<PAGE> 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 March 30, 1996 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 10, 1996: 2,272,473
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
<TABLE>
<CAPTION>
INDEX
-----
Page No.
--------
PART I: FINANCIAL INFORMATION
<S> <C> <C>
Item 1: Financial Statements
Consolidated Balance Sheets - Periods Ended March 30,
1996, April 1, 1995 and December 31, 1995 3
Consolidated Statements of Earnings - Three Months
Ended March 30, 1996 and April 1, 1995 4
Consolidated Statements of Cash Flows - Three Months
Ended March 30, 1996 and April 1, 1995 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
</TABLE>
2
<PAGE> 3
THE DAVEY TREE EXPERT COMPANY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 30, APRIL 1, DEC. 31,
1996 1995 1995
------------ ------------ ------------
ASSETS (UNAUDITED)
- ------ -----------------------------
CURRENT ASSETS
<S> <C> <C> <C>
Cash and Cash Equivalents $ 609 $ 659 $ 1,470
Accounts Receivable 37,483 30,092 34,622
Refundable Income Taxes - - 619 - -
Operating Supplies 2,687 2,563 2,136
Prepaid Expenses & Other Assets 1,948 3,282 2,082
Deferred Income Taxes 2,635 1,898 2,697
------------ ------------ ------------
Total Current Assets 45,362 39,113 43,007
PROPERTY AND EQUIPMENT:
Land and Land Improvements 6,227 6,379 6,446
Buildings and Leasehold Improvements 17,012 16,456 15,956
Equipment 145,446 133,746 139,711
------------ ------------ ------------
168,685 156,581 162,113
Less Accumulated Depreciation 110,057 101,506 107,977
------------ ------------ ------------
Net Property and Equipment 58,628 55,075 54,136
OTHER ASSETS AND INTANGIBLES 7,418 7,008 7,309
------------ ------------ ------------
TOTAL ASSETS $ 111,408 $ 101,196 $ 104,452
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Accounts Payable 13,380 10,113 10,227
Accrued Liabilities 15,626 12,866 13,935
Income Taxes Payable 779 - - 3,171
Notes Payable, Bank 226 187 400
Current Maturities of Long-Term Debt 9,477 7,296 2,781
------------ ------------ ------------
Total Current Liabilities 39,488 30,462 30,514
LONG-TERM DEBT 15,675 20,541 17,049
DEFERRED INCOME TAXES 2,977 3,257 3,182
INSURANCE LIABILITIES 6,191 5,392 6,380
OTHER LIABILITIES 878 635 797
------------ ------------ ------------
TOTAL LIABILITIES 65,209 60,287 57,922
------------ ------------ ------------
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 4,364,220 Shares at
March 30, 1996, April 1, 1995 and December 31, 1995 4,364 4,364 4,364
Additional Paid-in Capital 7,836 7,554 7,836
Retained Earnings 68,141 60,831 67,922
------------ ------------ ------------
80,341 72,749 80,122
LESS:
Treasury Shares at cost: 2,075,200 Shares at
March 30, 1996; 2,012,709 Shares at April 1, 1995;
and 2,052,488 Shares at December 31, 1995 (33,785) (31,079) (33,198)
Subscriptions Receivable from Employees (284) (592) (297)
Future Contributions to ESOT (73) (169) (97)
------------ ------------ ------------
TOTAL SHAREHOLDERS' EQUITY 46,199 40,909 46,530
------------ ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 111,408 $ 101,196 $ 104,452
============= ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE> 4
THE DAVEY TREE EXPERT COMPANY
CONSOLIDATED STATEMENTS OF EARNINGS
THREE MONTHS ENDED MARCH 30, 1996 AND APRIL 1, 1995
(DOLLARS IN THOUSANDS EXCEPT EARNINGS PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
March 30, 1996 April 1, 1995
---------------------------- ---------------------------
<S> <C> <C> <C> <C>
REVENUES $ 60,228 100.0% $ 46,382 100.0%
----------- --------- ------------ ---------
COSTS AND EXPENSES
Operating Costs 43,914 72.9 35,960 77.6
Selling 7,860 13.1 6,549 14.1
General and Administrative 4,170 6.9 3,717 8.0
Depreciation 3,260 5.4 3,062 6.6
----------- --------- ------------ ---------
TOTAL COSTS AND EXPENSES 59,204 98.3 49,288 106.3
----------- --------- ------------ ---------
EARNINGS/(LOSS) BEFORE INTEREST, OTHER
EXPENSE AND INCOME TAXES 1,024 1.7 (2,906) (6.3)
INTEREST EXPENSE (488) (0.8) (527) (1.1)
OTHER INCOME/(EXPENSE) 136 0.2 (87) (0.2)
----------- --------- ------------ ---------
EARNINGS/(LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAX 672 1.1 (3,520) (7.6)
INCOME TAX EXPENSE/(CREDITS) 264 0.4 (1,443) (3.1)
----------- --------- ------------ ---------
EARNINGS/(LOSS) FROM CONTINUING OPERATIONS 408 0.7 (2,077) (4.5)
DISCONTINUED OPERATIONS, NET 236 0.5
----------- --------- ------------ ---------
NET EARNINGS/(LOSS) $ 408 0.7% $ (1,841) (4.0)%
=========== ========= ============ =========
NET EARNINGS/(LOSS) PER COMMON SHARE
FROM CONTINUING OPERATIONS $ 0.17 $ (0.84)
=========== ===========
NET EARNINGS/(LOSS) PER COMMON SHARE $ 0.17 $ (0.74)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING, INCLUDING
COMMON STOCK EQUIVALENTS 2,382,027 2,486,405
=========== ============
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE> 5
THE DAVEY TREE EXPERT COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THREE MONTHS ENDED MARCH 30, 1996 AND APRIL 1, 1995
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 30, APRIL 1,
1996 1995
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net Earnings/(Loss) $ 408 $ (1,841)
Adjustments to Reconcile Net Earnings to
Net Cash Provided by Operating Activities:
Depreciation 3,260 3,062
Amortization 117 146
Deferred Income Taxes (143) - -
Other 253 (596)
--------------- ---------------
3,895 771
Change in Operating Assets and Liabilities:
Accounts Receivable (2,861) (2,079)
Other Assets (409) (51)
Accounts Payable and Accrued Liabilities 4,844 2,927
Insurance Liabilities (189) 342
Other Liabilities (2,311) (1,187)
--------------- ---------------
Net Cash Provided by Operating Activities 2,969 723
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Sales of Property and Equipment 215 911
Acquisitions (820) (395)
Amount Receivable from Sale of Business 1,300
Capital Expenditures:
Land and Buildings (346)
Equipment (7,154) (3,894)
--------------- ---------------
Net Cash Used In Investing Activities (8,105) (2,078)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
ESOT Payment of Debt Guaranteed by the Company 24 24
Net Borrowings (Payments) Under Notes Payable, Bank (174) 88
Principal Payments of Long-Term Debt (285) (1,486)
Proceeds from Issuance of Long-Term Debt 5,607 4,355
Sales of Treasury Shares 123
Receipts from Stock Subscriptions 13 14
Dividends Paid (323) (314)
Repurchase of Common Shares (587) (1,763)
--------------- ---------------
Net Cash Provided By Financing Activities 4,275 1,041
--------------- ---------------
NET CHANGE IN CASH AND EQUIVALENTS (861) (314)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,470 973
--------------- ---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 609 $ 659
=============== ===============
</TABLE>
See Notes to Consolidated Financial Statements
5
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THE DAVEY TREE EXPERT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
THREE MONTHS ENDED MARCH 30, 1996
UNAUDITED
---------
NOTE 1 - BASIS OF PRESENTATION
- ------------------------------
The accompanying unaudited Consolidated Financial Statements as of
March 30, 1996 and April 1, 1995 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 the 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 net income per common share from continuing operations and the net income
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 30, 1996 and April 1, 1995
are not necessarily indicative of the results to be expected for the full year.
NOTE 3 - DIVIDENDS
- ------------------
On March 10, 1996 the Registrant paid a $.14 per share dividend to all
shareholders of record at March 1, 1996. This compares to a $.13 per share
dividend paid in the first quarter of 1995.
NOTE 4 - ACCRUED LIABILITIES
- ----------------------------
Accrued liabilities consisted of:
<TABLE>
<CAPTION>
MARCH 30, APRIL 1, DEC. 31,
1996 1995 1995
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Compensation $ 3,573 $ 2,944 $ 3,521
Vacation 1,807 1,593 1,658
Insurance Liabilities 7,352 4,751 7,082
Taxes, other than taxes on income 1,921 2,116 915
Other 973 1,462 759
------------ ------------ ------------
$ 15,626 $ 12,866 $ 13,935
============ ============ ============
</TABLE>
6
<PAGE> 7
NOTE 5 - LONG-TERM DEBT
- -----------------------
Long-term debt consisted of:
<TABLE>
<CAPTION>
MARCH 30, APRIL 1, DEC. 31,
1996 1995 1995
------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Revolving Credit Agreement:
<S> <C> <C> <C>
Prime rate borrowings $ 2,900 $ 6,200 $ 2,900
London Interbank Offered Rate
(LIBOR) borrowings 12,800 6,000
Term note agreement 8,400 10,800 9,600
Notes payable 8,000
------------- ------------- -------------
24,100 25,000 18,500
Long-term debt of ESOT 73 193 97
Subordinated notes - stock redemption 554 808 673
Term loans and others 425 1,836 560
------------- ------------- -------------
25,152 27,837 19,830
Less current maturities 9,477 7,296 2,781
------------- ------------- -------------
$ 15,675 $ 20,541 $ 17,049
============= ============= =============
</TABLE>
NOTE 6 - ACQUISITIONS
- ---------------------
In the first quarter of 1996, the Registrant acquired the assets of two
organizations which provide horticultural services for a total purchase price of
$820,000, and accounted for each transaction as a purchase. 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 - DISCONTINUED OPERATION
- -------------------------------
In March, 1995 the Company sold substantially all of the operating
assets, excluding real estate, of its interior plant care business. Amounts
related to the discontinued operation and recognized in the financial statements
are as follows:
<TABLE>
<CAPTION>
MAR. 30 APRIL 1
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Revenue $ - - $ 555
----------- -----------
Loss from discontinued operation, net of applicable
income tax benefits of $116,000 in 1995. - - (168)
Gain on sale of assets, less applicable income taxes
of $280,000 - - 404
----------- -----------
Discontinued operation, net $ - - $ 236
----------- -----------
Remaining assets and liabilities as of March 30, 1996
Real estate and receivable, net $ 441 $ 1,798
----------- -----------
Accounts payable, accrued liabilities and long-term debt $ 77 $ 372
----------- -----------
</TABLE>
7
<PAGE> 8
THE DAVEY TREE EXPERT COMPANY
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
---------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
THREE MONTHS ENDED MARCH 30, 1996
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Operating activities provided $2,969,000 during the first quarter of 1996, a net
increase of $2,246,000 when compared to the $723,000 provided last year. This
net improvement was primarily due to higher net earnings and accounts payable
and accrued liabilities, partially offset by an increase in accounts receivable
and a reduction of other liabilities.
Net earnings in the first quarter of $408,000 represented an improvement of
$2,249,000 when compared to the $1,841,000 loss experienced in the first three
months of 1995. Earnings were favorably impacted in most of the Registrant's
service lines; in particular, earnings generated by the Registrant's Western
operations were substantially higher. This improvement in Western operations
resulted primarily from two factors. First, Residential and Commercial services
revenues continue to be favorably influenced by heightened sales efforts as well
as a generally improved California economy. Also, earnings in the Registrant's
Utility and Consulting services continue to be strongly influenced by additional
work that had been obtained with its major Western U.S. customer during the
fourth quarter of 1995. Although the Registrant is encouraged by these first
quarter results, many of its services remain highly seasonal, and may also be
subject to customer budget constraints and/or the competitive bidding process.
For these reasons, and given 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 payable and accrued liabilities generated $4,844,000, a net increase of
$1,917,000 when compared to the $2,927,000 provided in the first quarter of
1995. The increase was primarily attributable to higher capital expenditures, as
well as increases in other costs commensurate with the increase in revenues. It
also resulted from an increase in the current portion of insurance liabilities,
attributable primarily to the further development in estimated ultimate claims
costs for workers compensation, and to a lesser extent, it was impacted by the
timing of certain liability insurance payments by the Registrant's Western
operation.
Accounts receivable adversely impacted cash flow by $2,861,000, $782,000 more
than the $2,079,000 negative impact in the prior year. This increase was due in
part to higher revenues; however, at the end of March, average days outstanding
were 52.5 days compared to 49.9 days in 1995. Although days outstanding did
increase over the prior year, they have declined since December 31, 1995, by 1.3
days. The increase from March 1995 was primarily due to work in process related
to certain contracts with one of the Registrant's Western Utility customers. The
Registrant anticipates this contract will continue to adversely affect days
outstanding as the contract calls for billings and payments in six month
intervals. While the Registrant continues to work to reduce average days
outstanding, it is not concerned as to the overall collectibility of accounts.
Other liabilities required the use of $2,311,000 in cash, $1,124,000 more than
that used in 1995; due to the higher net earnings generated in 1996, the
Registrant was required to accelerate its estimated tax payments for the year.
8
<PAGE> 9
Cash used in investing activities totaled $8,105,000, a $6,027,000 increase when
compared to the $2,078,000 used in 1995. This net increase was mainly
attributable to the current year increase in capital expenditures required to
sustain the growth in revenues, as well as a reduction in amounts receivable
from last year related to the sale of certain assets associated with the
Registrant's interior plant care operations. (See Note 7 to the Financial
Statements on page 7 on Form 10-Q). The Registrant believes its revised
capital budget of $14,500,000 for 1996 is consistent with its plan to expand
services, maintain equipment on existing operations, and provide for the
ongoing purchase of branch office facilities.
Cash flows provided by financing activities increased $3,234,000 to $4,275,000
when compared to the $1,041,000 provided in 1995. This increase was due to two
factors. First, the Registrant's long term borrowings, net of repayments,
increased by $2,191,000 when compared to 1995, a function of the increase in
capital expenditures. Second, the Registrant's repurchase of common shares
declined by $1,176,000 when compared to last year; the significant repurchases
in 1995 were attributable to the redemption of shares held by a former vice
president.
At March 30, 1996, the Registrant's principal source of liquidity consisted of
$609,000 in cash and cash equivalents; short-term lines of credit and amounts
available to be borrowed from banks via notes payable totaling $3,822,000, of
which $226,000 had been drawn at the end of the quarter; and a credit agreement
in the amount of $35,000,000, of which $15,700,000 had been drawn and $7,431,000
was considered drawn to cover outstanding standby letters of credit. Including
the outstanding balance on the term note agreement of $8,400,000, the
Registrant's credit facilities total $47,222,000. The Registrant believes its
available credit will exceed credit requirements, and that its liquidity is
adequate.
RESULTS OF OPERATIONS
- ---------------------
Revenues of $60,228,000 increased $13,846,000, an increase of 30% from the
$46,382,000 generated in the first quarter of 1995. All of the Registrant's
service lines contributed to this improvement, and as previously discussed, a
significant amount of the increase was derived from its Western U.S. operations,
particularly that additional work obtained from its major Western U.S. customer.
This additional work, which commenced during the fourth quarter of 1995, will
begin to be phased out during the second quarter, and will be substantially
complete by the third quarter of 1996. It is for this reason, as well as the
seasonal nature of the Registrant's business, that the rate of increase in
revenues during the remainder of 1996 is not anticipated to remain at the level
experienced in the first quarter.
Operating costs of $43,914,000 increased $7,954,000, but as a percentage of
revenues declined 4.7% to 72.9%. This improvement in operating costs as a
percentage of revenues was attributable to two factors. First, the Registrant's
Consulting services revenues increased substantially from the prior year
relative to its other service lines. In that its Consulting services are far
less capital intensive, this improvement in the revenue mix favorably influenced
operating costs. Second, the overall percentage decrease was a result of lower
direct labor, payroll tax, and equipment costs. The Registrant believes that in
1996 these costs as a percentage of revenues will remain at or slightly below
1995 levels.
Selling costs for the first quarter of $7,860,000 increased $1,311,000 when
compared to the prior year, but decreased as a percentage of revenues by 1.0% to
13.1%. The major factors affecting the dollar increase were higher sales
commissions, which were attributable to increased Residential and Commercial
service line revenues, as well as travel and other sales costs associated with
the Registrant's consulting services.
Although General and Administrative costs of $4,170,000 were $453,000 higher
than in 1995, as a percentage of revenues they declined by 1.1% to 6.9%. Most of
the dollar increment resulted from higher administrative salaries; the increases
resulted from higher incentive accruals for the Registrant's Residential and
Commercial service lines, and support services required for the additional work
obtained from its major Western U.S. customer.
9
<PAGE> 10
Depreciation expense of $3,260,000 remained almost even with last year, and as a
percentage of revenues declined 1.2% to 5.4%. The reduced percentage is a result
of lower capital expenditures in 1995 and 1994. In 1996, the Registrant
anticipates that depreciation expense will approximate $13,000,000.
Interest expense of $488,000 was slightly lower than last year, and declined .3%
as a percentage of revenues to .8%. The reduction was mainly due to an
approximate 75 basis point decline in interest rates from last year at this
time. The Registrant anticipates that interest expense will approximate
$2,000,000 in 1996.
As a result of the above factors, earnings from continuing operations before
income taxes were $672,000 or 1.1% of revenues, and increased $4,192,000 or 8.7%
as a percentage of revenues when compared to the $3,520,000 loss in the first
quarter of 1995. Effective income tax rates of 39.3% and 41.0% were used to
compute income tax expense and credits in 1996 and 1995, respectively.
The Registrant's net earnings of $408,000 were $2,249,000 higher than the
$1,841,000 net loss experienced in 1995, after reflecting a net 236,000
contributed by the discontinued operation last year (see Note 7 on page 7 on
this form 10-Q). As a percentage of revenues, the current year net improved 4.7%
to .7%.
10
<PAGE> 11
THE DAVEY TREE EXPERT COMPANY
PART II: OTHER INFORMATION
--------------------------
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 10, 1996
11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-30-1996
<CASH> 609
<SECURITIES> 0
<RECEIVABLES> 37,483
<ALLOWANCES> 330
<INVENTORY> 2,687
<CURRENT-ASSETS> 45,362
<PP&E> 168,685
<DEPRECIATION> 110,057
<TOTAL-ASSETS> 111,408
<CURRENT-LIABILITIES> 39,488
<BONDS> 0
<COMMON> 4,364
0
0
<OTHER-SE> 41,835
<TOTAL-LIABILITY-AND-EQUITY> 111,408
<SALES> 0
<TOTAL-REVENUES> 60,228
<CGS> 0
<TOTAL-COSTS> 59,204
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 488
<INCOME-PRETAX> 672
<INCOME-TAX> 264
<INCOME-CONTINUING> 408
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 408
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
</TABLE>
