities.
Financing activities provided $3,845,000, $1,030,000 less than that provided in
1996. The reduction was due to a lower increase in the level of borrowings under
the Registrant's revolving credit agreement in 1997, principally resulting from
the increase in cash provided by operating activities.
At March 29, 1997, the Registrant's principal source of liquidity consisted of
$222,000 in cash and cash equivalents; short-term lines of credit and amounts
available to be borrowed from banks via notes payable totaling $3,807,000 of
which $673,000 had been drawn and a revolving credit agreement in the amount of
$35,000,000, of which $19,100,000 had been drawn and $8,110,000 was considered
drawn to cover outstanding standby letters of credit. The Registrant is in the
process of negotiating with its principal banks to allow for more favorable
pricing under its existing credit facility, as well as to provide an additional
$5,000,000 temporary line of credit. Including this line of credit and the
outstanding term note agreement of $6,600,000, the Registrant's credit
facilities will total $49,807,000. Accordingly, the Registrant believes its
available credit will exceed credit requirements, and that its liquidity is
adequate.
RESULTS OF OPERATIONS
Revenues of $60,377,000 increased $149,000 when compared to the $60,228,000
generated in the first quarter of 1996. As previously discussed, revenues remain
relatively strong in the Registrant's Utility, Consulting, and Residential
services.
Operating costs declined both in dollars and as a percentage of revenues when
compared with 1996 first quarter results. At $43,205,000, operating costs
declined $680,000 from last year's level of $43,885,000 and as a percentage of
revenues they declined 1.3% to 71.6%. The percentage reduction was primarily the
result of lower operating costs associated with relatively higher Residential
and Consulting service revenues. These services, when compared to other
services, favorably influence operating costs because they are generally higher
priced services with inherently higher gross margins and attendent lower
operating costs. Consulting services in particular are far less capital
intensive and any increase in these revenues relative to the Registrant's other
services will benefit its cost structure.
For the quarter, selling costs of $8,040,000 increased $214,000, and as a
percentage of revenues increased .3% to 13.3%, when compared to last year. This
increase was mainly the result of local advertising and promotional expenses
associated with the Registrant's marketing efforts for its Residential,
Commercial and Consulting services.
General and Administrative costs increased by $225,000 and as a percentage of
revenues they increased .4% to 7.3%. The increase was mainly attributable to
costs related to the Registrant's continued upgrade of its information service
technologies, along with costs related to the expansion of its Commercial and
Consulting services.
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Depreciation and Amortization expense of $3,890,000 increased $513,000 or .8% as
a percentage of revenues when compared to the prior year. Both the dollar and
percent increase resulted from higher capital expenditures in the current and
two preceding years, primarily for equipment to support Utility, Residential and
Commercial services. The Registrant anticipates that depreciation expense will
approximate $15,000,000 in 1997.
Interest expense of $545,000 increased $57,000 when compared to the $488,000
incurred last year, and as a percentage of revenues it increased .1% to .9%. The
increase was mainly caused by higher debt levels in the current year, as well as
slightly higher interest rates associated with the Registrant's LIBOR-based
borrowings.
As a result of the above factors, earnings before income taxes were $474,000 or
.8% of revenues, a decrease of $198,000 or .3% as a percentage of revenues when
compared to the first quarter of 1996. Effective income tax rates of 41.1% and
39.3% were used to compute income tax expense in 1997 and 1996, respectively.
The Registrant's net earnings of $279,000 were $129,000 lower than the $408,000
earned in 1996. As a percentage of revenues, the current year net declined .2%
to .5%.
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THE DAVEY TREE EXPERT COMPANY
PART II: OTHER INFORMATION
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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
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David E. Adante
Executive Vice President, CFO and
Secretary-Treasurer
BY: /s/ Bradley L. Comport
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Bradley L. Comport
Corporate Controller
May 13, 1996
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