10-Q 1 dt2015q210q.htm 10-Q DT 2015 Q2 10Q
 
 
 
 
 

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 July 4, 2015
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 13,040,054 Common Shares, $1.00 par value, outstanding as of July 31, 2015

 
 
 
 
 



The Davey Tree Expert Company
Quarterly Report on Form 10-Q
July 4, 2015
INDEX
 
 
Page
Part I.
Financial Information
 
 
 
Item 1.  
Financial Statements (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
9
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
30
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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)
 
 
July 4,
2015
 
December 31,
2014
Assets
 
 
 
Current assets:
 
 
 
Cash
$
18,226

 
$
18,415

Accounts receivable, net
130,495

 
111,598

Operating supplies
7,098

 
6,968

Other current assets
21,562

 
30,215

Total current assets
177,381

 
167,196

 
 
 
 
Property and equipment
559,580

 
532,949

Less accumulated depreciation
383,956

 
372,066

 
175,624

 
160,883

 
 
 
 
Other assets
20,308

 
18,862

Identified intangible assets and goodwill, net
34,882

 
34,063

 
$
408,195

 
$
381,004

Liabilities and shareholders' equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
33,377

 
$
42,140

Accrued expenses
28,693

 
34,925

Other current liabilities
25,430

 
31,288

Total current liabilities
87,500

 
108,353

 
 
 
 
Long-term debt
121,675

 
81,306

Self-insurance accruals
38,331

 
35,886

Other noncurrent liabilities
18,832

 
18,968

 
266,338

 
244,513

Common shareholders' equity:
 

 
 

 
 
 
 
Common shares, $1.00 par value, per share; 48,000 shares authorized; 21,457 shares issued and outstanding before treasury shares as of July 4, 2015
21,457

 
21,457

Additional paid-in capital
14,611

 
9,461

Common shares subscribed, unissued
9,076

 
9,381

Retained earnings
262,525

 
251,470

Accumulated other comprehensive loss
(13,333
)
 
(11,523
)
 
294,336

 
280,246

Less: Cost of Common shares held in treasury; 8,420 shares at
July 4, 2015 and 8,292 shares at December 31, 2014
147,383

 
138,155

Common shares subscription receivable
5,096

 
5,600

 
 
 
 
 
141,857

 
136,491

 
$
408,195

 
$
381,004

 
 
 
 
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
 
Six Months Ended
 
July 4,
2015
 
June 28,
2014
 
July 4,
2015
 
June 28,
2014
Revenues
$
224,773

 
$
213,183

 
$
399,065

 
$
370,570

 
 
 
 
 
 
 
 
Costs and expenses:
 
 
 
 
 
 
 
Operating
137,341

 
130,283

 
257,199

 
239,514

Selling
34,914

 
35,813

 
67,570

 
64,872

General and administrative
13,534

 
12,905

 
28,666

 
26,804

Depreciation and amortization
11,607

 
10,468

 
22,268

 
20,368

Gain on sale of assets, net
(419
)
 
(101
)
 
(449
)
 
(78
)
 
196,977

 
189,368

 
375,254

 
351,480

 
 
 
 
 
 
 
 
Income from operations
27,796

 
23,815

 
23,811

 
19,090

 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
Interest expense
(900
)
 
(706
)
 
(1,690
)
 
(1,425
)
Interest income
59

 
76

 
122

 
145

Other, net
(881
)
 
(500
)
 
(1,708
)
 
(1,305
)
 
 
 
 
 
 
 
 
Income before income taxes
26,074

 
22,685

 
20,535

 
16,505

 
 
 
 
 
 
 
 
Income taxes
10,142

 
8,639

 
8,131

 
6,470

 
 
 
 
 
 
 
 
Net income
$
15,932

 
$
14,046

 
$
12,404

 
$
10,035

 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 
 
 
 
Basic
$
1.21

 
$
1.04

 
$
.93

 
$
.73

Diluted
$
1.17

 
$
1.01

 
$
.90

 
$
.71

 
 
 
 
 
 
 
 
Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
13,214

 
13,486

 
13,375

 
13,671

Diluted
13,665

 
13,880

 
13,835

 
14,070

 
 
 
 
 
 
 
 
Dividends declared per share
$
.050

 
$
.045

 
$
.100

 
$
.090

 
 
 
 
 
 
 
 
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
 
Six Months Ended
 
July 4,
2015
 
June 28,
2014
 
July 4,
2015
 
June 28,
2014
Net income
$
15,932

 
$
14,046

 
$
12,404

 
$
10,035

Components of other comprehensive income/(loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(84
)
 
971

 
(2,267
)
 
(3
)
Reclassification to results of operations:
 
 
 
 
 
 
 
Amortization of defined benefit pension items:
 
 
 
 
 
 
 
Net actuarial loss
215

 
110

 
455

 
220

Prior service cost

 
2

 
2

 
4

Defined benefit pension plan adjustments
215

 
112

 
457

 
224

 
 
 
 
 
 
 
 
Other comprehensive income/(loss), net of tax
131

 
1,083

 
(1,810
)
 
221

 
 
 
 
 
 
 
 
Comprehensive income
$
16,063

 
$
15,129

 
$
10,594

 
$
10,256

 
 
 
 
 
 
 
 
See notes to condensed consolidated financial statements.
 
 
 
 
 
 
 





- 4 -


THE DAVEY TREE EXPERT COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
 
 
Six Months Ended
 
 
July 4,
2015
 
June 28,
2014
Operating activities
 
 
 
 
Net income
 
$
12,404

 
$
10,035

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
 
Depreciation and amortization
 
22,268

 
20,368

Other
 
(1,303
)
 
430

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
(18,897
)
 
(18,831
)
Operating liabilities
 
(3,699
)
 
(4,964
)
Other, net
 
7,919

 
7,125

 
 
6,288

 
4,128

Net cash provided by operating activities
 
18,692

 
14,163

 
 
 
 
 
Investing activities
 
 

 
 

Capital expenditures:
 
 

 
 

Equipment
 
(44,545
)
 
(32,648
)
Land and building
 
(1,013
)
 
(2,011
)
Purchases of businesses
 
(1,549
)
 
(6,771
)
Other
 
607

 
185

Net cash used in investing activities
 
(46,500
)
 
(41,245
)
 
 
 
 
 
Financing activities
 
 

 
 

Revolving credit facility proceeds, net
 
40,500

 
36,500

Purchase of common shares for treasury
 
(11,614
)
 
(11,494
)
Sale of common shares from treasury
 
6,887

 
6,559

Dividends
 
(1,348
)
 
(1,242
)
Payments of notes payable
 
(6,806
)
 
(5,281
)
Net cash provided by financing activities
 
27,619

 
25,042

 
 
 
 
 
Decrease in cash
 
(189
)
 
(2,040
)
 
 
 
 
 
Cash, beginning of period
 
18,415

 
15,861

Cash, end of period
 
$
18,226

 
$
13,821

 
 
 
 
 
Supplemental cash flow information follows:
 
 

 
 

Interest paid
 
$
909

 
$
1,393

Income taxes paid
 
9,143

 
2,645

 
 
 
 
 
See notes to condensed consolidated financial statements.
 
 

 
 



- 5 -


The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
July 4, 2015
(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, 2014 (the “2014 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 ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which 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.

On July 9, 2015, the FASB approved a one-year deferral of the effective date of ASU 2014-09, which now becomes effective for Davey Tree beginning with the first quarter 2018 and can be adopted either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption. The FASB also affirmed its proposal to permit all entities to apply the new revenue standard early, but not before the


- 6 -


The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
July 4, 2015
(Amounts in thousands, except share data)



A.
Basis of Financial Statement Preparation (continued)
original effective date, which for Davey Tree would be first quarter 2017. The new revenue guidance will supersede existing revenue guidance affecting our Company, and may also affect our business processes and our information technology systems. As a result, our evaluation of the effect of the new revenue guidance will extend over future periods.


B.
Seasonality of Business
Due to the seasonality of our business, our operating results for the six months ended July 4, 2015 are not indicative of results that may be expected for any other interim period or for the year ending December 31, 2015. 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
July 4,
2015
 
December 31,
2014
Accounts receivable
$
108,997

 
$
98,657

Receivables under contractual arrangements
24,274

 
15,362

 
133,271

 
114,019

Less allowances for doubtful accounts
2,776

 
2,421

Accounts receivable, net
$
130,495

 
$
111,598


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
July 4,
2015
 
December 31,
2014
Refundable income taxes
$
3,462

 
$
2,122

Prepaid expenses
8,572

 
14,088

Note receivable

 
4,319

Other
9,528

 
9,686

Total
$
21,562

 
$
30,215







- 7 -


The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
July 4, 2015
(Amounts in thousands, except share data)





C.
Accounts Receivable, Net and Supplemental Balance-Sheet Information (continued)
Accrued expenses
July 4,
2015
 
December 31,
2014
Employee compensation
$
15,053

 
$
19,195

Accrued compensated absences
8,794

 
8,034

Self-insured medical claims
560

 
2,722

Customer advances, deposits
438

 
2,030

Taxes, other than income
2,358

 
2,054

Other
1,490

 
890

Total
$
28,693

 
$
34,925



D.
Business Combinations

Our investment in businesses during the first six months of 2015 was $2,449, with no liabilities assumed and debt issued of $900. The purchase price allocation is preliminary. 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 six months ended June 28, 2014, our investment in businesses was $9,269, with liabilities assumed of $1,078 and debt issued of $1,420.

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.

Investments in Business Subsequent to July 4, 2015--Subsequent to July 4, 2015 and through the date the financial statements were available for issuance, August 4, 2015, we made an investment in a business, the purchase price of which approximated $1,700.



- 8 -


The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
July 4, 2015
(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:
 
July 4, 2015
 
December 31, 2014
Identified Intangible Assets and Goodwill, Net
Carrying
Amount
 
Accumulated
Amortization
 
Carrying
Amount
 
Accumulated
Amortization
Amortized intangible assets:
 
 
 
 
 
 
 
Customer lists/relationships
$
16,803

 
$
13,172

 
$
16,076

 
$
12,560

Employment-related
7,168

 
5,985

 
7,026

 
5,776

Tradenames
5,368

 
4,341

 
5,286

 
4,153

 
 
 
 
 
 
 
 
Amortized intangible assets
$
29,339

 
$
23,498

 
$
28,388

 
$
22,489

 
 
 
 
 
 
 
 
Less accumulated amortization
23,498

 
 

 
22,489

 
 

 
 
 
 
 
 
 
 
Identified intangibles, net
5,841

 
 

 
5,899

 
 

 
 
 
 
 
 
 
 
Unamortized intangible assets:
 

 
 

 
 

 
 

Goodwill
29,041

 
 

 
28,164

 
 

 
$
34,882

 
 

 
$
34,063

 
 


F.
Long-Term Debt
Our long-term debt consisted of the following:
 
July 4,
2015
 
December 31,
2014
Revolving credit facility
 
 
 
Swing-line borrowings
$
3,000

 
$
7,500

LIBOR borrowings
82,000

 
37,000

 
85,000

 
44,500

Senior unsecured notes
30,000

 
30,000

Term loans
9,181

 
15,087

 
124,181

 
89,587

Less current portion
2,506

 
8,281

 
$
121,675

 
$
81,306


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)
July 4, 2015
(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 July 4, 2015, we had unused commitments under the facility approximating $31,668, with $143,332 committed, consisting of borrowings of $85,000 and issued letters of credit of $58,332. 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
 
Six Months Ended
 
July 4,
2015
 
June 28,
2014
 
July 4,
2015
 
June 28,
2014
Compensation expense, all share-based payment plans
$
557

 
$
472

 
$
1,055

 
$
892


- 10 -


The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
July 4, 2015
(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 $263 being recognized for the six months ended July 4, 2015 and $211 for the six months ended June 28, 2014.

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 $223 for the six months ended July 4, 2015 and $154 for the six months ended June 28, 2014.

Stock-Settled Stock Appreciation Rights--During the six months ended July 4, 2015, the Compensation Committee awarded 133,550 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 July 4, 2015.
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, 2015
 
303,271

 
$
3.84

 
 
 
 
 
 
Granted
 
133,550

 
5.78

 
 
 
 
 
 
Forfeited
 

 

 
 
 
 
 
 
Vested
 
(83,484
)
 
3.65

 
 
 
 
 
 
Unvested, July 4, 2015
 
353,337

 
$
4.62

 
3.1 years
 
$
1,409

 
$
10,636

 
 
 
 
 
 
 
 
 
 
 
Employee SSARs
 
344,338

 
$
4.67

 
3.2 years
 
$
1,391

 
$
10,365

Nonemployee Director SSARs
 
8,999

 
$
2.23

 
1.3 years
 
$
18

 
$
271

 
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 $229 for the six months ended July 4, 2015 and $201 for the six months ended June 28, 2014.

Performance-Based Restricted Stock Units--During the six months ended July 4, 2015, the Compensation Committee awarded 42,152 performance-based restricted stock units to certain directors and management employees. The Compensation Committee made similar awards in prior periods. The awards vest over specified periods. The following table summarizes performance-based restricted stock units as of July 4, 2015.


- 11 -


The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
July 4, 2015
(Amounts in thousands, except share data)



G.
Stock-Based Compensation (continued)
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, 2015
 
117,709

 
$
21.14

 
 
 
 
 
 
Granted
 
42,152

 
29.14

 
 
 
 
 
 
Forfeited
 

 

 
 
 
 
 
 
Vested
 
(10,533
)
 
15.42

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unvested, July 4, 2015
 
149,328

 
$
23.80

 
3.0 years
 
$
2,345

 
$
4,495


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 $340 for the six months ended July 4, 2015 and $326 for the six months ended June 28, 2014.

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.
 
Six Months Ended
 
July 4,
2015
 
June 28,
2014
Volatility rate
10.9
%
 
11.2
%
Risk-free interest rate
2.1
%
 
2.6
%
Expected dividend yield
.7
%
 
1.5
%
Expected life of awards (years)
9.3

 
8.7








- 12 -


The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
July 4, 2015
(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 six months ended July 4, 2015.
Stock Options
 
Number
of
Options
Outstanding
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Life
 
Aggregate
Intrinsic
Value
Outstanding, January 1, 2015
 
770,131

 
$
19.33

 
 
 
 
Granted
 
148,000

 
30.10

 
 
 
 
Exercised
 
(37,767
)
 
13.41

 
 
 
 
Forfeited
 
(20,700
)
 
20.33

 
 
 
 
Outstanding, July 4, 2015
 
859,664

 
$
21.42

 
6.6 years
 
$
7,462

 
 
 
 
 
 
 
 
 
Exercisable, July 4, 2015
 
406,284

 
$
16.41

 
4.2 years
 
$
5,562


As of July 4, 2015, there was approximately $2,187 of unrecognized compensation cost related to stock options outstanding. The cost is expected to be recognized over a weighted-average period of 3.8 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
 
Six Months Ended
 
July 4,
2015
 
June 28,
2014
 
July 4,
2015
 
June 28,
2014
Components of pension cost
 
 
 
 
 
 
 
Service costs--increase in benefit obligation earned
$
5

 
$
13

 
$
26

 
$
26

Interest cost on projected benefit obligation
376

 
405

 
755

 
809

Expected return on plan assets
(406
)
 
(498
)
 
(811
)
 
(996
)
Curtailment cost
49

 

 
49

 

Amortization of net actuarial loss
346

 
177

 
733

 
354

Amortization of prior service cost
1

 
3

 
4

 
6

Net pension cost of defined benefit pension plans
$
371

 
$
100

 
$
756

 
$
199

 
During the second quarter ended July 4, 2015, the Board of Directors approved a pension plan amendment for the Supplemental Executive Retirement Plan (the “SERP”) to cease the accrual of additional retirement benefits, resulting in recognition of plan curtailment cost of $49, which consisted of existing net prior service costs prior to


- 13 -


The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
July 4, 2015
(Amounts in thousands, except share data)



H.    Net Periodic Benefit Cost--Defined Benefit Pension Plans (continued)

the plan freeze. As required, we remeasured the SERP’s accumulated benefits obligation which, after the plan freeze, is being amortized based on the remaining life expectancy of plan participants instead of the remaining service period of these participants.


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 2015 annual effective tax rate is estimated to approximate 39%.  Our annual effective tax rate for 2014 was 39.5%.

At December 31, 2014, we had unrecognized tax benefits of $1,949, of which $1,512 would affect our effective rate if recognized, and accrued interest expense related to unrecognized benefits of $77. At July 4, 2015, 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 July 4, 2015, 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.









- 14 -


The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
July 4, 2015
(Amounts in thousands, except share data)




J.
Accumulated Other Comprehensive Income (Loss) (continued)
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, 2015
 
$
(1,151
)
 
$
(10,372
)
 
$
(11,523
)
Other comprehensive income (loss) before reclassifications
 
 
 
 
 
 
Unrealized losses
 
(2,267
)
 

 
(2,267
)
Amounts reclassified from accumulated other comprehensive income (loss)
 

 
737

 
737

Tax effect
 

 
(280
)
 
(280
)
Net of tax amount
 
(2,267
)
 
457

 
(1,810
)
Balance at July 4, 2015
 
$
(3,418
)
 
$
(9,915
)
 
$
(13,333
)

The change in defined benefit pension plans of $737 for the six months ended July 4, 2015 is included in net periodic pension expense and is classified in the condensed statement of operations as costs and expenses, general and administrative.



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:











- 15 -


The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
July 4, 2015
(Amounts in thousands, except share data)




K.
Per Share Amounts and Common Shares Outstanding (continued)
 
Three Months Ended
 
Six Months Ended
 
July 4,
2015
 
June 28,
2014
 
July 4,
2015
 
June 28,
2014
Income available to common shareholders:
 
 
 
 
 
 
 
Net income
$
15,932

 
$
14,046

 
$
12,404

 
$
10,035

 
 
 
 
 
 
 
 
Weighted-average shares:
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
Outstanding
13,099

 
13,360

 
13,146

 
13,419

Partially-paid share subscriptions
115

 
126

 
229

 
252

Basic weighted-average shares
13,214

 
13,486

 
13,375

 
13,671

 
 
 
 
 
 
 
 
Diluted:
 
 
 
 
 
 
 
Basic from above
13,214

 
13,486

 
13,375

 
13,671

Incremental shares from assumed:
 
 
 
 
 
 
 
Exercise of stock subscription purchase rights
61

 
44

 
62

 
44

Exercise of stock options and awards
390

 
350

 
398

 
355

Diluted weighted-average shares
13,665

 
13,880

 
13,835

 
14,070

 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 
 
 
 
Basic
$
1.21

 
$
1.04

 
$
.93

 
$
.73

 
 
 
 
 
 
 
 
Diluted
$
1.17

 
$
1.01

 
$
.90

 
$
.71

Common Shares Outstanding--A summary of the activity of the common shares outstanding for the six months ended July 4, 2015 follows:
 
Shares outstanding at January 1, 2015
13,164,933

Shares purchased
(386,138
)
Shares sold
197,749

Stock subscription offering -- cash purchases
18,774

Options and awards exercised
41,832

 
(127,783
)
Shares outstanding at July 4, 2015
13,037,150





- 16 -


The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
July 4, 2015
(Amounts in thousands, except share data)




K.
Per Share Amounts and Common Shares Outstanding (continued)
On May 19, 2015, at the Annual Meeting of Shareholders, the Company's shareholders approved an increase in the number of the Company's authorized common shares, par value $1.00, to 48 million from 24 million. The number of authorized preferred shares of the Company remains at 4 million preferred shares, no par value, of which none were issued.

On July 4, 2015, we had 13,037,150 common shares outstanding, employee and director options exercisable to purchase 406,284 common shares, partially-paid subscriptions for 459,830 common shares and purchase rights outstanding for 184,239 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.



- 17 -


The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
July 4, 2015
(Amounts in thousands, except share data)



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.
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 2014 Annual Report.    

Segment information reconciled to consolidated external reporting information follows:














- 18 -


The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
July 4, 2015
(Amounts in thousands, except share data)



L.
Operations by Business Segment (continued)
 
Utility
 
Residential and
Commercial
 
All
Other
 
Reconciling
Adjustments
 
 
Consolidated
Three Months Ended July 4, 2015
 
 
 
 
 
 
 
 
 
 
Revenues
$
108,537

 
$
115,635

 
$
601

 
$

 
 
$
224,773

Income (loss) from operations
7,478

 
22,712

 
(923
)
 
(1,471
)
(a)
 
27,796

Interest expense
 
 
 
 
 
 
(900
)
 
 
(900
)
Interest income
 
 
 
 
 
 
59

 
 
59

Other income (expense), net
 
 
 
 
 
 
(881
)
 
 
(881
)
Income before income taxes
 
 
 
 
 
 
 
 
 
$
26,074

Segment assets, total
$
164,250

 
$
165,587

 
$

 
$
78,358

(b)
 
$
408,195

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 28, 2014
 
 
 
 
 
 
 
 
 
 
Revenues
$
98,842

 
$
113,512

 
$
829

 
$

 
 
$
213,183

Income (loss) from operations
5,940

 
20,134

 
(1,091
)
 
(1,168
)
(a)
 
23,815

Interest expense
 
 
 
 
 
 
(706
)
 
 
(706
)
Interest income
 
 
 
 
 
 
76

 
 
76

Other income (expense), net
 
 
 
 
 
 
(500
)
 
 
(500
)
Income before income taxes
 
 
 
 
 
 
 
 
 
$
22,685

Segment assets, total
$
143,504

 
$
160,201

 
$

 
$
62,875

(b)
 
$
366,580

 
 
 
 
 
 
 
 
 
 
 
Six Months Ended July 4, 2015
 
 
 
 
 
 
 
 
 
 
Revenues
$
208,920

 
$
189,092

 
$
1,053

 
$

 
 
$
399,065

Income (loss) from operations
11,363

 
18,823

 
(3,538
)
 
(2,837
)
(a)
 
23,811

Interest expense
 
 
 
 
 
 
(1,690
)
 
 
(1,690
)
Interest income
 
 
 
 
 
 
122

 
 
122

Other income (expense), net
 
 
 
 
 
 
(1,708
)
 
 
(1,708
)
Income before income taxes
 
 
 
 
 
 
 
 
 
$
20,535

Segment assets, total
$
164,250

 
$
165,587

 
$

 
$
78,358

(b)
 
$
408,195

 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 28, 2014
 
 
 
 
 
 
 
 
 
 
Revenues
$
188,134

 
$
181,319

 
$
1,117

 
$

 
 
$
370,570

Income (loss) from operations
8,725

 
15,897

 
(3,607
)
 
(1,925
)
(a)
 
19,090

Interest expense
 
 
 
 
 
 
(1,425
)
 
 
(1,425
)
Interest income
 
 
 
 
 
 
145

 
 
145

Other income (expense), net
 
 
 
 
 
 
(1,305
)
 
 
(1,305
)
Income before income taxes
 
 
 
 
 
 
 
 
 
$
16,505

Segment assets, total
$
143,504

 
$
160,201

 
$

 
$
62,875

(b)
 
$
366,580

 
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. 



- 19 -


The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
July 4, 2015
(Amounts in thousands, except share data)



M.
Fair Value Measurements and Financial Instruments
Financial Accounting Standards Board Accounting Standard Codification 820, “Fair Value of Measurements and Disclosures (“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.
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 July 4, 2015 were as follows:
 
 
 
 
Fair Value Measurements at
July 4, 2015 Using:
Assets and Liabilities Recorded at
Fair Value on a Recurring Basis
 
Total
Carrying
Value at
July 4, 2015
 
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
 
$
15,646

 
$
15,646

 
$

 
$

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Deferred compensation
 
$
1,604

 
$

 
$
1,604

 
$











- 20 -


The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
July 4, 2015
(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, 2014 were as follows:
 
 
 
 
Fair Value Measurements at
December 31, 2014 Using:
Assets and Liabilities Recorded at
Fair Value on a Recurring Basis
 
Total
Carrying
Value at
December 31,
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
 
$
13,684

 
$
13,684

 
$

 
$

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Deferred compensation
 
$
1,423

 
$

 
$
1,423

 
$


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:

 
 
July 4, 2015
 
December 31, 2014
 
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Revolving credit facility, noncurrent
 
$
85,000

 
$
85,000

 
$
44,500

 
$
44,500

Senior unsecured notes
 
30,000

 
30,288

 
30,000

 
30,688

Term loans, noncurrent
 
6,675

 
6,944

 
6,806

 
7,195

Total
 
$
121,675

 
$
122,232

 
$
81,306

 
$
82,383



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


- 21 -


The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
July 4, 2015
(Amounts in thousands, except share data)



M.
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.


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.

- 22 -


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
 
Six Months Ended
 
July 4,
2015
 
June 28,
2014
 
Percentage
Change
 
July 4,
2015
 
June 28,
2014
 
Percentage
Change
Revenues
100.0
 %
 
100.0
 %
 
 %
 
100.0
 %
 
100.0
 %
 
 %
 
 
 
 
 
 
 
 
 
 
 
 
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
Operating
61.1

 
61.1

 

 
64.5

 
64.6

 
(.1
)
Selling
15.5

 
16.8

 
(1.3
)
 
16.9

 
17.5

 
(.6
)
General and administrative
6.0

 
6.1

 
(.1
)
 
7.2

 
7.2

 

Depreciation and amortization
5.2

 
4.9

 
.3

 
5.6

 
5.5

 
.1

Gain on sale of assets, net
(.2
)
 

 
(.2
)
 
(.1
)
 

 
(.1
)
 
 
 
 
 
 
 
 
 
 
 
 
Income from operations
12.4

 
11.1

 
1.3

 
5.9

 
5.2

 
.7

 
 
 
 
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
Interest expense
(.4
)
 
(.3
)
 
(.1
)
 
(.4
)
 
(.4
)
 

Interest income

 

 

 

 

 

Other, net
(.4
)
 
(.2
)
 
(.2
)
 
(.4
)
 
(.4
)
 

 
 
 
 
 
 
 
 
 
 
 
 
Income before income taxes
11.6

 
10.6

 
1.0

 
5.1

 
4.4

 
.7

 
 
 
 
 
 
 
 
 
 
 
 
Income taxes
4.5

 
4.0

 
.5

 
2.0

 
1.7

 
.3

 
 
 
 
 
 
 
 
 
 
 
 
Net income
7.1
 %
 
6.6
 %
 
.5
 %
 
3.1
 %
 
2.7
 %
 
.4
 %
 
 
 
 
 
 
 
 
 
 
 
 



- 23 -


Second Quarter—Three Months Ended July 4, 2015 Compared to Three Months Ended June 28, 2014

Our results of operations for the three months ended July 4, 2015 compared to the three months ended June 28, 2014 follows:
 
Three Months Ended
 
July 4,
2015
 
June 28,
2014
 
Change
 
Percentage
Change
Revenues
$
224,773

 
$
213,183

 
$
11,590

 
5.4
 %
 
 
 
 
 
 
 
 
Costs and expenses:
 

 
 

 
 

 
 

Operating
137,341

 
130,283

 
7,058

 
5.4

Selling
34,914

 
35,813

 
(899
)
 
(2.5
)
General and administrative
13,534

 
12,905

 
629

 
4.9

Depreciation and amortization
11,607

 
10,468

 
1,139

 
10.9

Gain on sale of assets, net
(419
)
 
(101
)
 
(318
)
 
nm

 
196,977

 
189,368

 
7,609

 
4.0

 
 
 
 
 
 
 
 
Income from operations
27,796

 
23,815

 
3,981

 
16.7

Other income (expense):
 

 
 

 
 

 
 
Interest expense
(900
)
 
(706
)
 
(194
)
 
27.5

Interest income
59

 
76

 
(17
)
 
(22.4
)
Other, net
(881
)
 
(500
)
 
(381
)
 
76.2

Income before income taxes
26,074