DAVEY TREE EXPERT CO - 10-Q Quarterly Report

X	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the quarterly period ended September 27, 2003

	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 0-11917

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)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Shares, $1.00 par value

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 is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes X No

There were 7,577,791 Common Shares outstanding as of October 31, 2003.

The Davey Tree Expert Company
Quarterly Report on Form 10-Q
September 27, 2003

INDEX

		Page

Part I. Financial Information

Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets -- September 27, 2003 and December 31, 2002	2

	Condensed Consolidated Statements of Operations -- Three months and nine months ended September 27, 2003 and September 28, 2002	3

	Condensed Consolidated Statements of Cash Flows -- Nine months ended September 27, 2003 and September 28, 2002	4

	Notes to Condensed Consolidated Financial Statements	5

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	13

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	18

Item 4.	Controls and Procedures	18

Part II. Other Information

Item 6.	Exhibits and Reports on Form 8-K	19

Signatures

Exhibit Index

THE DAVEY TREE EXPERT COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except per share amounts)

	September 27, 2003	December 31, 2002
Assets
Current assets:
Cash and cash equivalents	$ 364	$ 591
Accounts receivable, net	60,430	49,197
Operating supplies	3,231	2,857
Other current assets	10,672	8,858

Total current assets	74,697	61,503

Property and equipment	236,536	229,038
Less accumulated depreciation	169,073	162,175


	67,463	66,863

Other assets	24,710	25,230
Identified intangible assets and goodwill, net	7,898	7,560

	$ 174,768	$ 161,156


Liabilities and shareholders' equity
Current liabilities:
Accounts payable	$ 16,653	$ 18,097
Accrued expenses	19,979	16,659
Other current liabilities	11,642	11,325

Total current liabilities	48,274	46,081

Long-term debt	39,235	36,605
Self-insurance accruals	17,758	13,493
Other noncurrent liabilities	10,461	10,842

	115,728	107,021

Common shareholders' equity:
Common shares, $1.00 par value, per share; 24,000 shares authorized; 10,728 shares issued	10,728	10,728
Additional paid-in capital	6,337	5,710
Common shares subscribed, unissued	9,726	9,817
Retained earnings	87,514	82,525
Accumulated other comprehensive income (loss)	(649)	(1,057)

	113,656	107,723
Less: Cost of common shares in treasury; 3,107 shares at September 27 and 3,048 shares at December 31	47,172	44,956
Common share subscriptions receivable	7,444	8,632

	59,040	54,135

	$ 174,768	$ 161,156

See notes to condensed consolidated financial statements.

THE DAVEY TREE EXPERT COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)

	Three Months Ended		Nine Months Ended
	September 27, 2003	September 28, 2002	September 27, 2003	September 28, 2002

Revenues	$ 92,619	$ 80,705	$ 254,061	$ 238,432

Costs and expenses:
Operating	58,900	52,656	165,859	158,703
Selling	15,026	13,172	41,115	37,819
General and administrative	6,291	5,894	19,300	18,312
Depreciation and amortization	5,272	5,233	15,289	14,887

	85,489	76,955	241,563	229,721


Income from operations	7,130	3,750	12,498	8,711

Other income (expense):
Interest expense	(529)	(799)	(1,760)	(2,316)
Other, net	(58)	(181)	27	693


Income before income taxes	6,543	2,770	10,765	7,088

Income taxes	2,584	1,096	4,252	2,806


Net income	$ 3,959	$ 1,674	$ 6,513	$ 4,282


Net income per share: Basic	$ .51	$ .20	$ .79	$ .54

Diluted	$ .48	$ .19	$ .76	$ .51


See notes to condensed consolidated financial statements.

THE DAVEY TREE EXPERT COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)

	Nine Months Ended
	September 27, 2003	September 28, 2002
Operating activities
Net income	$ 6,513	$ 4,282
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization	15,289	14,887
Other	(440)	(1,344)

	21,362	17,825
Changes in operating assets and liabilities:
Accounts receivable	(11,233)	(5,943)
Operating liabilities	5,828	4,565
Other	(867)	(3,494)

	(6,272)	(4,872)

Net cash provided by operating activities	15,090	12,953

Investing activities
Capital expenditures, equipment	(14,246)	(13,052)
Other	(972)	435

Net cash used in investing activities	(15,218)	(12,617)

Financing activities
Revolving credit facility proceeds, net	3,600	300
Purchase of common shares for treasury	(4,279)	(4,284)
Sale of common shares from treasury	3,787	4,376
Dividends	(1,524)	(1,456)
Other	(1,683)	414

Net cash used in financing activities	(99)	(650)


Decrease in cash and cash equivalents	(227)	(314)

Cash and cash equivalents, beginning of period	591	406


Cash and cash equivalents, end of period	$ 364	$ 92


Supplemental cash flow information follows:
Interest paid	$ 1,722	$ 2,189
Income taxes paid	4,590	3,909
Noncash transactions:
Debt issued for purchases of businesses	799	1,560

Detail of acquisitions:
Assets acquired:
Equipment	$ 384	$ 1,191
Intangibles	1,426	3,314
Liabilities assumed	-	257
Debt issued for purchases of businesses	799	1,560

Cash paid	$ 1,011	$ 2,688


See notes to condensed consolidated financial statements.

The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 27, 2003
(Amounts in thousands, except share data)

A. Basis of Financial Statement Preparation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) and with the rules and regulations of the Securities and Exchange Commission (SEC) for interim financial information. In the opinion of management, the financial statements include all material adjustments necessary for a fair presentation, consisting of normal recurring adjustments and accruals.

Certain information and disclosures required by GAAP for complete financial statements have been omitted in accordance with the rules and regulations of the SEC. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2002.

Accounting Estimates--The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates.

Stock-Based Compensation--In accordance with the Company's accounting policy for stock-based compensation, no expense has been recognized related to stock options, as holders of stock options have historically had to pay an amount equal to the market value of the shares at the date of grant.

The following table summarizes the impact on net income and net income per share had the Company used the fair value method of accounting, the alternative policy in FAS No. 123, "Accounting for Stock-Based Compensation."

	Three Months Ended		Nine Months Ended
	September 27, 2003	September 28, 2003	September 27, 2003	September 28, 2003
Net income as reported	$ 3,959	$ 1,674	$ 6,513	$ 4,282
Deduct stock-based compensation, determined under fair value	7	6	10	9

Pro forma net income, FAS 123 adjusted	$ 3,952	$ 1,668	$ 6,503	$ 4,273


Net income per share--basic
As reported	$ .51	$ .20	$ .79	$ .54
Pro forma, FAS 123 adjusted	.50	.20	.79	.54

Net income (loss) per share--diluted
As reported	$ .48	$ .19	$ .76	$ .51
Pro forma, FAS 123 adjusted	.48	.19	.76	.51

The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 27, 2003
(Amounts in thousands, except share data)

B. Seasonality of Business

Operating results for the nine months ended September 27, 2003 are not indicative of results that may be expected for the year ending December 31, 2003 because of business seasonality. Business seasonality results in higher revenues during the second and third quarters as compared with the first and fourth quarters of the year, while the methods of accounting for fixed costs, such as depreciation and interest expense, are not significantly impacted by business seasonality.

C. Accounts Receivable, Net

Accounts receivable, net, consisted of the following:

	September 27, 2003	December 31, 2002

Accounts receivable	$ 67,580	$ 57,376
Receivables under contractual arrangements	6,197	5,880

	73,777	63,256
Less prepetition accounts receivable from PG&E classified as noncurrent other assets	12,072	12,490

	61,705	50,766
Less allowances for doubtful accounts	1,275	1,569

	$ 60,430	$ 49,197

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

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

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

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

The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 27, 2003
(Amounts in thousands, except share data)

C. Accounts Receivable, Net (continued)

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

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

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

D. Long-Term Debt

Long-term debt consisted of the following:

	September 27, 2003	December 31, 2002

Revolving credit agreement
Prime rate borrowings	$ 1,000	$ 400
LIBOR borrowings	37,000	34,000

	38,000	34,400

Subordinated notes, share redemptions	84	389
Term loans	3,014	2,248

	41,098	37,037
Less current portion	1,863	432

	$ 39,235	$ 36,605

Revolving Credit Agreement--The Company has a $90,000 three-year revolving credit agreement with a group of banks, which will expire in November 2005 and permits borrowings, as defined, up to $90,000 with a letter of credit sublimit of $30,000. The revolving credit agreement contains certain affirmative and negative covenants customary for this type of agreement and includes financial covenant ratios, as defined, with respect to interest coverage, funded debt to EBITDA (earnings before interest, taxes, depreciation and amortization), and funded debt to capitalization.

The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 27, 2003
(Amounts in thousands, except share data)

D. Long-Term Debt (continued)

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

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

E. Comprehensive Income (Loss)

The components of comprehensive income (loss) follow:

	Three Months Ended		Nine Months Ended
	September 27, 2003	September 28, 2002	September 27, 2003	September 28, 2002
Comprehensive income (loss)

Net income	$ 3,959	$ 1,674	$ 6,513	$ 4,282
Other comprehensive income (loss)
Foreign currency translation adjustments	(105)	(57)	424	39
Derivative instruments:
Change in fair value of interest rate swaps	87	95	(25)	344


Other comprehensive income (loss), before income taxes	(18)	38	399	383
Income tax benefit (expense), related to items of other comprehensive income	(33)	(36)	10	(131)

Other comprehensive income	(51)	2	409	252

Comprehensive income	$ 3,908	$ 1,676	$ 6,922	$ 4,534

The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 27, 2003
(Amounts in thousands, except share data)

F. Net Income Per Share, Dividends and Common Shares Outstanding

Net income per share is computed as follows:

	Three Months Ended		Nine Months Ended
	September 27, 2003	September 28, 2002	September 27, 2003	September 28, 2002
Income available to common shareholders:
Net income	$ 3,959	$ 1,674	$ 6,513	$ 4,282


Weighted average shares:
Basic:
Outstanding	7,629,919	7,885,917	7,659,642	7,800,978
Partially-paid share subscriptions	204,283	542,744	606,189	182,903

Basic weighted average shares	7,834,202	8,428,661	8,265,831	7,983,881


Diluted:
Basic from above	7,834,202	8,428,661	8,265,831	7,983,881
Incremental shares from assumed:
Exercise of stock subscription rights	32,231	8,643	19,116	8,643
Exercise of stock options	333,462	396,736	326,738	391,113

Diluted weighted average shares	8,199,895	8,834,040	8,611,685	8,383,637


Net income per share:
Basic	$ .51	$ .20	$ .79	$ .54

Diluted	$ .48	$ .19	$ .76	$ .51

Dividends--On September 10, 2003, the Company paid a $.06 per share dividend to common shareholders of record on September 1, 2003. On September 10, 2002, a $.06 per share dividend was paid to common shareholders of record on September 1, 2002. For the nine months ended September 27, 2003 and September 28, 2002, total dividends paid during the periods were $.18 per share.

Common Shares Outstanding--The table below reconciles the activity of the common shares outstanding for the nine months ended September 27, 2003:

Shares outstanding at December 31, 2002	7,680,367

Shares purchased	(330,240)
Shares sold to employees	145,702
Stock subscription offering -- cash purchases	1,287
Options exercised	123,800

	(59,451)

Shares outstanding at September 27, 2003	7,620,916

On September 27, 2003, the Company had 7,620,916 common shares outstanding, options exercisable to purchase 752,115 common shares, partially-paid subscriptions for 810,472 common shares and purchase rights outstanding for 258,859 common shares.

The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 27, 2003
(Amounts in thousands, except share data)

F. Net Income Per Share, Dividends and Common Shares Outstanding (continued)

The partially-paid subscriptions relate to common shares purchased at $12.00 per share, in connection with the stock subscription offering completed in August 2002, whereby some employees opted to finance their subscription with a down-payment of at least 10% of their total purchase price and a seven- year promissory note for the balance due, with interest at 4.75%. Promissory note payments, of both principal and interest, are made either by payroll deduction or annual lump-sum payment. The promissory notes are collateralized with the common shares subscribed and the common shares are only issued when the related promissory note is paid-in-full. Dividends are paid on all unissued subscribed shares.

The purchase rights outstanding were granted to purchase one additional common share at the price of $12.00 per share for every two common shares purchased in connection with the stock subscription offering completed in August 2002. 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.

G. Segment Information

The Company's operating results are reported in two segments: Residential and Commercial Services and Utility Services for operations in the United States. Residential and Commercial Services provides for the treatment, preservation, maintenance, cultivation, planting and removal of trees, shrubs and other plant life; its services also include the practice of landscaping, tree surgery, tree feeding and tree spraying, as well as the application of fertilizer, herbicides and insecticides. Utility Services is principally engaged in the practice of line clearing for public utilities, including the clearing of tree growth from power lines, clearance of rights-of-way and chemical brush control.

The Company also has two nonreportable segments: Canadian operations, which provides a comprehensive range of Davey horticultural services, and Davey Resource Group, which provides services related to natural resource management and consulting, forestry research and development, and environmental planning and also maintains research, technical support and laboratory diagnostic facilities. Canadian operations and Davey Resource Group are presented below as "All Other."

Measurement of Segment Profit and Loss and Segment Assets--The Company evaluates performance and allocates resources based primarily on operating income and also actively manages business unit operating assets.

The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 27, 2003
(Amounts in thousands, except share data)

G. Segment Information (continued)

Segment information reconciled to consolidated external reporting information follows:

	Utility Services	Residential Commercial Services	All Other	Reconciling Adjustments	Consolidated
Three Months Ended September 27, 2003

Revenues	$ 36,713	$ 46,415	$ 9,491	$ -	$ 92,619
Income (loss) from operations	952	5,400	1,062	(284) (a)	7,130

Interest expense				529	529
Other income (expense), net				(58)	(58)

Income before income taxes					$ 6,543


Three Months Ended September 28, 2002

Revenues	$ 30,842	$ 41,215	$ 8,648	$ -	$ 80,705
Income (loss) from operations	(613)	4,193	803	(633) (a)	3,750

Interest expense				799	799
Other income (expense), net				(181)	(181)

Income before income taxes					$