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EX-31.2 - EXHIBIT 31.2 - DAVEY TREE EXPERT COdt2014q310qex312.htm

 
 
 
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 2014
OR
¨  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)

Ohio
34-0176110
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
 
 
1500 North Mantua Street
P.O. Box 5193
Kent, Ohio 44240
(Address of principal executive offices) (Zip code)
 
(330) 673-9511
(Registrant's telephone number, including area code)

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, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
¨ Large Accelerated Filer
x Accelerated Filer
 
¨ Non-Accelerated Filer
¨ Smaller Reporting Company

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 13,212,772 Common Shares, $1.00 par value, outstanding as of October 31, 2014

 
 
 
 
 



The Davey Tree Expert Company
Quarterly Report on Form 10-Q
September 27, 2014
INDEX
 
 
Page
Part I.
Financial Information
 
 
 
Item 1.  
Financial Statements (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

We,” “Us,” “Our,” “Davey” and “Davey Tree,” unless the context otherwise requires, means The Davey Tree Expert Company and its subsidiaries.

- 1 -


THE DAVEY TREE EXPERT COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except per share data dollar amounts)
 
 
September 27,
2014
 
December 31,
2013
Assets
 
 
 
Current assets:
 
 
 
Cash
$
17,143

 
$
15,861

Accounts receivable, net
127,679

 
105,256

Operating supplies
6,391

 
5,661

Other current assets
26,748

 
25,238

Total current assets
177,961

 
152,016

 
 
 
 
Property and equipment
526,574

 
484,150

Less accumulated depreciation
369,305

 
347,266

 
157,269

 
136,884

 
 
 
 
Other assets
16,900

 
16,917

Identified intangible assets and goodwill, net
34,466

 
27,561

 
$
386,596

 
$
333,378

Liabilities and shareholders' equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
32,852

 
$
37,922

Accrued expenses
31,113

 
36,858

Other current liabilities
35,619

 
30,491

Total current liabilities
99,584

 
105,271

 
 
 
 
Long-term debt
91,578

 
50,034

Self-insurance accruals
40,093

 
34,655

Other noncurrent liabilities
11,847

 
12,280

 
243,102

 
202,240

Common shareholders' equity:
 

 
 

 
 
 
 
Common shares, $1.00 par value, per share; 24,000 shares authorized; 21,457 shares issued and outstanding before treasury shares as of September 27, 2014
21,457

 
21,457

Additional paid-in capital
8,100

 
5,008

Common shares subscribed, unissued
9,557

 
10,467

Retained earnings
248,669

 
230,975

Accumulated other comprehensive loss
(5,323
)
 
(4,393
)
 
282,460

 
263,514

Less: Cost of Common shares held in treasury; 8,171 shares at September 27, 2014 and 8,018 shares at December 31, 2013
133,113

 
125,034

Common shares subscription receivable
5,853

 
7,342

 
 
 
 
 
143,494

 
131,138

 
$
386,596

 
$
333,378

 
 
 
 
See notes to condensed consolidated financial statements.
 

 
 


- 2 -


THE DAVEY TREE EXPERT COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share dollar amounts)
 
 
Three Months Ended
 
Nine Months Ended
 
September 27,
2014
 
September 28,
2013
 
September 27,
2014
 
September 28,
2013
Revenues
$
216,604

 
$
194,772

 
$
587,174

 
$
533,675

 
 
 
 
 
 
 
 
Costs and expenses:
 
 
 
 
 
 
 
Operating
138,991

 
125,658

 
378,505

 
346,310

Selling
37,179

 
32,376

 
102,051

 
89,623

General and administrative
12,407

 
12,103

 
39,211

 
37,330

Depreciation and amortization
11,071

 
10,255

 
31,439

 
29,471

Gain on sale of assets, net
(188
)
 
(501
)
 
(266
)
 
(1,161
)
 
199,460

 
179,891

 
550,940

 
501,573

 
 
 
 
 
 
 
 
Income from operations
17,144

 
14,881

 
36,234

 
32,102

 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
Interest expense
(676
)
 
(711
)
 
(2,101
)
 
(2,052
)
Interest income
56

 
76

 
201

 
237

Other, net
(1,112
)
 
(713
)
 
(2,417
)
 
(2,022
)
 
 
 
 
 
 
 
 
Income before income taxes
15,412

 
13,533

 
31,917

 
28,265

 
 
 
 
 
 
 
 
Income taxes
5,755

 
4,889

 
12,225

 
10,797

 
 
 
 
 
 
 
 
Net income
$
9,657

 
$
8,644

 
$
19,692

 
$
17,468

 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 
 
 
 
Basic
$
.72

 
$
.63

 
$
1.43

 
$
1.24

Diluted
$
.69

 
$
.61

 
$
1.39

 
$
1.20

 
 
 
 
 
 
 
 
Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
13,428

 
13,720

 
13,745

 
14,087

Diluted
13,899

 
14,255

 
14,167

 
14,547

 
 
 
 
 
 
 
 
Dividends declared per share
$
.050

 
$
.045

 
$
.140

 
$
.135

 
 
 
 
 
 
 
 
See notes to condensed consolidated financial statements.
 
 
 
 
 
 
 


- 3 -


THE DAVEY TREE EXPERT COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In thousands)


 
Three Months Ended
 
Nine Months Ended
 
September 27,
2014
 
September 28,
2013
 
September 27,
2014
 
September 28,
2013
Net income
$
9,657

 
$
8,644

 
$
19,692

 
$
17,468

Components of other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(1,263
)
 
444

 
(1,266
)
 
(925
)
Reclassification to results of operations:
 
 
 
 
 
 
 
Amortization of defined benefit pension items:
 
 
 
 
 
 
 
Net actuarial loss
109

 
216

 
329

 
646

Prior service cost
3

 
1

 
7

 
5

Defined benefit pension plan adjustments
112

 
217

 
336

 
651

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
(1,151
)
 
661

 
(930
)
 
(274
)
 
 
 
 
 
 
 
 
Comprehensive income
$
8,506

 
$
9,305

 
$
18,762

 
$
17,194

 
 
 
 
 
 
 
 
See notes to condensed consolidated financial statements.
 
 
 
 
 
 
 





- 4 -


THE DAVEY TREE EXPERT COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
 
 
Nine Months Ended
 
 
September 27,
2014
 
September 28,
2013
Operating activities
 
 
 
 
Net income
 
$
19,692

 
$
17,468

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
 
Depreciation and amortization
 
31,439

 
29,471

Other
 
(322
)
 
(608
)
Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
(20,570
)
 
(365
)
Operating liabilities
 
(5,535
)
 
(14,441
)
Other, net
 
(1,608
)
 
(14,105
)
 
 
3,404

 
(48
)
Net cash provided by operating activities
 
23,096

 
17,420

 
 
 
 
 
Investing activities
 
 

 
 

Capital expenditures:
 
 

 
 

Equipment
 
(40,152
)
 
(37,639
)
Land and building
 
(9,116
)
 
(2,592
)
Purchases of businesses
 
(9,544
)
 
(80
)
Other
 
423

 
1,748

Net cash used in investing activities
 
(58,389
)
 
(38,563
)
 
 
 
 
 
Financing activities
 
 

 
 

Revolving credit facility proceeds, net
 
34,600

 
20,300

Purchase of common shares for treasury
 
(13,242
)
 
(13,716
)
Sale of common shares from treasury
 
8,143

 
7,959

Dividends
 
(1,998
)
 
(1,910
)
Proceeds from notes payable
 
9,072

 
3,808

Net cash provided by financing activities
 
36,575

 
16,441

 
 
 
 
 
Increase (decrease) in cash
 
1,282

 
(4,702
)
 
 
 
 
 
Cash, beginning of period
 
15,861

 
19,647

Cash, end of period
 
$
17,143

 
$
14,945

 
 
 
 
 
Supplemental cash flow information follows:
 
 

 
 

Interest paid
 
$
2,461

 
$
2,370

Income taxes paid
 
6,449

 
16,901

 
 
 
 
 
See notes to condensed consolidated financial statements.
 
 

 
 



- 5 -


The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 27, 2014
(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, 2013 (the “2013 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, income taxes and revenue recognition. Actual results could differ from those estimates.
Interim Results of Operations--Interim results may not be indicative of calendar year performance because of seasonal and short-term variations.

Recent Accounting Guidance

Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606)--In May 2014, the FASB issued Accounting Standards Update No. 2014-09 ("ASU 2014-09"), “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 supersedes the guidance in Topic 605, "Revenue Recognition," and will replace all current U.S. GAAP guidance on revenue recognition and eliminate all industry-specific guidance.

The new revenue recognition guidance provides a unified model to determine when and how revenue is recognized. The underlying principle is that an entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration for which the entity expects in exchange for those goods and services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of the time value of money in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The guidance also requires enhanced information to be presented in the financial statements regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers.

The guidance will be effective for Davey Tree beginning January 1, 2017 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. Early adoption is not permitted. We are currently evaluating the ASU to determine the impact that it may have, if any, on our consolidated financial statements.

- 6 -


The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 27, 2014
(Amounts in thousands, except share data)



B.
Seasonality of Business
Due to the seasonality of our business, our operating results for the nine months ended September 27, 2014 are not indicative of results that may be expected for any other interim period or for the year ending December 31, 2014. Business seasonality is the result of traditionally 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
September 27,
2014
 
December 31,
2013
Accounts receivable
$
102,524

 
$
93,156

Receivables under contractual arrangements
27,213

 
14,309

 
129,737

 
107,465

 
 
 
 
Less allowances for doubtful accounts
2,058

 
2,209

 
 
 
 
Accounts receivable, net
$
127,679

 
$
105,256


Receivables under contractual arrangements consist of work-in-process in accordance with the terms of contracts, primarily with utility services customers.


The following comprise the amounts included in the balance sheet:
Other current assets
September 27,
2014
 
December 31,
2013
Refundable income taxes
$

 
$
5,317

Deferred income taxes
7,715

 
7,715

Prepaid expenses
18,742

 
11,393

Other
291

 
813

Total
$
26,748

 
$
25,238



 









- 7 -


The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 27, 2014
(Amounts in thousands, except share data)



C.
Accounts Receivable, Net and Supplemental Balance-Sheet Information (continued)

Accrued expenses
September 27,
2014
 
December 31,
2013
Employee compensation
$
18,571

 
$
18,578

Accrued compensated absences
7,407

 
6,953

Self-insured medical claims
2,320

 
2,503

Customer advances, deposits
719

 
2,191

Taxes, other than income
1,847

 
5,730

Other
249

 
903

Total
$
31,113

 
$
36,858



 
 
 
 
Other current liabilities
September 27,
2014
 
December 31,
2013
Current portion of:
 
 
 
Long-term debt
$
12,382

 
$
8,434

Self-insurance accruals
22,461

 
22,057

Other
776

 

Total
$
35,619

 
$
30,491






D.
Business Combinations

During the first nine months of 2014 we invested $12,702 in seven businesses, including liabilities assumed of $1,078 and debt issued of $2,080. The cash paid was preliminarily allocated, including the liabilities assumed, to the fair value of the primary assets acquired: including, tangible assets of $4,395 and intangible assets (including goodwill) of $8,307. The measurement period for purchase price allocations ends as soon as information of the facts and circumstances becomes available, but does not exceed twelve months. During the nine months ended September 28, 2013, our investment in businesses was $110, with no liabilities assumed and debt issued of $30.

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 was not significant.



- 8 -


The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 27, 2014
(Amounts in thousands, except share data)



E.
Identified Intangible Assets and Goodwill, Net
The carrying amounts of the identified intangibles and goodwill acquired in connection with our historical investments in businesses were as follows:
 
September 27, 2014
 
December 31, 2013
Identified Intangible Assets and Goodwill, Net
Carrying
Amount
 
Accumulated
Amortization
 
Carrying
Amount
 
Accumulated
Amortization
Amortized intangible assets:
 
 
 
 
 
 
 
Customer lists/relationships
$
16,344

 
$
12,263

 
$
14,429

 
$
11,398

Employment-related
6,601

 
5,664

 
5,631

 
5,474

Tradenames
5,312

 
4,067

 
4,525

 
3,754

 
 
 
 
 
 
 
 
Amortized intangible assets
$
28,257

 
$
21,994

 
$
24,585

 
$
20,626

 
 
 
 
 
 
 
 
Less accumulated amortization
21,994

 
 

 
20,626

 
 

 
 
 
 
 
 
 
 
Identified intangibles, net
6,263

 
 

 
3,959

 
 

 
 
 
 
 
 
 
 
Unamortized intangible assets:
 

 
 

 
 

 
 

Goodwill
28,203

 
 

 
23,602

 
 

 
$
34,466

 
 

 
$
27,561

 
 


F.
Long-Term Debt
Our long-term debt consisted of the following:
 
September 27,
2014
 
December 31,
2013
Revolving credit facility
 
 
 
Swing-line borrowings
$
6,600

 
$

LIBOR borrowings
48,000

 
20,000

 
54,600

 
20,000

Senior unsecured notes
30,000

 
30,000

Term loans
19,360

 
8,468

 
103,960

 
58,468

Less current portion
12,382

 
8,434

 
$
91,578

 
$
50,034


Revolving Credit Facility and 5.09% Senior Unsecured Notes--We have a $175,000 revolving credit facility with a group of banks, which will expire in November 2018 and permits borrowings, as defined, up to $175,000, including a letter of credit sublimit of $100,000 and a swing-line commitment of $15,000. Under certain circumstances, the amount available under the revolving credit facility may be increased to $210,000.  The revolving credit facility contains certain affirmative and negative covenants customary for this type of facility and


- 9 -


The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 27, 2014
(Amounts in thousands, except share data)



F.
Long-Term Debt (continued)
includes financial covenant ratios with respect to a maximum leverage ratio and a maximum balance sheet leverage ratio.

As of September 27, 2014, we had unused commitments under the facility approximating $67,614, with $107,386 committed, consisting of borrowings of $54,600 and issued letters of credit of $52,786. Borrowings outstanding bear interest, at Davey Tree’s option, of either (a) a base rate or (b) LIBOR plus a margin adjustment ranging from .75% 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 1.5%, or (iii) the federal funds rate plus .5%. A commitment fee ranging from .10% to .25% is also required based on the average daily unborrowed commitment.

The $30,000 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 commence 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.


G.
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 will remain in effect for 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 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 and performance-based restricted stock units -- included in the results of operations follows:
 
 
Three months ended
 
Nine Months Ended
 
September 27,
2014
 
September 28,
2013
 
September 27,
2014
 
September 28,
2013
Compensation expense, all share-based payment plans
$
497

 
$
342

 
$
1,389

 
$
1,018


- 10 -


The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 27, 2014
(Amounts in thousands, except share data)



 G.    Stock-Based Compensation (continued)

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 plan resulted in compensation cost of $330 being recognized for the nine months ended September 27, 2014 and $307 for the nine months ended September 28, 2013.

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 $285 for the nine months ended September 27, 2014 and $162 for the nine months ended September 28, 2013.

Stock-Settled Stock Appreciation Rights--During the nine months ended September 27, 2014, the Compensation Committee awarded 127,050 stock-settled stock appreciation rights (“SSARs”) to certain management employees and nonemployee directors, which vest ratably over five years. A SSAR is an award that allows the recipient to receive common stock equal to the appreciation in the fair market value of our common stock between the date the award was granted and the conversion date of the shares vested.

The following table summarizes our SSARs as of September 27, 2014.
Stock-Settled
Stock Appreciation Rights
 
Number
of
Rights
 
Weighted-
Average
Award Date
Value
 
Weighted-
Average
Remaining
Contractual
Life
 
Unrecognized
Compensation
Cost
 
Aggregate
Intrinsic
Value
Unvested, January 1, 2014
 
283,453

 
$
3.15

 
 
 
 
 
 
Granted
 
127,050

 
4.88

 
 
 
 
 
 
Forfeited
 

 

 
 
 
 
 
 
Vested
 
(95,072
)
 
3.18

 
 
 
 
 
 
Unvested, September 27, 2014
 
315,431

 
$
3.84

 
2.3 years
 
$
954

 
$
8,769

 
 
 
 
 
 
 
 
 
 
 
Employee SSARs
 
298,454

 
$
3.92

 
2.3 years
 
$
922

 
$
8,297

Nonemployee Director SSARs
 
16,977

 
$
2.29

 
2.1 years
 
$
32

 
$
472

 
Compensation costs for stock appreciation rights are determined using a fair-value method and amortized over the requisite service period. Compensation expense for stock appreciation rights was $296 for the nine months ended September 27, 2014 and $233 for the nine months ended September 28, 2013.

Performance-Based Restricted Stock Units--During the nine months ended September 27, 2014, the Compensation Committee awarded 39,476 performance-based restricted stock units to certain directors and management employees. The Compensation Committee made similar awards in prior periods. The awards vest



- 11 -


The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 27, 2014
(Amounts in thousands, except share data)



G.
Stock-Based Compensation (continued)
over specified periods. The following table summarizes performance-based restricted stock units as of September 27, 2014.
Performance-Based
Restricted Stock Units
 
Number
of
Stock
Units
 
Weighted-
Average
Grant Date
Value
 
Weighted-
Average
Remaining
Contractual
Life
 
Unrecognized
Compensation
Cost
 
Aggregate
Intrinsic
Value
Unvested, January 1, 2014
 
95,558

 
$
19.03

 
 
 
 
 
 
Granted
 
39,476

 
24.64

 
 
 
 
 
 
Forfeited
 

 

 
 
 
 
 
 
Vested
 
(14,203
)
 
17.94

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unvested, September 27, 2014
 
120,831

 
$
20.99

 
2.9 years
 
$
1,593

 
$
3,359


Compensation cost for restricted stock awards 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 awards totaled $478 for the nine months ended September 27, 2014 and $316 for the nine months ended September 28, 2013.

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 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 and forfeiture 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.
 
Nine Months Ended
 
September 27,
2014
 
September 28,
2013
Volatility rate
11.2
%
 
11.3
%
Risk-free interest rate
2.6
%
 
2.1
%
Expected dividend yield
1.1
%
 
1.5
%
Expected life of awards (years)
9.4

 
9.4









- 12 -


The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 27, 2014
(Amounts in thousands, except share data)



G.
Stock-Based Compensation (continued)

General Stock Option Information--The following table summarizes activity under the stock option plans for the nine months ended September 27, 2014.
Stock Options
 
Number
of
Options
Outstanding
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Life
 
Aggregate
Intrinsic
Value
Outstanding, January 1, 2014
 
662,246

 
$
16.68

 
 
 
 
Granted
 
183,500

 
26.40

 
 
 
 
Exercised
 
(62,492
)
 
13.07

 
 
 
 
Forfeited
 

 

 
 
 
 
Outstanding, September 27, 2014
 
783,254

 
$
19.24

 
6.5 years
 
$
6,705

 
 
 
 
 
 
 
 
 
Exercisable, September 27, 2014
 
329,950

 
$
14.34

 
4.1 years
 
$
4,440


As of September 27, 2014, there was approximately $1,623 of unrecognized compensation cost related to stock options outstanding. The cost is expected to be recognized over a weighted-average period of 3.0 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, stock-settled stock appreciation rights, restricted stock units or purchases under the Employee Stock Purchase Plan.


H.
Net Periodic Benefit Cost--Defined Benefit Pension Plans
The results of operations included the following net periodic benefit cost recognized related to our defined-benefit pension plans.
 
Three Months Ended
 
Nine Months Ended
 
September 27,
2014
 
September 28,
2013
 
September 27,
2014
 
September 28,
2013
Components of pension cost
 
 
 
 
 
 
 
Service costs--increase in benefit obligation earned
$
12

 
$
55

 
$
38

 
$
166

Interest cost on projected benefit obligation
405

 
379

 
1,214

 
1,136

Expected return on plan assets
(499
)
 
(439
)
 
(1,495
)
 
(1,319
)
Amortization of net actuarial loss
177

 
347

 
531

 
1,041

Amortization of prior service cost
4

 
3

 
10

 
10

Net pension cost of defined benefit pension plans
$
99

 
$
345

 
$
298

 
$
1,034

 
Employer Contributions--Contributions of $1,175 were made to our defined-benefit pension plans during the nine months ended September 27, 2014. We expect, as of September 27, 2014, to make additional defined-benefit plan contributions totaling $250 before December 31, 2014.


- 13 -


The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 27, 2014
(Amounts in thousands, except share data)



I.
Income Taxes
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 2014 annual effective tax rate is estimated to approximate 38%.  Our annual effective tax rate for 2013 was 35.7%.

At December 31, 2013, we had unrecognized tax benefits of $1,221, of which $942 would affect our effective rate if recognized, and accrued interest expense related to unrecognized benefits of $41. At September 27, 2014, there were no significant changes in the unrecognized tax benefits, including the amount that would affect our effective rate if recognized, or the accrued interest expense related to the unrecognized benefits. 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.
 
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. During the fourth quarter 2013, the U.S. Internal Revenue Service completed its audit of the Company's U.S. income tax returns for 2010 and 2011 and, during 2010, Canada Revenue Agency completed its audit of the Company's Canadian operations for 2006, 2007 and 2008. With the exception of U.S. state jurisdictions, the Company is no longer subject to examination by tax authorities for the years through 2010. As of September 27, 2014, we believe it is reasonably possible that the total amount of unrecognized tax benefits will not significantly increase or decrease.


J.
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: 
 
 
Foreign
Currency
Translation
Adjustments
 
Defined
Benefit
Pension
Plans
 
Accumulated
Other
Comprehensive
Income (Loss)
Balance at January 1, 2014
 
$
1,647

 
$
(6,040
)
 
$
(4,393
)
Other comprehensive income (loss) before reclassifications
 
 
 
 
 
 
Unrealized losses
 
(1,266
)
 

 
(1,266
)
Amounts reclassified from accumulated other comprehensive income (loss)
 

 
541

 
541

Tax effect
 

 
(205
)
 
(205
)
Net of tax amount
 
(1,266
)
 
336

 
(930
)
Balance at September 27, 2014
 
$
381

 
$
(5,704
)
 
$
(5,323
)

The change in defined benefit pension plans of $541 for the nine months ended September 27, 2014 is included in net periodic pension expense and is classified in the condensed statement of operations as costs and expenses, general and administrative.


- 14 -


The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 27, 2014
(Amounts in thousands, except share data)




K.
Per Share Amounts and Common 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
 
Nine Months Ended
 
September 27,
2014
 
September 28,
2013
 
September 27,
2014
 
September 28,
2013
Income available to common shareholders:
 
 
 
 
 
 
 
Net income
$
9,657

 
$
8,644

 
$
19,692

 
$
17,468

 
 
 
 
 
 
 
 
Weighted-average shares:
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
Outstanding
13,307

 
13,583

 
13,382

 
13,680

Partially-paid share subscriptions
121

 
137

 
363

 
407

Basic weighted-average shares
13,428

 
13,720

 
13,745

 
14,087

 
 
 
 
 
 
 
 
Diluted:
 
 
 
 
 
 
 
Basic from above
13,428

 
13,720

 
13,745

 
14,087

Incremental shares from assumed:
 
 
 
 
 
 
 
Exercise of stock subscription purchase rights
77

 
59

 
55

 
35

Exercise of stock options and awards
394

 
476

 
367

 
425

Diluted weighted-average shares
13,899

 
14,255

 
14,167

 
14,547

 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 
 
 
 
Basic
$
.72

 
$
.63

 
$
1.43

 
$
1.24

 
 
 
 
 
 
 
 
Diluted
$
.69

 
$
.61

 
$
1.39

 
$
1.20

Common Shares Outstanding--A summary of the activity of the common shares outstanding for the nine months ended September 27, 2014 follows:
 
Shares outstanding at January 1, 2014
13,438,611

Shares purchased
(498,684
)
Shares sold
212,180

Stock subscription offering -- cash purchases
41,247

Options and awards exercised
92,632

 
(152,625
)
Shares outstanding at September 27, 2014
13,285,986


- 15 -


The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 27, 2014
(Amounts in thousands, except share data)




K.
Per Share Amounts and Common Shares Outstanding (continued)
On September 27, 2014, we had 13,285,986 common shares outstanding, employee and director options exercisable to purchase 329,950 common shares, partially-paid subscriptions for 485,115 common shares and purchase rights outstanding for 197,456 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 $19.70 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 637,714 common shares for $12,563 at $19.70 per share.

Under the plan, a participant in the offering purchasing common shares for an aggregate purchase price of less than $5 had to pay with cash. All participants (excluding Company directors and officers) purchasing $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-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 of common shares were granted a "right" to purchase one additional common share at a price of $19.70 per share for every three common shares purchased under the plan. As a result of the stock subscription, employees were granted rights to purchase 211,800 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.


L.
Operations by Business Segment
We provide a wide range of arboriculture, horticulture, 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.
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, rights-of-way and chemical brush control; and, natural resource management and consulting, forestry research and development, and environmental planning.

- 16 -


The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 27, 2014
(Amounts in thousands, except share data)



L.    Operations by Business Segment (continued)
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 2013 Annual Report.

Segment information reconciled to consolidated external reporting information follows:
 
Utility
 
Residential and
Commercial
 
All
Other
 
Reconciling
Adjustments
 
 
Consolidated
Three Months Ended September 27, 2014
 
 
 
 
 
 
 
 
 
 
Revenues
$
108,096

 
$
107,671

 
$
837

 
$

 
 
$
216,604

Income (loss) from operations
5,725

 
13,421

 
(514
)
 
(1,488
)
(a)
 
17,144

Interest expense
 
 
 
 
 
 
(676
)
 
 
(676
)
Interest income
 
 
 
 
 
 
56

 
 
56

Other income (expense), net
 
 
 
 
 
 
(1,112
)
 
 
(1,112
)
Income before income taxes
 
 
 
 
 
 
 
 
 
$
15,412

Segment assets, total
$
155,231

 
$
156,685

 
$

 
$
74,680

(b)
 
$
386,596

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 28, 2013
 
 
 
 
 
 
 
 
 
 
Revenues
$
98,293

 
$
96,023

 
$
456

 
$

 
 
$
194,772

Income (loss) from operations
3,573

 
12,670

 
(411
)
 
(951
)
(a)
 
14,881

Interest expense
 
 
 
 
 
 
(711
)
 
 
(711
)
Interest income
 
 
 
 
 
 
76

 
 
76

Other income (expense), net
 
 
 
 
 
 
(713
)
 
 
(713
)
Income before income taxes
 
 
 
 
 
 
 
 
 
$
13,533

Segment assets, total
$
143,980

 
$
132,003

 
$

 
$
74,449

(b)
 
$
350,432

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 27, 2014
 
 
 
 
 
 
 
 
 
 
Revenues
$
296,230

 
$
288,990

 
$
1,954

 
$

 
 
$
587,174

Income (loss) from operations
14,450

 
29,318

 
(4,121
)
 
(3,413
)
(a)
 
36,234

Interest expense
 
 
 
 
 
 
(2,101
)
 
 
(2,101
)
Interest income
 
 
 
 
 
 
201

 
 
201

Other income (expense), net
 
 
 
 
 
 
(2,417
)
 
 
(2,417
)
Income before income taxes
 
 
 
 
 
 
 
 
 
$
31,917

Segment assets, total
$
155,231

 
$
156,685

 
$

 
$
74,680

(b)
 
$
386,596

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 28, 2013
 
 
 
 
 
 
 
 
 
 
Revenues
$
278,387

 
$
253,511

 
$
1,777

 
$

 
 
$
533,675

Income (loss) from operations
8,580

 
27,774

 
(2,294
)
 
(1,958
)
(a)
 
32,102

Interest expense
 
 
 
 
 
 
(2,052
)
 
 
(2,052
)
Interest income
 
 
 
 
 
 
237

 
 
237

Other income (expense), net
 
 
 
 
 
 
(2,022
)
 
 
(2,022
)
Income before income taxes
 
 
 
 
 
 
 
 
 
$
28,265

Segment assets, total
$
143,980

 
$
132,003

 
$

 
$
74,449

(b)
 
$
350,432

 

- 17 -


The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 27, 2014
(Amounts in thousands, except share data)



L.    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. 


M.
Fair Value Measurements and Financial Instruments
Fair value is the price that would be received to sell an asset or 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--A valuation hierarchy is used for presentation of the inputs to measure fair value.  This hierarchy prioritizes the inputs into three broad levels.  Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities.  Level 2 inputs are unadjusted quoted prices for similar assets and liabilities in active markets, unadjusted quoted prices for identical or similar assets in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability. Level 3 inputs are unobservable inputs used to measure assets and liabilities at fair value.  A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

Our assets and liabilities measured at fair value on a recurring basis at September 27, 2014, were as follows:
 
 
 
 
Fair Value Measurements at
September 27, 2014 Using:
Assets and Liabilities Recorded at
Fair Value on a Recurring Basis
 
Total
Carrying
Value at
September 27,
2014
 
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
 
$
13,078

 
$
13,078

 
$

 
$

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Deferred compensation
 
$
1,400

 
$

 
$
1,400

 
$











- 18 -


The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 27, 2014
(Amounts in thousands, except share data)



M.    Fair Value Measurements and Financial Instruments (continued)

Our assets and liabilities measured at fair value on a recurring basis at December 31, 2013 were as follows:
 
 
 
 
Fair Value Measurements at
December 31, 2013 Using:
Assets and Liabilities Recorded at
Fair Value on a Recurring Basis
 
Total
Carrying
Value at
December 31,
2013
 
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
 
$
12,716

 
$
12,716

 
$

 
$

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Deferred compensation
 
$
1,144

 
$

 
$
1,144

 
$


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--Fair value information is required to be presented for all financial instruments, whether reported at fair value or historical carrying value.
The fair values of our current 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. The assets invested for self-insurance are reported at fair value. Financial instruments classified as noncurrent liabilities and their carrying values and fair values were as follows:
 
 
September 27, 2014
 
December 31, 2013
Financial Instruments Recorded at
Historical Carrying Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Revolving credit facility, noncurrent
 
$
54,600

 
$
54,600

 
$
20,000

 
$
20,000

Senior unsecured notes
 
30,000

 
30,099

 
30,000

 
28,219

Term loans, noncurrent
 
6,978

 
6,742

 
34

 
34

Total
 
$
91,578

 
$
91,441

 
$
50,034

 
$
48,253



The carrying value of our revolving credit facility approximates fair value as the interest rates on the amounts outstanding are variable. The fair value of our senior unsecured notes and our term loans is determined based on expected future weighted-average interest rates with the same remaining maturities--Level 2 inputs.





- 19 -


The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 27, 2014
(Amounts in thousands, except share data)




M.    Fair Value Measurements and Financial Instruments (continued)

Market Risk and Derivative Financial Instruments

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. We use derivative financial instruments from time-to-time to manage risks, in part, associated with changes in interest rates and changes in fuel prices.

Foreign Currency Exchange Rate Risk--We are exposed to market risk related to foreign currency exchange rate risk resulting from our operations in Canada, where we provide a comprehensive range of horticultural services. 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. Similarly, the Canadian dollar-denominated assets and liabilities may result in financial exposure as to the timing of transactions and the net asset / liability position of our Canadian operations. Presently, we do not engage in hedging activities related to our foreign currency rate risk.

Interest Rate Risk--We are exposed to market risk related to changes in interest rates on long-term debt obligations. We regularly monitor and measure our interest rate risk and, to the extent that we believe we are exposed, from time-to-time we have entered into interest rate swap contracts--derivative financial instruments--with the objective of altering interest rate exposures related to a portion of variable debt.

Fuel Derivatives--From time-to-time we have entered into fuel derivatives as “economic hedges” related to fuel consumed by Davey Tree service vehicles. The objectives of the economic hedges are to fix the price of a portion of our fuel needs and mitigate the earnings and cash flow volatility attributable to the risk of changing prices.

The following table sets forth quantitative information related to our derivative instruments and where amounts were recorded in our consolidated financial statements.
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 27,
2014
 
September 28,
2013
 
September 27,
2014
 
September 28,
2013
Economic Hedges - Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
 
 
 
 Fuel Derivatives:
 
 
 
 
 
 
 
 
 Change in fair value, recognized in results of operations, as a (reduction) increase in operating costs and expenses
 
$

 
$
(92
)
 
$

 
$
(125
)

As of September 27, 2014 we were not invested in, nor did we hold, any derivative contracts. And, during the fourth quarter 2013, all derivative contracts previously entered into expired.


- 20 -


The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 27, 2014
(Amounts in thousands, except share data)



N.
Contingencies
We are party to a number of lawsuits, threatened lawsuits and other claims arising out of the normal course of business.
     
With respect to all such matters, we record an accrual for a loss contingency when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In addition, narrative information is provided for matters as to which management believes a material loss is reasonably possible.
 
Management assesses all such matters, including the matter described below, based on current information and makes judgments concerning their potential outcome, giving due consideration to the nature of the claim, the amount and nature of damages sought and the probability of success.  Management's judgment is made subject to the known uncertainty of litigation and management's judgment as to estimates made may prove materially different from actual results.

California Fire Litigation: San Diego County--Davey Tree Surgery Company, a Davey subsidiary, and Davey Resource Group, a Davey division, along with the Company have previously been sued, together with a utility services customer, San Diego Gas & Electric ("SDG&E"), and its parent company, as defendants, and as cross-defendants in cross-complaints filed by SDG&E, in the Superior Court of the State of California in and for the County of San Diego, arising out of a wildfire in San Diego County that started on October 22, 2007, referred to as the Rice Canyon fire.

Numerous lawsuits related to the Rice Canyon fire were filed against SDG&E, its parent company, Sempra Energy, and Davey. The earliest of the lawsuits naming Davey was filed on April 18, 2008. The Court ordered that the lawsuits be organized into four groups based on type of plaintiff, namely insurance subrogation claimants, individual/business claimants, governmental claimants, and plaintiffs seeking class certification. Plaintiffs motions seeking class certification were denied and the orders denying class certification were affirmed on appeal. SDG&E filed cross-complaints against Davey for contractual indemnity, declaratory relief, and breach of contract.

During the third quarter 2012, Davey entered into a Settlement and Release Agreement (the “Agreement”) among Davey, SDG&E and Davey's insurers.

Under the Agreement (a) Davey paid SDG&E an amount previously expensed and accrued as self-insurance, (b) Davey's insurers paid SDG&E amounts under Davey's insurance policies in effect during the period of the Rice Canyon fire, and (c) SDG&E dismissed its cross-complaints against Davey and agreed to defend and hold harmless Davey from any and all claims that are currently asserted against Davey.

- 21 -


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 arboriculture, 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, 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."

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
 
Nine Months Ended
 
September 27,
2014
 
September 28,
2013
 
Percentage
Change
 
September 27,
2014
 
September 28,
2013
 
Percentage
Change
Revenues
100.0
 %
 
100.0
 %
 
 %
 
100.0
 %
 
100.0
 %
 
 %
 
 
 
 
 
 
 
 
 
 
 
 
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
Operating
64.2

 
64.5

 
(.3
)
 
64.4

 
64.9

 
(.5
)
Selling
17.2

 
16.6

 
.6

 
17.3

 
16.8

 
.5

General and administrative
5.7

 
6.2

 
(.5
)
 
6.7

 
7.0

 
(.3
)
Depreciation and amortization
5.1

 
5.3

 
(.2
)
 
5.4

 
5.5

 
(.1
)
Gain on sale of assets, net
(.1
)
 
(.2
)
 
.1

 

 
(.2
)
 
.2

 
 
 
 
 
 
 
 
 
 
 
 
Income from operations
7.9

 
7.6

 
.3

 
6.2

 
6.0

 
.2

 
 
 
 
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
Interest expense
(.3
)
 
(.3
)
 

 
(.4
)
 
(.4
)
 

Interest income

 

 

 

 

 

Other, net
(.5
)
 
(.4
)
 
(.1
)
 
(.4
)
 
(.3
)
 
(.1
)
 
 
 
 
 
 
 
 
 
 
 
 
Income before income taxes
7.1

 
6.9

 
.2

 
5.4

 
5.3

 
.1

 
 
 
 
 
 
 
 
 
 
 
 
Income taxes
2.7

 
2.5

 
.2

 
2.1

 
2.0

 
.1

 
 
 
 
 
 
 
 
 
 
 
 
Net income
4.4
 %
 
4.4
 %
 
 %
 
3.3
 %
 
3.3
 %
 
 %