UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 201829, 2019
OR
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¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______________ to ______________
Commission file number 000-11917
THE DAVEY TREE EXPERT COMPANY
(Exact name of registrant as specified in its charter)
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Ohio | 34-0176110 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
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1500 North Mantua Street |
P.O. Box 5193 |
Kent, Ohio 44240 |
(Address of principal executive offices) (Zip code) |
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(330) 673-9511 |
(Registrant's telephone number, including area code) |
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Securities registered pursuant to Section 12(b) of the Act: |
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Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
N/A | | N/A | | N/A |
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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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(Check one): | | ¨ Large Accelerated Filer | | x Accelerated Filer | | ¨ Emerging Growth Company |
| | ¨ Non-Accelerated Filer (Do not check if a smaller reporting company) | | ¨ Smaller Reporting Company | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
There were 23,631,18222,801,689 Common Shares, $1.00 par value, outstanding as of August 3, 2018.
2, 2019.
The Davey Tree Expert Company
Quarterly Report on Form 10-Q
June 30, 201829, 2019
INDEX
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Part I. | Financial Information |
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Item 1. | Financial Statements (Unaudited) | |
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"We,” “us,” “our,” “Davey” and “Davey Tree,” unless the context otherwise requires, means The Davey Tree Expert Company and its subsidiaries.
THE DAVEY TREE EXPERT COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except per share data dollar amounts)
| | | June 30, 2018 | | December 31, 2017 | June 29, 2019 | | December 31, 2018 |
Assets | | | | | | |
Current assets: | | | | | | |
Cash | $ | 12,483 |
| | $ | 13,121 |
| $ | 16,057 |
| | $ | 22,661 |
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Accounts receivable, net | 178,269 |
| | 168,671 |
| 212,421 |
| | 195,906 |
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Operating supplies | 13,922 |
| | 10,069 |
| 13,332 |
| | 14,415 |
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Other current assets | 12,326 |
| | 17,264 |
| 11,526 |
| | 22,086 |
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Total current assets | 217,000 |
| | 209,125 |
| 253,336 |
| | 255,068 |
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Property and equipment | 640,087 |
| | 616,036 |
| 662,217 |
| | 639,396 |
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Less accumulated depreciation | 431,851 |
| | 422,853 |
| 454,811 |
| | 437,111 |
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| 208,236 |
| | 193,183 |
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Total property and equipment, net | | 207,406 |
| | 202,285 |
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Right-of-use assets - operating leases | | 39,534 |
| | — |
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Other assets | 24,874 |
| | 29,156 |
| 20,016 |
| | 21,769 |
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Identified intangible assets and goodwill, net | 43,144 |
| | 41,671 |
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| $ | 493,254 |
| | $ | 473,135 |
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Intangible assets and goodwill, net | | 49,857 |
| | 47,501 |
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Total assets | | $ | 570,149 |
| | $ | 526,623 |
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Liabilities and shareholders' equity | |
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Current liabilities: | |
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Accounts payable | $ | 37,076 |
| | $ | 45,093 |
| $ | 34,735 |
| | $ | 43,958 |
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Accrued expenses | 40,512 |
| | 42,816 |
| 47,317 |
| | 44,061 |
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Current portion of long-term debt and finance lease liabilities | | 11,119 |
| | 23,859 |
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Other current liabilities | 33,959 |
| | 40,748 |
| 42,187 |
| | 27,434 |
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Total current liabilities | 111,547 |
| | 128,657 |
| 135,358 |
| | 139,312 |
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Long-term debt | 157,907 |
| | 119,210 |
| 166,374 |
| | 155,563 |
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Self-insurance accruals | 45,093 |
| | 43,912 |
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Lease liabilities - finance leases | | 1,985 |
| | 2,862 |
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Lease liabilities - operating leases | | 25,825 |
| | — |
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Self-insurance reserve | | 58,246 |
| | 56,351 |
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Other noncurrent liabilities | 17,040 |
| | 19,966 |
| 10,378 |
| | 10,125 |
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| 331,587 |
| | 311,745 |
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Redeemable common shares related to 401KSOP and Employee Stock Ownership Plan (ESOP); 6,169 and 6,467 shares at redemption value as of June 30, 2018 and December 31, 2017 | 121,525 |
| | 123,520 |
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Total liabilities | | 398,166 |
| | 364,213 |
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Commitments and contingencies (Note P) | | | | |
Redeemable common shares related to 401KSOP and Employee Stock Ownership Plan (ESOP); 5,297 and 5,642 shares at redemption value as of June 29, 2019 and December 31, 2018 | | 119,702 |
| | 119,049 |
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Common shareholders' equity: | |
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Common shares, $1.00 par value, per share; 48,000 shares authorized; 36,745 and 36,447 shares issued and outstanding before deducting treasury shares and which excludes 6,169 and 6,467 shares subject to redemption as of June 30, 2018 and December 31, 2017 | 36,745 |
| | 36,447 |
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Common shares, $1.00 par value, per share; 48,000 shares authorized; 37,617 and 37,272 shares issued and outstanding before deducting treasury shares and which excludes 5,297 and 5,642 shares subject to redemption as of June 29, 2019 and December 31, 2018 | | 37,617 |
| | 37,272 |
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Additional paid-in capital | 69,810 |
| | 58,554 |
| 91,921 |
| | 82,623 |
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Common shares subscribed, unissued | 7,131 |
| | 7,529 |
| 5,948 |
| | 6,799 |
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Retained earnings | 153,647 |
| | 143,835 |
| 167,611 |
| | 157,472 |
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Accumulated other comprehensive loss | (9,679 | ) | | (8,393 | ) | (5,269 | ) | | (5,034 | ) |
| 257,654 |
| | 237,972 |
| 297,828 |
| | 279,132 |
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Less: Cost of common shares held in treasury; 19,290 shares at June 30, 2018 and 18,693 shares at December 31, 2017 | 216,065 |
| | 198,327 |
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Less: Cost of common shares held in treasury; 20,114 shares at June 29, 2019 and 20,033 shares at December 31, 2018 | | 245,116 |
| | 235,042 |
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Common shares subscription receivable | 1,447 |
| | 1,775 |
| 431 |
| | 729 |
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Total common shareholders' equity | 40,142 |
| | 37,870 |
| 52,281 |
| | 43,361 |
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| $ | 493,254 |
| | $ | 473,135 |
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Total liabilities and shareholders' equity | | $ | 570,149 |
| | $ | 526,623 |
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See notes to condensed consolidated financial statements. | |
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THE DAVEY TREE EXPERT COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share dollar amounts)
| | | Three Months Ended | | Six Months Ended | Three Months Ended | | Six Months Ended |
| June 30, 2018 | | July 1, 2017 | | June 30, 2018 | | July 1, 2017 | June 29, 2019 | | June 30, 2018 | | June 29, 2019 | | June 30, 2018 |
Revenues | $ | 270,649 |
| | $ | 245,037 |
| | $ | 479,300 |
| | $ | 437,850 |
| $ | 301,434 |
| | $ | 270,649 |
| | $ | 549,323 |
| | $ | 479,300 |
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Costs and expenses: | | | | | | | | | | | | | | |
Operating | 167,682 |
| | 151,525 |
| | 312,305 |
| | 285,184 |
| 187,778 |
| | 167,682 |
| | 353,794 |
| | 312,305 |
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Selling | 44,317 |
| | 40,816 |
| | 83,974 |
| | 76,350 |
| 50,629 |
| | 44,317 |
| | 96,933 |
| | 83,974 |
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General and administrative | 17,358 |
| | 15,213 |
| | 35,076 |
| | 31,613 |
| 18,671 |
| | 17,358 |
| | 37,715 |
| | 35,076 |
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Depreciation and amortization | 13,938 |
| | 13,000 |
| | 27,059 |
| | 25,190 |
| 14,590 |
| | 13,938 |
| | 28,802 |
| | 27,059 |
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Gain on sale of assets, net | (2,446 | ) | | (1,176 | ) | | (3,248 | ) | | (2,151 | ) | (516 | ) | | (2,446 | ) | | (1,169 | ) | | (3,248 | ) |
| 240,849 |
| | 219,378 |
| | 455,166 |
| | 416,186 |
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Total costs and expenses | | 271,152 |
| | 240,849 |
| | 516,075 |
| | 455,166 |
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Income from operations | 29,800 |
| | 25,659 |
| | 24,134 |
| | 21,664 |
| 30,282 |
| | 29,800 |
| | 33,248 |
| | 24,134 |
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Other income (expense): | | | | | | | | | | | | | | |
Interest expense | (1,754 | ) | | (1,072 | ) | | (3,155 | ) | | (2,329 | ) | (2,428 | ) | | (1,754 | ) | | (4,579 | ) | | (3,155 | ) |
Interest income | 101 |
| | 73 |
| | 179 |
| | 143 |
| 93 |
| | 101 |
| | 176 |
| | 179 |
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Other, net | (1,052 | ) | | (1,339 | ) | | (2,714 | ) | | (2,478 | ) | (3,153 | ) | | (1,052 | ) | | (4,808 | ) | | (2,714 | ) |
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Income before income taxes | 27,095 |
| | 23,321 |
| | 18,444 |
| | 17,000 |
| 24,794 |
| | 27,095 |
| | 24,037 |
| | 18,444 |
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Income taxes | 5,381 |
| | 9,098 |
| | 3,357 |
| | 6,664 |
| 5,047 |
| | 5,381 |
| | 4,783 |
| | 3,357 |
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Net income | $ | 21,714 |
| | $ | 14,223 |
| | $ | 15,087 |
| | $ | 10,336 |
| $ | 19,747 |
| | $ | 21,714 |
| | $ | 19,254 |
| | $ | 15,087 |
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Net income per share: | | | | | | | | | | | | | | |
Basic | $ | .94 |
| | $ | .57 |
| | $ | .62 |
| | $ | .41 |
| $ | .86 |
| | $ | .94 |
| | $ | .83 |
| | $ | .62 |
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Diluted | $ | .89 |
| | $ | .55 |
| | $ | .59 |
| | $ | .40 |
| $ | .82 |
| | $ | .89 |
| | $ | .80 |
| | $ | .59 |
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Weighted-average shares outstanding: | | | | | | | | | | | | | | |
Basic | 23,121 |
| | 24,998 |
| | 24,439 |
| | 24,984 |
| 22,915 |
| | 23,121 |
| | 23,139 |
| | 24,439 |
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Diluted | 24,307 |
| | 25,985 |
| | 25,561 |
| | 25,998 |
| 24,051 |
| | 24,307 |
| | 24,180 |
| | 25,561 |
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Dividends declared per share | $ | .025 |
| | $ | .025 |
| | $ | .050 |
| | $ | .050 |
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See notes to condensed consolidated financial statements. | See notes to condensed consolidated financial statements. | | | | | | | See notes to condensed consolidated financial statements. | | | | | | |
THE DAVEY TREE EXPERT COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)
| | | Three Months Ended | | Six Months Ended | Three Months Ended | | Six Months Ended |
| June 30, 2018 | | July 1, 2017 | | June 30, 2018 | | July 1, 2017 | June 29, 2019 | | June 30, 2018 | | June 29, 2019 | | June 30, 2018 |
Net income | $ | 21,714 |
| | $ | 14,223 |
| | $ | 15,087 |
| | $ | 10,336 |
| $ | 19,747 |
| | $ | 21,714 |
| | $ | 19,254 |
| | $ | 15,087 |
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Components of other comprehensive income/(loss), net of tax: | | | | | | | | | | | | | | |
Foreign currency translation adjustments | (747 | ) | | 881 |
| | (1,579 | ) | | 1,203 |
| 698 |
| | (747 | ) | | 1,207 |
| | (1,579 | ) |
Adjustments to defined benefit pension plans: | | | | | | | | |
Reclassification to results of operations: | | | | | | | | |
Amortization of defined benefit pension items: | | | | | | | | | | | | | | |
Net actuarial loss | 135 |
| | 147 |
| | 269 |
| | 294 |
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Net actuarial (gain) loss | | (1,498 | ) | | 135 |
| | (1,466 | ) | | 269 |
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Prior service cost | 12 |
| | 10 |
| | 24 |
| | 20 |
| 12 |
| | 12 |
| | 24 |
| | 24 |
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Defined benefit pension plan adjustments | 147 |
| | 157 |
| | 293 |
| | 314 |
| (1,486 | ) | | 147 |
| | (1,442 | ) | | 293 |
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Other comprehensive (loss)/income, net of tax | (600 | ) | | 1,038 |
| | (1,286 | ) | | 1,517 |
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Other comprehensive loss, net of tax | | (788 | ) | | (600 | ) | | (235 | ) | | (1,286 | ) |
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Comprehensive income | $ | 21,114 |
| | $ | 15,261 |
| | $ | 13,801 |
| | $ | 11,853 |
| $ | 18,959 |
| | $ | 21,114 |
| | $ | 19,019 |
| | $ | 13,801 |
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See notes to condensed consolidated financial statements. | See notes to condensed consolidated financial statements. | | | | | | | See notes to condensed consolidated financial statements. | | | | | | |
THE DAVEY TREE EXPERT COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
(In thousands, except per share data)
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| Common Shares | Additional Paid-in Capital | Common Shares Subscribed, Unissued | Retained Earnings | Accumulated Other Comprehensive Income (Loss), Net of Tax | Common Shares Held in Treasury | Common Shares Subscription Receivable | Total Common Shareholders' Equity |
Balances at March 30, 2019 | $ | 37,077 |
| $ | 81,201 |
| $ | 6,408 |
| $ | 156,389 |
| $ | (4,481 | ) | $ | (236,470 | ) | $ | (571 | ) | $ | 39,553 |
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Net income | — |
| — |
| — |
| 19,747 |
| — |
| — |
| — |
| 19,747 |
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Change in 401KSOP and ESOP related shares | 540 |
| 10,854 |
| — |
| (7,945 | ) | — |
| — |
| — |
| 3,449 |
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Shares sold to employees | — |
| 1,608 |
| — |
| — |
| — |
| 3,088 |
| — |
| 4,696 |
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Options exercised | — |
| (995 | ) | — |
| — |
| — |
| 2,208 |
| — |
| 1,213 |
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Subscription shares | — |
| (493 | ) | (460 | ) | — |
| — |
| 2,757 |
| 140 |
| 1,944 |
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Stock-based compensation | — |
| (254 | ) | — |
| — |
| — |
| — |
| — |
| (254 | ) |
Dividends, $.025 per shares | — |
| — |
| — |
| (580 | ) | — |
| — |
| — |
| (580 | ) |
Currency translation adjustments | — |
| — |
| — |
| — |
| 698 |
| — |
| — |
| 698 |
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Defined benefit pension plans | — |
| — |
| — |
| — |
| (1,486 | ) | — |
| — |
| (1,486 | ) |
Shares purchased | — |
| — |
| — |
| — |
| — |
| (16,699 | ) | — |
| (16,699 | ) |
Balances at June 29, 2019 | $ | 37,617 |
| $ | 91,921 |
| $ | 5,948 |
| $ | 167,611 |
| $ | (5,269 | ) | $ | (245,116 | ) | $ | (431 | ) | $ | 52,281 |
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Balances at January 1, 2019 | $ | 37,272 |
| $ | 82,623 |
| $ | 6,799 |
| $ | 157,472 |
| $ | (5,034 | ) | $ | (235,042 | ) | $ | (729 | ) | $ | 43,361 |
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Net income | — |
| — |
| — |
| 19,254 |
| — |
| — |
| — |
| 19,254 |
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Change in 401KSOP and ESOP related shares | 345 |
| 6,947 |
| — |
| (7,945 | ) | — |
| — |
| — |
| (653 | ) |
Shares sold to employees | — |
| 3,561 |
| — |
| — |
| — |
| 5,544 |
| — |
| 9,105 |
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Options exercised | — |
| (1,009 | ) | — |
| — |
| — |
| 2,289 |
| — |
| 1,280 |
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Subscription shares | — |
| (568 | ) | (851 | ) | — |
| — |
| 3,222 |
| 298 |
| 2,101 |
|
Stock-based compensation | — |
| 367 |
| — |
| — |
| — |
| — |
| — |
| 367 |
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Dividends, $.05 per shares | — |
| — |
| — |
| (1,170 | ) | — |
| — |
| — |
| (1,170 | ) |
Currency translation adjustments | — |
| — |
| — |
| — |
| 1,207 |
| — |
| — |
| 1,207 |
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Defined benefit pension plans | — |
| — |
| — |
| — |
| (1,442 | ) | — |
| — |
| (1,442 | ) |
Shares purchased | — |
| — |
| — |
| — |
| — |
| (21,129 | ) | — |
| (21,129 | ) |
Balances at June 29, 2019 | $ | 37,617 |
| $ | 91,921 |
| $ | 5,948 |
| $ | 167,611 |
| $ | (5,269 | ) | $ | (245,116 | ) | $ | (431 | ) | $ | 52,281 |
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See notes to condensed consolidated financial statements. | |
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THE DAVEY TREE EXPERT COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
(In thousands, except per share data)
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| Common Shares | Additional Paid-in Capital | Common Shares Subscribed, Unissued | Retained Earnings | Accumulated Other Comprehensive Income (Loss), Net of Tax | Common Shares Held in Treasury | Common Shares Subscription Receivable | Total Common Shareholders' Equity |
Balances at March 31, 2018 | $ | 36,269 |
| $ | 58,132 |
| $ | 7,457 |
| $ | 136,229 |
| $ | (9,079 | ) | $ | (201,489 | ) | $ | (1,629 | ) | $ | 25,890 |
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Net income | — |
| — |
| — |
| 21,714 |
| — |
| — |
| — |
| 21,714 |
|
Change in 401KSOP and ESOP related shares | 476 |
| 8,624 |
| — |
| (3,701 | ) | — |
| — |
| — |
| 5,399 |
|
Shares sold to employees | — |
| 2,684 |
| — |
| — |
| — |
| 4,216 |
| — |
| 6,900 |
|
Options exercised | — |
| 244 |
| — |
| — |
| — |
| 1,093 |
| — |
| 1,337 |
|
Subscription shares | — |
| (40 | ) | (326 | ) | — |
| — |
| 404 |
| 182 |
| 220 |
|
Stock-based compensation | — |
| 166 |
| — |
| — |
| — |
| — |
| — |
| 166 |
|
Dividends, $.025 per shares | — |
| — |
| — |
| (595 | ) | — |
| — |
| — |
| (595 | ) |
Currency translation adjustments | — |
| — |
| — |
| — |
| (747 | ) | — |
| — |
| (747 | ) |
Defined benefit pension plans | — |
| — |
| — |
| — |
| 147 |
| — |
| — |
| 147 |
|
Shares purchased | — |
| — |
| — |
| — |
| — |
| (20,289 | ) | — |
| (20,289 | ) |
Balances at June 30, 2018 | $ | 36,745 |
| $ | 69,810 |
| $ | 7,131 |
| $ | 153,647 |
| $ | (9,679 | ) | $ | (216,065 | ) | $ | (1,447 | ) | $ | 40,142 |
|
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Balances at January 1, 2018 | $ | 36,447 |
| $ | 58,554 |
| $ | 7,529 |
| $ | 143,835 |
| $ | (8,393 | ) | $ | (198,327 | ) | $ | (1,775 | ) | $ | 37,870 |
|
Net income | — |
| — |
| — |
| 15,087 |
| — |
| — |
| — |
| 15,087 |
|
Change in 401KSOP and ESOP related shares | 298 |
| 5,398 |
| — |
| (3,701 | ) | — |
| — |
| — |
| 1,995 |
|
Shares sold to employees | — |
| 4,444 |
| — |
| — |
| — |
| 6,522 |
| — |
| 10,966 |
|
Options exercised | — |
| 264 |
| — |
| — |
| — |
| 1,202 |
| — |
| 1,466 |
|
Subscription shares | — |
| 20 |
| (398 | ) | — |
| — |
| 538 |
| 328 |
| 488 |
|
Stock-based compensation | — |
| 1,130 |
| — |
| — |
| — |
| — |
| — |
| 1,130 |
|
Dividends, $.05 per shares | — |
| — |
| — |
| (1,219 | ) | — |
| — |
| — |
| (1,219 | ) |
Adoption of ASU 2014-09 | — |
| — |
| — |
| (355 | ) | — |
| — |
| — |
| (355 | ) |
Currency translation adjustments | — |
| — |
| — |
| — |
| (1,579 | ) | — |
| — |
| (1,579 | ) |
Defined benefit pension plans | — |
| — |
| — |
| — |
| 293 |
| — |
| — |
| 293 |
|
Shares purchased | — |
| — |
| — |
| — |
| — |
| (26,000 | ) | — |
| (26,000 | ) |
Balances at June 30, 2018 | $ | 36,745 |
| $ | 69,810 |
| $ | 7,131 |
| $ | 153,647 |
| $ | (9,679 | ) | $ | (216,065 | ) | $ | (1,447 | ) | $ | 40,142 |
|
| | | | | | | | |
See notes to condensed consolidated financial statements. | |
| |
| | | |
|
THE DAVEY TREE EXPERT COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
| | | | Six Months Ended | | Six Months Ended |
| | June 30, 2018 | | July 1, 2017 | | June 29, 2019 | | June 30, 2018 |
Operating activities | | | | | | | | |
Net income | | $ | 15,087 |
| | $ | 10,336 |
| | $ | 19,254 |
| | $ | 15,087 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
Depreciation and amortization | | 27,059 |
| | 25,190 |
| | 28,802 |
| | 27,059 |
|
Other | | (129 | ) | | (909 | ) | | 270 |
| | (129 | ) |
Changes in operating assets and liabilities: | | | | | |
Changes in operating assets and liabilities, net of assets acquired: | | | | | |
Accounts receivable | | (9,598 | ) | | (9,662 | ) | | (15,960 | ) | | (9,598 | ) |
Operating liabilities | | (8,907 | ) | | 1,123 |
| |
Accounts payable and accrued expenses | | | (609 | ) | | (10,321 | ) |
Self-insurance reserve | | | 1,690 |
| | 1,414 |
|
Prepaid expenses | | | 9,178 |
| | 3,955 |
|
Other, net | | (850 | ) | | 1,589 |
| | 1,661 |
| | (4,805 | ) |
| | 7,575 |
| | 17,331 |
| | 25,032 |
| | 7,575 |
|
Net cash provided by operating activities | | 22,662 |
| | 27,667 |
| | 44,286 |
| | 22,662 |
|
| | | | | |
Investing activities | | |
| | |
| | |
| | |
|
Capital expenditures: | | |
| | |
| | |
| | |
|
Equipment | | (40,228 | ) | | (37,858 | ) | | (37,192 | ) | | (40,228 | ) |
Land and building | | (238 | ) | | (2,992 | ) | | (229 | ) | | (238 | ) |
Purchases of businesses, net of cash acquired | | (2,544 | ) | | (7,452 | ) | | (3,030 | ) | | (2,544 | ) |
Other | | 4,396 |
| | 2,667 |
| |
Proceeds from sales of fixed assets | | | 1,634 |
| | 4,396 |
|
Net cash used in investing activities | | (38,614 | ) | | (45,635 | ) | | (38,817 | ) | | (38,614 | ) |
| | | | | |
Financing activities | | |
| | |
| | |
| | |
|
Revolving credit facility proceeds, net | | 39,000 |
| | 35,500 |
| |
Revolving credit facility borrowings | | | 264,500 |
| | 244,000 |
|
Revolving credit facility payments | | | (278,500 | ) | | (205,000 | ) |
Purchase of common shares for treasury | | (26,356 | ) | | (17,002 | ) | | (21,129 | ) | | (26,356 | ) |
Sale of common shares from treasury | | 12,920 |
| | 10,136 |
| | 12,486 |
| | 12,920 |
|
Dividends | | (1,218 | ) | | (1,268 | ) | |
Dividends paid | | | (1,170 | ) | | (1,218 | ) |
Proceeds from notes payable | | | 51,073 |
| | 12,888 |
|
Payments of notes payable | | (9,032 | ) | | (8,721 | ) | | (38,587 | ) | | (21,343 | ) |
Net cash provided by financing activities | | 15,314 |
| | 18,645 |
| |
| | | | | |
(Decrease)/increase in cash | | (638 | ) | | 677 |
| |
Payments of finance leases | | | (860 | ) | | (577 | ) |
Net cash (used in) provided by financing activities | | | (12,187 | ) | | 15,314 |
|
Effect of exchange rate changes on cash | | | 114 |
| | — |
|
Decrease in cash | | | (6,604 | ) | | (638 | ) |
Cash, beginning of period | | 13,121 |
| | 9,006 |
| | 22,661 |
| | 13,121 |
|
Cash, end of period | | $ | 12,483 |
| | $ | 9,683 |
| | $ | 16,057 |
| | $ | 12,483 |
|
| | | | | |
Supplemental cash flow information follows: | | |
| | |
| | |
| | |
|
Interest paid | | $ | 3,118 |
| | $ | 2,480 |
| | $ | 4,523 |
| | $ | 3,118 |
|
Income taxes paid | | 5,126 |
| | 3,179 |
| | 827 |
| | 5,126 |
|
| | | | | | | | |
See notes to condensed consolidated financial statements. | | |
| | |
| | |
| | |
|
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 201829, 2019
(Amounts in thousands, except share data)
| |
A. | Basis of Financial Statement Preparation |
The condensed consolidated financial statements present the financial position, results of operations and cash flows of The Davey Tree Expert Company and its subsidiaries. When we refer to “we,” “us,” “our,” “Davey,” or “Davey Tree”, we mean The Davey Tree Expert Company and its subsidiaries, unless otherwise expressly stated or the context indicates otherwise.
We have prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), as codified in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), and with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. The consolidated financial statements include all adjustments which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. All such adjustments are of a normal, recurring nature. All significant intercompany accounts and transactions have been eliminated.
Certain information and disclosures required by U.S. GAAP for complete financial statements have been omitted in accordance with the rules and regulations of the SEC. We suggest that these condensed consolidated financial statements be read in conjunction with the financial statements included in our annual report on Form 10-K for the year ended December 31, 20172018 (the “2017“2018 Annual Report”).
Use of Estimates in Financial Statement Preparation--The preparation of financial statements in accordance with U.S. GAAP requires the use of estimates and assumptions that affect reported amounts. Our consolidated financial statements include amounts that are based on management’s best estimates and judgments. Estimates are used for, but not limited to, accounts receivable valuation, depreciable lives of fixed assets, self-insurance accruals,reserves, income taxes and revenue recognition. Actual results could differ from those estimates.
Interim ResultsThe Company’s fiscal quarters each contain thirteen operating weeks, with the exception of Operations--Interim results may not be indicativethe fourth quarter of calendara 53-week fiscal year, performance becausewhich contains fourteen operating weeks. The Company’s fiscal quarter that ended June 29, 2019 is referred to as the second quarter of seasonal2019, and short-term variations.the fiscal quarter ended June 30, 2018 is referred to as the second quarter of 2018.
Recent Accounting Guidance
Accounting Standards Adopted in 2018
Accounting Standards Update 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business--In January 2017, the FASB issued Accounting Standard Update ("ASU") 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business," which provides guidance to evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. If substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single asset or a group of similar assets, the assets acquired (or disposed of) are not considered a business. The Company adopted the guidance effective January 1, 2018 and application has been applied prospectively for annual and interim periods beginning after December 15, 2017. The adoption of this guidance did not have a material impact on our consolidated financial statements.
Accounting Standards Update 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force)--In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which provides guidance on how cash receipts and cash payments related to eight specific cash flow issues are presented and classified in the statement of cash flows, with the objective of reducing the existing diversity in practice. The Company adopted ASU 2016-15 on January 1, 2018. The adoption of ASU 2016-15 did not have a material impact on our consolidated financial statements.
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2018
(Amounts in thousands, except share data)
| |
A. | Basis of Financial Statement Preparation (continued) |
Accounting Standards Update 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost--In March 2017, the FASB issued ASU 2017-07, “Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” which changes the presentation of net periodic benefit cost related to employer sponsored defined benefit plans and other postretirement benefits. Under ASU 2017-07, service costs will be included within the same income statement line item as other compensation costs arising from services rendered by pertinent employees during the period. The other components of net periodic benefit pension cost will be presented separately outside of income from operations. Additionally, only the service cost component of the net periodic benefit cost may be capitalized in assets. The amendments under ASU 2017-07 also provide a practical expedient that permits the use of amounts disclosed in the pension and other postretirement benefit plan footnote for prior year comparative periods as the estimation basis for applying the guidance retrospectively. The Company adopted ASU 2017-07 on January 1, 2018 and chose to use the practical expedient provided when applying the guidance retrospectively. Upon adoption, service costs are recognized in our financial statements as general and administrative expenses while the remaining components of net periodic benefit cost are recognized as other income (expense). Pension expense of $347 for the second quarter 2017 and $694 for the first six months of 2017 have been reclassified from general and administrative expense to other income (expense).
Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606)--In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which replaces all current U.S. GAAP guidance on revenue recognition and eliminates all industry-specific guidance.
The Company adopted ASU 2014-09 and applied it to all contracts that were not completed using the modified retrospective method for those contracts that were not completed as of adoption. The cumulative effect of applying the guidance in ASU 2014-09 to contracts that were not yet completed as of January 1, 2018 was not material. Further, the adoption of ASU 2014-09 did not have a significant impact on the amount or timing of revenue recognition. Therefore, we have not disclosed the amount by which each financial statement line item is affected in the current period as a result of applying ASU 2014-09 or an explanation of significant changes between our results as reported and those that would have been reported under legacy U.S. GAAP, as no significant changes were identified.
Accounting Standards Not Yet Adopted2019
Accounting Standards Update 2016-02, Leases (Topic 842)--In February 2016, the FASB issued ASUAccounting Standards Update ("ASU") 2016-02, “Leases (Topic 842).” ASU 2016-02, establishes a comprehensive new lease accounting model. The new standard: (a) clarifies the definition of a lease; (b)along with several subsequent updates, requires a dual approach to lease classification similar to current lease classifications; and (c) causes lessees to recognize assets and liabilities created by leases on thetheir balance sheet as a lease liabilityalong with a corresponding right-of-use asset for leases with a lease-term of more than twelve months. The new standard is effective for interim and annual periods beginning after December 15, 2018, which for Davey Tree would be January 1, 2019. Early adoption is permitted. The new standard requires a modified retrospective transition for capital or operating leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements, but it does not require transition accounting for leases that expire prior to the date of initial application.additional disclosure information. The Company plans to adopt ASU 2016-02adopted the standard on January 1, 2019. Management has assembled a project team and is in the process of gathering information to evaluate real estate, personal property and other arrangements that may meet the definition of a lease and has purchased a technology solution to assist with the management of leases. Management expects to adopt the standard2019 using the Comparative Under ASC 840 approach, which permitted the Company to not recast historical periods for the adoption, and has evaluated the accounting elections andutilized practical expedients available under the standard.
as available. The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2018
(Amounts in thousands, except share data)
| |
A. | Basis of Financial Statement Preparation (continued) |
Management expects that the adoption of ASU 2016-02 will have a materialthe new standard resulted in the recording, as of January 1, 2019, of operating right-of-use assets and lease liabilities of $37,429. The adoption of the new standard did not impact our consolidated results of operations and had no impact on the Company's consolidated financial statements.our cash flows.
Accounting Standards Update 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220)--In February 2018, the FASB issued ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220)." ASU 2018-02 provides an option to reclassify the stranded tax effects within accumulated other comprehensive income to retained earnings as a result of the Tax Cuts and Jobs Act of 2017 (the "Tax Reform Act"). This standard is2017. The Company adopted ASU 2018-02 effective January 1, 2019 and did not elect to reclassify the income tax effects of the Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings.
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 29, 2019
(Amounts in thousands, except share data)
| |
A. | Basis of Financial Statement Preparation (continued) |
SEC Release No. 33-10532, Disclosure Update and Simplification--In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of shareholders' equity for interim and annual reporting periods beginning after December 15, 2018, which for Davey Tree wouldfinancial statements. Under the amendments, an analysis of changes in each caption of shareholders' equity presented in the balance sheet must be January 1, 2019. Early adoption is permitted. Management has not yet completed its assessmentprovided in a note or separate statement. The analysis should present a reconciliation of the impactbeginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. We have incorporated the new standard on the Company's consolidated financial statements.changes required by SEC Release No. 33-10532 in this report.
| |
B. | Seasonality of Business |
Due to the seasonality of our business, our operating results for the three and six months endedJune 30, 201829, 2019 are not indicative of results that may be expected for any other interim period or for the year ending December 31, 2018. Business2019. Our business seasonality traditionally results in higher revenues during the second and third quarters as compared with the first and fourth quarters of the year, while the methods of accounting for fixed costs, such as depreciation expense, amortization, rent and interest expense, are not significantly impacted by business seasonality.
| |
C. | Accounts Receivable, Net and Supplemental Balance-Sheet Information |
Accounts receivable, net, consisted of the following:
| | Accounts receivable, net | June 30, 2018 | | December 31, 2017 | June 29, 2019 | | December 31, 2018 |
Accounts receivable | $ | 135,920 |
| | $ | 143,244 |
| $ | 165,105 |
| | $ | 158,556 |
|
Receivables under contractual arrangements(1) | 46,613 |
| | 29,895 |
| 50,164 |
| | 40,671 |
|
| 182,533 |
| | 173,139 |
| 215,269 |
| | 199,227 |
|
Less allowances for doubtful accounts | 4,264 |
| | 4,468 |
| 2,848 |
| | 3,321 |
|
Accounts receivable, net | $ | 178,269 |
| | $ | 168,671 |
| $ | 212,421 |
| | $ | 195,906 |
|
Receivables under contractual arrangements consist of work-in-process in accordance with the terms of contracts, primarily with utility services customers. | |
(1) | Receivables under contractual arrangements consist of work-in-process in accordance with the terms of contracts, primarily with utility services customers. |
The following items comprise the amounts included in the balance sheets:
| | Other current assets | June 30, 2018 | | December 31, 2017 | June 29, 2019 | | December 31, 2018 |
Refundable income taxes | $ | — |
| | $ | 587 |
| $ | — |
| | $ | 1,625 |
|
Prepaid expense | 11,938 |
| | 15,893 |
| 10,428 |
| | 19,529 |
|
Other | 388 |
| | 784 |
| 1,098 |
| | 932 |
|
Total | $ | 12,326 |
| | $ | 17,264 |
| $ | 11,526 |
| | $ | 22,086 |
|
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 201829, 2019
(Amounts in thousands, except share data)
| |
C. | Accounts Receivable, Net and Supplemental Balance-Sheet Information (continued) |
|
| | | | | | | |
Accrued expenses | June 30, 2018 | | December 31, 2017 |
Employee compensation | $ | 17,267 |
| | $ | 20,794 |
|
Accrued compensated absences | 9,959 |
| | 9,267 |
|
Self-insured medical claims | 4,666 |
| | 3,193 |
|
Income tax payable | 2,610 |
| | 3,443 |
|
Customer advances, deposits | 498 |
| | 1,672 |
|
Taxes, other than income | 3,099 |
| | 2,279 |
|
Other | 2,413 |
| | 2,168 |
|
Total | $ | 40,512 |
| | $ | 42,816 |
|
|
| | | | | | | |
Other assets, noncurrent | June 29, 2019 | | December 31, 2018 |
Assets invested for self-insurance | $ | 12,552 |
| | $ | 15,379 |
|
Investment--cost-method affiliate | 1,218 |
| | 1,218 |
|
Deferred income taxes | 411 |
| | 573 |
|
Other | 5,835 |
| | 4,599 |
|
Total | $ | 20,016 |
| | $ | 21,769 |
|
|
| | | | | | | |
Other current liabilities | June 30, 2018 | | December 31, 2017 |
Note payable | $ | — |
| | $ | 149 |
|
Current portion of: | | | |
Long-term debt | 9,944 |
| | 16,817 |
|
Self-insurance accruals | 24,015 |
| | 23,782 |
|
Total | $ | 33,959 |
| | $ | 40,748 |
|
|
| | | | | | | |
Accrued expenses | June 29, 2019 | | December 31, 2018 |
Employee compensation | $ | 18,966 |
| | $ | 24,086 |
|
Accrued compensated absences | 10,316 |
| | 9,711 |
|
Self-insured medical claims | 4,845 |
| | 3,343 |
|
Income tax payable | 3,881 |
| | 31 |
|
Customer advances, deposits | 1,258 |
| | 1,322 |
|
Taxes, other than income | 4,830 |
| | 2,546 |
|
Other | 3,221 |
| | 3,022 |
|
Total | $ | 47,317 |
| | $ | 44,061 |
|
|
| | | | | | | |
Other current liabilities | June 29, 2019 | | December 31, 2018 |
Notes payable | $ | 1,609 |
| | $ | — |
|
Current portion of: | | | |
Lease liability-operating leases | 13,341 |
| | — |
|
Self-insurance reserves | 27,237 |
| | 27,434 |
|
Total | $ | 42,187 |
| | $ | 27,434 |
|
|
| | | | | | | |
Other noncurrent liabilities | June 29, 2019 | | December 31, 2018 |
Pension and retirement plans | $ | 5,991 |
| | $ | 6,138 |
|
Other | 4,387 |
| | 3,987 |
|
Total | $ | 10,378 |
| | $ | 10,125 |
|
Our investmentinvestments in businesses during the first six months of 2018 was $3,534,2019 were $4,480, including liabilities assumed of $314 and debt issued, in the form of notes payable to the sellers, of $990,$1,133, and have been included in our residentialResidential and commercialCommercial segment. Measurement-period adjustments are not complete. The measurement period for purchase price allocations ends as soon as information of the facts and circumstances becomes available, but does not exceed
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 29, 2019
(Amounts in thousands, except share data)
| |
D. | Business Combinations (continued) |
one year from the acquisition date. During the six months ended July 1, 2017,June 30, 2018, our investment in businesses was $10,877,$3,534, including $3,099debt issued, in the form of debt issued.notes payable to the sellers, of $990.
The following table summarizes the preliminary purchase price allocation of the estimated fair values of the assets acquired and liabilities assumed:
| | | Six Months Ended | | | | | |
| June 30, 2018 | June 29, 2019 | | December 31, 2018 |
Detail of acquisitions: | |
| | | |
Assets acquired: | |
| |
| | |
|
Cash | | $ | 3 |
| | $ | — |
|
Receivables | | 41 |
| | 1,311 |
|
Operating supplies | $ | 22 |
| 79 |
| | 23 |
|
Prepaid expense | | 13 |
| | 89 |
|
Equipment | 1,869 |
| 830 |
| | 4,079 |
|
Deposits and other | 65 |
| — |
| | 7 |
|
Intangibles | 1,194 |
| 2,135 |
| | 4,895 |
|
Goodwill | 1,013 |
| 1,379 |
| | 2,840 |
|
Liabilities assumed | (629 | ) | (314 | ) | | (2,381 | ) |
Debt issued for purchases of businesses | (990 | ) | (1,133 | ) | | (2,402 | ) |
Cash paid | $ | 2,544 |
| $ | 3,033 |
| | $ | 8,461 |
|
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2018
(Amounts in thousands, except share data)
D. Business Combinations (continued)
The results of operations of acquired businesses have been included in the consolidated statements of operations beginning as of the effective dates of acquisition. The effect of these acquisitions on our consolidated revenues and results of operations for the period endingended June 30, 201829, 2019 was not significant. Pro forma net sales and results of operations for the acquisitionacquisitions, had itthey occurred at the beginning of the six months endedJune 30, 201829, 2019, are not material and, accordingly, are not provided.
Investments in Businesses The acquired intangible assets consist of tradenames, non-competition agreements and customer relationships. The tradenames and customer relationships were assigned an average six-year useful life and the non-competition agreements were assigned an average five-year useful life.
Subsequent to June 30, 2018--Subsequent to June 30, 201829, 2019 and through August 3, 2018,6, 2019, we made investments inacquired two businesses approximating $6,372.$932 with no liabilities assumed and debt issued of $157. The acquired companies are in our Residential and Commercial segment and are located in the British Columbia and Ontario, Canada markets. We do not expect the effect of these acquisitions on our consolidated revenues and results of operations, either individually or in the aggregate, to be significant.
The Davey Tree Expert Company Notes to Condensed Consolidated Financial Statements (Unaudited)
June 29, 2019
(Amounts in thousands, except share data)
| |
E. | Identified Intangible Assets and Goodwill, Net |
The carrying amounts of the identified intangible assets and goodwill acquired in connection with our historical investments in businesses were as follows:
| | | June 30, 2018 | | December 31, 2017 | June 29, 2019 | | December 31, 2018 |
Identified Intangible Assets and Goodwill, Net | Carrying Amount | | Accumulated Amortization | | Carrying Amount | | Accumulated Amortization | |
| | Carrying Amount | | Accumulated Amortization | | Carrying Amount | | Accumulated Amortization |
Amortized intangible assets: | | | | | | | | | | | | | | |
Customer lists/relationships | $ | 22,732 |
| | $ | 17,472 |
| | $ | 21,487 |
| | $ | 16,846 |
| $ | 26,892 |
| | $ | 19,073 |
| | $ | 25,179 |
| | $ | 18,251 |
|
Employment-related | 7,431 |
| | 6,759 |
| | 7,333 |
| | 6,624 |
| 8,184 |
| | 7,144 |
| | 8,133 |
| | 6,954 |
|
Tradenames | 6,310 |
| | 5,261 |
| | 5,978 |
| | 5,134 |
| 7,118 |
| | 5,608 |
| | 6,858 |
| | 5,435 |
|
| | | | | | | | | | | | | | |
Amortized intangible assets | 36,473 |
| | $ | 29,492 |
| | 34,798 |
| | $ | 28,604 |
| 42,194 |
| | $ | 31,825 |
| | 40,170 |
| | $ | 30,640 |
|
| | | | | | | | | | | | | | |
Less accumulated amortization | 29,492 |
| | |
| | 28,604 |
| | |
| 31,825 |
| | |
| | 30,640 |
| | |
|
| | | | | | | | | | | | | | |
Identified intangibles, net | 6,981 |
| | |
| | 6,194 |
| | |
| |
Identified intangible assets, net | | 10,369 |
| | |
| | 9,530 |
| | |
|
| | | | | | | | | | | | | | |
Unamortized intangible assets: | |
| | |
| | |
| | |
| |
Goodwill | 36,163 |
| | |
| | 35,477 |
| | |
| 39,488 |
| | |
| | 37,971 |
| | |
|
| $ | 43,144 |
| | |
| | $ | 41,671 |
| | |
| $ | 49,857 |
| | |
| | $ | 47,501 |
| | |
|
The changes in the carrying amounts of goodwill, by segment, for the six months ended June 29, 2019 and June 30, 2018 follow:
|
| | | | | | | | | | | | | | | |
| Balance at January 1, 2018 | | Acquisitions | | Translation and Other Adjustments | | Balance at June 30, 2018 |
Utility | $ | 3,424 |
| | $ | — |
| | $ | — |
| | $ | 3,424 |
|
Residential and Commercial | 32,053 |
| | 1,013 |
| | (327 | ) | | 32,739 |
|
Total | $ | 35,477 |
| | $ | 1,013 |
| | $ | (327 | ) | | $ | 36,163 |
|
In the first quarter of 2018, the Company finalized all purchase accounting adjustments related to the Arborguard Tree Specialists, Inc. acquisition. The Company has recorded fair value adjustments based on new information obtained during the measurement period primarily related to customer lists, and deferred taxes. These adjustments |
| | | | | | | | | | | | | | | |
| Balance at January 1, 2019 | | Acquisitions | | Translation and Other Adjustments | | Balance at June 29, 2019 |
Utility | $ | 4,911 |
| | $ | — |
| | $ | — |
| | $ | 4,911 |
|
Residential and Commercial | 33,060 |
| | 1,379 |
| | 138 |
| | 34,577 |
|
Total | $ | 37,971 |
| | $ | 1,379 |
| | $ | 138 |
| | $ | 39,488 |
|
| | | | | | | |
| | | | | | | |
| Balance at January 1, 2018 | | Acquisitions | | Translation and Other Adjustments | | Balance at June 30, 2018 |
Utility | $ | 3,424 |
| | $ | — |
| | $ | — |
| | $ | 3,424 |
|
Residential and Commercial | 32,053 |
| | 1,013 |
| | (327 | ) | | 32,739 |
|
Total | $ | 35,477 |
| | $ | 1,013 |
| | $ | (327 | ) | | $ | 36,163 |
|
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 201829, 2019
(Amounts in thousands, except share data)
| |
E. | Identified Intangible Assets and Goodwill, Net (continued) |
resulted in a decrease in goodwill of $298 from the Company's initial estimate. Additionally, the change to the provisional amount resulted in an increase inEstimated future aggregate amortization expense of $52 and accumulatedintangible assets--The estimated future aggregate amortization expense of $70,intangible assets, as of which $52 relates to the previous year.June 29, 2019 is as follows:
|
| | | | |
| | Estimated Future Amortization Expense |
Year ending December 31, 2019 | | $ | 1,254 |
|
2020 | | 2,327 |
|
2021 | | 1,885 |
|
2022 | | 1,655 |
|
2023 | | 1,500 |
|
Thereafter | | 1,748 |
|
| | $ | 10,369 |
|
| |
F. | Long-Term Debt and Commitments Related to Letters of Credit |
Our long-term debt consisted of the following:
| | | June 30, 2018 | | December 31, 2017 | June 29, 2019 | | December 31, 2018 |
Revolving credit facility | | | | |
Revolving credit facility: | | | | |
Swing-line borrowings | $ | 1,000 |
| | $ | — |
| $ | 1,500 |
| | $ | 2,500 |
|
LIBOR borrowings | 138,000 |
| | 100,000 |
| 78,000 |
| | 91,000 |
|
| 139,000 |
| | 100,000 |
| 79,500 |
| | 93,500 |
|
Senior unsecured notes | 18,000 |
| | 18,000 |
| |
Senior unsecured notes: | | | | |
5.09% Senior unsecured notes | | 12,000 |
| | 12,000 |
|
3.99% Senior unsecured notes | | 50,000 |
| | 50,000 |
|
4.00% Senior unsecured notes | | 25,000 |
| | — |
|
| | 87,000 |
| | 62,000 |
|
Term loans | 8,937 |
| | 16,242 |
| 10,194 |
| | 23,176 |
|
Capital leases | 2,551 |
| | 2,510 |
| |
| 168,488 |
| | 136,752 |
| 176,694 |
| | 178,676 |
|
Less debt issuance costs | 637 |
| | 725 |
| 513 |
| | 599 |
|
Less current portion | 9,944 |
| | 16,817 |
| 9,807 |
| | 22,514 |
|
| $ | 157,907 |
| | $ | 119,210 |
| $ | 166,374 |
| | $ | 155,563 |
|
Revolving Credit Facility --As of June 30, 2018,29, 2019, we had a $250,000$250,000 revolving credit facility with a group of banks, which expires in October 2022 and permits borrowings, as defined, up to $250,000,$250,000, including a letter of credit sublimit of $100,000$100,000 and a swing-line commitment of $25,000. Under certain circumstances, the amount available under the revolving credit facility may be increased to $325,000.$325,000. The revolving credit facility contains certain affirmative and negative covenants customary for this type of facility and includes financial covenant ratios with respect to a maximum leverage ratio (not to exceed 3.00 to 1.00 with exceptions in case of material acquisitions) and a minimum interest coverage ratio (not less than 3.00 to 1.00), in each case subject to certain further restrictions as described in the Credit Agreement.credit agreement. As of June 30, 2018,29, 2019, we had unused commitments under the facility approximating $108,087,167,712, with $141,913$82,288 committed, consisting of borrowings of $139,00079,500 and issued letters of credit of $2,913.2,788.
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 29, 2019
(Amounts in thousands, except share data)
| |
F. | Long-Term Debt and Commitments Related to Letters of Credit (continued) |
Borrowings outstanding bear interest, at Davey Tree’s option, of either (a) a base rate or (b) LIBOR plus a margin adjustment ranging from .875% to 1.50%--with the margin adjustments in both instances based on the Company's leverage ratio at the time of borrowing. The base rate is the greater of (i) the agent bank’s prime rate, (ii) LIBOR plus 1.50%, or (iii) the federal funds rate plus .50%. A commitment fee ranging from .10% to .225% is also required based on the average daily unborrowed commitment.
5.09% Senior Unsecured Notes--The senior unsecured notes are due July 22, 2020 and were issued during--During July 2010, as 5.09%we issued 5.09% Senior Unsecured Notes, Series A (the "5.09%"5.09% Senior Notes"), in the aggregate principal amount of $30,000 pursuant to a Master Note Purchase Agreement (the “Purchase Agreement”) between the Company and the purchasers of the 5.09%5.09% Senior Notes. The 5.09% Senior Notes are due July 22, 2020.
The 5.09%5.09% Senior Notes are equal in right of payment with our revolving credit facility and all other senior unsecured obligations of the Company. Interest is payable semiannually and five equal, annual principal payments commenced on July 22, 2016 (the sixth anniversary of issuance). The Purchase Agreement contains customary events of default and covenants related to limitations on indebtedness and transactions with affiliates and the maintenance of certain financial ratios.
3.99% Senior Unsecured Notes--On September 21, 2018, we issued 3.99% Senior Notes, Series A (the "3.99% Senior Notes"), in the aggregate principal amount of $50,000. The 3.99% Senior Notes are due September 21, 2028.
The 3.99% Senior Notes were issued pursuant to a Note Purchase and Private Shelf Agreement (the “Note Purchase and Shelf Agreement”) between the Company, PGIM, Inc. and the purchasers of the 3.99% Senior Notes. Subsequent series of promissory notes may be issued pursuant to the Note Purchase and Shelf Agreement (the "Shelf Notes") in an aggregate additional principal amount not to exceed $50,000 ($25,000 of which was issued on February 5, 2019).
The 3.99% Senior Notes are equal in right of payment with our revolving credit facility and all other senior unsecured obligations of the Company. Interest is payable semiannually and five equal, annual principal payments commence on September 21, 2024 (thesixth anniversary of issuance). The Note Purchase and Shelf Agreement contains customary events of default and covenants related to limitations on indebtedness and transactions with affiliates and the maintenance of certain financial ratios. The Company may prepay at any time all, or from time to time any part of, the outstanding principal amount of the 3.99% Senior Notes, subject to the payment of a make-whole amount.
In conjunction with the issuance of the 3.99% Senior Notes, on September 21, 2018, the Company entered into an amendment to its revolving credit facility. The amendment amended certain provisions and covenants in the credit agreement to generally conform them to the corresponding provisions and covenants in the Note Purchase and Shelf Agreement. The amendment also permitted the Company to incur indebtedness arising under the Note Purchase and Shelf Agreement in an aggregate principal amount not to exceed $75,000, which included the $50,000 of 3.99% Senior Notes, plus an additional $25,000 in Shelf Notes (which were issued on February 5, 2019).
4.00% Senior Unsecured Notes--On February 5, 2019, we issued 4.00% Senior Notes, Series B (the "4.00% Senior Notes") pursuant to the Note Purchase and Shelf Agreement in the aggregate principal amount of $25,000. The notes are due September 21, 2028. Subsequent series of Shelf Notes may be issued pursuant to the Note Purchase and Shelf Agreement in an aggregate additional principal amount not to exceed $25,000. A further amendment to the revolving credit facility would be required for such a transaction to be permissible under the revolving credit facility. The 4.00% Senior Notes are equal in right of payment with our revolving credit facility and all other senior unsecured obligations of the Company. Interest is payable semiannually and five equal, annual principal payments commence on September 21, 2024.
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 201829, 2019
(Amounts in thousands, except share data)
| |
F. | Long-Term Debt and Commitments Related to Letters of Credit (continued) |
eventsThe net proceeds of defaultall senior notes were used to pay down borrowings under our revolving credit facility.
Term loans--Periodically, the Company will enter into term loans for the procurement of insurance or to finance acquisitions.
Aggregate Maturities of Long-Term Debt--Aggregate maturities of long-term debt based on the principal amounts outstanding atJune 29, 2019 were as follows: 2019--$8,414; 2020--$7,990; 2021--$5,523; 2022--$79,755; 2023--$12; and covenants related to limitations on indebtedness and transactions with affiliates and the maintenance of certain financial ratios.thereafter $75,000.
Accounts Receivable Securitization Facility--In May 2018,2019, the Company amended its Accounts Receivable Securitization Facility (the "AR Securitization program") to extend the scheduled termination date for an additional one-year period, to May 6, 2019. In addition, for purposes of determining events of default, the Days' Sales Outstanding calculation was amended to include the most recent six fiscal months. The prior calculation was based on the most recent three fiscal months.19, 2020.
The AR Securitization program has a limit of $100,000, of which $58,150$67,438 was issued for letters of credit ("LCs") as of June 30, 2018.29, 2019.
Under the AR Securitization program, Davey Tree transfers by selling or contributing current and future trade receivables to a wholly-owned, bankruptcy-remote financing subsidiary which pledges a perfected first priority security interest in the trade receivables--equal to the issued letters of credit ("LCs")LCs as of June 30, 2018--to29, 2019--to the bank in exchange for the bank issuing LCs.
Receivables from PG&E Corporation and its regulated utility subsidiary, Pacific Gas and Electric Company (collectively, "PG&E", which filed voluntary bankruptcy petitions under Chapter 11 of the United States Bankruptcy Code in the U.S. Bankruptcy Court for the Northern District of California, while remaining in the securitized pool, are considered ineligible and are excluded from performance ratios and reserves.
Fees payable to the bank include: (a) an LC issuance fee, payable on each settlement date, in the amount of .90% per annum on the aggregate amount of all LCs outstanding plus outstanding reimbursement obligations (e.g., arising from drawn LCs), if any, and (b) an unused LC fee, payable monthly, equal to (i) .35% per annum for each day on which the sum of the total LCs outstanding plus any outstanding reimbursement obligations is greater than or equal to 50% of the facility limit and (ii) .45% per annum for each day on which the sum of the total LCs outstanding plus any outstanding reimbursement obligations is less than 50% of the facility limit. If an LC is drawn and the bank is not immediately reimbursed in full for the drawn amount, any outstanding reimbursement obligation will accrue interest at a per annum rate equal to a reserve-adjusted LIBOR or, in certain circumstances, a base rate equal to the higher of (i) the bank’s prime rate and (ii) the federal funds rate plus .50% and, following any default, 2.00% plus the greater of (a) adjusted LIBOR and (b) a base rate equal to the higher of (i) the bank’s prime rate and (ii) the federal funds rate plus .50%.
The agreements underlying the AR Securitization program contain various customary representations and warranties, covenants, and default provisions which provide for the termination and acceleration of the commitments under the AR Securitization program in circumstances including, but not limited to, failure to make payments when due, breach of a representation, warranty or covenant, certain insolvency events or failure to maintain the security interest in the trade receivables, and defaults under other material indebtedness.
Total Commitments Related to Issued Letters of Credit--As of June 30, 2018 and December 31, 2017,29, 2019, total commitments related to issued letters of creditLCs were $63,067,$72,236, of which $2,913$2,788 were issued under the revolving credit facility, $58,150$67,438 were issued under the AR Securitization program, and $2,010 were issued under short-term lines of credit. As of December 31, 2018, total commitments related to issued LCs were $72,565, of which $3,123 were issued under the revolving credit facility, $67,438 were issued under the AR Securitization program, and $2,004 were issued under short-term lines of credit.
As of June 29, 2019, we are in compliance with all debt covenants.
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 29, 2019
(Amounts in thousands, except share data)
We lease certain office and parking facilities, warehouse space, equipment, vehicles and information technology equipment under operating leases. Lease expense for these leases is recognized within the Condensed Consolidated Statements of Operations on a straight-line basis over the lease term, with variable lease payments recognized in the period those payments are incurred. The following table summarizes the amounts recognized in our Condensed Consolidated Balance Sheet related to leases:
|
| | | | | |
| Condensed Consolidated Balance Sheet Classification | | June 29, 2019 |
Assets | | | |
Operating lease assets | Right-of-use assets - operating leases | | $ | 39,534 |
|
Finance lease assets | Property and equipment, net | | 3,600 |
|
Total lease assets | | | $ | 43,134 |
|
Liabilities | | | |
Current operating lease liabilities | Other current liabilities | | $ | 13,341 |
|
Non-current operating lease liabilities | Lease liabilities - operating leases | | 25,825 |
|
Total operating lease liabilities | | | 39,166 |
|
Current portion of finance lease liabilities | Current portion of long-term debt and finance lease liabilities | | 1,312 |
|
Non-current finance lease liabilities | Lease liabilities - finance leases | | 1,985 |
|
Total finance lease liabilities | | | 3,297 |
|
Total lease liabilities | | | $ | 42,463 |
|
The components of lease cost recognized within our Condensed Consolidated Statement of Operations were as follows:
|
| | | | | | | | | |
| | | Three Months Ended | | Six Months Ended |
| Condensed Consolidated Statement of Operations Classification | | June 29, 2019 | | June 29, 2019 |
| | | | | |
Operating lease cost | Operating expense | | $ | 1,629 |
| | $ | 3,067 |
|
Operating lease cost | Selling expense | | 2,158 |
| | 4,325 |
|
Operating lease cost | General and administrative expense | | 202 |
| | 403 |
|
Finance lease cost: | | | | | |
Amortization of right-of-use assets | Depreciation and amortization | | 340 |
| | 685 |
|
Interest expense on lease liabilities | Interest expense | | 29 |
| | 63 |
|
Other lease cost (1) | Operating expense | | 1,011 |
| | 1,730 |
|
Other lease cost (1) | Selling expense | | 270 |
| | 616 |
|
Other lease cost (1) | General and administrative expense | | 1 |
| | 3 |
|
Total lease cost | | | $ | 5,640 |
| | $ | 10,892 |
|
| | | | | |
(1) Other lease cost includes short-term lease costs and variable lease costs. | | | | |
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 29, 2019
(Amounts in thousands, except share data)
We often have options to renew lease terms for buildings and other assets. The exercise of lease renewal options is generally at our sole discretion. In addition, certain lease agreements may be terminated prior to their original expiration date at our discretion. We evaluate each renewal and termination option at the lease commencement date to determine if we are reasonably certain to exercise the option on the basis of economic factors. The table below summarizes the weighted average remaining lease term as of June 29, 2019.
|
| |
Operating leases | 3.6 years |
Finance leases | 2.8 years |
The discount rate implicit within our leases is generally not determinable and therefore the Company determines the discount rate based on its incremental borrowing rate. The incremental borrowing rate for each lease is determined based on its term and the currency in which lease payments are made, adjusted for the impacts of collateral. The table below summarizes the weighted average discount rate used to measure our lease liabilities as of June 29, 2019.
|
| | |
Operating leases | 3.93 | % |
Finance leases | 3.42 | % |
Supplemental Cash Flow Information Related to Leases
|
| | | |
| Six Months Ended |
| June 29, 2019 |
Cash paid for amounts included in the measurement of lease liabilities: | |
Operating cash flows from operating leases | $ | (8,175 | ) |
Operating cash flows from finance leases | (63 | ) |
Financing cash flows from finance leases | (860 | ) |
Right-of-use assets obtained in exchange for lease obligations: | |
Operating leases | 47,779 |
|
Maturity Analysis of Lease Liabilities
|
| | | | | | | | |
| | As of June 29, 2019 |
| | Operating Leases | | Finance Leases |
Remaining six months of 2019 | | $ | 7,648 |
| | $ | 508 |
|
2020 | | 13,242 |
| | 1,371 |
|
2021 | | 9,778 |
| | 1,206 |
|
2022 | | 6,504 |
| | 272 |
|
2023 | | 2,855 |
| | 82 |
|
Thereafter | | 1,731 |
| | — |
|
Total lease payments | | 41,758 |
| | 3,439 |
|
Less interest | | 2,592 |
| | 142 |
|
Total | | $ | 39,166 |
| | $ | 3,297 |
|
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 29, 2019
(Amounts in thousands, except share data)
|
| | | | | | |
| | | | December 31, 2018 |
| | | | Operating Leases |
2019 | | | | $ | 14,023 |
|
2020 | | | | 11,272 |
|
2021 | | | | 7,712 |
|
2022 | | | | 5,129 |
|
2023 | | | | 2,060 |
|
Thereafter | | | | 1,923 |
|
Total lease payments | | | | $ | 42,119 |
|
| |
G.H. | Stock-Based Compensation |
Our shareholders approved the 2014 Omnibus Stock Plan (the “2014 Stock Plan”) at our annual meeting of shareholders on May 20, 2014. The 2014 Stock Plan replaced the expired 2004 Omnibus Stock Plan (the “2004 plan”) previously approved by the shareholders in 2004. The 2014 Stock Plan is administered by the Compensation Committee of the Board of Directors and has a term of ten years. All directors of the Company and employees of the Company and its subsidiaries are eligible to participate in the 2014 Stock Plan. The 2014 Stock
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2018
(Amounts in thousands, except share data)
G. Stock-Based Compensation (continued)
Plan (similar to the 2004 plan) continues the maintenance of the Employee Stock Purchase Plan, as well as provisions for the grant of stock options and other stock-based incentives. The 2014 Stock Plan provides for the grant of five percent of the number of the Company’s common shares outstanding as of the first day of each fiscal year plus the number of common shares that were available for grant of awards, but not granted, in prior years. In no event, however, may the number of common shares available for the grant of awards in any fiscal year exceed ten percent of the common shares outstanding as of the first day of that fiscal year. Common shares subject to an award that is forfeited, terminated, or canceled without having been exercised are generally added back to the number of shares available for grant under the 2014 Stock Plan.
Stock-based compensation expense under all share-based payment plans -- our Employee Stock Purchase Plan, stock option plans, stock-settled stock appreciation rights ("SSARs") and restricted stock units ("RSUs") -- are included in the results of operations as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2018 | | July 1, 2017 | | June 30, 2018 | | July 1, 2017 |
Compensation expense, all share-based payment plans | $ | 769 |
| | $ | 1,462 |
| | $ | 1,793 |
| | $ | 2,448 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 29, 2019 | | June 30, 2018 | | June 29, 2019 | | June 30, 2018 |
Compensation expense, all share-based payment plans | $ | 776 |
| | $ | 769 |
| | $ | 1,529 |
| | $ | 1,793 |
|
Stock-based compensation consisted of the following:
Employee Stock Purchase Plan--Under the Employee Stock Purchase Plan, all full-time employees with one year of service are eligible to purchase, through payroll deduction, common shares. Employee purchases under the Employee Stock Purchase Plan are at 85% of the fair market value of the common shares--a 15% discount. We recognize compensation costs as payroll deductions are made. The 15% discount of total shares purchased under the
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 29, 2019
(Amounts in thousands, except share data)
| |
H. | Stock-Based Compensation (continued) |
plan resulted in compensation cost of $488$536 being recognized for the six months endedJune 30, 201829, 2019 and $415$488 for the six months endedJuly 1, 2017. June 30, 2018.
Stock Option Plans--The stock options outstanding were awarded under a graded vesting schedule, measured at fair value, and have a term of ten years. Compensation costs for stock options are recognized over the requisite service period on the straight-line recognition method. Compensation cost recognized for stock options was $346$315 for the six months endedJune 30, 201829, 2019 and $395$346 for the six months endedJuly 1, 2017. June 30, 2018.
Stock-Settled Stock Appreciation Rights--During the six months endedJune 30, 2018, the Compensation Committee awarded 121,243 stock-settled stock appreciation rights (“SSARs”) to certain management employees, which vest ratably over five years. A SSARSSARs is an award that allows the recipient to receive common shares equal to the appreciation in the fair market value of our common shares between the date the award was granted and the conversion date of the shares vested. Effective January 1, 2019, Management and the Compensation Committee replaced the issuance of future SSARs with performance-based restricted stock units ("PRSUs") for certain management employees.
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2018
(Amounts in thousands, except share data)
| |
G. | Stock-Based Compensation (continued) |
The following table summarizes our SSARs as of June 30, 201829, 2019.
| | Stock-Settled Stock Appreciation Rights | | Number of Rights | | Weighted- Average Award Date Value | | Weighted- Average Remaining Contractual Life | | Unrecognized Compensation Cost | | Aggregate Intrinsic Value | | Number of Rights | | Weighted- Average Award Date Value | | Weighted- Average Remaining Contractual Life | | Unrecognized Compensation Cost | | Aggregate Intrinsic Value |
Unvested, January 1, 2018 | | 448,180 |
| | $ | 3.10 |
| | | | | | | |
Unvested, January 1, 2019 | | | 380,982 |
| | $ | 3.42 |
| | | | | | |
Granted | | 121,243 |
| | 3.84 |
| | | | | | | | — |
| | — |
| | | | | | |
Forfeited | | — |
| | — |
| | | | | | | | — |
| | — |
| | | | | | |
Vested | | (150,120 | ) | | 3.01 |
| | | | | | | | (115,080 | ) | | 3.31 |
| | | | | | |
Unvested, June 30, 2018 | | 419,303 |
| | $ | 3.35 |
| | 2.5 years | | $ | 1,173 |
| | $ | 8,009 |
| |
Unvested, June 29, 2019 | | | 265,902 |
| | $ | 3.47 |
| | 1.9 years | | $ | 734 |
| | $ | 5,611 |
|
Compensation costs for SSARs are determined using a fair-value method and amortized over the requisite service period. Compensation expense for SSARs was $290$190 for the six months endedJune 30, 201829, 2019 and $757$290 for the six months endedJuly 1, 2017. June 30, 2018.
Restricted Stock Units--During the six months endedJune 30, 2018,29, 2019, the Compensation Committee awarded 31,738 performance-based restricted stock units ("PRSUs")29,046 PRSUs to certain management employees and 13,188 restricted stock units ("RSUs")11,942 RSUs to nonemployee directors. The Compensation Committee made similar awards in prior periods. The awards vest over specified periods. The following table summarizes PRSUs and RSUs as of June 30, 2018.29, 2019.
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 29, 2019
(Amounts in thousands, except share data)
| |
H. | Stock-Based Compensation (continued) |
| | Restricted Stock Units | | Number of Stock Units | | Weighted- Average Grant Date Value | | Weighted- Average Remaining Contractual Life | | Unrecognized Compensation Cost | | Aggregate Intrinsic Value | | Number of Stock Units | | Weighted- Average Grant Date Value | | Weighted- Average Remaining Contractual Life | | Unrecognized Compensation Cost | | Aggregate Intrinsic Value |
Unvested, January 1, 2018 | | 290,666 |
| | $ | 14.41 |
| | | | | | | |
Unvested, January 1, 2019 | | | 247,838 |
| | $ | 15.68 |
| | | | | | |
Granted | | 44,926 |
| | 18.55 |
| | | | | | | | 40,988 |
| | 20.45 |
| | | | | | |
Forfeited | | — |
| | — |
| | | | | | | | — |
| | — |
| | | | | | |
Vested | | (80,806 | ) | | 12.71 |
| | | | | | | | (60,474 | ) | | 13.55 |
| | | | | | |
Unvested, June 30, 2018 | | 254,786 |
| | $ | 15.67 |
| | 2.5 years | | $ | 2,213 |
| | $ | 4,866 |
| |
Unvested, June 29, 2019 | | | 228,352 |
| | $ | 17.10 |
| | 2.4 years | | $ | 2,078 |
| | $ | 4,818 |
|
Employee PRSUs | | 216,134 |
| | $ | 15.40 |
| | 2.7 years | | $ | 1,783 |
| | $ | 4,128 |
| | 196,930 |
| | $ | 16.79 |
| | 2.5 years | | $ | 1,666 |
| | $ | 4,155 |
|
Nonemployee Director RSUs | | 38,652 |
| | $ | 17.17 |
| | 1.9 years | | $ | 430 |
| | $ | 738 |
| | 31,422 |
| | $ | 19.01 |
| | 2.0 years | | $ | 412 |
| | $ | 663 |
|
Compensation cost for restricted stock awardsRSUs is determined using a fair-value method and amortized on the straight-line recognition method over the requisite service period. Compensation expense on restricted stock awardsRSUs totaled $669$488 for the six months endedJune 30, 201829, 2019 and $881$669 for the six months endedJuly 1, 2017. June 30, 2018.
We estimated the fair value of each stock-based award on the date of grant using a binomial option-pricing model. The binomial model considers a range of assumptions related to volatility, risk-free interest rate and employee
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2018
(Amounts in thousands, except share data)
| |
G. | Stock-Based Compensation (continued) |
exercise behavior. Expected volatilities utilized in the binomial model are based on historical volatility of our stock prices and other factors. Similarly, the dividend yield is based on historical experience and expected future changes. The binomial model also incorporates exercise assumptions based on an analysis of historical data. The expected life of the stock-based awards is derived from the output of the binomial model and represents the period of time that awards granted are expected to be outstanding.
The fair values of stock-based awards granted were estimated at the dates of grant with the following weighted-average assumption.
| | | Six Months Ended | Six Months Ended |
| June 30, 2018 | | July 1, 2017 | June 29, 2019 | | June 30, 2018 |
Volatility rate | 10.1 | % | | 10.3 | % | 9.9 | % | | 10.1 | % |
Risk-free interest rate | 2.7 | % | | 2.2 | % | 2.3 | % | | 2.7 | % |
Expected dividend yield | .7 | % | | .7 | % | .7 | % | | .7 | % |
Expected life of awards (years) | 9.2 |
| | 8.9 |
| 8.8 |
| | 9.2 |
|
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 29, 2019
(Amounts in thousands, except share data)
| |
H. | Stock-Based Compensation (continued) |
General Stock Option Information--The following table summarizes activity under the stock option plans for the six months ended June 30, 2018.29, 2019.
| | Stock Options | | Number of Options Outstanding | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Life | | Aggregate Intrinsic Value | | Number of Options Outstanding | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Life | | Aggregate Intrinsic Value |
Outstanding, January 1, 2018 | | 1,528,615 |
| | $ | 13.05 |
| | | | | |
Outstanding, January 1, 2019 | | | 1,466,264 |
| | $ | 13.94 |
| | | | |
Granted | | 143,250 |
| | 19.10 |
| | | | | | 151,145 |
| | 21.10 |
| | | | |
Exercised | | (80,635 | ) | | 10.07 |
| | | | | | (75,139 | ) | | 10.43 |
| | | | |
Forfeited | | (41,300 | ) | | 12.37 |
| | | | | | (4,200 | ) | | 16.06 |
| | | | |
Outstanding, June 30, 2018 | | 1,549,930 |
| | $ | 13.78 |
| | 6.2 years | | $ | 8,246 |
| |
Outstanding, June 29, 2019 | | | 1,538,070 |
| | $ | 14.81 |
| | 5.9 years | | $ | 9,674 |
|
| | | | | | | | | | | | |
Exercisable, June 30, 2018 | | 965,780 |
| | $ | 11.62 |
| | 5.0 years | | $ | 7,225 |
| |
Exercisable, June 29, 2019 | | | 1,039,125 |
| | $ | 13.05 |
| | 4.8 years | | $ | 8,365 |
|
As of June 30, 2018,29, 2019, there was approximately $1,742$1,662 of unrecognized compensation cost related to stock options outstanding. The cost is expected to be recognized over a weighted-average period of 2.6 years.2.3 years. “Intrinsic value” is defined as the amount by which the market price of a common share exceeds the exercise price of an option.
Common shares are issued from treasury upon the exercise of stock options, SSARs, RSUs, PRSUs or purchases under the Employee Stock Purchase Plan.
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2018
(Amounts in thousands, except share data)
| |
H.I. | Net Periodic Benefit Expense--Defined Benefit Pension Plans |
The results of operations included the following net periodic benefit expense (income) recognized related to our defined-benefit pension plans.
| | | Three Months Ended | | Six Months Ended | Three Months Ended | | Six Months Ended |
| June 30, 2018 | | July 1, 2017 | | June 30, 2018 | | July 1, 2017 | June 29, 2019 | | June 30, 2018 | | June 29, 2019 | | June 30, 2018 |
Components of pension expense (income) | | | | | | | | | | | | | | |
Service costs--increase in benefit obligation earned | $ | 100 |
| | $ | 132 |
| | $ | 200 |
| | $ | 265 |
| $ | 30 |
| | $ | 100 |
| | $ | 75 |
| | $ | 200 |
|
Interest cost on projected benefit obligation | 179 |
| | 264 |
| | 359 |
| | 527 |
| 61 |
| | 179 |
| | 136 |
| | 359 |
|
Expected return on plan assets | (57 | ) | | (170 | ) | | (115 | ) | | (339 | ) | (14 | ) | | (57 | ) | | (37 | ) | | (115 | ) |
Settlement loss | | 1,677 |
| | — |
| | 1,677 |
| | — |
|
Amortization of net actuarial loss | 182 |
| | 238 |
| | 364 |
| | 475 |
| 31 |
| | 182 |
| | 75 |
| | 364 |
|
Amortization of prior service cost | 16 |
| | 15 |
| | 32 |
| | 31 |
| 16 |
| | 16 |
| | 32 |
| | 32 |
|
Net pension expense of defined benefit pension plans | $ | 420 |
| | $ | 479 |
| | $ | 840 |
| | $ | 959 |
| $ | 1,801 |
| | $ | 420 |
| | $ | 1,958 |
| | $ | 840 |
|
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 29, 2019
(Amounts in thousands, except share data)
| |
I. | Net Periodic Benefit Expense--Defined Benefit Pension Plans (continued) |
During April 2019, we entered into an agreement to purchase a guaranteed group annuity contract from a third-party insurance company which unconditionally and irrevocably guarantees the full-payment of all annuity payments to the remaining 231 participants in our Employee Retirement Plan (“ERP”) for which benefits were frozen effective December 31, 2008. The April 2019 agreement transferred all remaining ERP benefit obligations to the third-party insurance company, resulting in a pretax actuarial settlement loss of $1,677.
The components of net periodic benefit expense, other than the service cost component, are included in the line item other income (expense) in the income statement.statement of operations.
Our income tax provision for interim periods is determined using an estimate of our annual effective tax rate adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter we update our estimate of the annual effective tax rate and, if our estimated annual tax rate changes, we make a cumulative adjustment. The estimated annual effective tax rate for the six months ended June 29, 2019 was 19.9%. Our annual effective tax rate for the six months ended June 30, 2018 iswas estimated to approximateat 18.2%. Our effective tax rate was 20.4% and 19.9% for the sixthree months ended July 1, 2017 was estimated at 39.2%.June 29, 2019 and June 30, 2018, respectively. The change in the effective tax rate from statutory tax rates is primarily due to the Tax Reform Act, that was signed into law on December 22, 2017 by the Presidentimpact of the United States, which reduces the corporate federal income tax rate for 2018 and beyond from 35% to 21%.favorable discrete items.
As a result of the Tax Reform Act, the Company estimated a tax liability of $6,100 due to the transition toll tax on the deemed repatriation of deferred foreign earnings of non-U.S. operations, which the Company believes will be fully offset by foreign tax credits. The final amounts recorded in subsequent financial statements may differ from these provisional amounts due to, among other things, additional analysis related to foreign deferred earnings, changes in interpretations of the Tax Reform Act and related assumptions of the Company and additional regulatory guidance that may be issued.
On December 22, 2017, the SEC issued Staff Accounting Bulletin 118 (“SAB 118”). This guidance allows registrants a “measurement period”, not to exceed one year from the date of enactment, to complete their accounting for the tax effects of the Tax Reform Act. SAB 118 further directs that during the measurement period, registrants who are able to make reasonable estimates for the tax effects of the Tax Reform Act should include those amounts in their financial statements as “provisional” amounts. Registrants should reflect adjustments over subsequent periods as they are able to refine their estimates and complete their accounting for the tax effects of the Tax Reform Act. The provisional amounts computed by the Company are expected to be finalized when the
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2018
(Amounts in thousands, except share data)
| |
I. | Income Taxes (continued) |
U.S. corporate income tax return for 2017 is filed in 2018, but in no event later than one year from the enactment date.
At December 31, 2017,29, 2019, we had unrecognized tax benefits of $2,581,$1,332, of which $1,948$606 would affect our effective rate if recognized, and accrued interest expense related to unrecognized benefits of $128. During the second quarter$40. At December 31, 2018, we decreased our unrecognized tax benefits by $1,547 as a result of the pending settlement of the IRS audits of our 2015 and 2016 U.S. income tax returns. As of June 30, 2018, we had unrecognized tax benefits of $1,034,$1,325, of which $561$599 would affect our effective rate if recognized, and accrued interest expense related to unrecognized benefits of $21.$35. Unrecognized tax benefits are the differences between a tax position taken, or expected to be taken in a tax return, and the benefit recognized for financial reporting purposes. We recognize interest accrued related to unrecognized tax benefits in income tax expense. Penalties, if incurred, would be recognized as a component of income tax expense.
The Company is routinely under audit by federal, state, local and Canadian authorities in the area of income tax. These audits include questioning the timing and the amount of income and deductions and the allocation of income and deductions among various tax jurisdictions. The IRS finalized their audit of our 2015 and 2016 U.S. income tax returns in July 2018.Company has been audited by the Internal Revenue Service through 2016. With the exception of U.S. state jurisdictions, the Company is no longer subject to examination by tax authorities for the years through 2016. As of June 30, 2018,29, 2019, we believe it is reasonably possible that the total amount of unrecognized tax benefits will not significantly increase or decrease.
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 201829, 2019
(Amounts in thousands, except share data)
| |
J.K. | Accumulated Other Comprehensive Income (Loss) |
Comprehensive income (or loss) is comprised of net income (or net loss) and other components, including currency translation adjustments and defined-benefit pension plan adjustments.
The following summarizes the components of other comprehensive income (loss) accumulated in shareholders’ equity for the three and six months ended June 29, 2019 and the three and six months ended June 30, 2018 and six months ended July 1, 2017: |
| | | | | | | | | | | | |
| | Foreign Currency Translation Adjustments | | Defined Benefit Pension Plans | | Accumulated Other Comprehensive Income (Loss) |
Balance at January 1, 2018 | | $ | (3,305 | ) | | $ | (5,088 | ) | | $ | (8,393 | ) |
Other comprehensive income (loss) before reclassifications | | | | | | |
Unrealized losses | | $ | (1,579 | ) | | $ | — |
| | $ | (1,579 | ) |
Amounts reclassified from accumulated other comprehensive income (loss) | | — |
| | 396 |
| | 396 |
|
Tax effect | | — |
| | (103 | ) | | (103 | ) |
Net of tax amount | | (1,579 | ) | | 293 |
| | (1,286 | ) |
Balance at June 30, 2018 | | $ | (4,884 | ) | | $ | (4,795 | ) | | $ | (9,679 | ) |
2018:
| | | | Foreign Currency Translation Adjustments | | Defined Benefit Pension Plans | | Accumulated Other Comprehensive Income (Loss) | |
Balance at January 1, 2017 | | $ | (5,500 | ) | | $ | (6,662 | ) | | $ | (12,162 | ) | |
Three Months Ended June 29, 2019 | | | Foreign Currency Translation Adjustments | | Defined Benefit Pension Plans | | Accumulated Other Comprehensive Income (Loss) |
Balance at March 30, 2019 | | | $ | (5,310 | ) | | $ | 829 |
| | $ | (4,481 | ) |
Other comprehensive income (loss) before reclassifications | | | | | | | | | | | | |
Unrealized gains | | $ | 1,203 |
| | $ | — |
| | $ | 1,203 |
| | $ | 698 |
| | $ | — |
| | $ | 698 |
|
Amounts reclassified from accumulated other comprehensive income (loss) | | — |
| | 506 |
| | 506 |
| | — |
| | (1,655 | ) | | (1,655 | ) |
Tax effect | | — |
| | (192 | ) | | (192 | ) | | — |
| | 169 |
| | 169 |
|
Net of tax amount | | 1,203 |
| | 314 |
| | 1,517 |
| | 698 |
| | (1,486 | ) | | (788 | ) |
Balance at July 1, 2017 | | $ | (4,297 | ) | | $ | (6,348 | ) | | $ | (10,645 | ) | |
Balance at June 29, 2019 | | | $ | (4,612 | ) | | $ | (657 | ) | | $ | (5,269 | ) |
|
| | | | | | | | | | | | |
Three Months Ended June 30, 2018 | | Foreign Currency Translation Adjustments | | Defined Benefit Pension Plans | | Accumulated Other Comprehensive Income (Loss) |
Balance at March 31, 2018 | | $ | (4,137 | ) | | $ | (4,942 | ) | | $ | (9,079 | ) |
Other comprehensive income (loss) before reclassifications | | | | | | |
Unrealized losses | | $ | (747 | ) | | $ | — |
| | $ | (747 | ) |
Amounts reclassified from accumulated other comprehensive income (loss) | | — |
| | 198 |
| | 198 |
|
Tax effect | | — |
| | (51 | ) | | (51 | ) |
Net of tax amount | | (747 | ) | | 147 |
| | (600 | ) |
Balance at June 30, 2018 | | $ | (4,884 | ) | | $ | (4,795 | ) | | $ | (9,679 | ) |
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 29, 2019
(Amounts in thousands, except share data)
| |
K. | Accumulated Other Comprehensive Income (Loss) (continued) |
|
| | | | | | | | | | | | |
Six Months Ended June 29, 2019 | | Foreign Currency Translation Adjustments | | Defined Benefit Pension Plans | | Accumulated Other Comprehensive Income (Loss) |
Balance at January 1, 2019 | | $ | (5,819 | ) | | $ | 785 |
| | $ | (5,034 | ) |
Other comprehensive income (loss) before reclassifications | | | | | | |
Unrealized gains | | $ | 1,207 |
| | $ | — |
| | $ | 1,207 |
|
Amounts reclassified from accumulated other comprehensive income (loss) | | — |
| | (1,595 | ) | | (1,595 | ) |
Tax effect | | — |
| | 153 |
| | 153 |
|
Net of tax amount | | 1,207 |
| | (1,442 | ) | | (235 | ) |
Balance at June 29, 2019 | | $ | (4,612 | ) | | $ | (657 | ) | | $ | (5,269 | ) |
|
| | | | | | | | | | | | |
Six Months Ended June 30, 2018 | | Foreign Currency Translation Adjustments | | Defined Benefit Pension Plans | | Accumulated Other Comprehensive Income (Loss) |
Balance at January 1, 2018 | | $ | (3,305 | ) | | $ | (5,088 | ) | | $ | (8,393 | ) |
Other comprehensive income (loss) before reclassifications | | | | | | |
Unrealized losses | | $ | (1,579 | ) | | $ | — |
| | $ | (1,579 | ) |
Amounts reclassified from accumulated other comprehensive income (loss) | | — |
| | 396 |
| | 396 |
|
Tax effect | | — |
| | (103 | ) | | (103 | ) |
Net of tax amount | | (1,579 | ) | | 293 |
| | (1,286 | ) |
Balance at June 30, 2018 | | $ | (4,884 | ) | | $ | (4,795 | ) | | $ | (9,679 | ) |
The change in defined benefit pension plans of $396$(1,655) and $(1,595) for the six months endedJune 30, 2018three and the $506 for the six months ended July 1, 2017June 29, 2019 and $198 and $396 for the three and six months ended June 30, 2018 is included in net periodic pension expense classified in the condensed consolidated statement of operations as general and administrative or other income (expense).
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 201829, 2019
(Amounts in thousands, except share data)
| |
K.L. | Per Share Amounts and Common and Redeemable Shares Outstanding |
We calculate our basic earnings per share by dividing net income or net loss by the weighted average number of common shares outstanding during the period. Diluted earnings per share are calculated in a similar manner, but include the effect of dilutive securities. To the extent these securities are antidilutive, they are excluded from the calculation of earnings per share. The per share amounts were computed as follows:
| | | Three Months Ended | | Six Months Ended | Three Months Ended | | Six Months Ended |
| June 30, 2018 | | July 1, 2017 | | June 30, 2018 | | July 1, 2017 | June 29, 2019 | | June 30, 2018 | | June 29, 2019 | | June 30, 2018 |
Income available to common shareholders: | | | | | | | | | | | | | | |
Net income | $ | 21,714 |
| | $ | 14,223 |
| | $ | 15,087 |
| | $ | 10,336 |
| $ | 19,747 |
| | $ | 21,714 |
| | $ | 19,254 |
| | $ | 15,087 |
|
| | | | | | | | | | | | | | |
Weighted-average shares: | | | | | | | | | | | | | | |
Basic: | | | | | | | | | | | | | | |
Outstanding | 22,926 |
| | 24,797 |
| | 24,077 |
| | 24,582 |
| 22,764 |
| | 22,926 |
| | 22,837 |
| | 24,077 |
|
Partially-paid share subscriptions | 195 |
| | 201 |
| | 362 |
| | 402 |
| 151 |
| | 195 |
| | 302 |
| | 362 |
|
Basic weighted-average shares | 23,121 |
| | 24,998 |
| | 24,439 |
| | 24,984 |
| 22,915 |
| | 23,121 |
| | 23,139 |
| | 24,439 |
|
| | | | | | | | | | | | | | |
Diluted: | | | | | | | | | | | | | | |
Basic from above | 23,121 |
| | 24,998 |
| | 24,439 |
| | 24,984 |
| 22,915 |
| | 23,121 |
| | 23,139 |
| | 24,439 |
|
Incremental shares from assumed: | | | | | | | | | | | | | | |
Exercise of stock subscription purchase rights | 140 |
| | 141 |
| | 143 |
| | 143 |
| 88 |
| | 140 |
| | 104 |
| | 143 |
|
Exercise of stock options and awards | 1,046 |
| | 846 |
| | 979 |
| | 871 |
| 1,048 |
| | 1,046 |
| | 937 |
| | 979 |
|
Diluted weighted-average shares | 24,307 |
| | 25,985 |
| | 25,561 |
| | 25,998 |
| 24,051 |
| | 24,307 |
| | 24,180 |
| | 25,561 |
|
| | | | | | | | | | | | | | |
Net income per share: | | | | | | | | | | | | | | |
Basic | $ | .94 |
| | $ | .57 |
| | $ | .62 |
| | $ | .41 |
| $ | .86 |
| | $ | .94 |
| | $ | .83 |
| | $ | .62 |
|
| | | | | | | | | | | | | | |
Diluted | $ | .89 |
| | $ | .55 |
| | $ | .59 |
| | $ | .40 |
| $ | .82 |
| | $ | .89 |
| | $ | .80 |
| | $ | .59 |
|
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 201829, 2019
(Amounts in thousands, except share data)
| |
K.L. | Per Share Amounts and Common and Redeemable Shares Outstanding (continued) |
Common and Redeemable Shares Outstanding--A summary of the activity of the common and redeemable shares outstanding for the six months ended June 30, 201829, 2019 follows:
| | | Common Shares | | Redeemable | | | Common Shares Net of Treasury Shares | | Redeemable Shares | | Total |
| Net of Treasury Shares | | Shares | | Total | |
Shares outstanding at January 1, 2018 | 17,753,832 |
| | 6,467,027 |
| | 24,220,859 |
| |
Shares outstanding at January 1, 2019 | | 17,238,497 |
| | 5,642,155 |
| | 22,880,652 |
|
Shares purchased | (828,495 | ) | | (533,447 | ) | | (1,361,942 | ) | (433,296 | ) | | (569,267 | ) | | (1,002,563 | ) |
Shares sold | 369,171 |
| | 235,195 |
| | 604,366 |
| 235,591 |
| | 223,675 |
| | 459,266 |
|
Stock subscription offering -- cash purchases | 51,296 |
| | — |
| | 51,296 |
| 270,607 |
| | — |
| | 270,607 |
|
Options and awards exercised | 108,850 |
| | — |
| | 108,850 |
| 191,532 |
| | — |
| | 191,532 |
|
Shares outstanding at June 30, 2018 | 17,454,654 |
| | 6,168,775 |
| | 23,623,429 |
| |
Shares outstanding at June 29, 2019 | | 17,502,931 |
| | 5,296,563 |
| | 22,799,494 |
|
On June 30, 2018,29, 2019, we had 23,623,42922,799,494 common and redeemable shares outstanding, employee options exercisable to purchase 965,7801,039,125 common shares and partially-paid subscriptions for 723,914603,832 common shares and purchase rights outstanding for 289,391 common shares.
Stock Subscription Offering--Beginning May 2012, the Company offered to eligible employees and nonemployee directors the right to subscribe to common shares of the Company at $9.85$9.85 per share in accordance with the provisions of The Davey Tree Expert Company 2004 Omnibus Stock Plan and the rules of the Compensation Committee of the Company's Board of Directors (collectively, the "plan"). The offering period ended on August 1, 2012 and resulted in the subscription of 1,275,428 common shares for $12,563$12,563 at $9.85$9.85 per share.
Under the plan, a participant in the offering purchasing common shares for an aggregate purchase price of less than $5 had$5 was required to pay with cash. All participants (excluding Company directors and officers) purchasing $5$5 or more of the common shares had an option to finance their purchase through a down-payment of at least 10% of the total purchase price and a seven-yearseven-year promissory note for the balance due with interest at 2%. Payments on the promissory note can be made either by payroll deductions or annual lump-sum payments of both principal and interest.
Common shares purchased under the plan have been pledged as security for the payment of the promissory note and the common shares will not be issued until the promissory note is paid-in-full. Dividends will be paid on all subscribed shares, subject to forfeiture to the extent that payment is not ultimately made for the shares.
All participants in the offering purchasing in excess of $5$5 of common shares were granted a "right" to purchase one additional common share at a price of $9.85$9.85 per share for every three common shares purchased under the plan. As a result of the stock subscription, employees were granted rights to purchase 423,600 common shares. Each right may be exercised at the rate of one-seventh per year and will expire seven years after the date that the right was granted. Employees may not exercise a right should they cease to be employed by the Company.
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2018
(Amounts in thousands, except share data)
| |
L.M. | Operations by Business Segment |
We provide a wide range of arboricultural, horticultural, environmental and consulting services to residential, utility, commercial and government entities throughout the United States and Canada. We have two reportable operating segments organized by type or class of customer: Residential and Commercial, and Utility.
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 29, 2019
(Amounts in thousands, except share data)
| |
M. | Operations by Business Segment (continued) |
Residential and Commercial--Residential and Commercial provides services to our residential and commercial customers including: the treatment, preservation, maintenance, removal and planting of trees, shrubs and other plant life; the practice of landscaping, grounds maintenance, tree surgery, tree feeding and tree spraying; the application of fertilizer, herbicides and insecticides; and natural resource management and consulting, forestry research and development, and environmental planning.
Utility--Utility is principally engaged in providing services to our utility customers--investor-owned, municipal utilities, and rural electric cooperatives--including: the practice of line-clearing and vegetation management around power lines and rights-of-way and chemical brush control; and natural resource management and consulting, forestry research and development, and environmental planning.
All other operating activities, including research, technical support and laboratory diagnostic facilities, are included in “All Other.”
Measurement of Segment Profit and Loss and Segment Assets--We evaluate performance and allocate resources based primarily on operating income and also actively manage business unit operating assets. Segment information, including reconciling adjustments, is presented consistent with the basis described in our 20172018 Annual Report.
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 201829, 2019
(Amounts in thousands, except share data)
| |
L.M. | Operations by Business Segment (continued) |
Segment information reconciled to consolidated external reporting information follows:
| | | | Utility | | Residential and Commercial | | All Other | | Reconciling Adjustments | | Consolidated |
Three Months Ended June 29, 2019 | | | | | | | | | | |
Revenues | | $ | 151,192 |
| | $ | 149,970 |
| | $ | 272 |
| | $ | — |
| | $ | 301,434 |
|
Income (loss) from operations | | 9,995 |
| | 26,598 |
| | (5,401 | ) | | (910 | ) | (a) | | 30,282 |
|
Interest expense | | | | | | | | (2,428 | ) | | (2,428 | ) |
Interest income | | | | | | | | 93 |
| | 93 |
|
Other income (expense), net | | | | | | | | (3,153 | ) | | (3,153 | ) |
Income before income taxes | | | | | | | | | | $ | 24,794 |
|
Segment assets, total | | $ | 235,687 |
| | $ | 233,220 |
| | $ | — |
| | $ | 101,242 |
| (b) | | $ | 570,149 |
|
| Utility | | Residential and Commercial | | All Other | | Reconciling Adjustments | | Consolidated | | | | | | | | | |
Three Months Ended June 30, 2018 | | | | | | | | | | | | | | | | | | |
Revenues | $ | 128,496 |
| | $ | 141,465 |
| | $ | 688 |
| | $ | — |
| | $ | 270,649 |
| $ | 128,496 |
| | $ | 141,465 |
| | $ | 688 |
| | $ | — |
| | $ | 270,649 |
|
Income (loss) from operations | 6,265 |
| | 26,834 |
| | (2,764 | ) | | (535 | ) | (a) | | 29,800 |
| 6,265 |
| | 26,834 |
| | (2,764 | ) | | (535 | ) | (a) | | 29,800 |
|
Interest expense | | | | | | | (1,754 | ) | | (1,754 | ) | | | | | | | (1,754 | ) | | (1,754 | ) |
Interest income | | | | | | | 101 |
| | 101 |
| | | | | | | 101 |
| | 101 |
|
Other income (expense), net | | | | | | | (1,052 | ) | | (1,052 | ) | | | | | | | (1,052 | ) | | (1,052 | ) |
Income before income taxes | | | | | | | | | $ | 27,095 |
| | | | | | | | | $ | 27,095 |
|
Segment assets, total | $ | 197,287 |
| | $ | 222,638 |
| | $ | — |
| | $ | 73,329 |
| (b) | | $ | 493,254 |
| $ | 197,287 |
| | $ | 222,638 |
| | $ | — |
| | $ | 73,329 |
| (b) | | $ | 493,254 |
|
| | | | | | | | | | | | | | | | | | |
Three Months Ended July 1, 2017 | | | | | | | | | | |
Six Months Ended June 29, 2019 | | | | | | | | | | |
Revenues | $ | 112,903 |
| | $ | 131,299 |
| | $ | 835 |
| | $ | — |
| | $ | 245,037 |
| $ | 291,661 |
| | $ | 257,365 |
| | $ | 297 |
| | $ | — |
| | $ | 549,323 |
|
Income (loss) from operations | 4,270 |
| | 23,837 |
| | (965 | ) | | (1,483 | ) | (a) | | 25,659 |
| 15,875 |
| | 27,105 |
| | (8,369 | ) | | (1,363 | ) | (a) | | 33,248 |
|
Interest expense | | | | | | | (1,072 | ) | | (1,072 | ) | | | | | | | (4,579 | ) | | (4,579 | ) |
Interest income | | | | | | | 73 |
| | 73 |
| | | | | | | 176 |
| | 176 |
|
Other income (expense), net | | | | | | | (1,339 | ) | | (1,339 | ) | | | | | | | (4,808 | ) | | (4,808 | ) |
Income before income taxes | | | | | | | | | $ | 23,321 |
| | | | | | | | | $ | 24,037 |
|
Segment assets, total | $ | 171,472 |
| | $ | 202,502 |
| | $ | — |
| | $ | 86,198 |
| (b) | | $ | 460,172 |
| $ | 235,687 |
| | $ | 233,220 |
| | $ | — |
| | $ | 101,242 |
| (b) | | $ | 570,149 |
|
| | | | | | | | | | | | | | | | | | |
Six Months Ended June 30, 2018 | | | | | | | | | | | | | | | | | | |
Revenues | $ | 247,183 |
| | $ | 230,810 |
| | $ | 1,307 |
| | $ | — |
| | $ | 479,300 |
| $ | 247,183 |
| | $ | 230,810 |
| | $ | 1,307 |
| | $ | — |
| | $ | 479,300 |
|
Income (loss) from operations | 8,079 |
| | 23,729 |
| | (6,556 | ) | | (1,118 | ) | (a) | | 24,134 |
| 8,079 |
| | 23,729 |
| | (6,556 | ) | | (1,118 | ) | (a) | | 24,134 |
|
Interest expense | | | | | | | (3,155 | ) | | (3,155 | ) | | | | | | | (3,155 | ) | | (3,155 | ) |
Interest income | | | | | | | 179 |
| | 179 |
| | | | | | | 179 |
| | 179 |
|
Other income (expense), net | | | | | | | (2,714 | ) | | (2,714 | ) | | | | | | | (2,714 | ) | | (2,714 | ) |
Income before income taxes | | | | | | | | | $ | 18,444 |
| | | | | | | | | $ | 18,444 |
|
Segment assets, total | $ | 197,287 |
| | $ | 222,638 |
| | $ | — |
| | $ | 73,329 |
| (b) | | $ | 493,254 |
| $ | 197,287 |
| | $ | 222,638 |
| | $ | — |
| | $ | 73,329 |
| (b) | | $ | 493,254 |
|
| | | | | | | | | | |
Six Months Ended July 1, 2017 | | | | | | | | | | |
Revenues | $ | 225,381 |
| | $ | 210,886 |
| | $ | 1,583 |
| | $ | — |
| | $ | 437,850 |
| |
Income (loss) from operations | 6,928 |
| | 20,255 |
| | (3,193 | ) | | (2,326 | ) | (a) | | 21,664 |
| |
Interest expense | | | | | | | (2,329 | ) | | (2,329 | ) | |
Interest income | | | | | | | 143 |
| | 143 |
| |
Other income (expense), net | | | | | | | (2,478 | ) | | (2,478 | ) | |
Income before income taxes | | | | | | | | | $ | 17,000 |
| |
Segment assets, total | $ | 171,472 |
| | $ | 202,502 |
| | $ | — |
| | $ | 86,198 |
| (b) | | $ | 460,172 |
| |
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 29, 2019
(Amounts in thousands, except share data)
| |
M. | Operations by Business Segment (continued) |
Reconciling adjustments from segment reporting to consolidated external financial reporting include unallocated corporate items:
| |
(a) | Reclassification of depreciation expense and allocation of corporate expenses. |
| |
(b) | Corporate assets include cash, prepaid expenses, corporate facilities, enterprise-wide information systems and other nonoperating assets. |
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2018
(Amounts in thousands, except share data)
We account for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which we adopted on January 1, 2018, using the modified retrospective method. See Note A for further discussion of the adoption, including the impact on our 2018 financial statements.Customers.
Nature of Performance Obligations and Significant Judgments
At contract inception, the Company assesses the goods and services promised in its contracts with customers and identifies a performance obligation for each promised good or service (or bundle of goods and services) that is distinct. To identify the performance obligations, the Company considers alleach of the goods or services promised in the contract regardless of whether they are explicitly stated or are implied by customary business practices. A description of our performance obligations is included below.
Residential and Commercial Services - We provide a wide array of services for our residential and commercial customers including the treatment, preservation, maintenance, removal and planting of trees, shrubs and other plant life, landscaping, grounds maintenance, the application of fertilizer, herbicides and insecticides, natural resource management and consulting, forestry research and development, and environmental planning. A contract with a customer may include only one of these services, all of these services, or a combination of these services. For contracts in which we provide all, or a combination of, these services, we believe that the nature of our promise is to provide an integrated property management service for our customer. In these contracts, the customer has effectively outsourced the care and maintenance of its property grounds to us during the duration of the contract as we are responsible for providing a continuous delivery of outsourced maintenance activities over the contract term. As such, for contracts that contain a combination of services, we have concluded that we have a single performance obligation, which is accounted for as a series of distinct services.
Utility Services - We provide a suite of vegetation management or arboricultural services to our utility customers (investor-owned, municipal utilities, and rural electric cooperatives) including the practice of line-clearing and vegetation management around power lines and rights-of-way, chemical brush control, natural resource management and consulting, forestry research and development, and environmental planning. A contract with a customer may include only one of these services, all of these services, or a combination of these services. For contracts in which we provide all, or a combination of, these services, we believe that the nature of our promise is to provide an integrated overall vegetation management service, rather than the performance of discrete activities or services for the customer. As such, for contracts that contain a combination of services, we have concluded that we have a single performance obligation, which is accounted for as a series of distinct services.
Our contracts with our customers generally originate upon the completion of a quote for services for residential and commercial customers or the receipt of a purchase order (or similar work order) for utility customers. In some cases, our contracts are governed by master services agreements, in which case our contract under ASC 606 consists of the combination of the master services agreement and the quote/purchase order. Many of our contracts have a stated duration of one year or less or contain termination clauses that allow the customer to cancel the contract after a specified notice period, which is typically less than 90 days. Due to the fact that many of our arrangements allow the customer to terminate for convenience, the duration of the contract for revenue recognition purposes generally does not extend beyond the services that we have actually transferred. As a result, many of our contracts are, in effect, day-to-day or month-to-month contracts.
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2018
(Amounts in thousands, except share data)
| |
M. | Revenue Recognition (continued) |
Revenue from our residential, commercial, and utility performance obligations is recognized over time as the customer simultaneously receives and consumes the benefits of our services as we perform them. Many of our contracts compensate us based on an agreed upon price for each increment of service provided to the customer. Therefore, revenue is mainly recognized as each increment of service is provided to the customer at the amount that we are contractually entitled to. For contracts that contain a fixed price, we generally use a units-delivered based output method to measure progress. Revenue from our consulting services is also recognized over time and we use a cost-based input method to measure progress. Payment for our services is generally due within 30 days of such services being provided to the customer.
The transaction price for our contracts is determined upon establishment of the contract that contains the final terms of the sale, including the description, quantity, and price of each service purchased. Certain of our contracts contain variable consideration, including index-based pricing, chargebacks, and prompt payment discounts. The Company estimates variable consideration and performs a constraint analysis for these contracts on the basis of both historical information and current trends. However, these types of variable consideration do not have a material effect on the Company’s revenue, either individually or in the aggregate. In addition, although our contracts generally include fixed pricing for each increment of service, the ultimate quantity of services that will be required in order to fulfill our performance obligations is unknown at contract inception. Therefore, our total transaction price ultimately varies based on the quantity and types of services provided to our customer. However, this type of variable consideration is allocated entirely to the distinct services within the series to which it relates.
Disaggregation of Revenue
The following tables disaggregate our revenue for the three and six months ended June 29, 2019 and June 30, 2018 by major sources:
| | Three Months Ended June 30, 2018 | | Utility | | Residential and Commercial | | All Other | | Consolidated | |
Three Months Ended June 29, 2019 | | | Utility | | Residential and Commercial | | All Other | | Consolidated |
Type of service: | | | | | | | | | | | | | | | | |
Tree and plant care | | $ | 97,118 |
| | $ | 86,540 |
| | $ | (26 | ) | | $ | 183,632 |
| | $ | 112,823 |
| | $ | 86,450 |
| | $ | 7 |
| | $ | 199,280 |
|
Grounds maintenance | | — |
| | 37,786 |
| | — |
| | 37,786 |
| | — |
| | 45,657 |
| | — |
| | 45,657 |
|
Storm damage services | | 621 |
| | 911 |
| | — |
| | 1,532 |
| | 152 |
| | 988 |
| | — |
| | 1,140 |
|
Consulting and other | | 30,757 |
| | 16,228 |
| | 714 |
| | 47,699 |
| | 38,217 |
| | 16,875 |
| | 265 |
| | 55,357 |
|
Total revenues | | $ | 128,496 |
| | $ | 141,465 |
| | $ | 688 |
| | $ | 270,649 |
| | $ | 151,192 |
| | $ | 149,970 |
| | $ | 272 |
| | $ | 301,434 |
|
| | | | | | | | | |
Geography: | | | | | | | | | | | | | | | | |
United States | | $ | 118,661 |
| | $ | 129,905 |
| | $ | 688 |
| | $ | 249,254 |
| | $ | 140,701 |
| | $ | 139,437 |
| | $ | 272 |
| | $ | 280,410 |
|
Canada | | 9,835 |
| | 11,560 |
| | — |
| | 21,395 |
| | 10,491 |
| | 10,533 |
| | — |
| | 21,024 |
|
Total revenues | | $ | 128,496 |
| | $ | 141,465 |
| | $ | 688 |
| | $ | 270,649 |
| | $ | 151,192 |
| | $ | 149,970 |
| | $ | 272 |
| | $ | 301,434 |
|
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 201829, 2019
(Amounts in thousands, except share data)
| |
M.N. | Revenue Recognition (continued) |
|
| | | | | | | | | | | | | | | | |
Three Months Ended June 30, 2018 | | Utility | | Residential and Commercial | | All Other | | Consolidated |
Type of service: | | | | | | | | |
Tree and plant care | | $ | 97,118 |
| | $ | 86,540 |
| | $ | (26 | ) | | $ | 183,632 |
|
Grounds maintenance | | — |
| | 37,786 |
| | — |
| | 37,786 |
|
Storm damage services | | 621 |
| | 911 |
| | — |
| | 1,532 |
|
Consulting and other | | 30,757 |
| | 16,228 |
| | 714 |
| | 47,699 |
|
Total revenues | | $ | 128,496 |
| | $ | 141,465 |
| | $ | 688 |
| | $ | 270,649 |
|
Geography: | | | | | | | | |
United States | | $ | 118,661 |
| | $ | 129,905 |
| | $ | 688 |
| | $ | 249,254 |
|
Canada | | 9,835 |
| | 11,560 |
| | — |
| | 21,395 |
|
Total revenues | | $ | 128,496 |
| | $ | 141,465 |
| | $ | 688 |
| | $ | 270,649 |
|
|
| | | | | | | | | | | | | | | | |
Six Months Ended June 29, 2019 | | Utility | | Residential and Commercial | | All Other | | Consolidated |
Type of service: | | | | | | | | |
Tree and plant care | | $ | 216,209 |
| | $ | 146,877 |
| | $ | (4 | ) | | $ | 363,082 |
|
Grounds maintenance | | — |
| | 73,599 |
| | — |
| | 73,599 |
|
Storm damage services | | 1,224 |
| | 2,613 |
| | — |
| | 3,837 |
|
Consulting and other | | 74,228 |
| | 34,276 |
| | 301 |
| | 108,805 |
|
Total revenues | | $ | 291,661 |
| | $ | 257,365 |
| | $ | 297 |
| | $ | 549,323 |
|
Geography: | | | | | | | | |
United States | | $ | 270,583 |
| | $ | 240,436 |
| | $ | 297 |
| | $ | 511,316 |
|
Canada | | 21,078 |
| | 16,929 |
| | — |
| | 38,007 |
|
Total revenues | | $ | 291,661 |
| | $ | 257,365 |
| | $ | 297 |
| | $ | 549,323 |
|
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 29, 2019
(Amounts in thousands, except share data)
| |
N. | Revenue Recognition (continued) |
|
| | | | | | | | | | | | | | | | |
Six Months Ended June 30, 2018 | | Utility | | Residential and Commercial | | All Other | | Consolidated |
Type of service: | | | | | | | | |
Tree and plant care | | $ | 183,435 |
| | $ | 142,937 |
| | $ | (12 | ) | | $ | 326,360 |
|
Grounds maintenance | | — |
| | 60,588 |
| | — |
| | 60,588 |
|
Storm damage services | | 3,834 |
| | 1,810 |
| | — |
| | 5,644 |
|
Consulting and other | | 59,914 |
| | 25,475 |
| | 1,319 |
| | 86,708 |
|
Total revenues | | $ | 247,183 |
| | $ | 230,810 |
| | $ | 1,307 |
| | $ | 479,300 |
|
Geography: | | | | | | | | |
United States | | $ | 229,114 |
| | $ | 212,383 |
| | $ | 1,307 |
| | $ | 442,804 |
|
Canada | | 18,069 |
| | 18,427 |
| | — |
| | 36,496 |
|
Total revenues | | $ | 247,183 |
| | $ | 230,810 |
| | $ | 1,307 |
| | $ | 479,300 |
|
Contract Balances
Our contract liabilities consist of advance payments and billings in excess of costs incurred and deferred revenue. The Company has recognized $594 and $1,674 of revenue for the three and six months ended June 29, 2019 that was included in the contract liability balance at December 31, 2018 and $654 and $1,222 of revenue for the three and six months ended June 30, 2018 that was included in the contract liability balance at December 31, 2017.2017. Net contract liabilities consisted of the following:
|
| | | | | | | |
| June 30, 2018 | | December 31, 2017 |
Contract liabilities - current | $ | 3,847 |
| | $ | 2,072 |
|
Contract liabilities - noncurrent | 2,080 |
| | 2,020 |
|
Net contract liabilities | $ | 5,927 |
| | $ | 4,092 |
|
Practical Expedients & Accounting Policy Elections
Remaining performance obligations - The Company’s contracts for service revenue have an original duration of one year or less. Therefore, because of the short duration of these contracts, the Company has not disclosed the transaction price for the future performance obligations as of the end of each reporting period or when the Company expects to recognize this revenue.
Incremental costs of obtaining a contract - The Company’s contracts for service revenue have an original duration of one year or less. Therefore, the Company has elected to expense these costs as incurred.
Right to invoice - For the Company’s contracts in which it has the right to invoice the customer on the basis of actual work performed (i.e., output), the Company has elected to measure the satisfaction of performance obligation(s) on the basis of actual work performed, as the invoiced amount directly corresponds to the value transferred to the customer.
Sales taxes - The Company has, as an accounting policy election, decided to exclude from the measurement of the transaction price all sales taxes assessed by a governmental authority.
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2018
(Amounts in thousands, except share data)
| |
M. | Revenue Recognition (continued) |
Significant financing component - The Company’s contracts do not allow for payment terms which exceed one year, and thus need not account for the effects of a significant financing component.
|
| | | | | | | |
| June 29, 2019 | | December 31, 2018 |
Contract liabilities - current | $ | 4,440 |
| | $ | 2,907 |
|
Contract liabilities - noncurrent | 2,617 |
| | 2,287 |
|
Net contract liabilities | $ | 7,057 |
| | $ | 5,194 |
|
| |
N.O. | Fair Value Measurements and Financial Instruments |
Financial Accounting Standards Board Accounting Standard CodificationFASB ASC 820, “Fair Value of Measurements and DisclosuresDisclosures" (“Topic 820”)” defines fair value based on the price that would be received to sell an asset or the exit price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. Market participants are defined as buyers or sellers in the principal or most advantageous market for the asset or liability that are independent of the reporting entity, knowledgeable and able and willing to transact for the asset or liability.
Valuation Hierarchy--Topic 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value. The hierarchy prioritizes the inputs into three broad levels:
Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 29, 2019
(Amounts in thousands, except share data)
| |
O. | Fair Value Measurements and Financial Instruments (continued) |
Level 2 inputs are observable inputs other than prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated with observable market data.
Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
Our assets and liabilities measured at fair value on a recurring basis at June 30,29, 2019 were as follows:
|
| | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at June 29, 2019 Using: |
Assets and Liabilities Recorded at Fair Value on a Recurring Basis | | Total Carrying Value at June 29, 2019 | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Assets: | | | | | | | | |
Assets invested for self-insurance, classified as other assets, noncurrent | | $ | 12,552 |
| | $ | 12,552 |
| | $ | — |
| | $ | — |
|
Defined benefit pension plan assets | | 24 |
| | — |
| | 24 |
| | — |
|
| | | | | | | | |
Liabilities: | | | | | | | | |
Deferred compensation | | $ | 2,563 |
| | $ | — |
| | $ | 2,563 |
| | $ | — |
|
Our assets and liabilities measured at fair value on a recurring basis at December 31, 2018 were as follows:
| | | | | | Fair Value Measurements at June 30, 2018 Using: | | | | Fair Value Measurements at December 31, 2018 Using: |
Assets and Liabilities Recorded at Fair Value on a Recurring Basis | | Total Carrying Value at June 30, 2018 | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total Carrying Value at December 31, 2018 | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Assets: | | | | | | | | | | | | | | | | |
Assets invested for self-insurance, classified as other assets, noncurrent | | $ | 14,909 |
| | $ | 14,909 |
| | $ | — |
| | $ | — |
| | $ | 15,379 |
| | $ | 15,379 |
| | $ | — |
| | $ | — |
|
Defined benefit pension plan assets | | | 3,758 |
| | — |
| | 3,758 |
| | — |
|
| | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | |
Deferred compensation | | $ | 2,310 |
| | $ | — |
| | $ | 2,310 |
| | $ | — |
| | $ | 2,459 |
| | $ | — |
| | $ | 2,459 |
| | $ | — |
|
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 201829, 2019
(Amounts in thousands, except share data)
| |
N.O. | Fair Value Measurements and Financial Instruments (continued) |
Our assets and liabilities measured at fair value on a recurring basis at December 31, 2017 were as follows:
|
| | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at December 31, 2017 Using: |
Assets and Liabilities Recorded at Fair Value on a Recurring Basis | | Total Carrying Value at December 31, 2017 | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Assets: | | | | | | | | |
Assets invested for self-insurance, classified as other assets, noncurrent | | $ | 19,422 |
| | $ | 19,422 |
| | $ | — |
| | $ | — |
|
| | | | | | | | |
Liabilities: | | | | | | | | |
Deferred compensation | | $ | 2,146 |
| | $ | — |
| | $ | 2,146 |
| | $ | — |
|
The assets invested for self-insurance are money market funds--classified as Level 1--based on quoted market prices of the identical underlying securities in active markets. The estimated fair value of the deferred compensation--classified as Level 2--is based on the value of the Company's common shares, determined by independent valuation.
Fair Value of Financial Instruments--The fair values of our current financial assets and current liabilities, including cash, accounts receivable, accounts payable, and accrued expenses, among others, approximate their reported carrying values because of their short-term nature. Financial instruments classified as noncurrent liabilities and their carrying values and fair values were as follows:
| | | | June 30, 2018 | | December 31, 2017 | | June 29, 2019 | | December 31, 2018 |
| | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Revolving credit facility, noncurrent | | $ | 139,000 |
| | $ | 139,000 |
| | $ | 100,000 |
| | $ | 100,000 |
| | $ | 79,500 |
| | $ | 79,500 |
| | $ | 93,500 |
| | $ | 93,500 |
|
Senior unsecured notes | | 12,000 |
| | 12,059 |
| | 12,000 |
| | 12,389 |
| |
Senior unsecured notes, noncurrent | | | 81,000 |
| | 84,616 |
| | 56,000 |
| | 56,002 |
|
Term loans, noncurrent | | 5,801 |
| | 6,293 |
| | 7,935 |
| | 10,038 |
| | 6,387 |
| | 6,744 |
| | 6,662 |
| | 6,868 |
|
Total | | $ | 156,801 |
| | $ | 157,352 |
| | $ | 119,935 |
| | $ | 122,427 |
| | $ | 166,887 |
| | $ | 170,860 |
| | $ | 156,162 |
| | $ | 156,370 |
|
The carrying value of our revolving credit facility approximates fair value--classified as Level 2--as the interest rates on the amounts outstanding are variable. The fair value of our senior unsecured notes and term loans--classified as Level 2--is determined based on expected future weighted-average interest rates with the same remaining maturities.
Market Risk--In the normal course of business, we are exposed to market risk related to changes in foreign currency exchange rates, changes in interest rates and changes in fuel prices. We do not hold or issue derivative financial instruments for trading or speculative purposes. In prior years, we have used derivative financial
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2018
(Amounts in thousands, except share data)
| |
N. | Fair Value Measurements and Financial Instruments (continued) |
instruments to manage risk, in part, associated with changes in interest rates and changes in fuel prices. Presently, we are not engaged in any hedging or derivative activities.
| |
O.P. | Commitments and Contingencies |
We are party to a number of lawsuits, threatened lawsuits and other claims arising out of the normal course of business. On a quarterly basis, we assess our liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information available. Where it is probable that we will incur a loss and the amount of the loss can be reasonably estimated, we record a liability in our consolidated financial statements. These legal reservesaccruals may be increased or decreased to reflect any relevant developments on a quarterly basis. Where a loss is not probable or the amount of the loss is not estimable, we do not accrue legal reserves, consistent with applicable accounting guidance. Based on information currently available to us, advice of counsel, and available insurance coverage, we believe that our established reserves are adequate and the liabilities arising from the legal proceedings will not have a material adverse effect on our consolidated financial condition. We note, however, that in light of the inherent uncertainty in legal proceedings there can be no assurance that the ultimate resolution of a matter will not exceed established reserves. As a result, the outcome of a particular matter or a combination of matters may be material to our results of operations for a particular period, depending upon the size of the loss or our income for that particular period.
In November 2017, a suit was filed in Savannah, Georgia state court (“State Court”) against Davey Tree, its subsidiary, Wolf Tree, Inc. ("Wolf Tree"), a former Davey employee, two Wolf Tree employees, and a former Wolf Tree employee alleging various acts of negligence and seeking compensatory and punitive damages for wrongful death and assault
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 29, 2019
(Amounts in thousands, except share data)
| |
P. | Commitments and Contingencies (continued) |
and battery of the plaintiff’s husband, a Wolf Tree employee, in Savannah, Georgia, who was shot and killed in August 2017. The case has beenwas mediated unsuccessfully in December 2018 and was set for trial on January 22, 2019.
In July 2018, a related survival action was filed by the deceased'sdeceased’s estate against Davey Tree, its subsidiary, Wolf Tree, Inc., and four current and former employees in Savannah, Georgia, which arises out of the same allegations, seeks compensatory and punitive damages and also includes three RICO Racketeer Influenced and Corrupt Organizations ("RICO") claims under Georgia law seeking compensatory damages, treble damages, and punitive damages. The 2018 case has beenwas removed to the United States District Court for the Southern District of Georgia, Savannah Division, on August 2, 2018.2018 (“Federal Court”). The Company filed a motion to dismiss the RICO claims. Plaintiffs filed a motion to remand the case to state court, which the Company has opposed. The motions are pending.
On December 6, 2018, a former Wolf Tree employee pled guilty to conspiracy to conceal, harbor, and shield illegal aliens. On December 21, 2018, the United States federal prosecutors filed a motion to stay both actions on the grounds that on December 13, 2018, an indictment was issued charging two former Wolf Tree employees and one other individual with various crimes, including conspiracy to murder the deceased. On December 17, 2018, the United States Attorney’s Office for the Southern District of Georgia informed the Company and Wolf Tree that they are also under investigation for potential violations of immigration and other laws relating to the subject matter of the ongoing criminal investigation referenced above. The Company and Wolf Tree are cooperating with the investigation.
On December 28, 2018, the State Court granted the United States’ motion to stay but indicated that it would nonetheless consider certain pending matters, including: (1) Plaintiff and a co-defendant’s motions that Davey Tree be forced to produce privileged documents and testimony, which had been submitted to a Special Master for recommendation; and (2) the Defendants’ motions for summary judgment. On January 11, 2019, the Special Master issued his recommendation that both Plaintiff and the co-defendant’s motions to force Davey to disclose privileged information be denied. The State Court judge has not yet moved on the recommendation. On January 29, 2019, the State Court heard oral argument on Defendants’ motions for summary judgment, and the motions remain pending.
On January 28, 2019, the Federal Court also granted the United States’ motion to stay. On January 29, 2019, the State Court ordered the parties to return to mediation, which occurred on April 17, 2019 but was unsuccessful in resolving the matters.
In both cases, the Company has denied all liability and is vigorously defending the action. It also has retained separate counsel for threesome of the individual defendants, each of whom has denied all liability and also is vigorously defending the action.
PG&E Bankruptcy Filing
On January 29, 2019, Pacific Gas & Electric Company, and its parent company PG&E Corporation, our largest utility customer, filed voluntary bankruptcy petitions under Chapter 11 of the United States Bankruptcy Code in the U.S. Bankruptcy Court for the Northern District of California. PG&E accounted for approximately 12% of revenues during 2018, and 11% in 2017. As a utility company, PG&E serves residential and industrial customers in California and has an ongoing obligation to continue to serve its customers, and we continue to perform under our contracts with PG&E post-petition. As of the date of the bankruptcy filing, we had pre-petition accounts receivable of approximately $15,000 which we believe to be collectible. While uncertainty exists as to the outcome of the bankruptcy proceedings, we do not anticipate PG&E's bankruptcy to have a material impact on our future cash flows and results of operations.
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 29, 2019
(Amounts in thousands, except share data)
| |
P.Q. | The Davey 401KSOP and Employee Stock Ownership Plan |
On March 15, 1979, the Company consummated a plan, which transferred control of the Company to its employees. As a part of this plan, the Company initially sold 120,000 common shares (presently, 23,040,000 common shares adjusted for stock splits) to its Employee Stock Ownership Trust (“ESOT”) for $2,700. The Employee Stock Ownership Plan (“ESOP”), in conjunction with the related ESOT, provided for the grant to certain employees of ownership rights in, but not possession of, the common shares held by the trustee of the ESOT. Annual allocations of shares have been made to individual accounts established for the benefit of the participants.
Defined Contribution and Savings Plans--Most employees are eligible to participate in The Davey 401KSOP and ESOP Plan. Effective January 1, 1997, the plan commenced operations and retained the existing ESOP participant accounts and incorporated a deferred savings plan (a “401(k) plan”) feature. Participants in the 401(k) plan are allowed to make before-tax contributions, within Internal Revenue Service established limits, through payroll deductions. Effective January 1, 2009 we match, in either cash or our common shares, 100% of the first one percent and 50% of the next three percent of each participant's before-tax contribution, limited to the first four
The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2018
(Amounts in thousands, except share data)
P. The Davey 401KSOP and Employee Stock Ownership Plan (continued)
percent of the employee’s compensation deferred each year. All nonbargaining domestic employees who attained age 21 and completed one year of service are eligible to participate.
Our common shares are not listed or traded on an established public trading market, and market prices are, therefore, not available. Semiannually, an independent stock valuation firm determines the fair market value of our common shares based upon our performance and financial condition. The Davey 401KSOP and ESOP Plan includes a put option for shares of the Company’s common stock distributed from the plan. Shares are distributed from the Davey 401KSOP and ESOP Plan to former participants of the plan, their beneficiaries, donees or heirs (each, a “participant”). Since our common stock is not currently traded on an established securities market, if the owners of distributed shares desire to sell their shares, the Company is required to purchase the shares at fair value for two 60-day periods after distribution of the shares from the Davey 401KSOP and ESOP. The fair value of distributed shares subject to the put option totaled $5,677$4,187 and $3,843$6,288 as of June 30, 201829, 2019 and December 31, 2017,2018, respectively. The fair value of the shares held in the Davey 401KSOP and ESOP totaled $115,848$115,515 and $119,677$112,761 as of June 30, 201829, 2019 and December 31, 2017,2018, respectively. Due to the Company’s obligation under the put option, the distributed shares subject to the put option and the shares held in the Davey 401KSOP and ESOP (collectively referred to as 401KSOP and ESOP related shares) are recorded at fair value, classified as temporary equity in the mezzanine section of the consolidated balance sheets and totaled $121,525$119,702 and $123,520$119,049 as of June 30, 201829, 2019 and December 31, 2017,2018, respectively. Changes in the fair value of the 401KSOP and ESOP Plan related shares are reflected in retained earnings while net share activity associated with 401KSOP and ESOP Plan related shares are first reflected in additional paid-in capital and then retained earnings if additional paid-in capital is insufficient.
| |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations. |
(Amounts in thousands, except share data)
Management’s Discussion and Analysis of Financial Condition and Results of Operations is provided as a supplement to the accompanying condensed consolidated financial statements and notes to help provide an understanding of our financial condition, cash flows and results of operations.
We provide a wide range of arboricultural, horticultural, environmental and consulting services to residential, utility, commercial and government entities throughout the United States and Canada.
Our Business--Our operating results are reported in two segments: Residential and Commercial, and Utility. Residential and Commercial provides services to our residential and commercial customers including: the treatment, preservation, maintenance, removal and planting of trees, shrubs and other plant life; the practice of landscaping,
grounds maintenance, tree surgery, tree feeding and tree spraying; the application of fertilizer, herbicides and insecticides; and natural resource management and consulting, forestry research and development, and environmental planning. Utility is principally engaged in providing services to our utility customers--investor-owned, municipal utilities, and rural electric cooperatives--including: the practice of line-clearing and vegetation management around power lines and rights-of-way and chemical brush control,control; natural resource management and consulting, forestry research and development, and environmental planning. All other operating activities, including research, technical support and laboratory diagnostic facilities, are included in "All Other."
RESULTS OF OPERATIONS
The following table sets forth our consolidated results of operations as a percentage of revenues and the percentage change in dollar amounts of the results of operations for the periods presented.
| | | Three Months Ended | | Six Months Ended | Three Months Ended | | Six Months Ended |
| June 30, 2018 | | July 1, 2017 | | Percentage Change | | June 30, 2018 | | July 1, 2017 | | Percentage Change | June 29, 2019 | | June 30, 2018 | | Percentage Change | | June 29, 2019 | | June 30, 2018 | | Percentage Change |
Revenues | 100.0 | % | | 100.0 | % | | — | % | | 100.0 | % | | 100.0 | % | | — | % | 100.0 | % | | 100.0 | % | | — | % | | 100.0 | % | | 100.0 | % | | — | % |
| | | | | | | | | | | | | | | | | | | | | | |
Costs and expenses: | | | | | | | | | | | | | | | | | | | | | | |
Operating | 62.0 |
| | 61.8 |
| | .2 |
| | 65.2 |
| | 65.1 |
| | .1 |
| 62.3 |
| | 62.0 |
| | .3 |
| | 64.4 |
| | 65.2 |
| | (.8 | ) |
Selling | 16.4 |
| | 16.7 |
| | (.3 | ) | | 17.5 |
| | 17.4 |
| | .1 |
| 16.8 |
| | 16.4 |
| | .4 |
| | 17.6 |
| | 17.5 |
| | .1 |
|
General and administrative | 6.4 |
| | 6.2 |
| | .2 |
| | 7.3 |
| | 7.2 |
| | .1 |
| 6.2 |
| | 6.4 |
| | (.2 | ) | | 6.9 |
| | 7.3 |
| | (.4 | ) |
Depreciation and amortization | 5.1 |
| | 5.3 |
| | (.2 | ) | | 5.7 |
| | 5.8 |
| | (.1 | ) | 4.8 |
| | 5.1 |
| | (.3 | ) | | 5.2 |
| | 5.7 |
| | (.5 | ) |
Gain on sale of assets, net | (.9 | ) | | (.5 | ) | | (.4 | ) | | (.7 | ) | | (.5 | ) | | (.2 | ) | (.1 | ) | | (.9 | ) | | .8 |
| | (.2 | ) | | (.7 | ) | | .5 |
|
| | | | | | | | | | | | | | | | | | | | | | |
Income from operations | 11.0 |
| | 10.5 |
| | .5 |
| | 5.0 |
| | 4.8 |
| | .2 |
| 10.0 |
| | 11.0 |
| | (1.0 | ) | | 6.1 |
| | 5.0 |
| | 1.1 |
|
| | | | | | | | | | | | | | | | | | | | | | |
Other income (expense): | | | | | | | | | | | | | | | | | | | | | | |
Interest expense | (.6 | ) | | (.4 | ) | | (.2 | ) | | (.7 | ) | | (.5 | ) | | (.2 | ) | (.8 | ) | | (.6 | ) | | (.2 | ) | | (.8 | ) | | (.7 | ) | | (.1 | ) |
Interest income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Other, net | (.4 | ) | | (.5 | ) | | .1 |
| | (.5 | ) | | (.6 | ) | | .1 |
| (1.0 | ) | | (.4 | ) | | (.6 | ) | | (1.0 | ) | | (.5 | ) | | (.5 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Income before income taxes | 10.0 |
| | 9.5 |
| | .5 |
| | 3.8 |
| | 3.9 |
| | (.1 | ) | 8.2 |
| | 10.0 |
| | (1.8 | ) | | 4.3 |
| | 3.8 |
| | .5 |
|
| | | | | | | | | | | | | | | | | | | | | | |
Income taxes | 2.0 |
| | 3.7 |
| | (1.7 | ) | | .7 |
| | 1.5 |
| | (.8 | ) | 1.7 |
| | 2.0 |
| | (.3 | ) | | .9 |
| | .7 |
| | .2 |
|
| | | | | | | | | | | | | | | | | | | | | | |
Net income | 8.0 | % | | 5.8 | % | | 2.2 | % | | 3.1 | % | | 2.4 | % | | .7 | % | 6.6 | % | | 8.0 | % | | (1.4 | )% | | 3.5 | % | | 3.1 | % | | .4 | % |
| | | | | | | | | | | | |
Second Quarter—Three Months Ended June 30, 201829, 2019 Compared to Three Months Ended July 1, 2017June 30, 2018
Our results of operations for the three months ended June 30, 201829, 2019 compared to the three months ended July 1, 2017June 30, 2018 follows:
| | | Three Months Ended | Three Months Ended |
| June 30, 2018 | | July 1, 2017 | | Change | | Percentage Change | June 29, 2019 | | June 30, 2018 | | Change | | Percentage Change |
Revenues | $ | 270,649 |
| | $ | 245,037 |
| | $ | 25,612 |
| | 10.5 | % | $ | 301,434 |
| | $ | 270,649 |
| | $ | 30,785 |
| | 11.4 | % |
| | | | | | | | | | | | | | |
Costs and expenses: | | | | | |
| | |
| | | | | |
| | |
|
Operating | 167,682 |
| | 151,525 |
| | 16,157 |
| | 10.7 |
| 187,778 |
| | 167,682 |
| | 20,096 |
| | 12.0 |
|
Selling | 44,317 |
| | 40,816 |
| | 3,501 |
| | 8.6 |
| 50,629 |
| | 44,317 |
| | 6,312 |
| | 14.2 |
|
General and administrative | 17,358 |
| | 15,213 |
| | 2,145 |
| | 14.1 |
| 18,671 |
| | 17,358 |
| | 1,313 |
| | 7.6 |
|
Depreciation and amortization | 13,938 |
| | 13,000 |
| | 938 |
| | 7.2 |
| 14,590 |
| | 13,938 |
| | 652 |
| | 4.7 |
|
Gain on sale of assets, net | (2,446 | ) | | (1,176 | ) | | (1,270 | ) | | nm |
| (516 | ) | | (2,446 | ) | | 1,930 |
| | (78.9 | ) |
| 240,849 |
| | 219,378 |
| | 21,471 |
| | 9.8 |
| 271,152 |
| | 240,849 |
| | 30,303 |
| | 12.6 |
|
|
|
| | | | | | |
|
| | | | | | |
Income from operations | 29,800 |
| | 25,659 |
| | 4,141 |
| | 16.1 |
| 30,282 |
| | 29,800 |
| | 482 |
| | 1.6 |
|
Other income (expense): | |
| | | | |
| | | |
| | | | |
| | |
Interest expense | (1,754 | ) | | (1,072 | ) | | (682 | ) | | 63.6 |
| (2,428 | ) | | (1,754 | ) | | (674 | ) | | 38.4 |
|
Interest income | 101 |
| | 73 |
| | 28 |
| | 38.4 |
| 93 |
| | 101 |
| | (8 | ) | | (7.9 | ) |
Other, net | (1,052 | ) | | (1,339 | ) | | 287 |
| | (21.4 | ) | (3,153 | ) | | (1,052 | ) | | (2,101 | ) | | 199.7 |
|
Income before income taxes | 27,095 |
| | 23,321 |
| | 3,774 |
| | 16.2 |
| 24,794 |
| | 27,095 |
| | (2,301 | ) | | (8.5 | ) |
|
|
| | | | | | |
|
| | | | | | |
Income taxes | 5,381 |
| | 9,098 |
| | (3,717 | ) | | (40.9 | ) | 5,047 |
| | 5,381 |
| | (334 | ) | | (6.2 | ) |
|
|
| | | | | | |
|
| | | | | | |
Net income | $ | 21,714 |
| | $ | 14,223 |
| | $ | 7,491 |
| | 52.7 | % | $ | 19,747 |
| | $ | 21,714 |
| | $ | (1,967 | ) | | (9.1 | )% |
| | | | | | | | |
nm--not meaningful | |
| | |
| | |
| | |
| |
Revenues--Revenues of $270,649$301,434 increased $25,612$30,785 compared with $245,037$270,649 in the second quarter of 2017.2018. Utility Services increased $15,593$22,696 or 13.8%17.7% compared with the second quarter of 2017.2018. The increase is attributable to new accounts as well as increased work year-over-year and price increases on existing accounts. Residential and Commercial Services increased $10,166$8,505 or 7.7%6.0% from the second quarter of 2017.2018. Increases in tree and plant care and consulting revenues were partially offset by decreasesprimarily in grounds maintenance and storm damage revenues. Total revenues of $270,649 included $155 production incentive revenue during the second quarter of 2018 compared with $1,034 during the second quarter of 2017.
Operating Expenses--Operating expenses of $167,682$187,778 increased $16,157$20,096 compared with the second quarter of 2017.2018. Utility Services increased $11,345$13,280 or 13.4%13.8% compared with the second quarter of 20172018 but, as a percentage of revenue, decreased .3% to 72.3% from 74.8%. The increase is attributable to additional expenses for labor, fuel, equipment maintenance, subcontractors and toolscrew meals and saws associated with the increased revenue.lodging expenses, which were partially offset by a decrease in a subcontractor expense. Residential and Commercial Services increased $5,106$5,414 or 7.9%7.7% compared with the second quarter of 20172018 and, as a percentage of revenue, increased .1% to 50.4% from 49.5%. Increases inThe increase is attributable to additional expenses for labor, expense, fuel expense,equipment maintenance, subcontractor expense and tool and parts expense, which were partially offset by a reductiondecrease in materials expense.
Fuel costs of $8,700$9,480 increased $1,988,$780, or 29.6%9.0%, from the $6,712$8,700 incurred in the second quarter of 20172018 and impacted operating expenses within all segments. The $1,988$780 increase included usage increases approximating $190 and price increases approximating $243 and usage increases approximating $1,745.$590.
Selling Expenses--Selling expenses of $44,317$50,629 increased $3,501$6,312 compared with the second quarter of 2017 but,2018 and, as a percentage of revenues, decreased .3%increased to 16.8% from 16.4%. Utility Services increased $1,491$4,475 or 12.4%33.2% over the second quarter of 20172018 and, as a percentage of revenue, increased to 11.9% from 10.5%. The increase is attributable to
increases in field management wages and incentive expense, travel expense and communication expense. Residential and Commercial Services increased $1,777 or 5.6% over the second quarter of 2018 but, as a percentage of revenue, decreased .1% to 10.5%. Increases in field management wages and incentive expense and employee development were partially offset by decreases in travel and rent expenses.
Residential and Commercial Services experienced an increase of $1,876 or 6.2% over the second quarter of 2017 but, as a percentage of revenue, decreased .3% to22.5% from 22.6%. Increases in field management wages and incentive expense, rent and communications expenses were partially offset by a decrease in office support wages, field management auto expense, field management travel expense, computer expense rent and employee development primarily accounted for the increase.wages.
General and Administrative Expenses--General and administrative expenses of $17,358$18,671 increased $2,145$1,313 from $15,213$17,358 in the second quarter of 2017. Increases in2018. The increases are attributable to salary and incentive expense, travel and living expenses, professional servicescomputer expenses and general insurance expense and were partially offset by reductionsa decrease in employee developmentprofessional services expense.
Depreciation and Amortization Expense--Depreciation and amortization expense of $13,938$14,590 increased $938$652 from $13,000$13,938 incurred in the second quarter of 2017,2018, primarily due to increased capital expenditures and purchases of businesses in recent years.
Gain on the Sale of Assets, Net--Gain on the sale of assets of $2,446$516 for the second quarter of 2018 increased $1,2702019 decreased $1,930 from the $1,176$2,446 gain in the second quarter of 2017. Higher2018. We sold fewer units of equipment and experienced a lower average sales prices on units sold and the sale of real estate were partially offset by reductions in the quantity of units soldgain per unit in the second quarter of 20182019 as compared with the second quarter of 2017.2018. In the second quarter of 2018, we also sold a parcel of real estate at a gain, while we did not have any real estate sales in the second quarter of 2019.
Interest Expense--Interest expense of $1,754$2,428 increased $682$674 from the $1,072$1,754 incurred in the second quarter of 2017.2018. The increase is attributable to higher-averagehigher interest rates and higher average debt levels necessary to fund operations and capital expenditures during the second quarter of 2018,2019, as compared with the second quarter of 2017.2018.
Other, Net--Other, net, of $1,052 decreased $287$3,153 increased $2,101 from the $1,339$1,052 incurred in the second quarter of 20172018 and consisted of nonoperating income and expense, including foreign currency transaction gains/losses on the intercompany account balances of our Canadian operations.
Income Tax ExpenseTaxes--Income tax expensetaxes for the second quarter of 2018 was $5,381,2019 were $5,047, as compared to $9,098$5,381 for the second quarter of 2017.2018. Our tax provision for interim periods is determined using an estimate of our annual effective tax rate adjusted for discrete items, if any, that are taken into account in the relevant period. The 2018 effective tax rate as of the second quarter of 2018 is estimated to approximate 18.2%2019 was 20.4%, as compared with the second quarter of 20172018 of 39.2%19.9%. The decrease is attributable to the reduction in the corporate federal income tax rate with the passage of the Tax Cuts and Jobs Act that was signed into law in December 2017.
Net Income--Net income of $19,747 for the second quarter of 2019 was $1,967 less than the $21,714 for the second quarter of 2018 was $7,491 more than the $14,223 for the second quarter of 2017.2018.
First Half—Six Months Ended June 30, 201829, 2019 Compared to Six Months Ended July 1, 2017June 30, 2018
Our results of operations for the six months ended June 30, 201829, 2019 compared to the six months ended July 1, 2017June 30, 2018 follows:
| | | Six Months Ended | Six Months Ended |
| June 30, 2018 | | July 1, 2017 | | Change | | Percentage Change | June 29, 2019 | | June 30, 2018 | | Change | | Percentage Change |
Revenues | $ | 479,300 |
| | $ | 437,850 |
| | $ | 41,450 |
| | 9.5 | % | $ | 549,323 |
| | $ | 479,300 |
| | $ | 70,023 |
| | 14.6 | % |
| | | | | | | | | | | | | | |
Costs and expenses: | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
Operating | 312,305 |
| | 285,184 |
| | 27,121 |
| | 9.5 |
| 353,794 |
| | 312,305 |
| | 41,489 |
| | 13.3 |
|
Selling | 83,974 |
| | 76,350 |
| | 7,624 |
| | 10.0 |
| 96,933 |
| | 83,974 |
| | 12,959 |
| | 15.4 |
|
General and administrative | 35,076 |
| | 31,613 |
| | 3,463 |
| | 11.0 |
| 37,715 |
| | 35,076 |
| | 2,639 |
| | 7.5 |
|
Depreciation and amortization | 27,059 |
| | 25,190 |
| | 1,869 |
| | 7.4 |
| 28,802 |
| | 27,059 |
| | 1,743 |
| | 6.4 |
|
Gain on sale of assets, net | (3,248 | ) | | (2,151 | ) | | (1,097 | ) | | 51.0 |
| (1,169 | ) | | (3,248 | ) | | 2,079 |
| | (64.0 | ) |
| 455,166 |
| | 416,186 |
| | 38,980 |
| | 9.4 |
| 516,075 |
| | 455,166 |
| | 60,909 |
| | 13.4 |
|
| | | | | | | | | | | | | | |
Income from operations | 24,134 |
| | 21,664 |
| | 2,470 |
| | 11.4 |
| 33,248 |
| | 24,134 |
| | 9,114 |
| | 37.8 |
|
Other income (expense): | |
| | |
| | |
| | | |
| | |
| | |
| | |
Interest expense | (3,155 | ) | | (2,329 | ) | | (826 | ) | | 35.5 |
| (4,579 | ) | | (3,155 | ) | | (1,424 | ) | | 45.1 |
|
Interest income | 179 |
| | 143 |
| | 36 |
| | 25.2 |
| 176 |
| | 179 |
| | (3 | ) | | (1.7 | ) |
Other, net | (2,714 | ) | | (2,478 | ) | | (236 | ) | | 9.5 |
| (4,808 | ) | | (2,714 | ) | | (2,094 | ) | | 77.2 |
|
Income before income taxes | 18,444 |
| | 17,000 |
| | 1,444 |
| | 8.5 |
| 24,037 |
| | 18,444 |
| | 5,593 |
| | 30.3 |
|
| | | | | | | | | | | | | | |
Income taxes | 3,357 |
| | 6,664 |
| | (3,307 | ) | | (49.6 | ) | 4,783 |
| | 3,357 |
| | 1,426 |
| | 42.5 |
|
| | | | | | | | | | | | | | |
Net income | $ | 15,087 |
| | $ | 10,336 |
| | $ | 4,751 |
| | 46.0 | % | $ | 19,254 |
| | $ | 15,087 |
| | $ | 4,167 |
| | 27.6 | % |
Revenues--Revenues of $479,300$549,323 increased $41,450$70,023 compared with $437,850$479,300 in the first half of 2017.2018. Utility Services increased $21,802$44,478 or 9.7%18.0% compared with the first half of 2017. Contracts lost2018. The increase is attributable to new accounts, as well as increased work year-over-year and significant reductions in contract scope with two utility providers within our U.S. Utility operations were offset by new contracts obtained andprice increases in rates and productivity on other contractsexisting accounts within both our U.S. and Canadian operations. Residential and Commercial Services increased $19,924$26,555 or 9.4%11.5% from the first half of 2017.2018. Increases were predominately in tree and plant care, consulting and grounds maintenance and consulting revenues were partially offset by decreases in storm damage revenues. Total revenues of $479,300 included production incentive revenue, recognized under the completed-performance method,maintenance.of $401during the first half of 2018 compared with $1,056 during the first half of 2017.
Operating Expenses--Operating expenses of $312,305$353,794 increased $27,121$41,489 compared with the first half of 2017 and,2018 but, as a percentage of revenues, increased .1%decreased to 64.4% from 65.2%. Utility Services increased $16,554$25,316 or 9.7%13.5% compared with the first half of 20172018 but, as a percentage of revenue, remained atdecreased to 73.0% from 75.8%. The increase was attributable to additional labor expense, equipment maintenance expense, fuel expense, and meals and lodging expense, which were partially offset by decreases in subcontractor and materials expenses.Residential and Commercial Services increased $15,982 or 13.1% compared with the first half of 2018 and, as a percentage of revenue, increased to 53.7% from 53.0%. Increases in labor expense, fuel, equipment maintenance expense, subcontractor expense and equipment maintenancemeals and lodging expense were partially offset by a decrease in equipment rentalmaterials expense.Residential and Commercial Services increased $10,711 or 9.6% compared with the first half of 2017 and, as a percentage of revenue, increased .1% to 53.0%. The increase was attributable to additional expenses for labor expense, equipment maintenance expense, materials expense, subcontractor expense, fuel expense, tool expense and crew expenses associated with the increased revenue.
Fuel costs of $15,642$17,001 increased $3,319,$1,359, or 26.9%8.7%, from the $12,323$15,642 incurred in the first half of 20172018 and impacted operating expenses within all segments. The $3,319$1,359 increase included usage increases approximating $439 and price increases approximating $426 and usage increases approximating $2,893.
$920.
Selling Expenses--Selling expenses of $83,974$96,933 increased $7,624$12,959 compared with the first half of 20172018 and, as a percentage of revenue, increased .1% to 17.6% from 17.5%. Utility Services increased $2,547$9,080 or 10.6%34.3% over the first half of 20172018 and, as a percentage of revenue, increased .1% to 12.2% from 10.7%. Increases in field management wages and incentiveThe increase was attributable to
expense, computeradditional field management wages and incentive expense, rent andexpense, travel expense were partially offset by a decrease in office support wages.and communications expense. Residential and Commercial Services experienced an increase of $4,936$3,918 or 9.1%6.6% over the first half of 20172018 but, as a percentage of revenue, decreased .1% to 24.6% from 25.7%. Increases in field management wages and incentive expense, office rent expense, employee development expense, field management travel expense and marketing expense were partially offset by a decrease in office support wages, and communication expense contributed to the increase.
wages.
General and Administrative Expenses--General and administrative expenses of $35,076$37,715 increased $3,463$2,639 from $31,613$35,076 in the first half of 2017.2018. Increases in salary and incentive expense, stock compensation expense, computer expense, pensiontravel expense, professional service expense, travel, rent, general insurance expense and advertisingrent expense contributed to the increase.were partially offset by a decrease in professional services expense.
Depreciation and Amortization Expense--Depreciation and amortization expense of $27,059$28,802 increased $1,869$1,743 from $25,190$27,059 incurred in the first half of 2017.2018. The increase was attributable to higher capital expenditures necessary to support the business and purchases of businesses in recent years.
Gain on the Sale of Assets, Net--Gain on the sale of assets of $3,248$1,169 for the first half of 2018 increased $1,0972019 decreased $2,079 from the $2,151$3,248 gain in the first half of 2017due to higher average sales prices on fewer2018. We sold more individual units sold and the sale of a property inequipment during the first half of 20182019 as compared with the first half of 2017.2018, but experienced a lower average gain per unit. In 2018, we also sold a parcel of real estate at a gain, while we did not have any real estate sales in the first half of 2019.
Interest Expense--Interest expense of $3,155$4,579 increased $826$1,424 from the $2,329$3,155 incurred in the first half of 2017.2018. The increase is attributable to higher-averagehigher interest rates and higher average debt levels necessary to fund operations, capital expenditures and purchases of businesses during the first six months of 2018,2019, as compared with the first six months of 2017.2018.
Other, Net--Other, net, of $2,714$4,808 increased $236$2,094 from the $2,478$2,714 incurred in the first half of 20172018 and consisted of nonoperating income and expense, including foreign currency gains/losses on the intercompany account balances of our Canadian operations.
Income Tax ExpenseTaxes--Income tax expensetaxes for the first half of 2018 was $3,357,2019 were $4,783, as compared to $6,664$3,357 for the first half of 2017.2018. Our tax provision for interim periods is determined using an estimate of our annual effective tax rate adjusted for discrete items, if any, that are taken into account in the relevant period. The 2018 effective tax rate for the first half of 20182019 is estimated to approximate 18.2%19.9%. Our effective tax rate for the first half of 20172018 was 39.2%18.2%. The decreasechange in the effective tax rate from statutory tax rates is attributableprimarily due to the reduction in the corporate federal income tax rate with the passageimpact of the Tax Cuts and Jobs Act that was signed into law in December 2017.favorable discrete items.
Net Income--Net income of $19,254 for the first half of 2019 was $4,167 more than the net income of $15,087 for the first half of 2018 was $4,751 more than the $10,336 for the first half of 2017.2018.
LIQUIDITY AND CAPITAL RESOURCES
Our principal financial requirements are for capital spending, working capital and business acquisitions.
Cash Flow Summary
Our cash flows from operating, investing and financing activities for the six months ended June 30, 201829, 2019 and July 1, 2017June 30, 2018 follow:
| | | Six Months Ended | Six Months Ended |
| June 30, 2018 | | July 1, 2017 | June 29, 2019 | | June 30, 2018 |
Cash provided by (used in): | | | | | | |
Operating activities | $ | 22,662 |
| | $ | 27,667 |
| $ | 44,286 |
| | $ | 22,662 |
|
Investing activities | (38,614 | ) | | (45,635 | ) | (38,817 | ) | | (38,614 | ) |
Financing activities | 15,314 |
| | 18,645 |
| (12,187 | ) | | 15,314 |
|
(Decrease)/Increase in cash | $ | (638 | ) | | $ | 677 |
| |
Effect of exchange rate changes on cash | | 114 |
| | — |
|
Decrease in cash | | $ | (6,604 | ) | | $ | (638 | ) |
Cash Provided By Operating Activities--Cash provided by operating activities was $22,662$44,286 for the first six months of 2018,2019, or $5,005 less$21,624 more than the $27,667$22,662 provided in the first six months of 2017.2018. The $5,005 decrease$21,624 increase in operating cash flow provided was primarily attributable to a $12,469 increasedecrease of $9,712 in cash used for operatingaccounts payable and accrued expenses and a $6,466 change in other assets and liabilities, excluding accounts receivable, partially offset by a $4,751 increase in net income, an increase of $1,869$6,362 in depreciation and amortization and $64 less cash used inby accounts receivable.
Overall, accounts receivable increased $15,960 during the first six months of 2019, as compared to an increase of $9,598 during the first six months of 2018, as compared to an increase of $9,662 during the first six months of 2017.2018. With respect to the change in accounts receivable arising from business levels, the “days-sales-outstanding” in accounts receivable (sometimes referred to as “DSO”) at the end of the first six months of 20182019 increased by one dayfour days to 64 days, when compared to 60 days when compared toat the end of the first six months of 2017. The2018, with the current six months being impacted by the pre-petition receivables of approximately $15,000 from PG&E. DSO excluding PG&E pre-petition receivables would be 60 days at July 1, 2017 was 59 days.the end of the first six months of 2019.
Operating liabilitiesAccounts payable and accrued expenses decreased $8,907$609 in the first six months of 2018,2019, or $10,030 more$9,712 less than the $1,123 increase$10,321 decrease in the first six months of 2017. Accounts payable and accrued expenses decreased $10,321 during the first six months of 2018 as compared with a decrease of $4,252 for the first six months of 2017.2018. Decreases in employee compensation accruals, trade payables income taxes payable and advance payments from customersemployee compensation were partially offset by increases in self-insured medical accruals, compensated absence accrualsincome taxes, advance payments from customers, and non-income taxes payable.other than income. Self-insurance accrualsreserves increased $1,414$1,690 in the first six months of 2018,2019, which was $3,961 less$276 more than the increase of $5,375$1,414 experienced in the first six months of 2017.2018.
Operating assets and liabilities other, net, used $850provided $1,661 of cash for the first six months of 20182019 as compared with providing $1,589using $4,805 of cash for the first six months of 2017.2018. The $2,439$6,466 net change related primarily to an increasedecreases in operating supplies, prepaid expenses, prepaid income taxes and decreases in deposits and pension and post-retirement benefits.assets invested for self-insurance.
Cash Used In Investing Activities--Cash used in investing activities for the first six months of 20182019 was $38,614,$38,817, or $7,021$203 less than the $45,635$38,614 used during the first six months of 2017. Reductions2018. The decrease was primarily the result of decreases in capital expenditures for equipment land and buildings andof $3,036 partially offset by an increase for purchases of businesses account forof $486 and a decrease in proceeds from the decrease.sales of fixed assets of $2,762.
Cash (Used In) Provided By Financing Activities--Cash provided byused in financing activities of $15,314 decreased $3,331$12,187 increased $27,501 during the first six months of 20182019 as compared with $18,645$15,314 of cash provided during the first six months of 2017.2018. During the first six months of 2018,2019, our revolving credit facility, provided $39,000net used $14,000 in cash as compared with $35,500$39,000 provided during the first six months of 2017.2018. We use the credit facility primarily for capital expenditures, redemptions of shares and payments of notes payable related to acquisitions. PaymentsNotes payable provided $12,486, including $25,000 of notes payable used $9,032cash provided by the issuance of 4.00% Senior Notes during the first six months of 2018,2019, an increase of $311$21,518 when compared to the $8,721$9,032 used in the first six months of 2017.2018. The proceeds of the 4.00% Senior Notes were used to pay down the revolving credit facility. Treasury share transactions (purchases and sales) used $13,436$8,643 for the first six months of 2018, $6,570 more2019, $4,793 less than the $6,866$13,436 used in the first six months of 2017,2018, and included $328$298 of cash received from our common share subscriptions. Dividends paid of $1,218$1,170 during the first six months of 20182019 decreased $50$48 as compared with $1,268$1,218 paid in the first six months of 2017.2018.
The Company currently repurchases common shares at the shareholders’ request in accordance with the terms of the Davey 401KSOP and ESOP Plan and also repurchases common shares from time to time at the Company’s
discretion. The amount of common shares offered to the Company for repurchase by the holders of shares distributed from the Davey 401KSOP and ESOP Plan is not within the control of the Company, but is at the discretion of the shareholders. The Company expects to continue to repurchase its common shares, as offered by its shareholders from time to time, at their then current fair value. However, other than for repurchases pursuant to the put option under The Davey 401KSOP and ESOP Plan, as described in Note P,Q, such purchases are not required, and the Company retains the right to discontinue them at any time. Repurchases of redeemable common shares at the shareholders' request approximated $20,179$8,683 and $8,778$20,179 during the six months ended June 29, 2019 and June 30, 2018, and July 1, 2017, respectively. Share repurchases, other than redeemable common shares, approximated $6,177$12,446 and $8,224$6,177 during the six months ended June 30, 201829, 2019 and July 1, 2017, respectively.
Revolving Credit Facility--In October 2017, we amended our revolving credit facility. The Amended and Restated Credit Agreement provides for a revolving credit facility with a group of banks under which up to an aggregate of $250,000 is available, with a letter of credit sublimit of $100,000 and a swing-line commitment of $25,000. Under certain circumstances, the amount available under the revolving credit facility may be increased to $325,000.
The Amended and Restated Credit Agreement extended the term of the revolving credit facility to October 6, 2022. The revolving credit facility contains certain affirmative and negative covenants customary for this type of facility and includes financial covenant ratios with respect to a maximum leverage ratio (not to exceed 3.00 to 1.00 with exceptions in case of material acquisitions) and a minimum interest coverage ratio (not less than 3.00 to 1.00), in each case subject to certain further restrictions as described in the Credit Agreement.
As of June 30, 2018, we had unused commitments under the facility approximating$108,087, with $141,913 committed, consisting of borrowings of$139,000 and issued letters of credit of$2,913.respectively.
Borrowings outstanding bear interest, at Davey Tree’s option, of either (a) a base rate or (b) LIBOR plus a margin adjustment ranging from .875% to 1.50%--with the margin adjustments in both instances based on the Company's leverage ratio at the time of borrowing. The base rate was the greater of (i) the agent bank’s prime rate, (ii) LIBOR plus 1.50%, or (iii) the federal funds rate plus .50%. A commitment fee ranging from .10% to .225% was also required based on the average daily unborrowed commitment.
5.09% Senior Unsecured Notes--The senior unsecured notes are due July 22, 2020 and were issued during July 2010 as 5.09% Senior Unsecured Notes, Series A (the "5.09% Senior Notes"), pursuant to a Master Note Purchase Agreement (the “Purchase Agreement”) between the Company and the purchasers of the 5.09% Senior Notes.
The 5.09% Senior Notes are equal in right of payment with our revolving credit facility and all other senior unsecured obligations of the Company. Interest is payable semiannually and five equal, annual principal payments commenced on July 22, 2016 (thesixth anniversary of issuance). The Purchase Agreement contains customary events of default and covenants related to limitations on indebtedness and transactions with affiliates and the maintenance of certain financial ratios.
Accounts Receivable Securitization Facility--In May 2018, the Company amended its Accounts Receivable Securitization Facility (the "AR Securitization program") to extend the scheduled termination date for an additional one-year period, to May 6, 2019. In addition, for purposes of determining events of default, the Days' Sales Outstanding calculation was amended to include the most recent six fiscal months. The prior calculation was based on the most recent three fiscal months.
The AR Securitization program has a limit of $100,000 of which $58,150 was issued for letters of credit as of June 30, 2018 .
Under the AR Securitization program, Davey Tree transfers by selling or contributing current and future trade receivables to a wholly-owned, bankruptcy-remote financing subsidiary which pledges a perfected first priority security interest in the trade receivables--equal to the issued letters of credit ("LCs") as of June 30, 2018--to the bank in exchange for the bank issuing LCs.
Fees payable to the bank include: (a) an LC issuance fee, payable on each settlement date, in the amount of .90% per annum on the aggregate amount of all LCs outstanding plus outstanding reimbursement obligations (e.g.,
arising from drawn LCs), if any, and (b) an unused LC fee, payable monthly, equal to (i) .35% per annum for each day on which the sum of the total LCs outstanding plus any outstanding reimbursement obligations is greater than or equal to 50% of the facility limit and (ii) .45% per annum for each day on which the sum of the total LCs outstanding plus any outstanding reimbursement obligations is less than 50% of the facility limit. If an LC is drawn and the bank is not immediately reimbursed in full for the drawn amount, any outstanding reimbursement obligation will accrue interest at a per annum rate equal to a reserve-adjusted LIBOR or, in certain circumstances, a base rate equal to the higher of (i) the bank’s prime rate and (ii) the federal funds rate plus .50% and, following any default, 2.00% plus the greater of (a) adjusted LIBOR and (b) a base rate equal to the higher of (i) the bank’s prime rate and (ii) the federal funds rate plus .50%.
The agreements underlying the AR Securitization program contain various customary representations and warranties, covenants, and default provisions which provide for the termination and acceleration of the commitments under the AR Securitization program in circumstances including, but not limited to, failure to make payments when due, breach of a representation, warranty or covenant, certain insolvency events or failure to maintain the security interest in the trade receivables, and defaults under other material indebtedness.
Contractual Obligations Summary and Commercial Commitments
The following summarizes our long-term contractual obligations, as of June 30, 2018, to make future payments for the periods indicated: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Six Months Ending December 31, 2018 | | | | | | |
| | | | | Year Ending December 31, | | |
Description | | Total | | | 2019 | | 2020 | | 2021 | | 2022 | | Thereafter |
Revolving credit facility | | $ | 139,000 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 139,000 |
| | $ | — |
|
Senior unsecured notes | | 18,000 |
| | 6,000 |
| | 6,000 |
| | 6,000 |
| | — |
| | — |
| | — |
|
Term loans | | 8,937 |
| | 3,055 |
| | 1,092 |
| | 4,790 |
| | — |
| | — |
| | — |
|
Capital lease obligations | | 2,551 |
| | 811 |
| | 945 |
| | 709 |
| | 86 |
| | — |
| | — |
|
Operating lease obligations | | 24,013 |
| | 6,284 |
| | 4,636 |
| | 3,150 |
| | 2,074 |
| | 4,383 |
| | 3,486 |
|
Self-insurance accruals | | 69,108 |
| | 24,015 |
| | 12,630 |
| | 8,134 |
| | 4,991 |
| | 6,039 |
| | 13,299 |
|
Purchase obligations | | 7,979 |
| | 7,979 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Other liabilities | | 17,039 |
| | 3,444 |
| | 6,136 |
| | 1,754 |
| | 2,025 |
| | 1,474 |
| | 2,206 |
|
| | $ | 286,627 |
| | $ | 51,588 |
| | $ | 31,439 |
| | $ | 24,537 |
| | $ | 9,176 |
| | $ | 150,896 |
| | $ | 18,991 |
|
The self-insurance accruals in the summary above reflect the total of the undiscounted amount accrued, for which amounts estimated to be due each year may differ from actual payments required to fund claims. Purchase obligations in the summary above represent open purchase-order amounts that we anticipate will become payable for goods and services that we have negotiated for delivery as of June 30, 2018. Other liabilities include estimates of future expected funding requirements related to retirement plans and other sundry items. Because their future cash outflows are uncertain, accrued income tax liabilities for uncertain tax positions, as of June 30, 2018, have not been included in the summary above. Noncurrent deferred taxes and payments related to defined benefit pension plans are also not included in the summary.
As of June 30,29, 2019 and December 31, 2018, total commitments related to issued letters of credit were $63,067,$72,236, of which $2,913$2,788 were issued under the revolving credit facility, $58,150$67,438 were issued under the AR Securitization program, and $2,004 were issued under short-term lines of credit. As of December 31, 2017, total commitments related to issued letters of credit were $63,242, of which $3,088 were issued under the revolving credit facility, $58,150 were issued under the AR Securitization facility, and $2,004$2,010 were issued under short-term lines of credit.
Also, as is common in our industry, we have performance obligations that are supported by surety bonds, which expire during 20182019 through 2023.2023. We intend to renew the surety bonds where appropriate and as necessary.
Capital Resources
Cash generated from operations and our revolving credit facility are our primary sources of capital.
Business seasonality traditionally results in higher revenues during the second and third quarters as compared with the first and fourth quarters of the year, while our methods of accounting for fixed costs, such as depreciation and amortization expense, rent and interest expense, are not significantly impacted by business seasonality. Capital resources during these periods are equally affected. We satisfy seasonal working capital needs and other financing requirements with the revolving credit facility and other short-term lines of credit. We are continually reviewing our existing sources of financing and evaluating alternatives. At June 30, 2018,29, 2019, we had working capital of $105,453,$117,978, and short-term lines of credit approximating $7,133$3,095 and $108,087$167,712 available under our revolving credit facility.
We believe our sources of capital, at this time, provide us with the financial flexibility to meet our capital-spending plans and to continue to complete business acquisitions for at least the next twelve months and for the reasonably foreseeable future.
Recent Accounting Guidance
Accounting Standards Adopted in 2018
Accounting Standards Update 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business--In January 2017, the FASB issued ASU 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business," which provides guidance to evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. If substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single asset or a group of similar assets, the assets acquired (or disposed of) are not considered a business. The Company adopted the guidance effective January 1, 2018 and application will be applied prospectively for annual and interim periods beginning after December 15, 2017. The adoption of this guidance did not have a material impact on our consolidated financial statements.
Accounting Standards Update 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force)--In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which provides guidance on how cash receipts and cash payments related to eight specific cash flow issues are presented and classified in the statement of cash flows, with the objective of reducing the existing diversity in practice. The Company adopted ASU 2016-15 on January 1, 2018. The adoption of ASU 2016-15 did not have a material impact on our consolidated financial statements.
Accounting Standards Update 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost--In March 2017, the FASB issued ASU 2017-07, “Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” which changes the presentation of net periodic benefit cost related to employer sponsored defined benefit plans and other postretirement benefits. Under ASU 2017-07, service costs will be included within the same income statement line item as other compensation costs arising from services rendered by pertinent employees during the period. The other components of net periodic benefit pension cost will be presented separately outside of income from operations. Additionally, only the service cost component of the net periodic benefit cost may be capitalized in assets. The amendments under ASU 2017-07 also provide a practical expedient that permits the use of amounts disclosed in its pension and other postretirement benefit plan note for prior year comparative periods as the estimation basis for applying the guidance retrospectively. The Company adopted ASU 2017-07 on January 1, 2018 and chose to use the practical expedient provided when applying the guidance retrospectively. Upon adoption, service costs are recognized in our financial statements as general and administrative expenses while the remaining components of net periodic benefit cost are recognized as other income (expense). Pension expense of $347 for the second quarter 2017 and
$694 for the first six months of 2017 have been reclassified from general and administrative expense to other income (expense).
Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606)--In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which replaces all current U.S. GAAP guidance on revenue recognition and eliminates all industry-specific guidance. The Company adopted ASU 2014-09 and applied it to all contracts that were not completed using the modified retrospective method. The cumulative effect of applying the guidance in ASU 2014-09 to contracts that were not yet completed as of January 1, 2018 was not material. Further, the adoption of ASU 2014-09 did not have a significant impact on the amount or timing of revenue recognition. Therefore, we have not disclosed the amount by which each financial statement line item is affected in the current period as a result of applying ASU 2014-09 or an explanation of significant changes between our results as reported and those that would have been reported under legacy GAAP as no significant changes were identified.
Accounting Standards Not Yet Adopted
Accounting Standards Update 2016-02, Leases (Topic 842)--In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” ASU 2016-02 establishes a comprehensive new lease accounting model. The new standard: (a) clarifies the definition of a lease; (b) requires a dual approach to lease classification similar to current lease classifications; and, (c) causes lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset for leases with a lease-term of more than twelve months. The new standard is effective for interim and annual periods beginning after December 15, 2018, which for Davey Tree would be January 1, 2019. Early adoption is permitted. The new standard requires a modified retrospective transition for capital or operating leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements, but it does not require transition accounting for leases that expire prior to the date of initial application. The Company plans to adopt ASU 2016-02 on January 1, 2019. Management has assembled a project team and is in the process of gathering information to evaluate real estate, personal property and other arrangements that may meet the definition of a lease and has purchased a technology solution to assist with the management of leases. Management expects to adopt the standard using the Comparative Under ASC 840 approach and has evaluated the accounting elections and practical expedients available under the standard. Management expects that the adoption of ASU 2016-02 will have a material impact on the Company's consolidated financial statements.
Accounting Standards Update 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220)--In February 2018, the FASB issued ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220)." ASU 2018-02 provides an option to reclassify the stranded tax effects within accumulated other comprehensive income to retained earnings as a result of the Tax Cuts and Jobs Act of 2017. This standard is effective for interim and annual reporting periods beginning after December 15, 2018, which for Davey Tree would be January 1, 2019. Early adoption is permitted. Management has not yet completed its assessment of the impact of the new standard on the Company's consolidated financial statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented.
As discussed in our annual report on Form 10-K for the year ended December 31, 2017,2018, we believe that our policies related to revenue recognition, the allowance for doubtful accounts, stock valuation and self-insurance accrualsreserves are our “critical accounting policies and estimates”--those most important to the financial presentations and those that require the most difficult, subjective or complex judgments. During the first quarter 2018, we updated our revenue recognition policies in conjunction with our adoption of Accounting Standards Codification 606, "Revenue from
Contracts with Customers" as further described in Note M Revenue Recognition of the Notes to Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q.
On an ongoing basis, we evaluate our estimates and assumptions, including those related to accounts receivable, specifically those receivables under contractual arrangements primarily with Utility customers; allowance for doubtful accounts; and self-insurance accruals.reserves. We base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. These statements relate to future events or our future financial performance. In some cases, forward-looking statements may be identified by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors that may cause our or our industry's actual results, levels of activity, performance or achievements to differ materially from what is expressed or implied in these forward-looking statements. Some important factors that could cause actual results to differ materially from those in the forward-looking statements include:
Our business, other than tree services to utility customers, is highly seasonal and weather dependent.
Various economic factors may adversely impact our customers’ spending and pricing for our services, and impede our collection of accounts receivable.
Significant customers, particularly utilities, may experience financial difficulties, resulting in payment delays or delinquencies.
The seasonal nature of our business and changes in general and local economic conditions, among other factors, may cause our quarterly results to fluctuate, and our prior performance is not necessarily indicative of future results.
The uncertainties in the credit and financial markets may limit our access to capital.
Significant increases in fuel prices for extended periods of time will increase our operating expenses.
Fluctuations in foreign currency exchange rates may have a material adverse impact on our operating results.
We have significant contracts with our utility, commercial and government customers that include liability risk exposure as part of those contracts. Consequently, we have substantial excess-umbrella liability insurance, and increases in the cost of obtaining adequate insurance, or the inadequacy of our self-insurance accruals or insurance coverages, could negatively impact our liquidity and financial condition.
Because no public market exists for our common shares, the ability of shareholders to sell their common shares is limited.
Significant increases in health care costs could negatively impact our results of operations or financial position.
We are subject to intense competition.
Our failure to comply with environmental laws could result in significant liabilities, fines and/or penalties.
The impact of regulations initiated as a response to possible changing climate conditions could have a negative effect on our results of operations or our financial condition.
We may encounter difficulties obtaining surety bonds or letters of credit necessary to support our operations.
We are dependent, in part, on our reputation of quality, integrity and performance. If our reputation is damaged, we may be adversely affected.
We may be unable to attract and retain a sufficient number of qualified employees for our field operations, and we may be unable to attract and retain qualified management personnel.
Our facilities could be damaged or our operations could be disrupted, or our customers or vendors may be adversely affected, by events such as natural disasters, pandemics, terrorist attacks or other external events.
A disruption in our information technology systems, including a disruption related to cybersecurity, could adversely affect our financial performance.
We are subject to third-party and governmental regulatory claims and litigation that may have an adverse effect on us.
We may misjudge a competitive bid and be contractually bound to an unprofitable contract.
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▪ | We may be unable to attract and retain a sufficient number of qualified employees for our field operations, and we may be unable to attract and retain qualified management personnel. |
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▪ | We have significant contracts with our utility, commercial and government customers that include liability risk exposure as part of those contracts. Consequently, we have substantial excess-umbrella liability insurance, and increases in the cost of obtaining adequate insurance, or the inadequacy of our self-insurance accruals or insurance coverages, could negatively impact our liquidity and financial condition. |
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▪ | The unavailability or cancellation of third-party insurance coverage may have a material adverse effect on our financial condition and results of operations as well as disrupt our operations. |
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▪ | We could be materially adversely affected by wildfires in California and other areas as well as other severe weather events and natural disasters, including negative impacts to our business, reputation, financial condition, results of operations, liquidity and cash flows. |
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▪ | Our business, other than tree services to utility customers, is highly seasonal and weather dependent. |
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▪ | Significant customers, particularly utilities, may experience financial difficulties, resulting in payment delays or delinquencies. |
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▪ | We are subject to litigation and third-party and governmental regulatory claims and adverse litigation judgments or settlements resulting from those claims could materially adversely affect our business. |
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▪ | Significant increases in fuel prices for extended periods of time will increase our operating expenses. |
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▪ | We are subject to intense competition. |
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▪ | Various economic factors may adversely impact our customers’ spending and pricing for our services, and impede our collection of accounts receivable. |
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▪ | The impact of regulations initiated as a response to possible changing climate conditions could have a negative effect on our results of operations or our financial condition. |
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▪ | The seasonal nature of our business and changes in general and local economic conditions, among other factors, may cause our quarterly results to fluctuate, and our prior performance is not necessarily indicative of future results. |
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▪ | We may misjudge a competitive bid and be contractually bound to an unprofitable contract. |
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▪ | A disruption in our information technology systems, including a disruption related to cybersecurity, could adversely affect our financial performance. |
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▪ | We are dependent, in part, on our reputation of quality, integrity and performance. If our reputation is damaged, we may be adversely affected. |
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▪ | Because no public market exists for our common shares, the ability of shareholders to sell their common shares is limited. |
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▪ | Our failure to comply with environmental laws could result in significant liabilities, fines and/or penalties. |
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▪ | We may encounter difficulties obtaining surety bonds or letters of credit necessary to support our operations. |
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▪ | The uncertainties in the credit and financial markets may limit our access to capital. |
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▪ | Fluctuations in foreign currency exchange rates may have a material adverse impact on our operating results. |
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▪ | Significant increases in health care costs could negatively impact our results of operations or financial position. |
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▪ | Our facilities could be damaged or our operations could be disrupted, or our customers or vendors may be adversely affected, by events such as natural disasters, pandemics, terrorist attacks or other external events. |
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▪ | Our inability to properly verify the employment eligibility of our employees could adversely affect our business. |
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after the date of this quarterly report on Form 10-Q to conform these statements to actual future results.
The factors described above, as well as other factors that may adversely impact our actual results, are discussed in "Part III - Item 1A. Risk Factors." of this quarterly report on Form 10-Q and in our annual report on Form 10-K for the year ended December 31, 2017 in “Part I - Item 1A. Risk Factors.”2018.
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Item 3. | Quantitative and Qualitative Disclosures about Market Risk. |
During the quartersix months ended June 30, 2018,29, 2019, there have been no material changes in the market risk previously presented in our annual report on Form 10-K for the year ended December 31, 2017.2018.
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Item 4. | Controls and Procedures. |
(a) Management’s Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this report in ensuring that information required to be disclosed in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the fiscal quarter ended June 30, 201829, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
The Davey Tree Expert Company
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Part II. | Other Information |
Items 3, 4 and 5 are not applicable.
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Item 1. | Legal Proceedings. |
In November 2017, a suit was filed against Davey Tree, its subsidiary, Wolf Tree, Inc., a former Davey employee, two Wolf employees, and a former Wolf employee alleging various acts of negligence and seeking compensatory and punitive damages for wrongful death and assault and battery of the plaintiff’s husband, a Wolf Tree employee in Savannah, Georgia, who was killed in August 2017. The case has been set for trial on January 22, 2019. In July 2018, a survival action was filed by the deceased's estate against Davey Tree, its subsidiary, Wolf Tree, Inc., and four current and former employees in Savannah, Georgia, which arises out of the same allegations, seeks compensatory and punitive damages and also includes three RICO claims under Georgia law seeking compensatory damages, treble damages, and punitive damages.The 2018 case has been removed to the United States District Court for the Southern District of Georgia, Savannah Division, on August 2, 2018. The Company has denied all liability and is vigorously defending the action. It also has retained separate counsel for three of the individual defendants, each of whom has denied all liability and also is vigorously defending the action.
On a quarterly basis, we assess our liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information available. Where it is probable that we will incur a loss and the amount of the loss can be reasonably estimated, we record a liability in our consolidated financial statements. These legal reservesaccruals may be increased or decreased to reflect any relevant developments on a quarterly basis. Where a loss is not probable or the amount of the loss is not estimable, we do not accruerecord a legal reserves,accrual, consistent with applicable accounting guidance. Based on information currently available to us, advice of counsel, and available insurance coverage, we believe that our established reservesaccruals are adequate and the liabilities arising from the legal proceedings will not have a material adverse effect on our consolidated financial condition. We note, however, that in light of the inherent uncertainty in legal proceedings there can be no assurance that the ultimate resolution of a matter will not exceed established reserves.accruals. As a result, the outcome of a particular matter or a combination of matters may be material to our results of operations for a particular period, depending upon the size of the loss or our income for that particular period.
In November 2017, a suit was filed in Savannah, Georgia state court (“State Court”) against Davey Tree, its subsidiary, Wolf Tree, Inc. ("Wolf Tree"), a former Davey employee, two Wolf Tree employees, and a former Wolf Tree employee alleging various acts of negligence and seeking compensatory and punitive damages for wrongful death and assault and battery of the plaintiff’s husband, a Wolf Tree employee, who was shot and killed in August 2017. The case was mediated unsuccessfully in December 2018 and was set for trial on January 22, 2019.
In July 2018, a related survival action was filed by the deceased’s estate against Davey Tree, its subsidiary, Wolf Tree, Inc., and four current and former employees in Savannah, Georgia, which arises out of the same allegations, seeks compensatory and punitive damages and also includes three RICO claims under Georgia law seeking compensatory damages, treble damages, and punitive damages. The 2018 case was removed to the United States District Court for the Southern District of Georgia, Savannah Division, on August 2, 2018 (“Federal Court”). The Company filed a motion to dismiss the RICO claims. Plaintiffs filed a motion to remand the case to state court, which the Company has opposed. The motions are pending.
On December 6, 2018, a former Wolf Tree employee pled guilty to conspiracy to conceal, harbor, and shield illegal aliens. On December 21, 2018, the United States federal prosecutors filed a motion to stay both actions on the grounds that on December 13, 2018, an indictment was issued charging two former Wolf Tree employees and one other individual with various crimes, including conspiracy to murder the deceased. On December 17, 2018, the United States Attorney’s Office for the Southern District of Georgia informed the Company and Wolf Tree that they are also under investigation for potential violations of immigration and other laws relating to the subject matter of the ongoing criminal investigation referenced above. The Company and Wolf Tree are cooperating with the investigation.
On December 28, 2018, the State Court granted the United States’ motion to stay but indicated that it would nonetheless consider certain pending matters, including: (1) Plaintiff and a co-defendant’s motions that Davey Tree be forced to produce privileged documents and testimony, which had been submitted to a Special Master for recommendation; and (2) the Defendants’ motions for summary judgment. On January 11, 2019, the Special Master issued his recommendation that both Plaintiff and the co-defendant’s motions to force Davey to disclose privileged information be denied. The State Court judge has not yet moved on the recommendation. On January 29, 2019, the State Court heard oral argument on Defendants’ motions for summary judgment, and the motions remain pending.
On January 28, 2019, the Federal Court also granted the United States’ motion to stay. On January 29, 2019, the State Court ordered the parties to return to mediation, which occurred on April 17, 2019 but was unsuccessful in resolving the matters.
In both cases, the Company has denied all liability and is vigorously defending the action. It also has retained separate counsel for some of the individual defendants, each of whom has denied all liability and also is vigorously defending the action.
The factors described below representOur Annual Report on Form 10-K for the principal risks we face. Except as otherwise indicated, these factors may or may not occur and we are not inyear ended December 31, 2018, includes a position to express a view on the likelihood of any such factor occurring. Other factors may exist that we do not consider to be significant based on information that is currently available or that we are not currently able to anticipate.
Our business is highly seasonal and weather dependent.
Our business, other than tree services to utility customers, is highly seasonal and weather dependent, primarily due to fluctuations in horticultural services provided to Residential and Commercial customers. We have historically incurred losses in the first quarter, while revenue and operating income are generally highest in the second and third quarters of the calendar year. Inclement weather, such as uncharacteristically low or high (drought) temperatures, in the second and third quarters could dampen the demand for our horticultural services, resulting in reduced revenues that would have an adverse effect on our results of operations.
Economic conditions may adversely impact our customers’ future spending as well as pricing and payment for our services, thus negatively impacting our operations and growth.
Various economic factors may adversely impact the demand for our services and potentially result in depressed prices for our services and the delay or cancellation of projects. That may make it difficult to estimate our customers' requirements for our services and, therefore, add uncertainty to customer demand. Various economic factors and customers' confidence in future economic conditions may cause a reduction in our customers' spending for our services and may also impact the abilitydetailed discussion of our customers to pay amounts owed, which could reduce our cash flow and adversely impact our debt or equity financing. These events could have a material adverse effect on our operations and our ability to grow at historical levels.risk factors.
Financial difficulties or the bankruptcy of one or more of our major customers could adversely affect our results.
Our ability to collect our accounts receivable and future sales depends, in part, on the financial strength of our customers. We grant credit, generally without collateral, to our customers. Consequently, we are subject to credit risk related to changes in business and economic factors throughout the United States and Canada. In the event customers experience financial difficulty, and particularly if bankruptcy results, our profitability may be adversely impacted by our failure to collect our accounts receivable in excess of our estimated allowance for uncollectible accounts. Additionally, our future revenues could be reduced by the loss of a customer due to bankruptcy. Our failure to collect accounts receivable and/or the loss of one or more major customers could have an adverse effect on our net income and financial condition.
Our business is dependent upon service to our utility customers and we may be affected by developments in the utility industry.
We derive approximately 51% of our total annual revenues from our Utility segment, including approximately 11% of our total annual revenues from Pacific Gas & Electric Company. Significant adverse developments in the utility industry generally, or specifically for our major utility customers, could result in pressure to reduce costs by utility industry service providers (such as us), delays in payments of our accounts receivable, or increases in uncollectible accounts receivable, among other things. As a result, such developments could have an adverse effect on our results of operations.
Our quarterly results may fluctuate.
We have experienced and expect to continue to experience quarterly variations in revenues and operating income as a result of many factors, including:
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▪ | the seasonality of our business; |
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▪ | the timing and volume of customers' projects; |
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▪ | budgetary spending patterns of customers; |
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▪ | the commencement or termination of service agreements; |
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▪ | costs incurred to support growth internally or through acquisitions; |
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▪ | changes in our mix of customers, contracts and business activities; |
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▪ | fluctuations in insurance expense due to changes in claims experience and actuarial assumptions; and |
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▪ | general and local economic conditions. |
Accordingly, our operating results in any particular quarter may not be indicative of the results that you can expect for any other quarter or for the entire year.
We may not have access to capital in the future due to uncertainties in the financial and credit markets.
We may need new or additional financing in the future to conduct our operations, expand our business or refinance existing indebtedness. Future changes in the general economic conditions and/or financial markets in the United States or globally could affect adversely our ability to raise capital on favorable terms or at all. From time-to-time we have relied, and may also rely in the future, on access to financial markets as a source of liquidity for working capital requirements, acquisitions and general corporate purposes. Our access to funds under our revolving credit facility is dependent on the ability of the financial institutions that are parties to the facility to meet their funding commitments. Those financial institutions may not be able to meet their funding commitments if they experience shortages of capital and liquidity or if they experience excessive volumes of borrowing requests within a short period of time. Economic disruptions and any resulting limitations on future funding, including any restrictions on access to funds under our revolving credit facility, could have a material adverse effect on us.
We are subject to the risk of changes in fuel costs.
The cost of fuel is a major operating expense of our business. Significant increases in fuel prices for extended periods of time will cause our operating expenses to fluctuate. An increase in cost with partial or no corresponding compensation from customers would lead to lower margins that would have an adverse effect on our results of operations.
We are subject to the effect of foreign currency exchange rate fluctuations, which may have a material adverse impact on us.
We are exposed to foreign currency exchange rate risk resulting from our operations in Canada, where we provide a comprehensive range of horticultural services. Fluctuations in foreign currency exchange rates may make our services more expensive for others to purchase or increase our operating costs, affecting our competitiveness and our profitability. Our financial results could be affected by factors such as changes in the foreign currency exchange rate or differing economic conditions in the Canadian markets as compared with the markets for our services in the United States. Our earnings are affected by translation exposures from currency fluctuations in the value of the U.S. dollar as compared to the Canadian dollar.
Revenues from customers in Canada are subject to foreign currency exchange. Thus, certain revenues and expenses have been, and are expected to be, subject to the effect of foreign currency fluctuations, and these fluctuations may have a material adverse impact on our operating results, asset values and could reduce shareholders’ equity. In addition, if we expand our Canadian operations, exposures to gains and losses on foreign currency transactions may increase.
We could be negatively impacted if our self-insurance accruals or our insurance coverages prove to be inadequate.
We are generally self-insured for losses and liabilities related to workers' compensation, vehicle liability and general liability claims (including any wildfire-related claims, up to certain retained coverage limits). A liability for unpaid claims and associated expenses, including incurred but not reported losses, is actuarially determined and reflected in our consolidated balance sheet as an accrued liability. The determination of such claims and expenses, and the extent of the need for accrued liabilities, are continually reviewed and updated. If we were to experience insurance claims or costs above our estimates and were unable to offset such increases with earnings, our business could be adversely affected. Also, where we self-insure, a deterioration in claims management, whether by our management or by a third-party claims administrator, could lead to delays in settling claims, thereby increasing claim costs, particularly as it relates to workers’ compensation. In addition, catastrophic uninsured claims filed against us or the inability of our insurance carriers to pay otherwise-insured claims would have an adverse effect on our financial condition.
Furthermore, many customers, particularly utilities, prefer to do business with contractors with significant financial resources, who can provide substantial insurance coverage. Should we be unable to renew our excess liability insurance and other commercial insurance policies at competitive rates, this loss would have an adverse effect on our financial condition and results of operations.
Increases in our health insurance costs and uncertainty about federal health care policies could adversely affect our results of operations and cash flows.
The costs of employee health care insurance have been increasing in recent years due to rising health care costs, legislative changes, and general economic conditions. We cannot predict what other health care programs and regulations will ultimately be implemented at the federal or state level or the effect of any future legislation or regulations on our business, results of operations and cash flows. In addition, we cannot predict when and if Congress will repeal and/or replace certain health care programs and regulations at the federal level and the impact that such changes would have on our business. A continued increase in health care costs or additional costs incurred as a result of the Patient Protection and Affordable Care Act and the Health Care and Education
Reconciliation Act of 2010 or other future health care reform laws imposed by Congress or state legislatures could have a negative impact on our financial position, results of operations and cash flows.
The unavailability or cancellation of third-party insurance coverage may have a material adverse effect on our financial condition and results of operations as well as disrupt our operations.
Any of our existing excess insurance coverage may not be renewed upon the expiration of the coverage period or future coverage may not be available at competitive rates for the required limits. In addition, our third-party insurers could fail, suddenly cancel our coverage or otherwise be unable to provide us with adequate insurance coverage. If any of these events occur, they may have a material adverse effect on our financial condition and results of operations as well as disrupt our operations. For example, we have operations in California, which has an environment prone to wildfires. Should our third-party insurers determine to exclude coverage for wildfires in the future, we could be exposed to significant liabilities, having a material adverse effect on our financial condition and results of operations and potentially disrupting our California operations.
Because no public market exists for our common shares, your ability to sell your common shares may be limited.
Our common shares are not traded on any national exchange, market system or over-the-counter bulletin board. Because no public market exists for our common shares, your ability to sell these shares is limited.
We are subject to intense competition.
We believe that each aspect of our business is highly competitive. Principal methods of competition in our operating segments are customer service, marketing, image, performance and reputation. Pricing is not always a critical factor in a customer’s decision with respect to our Residential and Commercial segment; however, pricing is generally the principal method of competition for our Utility segment, although in most instances consideration is given to reputation and past production performance. On a national level, our competition is primarily landscape construction and maintenance companies as well as residential and commercial lawn care companies. At a local and regional level, our competition comes mainly from small, local companies which are engaged primarily in tree care and lawn services. Our Utility segment competes principally with one major national competitor, as well as several smaller regional firms. Furthermore, competitors may have lower costs because privately-owned companies operating in a limited geographic area may have significantly lower labor and overhead costs. Our competitors may develop the expertise, experience and resources to provide services that are superior in both price and quality to our services. These strong competitive pressures could inhibit our success in bidding for profitable business and may have a material adverse effect on our business, financial condition and results of operations.
Our failure to comply with environmental laws could result in significant liabilities.
Our facilities and operations are subject to governmental regulations designed to protect the environment, particularly with respect to our services regarding insect and tree, shrub and lawn disease management, because these services involve to a considerable degree the blending and application of spray materials, which require formal licensing in most areas. Continual changes in environmental laws, regulations and licensing requirements, environmental conditions, environmental awareness, technology and social attitudes make it necessary for us to maintain a high degree of awareness of the impact such changes have on our compliance programs and the market for our services. We are subject to existing federal, state and local laws, regulations and licensing requirements regulating the use of materials in our spraying operations as well as certain other aspects of our business. If we fail to comply with such laws, regulations or licensing requirements, we may become subject to significant liabilities, fines and/or penalties, which could adversely affect our financial condition and results of operations.
We cannot predict the impact that the policies regarding changing climate conditions, including legal, regulatory and social responses thereto, may have on our business.
Many scientists, environmentalists, international organizations, political activists, regulators and other commentators believe that global climate change has added, and will continue to add, to the unpredictability, frequency and severity of natural disasters in certain parts of the world. In response, a number of legal and regulatory measures and social initiatives have been introduced in an effort to reduce greenhouse gas and other carbon emissions that these parties believe may be contributors to global climate change. These proposals, if enacted, could result in a variety of regulatory programs, including potential new regulations, additional charges and taxes to fund energy efficiency activities, or other regulatory actions. Any of these actions could result in increased costs associated with our operations and impact the prices we charge our customers.
We cannot predict the impact, if any, that changing climate conditions will have on us or our customers. However, it is possible that the legal, regulatory and social responses to real or perceived climate change could have a negative effect on our results of operations or our financial condition.
We may be adversely affected if we are unable to obtain necessary surety bonds or letters of credit.
Surety market conditions are currently difficult as a result of significant losses incurred by many sureties in recent years, both in the construction industry as well as in certain larger corporate bankruptcies. As a result, less bonding capacity is available in the market and terms have become more expensive and restrictive. Further, under standard terms in the surety market, sureties issue or continue bonds on a project-by-project basis and can decline to issue bonds at any time or require the posting of collateral as a condition to issuing or renewing any bonds. If surety providers were to limit or eliminate our access to bonding, we would need to post other forms of collateral for project performance, such as letters of credit or cash. We may be unable to secure sufficient letters of credit on acceptable terms, or at all. Accordingly, if we were to experience an interruption or reduction in the availability of bonding capacity, our liquidity may be adversely affected.
We may be adversely affected if our reputation is damaged.
We are dependent, in part, upon our reputation of quality, integrity and performance. If our reputation were damaged in some way, it may impact our ability to grow or maintain our business.
We may be unable to employ a sufficient workforce for our field operations.
Our industry operates in an environment that requires heavy manual labor. We may experience slower growth in the labor force for this type of work than in the past. As a result, we may experience labor shortages or the need to pay more to attract and retain qualified employees.
We may be unable to attract and retain skilled management.
Our success depends, in part, on our ability to attract and retain key managers. Competition for the best people can be intense and we may not be able to promote, hire or retain skilled managers. The loss of services of one or more of our key managers could have a material adverse impact on our business because of the loss of the manager's skills, knowledge of our industry and years of industry experience, and the difficulty of promptly finding qualified replacement personnel.
Natural disasters, pandemics, terrorist attacks and other external events could adversely affect our business.
Natural disasters, pandemics, terrorist attacks and other adverse external events could materially damage our facilities or disrupt our operations, or damage the facilities or disrupt the operations of our customers or vendors. The occurrence of any such event could adversely affect our business, financial condition and results of operations.
A disruption in our information technology systems, including a disruption related to cybersecurity, could adversely affect our financial performance.
We rely on the accuracy, capacity and security of our information technology systems. Despite the security measures that we have implemented, including those measures related to cybersecurity, our systems could be breached or damaged by computer viruses, natural or man-made incidents or disasters or unauthorized physical or electronic access. A breach could result in business disruption, theft of our intellectual property, trade secrets or customer information and unauthorized access to personnel information. To the extent that our business is interrupted or data is lost, destroyed or inappropriately used or disclosed, such disruptions could adversely affect our competitive position, reputation, relationships with our customers, financial condition, operating results and cash flows. In addition, we may be required to incur significant costs to protect against the damage caused by these disruptions or security breaches in the future.
We are subject to third-party and governmental regulatory claims and litigation.
From time-to-time, customers, vendors, employees, governmental regulatory authorities and others may make claims and take legal action against us. Whether these claims and legal actions are founded or unfounded, if such claims and legal actions are not resolved in our favor, they may result in significant financial liability. Any such financial liability could have a material adverse effect on our financial condition and results of operations. Any such claims and legal actions may also require significant management attention and may detract from management's focus on our operations.
We may be adversely affected if we enter into a major unprofitable contract.
Our Residential and Commercial segment and our Utility segment frequently operate in a competitive bid contract environment. As a result, we may misjudge a bid and be contractually bound to an unprofitable contract, which could adversely affect our results of operations.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
The following table provides information on purchases of our common shares outstanding made by us during the first six months of 20182019.
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| | | | | | | | | | | |
Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs |
Fiscal 2018 | | | | | | | | |
January 1 to January 27 | | 1,052 |
| | $ | 18.30 |
| | — | | 129,761 |
January 28 to February 24 | | 213 |
| | 18.30 |
| | — | | 129,761 |
February 25 to March 31 | | 299,799 |
| | 19.10 |
| | — | | 129,761 |
Total First Quarter | | 301,064 |
| | 19.10 |
| | — | | |
| | | | | | | | |
April 1 to April 28 | | 336,766 |
| | 19.10 |
| | — | | 129,761 |
April 29 to May 26 | | 250,173 |
| | 19.10 |
| | — | | 1,129,761 |
May 27 to June 30 | | 473,939 |
| | 19.10 |
| | 127,486 | | 1,002,275 |
Total Second Quarter | | 1,060,878 |
| | 19.10 |
| | 127,486 | | |
| | | | | | | | |
Total Year-to-Date | | 1,361,942 |
| | $ | 19.10 |
| | 127,486 | | |
|
| | | | | | | | | | | |
Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs |
Fiscal 2019 | | | | | | | | |
January 1 to January 26 | | 624 |
| | $ | 19.70 |
| | — | | 954,492 |
January 27 to February 23 | | 1,165 |
| | 21.10 |
| | — | | 954,492 |
February 24 to March 30 | | 208,289 |
| | 21.10 |
| | — | | 954,492 |
Total First Quarter | | 210,078 |
| | 21.10 |
| | — | | |
| | | | | | | | |
March 31 to April 27 | | 375,434 |
| | 21.10 |
| | — | | 954,492 |
April 28 to May 25 | | 180,505 |
| | 21.10 |
| | — | | 954,492 |
May 26 to June 29 | | 236,546 |
| | 21.10 |
| | 41,448 | | 913,044 |
Total Second Quarter | | 792,485 |
| | 21.10 |
| | 41,448 | | |
| | | | | | | | |
Total Year-to-Date | | 1,002,563 |
| | $ | 21.10 |
| | 41,448 | | |
Our common shares are not listed or traded on an established public trading market and market prices are, therefore, not available. Semiannually, for purposes of the Davey 401KSOP and ESOP, the fair market value of our common shares is determined by an independent stock valuation firm, based upon our performance and financial condition, using a peer group of comparable companies selected by that firm. The peer group currently consists of: ABM Industries Incorporated; Comfort Systems USA, Inc.; Dycom Industries, Inc.; MYR Group, Inc.; Quanta Services, Inc.; Rollins, Inc.; and Scotts Miracle-Gro Company. The semiannual valuations are effective for a period of six months and the per-share price established by those valuations is the price at which our Board of Directors has determined our common shares will be bought and sold during that six-month period in transactions involving Davey Tree or one of its employee benefit or stock purchase plans. Since 1979, we have provided a ready market for all shareholders through our direct purchase of their common shares, although we are under no obligation to do so (other than for repurchases pursuant to the put option under The Davey 401KSOP and ESOP Plan, as described in Note P,Q, The Davey 401KSOP and Employee Stock Ownership Plan). The purchases described above were added to our treasury stock.
At the Annual Meeting of Shareholders of the Company held on May 16, 2017, the shareholders of the Company approved proposals to amend the Company's Articles of Incorporation to (i) expand the Company's current right of first refusal with respect to proposed transfers of shares of the Company's common shares, (ii) clarify provisions regarding when the Company may provide notice of its decision to exercise its right of first refusal with respect to proposed transfers of common shares by the estate or personal representative of a deceased shareholder, and (iii) grant the Company a right to repurchase common shares held by certain shareholders of the Company.
On May 10, 2017, the Board of Directors of the Company adopted a policy regarding the Company's exercise of the repurchase right granted to the Company through amendments to the Company's Articles of Incorporation, as approved by shareholders on May 16, 2017.
Until further action by the Board, it will beis the policy of the Company not to exercise its repurchase rights under the amended Articles with respect to shares of the Company's common shares held by current and retired employees
and current and former directors of the Company (subject to exceptions set forth in the policy) (collectively, "Active Shareholders"), their spouses, their first-generation descendants and trusts established exclusively for their benefit.
Until further action by the Board, it willis also be the policy of the Company not to exercise its rights under the amended Articles to repurchase shares of the Company's common shares proposed to be transferred by an Active Shareholder to his or her spouse, a first-generation descendant, or a trust established exclusively for the benefit of one or more of an Active Shareholder, his or her spouse and first-generation descendants of an Active Shareholder, or upon the death of an Active Shareholder, such transfers from the estate or personal representative of a deceased Active Shareholder. The Board may suspend, change or discontinue the policy at any time without prior notice.
In accordance with the amendments to the Articles approved by the Company's shareholders at the 2017 Annual Meeting, on May 17, 2017, the Company's Board of Directors authorized the Company to repurchase up to 200,000 common shares, which authorization was increased by an additional 1,000,000 common shares in May 2018. Of the 1,200,000 total shares authorized, 1,002,275913,044 remain available under the program. Share repurchases may be made from time to time and the timing of any repurchases and the actual number of shares repurchased will depend on a variety of factors. The Company is not obligated to purchase any shares, and repurchases may be commenced, suspended or discontinued from time to time without prior notice. The repurchase program does not have an expiration date.
See Exhibit Index page below.
Exhibit Index
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Exhibit No. | Description | | |
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| Joinder Agreement, dated May 7, 2018, by and among Davey Receivables LLC, Davey Resource Group, Inc. and PNC Bank, National Association, to the Receivables Purchase Agreement, dated May 9, 2016 (incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on May 8, 2018)23, 2019). | | |
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| | | Filed Herewith |
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| | | Filed Herewith |
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| | | Furnished Herewith |
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| | | Furnished Herewith |
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101 | The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2018,29, 2019, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets (unaudited), (ii) the Condensed Consolidated Statements of Operations (unaudited), (iii) the Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited), (iv) the Condensed Consolidated Statements of Shareholders' Equity (unaudited), (v) the Condensed Consolidated Statements of Cash Flows (unaudited), and (v)(vi) Notes to Condensed Consolidated Financial Statements (unaudited). | | Filed Herewith |
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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.
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| | | THE DAVEY TREE EXPERT COMPANY |
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Date: | August 9, 20186, 2019 | By: | /s/ Joseph R. Paul | |
| | | Joseph R. Paul | |
| | | Executive Vice President, Chief Financial Officer and Secretary | |
| | | (Principal Financial Officer) | |
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Date: | August 9, 20186, 2019 | By: | /s/ Thea R. Sears | |
| | | Thea R. Sears | |
| | | Vice President and Controller | |
| | | (Principal Accounting Officer) | |