Three Months Ended		Nine Months Ended
	September 27,          2003	September 28,          2002	September 27,          2003	September 28,          2002
Revenues	100.0 %	100.0 %	100.0 %	100.0 %
Costs and expenses:
Operating	63.6	65.3	65.3	66.5
Selling	16.2	16.3	16.2	15.9
General and administrative	6.8	7.3	7.6	7.7
Depreciation and amortization	5.7	6.5	6.0	6.2
Income from operations	7.7	4.6	4.9	3.7
Other income (expense):
Interest expense	(.6)	(1.0)	(.7)	(1.0)
Other, net	-	(.2)	-	.3
Income before income taxes	7.1	3.4	4.2	3.0
Income taxes	2.8	1.3	1.7	1.2
Net income	4.3 %	2.1 %	2.5 %	1.8 %

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Results of Operations--Three Months Ended September 27, 2003 Compared to Three Months Ended September 28, 2002.

Revenues--Revenues of $92,619 increased $11,914 from the $80,705 earned in 2002. Utility Services increased $5,871 or 19.0% from the prior year. Contract pricing adjustments and new contracts within our western utility operations as well as additional revenues in our eastern utility operations, the result of storm damage primarily within North Carolina, accounted for the increase.  Residential and Commercial services increased $5,200 or 12.6% over the same period last year, the result of acquisitions made in 2003 and the last quarter of 2002 as well as more favorable weather conditions than in the same period last year.

Operating Expenses--Operating expenses of $58,900 increased $6,244 from the third quarter of 2002 but as a percentage of revenues decreased 1.7% to 63.6%. Utility Services increased $4,126 or 16.7% from the third quarter of 2002.  Additional costs for labor and equipment associated with the new contracts obtained within our western utility operations as well as additional costs related to the storm work in North Carolina gave rise to the increase.  Residential and Commercial services increased $2,284 or 10.1%, for labor and materials associated with the increase in revenues.

Selling Expenses--Selling expenses of $15,026 increased $1,854 over the same period last year and as a percentage of revenues decreased .1% to 16.2%.  Residential and Commercial Services experienced an increase of $2,166 or 23.5% over the same quarter last year. Increases in field management wages, branch office wages, rent and communications related to new operations acquired after the first quarter of 2002 account for the increase. The remaining segments combined decreased $312.

General and Administrative Expenses--General and administrative expenses of $6,291 increased $397 or 6.7% from the $5,894 experienced in 2002 but as a percentage of revenues declined .5% to 6.8%. Increases in incentive expense coupled with the recognition of pension expense in 2003 as compared to income in the same period last year accounted for the increase.

Depreciation and Amortization Expense--Depreciation and amortization expense increased $39 from the corresponding period last year and as a percentage of revenues, decreased .8% to 5.7%.  The increase continues to be the result of additional expenditures for equipment and acquisitions that occurred after the first quarter 2002 but primarily during the fourth quarter 2002.

Interest Expense--Interest expense of $529 declined $270 from the $799 incurred in 2002.  The decline is the result of lower interest rates on bank borrowings and lower average levels of debt during the period.

Income Taxes--Income tax for the quarter was $2,584, an increase of $1,488 from the prior year.  The effective tax rate was 39.5% as compared to 39.6% during 2002.

Net Income--Net income for the quarter of $3,959 was $2,285 greater than the $1,674 experienced in 2002 and as a percentage of revenues increased 2.2% to 4.3%.

Results of Operations--Nine Months Ended September 27, 2003 Compared to Nine Months Ended September 28, 2002.

Revenues--Revenues of $254,061 increased $15,629 or 6.6% from the $238,432 earned in 2002. Utility Services increased $6,865 or 7.0% due to contract pricing adjustments and new contracts within our western utility operations and storm damage contracts obtained by our eastern utility operations.  Residential and Commercial Services increased $6,024, the result of additional storm and snow removal work performed during the first quarter 2003, more favorable weather conditions as compared to the prior year and acquisitions obtained during 2003 and the latter half of 2002.

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Operating Expenses--Operating expenses of $165,859 increased $7,156 from 2002 but as a percentage of revenues decreased 1.2% to 65.3%. Utility Services and all other segments combined increased $7,202 from the first nine months of 2002.  Labor and equipment costs associated with the new contracts obtained within our western utility, Canadian and consulting operations combined with expenses associated with the storm work in North Carolina gave rise to the increase.

Selling Expenses--Selling expenses of $41,115 increased $3,296 or 8.7% from the $37,819 experienced in the first nine months of 2002.  Residential and Commercial Services increased $3,852 or 14.6% to $30,207.  Field management wages, branch office expenses and wages associated with the new operations acquired in 2003 and the latter half of 2002 accounted for the increase. The remaining segments combined decreased $556.

General and Administrative Expenses--General and administrative expenses of $19,300 increased $988 from the $18,312 in 2002 and as a percentage of revenue declined .1% to 7.6%.  The increase is attributable to the recognition of pension expense in 2003 as compared to income in 2002, a change of $719, an increase in professional services of $836, the result of a $600 credit in 2002 from the resolution of disputed services.  The increases in pension expense and professional services were partially offset by a reduction in incentive expense of $477. 

Depreciation and Amortization Expense--Depreciation and amortization expense of $15,289 increased $402 from the $14,887 experienced last year but as a percentage of revenues declined .2% to 6.0%.  The increase is related to equipment and acquisition expenditures in 2003 and the last half of 2002.

Interest Expense--Interest expense of $1,760 declined $556 from the first nine months of 2002, a .3% reduction as a percentage of revenue.  Lower interest rates on bank borrowings and lower average debt levels account for the decline.

Income Taxes--Income tax for the first nine months of 2003 was $4,252 as compared to $2,806 in the prior year.  The effective tax rate was 39.5% as compared to 39.6% in 2002.

Net Income--Net income of $6,513 increased $2,231 from the $4,282 experienced in 2002 and as a percentage of revenue increased ..7% to 2.5%.

 

LIQUIDITY AND CAPITAL RESOURCES

Our principal financial requirements are for capital spending, working capital and business acquisitions.

Cash decreased $227 during the first nine months of 2003.  Net cash provided by operating activities of $15,090 served to partially offset the $15,218 used in investing activities and $99 used in financing activities.

 

Net Cash Provided By Operating Activities

Operating activities for the first nine months of 2003 provided $15,090 of cash, an increase of $2,137 as compared to the $12,953 provided during the first nine months of 2002.  The $2,137 net increase is attributable to higher levels of net income, depreciation and amortization and increases in accounts payable, accrued expenses and self-insurance accruals.  These increases were partially offset by an increase in accounts receivable, lower gains on the sales of property and lower increases in intangibles.

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Accounts receivable dollars increased $11,233 during the first nine months of 2003 whereas the "days-sales-outstanding" in accounts receivable decreased two days as at September 27, 2003 as compared with the third quarter 2002. We continue to strive to collect accounts receivable dollars and reduce days-sales-outstanding.

Operating liabilities provided $5,828 in cash, $1,263 more than the $4,565 provided in 2002.  The increase is attributable to an increase in accounts payable and accrued expenses and increases in self-insurance accruals necessary to provide for future estimated claims payments in our vehicle, general liability and workers compensation lines of coverage. 

On April 6, 2001, one of the Company's largest utility customers, Pacific Gas and Electric Company ("PG&E") filed a voluntary bankruptcy petition under Chapter 11 of the U. S. Bankruptcy Code. Subsequent to the bankruptcy petition date, the Company continued to provide services under the terms of its contracts with PG&E. The Company continues to perform services for PG&E and receives payment for post-petition date services performed, as part of PG&E's administrative expenses.

On September 20, 2001, PG&E filed a reorganization plan as part of its Chapter 11 bankruptcy proceeding that seeks to pay all of its creditors in full.  In addition to PG&E's reorganization plan, there was a competing alternative proposed plan of reorganization filed by the California Public Utilities Commission and the Official Committee of Unsecured Creditors ("CPUC/OCC plan").  The bankruptcy court began confirmation hearings in December 2002 to determine whether to confirm the PG&E plan, the CPUC/OCC plan or neither plan. The bankruptcy court subsequently suspended the confirmation trial process in early 2003 and ordered mandatory settlement discussions. 

On June 19, 2003, it was announced that Pacific Gas & Electric Corporation ("PG&E Corporation," the parent company of PG&E), the staff of the California Public Utilities Commission ("CPUC"), and PG&E entered into a proposed settlement agreement that contemplates a new plan of reorganization (the "Settlement Plan") to supersede the competing plans. Subsequently, PG&E Corporation, PG&E, and the Official Committee of Unsecured Creditors ("OCC"), as co-proponents, filed the Settlement Plan with the bankruptcy court. The Settlement Plan contemplates the payment of all creditors, in full and in cash. 

The Settlement Plan must go through CPUC hearings and be voted on by the CPUC. It also must be reviewed in formal hearings by the bankruptcy court.  The CPUC hearings and vote are expected to be completed and a final CPUC decision to be announced during December 2003.  The creditors as of October 31, 2003 have, with the exception of one class of creditors, voted overwhelmingly for the Settlement Plan.   The confirmation hearings in the bankruptcy court are expected to be completed and the Settlement Plan is expected to be confirmed in December 2003.  The effective date of the Settlement Plan, if approved by CPUC and confirmed by the bankruptcy court, is expected to be during the first quarter 2004. The Settlement Plan currently provides that the prepetition accounts receivable will be paid at the effective date. 

Management has monitored the situation closely and will continue to assess the collectibility of its receivables from PG&E.  In management's opinion, the prepetition receivables from PG&E are collectible.  Because of the uncertainty as to when payment will be received, the prepetition receivables are classified as noncurrent other assets.

The balance of prepetition accounts receivable, $12,072, has been reduced from the initial April 6, 2001 balance outstanding, $13,326, by interest payments received from PG&E of $139 during July 2003, $138 during May 2003,  $141 during January 2003, and $836 during 2002 ($695 - July 2002 and $141 - October 2002).

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Net Cash Used in Investing Activities

Investing activities used $15,218 in cash, $2,601 more than the $12,617 used in 2002 and is the result of higher levels of capital expenditures for field equipment coupled with lower proceeds from the sales of property and equipment. Capital expenditures in 2003 are expected to exceed 2002 levels.

Net Cash Provided by Financing Activities

Financing activities used $99 of cash, $551 less than the $650 used last year.  Our revolving credit agreement and other borrowings provided $1,203 more cash than the $714 provided in 2002 and were used primarily for capital expenditures. Treasury share transactions (purchases and sales) used $584 more than the $92 provided in 2002.  Dividends paid increased to $1,524 from the $1,456 paid in the first nine months of 2002.

Revolving Credit Agreement--The Company has a $90,000 three-year revolving credit agreement with a group of banks, which will expire in November 2005 and permits borrowings, as defined, up to $90,000 with a letter of credit sublimit of $30,000.

As of September 27, 2003, the Company had unused commitments under the agreement approximating $24,194, with $65,806 committed under the agreement, consisting of borrowings of $38,000 and issued letters of credit of $27,806.  Borrowings outstanding bear interest, at the Company's option, at the agent bank's prime rate or LIBOR plus a margin adjustment ranging from 1.0% to 2.0%, based on a ratio of funded debt to EBITDA (earnings before interest, taxes, depreciation and amortization).  A commitment fee ranging from .20% to .45% is also required based on the average daily-unborrowed commitment.

The Company uses interest rate swaps to effectively convert a portion of variable-rate revolving credit borrowings to a fixed rate, thus reducing the impact of interest-rate changes on future interest expense.  As of September 27, 2003, the Company had two interest rate swaps outstanding, with the underlying notional amounts totaling $15,000, requiring interest to be paid at 4.14% and maturing in November 2005.  The fair value of the swaps is the amount quoted by the financial institution that the Company would pay to terminate the agreements, a liability of $390 at September 27, 2003.

Contractual Obligations Summary

The following is a summary of our long-term contractual obligations, as at September 27, 2003, to make future payments for the periods indicated.

		Three Months Ending December 31,	Year Ending December 31,
Description	Total	2003	2004	2005	2006	2007	Thereafter
Revolving credit agreement	$  38,000	$                -	$            -	$  38,000	$           -	$           -	$             -
Subordinated notes	84	84	-	-	-	-	-
Term loans	3,014	11	1,776	647	365	215	-
Capital lease obligations	3,213	115	657	807	616	1,018	-
Operating lease obligations	4,874	426	1,456	1,049	762	538	643
Self-insurance accruals	28,415	3,346	9,874	6,603	3,851	2,008	2,733
	$  77,600	$        3,982	$  13,763	$  47,106	$   5,594	$   3,779	$     3,376

The self-insurance accruals in the summary above reflect the total of the undiscounted amount accrued as at September 27, 2003 and amounts estimated to be due each year may differ from actual payments required to fund claims.

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As of September 27, 2003, we were contingently liable for letters of credit in the amount of $32,036, of which $27,806 is committed under the revolving credit facility.  Substantially all of these letters of credit, which expire within a year, are planned for renewal as necessary.

Also, as is common with our industry, we have performance obligations that are supported by surety bonds, which expire during 2003 through 2006.  We intend to renew the performance bonds where appropriate and as necessary.

Capital Resources

Cash generated from operations and our revolving credit agreement are our primary sources of capital.

Business seasonality 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 interest expense, are not significantly impacted by business seasonality. Capital resources during these periods are equally effected. We satisfy seasonal working capital needs and other financing requirements with the revolving credit agreement and several other short-term lines of credit.  We are continuously reviewing our existing sources of financing and evaluating alternatives. At September 27, 2003, we had working capital of $26,423, short-term lines of credit approximating $3,816 and $24,194 available under our revolving credit agreement.

Our sources of capital presently allow us the financial flexibility to meet our capital-spending plan and to complete business acquisitions.

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.  

The Company considers its critical accounting policies to be those that require the more significant estimates, judgments and assumptions in the preparation of its financial statements, including those related to accounts receivable, specifically those receivables under contractual arrangements primarily arising from Utility Services customers; bad debts; and self-insurance accruals.  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.

There have been no significant changes in estimates, judgments and assumptions in the preparation of these interim financial statements from those used in the preparation of the Company's latest annual financial statements.

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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).  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, but are not limited to: (a) our business, other than tree services to utility customers, being highly seasonal and weather dependent; (b) significant customers, particularly utilities, may experience financial difficulties, resulting in payment delays or delinquencies, and (c) because no public market exists for our common shares, the ability of shareholders to sell their common shares is limited.

 

Item 3.   Quantitative and Qualitative Disclosures about Market Risk

During the nine months ended September 27, 2003, there have been no material changes in the reported market risks presented in the Company's Annual Report on Form 10-K for the year ended December 31, 2002.

 

Item 4.   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 pursuant to the Rule 13a-15 of the Exchange Act.  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 27, 2003 in alerting them on a timely basis to material information required to be included in our periodic filings with the SEC.

There have been no significant changes in our internal control over financial reporting or in other factors that have materially affected or are reasonably likely to materially affect these internal controls over financial reporting subsequent to September 27, 2003.

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The Davey Tree Expert Company

Part II.  Other Information

Items 1, 2, 3 and 5 are not applicable.

 

Item 6.	Exhibits and Reports on Form 8-K
	(a)     Exhibits (see Exhibit Index page, below)
	(b)     Reports on Form 8-K
	None

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		THE DAVEY TREE EXPERT COMPANY
	By:	/s/ David E. Adante
Date: November 6, 2003		David E. Adante
		Executive Vice President, Chief Financial Officer and Secretary
		(Principal Financial Officer)
Date: November 6, 2003	By:	/s/ Nicholas R. Sucic
		Nicholas R. Sucic
		Corporate Controller
		(Principal Accounting Officer)

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Exhibit Index

3.3 - 2003 Amended Articles of Incorporation	Filed Herewith
31.1 - Certification of Chief Executive Officer pursuant to Section 302 of the           Sarbanes-Oxley Act of 2002.	Filed Herewith
31.2 - Certification of Chief Financial Officer pursuant to Section 302 of the           Sarbanes-Oxley Act of 2002.	Filed Herewith
32.1 - Certification of Chief Executive Officer pursuant to Section 906 of the           Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.	Furnished Herewith
32.2 - Certification of Chief Financial Officer pursuant to Section 906 of the           Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.	Furnished Herewith

 

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