~~The Davey Tree Expert Company~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~September 29, 2018~~

~~(Amounts in thousands, except share data)~~


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

Accounts receivable, net, consisted of the following:



Accounts receivable, net	September 28, 2019		December 31, 2018
Accounts receivable	$	177,644	$	158,556
Receivables under contractual arrangements⁽¹⁾	57,430		40,671
	235,074		199,227
Less allowances for doubtful accounts	2,829		3,321
Accounts receivable, net	$	232,245	$	195,906

Accounts receivable, net September 29,
2018 December 31,
2017
Accounts receivable $ 150,161
$ 143,244
Receivables under contractual arrangements 48,526
29,895
198,687
173,139
Less allowances for doubtful accounts 4,310
4,468
Accounts receivable, net $ 194,377
$ 168,671

~~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 September 29,
2018 December 31,
2017
Refundable income taxes $ —
$ 587
Prepaid expense 24,997
15,893
Other 842
784
Total $ 25,839
$ 17,264

Accrued expenses September 29,
2018 December 31,
2017
Employee compensation $ 22,867
$ 20,794
Accrued compensated absences 10,054
9,267
Self-insured medical claims 5,847
3,193
Income tax payable 2,660
3,443
Customer advances, deposits 439
1,672
Taxes, other than income 3,827
2,279
Other 2,138
2,168
Total $ 47,832
$ 42,816


⁽¹⁾	Receivables under contractual arrangements consist of work-in-process in accordance with the terms of contracts, primarily with utility services customers.

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September ~~29, 2018~~28, 2019

(Amounts in thousands, except share data)


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

The following items comprise the amounts included in the balance sheets:



Other current assets	September 28, 2019		December 31, 2018
Refundable income taxes	$	—	$	1,625
Prepaid expense	29,979		19,529
Other	905		932
Total	$	30,884	$	22,086



Other assets, noncurrent	September 28, 2019		December 31, 2018
Assets invested for self-insurance	$	13,302	$	15,379
Investment--cost-method affiliate	1,251		1,218
Deferred income taxes	1,519		573
Other	5,605		4,599
Total	$	21,677	$	21,769



Accrued expenses	September 28, 2019		December 31, 2018
Employee compensation	$	25,052	$	24,086
Accrued compensated absences	10,327		9,711
Self-insured medical claims	6,611		3,343
Income tax payable	9,183		31
Customer advances, deposits	2,337		1,322
Taxes, other than income	5,059		2,546
Other	2,651		3,022
Total	$	61,220	$	44,061



Other current liabilities	September 28, 2019		December 31, 2018
Notes payable	$	425	$	—
Current portion of:
Lease liability-operating leases	14,159		—
Self-insurance reserves	27,099		27,434
Total	$	41,683	$	27,434

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 28, 2019

(Amounts in thousands, except share data)


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



Other noncurrent liabilities	September 28, 2019		December 31, 2018
Pension and retirement plans	$	6,047	$	6,138
Other	4,440		3,987
Total	$	10,487	$	10,125

Other current liabilities September 29,
2018 December 31,
2017
Note payable $ 100
$ 149
Current portion of:
Long-term debt 25,991
16,817
Self-insurance reserves 23,825
23,782
Total $ 49,916
$ 40,748

Other noncurrent liabilities September 29,
2018 December 31,
2017
Pension and retirement plans $ 6,061
$ 14,759
Other 3,487
5,207
Total $ 9,548
$ 19,966


D.	Business Combinations

Our investments in businesses during the first nine months of ~~2018~~2019 were ~~$10,553,~~$5,527, including liabilities assumed of $402 and debt issued, in the form of notes payable to the sellers, of ~~$2,312,~~$1,322, and have been included in our ~~residential~~Residential and ~~commercial and utility segments.~~Commercial segment. Measurement-period adjustments are not complete. The measurement period for purchase price allocations ends as soon as information of the facts and circumstances becomes available, but does not exceed one year from the acquisition date. During the nine months ended September ~~30, 2017,~~29, 2018, our investment in businesses was ~~$10,877,~~$10,553, including ~~$3,099~~debt issued, in the form of ~~debt issued.~~notes payable to the sellers, of $2,312.

The following table summarizes the preliminary purchase price allocation of the estimated fair values of the assets acquired and liabilities assumed:



	September 28, 2019			December 31, 2018
Detail of acquisitions:
Assets acquired:
Cash	$	3		$	—
Receivables	41			1,311
Operating supplies	79			23
Prepaid expense	13			89
Equipment	1,120			4,079
Deposits and other	—			7
Intangibles	2,473			4,895
Goodwill	1,798			2,840
Liabilities assumed	(402		)	(2,381		)
Debt issued for purchases of businesses	(1,322		)	(2,402		)
Cash paid	$	3,803		$	8,461

Nine Months Ended
September 29,
2018 September 30,
2017
Detail of acquisitions:

Assets acquired:

Cash $ —
$ 326
Receivables 1,336
1,753
Operating supplies 23
—
Prepaid expense 84
128
Equipment 4,019
1,904
Deposits and other 5
129
Intangibles 4,617
4,566
Goodwill 2,603
5,027
Liabilities assumed (2,134 ) (2,956 )
Debt issued for purchases of businesses (2,312 ) (3,099 )
Cash paid $ 8,241
$ 7,778

~~Index~~

~~The Davey Tree Expert Company~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~September 29, 2018~~

~~(Amounts in thousands, except share data)~~


D.	~~Business Combinations (continued)~~

The results of operations of acquired businesses have been included in the consolidated statements of operations beginning as of the effective dates of acquisition. The effect of these acquisitions on our consolidated revenues and results of operations for the period ended September ~~29, 2018~~28, 2019 was not significant. Pro forma net sales and results of operations for the acquisitions, had they occurred at the beginning of the nine months endedSeptember ~~29, 2018~~28, 2019, are not material and, accordingly, are not provided.

The acquired intangible assets consist of tradenames, non-competition agreements and customer relationships. The tradenames and customer relationships were assigned an average useful life of six years and the non-competition agreements were assigned an average useful life of five years.

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 28, 2019

(Amounts in thousands, except share data)


D.	Business Combinations (continued)

Subsequent to September 28, 2019 and through November 5, 2019, we acquired a business for approximately $4,000. The acquired company is in our Residential and Commercial segment. We do not expect the effect of this acquisition on our consolidated revenues and results of operations to be significant.


E.	Identified Intangible Assets and Goodwill, Net

The carrying amounts of the identified intangible assets and goodwill acquired were as follows:



	September 28, 2019				December 31, 2018
	Carrying Amount		Accumulated Amortization		Carrying Amount		Accumulated Amortization
Amortized intangible assets:
Customer lists/relationships	$	27,141	$	19,565	$	25,179	$	18,251
Employment-related	8,229		7,245		8,133		6,954
Tradenames	7,160		5,698		6,858		5,435

Amortized intangible assets	42,530		$	32,508	40,170		$	30,640

Less accumulated amortization	32,508				30,640

Identified intangible assets, net	10,022				9,530

Goodwill	39,898				37,971
	$	49,920			$	47,501

September 29, 2018 December 31, 2017
Identified Intangible Assets and Goodwill, Net
Carrying
Amount

Accumulated
Amortization

Carrying
Amount

Accumulated
Amortization
Amortized intangible assets:
Customer lists/relationships $ 25,012
$ 17,860
$ 21,487
$ 16,846
Employment-related 8,080
6,853
7,333
6,624
Tradenames 6,806
5,345
5,978
5,134

Amortized intangible assets 39,898
$ 30,058
34,798
$ 28,604

Less accumulated amortization 30,058

28,604

Identified intangible assets, net 9,840

6,194

Unamortized intangible assets:

Goodwill 37,762

35,477

$ 47,602

$ 41,671

The changes in the carrying amounts of goodwill, by segment, for the nine months ended September 28, 2019 and September 29, 2018 follow:



	Balance at January 1, 2019		Acquisitions		Translation and Other Adjustments			Balance at September 28, 2019
Utility	$	4,911	$	—	$	—		$	4,911
Residential and Commercial	33,060		1,798		129			34,987
Total	$	37,971	$	1,798	$	129		$	39,898


	Balance at January 1, 2018		Acquisitions		Translation and Other Adjustments			Balance at September 29, 2018
Utility	$	3,424	$	1,499	$	—		$	4,923
Residential and Commercial	32,053		1,104		(318		)	32,839
Total	$	35,477	$	2,603	$	(318	)	$	37,762

Balance at
January 1, 2018
Acquisitions
Translation
and Other
Adjustments

Balance at
September 29, 2018
Utility $ 3,424
$ 1,499
$ —
$ 4,923
Residential and Commercial 32,053
1,104
(318 ) 32,839
Total $ 35,477
$ 2,603
$ (318 ) $ 37,762

In the first quarter of 2018, the Company finalized all purchase accounting adjustments related to the Arborguard Tree Specialists, Inc. acquisition. The Company has recorded fair value adjustments based on new information obtained during the measurement period primarily related to customer lists, and deferred taxes. These adjustments were not material.

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September ~~29, 2018~~28, 2019

(Amounts in thousands, except share data)


E.	Identified Intangible Assets and Goodwill, Net (continued)

Estimated future aggregate amortization expense of intangible assets--The estimated future aggregate amortization expense of intangible assets, as of September 28, 2019 is as follows:



	Estimated Future Amortization Expense
Year ending December 31, 2019	$	648
2020	2,388
2021	1,923
2022	1,692
2023	1,524
Thereafter	1,847
	$	10,022


F.	Long-Term Debt and Commitments Related to Letters of Credit

Our long-term debt consisted of the following:



	September 28, 2019		December 31, 2018
Revolving credit facility:
Swing-line borrowings	$	10,000	$	2,500
LIBOR borrowings	55,000		91,000
	65,000		93,500
Senior unsecured notes:
5.09% Senior unsecured notes	6,000		12,000
3.99% Senior unsecured notes	50,000		50,000
4.00% Senior unsecured notes	25,000		—
	81,000		62,000
Term loans	29,254		23,176
	175,254		178,676
Less debt issuance costs	467		599
Less current portion	29,223		22,514
	$	145,564	$	155,563

September 29,
2018 December 31,
2017
Revolving credit facility:
Swing-line borrowings $ 12,000
$ —
LIBOR borrowings 80,000
100,000
92,000
100,000
5.09% Senior unsecured notes 12,000
18,000
3.99% Senior unsecured notes 50,000
—
Term loans 25,481
16,242
Capital leases 3,781
2,510
183,262
136,752
Less debt issuance costs 646
725
Less current portion 25,991
16,817
$ 156,625
$ 119,210

Revolving Credit Facility --As of September ~~29, 2018,~~28, 2019, we had a ~~$250,000~~$250,000 revolving credit facility with a group of banks, which expires in October 2022 and permits borrowings, as defined, up to ~~$250,000~~,$250,000, including a letter of credit sublimit of ~~$100,000~~$100,000 and a swing-line commitment of $25,000. Under certain circumstances, the amount available under the revolving credit facility may be increased to ~~$325,000~~.$325,000. The revolving credit facility contains certain affirmative and negative covenants customary for this type of facility and includes financial covenant ratios with respect to a maximum leverage ratio (not to exceed 3.00 to 1.00 with exceptions in case of material acquisitions) and a minimum interest coverage ratio (not less than 3.00 to 1.00), in each case subject to certain further restrictions

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 28, 2019

(Amounts in thousands, except share data)


F.	Long-Term Debt and Commitments Related to Letters of Credit (continued)

as described in the credit agreement. As of September ~~29, 2018~~,28, 2019, we had unused commitments under the facility approximating$~~155,087~~,182,087, with ~~$94,913~~$67,913 committed, consisting of borrowings of$~~92,000~~65,000 and issued letters of credit of$~~2,913~~.2,913.

Borrowings outstanding bear interest, at Davey Tree’s option, of either (a) a base rate or (b) LIBOR plus a margin adjustment ranging from .875% to 1.50%--with the margin adjustments in both instances based on the Company's leverage ratio at the time of borrowing. The base rate is the greater of (i) the agent bank’s prime rate, (ii) LIBOR plus 1.50%, or (iii) the federal funds rate plus .50%. A commitment fee ranging from .10% to .225% is also required based on the average daily unborrowed commitment.

5.09% Senior Unsecured Notes--During July 2010, we issued 5.09% Senior Unsecured Notes, Series A (the "5.09% Senior Notes"), in the aggregate principal amount of $30,000 pursuant to a Master Note Purchase Agreement (the ~~“5.09% Senior Note Purchase~~“Purchase Agreement”) between the Company and the purchasers of the 5.09% Senior Notes. The 5.09% Senior ~~Unsecured~~ Notes are due July 22, 2020.

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~~5 equal, annual principal payments commenced on July 22, 2016 (the~~sixth~~6th anniversary of issuance). The ~~5.09% Senior Note~~ Purchase Agreement

~~Index~~

~~The Davey Tree Expert Company~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~September 29, 2018~~

~~(Amounts in thousands, except share data)~~

~~F. Long-Term Debt and Commitments Related to Letters of Credit (continued)~~

contains customary events of default and covenants related to limitations on indebtedness and transactions with affiliates and the maintenance of certain financial ratios.

3.99% Senior Unsecured Notes--On September 21, 2018, we issued 3.99% Senior Notes, Series A (the "3.99% Senior Notes"), in the aggregate principal amount of $50,000. The 3.99% Senior Notes are due September 21, 2028.

The 3.99% Senior Notes were issued pursuant to a Note Purchase and Private Shelf Agreement (the ~~“3.99% Senior Note~~“Note Purchase and Shelf Agreement”) between the Company, PGIM, Inc. and the purchasers of the 3.99% Senior Notes. Subsequent series of promissory notes may be issued pursuant to the ~~3.99% Senior~~ Note Purchase and Shelf Agreement (the "Shelf Notes") in an aggregate additional principal amount not to exceed ~~$50,000.~~$50,000 ($25,000 of which was issued on February 5, 2019).

~~The net proceeds of the 3.99% Senior Notes were used to pay down borrowings under our revolving credit facility.~~

The 3.99% Senior Notes are equal in right of payment with our revolving credit facility and all other senior unsecured obligations of the Company. Interest is payable semiannually and ~~five~~5 equal, annual principal payments commence on September 21, 2024 (the~~sixth~~6th anniversary of issuance). The ~~3.99% Senior~~ Note Purchase and Shelf Agreement contains customary events of default and covenants related to limitations on indebtedness and transactions with affiliates and the maintenance of certain financial ratios. The Company may prepay at any time all, or from time to time any part of, the outstanding principal amount of the 3.99% Senior Notes, subject to the payment of a make-whole amount.

In conjunction with the issuance of the 3.99% Senior Notes, on September 21, 2018, the Company entered into an amendment to its revolving credit facility.

The amendment ~~amends~~amended certain provisions and covenants in the credit agreement to generally conform them to the corresponding provisions and covenants in the ~~3.99% Senior~~ Note Purchase and Shelf Agreement. The amendment also ~~permits~~permitted the Company to incur indebtedness arising under the ~~3.99% Senior~~ Note Purchase and Shelf Agreement in an aggregate principal amount not to exceed $75,000, which ~~includes~~included the $50,000 of ~~Series A~~3.99% Senior Notes, plus an additional $25,000 in Shelf ~~Notes.~~Notes (which were issued on February 5, 2019).

4.00% Senior Unsecured Notes--On February 5, 2019, we issued 4.00% Senior Notes, Series B (the "4.00% Senior Notes") pursuant to the Note Purchase and Shelf Agreement in the aggregate principal amount of $25,000. The notes are due September 21, 2028. Subsequent series of Shelf Notes may be issued pursuant to the Note Purchase and Shelf Agreement in an aggregate additional principal amount not to exceed $25,000. A further amendment to the revolving credit facility would be required for such a transaction to be permissible under the revolving credit facility. The 4.00% Senior Notes are equal in right of payment with our revolving credit facility and all other senior unsecured

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 28, 2019

(Amounts in thousands, except share data)


F.	Long-Term Debt and Commitments Related to Letters of Credit (continued)

obligations of the Company. Interest is payable semiannually and 5 equal, annual principal payments commence on September 21, 2024.

The net proceeds of all senior notes were used to pay down borrowings under our revolving credit facility.

Term loans--Periodically, the ~~company~~Company will enter into term loans for the procurement of insurance or to finance acquisitions.

Aggregate Maturities of Long-Term Debt--Aggregate maturities of long-term debt based on the principal amounts outstanding atSeptember 28, 2019 were as follows: 2019--$6,460; 2020--$22,871; 2021--$5,558; 2022--$65,328; 2023--$37; and thereafter $75,000.

Accounts Receivable Securitization Facility--In May ~~2018,~~2019, the Company amended its Accounts Receivable Securitization Facility (the "AR Securitization program") to extend the scheduled termination date for an additional ~~one-year~~one year period, to May 6, 2019. In addition, for purposes of determining events of default, the Days' Sales Outstanding calculation was amended to include the most recent six fiscal months. The prior calculation was based on the most recent three fiscal months.19, 2020.

The AR Securitization program has a limit of $100,000, of which $76,732 and $67,438 ~~was~~were issued for letters of credit ("LCs") as of September ~~29, 2018.~~28, 2019 and December 31, 2018, respectively.

Under the AR Securitization program, Davey Tree transfers by selling or contributing current and future trade receivables to a wholly-owned, bankruptcy-remote financing subsidiary which pledges a perfected first priority security interest in the trade receivables--equal to the issued ~~letters of credit ("LCs")~~LCs as of September ~~29, 2018--to~~28, 2019--to the bank in exchange for the bank issuing LCs.

Pre-petition receivables from PG&E Corporation and its regulated utility subsidiary, Pacific Gas and Electric Company (collectively, "PG&E"), which filed voluntary bankruptcy petitions under Chapter 11 of the United States Bankruptcy Code in the U.S. Bankruptcy Court for the Northern District of California, while remaining in the securitized pool, are considered ineligible and are excluded from performance ratios and reserves.

Fees payable to the bank include: (a) an LC issuance fee, payable on each settlement date, in the amount of .90% per annum on the aggregate amount of all LCs outstanding plus outstanding reimbursement obligations (e.g.,

~~Index~~

~~The Davey Tree Expert Company~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~September 29, 2018~~

~~(Amounts in thousands, except share data)~~

~~F. Long-Term Debt and Commitments Related to Letters of Credit (continued)~~

arising from drawn LCs), if any, and (b) an unused LC fee, payable monthly, equal to (i) .35% per annum for each day on which the sum of the total LCs outstanding plus any outstanding reimbursement obligations is greater than or equal to 50% of the facility limit and (ii) .45% per annum for each day on which the sum of the total LCs outstanding plus any outstanding reimbursement obligations is less than 50% of the facility limit. If an LC is drawn and the bank is not immediately reimbursed in full for the drawn amount, any outstanding reimbursement obligation will accrue interest at a per annum rate equal to a reserve-adjusted LIBOR or, in certain circumstances, a base rate equal to the higher of (i) the bank’s prime rate and (ii) the federal funds rate plus .50% and, following any default, 2.00% plus the greater of (a) adjusted LIBOR and (b) a base rate equal to the higher of (i) the bank’s prime rate and (ii) the federal funds rate plus .50%.

The agreements underlying the AR Securitization program contain various customary representations and warranties, covenants, and default provisions which provide for the termination and acceleration of the commitments under the AR Securitization program in circumstances including, but not limited to, failure to make payments when due, breach of a representation, warranty or covenant, certain insolvency events or failure to maintain the security interest in the trade receivables, and defaults under other material indebtedness.

Total Commitments Related to Issued Letters of Credit--As of September ~~29, 2018,~~28, 2019, total commitments related to issued ~~letters of credit~~LCs were ~~$72,355,~~$81,655, of which $2,913 were issued under the revolving credit facility, $76,732 were issued under the AR Securitization program, and $2,010 were issued under short-term lines of credit. As of December 31, 2018,

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 28, 2019

(Amounts in thousands, except share data)


F.	Long-Term Debt and Commitments Related to Letters of Credit (continued)

total commitments related to issued LCs were $72,565, of which $3,123 were issued under the revolving credit facility, $67,438 were issued under the AR Securitization program, and $2,004 were issued under short-term lines of credit. As of December 31, 2017, total commitments related to issued letters of credit were $63,242, of which $3,088 were issued under the revolving credit facility, $58,150 were issued under the AR Securitization program, and $2,004 were issued under short-term lines of credit.

As of September ~~29, 2018,~~28, 2019, we are in compliance with all debt covenants.


G.	Leases

We lease certain office and parking facilities, warehouse space, equipment, vehicles and information technology equipment under operating leases. Lease expense for these leases is recognized within the Condensed Consolidated Statements of Operations on a straight-line basis over the lease term, with variable lease payments recognized in the period those payments are incurred. The following table summarizes the amounts recognized in our Condensed Consolidated Balance Sheet related to leases:



	Condensed Consolidated Balance Sheet Classification	September 28, 2019
Assets
Operating lease assets	Right-of-use assets - operating leases	$	40,189
Finance lease assets	Property and equipment, net	3,260
Total lease assets		$	43,449
Liabilities
Current operating lease liabilities	Other current liabilities	$	14,159
Non-current operating lease liabilities	Lease liabilities - operating leases	25,878
Total operating lease liabilities		40,037
Current portion of finance lease liabilities	Current portion of long-term debt and finance lease liabilities	1,309
Non-current finance lease liabilities	Lease liabilities - finance leases	1,787
Total finance lease liabilities		3,096
Total lease liabilities		$	43,133

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 28, 2019

(Amounts in thousands, except share data)


G.	Leases (continued)

The components of lease cost recognized within our Condensed Consolidated Statement of Operations were as follows:



		Three Months Ended		Nine Months Ended
	Condensed Consolidated Statement of Operations Classification	September 28, 2019		September 28, 2019

Operating lease cost	Operating expense	$	1,845	$	4,912
Operating lease cost	Selling expense	2,188		6,513
Operating lease cost	General and administrative expense	214		617
Finance lease cost:
Amortization of right-of-use assets	Depreciation and amortization	339		1,024
Interest expense on lease liabilities	Interest expense	28		91
Other lease cost ⁽¹⁾	Operating expense	855		2,585
Other lease cost ⁽¹⁾	Selling expense	195		811
Other lease cost ⁽¹⁾	General and administrative expense	12		15
Total lease cost		$	5,676	$	16,568

⁽¹⁾ Other lease cost includes short-term lease costs and variable lease costs.

We often have options to renew lease terms for buildings and other assets. The exercise of lease renewal options is generally at our sole discretion. In addition, certain lease agreements may be terminated prior to their original expiration date at our discretion. We evaluate each renewal and termination option at the lease commencement date to determine if we are reasonably certain to exercise the option on the basis of economic factors. The table below summarizes the weighted average remaining lease term as of September 28, 2019.



Operating leases	3.5 years
Finance leases	2.5 years

The discount rate implicit within our leases is generally not determinable and therefore the Company determines the discount rate based on its incremental borrowing rate. The incremental borrowing rate for each lease is determined based on its term and the currency in which lease payments are made, adjusted for the impacts of collateral. The table below summarizes the weighted average discount rate used to measure our lease liabilities as of September 28, 2019.



Operating leases	3.82	%
Finance leases	3.36	%

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 28, 2019

(Amounts in thousands, except share data)


G.	Leases (continued)

Supplemental Cash Flow Information Related to Leases



	Nine Months Ended
	September 28, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	(12,524	)
Operating cash flows from finance leases	(91		)
Financing cash flows from finance leases	(1,061		)
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	52,889

Maturity Analysis of Lease Liabilities



	As of September 28, 2019
	Operating Leases		Finance Leases
Remaining three months of 2019	$	4,126	$	280
2020	14,679		1,371
2021	10,958		1,206
2022	7,398		272
2023	3,410		82
Thereafter	2,468		—
Total lease payments	43,039		3,211
Less interest	3,002		115
Total	$	40,037	$	3,096



	December 31, 2018
	Operating Leases
2019	$	14,023
2020	11,272
2021	7,712
2022	5,129
2023	2,060
Thereafter	1,923
Total lease payments	$	42,119

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 28, 2019

(Amounts in thousands, except share data)


H.	Stock-Based Compensation

Our shareholders approved the 2014 Omnibus Stock Plan (the “2014 Stock Plan”) at our annual meeting of shareholders on May 20, 2014. The 2014 Stock Plan replaced the expired 2004 Omnibus Stock Plan (the “2004 plan”) previously approved by the shareholders in 2004. The 2014 Stock Plan is administered by the Compensation Committee of the Board of Directors and has a term of ten years. All directors of the Company and employees of the Company and its subsidiaries are eligible to participate in the 2014 Stock Plan. The 2014 Stock 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~~5 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~~10 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.

~~Index~~

~~The Davey Tree Expert Company~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~September 29, 2018~~

~~(Amounts in thousands, except share data)~~


G.	~~Stock-Based Compensation (continued)~~

Stock-based compensation expense under all share-based payment plans -- our Employee Stock Purchase Plan, stock option plans, stock-settled stock appreciation rights ("SSARs") and restricted stock units ("RSUs") -- are included in the results of operations as follows:



	Three Months Ended				Nine Months Ended
	September 28, 2019		September 29, 2018		September 28, 2019		September 29, 2018
Compensation expense, all share-based payment plans	$	655	$	785	$	2,184	$	2,578

Three Months Ended Nine Months Ended
September 29,
2018 September 30,
2017 September 29,
2018 September 30,
2017
Compensation expense, all share-based payment plans $ 785
$ 847
$ 2,578
$ 3,295

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 ~~$765~~$866 being recognized for the nine months endedSeptember ~~29, 2018~~28, 2019 and ~~$670~~$765for the nine months endedSeptember ~~30, 2017~~.29, 2018.

Stock Option Plans--The stock options outstanding were awarded under a graded vesting schedule, measured at fair value, and have a term of ten years. Compensation costs for stock options are recognized over the requisite service period on the straight-line recognition method. Compensation cost recognized for stock options was ~~$506~~$444 for the nine months endedSeptember ~~29, 2018~~28, 2019 and ~~$532~~$506 for the nine months endedSeptember ~~30, 2017~~.29, 2018.

Stock-Settled Stock Appreciation Rights--~~During the~~ ~~nine months endedSeptember 29, 2018, the Compensation Committee awarded~~ ~~121,243~~ ~~stock-settled stock appreciation rights (“SSARs”) to certain management employees, which vest ratably over~~ ~~five~~ ~~years.~~ A SSAR is an award that allows the recipient to receive common shares equal to the appreciation in the fair market value of our common shares between the date the award was granted and the conversion date of the shares vested. Effective January 1, 2019, management and the Compensation Committee replaced the issuance of future SSARs with performance-based restricted stock units ("PRSUs") for certain management employees.

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September ~~29, 2018~~28, 2019

(Amounts in thousands, except share data)


G.H.	Stock-Based Compensation (continued)

The following table summarizes our SSARs as of September ~~29, 2018~~28, 2019.



Stock-Settled Stock Appreciation Rights	Number of Rights		Weighted- Average Award Date Value		Weighted- Average Remaining Contractual Life	Unrecognized Compensation Cost		Aggregate Intrinsic Value
Unvested, January 1, 2019	380,982		$	3.42
Granted	—		—
Forfeited	(3,197	)	3.43
Vested	(115,080	)	3.31
Unvested, September 28, 2019	262,705		$	3.47	1.7 years	$	631	$	5,937

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, 2018 448,180
$ 3.10

Granted 121,243
3.84

Forfeited —
—

Vested (150,120 ) 3.01

Unvested, September 29, 2018 419,303
$ 3.35
2.3 years $ 1,058
$ 8,260

Compensation costs for SSARs are determined using a fair-value method and amortized over the requisite service period. Compensation expense for SSARs was ~~$406~~$269 for the nine months endedSeptember ~~29, 2018~~28, 2019 and ~~$931~~$406 for the nine months endedSeptember ~~30, 2017~~.29, 2018.

Restricted Stock Units--During the nine months endedSeptember ~~29, 2018~~,28, 2019, the Compensation Committee awarded ~~31,738~~ ~~performance-based restricted stock units ("PRSUs")~~29,046 PRSUs to certain management employees and ~~13,188 restricted stock units ("RSUs")~~11,942 RSUs to nonemployee directors. The Compensation Committee made similar awards in prior periods. The awards vest over specified periods. The following table summarizes PRSUs and RSUs as of September ~~29, 2018.~~28, 2019.



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, 2019	247,838		$	15.68
Granted	40,988		20.45
Forfeited	(4,093	)	16.39
Vested	(60,474	)	13.55
Unvested, September 28, 2019	224,259		$	17.11	2.1 years	$	1,839	$	5,068
Employee PRSUs	192,837		$	16.80	2.3 years	$	1,474	$	4,358
Nonemployee Director RSUs	31,422		$	19.01	1.7 years	$	365	$	710

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, 2018 290,666
$ 14.41

Granted 44,926
18.55

Forfeited —
—

Vested (80,806 ) 12.71

Unvested, September 29, 2018 254,786
$ 15.67
2.2 years $ 1,996
$ 5,019
Employee PRSUs 216,134
$ 15.40
2.4 years $ 1,617
$ 4,258
Nonemployee Director RSUs 38,652
$ 17.17
1.6 years $ 379
$ 761

Compensation cost for ~~restricted stock awards~~RSUs 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~~RSUs totaled ~~$901~~$605 for the nine months endedSeptember ~~29, 2018~~28, 2019 and ~~$1,162~~$901 for the nine months endedSeptember ~~30, 2017~~.29, 2018.

We estimated the fair value of each stock-based award on the date of grant using a binomial option-pricing model. The binomial model considers a range of assumptions related to volatility, risk-free interest rate and employee

~~Index~~

~~The Davey Tree Expert Company~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~September 29, 2018~~

~~(Amounts in thousands, except share data)~~


G.	~~Stock-Based Compensation (continued)~~

exercise behavior. Expected volatilities utilized in the binomial model are based on historical volatility of our stock prices and other factors. Similarly, the dividend yield is based on historical experience and expected future changes. The

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 28, 2019

(Amounts in thousands, except share data)


H.	Stock-Based Compensation (continued)

binomial model also incorporates exercise assumptions based on an analysis of historical data. The expected life of the stock-based awards is derived from the output of the binomial model and represents the period of time that awards granted are expected to be outstanding.

The fair values of stock-based awards granted were estimated at the dates of grant with the following weighted-average assumption.



	Nine Months Ended
	September 28, 2019		September 29, 2018
Volatility rate	9.9	%	10.1	%
Risk-free interest rate	2.3	%	2.7	%
Expected dividend yield	.7	%	.7	%
Expected life of awards (years)	8.8		9.2

Nine Months Ended
September 29,
2018 September 30,
2017
Volatility rate 10.1 % 10.3 %
Risk-free interest rate 2.7 % 2.2 %
Expected dividend yield .7 % .7 %
Expected life of awards (years) 9.2
8.9

General Stock Option Information--The following table summarizes activity under the stock option plans for the nine months ended September ~~29, 2018~~.28, 2019.



Stock Options	Number of Options Outstanding		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life	Aggregate Intrinsic Value
Outstanding, January 1, 2019	1,466,264		$	13.94
Granted	151,145		21.10
Exercised	(91,739	)	10.48
Forfeited	(20,160	)	17.67
Outstanding, September 28, 2019	1,505,510		$	14.82	5.7 years	$	11,713

Exercisable, September 28, 2019	1,015,025		$	13.08	4.5 years	$	9,667

Stock Options
Number
of
Options
Outstanding

Weighted-
Average
Exercise
Price

Weighted-
Average
Remaining
Contractual
Life

Aggregate
Intrinsic
Value
Outstanding, January 1, 2018 1,528,615
$ 13.05

Granted 143,250
19.10

Exercised (104,243 ) 10.24

Forfeited (49,000 ) 13.43

Outstanding, September 29, 2018 1,518,622
$ 13.80
6.0 years $ 8,960

Exercisable, September 29, 2018 942,172
$ 11.66
4.8 years $ 7,577

As of September ~~29, 2018~~,28, 2019, there was approximately ~~$1,558~~$1,484 of unrecognized compensation cost related to stock options outstanding. The cost is expected to be recognized over a weighted-average period of ~~2.3 years~~.2.7 years. “Intrinsic value” is defined as the amount by which the market price of a common share exceeds the exercise price of an option.

Common shares are issued from treasury upon the exercise of stock options, SSARs, RSUs, PRSUs or purchases under the Employee Stock Purchase Plan.

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September ~~29, 2018~~28, 2019

(Amounts in thousands, except share data)


H.I.	Net Periodic Benefit Expense--Defined Benefit Pension Plans

The results of operations included the following net periodic benefit expense (income) recognized related to our defined-benefit pension plans.



	Three Months Ended					Nine Months Ended
	September 28, 2019		September 29, 2018			September 28, 2019			September 29, 2018
Components of pension expense (income)
Service costs--increase in benefit obligation earned	$	—	$	100		$	75		$	300
Interest cost on projected benefit obligation	31		180			167			539
Expected return on plan assets	—		(58		)	(37		)	(173		)
Settlement loss	—		—			1,677			—
Amortization of net actuarial loss	6		181			81			545
Amortization of prior service cost	16		16			48			48
Net pension expense of defined benefit pension plans	$	53	$	419		$	2,011		$	1,259

Three Months Ended Nine Months Ended
September 29,
2018 September 30,
2017 September 29,
2018 September 30,
2017
Components of pension expense (income)
Service costs--increase in benefit obligation earned $ 100
$ 132
$ 300
$ 397
Interest cost on projected benefit obligation 180
263
539
790
Expected return on plan assets (58 ) (169 ) (173 ) (508 )
Amortization of net actuarial loss 181
237
545
712
Amortization of prior service cost 16
17
48
48
Net pension expense of defined benefit pension plans $ 419
$ 480
$ 1,259
$ 1,439
During April 2019, we entered into an agreement to purchase a guaranteed group annuity contract from a third-party insurance company which unconditionally and irrevocably guarantees the full-payment of all annuity payments to the remaining 231 participants in our Employee Retirement Plan (“ERP”) for which benefits were frozen effective December 31, 2008. The April 2019 agreement transferred all remaining ERP benefit obligations to the third-party insurance company, resulting in a pretax actuarial settlement loss of $1,677.

The components of net periodic benefit expense, other than the service cost component, are included in the line item other income (expense) in the ~~income statement.~~statement of operations.


I.J.	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 estimated annual effective tax rate for the nine months ended September 28, 2019 was 24.0%. Our annual effective tax rate for the nine months ended September 29, 2018 ~~is 21.7%. Our annual effective tax rate for the nine months ended September 30, 2017~~ was estimated at ~~37.8%~~21.7%. Our ~~actual~~ effective tax rate was ~~27.3%~~29.2% and ~~36.3%~~27.3% for the three months ended September ~~29, 2018~~28, 2019 and September ~~30, 2017,~~29, 2018, respectively. The change in the effective tax rate from statutory tax rates is primarily due to the ~~Tax Reform Act, that was signed into law on December 22, 2017~~impact of state and local taxes which are partially offset by ~~the President of the United States, which reduces the corporate federal income tax rate for 2018 and beyond from 35% to 21%.~~favorable discrete items.

As ~~a result~~ of the Tax Reform Act, the Company estimated a tax liability of $6,100 due to the transition toll tax on the deemed repatriation of deferred foreign earnings of non-U.S. operations, which the Company believes will be fully offset by foreign tax credits. The final amounts recorded in subsequent financial statements may differ from these provisional amounts due to, among other things, additional analysis related to foreign deferred earnings, changes in interpretations of the Tax Reform Act and related assumptions of the Company and additional regulatory guidance that may be issued.

On December 22, 2017, the SEC issued Staff Accounting Bulletin 118 (“SAB 118”). This guidance allows registrants a “measurement period”, not to exceed one year from the date of enactment, to complete their accounting for the tax effects of the Tax Reform Act. SAB 118 further directs that during the measurement period, registrants who are able to make reasonable estimates for the tax effects of the Tax Reform Act should include those amounts in their financial statements as “provisional” amounts. Registrants should reflect adjustments over

~~Index~~

~~The Davey Tree Expert Company~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

September ~~29, 2018~~

~~(Amounts in thousands, except share data)~~


I.	~~Income Taxes (continued)~~

subsequent periods as they are able to refine their estimates and complete their accounting for the tax effects of the Tax Reform Act. The provisional amounts computed by the Company will be finalized in the fourth quarter of 2018.

~~At December 31, 2017,~~28, 2019, we had unrecognized tax benefits of ~~$2,581,~~$1,323, of which ~~$1,948~~$597 would affect our effective rate if recognized, and accrued interest expense related to unrecognized benefits of ~~$128. During the second quarter~~$40. At December 31, 2018, ~~we decreased our unrecognized tax benefits by $1,547 as a result of the pending settlement of the IRS audits of our 2015 and 2016 U.S. income tax returns. As of~~ ~~September 29, 2018~~, we had unrecognized tax benefits of ~~$1,059,~~$1,325, of which ~~$585~~$599 would affect our effective rate if recognized, and accrued interest expense related to unrecognized benefits of ~~$24.~~$35. Unrecognized tax benefits are the differences between a tax position taken, or expected to be taken in a tax return, and the benefit recognized for financial reporting purposes.

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 28, 2019

(Amounts in thousands, except share data)


J.	Income Taxes (continued)

We recognize interest accrued related to unrecognized tax benefits in income tax expense. Penalties, if incurred, would be recognized as a component of income tax expense.

The Company is routinely under audit by federal, state, local and Canadian authorities in the area of income tax. These audits include questioning the timing and the amount of income and deductions and the allocation of income and deductions among various tax jurisdictions. The ~~IRS finalized their audit of our 2015 and 2016 U.S. income tax returns in July 2018.~~Company has been audited by the Internal Revenue Service through 2016. With the exception of U.S. state jurisdictions, the Company is no longer subject to examination by tax authorities for the years through 2016. As of September ~~29, 2018,~~28, 2019, we believe it is reasonably possible that the total amount of unrecognized tax benefits will not significantly increase or decrease.


J.K.	Accumulated Other Comprehensive Income (Loss)

Comprehensive income (or loss) is comprised of net income (or net loss) and other components, including currency translation adjustments and ~~defined-benefit~~defined benefit pension plan adjustments.

The following summarizes the components of other comprehensive income (loss) accumulated in shareholders’ equity for the three and nine months ended September ~~29, 2018~~28, 2019 and the three and nine months ended September ~~30, 2017:~~29, 2018:


Three Months Ended September 29, 2018	Foreign Currency Translation Adjustments			Defined Benefit Pension Plans			Accumulated Other Comprehensive Income (Loss)
Balance at July 1, 2018	$	(4,884	)	$	(4,795	)	$	(9,679	)
Three Months Ended September 28, 2019										Foreign Currency Translation Adjustments			Defined Benefit Pension Plans			Accumulated Other Comprehensive Income (Loss)
Balance at June 29, 2019										$	(4,612	)	$	(657	)	$	(5,269	)
Other comprehensive income (loss) before reclassifications
Unrealized gains	$	517		$	—		$	517
Unrealized losses										$	(384	)	$	—		$	(384	)
Amounts reclassified from accumulated other comprehensive income (loss)	—			197			197			—			22			22
Tax effect	—			(51		)	(51		)	—			(5		)	(5		)
Net of tax amount	517			146			663			(384		)	17			(367		)
Balance at September 29, 2018	$	(4,367	)	$	(4,649	)	$	(9,016	)
Balance at September 28, 2019										$	(4,996	)	$	(640	)	$	(5,636	)



Three Months Ended September 29, 2018	Foreign Currency Translation Adjustments			Defined Benefit Pension Plans			Accumulated Other Comprehensive Income (Loss)
Balance at June 30, 2018	$	(4,884	)	$	(4,795	)	$	(9,679	)
Other comprehensive income (loss) before reclassifications
Unrealized gains	$	517		$	—		$	517
Amounts reclassified from accumulated other comprehensive income (loss)	—			197			197
Tax effect	—			(51		)	(51		)
Net of tax amount	517			146			663
Balance at September 29, 2018	$	(4,367	)	$	(4,649	)	$	(9,016	)

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September ~~29, 2018~~28, 2019

(Amounts in thousands, except share data)


J.K.	Accumulated Other Comprehensive Income (Loss) (continued)



Nine Months Ended September 28, 2019	Foreign Currency Translation Adjustments			Defined Benefit Pension Plans			Accumulated Other Comprehensive Income (Loss)
Balance at January 1, 2019	$	(5,819	)	$	785		$	(5,034	)
Other comprehensive income (loss) before reclassifications
Unrealized gains	$	823		$	—		$	823
Amounts reclassified from accumulated other comprehensive income (loss)	—			(1,573		)	(1,573		)
Tax effect	—			148			148
Net of tax amount	823			(1,425		)	(602		)
Balance at September 28, 2019	$	(4,996	)	$	(640	)	$	(5,636	)

Three Months Ended September 30, 2017
Foreign
Currency
Translation
Adjustments

Defined
Benefit
Pension
Plans

Accumulated
Other
Comprehensive
Income (Loss)
Balance at July 2, 2017 $ (4,297 ) $ (6,348 ) $ (10,645 )
Other comprehensive income (loss) before reclassifications
Unrealized gains $ 1,295
$ —
$ 1,295
Amounts reclassified from accumulated other comprehensive income (loss) —
254
254
Tax effect —
(97 ) (97 )
Net of tax amount 1,295
157
1,452
Balance at September 30, 2017 $ (3,002 ) $ (6,191 ) $ (9,193 )



Nine Months Ended September 29, 2018	Foreign Currency Translation Adjustments			Defined Benefit Pension Plans			Accumulated Other Comprehensive Income (Loss)
Balance at January 1, 2018	$	(3,305	)	$	(5,088	)	$	(8,393	)
Other comprehensive income (loss) before reclassifications
Unrealized losses	$	(1,062	)	$	—		$	(1,062	)
Amounts reclassified from accumulated other comprehensive income (loss)	—			593			593
Tax effect	—			(154		)	(154		)
Net of tax amount	(1,062		)	439			(623		)
Balance at September 29, 2018	$	(4,367	)	$	(4,649	)	$	(9,016	)

Nine Months Ended September 29, 2018
Foreign
Currency
Translation
Adjustments

Defined
Benefit
Pension
Plans

Accumulated
Other
Comprehensive
Income (Loss)
Balance at January 1, 2018 $ (3,305 ) $ (5,088 ) $ (8,393 )
Other comprehensive income (loss) before reclassifications
Unrealized losses $ (1,062 ) $ —
$ (1,062 )
Amounts reclassified from accumulated other comprehensive income (loss) —
593
593
Tax effect —
(154 ) (154 )
Net of tax amount (1,062 ) 439
(623 )
Balance at September 29, 2018 $ (4,367 ) $ (4,649 ) $ (9,016 )

Nine Months Ended September 30, 2017
Foreign
Currency
Translation
Adjustments

Defined
Benefit
Pension
Plans

Accumulated
Other
Comprehensive
Income (Loss)
Balance at January 1, 2017 $ (5,500 ) $ (6,662 ) $ (12,162 )
Other comprehensive income (loss) before reclassifications
Unrealized gains $ 2,498
$ —
$ 2,498
Amounts reclassified from accumulated other comprehensive income (loss) —
760
760
Tax effect —
(289 ) (289 )
Net of tax amount 2,498
471
2,969
Balance at September 30, 2017 $ (3,002 ) $ (6,191 ) $ (9,193 )

The ~~changes~~change in defined benefit pension plans of ~~$197~~$22 and ~~$593~~ ~~for the three and nine months ended~~ ~~September 29, 2018, respectively, and the $254 and $760~~$(1,573) for the three and nine months ended September ~~30, 2017, respectively,~~28, 2019 and $197 and $593 for the three and nine months ended September 29, 2018 is included in net periodic pension expense classified in the condensed consolidated statement of operations as general and administrative or other income (expense).

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September ~~29, 2018~~28, 2019

(Amounts in thousands, except share data)


J.	~~Accumulated Other Comprehensive Income (Loss) (continued)~~

~~are included in net periodic pension expense classified in the condensed statement of operations as general and administrative or other income (expense).~~


K.L.	Per Share Amounts and Common and Redeemable Shares Outstanding

We calculate our basic earnings per share by dividing net income or net loss by the weighted average number of common shares outstanding during the period. Diluted earnings per share are calculated in a similar manner, but include the effect of dilutive securities. To the extent these securities are antidilutive, they are excluded from the calculation of earnings per share. The per share amounts were computed as follows:



	Three Months Ended				Nine Months Ended
	September 28, 2019		September 29, 2018		September 28, 2019		September 29, 2018
Income available to common shareholders:
Net income	$	13,434	$	8,384	$	32,688	$	23,471

Weighted-average shares:
Basic:
Outstanding	22,790		23,592		22,822		23,916
Partially-paid share subscriptions	3		176		8		527
Basic weighted-average shares	22,793		23,768		22,830		24,443

Diluted:
Basic from above	22,793		23,768		22,830		24,443
Incremental shares from assumed:
Exercise of stock subscription purchase rights	13		151		73		146
Exercise of stock options and awards	1,196		897		1,024		954
Diluted weighted-average shares	24,002		24,816		23,927		25,543

Net income per share:
Basic	$	.59	$	.35	$	1.43	$	.96

Diluted	$	.56	$	.34	$	1.37	$	.92

Three Months Ended Nine Months Ended
September 29,
2018 September 30,
2017 September 29,
2018 September 30,
2017
Income available to common shareholders:
Net income $ 8,384
$ 10,237
$ 23,471
$ 20,573

Weighted-average shares:
Basic:
Outstanding 23,592
24,925
23,916
24,965
Partially-paid share subscriptions 176
195
527
586
Basic weighted-average shares 23,768
25,120
24,443
25,551

Diluted:
Basic from above 23,768
25,120
24,443
25,551
Incremental shares from assumed:
Exercise of stock subscription purchase rights 151
158
146
148
Exercise of stock options and awards 897
1,138
954
1,015
Diluted weighted-average shares 24,816
26,416
25,543
26,714

Net income per share:
Basic $ .35
$ .41
$ .96
$ .81

Diluted $ .34
$ .39
$ .92
$ .77

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September ~~29, 2018~~28, 2019

(Amounts in thousands, except share data)


K.L.	Per Share Amounts and Common and Redeemable Shares Outstanding (continued)

Common and Redeemable Shares Outstanding--A summary of the activity of the common and redeemable shares outstanding for the nine months ended September ~~29, 2018~~28, 2019 follows:



	Common Shares Net of Treasury Shares		Redeemable Shares		Total
Shares outstanding at January 1, 2019	17,238,497		5,642,155		22,880,652
Shares purchased	(612,397	)	(580,444	)	(1,192,841	)
Shares sold	240,872		237,474		478,346
Stock subscription offering -- cash purchases	861,519		—		861,519
Options and awards exercised	214,685		—		214,685
Shares outstanding at September 28, 2019	17,943,176		5,299,185		23,242,361

Common Shares
Net of Treasury Shares
Redeemable Shares Total
Shares outstanding at January 1, 2018 17,753,832
6,467,027
24,220,859
Shares purchased (1,053,421 ) (560,220 ) (1,613,641 )
Shares sold 369,296
250,767
620,063
Stock subscription offering -- cash purchases 80,487
—
80,487
Options and awards exercised 140,663
—
140,663
Shares outstanding at September 29, 2018 17,290,857
6,157,574
23,448,431

On September ~~29, 2018~~,28, 2019, we had ~~23,448,431~~23,242,361 common and redeemable shares outstanding, employee options exercisable to purchase ~~942,172~~1,015,025 common shares and partially-paid subscriptions for ~~702,984~~11,122 common ~~shares and purchase rights outstanding for~~ ~~276,074~~ ~~common~~ shares.

Stock Subscription Offering--Beginning May 2012, the Company offered to eligible employees and nonemployee directors the right to subscribe to common shares of the Company at ~~$9.85~~$9.85 per share in accordance with the provisions of The Davey Tree Expert Company 2004 Omnibus Stock Plan and the rules of the Compensation Committee of the Company's Board of Directors (collectively, the "plan"). The offering period ended on August 1, 2012 and resulted in the subscription of 1,275,428 common shares for ~~$12,563~~$12,563 at ~~$9.85~~$9.85 per share.

Under the plan, a participant in the offering purchasing common shares for an aggregate purchase price of less than $5$5 was required to pay with cash. All participants (excluding Company directors and officers) purchasing $5$5 or more of the common shares had an option to finance their purchase through a down-payment of at least 10% of the total purchase price and a ~~seven-year~~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$5 of common shares were granted a "right" to purchase one additional common share at a price of ~~$9.85~~$9.85 per share for every ~~three~~3 common shares purchased under the plan. As a result of the stock subscription, employees were granted rights to purchase 423,600 common shares. Each right may be exercised at the rate of one-seventh per year and will expire seven years after the date that the right was granted. Employees may not exercise a right should they cease to be employed by the Company.

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September ~~29, 2018~~28, 2019

(Amounts in thousands, except share data)


L.M.	Operations by Business Segment

We provide a wide range of arboricultural, horticultural, environmental and consulting services to residential, utility, commercial and government entities throughout the United States and Canada. We have ~~two~~2 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 and rights-of-way and chemical brush control; and natural resource management and consulting, forestry research and development, and environmental planning.

All other operating activities, including research, technical support and laboratory diagnostic facilities, are included in “All Other.”

Measurement of Segment Profit and Loss and Segment Assets--We evaluate performance and allocate resources based primarily on operating income and also actively manage business unit operating assets. Segment information, including reconciling adjustments, is presented consistent with the basis described in our ~~2017~~2018 Annual Report.

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September ~~29, 2018~~28, 2019

(Amounts in thousands, except share data)


L.M.	Operations by Business Segment (continued)

Segment information reconciled to consolidated external reporting information follows:


															Utility		Residential and Commercial		All Other			Reconciling Adjustments				Consolidated
Three Months Ended September 28, 2019
Revenues															$	160,088	$	146,769	$	616		$	—			$	307,473
Income (loss) from operations															10,941		17,667		(3,456		)	(2,369		)	(a)	22,783
Interest expense																						(2,018		)		(2,018		)
Interest income																						94				94
Other income (expense), net																						(1,886		)		(1,886		)
Income before income taxes																										$	18,973
Segment assets, total															$	247,031	$	238,692	$	—		$	115,475		(b)	$	601,198
	Utility		Residential and Commercial		All Other			Reconciling Adjustments				Consolidated
Three Months Ended September 29, 2018
Revenues	$	135,768	$	130,408	$	(858	)	$	—			$	265,318		$	135,768	$	130,408	$	(858	)	$	—			$	265,318
Income (loss) from operations	6,198		13,360		(3,615		)	(1,358		)	(a)	14,585			6,198		13,360		(3,615		)	(1,358		)	(a)	14,585
Interest expense								(1,811		)		(1,811		)								(1,811		)		(1,811		)
Interest income								80				80										80				80
Other income (expense), net								(1,322		)		(1,322		)								(1,322		)		(1,322		)
Income before income taxes												$	11,532													$	11,532
Segment assets, total	$	222,194	$	214,374	$	—		$	85,087		(b)	$	521,655		$	222,194	$	214,374	$	—		$	85,087		(b)	$	521,655

Three Months Ended September 30, 2017
Nine Months Ended September 28, 2019
Revenues	$	124,540	$	124,678	$	370		$	—			$	249,588		$	451,749	$	404,134	$	913		$	—			$	856,796
Income (loss) from operations	6,854		14,616		(490		)	(1,931		)	(a)	19,049			26,816		44,772		(11,825		)	(3,732		)	(a)	56,031
Interest expense								(1,278		)		(1,278		)								(6,597		)		(6,597		)
Interest income								67				67										270				270
Other income (expense), net								(1,764		)		(1,764		)								(6,694		)		(6,694		)
Income before income taxes												$	16,074													$	43,010
Segment assets, total	$	180,031	$	206,946	$	—		$	92,632		(b)	$	479,609		$	247,031	$	238,692	$	—		$	115,475		(b)	$	601,198

Nine Months Ended September 29, 2018
Revenues	$	382,951	$	361,218	$	449		$	—			$	744,618		$	382,951	$	361,218	$	449		$	—			$	744,618
Income (loss) from operations	14,277		37,089		(10,171		)	(2,476		)	(a)	38,719			14,277		37,089		(10,171		)	(2,476		)	(a)	38,719
Interest expense								(4,966		)		(4,966		)								(4,966		)		(4,966		)
Interest income								259				259										259				259
Other income (expense), net								(4,036		)		(4,036		)								(4,036		)		(4,036		)
Income before income taxes												$	29,976													$	29,976
Segment assets, total	$	222,194	$	214,374	$	—		$	85,087		(b)	$	521,655		$	222,194	$	214,374	$	—		$	85,087		(b)	$	521,655

Nine Months Ended September 30, 2017
Revenues	$	349,921	$	335,564	$	1,953		$	—			$	687,438
Income (loss) from operations	13,782		34,871		(3,683		)	(4,257		)	(a)	40,713
Interest expense								(3,607		)		(3,607		)
Interest income								210				210
Other income (expense), net								(4,242		)		(4,242		)
Income before income taxes												$	33,074
Segment assets, total	$	180,031	$	206,946	$	—		$	92,632		(b)	$	479,609

~~Index~~

Capital Resources

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

Business seasonality traditionally results in higher revenues during the second and third quarters as compared with the first and fourth quarters of the year, while our methods of accounting for fixed costs, such as depreciation and amortization expense, rent and interest expense, are not significantly impacted by business seasonality. Capital resources during these periods are equally affected. We satisfy seasonal working capital needs and other financing requirements with the revolving credit facility and other short-term lines of credit. We are continually reviewing our existing sources of financing and evaluating alternatives. At September ~~29, 2018,~~28, 2019, we had working capital of ~~$105,812,~~$116,150, and short-term lines of credit approximating ~~$7,152~~$6,696 and ~~$155,087~~$182,087 available under our revolving credit facility.

For more information regarding our outstanding debt, see Note F, Long-Term Debt and Commitments Related to Letters of Credit.

We believe our sources of capital, at this time, provide us with the financial flexibility to meet our capital-spending plans and to continue to complete business acquisitions for at least the next twelve months and for the reasonably foreseeable future.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented.

As discussed in our annual report on Form 10-K for the year ended December 31, ~~2017~~,2018, we believe that our policies related to revenue recognition, the allowance for doubtful accounts, stock valuation and self-insurance reserves are our “critical accounting policies and estimates”--those most important to the financial presentations and those that require the most difficult, subjective or complex judgments. During the first quarter 2018, we updated our revenue recognition policies in conjunction with our adoption of Accounting Standards Codification 606, "Revenue from Contracts with Customers" as further described in Note M. Revenue Recognition of the Notes to Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q.

On an ongoing basis, we evaluate our estimates and assumptions, including those related to accounts receivable, specifically those receivables under contractual arrangements primarily with Utility customers; allowance for

Index

doubtful accounts; and self-insurance reserves. We base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. These statements relate to future events or our future financial performance. In some cases, forward-looking statements may be identified by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors that may cause our or our industry's actual results, levels of activity, performance or achievements to differ materially from what is expressed or implied in these forward-looking statements. Some important factors that could cause actual results to differ materially from those in the forward-looking statements include:


▪	We may be unable to attract and retain a sufficient number of qualified employees for our field operations, and we may be unable to attract and retain qualified management personnel.

▪

We have significant contracts with our utility, commercial and government customers that include liability risk exposure as part of those contracts. Consequently, we have substantial excess-umbrella liability insurance, and increases in the cost of obtaining adequate insurance, or the inadequacy of our self-insurance accruals or insurance coverages, could negatively impact our liquidity and financial condition.


▪	The unavailability or cancellation of third-party insurance coverage may have a material adverse effect on our financial condition and results of operations as well as disrupt our operations.


▪	We could be materially adversely affected by wildfires in California and other areas as well as other severe weather events and natural disasters, including negative impacts to our business, reputation, financial condition, results of operations, liquidity and cash flows.


▪	Our business, other than tree services to utility customers, is highly seasonal and weather dependent.


▪	Significant customers, particularly utilities, may experience financial difficulties, resulting in payment delays or delinquencies.


▪	We are subject to litigation and third-party and governmental regulatory claims and adverse litigation judgments or settlements resulting from those claims could materially adversely affect our business.


▪	Significant increases in fuel prices for extended periods of time will increase our operating expenses.


▪	We are subject to intense competition.


▪	Various economic factors may adversely impact our customers’ spending and pricing for our services, and impede our collection of accounts receivable.


▪	The impact of regulations initiated as a response to possible changing climate conditions could have a negative effect on our results of operations or our financial condition.


▪	The seasonal nature of our business and changes in general and local economic conditions, among other factors, may cause our quarterly results to fluctuate, and our prior performance is not necessarily indicative of future results.


▪	We may misjudge a competitive bid and be contractually bound to an unprofitable contract.


▪	A disruption in our information technology systems, including a disruption related to cybersecurity, could adversely affect our financial performance.


▪	We are dependent, in part, on our reputation of quality, integrity and performance. If our reputation is damaged, we may be adversely affected.


▪	Because no public market exists for our common shares, the ability of shareholders to sell their common shares is limited.


▪	Our failure to comply with environmental laws could result in significant liabilities, fines and/or penalties.

Index

~~Our business, other than tree services to utility customers, is highly seasonal and weather dependent.~~

~~Various economic factors may adversely impact our customers’ spending and pricing for our services, and impede our collection of accounts receivable.~~

~~Significant customers, particularly utilities, may experience financial difficulties, resulting in payment delays or delinquencies.~~

The seasonal nature of our business and changes in general and local economic conditions, among other factors, may cause our quarterly results to fluctuate, and our prior performance is not necessarily indicative of future results.

~~The uncertainties in the credit and financial markets may limit our access to capital.~~

~~Significant increases in fuel prices for extended periods of time will increase our operating expenses.~~

~~Fluctuations in foreign currency exchange rates may have a material adverse impact on our operating results.~~

We have significant contracts with our utility, commercial and government customers that include liability risk exposure as part of those contracts. Consequently, we have substantial excess-umbrella liability insurance, and increases in the cost of obtaining adequate insurance, or the inadequacy of our self-insurance reserves or insurance coverages, could negatively impact our liquidity and financial condition.

~~Because no public market exists for our common shares, the ability of shareholders to sell their common shares is limited.~~

~~Significant increases in health care costs could negatively impact our results of operations or financial position.~~

~~We are subject to intense competition.~~

~~Our failure to comply with environmental laws could result in significant liabilities, fines and/or penalties.~~

~~The impact of regulations initiated as a response to possible changing climate conditions could have a negative effect on our results of operations or our financial condition.~~

~~We may encounter difficulties obtaining surety bonds or letters of credit necessary to support our operations.~~

~~We are dependent, in part, on our reputation of quality, integrity and performance. If our reputation is damaged, we may be adversely affected.~~

~~We may be unable to attract and retain a sufficient number of qualified employees for our field operations, and we may be unable to attract and retain qualified management personnel.~~

Our facilities could be damaged or our operations could be disrupted, or our customers or vendors may be adversely affected, by events such as natural disasters, pandemics, terrorist attacks or other external events.

~~A disruption in our information technology systems, including a disruption related to cybersecurity, could adversely affect our financial performance.~~

~~We are subject to third-party and governmental regulatory claims and litigation that may have an adverse effect on us.~~

~~We may misjudge a competitive bid and be contractually bound to an unprofitable contract.~~


▪	We may encounter difficulties obtaining surety bonds or letters of credit necessary to support our operations.


▪	The uncertainties in the credit and financial markets may limit our access to capital.


▪	Fluctuations in foreign currency exchange rates may have a material adverse impact on our operating results.


▪	Significant increases in health care costs could negatively impact our results of operations or financial position.


▪	Our facilities could be damaged or our operations could be disrupted, or our customers or vendors may be adversely affected, by events such as natural disasters, pandemics, terrorist attacks or other external events.


▪	Our inability to properly verify the employment eligibility of our employees could adversely affect our business.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after the date of this quarterly report on Form 10-Q to conform these statements to actual future results.

~~Index~~

The factors described above, as well as other factors that may adversely impact our actual results, are discussed in "Part III - Item 1A. Risk Factors." of ~~this quarterly report on Form 10-Q and in~~ our annual report on Form 10-K for the year ended December 31, ~~2017~~ ~~in “Part I - Item 1A. Risk Factors.”~~2018.


Item 3.	Quantitative and Qualitative Disclosures about Market Risk.

During the ~~quarter~~nine months ended September ~~29, 2018~~,28, 2019, there ~~have been~~were no material changes in the market risk previously presented in our annual report on Form 10-K for the year ended December 31, ~~2017~~.2018.


Item 4.	Controls and Procedures.

(a) Management’s Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this report in ensuring that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the fiscal quarter ended September ~~29, 2018~~28, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The Davey Tree Expert Company


Part II.	Other Information

Items 3, 4 and 5 are not applicable.

~~Index~~


Item 1.	Legal Proceedings.

In November 2017, a suit was filed against Davey Tree, its subsidiary, Wolf Tree, Inc., a former Davey employee, two Wolf employees, and a former Wolf employee alleging various acts of negligence and seeking compensatory and punitive damages for wrongful death and assault and battery of the plaintiff’s husband, a Wolf Tree employee in Savannah, Georgia, who was killed in August 2017. The case has been set for mediation on December 3-4, 2018 and for trial on January 22, 2019. In July 2018, a survival action was filed by the deceased's estate against Davey Tree, its subsidiary, Wolf Tree, Inc., and four current and former employees in Savannah, Georgia, which arises out of the same allegations, seeks compensatory and punitive damages and also includes three RICO claims under Georgia law seeking compensatory damages, treble damages, and punitive damages.The 2018 case was removed to the United States District Court for the Southern District of Georgia, Savannah Division, on August 2, 2018. The Company filed a motion to dismiss the RICO claims. Plaintiffs filed a motion to remand the case to state court, which the Company has opposed. The Company has denied all liability and is vigorously defending the action. It also has retained separate counsel for three of the individual defendants, each of whom has denied all liability and also is vigorously defending the action.

On a quarterly basis, we assess our liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information available. Where it is probable that we will incur a loss and the amount of the loss can be reasonably estimated, we record a liability in our consolidated financial statements. These legal accruals may

Index

be increased or decreased to reflect any relevant developments on a quarterly basis. Where a loss is not probable or the amount of the loss is not estimable, we do not record a legal accrual, consistent with applicable accounting guidance. Based on information currently available to us, advice of counsel, and available insurance coverage, we believe that our established accruals are adequate and the liabilities arising from the legal proceedings will not have a material adverse effect on our consolidated financial condition. We note, however, that in light of the inherent uncertainty in legal proceedings there can be no assurance that the ultimate resolution of a matter will not exceed established accruals. As a result, the outcome of a particular matter or a combination of matters may be material to our results of operations for a particular period, depending upon the size of the loss or our income for that particular period.

In November 2017, a suit was filed in Savannah, Georgia state court (“State Court”) against Davey Tree, its subsidiary, Wolf Tree, Inc. ("Wolf Tree"), a former Davey employee, two Wolf Tree employees, and a former Wolf Tree employee alleging various acts of negligence and seeking compensatory and punitive damages for wrongful death and assault and battery of the plaintiff’s husband, a Wolf Tree employee, who was shot and killed in August 2017. The case was mediated unsuccessfully in December 2018 and was set for trial on January 22, 2019.

In July 2018, a related survival action was filed by the deceased’s estate against Davey Tree, its subsidiary, Wolf Tree, and four current and former employees in Savannah, Georgia, which arises out of the same allegations, seeks compensatory and punitive damages and also includes three RICO claims under Georgia law seeking compensatory damages, treble damages, and punitive damages. The 2018 case was removed to the United States District Court for the Southern District of Georgia, Savannah Division, on August 2, 2018 (“Federal Court”). The Company filed a motion to dismiss the RICO claims. Plaintiffs filed a motion to remand the case to state court, which the Company has opposed. The motions are pending.

On December 6, 2018, a former Wolf Tree employee pled guilty to conspiracy to conceal, harbor, and shield illegal aliens. On December 21, 2018, the United States federal prosecutors filed a motion to stay both actions on the grounds that on December 13, 2018, an indictment was issued charging two former Wolf Tree employees and one other individual with various crimes, including conspiracy to murder the deceased. On December 17, 2018, the United States Attorney’s Office for the Southern District of Georgia informed the Company and Wolf Tree that they are also under investigation for potential violations of immigration and other laws relating to the subject matter of the ongoing criminal investigation referenced above. The Company and Wolf Tree are cooperating with the investigation.

On December 28, 2018, the State Court granted the United States’ motion to stay but indicated that it would nonetheless consider certain pending matters, including: (1) Plaintiff and a co-defendant’s motions that Davey Tree be forced to produce privileged documents and testimony, which had been submitted to a Special Master for recommendation; and (2) the Defendants’ motions for summary judgment. On January 11, 2019, the Special Master issued his recommendation that both Plaintiff and the co-defendant’s motions to force Davey to disclose privileged information be denied. The State Court judge has not yet moved on the recommendation. On January 29, 2019, the State Court heard oral argument on Defendants’ motions for summary judgment, and the motions remain pending.

On January 28, 2019, the Federal Court also granted the United States’ motion to stay. On January 29, 2019, the State Court ordered the parties to return to mediation, which occurred on April 17, 2019 but was unsuccessful in resolving the matters.

In both cases, the Company has denied all liability and is vigorously defending the action. It also has retained separate counsel for some of the individual defendants, each of whom has denied all liability and also is vigorously defending the action.


Item 1A.	Risk Factors.

~~The factors described below represent~~Our Annual Report on Form 10-K for the ~~principal risks we face. Except as otherwise indicated, these factors may or may not occur and we are not in~~year ended December 31, 2018, includes a position to express a view on the likelihood of any such factor occurring. Other factors may exist that we do not consider to be significant based on information that is currently available or that we are not currently able to anticipate.

~~Our business is highly seasonal and weather dependent.~~

Our business, other than tree services to utility customers, is highly seasonal and weather dependent, primarily due to fluctuations in horticultural services provided to Residential and Commercial customers. We have historically incurred losses in the first quarter, while revenue and operating income are generally highest in the second and third quarters of the calendar year. Inclement weather, such as uncharacteristically low or high (drought) temperatures, in the second and third quarters could dampen the demand for our horticultural services, resulting in reduced revenues that would have an adverse effect on our results of operations.

~~Economic conditions may adversely impact our customers’ future spending as well as pricing and payment for our services, thus negatively impacting our operations and growth.~~

Various economic factors may adversely impact the demand for our services and potentially result in depressed prices for our services and the delay or cancellation of projects. That may make it difficult to estimate our customers' requirements for our services and, therefore, add uncertainty to customer demand. Various economic factors and customers' confidence in future economic conditions may cause a reduction in our customers' spending for our services and may also impact the abilitydetailed discussion of our ~~customers to pay amounts owed, which could reduce our cash flow and adversely impact our debt or equity financing. These events could~~risk factors. There have abeen no material ~~adverse effect on our operations and our ability to grow at historical levels.~~

~~Index~~

~~Financial difficulties or the bankruptcy of one or more of our major customers could adversely affect our results.~~

Our ability to collect our accounts receivable and future sales depends, in part, on the financial strength of our customers. We grant credit, generally without collateral, to our customers. Consequently, we are subject to credit risk related to changes in business and economic factors throughout the United States and Canada. In the event customers experience financial difficulty, and particularly if bankruptcy results, our profitability may be adversely impacted by our failure to collect our accounts receivable in excess of our estimated allowance for uncollectible accounts. Additionally, our future revenues could be reduced by the loss of a customer due to bankruptcy. Our failure to collect accounts receivable and/or the loss of one or more major customers could have an adverse effect on our net income and financial condition.

~~Our business is dependent upon service to our utility customers and we may be affected by developments in the utility industry.~~

We derive approximately 51% of our total annual revenues from our Utility segment, including approximately 11% of our total annual revenues from Pacific Gas & Electric Company. Significant adverse developments in the utility industry generally, or specifically for our major utility customers, could result in pressure to reduce costs by utility industry service providers (such as us), delays in payments of our accounts receivable, or increases in uncollectible accounts receivable, among other things. As a result, such developments could have an adverse effect on our results of operations.

~~Our quarterly results may fluctuate.~~

~~We have experienced and expect to continue to experience quarterly variations in revenues and operating income as a result of many factors, including:~~


▪	~~the seasonality of our business;~~


▪	~~the timing and volume of customers' projects;~~


▪	~~budgetary spending patterns of customers;~~


▪	~~the commencement or termination of service agreements;~~


▪	~~costs incurred to support growth internally or through acquisitions;~~


▪	~~changes in our mix of customers, contracts and business activities;~~


▪	~~fluctuations in insurance expense due to changes in claims experience and actuarial assumptions; and~~


▪	~~general and local economic conditions.~~

~~Accordingly, our operating results in any particular quarter may not be indicative of the results that you can expect for any other quarter or for the entire year.~~

~~We may not have access to capital in the future due to uncertainties in the financial and credit markets.~~

We may need new or additional financing in the future to conduct our operations, expand our business or refinance existing indebtedness. Future changes in the general economic conditions and/or financial markets in the United States or globally could affect adversely our ability to raise capital on favorable terms or at all. From time-to-time we have relied, and may also rely in the future, on access to financial markets as a source of liquidity for working capital requirements, acquisitions and general corporate purposes. Our access to funds under our revolving credit facility is dependent on the ability of the financial institutions that are parties to the facility to meet their funding commitments. Those financial institutions may not be able to meet their funding commitments if they experience shortages of capital and liquidity or if they experience excessive volumes of borrowing requests within a short period of time. Economic disruptions and any resulting limitations on future funding, including any restrictions on access to funds under our revolving credit facility, could have a material adverse effect on us.

~~Index~~

~~We are subject~~ to the risk ~~of changes in fuel costs.~~factors as previously disclosed.

The cost of fuel is a major operating expense of our business. Significant increases in fuel prices for extended periods of time will cause our operating expenses to fluctuate. An increase in cost with partial or no corresponding compensation from customers would lead to lower margins that would have an adverse effect on our results of operations.

~~We are subject to the effect of foreign currency exchange rate fluctuations, which may have a material adverse impact on us.~~

We are exposed to foreign currency exchange rate risk resulting from our operations in Canada, where we provide a comprehensive range of horticultural services. Fluctuations in foreign currency exchange rates may make our services more expensive for others to purchase or increase our operating costs, affecting our competitiveness and our profitability. Our financial results could be affected by factors such as changes in the foreign currency exchange rate or differing economic conditions in the Canadian markets as compared with the markets for our services in the United States. Our earnings are affected by translation exposures from currency fluctuations in the value of the U.S. dollar as compared to the Canadian dollar.

Revenues from customers in Canada are subject to foreign currency exchange. Thus, certain revenues and expenses have been, and are expected to be, subject to the effect of foreign currency fluctuations, and these fluctuations may have a material adverse impact on our operating results, asset values and could reduce shareholders’ equity. In addition, if we expand our Canadian operations, exposures to gains and losses on foreign currency transactions may increase.

~~We could be negatively impacted if our self-insurance reserves or our insurance coverages prove to be inadequate.~~

We are generally self-insured for losses and liabilities related to workers' compensation, vehicle liability and general liability claims (including any wildfire-related claims, up to certain retained coverage limits). A liability for unpaid claims and associated expenses, including incurred but not reported losses, is actuarially determined and reflected in our consolidated balance sheet as an accrued liability. The determination of such claims and expenses, and the extent of the need for reserves, are continually reviewed and updated. If we were to experience insurance claims or costs above our estimates and were unable to offset such increases with earnings, our business could be adversely affected. Also, where we self-insure, a deterioration in claims management, whether by our management or by a third-party claims administrator, could lead to delays in settling claims, thereby increasing claim costs, particularly as it relates to workers’ compensation. In addition, catastrophic uninsured claims filed against us or the inability of our insurance carriers to pay otherwise-insured claims would have an adverse effect on our financial condition.

Furthermore, many customers, particularly utilities, prefer to do business with contractors with significant financial resources, who can provide substantial insurance coverage. Should we be unable to renew our excess liability insurance and other commercial insurance policies at competitive rates, this loss would have an adverse effect on our financial condition and results of operations.

~~Increases in our health insurance costs and uncertainty about federal health care policies could adversely affect our results of operations and cash flows.~~

The costs of employee health care insurance have been increasing in recent years due to rising health care costs, legislative changes, and general economic conditions. We cannot predict what other health care programs and regulations will ultimately be implemented at the federal or state level or the effect of any future legislation or regulations on our business, results of operations and cash flows. In addition, we cannot predict when and if Congress will repeal and/or replace certain health care programs and regulations at the federal level and the impact that such changes would have on our business. A continued increase in health care costs or additional costs incurred as a result of the Patient Protection and Affordable Care Act and the Health Care and Education

Index

Reconciliation Act of 2010 or other future health care reform laws imposed by Congress or state legislatures could have a negative impact on our financial position, results of operations and cash flows.

~~The unavailability or cancellation of third-party insurance coverage may have a material adverse effect on our financial condition and results of operations as well as disrupt our operations.~~

Any of our existing excess insurance coverage may not be renewed upon the expiration of the coverage period or future coverage may not be available at competitive rates for the required limits. In addition, our third-party insurers could fail, suddenly cancel our coverage or otherwise be unable to provide us with adequate insurance coverage. If any of these events occur, they may have a material adverse effect on our financial condition and results of operations as well as disrupt our operations. For example, we have operations in California, which has an environment prone to wildfires. Should our third-party insurers determine to exclude coverage for wildfires in the future, we could be exposed to significant liabilities, having a material adverse effect on our financial condition and results of operations and potentially disrupting our California operations.

~~Because no public market exists for our common shares, your ability to sell your common shares may be limited.~~

Our common shares are not traded on any national exchange, market system or over-the-counter bulletin board. Because no public market exists for our common shares, your ability to sell these shares is limited.

~~We are subject to intense competition.~~

We believe that each aspect of our business is highly competitive. Principal methods of competition in our operating segments are customer service, marketing, image, performance and reputation. Pricing is not always a critical factor in a customer’s decision with respect to our Residential and Commercial segment; however, pricing is generally the principal method of competition for our Utility segment, although in most instances consideration is given to reputation and past production performance. On a national level, our competition is primarily landscape construction and maintenance companies as well as residential and commercial lawn care companies. At a local and regional level, our competition comes mainly from small, local companies which are engaged primarily in tree care and lawn services. Our Utility segment competes principally with one major national competitor, as well as several smaller regional firms. Furthermore, competitors may have lower costs because privately-owned companies operating in a limited geographic area may have significantly lower labor and overhead costs. Our competitors may develop the expertise, experience and resources to provide services that are superior in both price and quality to our services. These strong competitive pressures could inhibit our success in bidding for profitable business and may have a material adverse effect on our business, financial condition and results of operations.

~~Our failure to comply with environmental laws could result in significant liabilities.~~

Our facilities and operations are subject to governmental regulations designed to protect the environment, particularly with respect to our services regarding insect and tree, shrub and lawn disease management, because these services involve to a considerable degree the blending and application of spray materials, which require formal licensing in most areas. Continual changes in environmental laws, regulations and licensing requirements, environmental conditions, environmental awareness, technology and social attitudes make it necessary for us to maintain a high degree of awareness of the impact such changes have on our compliance programs and the market for our services. We are subject to existing federal, state and local laws, regulations and licensing requirements regulating the use of materials in our spraying operations as well as certain other aspects of our business. If we fail to comply with such laws, regulations or licensing requirements, we may become subject to significant liabilities, fines and/or penalties, which could adversely affect our financial condition and results of operations.

~~Index~~

~~We cannot predict the impact that the policies regarding changing climate conditions, including legal, regulatory and social responses thereto, may have on our business.~~

Many scientists, environmentalists, international organizations, political activists, regulators and other commentators believe that global climate change has added, and will continue to add, to the unpredictability, frequency and severity of natural disasters in certain parts of the world. In response, a number of legal and regulatory measures and social initiatives have been introduced in an effort to reduce greenhouse gas and other carbon emissions that these parties believe may be contributors to global climate change. These proposals, if enacted, could result in a variety of regulatory programs, including potential new regulations, additional charges and taxes to fund energy efficiency activities, or other regulatory actions. Any of these actions could result in increased costs associated with our operations and impact the prices we charge our customers.

We cannot predict the impact, if any, that changing climate conditions will have on us or our customers. However, it is possible that the legal, regulatory and social responses to real or perceived climate change could have a negative effect on our results of operations or our financial condition.

~~We may be adversely affected if we are unable to obtain necessary surety bonds or letters of credit.~~

Surety market conditions are currently difficult as a result of significant losses incurred by many sureties in recent years, both in the construction industry as well as in certain larger corporate bankruptcies. As a result, less bonding capacity is available in the market and terms have become more expensive and restrictive. Further, under standard terms in the surety market, sureties issue or continue bonds on a project-by-project basis and can decline to issue bonds at any time or require the posting of collateral as a condition to issuing or renewing any bonds. If surety providers were to limit or eliminate our access to bonding, we would need to post other forms of collateral for project performance, such as letters of credit or cash. We may be unable to secure sufficient letters of credit on acceptable terms, or at all. Accordingly, if we were to experience an interruption or reduction in the availability of bonding capacity, our liquidity may be adversely affected.

~~We may be adversely affected if our reputation is damaged.~~

~~We are dependent, in part, upon our reputation of quality, integrity and performance. If our reputation were damaged in some way, it may impact our ability to grow or maintain our business.~~

~~We may be unable to employ a sufficient workforce for our field operations.~~

Our industry operates in an environment that requires heavy manual labor. We may experience slower growth in the labor force for this type of work than in the past. As a result, we may experience labor shortages or the need to pay more to attract and retain qualified employees.

~~We may be unable to attract and retain skilled management.~~

Our success depends, in part, on our ability to attract and retain key managers. Competition for the best people can be intense and we may not be able to promote, hire or retain skilled managers. The loss of services of one or more of our key managers could have a material adverse impact on our business because of the loss of the manager's skills, knowledge of our industry and years of industry experience, and the difficulty of promptly finding qualified replacement personnel.

~~Natural disasters, pandemics, terrorist attacks and other external events could adversely affect our business.~~

Natural disasters, pandemics, terrorist attacks and other adverse external events could materially damage our facilities or disrupt our operations, or damage the facilities or disrupt the operations of our customers or vendors. The occurrence of any such event could adversely affect our business, financial condition and results of operations.

~~Index~~

~~A disruption in our information technology systems, including a disruption related to cybersecurity, could adversely affect our financial performance.~~

We rely on the accuracy, capacity and security of our information technology systems. Despite the security measures that we have implemented, including those measures related to cybersecurity, our systems could be breached or damaged by computer viruses, natural or man-made incidents or disasters or unauthorized physical or electronic access. A breach could result in business disruption, theft of our intellectual property, trade secrets or customer information and unauthorized access to personnel information. To the extent that our business is interrupted or data is lost, destroyed or inappropriately used or disclosed, such disruptions could adversely affect our competitive position, reputation, relationships with our customers, financial condition, operating results and cash flows. In addition, we may be required to incur significant costs to protect against the damage caused by these disruptions or security breaches in the future.

~~We are subject to third-party and governmental regulatory claims and litigation.~~

From time-to-time, customers, vendors, employees, governmental regulatory authorities and others may make claims and take legal action against us. Whether these claims and legal actions are founded or unfounded, if such claims and legal actions are not resolved in our favor, they may result in significant financial liability. Any such financial liability could have a material adverse effect on our financial condition and results of operations. Any such claims and legal actions may also require significant management attention and may detract from management's focus on our operations.

~~We may be adversely affected if we enter into a major unprofitable contract.~~

Our Residential and Commercial segment and our Utility segment frequently operate in a competitive bid contract environment. As a result, we may misjudge a bid and be contractually bound to an unprofitable contract, which could adversely affect our results of operations.

~~Index~~


Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.

The following table provides information on purchases of our common shares outstanding made by us during the first nine months of ~~2018~~2019.

Period
Total
Number of
Shares
Purchased

Average
Price
Paid per
Share

Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs

Maximum Number (or
Approximate Dollar
Value) of Shares that
May Yet Be Purchased
Under the Plans or
Programs
Fiscal 2018
January 1 to January 27 1,052
$ 18.30
— 129,761
January 28 to February 24 213
18.30
— 129,761
February 25 to March 31 299,799
19.10
— 129,761
Total First Quarter 301,064
19.10
—

April 1 to April 28 336,766
19.10
— 129,761
April 29 to May 26 250,173
19.10
— 1,129,761
May 27 to June 30 473,939
19.10
127,486 1,002,275
Total Second Quarter 1,060,878
19.10
127,486

July 1 to July 28 1,267
19.10
— 1,002,275
July 29 to August 25 100,651
19.70
— 1,002,275
August 26 to September 29 149,781
19.70
— 1,002,275
Total Third Quarter 251,699
19.70
—

Total Year-to-Date 1,613,641
$ 19.19
127,486



Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
Fiscal 2019
January 1 to January 26	624	$	19.70	—	954,492
January 27 to February 23	1,165	21.10		—	954,492
February 24 to March 30	208,289	21.10		—	954,492
Total First Quarter	210,078	21.10		—

March 31 to April 27	375,434	21.10		—	954,492
April 28 to May 25	180,505	21.10		—	954,492
May 26 to June 29	236,546	21.10		41,448	913,044
Total Second Quarter	792,485	21.10		41,448

June 30 to July 27	1,114	22.60		—	913,044
July 28 to August 24	100,558	22.60		—	913,044
August 25 to September 28	88,606	22.60		—	913,044
Total Third Quarter	190,278	22.60		—

Total Year-to-Date	1,192,841	$	21.34	41,448

Our common shares are not listed or traded on an established public trading market and market prices are, therefore, not available. Semiannually, for purposes of the Davey 401KSOP and ESOP, the fair market value of our common shares is determined by an independent stock valuation firm, based upon our performance and financial condition, using a peer group of comparable companies selected by that firm. The peer group currently consists of: ABM Industries Incorporated; Comfort Systems USA, Inc.; Dycom Industries, Inc.; MYR Group, Inc.; Quanta Services, Inc.; Rollins, Inc.; and Scotts Miracle-Gro Company. The semiannual valuations are effective for a period of six months and the per-share price established by those valuations is the price at which our Board of Directors has determined our common shares will be bought and sold during that six-month period in transactions involving Davey Tree or one of its employee benefit or stock purchase plans. Since 1979, we have provided a ready market for all shareholders through our direct purchase of their common shares, although we are under no obligation to do so (other than for repurchases pursuant to the put option under The Davey 401KSOP and ESOP Plan, as described in Note P,Q, The Davey 401KSOP and Employee Stock Ownership Plan). The purchases described above were added to our treasury stock.

At the Annual Meeting of Shareholders of the Company held on May 16, 2017, the shareholders of the Company approved proposals to amend the Company's Articles of Incorporation to (i) expand the Company's right of first refusal with respect to proposed transfers of shares of the Company's common shares, (ii) clarify provisions regarding when the Company may provide notice of its decision to exercise its right of first refusal with respect to proposed transfers of common shares by the estate or personal representative of a deceased shareholder, and (iii) grant the Company a right to repurchase common shares held by certain shareholders of the Company.

Index

On May 10, 2017, the Board of Directors of the Company adopted a policy regarding the Company's exercise of the repurchase right granted to the Company through amendments to the Company's Articles of Incorporation, as approved by shareholders on May 16, 2017.

Until further action by the Board, it is the policy of the Company not to exercise its repurchase rights under the amended Articles with respect to shares of the Company's common shares held by current and retired employees and current and former directors of the Company (subject to exceptions set forth in the policy) (collectively, "Active Shareholders"), their spouses, their first-generation descendants and trusts established exclusively for their benefit.

Until further action by the Board, it is also the policy of the Company not to exercise its rights under the amended Articles to repurchase shares of the Company's common shares proposed to be transferred by an Active Shareholder to his or her spouse, a first-generation descendant, or a trust established exclusively for the benefit of one or more of an Active Shareholder, his or her spouse and first-generation descendants of an Active Shareholder, or upon the death of an Active Shareholder, such transfers from the estate or personal representative of a deceased Active Shareholder. The Board may suspend, change or discontinue the policy at any time without prior notice.

In accordance with the amendments to the Articles approved by the Company's shareholders at the 2017 Annual Meeting, on May 17, 2017, the Company's Board of Directors authorized the Company to repurchase up to 200,000 common shares, which authorization was increased by an additional 1,000,000 common shares in May 2018. Of the 1,200,000 total shares authorized, ~~1,002,275~~913,044 remain available under the program. Share repurchases may be made from time to time and the timing of any repurchases and the actual number of shares repurchased will depend on a variety of factors. The Company is not obligated to purchase any shares, and repurchases may be commenced, suspended or discontinued from time to time without prior notice. The repurchase program does not have an expiration date.


Item 6.	Exhibits.

See Exhibit Index page below.

Index

Exhibit Index



Exhibit No.	Description

~~10.1~~31.1	Master Note Purchase and Private Shelf Agreement, dated September 21, 2018, by and among PGIM, Inc., each of the Purchasers thereto, and The Davey Tree Expert Company (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on September 27, 2018).

~~10.2~~	First Amendment to Third Amended and Restated Credit Agreement, dated September 21, 2018, among The Davey Tree Expert Company, as borrower, various lending institutions party thereto, as banks, and KeyBank National Association, as administrative agent (incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on September 27, 2018).

~~31.1~~	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	Filed Herewith

31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	Filed Herewith

32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.	Furnished Herewith

32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.	Furnished Herewith

101	The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended September ~~29, 2018,~~28, 2019, formatted in ~~XBRL (eXtensible~~iXBRL (inline eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets (unaudited), (ii) the Condensed Consolidated Statements of Operations (unaudited), (iii) the Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited), (iv) the Condensed Consolidated Statements of Shareholders' Equity (unaudited), (v) the Condensed Consolidated Statements of Cash Flows (unaudited), and ~~(v)~~(vi) Notes to Condensed Consolidated Financial Statements (unaudited). The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.	Filed Herewith

104	Cover Page Interactive Data File (embedded within the inline XBRL document)	Filed Herewith

Index

Signatures

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



			THE DAVEY TREE EXPERT COMPANY

Date:	November ~~6, 2018~~5, 2019	By:	/s/ Joseph R. Paul
			Joseph R. Paul
			Executive Vice President, Chief Financial Officer and Secretary
			(Principal Financial Officer)

Date:	November ~~6, 2018~~5, 2019	By:	/s/ Thea R. Sears
			Thea R. Sears
			Vice President and Controller
			(Principal Accounting Officer)

- 5150 -



Ohio			34-0176110
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification Number)



Securities registered pursuant to Section 12(b) of the Act:

~~1500 North Mantua Street~~Title of each class		Trading Symbol(s)	Name of each exchange on which registered
~~P.O. Box 5193~~N/A
~~Kent, Ohio 44240~~
~~(Address of principal executive offices) (Zip code)~~

~~(330) 673-9511~~N/A
~~(Registrant's telephone number, including area code)~~	N/A



~~(Check one):~~Large Accelerated Filer	☐		¨ ~~Large~~ Accelerated Filer	☒		x ~~Accelerated~~Emerging Growth Company	☐
Non-Accelerated Filer	☐		¨ ~~Emerging Growth Company~~
		¨ ~~Non-Accelerated Filer~~		¨Smaller Reporting Company	☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨


	September 29, 2018			December 31, 2017			September 28, 2019			December 31, 2018
Assets
Current assets:
Cash	$	10,516		$	13,121		$	13,702		$	22,661
Accounts receivable, net	194,377			168,671			232,245			195,906
Operating supplies	14,181			10,069			12,030			14,415
Other current assets	25,839			17,264			30,884			22,086
Total current assets	244,913			209,125			288,861			255,068

Property and equipment	634,655			616,036			662,256			639,396
Less accumulated depreciation	431,706			422,853			461,705			437,111
Total property and equipment, net	202,949			193,183			200,551			202,285

Right-of-use assets - operating leases							40,189			—
Other assets	26,191			29,156			21,677			21,769
Identified intangible assets and goodwill, net	47,602			41,671
Intangible assets and goodwill, net							49,920			47,501
Total assets	$	521,655		$	473,135		$	601,198		$	526,623

Liabilities and shareholders' equity
Current liabilities:
Accounts payable	$	41,353		$	45,093		$	39,276		$	43,958
Accrued expenses	47,832			42,816			61,220			44,061
Current portion of long-term debt and finance lease liabilities							30,532			23,859
Other current liabilities	49,916			40,748			41,683			27,434
Total current liabilities	139,101			128,657			172,711			139,312

Long-term debt	156,625			119,210			145,564			155,563
Lease liabilities - finance leases							1,787			2,862
Lease liabilities - operating leases							25,878			—
Self-insurance reserve	49,260			43,912			62,643			56,351
Other noncurrent liabilities	9,548			19,966			10,487			10,125
Total liabilities	354,534			311,745			419,070			364,213
Commitments and contingencies (Note O)

Redeemable common shares related to 401KSOP and Employee Stock Ownership Plan (ESOP); 6,158 and 6,467 shares at redemption value as of September 29, 2018 and December 31, 2017	121,304			123,520

Commitments and contingencies (Note P)
Redeemable common shares related to 401KSOP and Employee Stock Ownership Plan (ESOP); 5,299 and 5,642 shares at redemption value as of September 28, 2019 and December 31, 2018							119,758			119,049
Common shareholders' equity:
Common shares, $1.00 par value, per share; 48,000 shares authorized; 36,756 and 36,447 shares issued and outstanding before deducting treasury shares and which excludes 6,158 and 6,467 shares subject to redemption as of September 29, 2018 and December 31, 2017	36,756			36,447
Common shares, $1.00 par value, per share; 48,000 shares authorized; 37,615 and 37,272 shares issued and outstanding before deducting treasury shares and which excludes 5,299 and 5,642 shares subject to redemption as of September 28, 2019 and December 31, 2018							37,623			37,272
Additional paid-in capital	70,733			58,554			91,448			82,623
Common shares subscribed, unissued	6,924			7,529			110			6,799
Retained earnings	161,433			143,835			180,470			157,472
Accumulated other comprehensive loss	(9,016		)	(8,393		)	(5,636		)	(5,034		)
	266,830			237,972			304,015			279,132
Less: Cost of common shares held in treasury; 19,465 shares at September 29, 2018 and 18,693 shares at December 31, 2017	220,160			198,327
Less: Cost of common shares held in treasury; 19,671 shares at September 28, 2019 and 20,033 shares at December 31, 2018							241,631			235,042
Common shares subscription receivable	853			1,775			14			729
Total common shareholders' equity	45,817			37,870			62,370			43,361
Total liabilities and shareholders' equity	$	521,655		$	473,135		$	601,198		$	526,623

See notes to condensed consolidated financial statements.


	Nine Months Ended						Nine Months Ended
	September 29, 2018			September 30, 2017			September 28, 2019			September 29, 2018
Operating activities
Net income	$	23,471		$	20,573		$	32,688		$	23,471
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	41,866			38,939			44,121			41,866
Other	(834		)	(443		)	(1,106		)	(834		)
Changes in operating assets and liabilities:
Changes in operating assets and liabilities, net of assets acquired:
Accounts receivable	(24,370		)	(23,135		)	(35,956		)	(24,370		)
Operating liabilities	6,667			12,139
Accounts payable and accrued expenses							18,691			1,276
Self-insurance reserve							5,952			5,391
Prepaid expenses							(10,388		)	(9,020		)
Other, net	(22,003		)	(9,644		)	3,212			(12,983		)
Total changes in operating assets and liabilities	1,326			17,856
							24,526			1,326
Net cash provided by operating activities	24,797			38,429			57,214			24,797

Investing activities
Capital expenditures:
Equipment	(47,689		)	(44,727		)	(45,148		)	(47,689		)
Land and building	(591		)	(3,641		)	(1,108		)	(591		)
Purchases of businesses, net of cash acquired	(8,241		)	(7,452		)	(3,800		)	(8,241		)
Other	5,836			3,372
Proceeds from sales of fixed assets							2,502			5,836
Net cash used in investing activities	(50,685		)	(52,448		)	(47,554		)	(50,685		)

Financing activities
Revolving credit facility (payments)/proceeds, net	(8,000		)	30,000
Revolving credit facility borrowings							358,000			396,500
Revolving credit facility payments							(386,500		)	(404,500		)
Purchase of common shares for treasury	(30,958		)	(19,512		)	(25,435		)	(30,958		)
Sale of common shares from treasury	14,235			11,268			13,852			14,235
Dividends paid	(1,818		)	(1,898		)	(1,745		)	(1,818		)
Proceeds from notes payable	72,746			16,443			95,200			72,746
Payments of notes payable	(22,922		)	(21,053		)	(71,027		)	(22,258		)
Net cash provided by financing activities	23,283			15,248

(Decrease)/increase in cash	(2,605		)	1,229
Payments of finance leases							(1,061		)	(664		)
Net cash (used in) provided by financing activities							(18,716		)	23,283
Effect of exchange rate changes on cash							97			—
Decrease in cash							(8,959		)	(2,605		)
Cash, beginning of period	13,121			9,006			22,661			13,121
Cash, end of period	$	10,516		$	10,235		$	13,702		$	10,516

Supplemental cash flow information follows:
Interest paid	$	5,163		$	4,079		$	7,355		$	5,163
Income taxes paid	7,898			7,189			2,239			7,898

See notes to condensed consolidated financial statements.



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



¨☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



						Page
Part I.	Financial Information

Item 1.	Financial Statements (Unaudited)
		Condensed Consolidated Balance Sheets				2
		Condensed Consolidated Statements of Operations				3
		Condensed Consolidated Statements of Comprehensive Income (Loss)				4
		Condensed Consolidated Statements of ~~Cash Flows~~Shareholders' Equity				5
		Condensed Consolidated Statements of Cash Flows				7
		Notes to Condensed Consolidated Financial Statements
			A	—	Basis of Financial Statement Preparation	6
	~~B — Seasonality of Business~~	8
			C B	— ~~Accounts Receivable, Net and Supplemental Balance-Sheet Information~~	Seasonality of Business	9
			~~D — Business Combinations~~C	10—	Accounts Receivable, Net and Supplemental Balance-Sheet Information	9
			E D	— ~~Identified Intangible Assets and Goodwill, Net~~	Business Combinations	11
			E	—	Identified Intangible Assets and Goodwill, Net	12
			F	—	Long-Term Debt and Commitments Related to Letters of Credit	1213
			G ~~— Stock-Based Compensation~~	14—	Leases	16
			H ~~— Net Periodic Benefit Expense--Defined Benefit Pension Plans~~	18
	I — ~~Income Taxes~~	18
	~~J — Accumulated Other Comprehensive Income (Loss)~~Stock-Based Compensation	19
			I	—	Net Periodic Benefit Expense--Defined Benefit Pension Plans	22
			J	—	Income Taxes	22
			K	—	Accumulated Other Comprehensive Income (Loss)	23
			L	—	Per Share Amounts and Common and Redeemable Shares Outstanding	21
	~~L — Operations by Business Segment~~	23
	~~M — Revenue Recognition~~	25
			M	—	Operations by Business Segment	27
			N	—	Revenue Recognition	29
			O	—	Fair Value Measurements and Financial ~~Instruments~~Information	2831
			~~O — Commitments and Contingencies~~P	30—	Commitments and Contingencies	33
			P Q	—	The Davey 401KSOP and Employee Stock Ownership Plan	3035

Item 2.	~~Management’s~~Management's Discussion and Analysis of Financial Condition and Results of Operations					31
	~~Results of Operations~~	32
	~~Liquidity and Capital Resources~~	36
		~~Cash Flow Summary~~Results of Operations				37
	~~Contractual Obligations Summary and Commercial Commitments~~	38
	Liquidity of Capital Resources	39
	~~Critical Accounting Policies and Estimates~~	39
	~~Note Regarding Forward-Looking Statements~~	39

~~Item 3.~~	~~Quantitative and Qualitative Disclosures about Market Risk~~	41

~~Item 4.~~				~~Controls and Procedures~~	41

~~Part II.~~	~~Other Information~~

~~Item 1.~~	~~Legal Proceedings~~Cash Flow Summary	42

~~Item 1A.~~Contractual Obligations Summary and Commercial Commitments				~~Risk Factors~~	4243

~~Item 2.~~Capital Resources				43
		Critical Accounting Policies and Estimates				43
		Note Regarding Forward-Looking Statements				44

Item 3.	Quantitative and Qualitative Disclosures about Market Risk					45

Item 4.	Controls and Procedures					45

Part II.	Other Information					45

Item 1.	Legal Proceedings					45

Item 1A.	Risk Factors					46

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds					47

Item 6.	Exhibits					48

~~Item 6.~~						~~Exhibits~~Exhibit Index	49

~~Exhibit Index~~Signatures						50

~~Signatures~~							51 "We," "us" "our," "Davey" and "Davey Tree," unless the context otherwise requires, means The Davey Tree Expert Company and its subsidiaries.



	Common Shares		Additional Paid-in Capital			Common Shares Subscribed, Unissued			Retained Earnings			Accumulated Other Comprehensive Income (Loss), Net of Tax			Common Shares Held in Treasury			Common Shares Subscription Receivable			Total Common Shareholders' Equity
Balances at June 29, 2019	$	37,617	$	91,921		$	5,948		$	167,611		$	(5,269	)	$	(245,116	)	$	(431	)	$	52,281
Net income	—		—			—			13,434			—			—			—			13,434
Change in 401KSOP and ESOP related shares	6		(61		)	—			—			—			—			—			(55		)
Shares sold to employees	—		193			—			—			—			250			—			443
Options exercised	—		216			—			—			—			283			—			499
Subscription shares	—		(1,413		)	(5,838		)	—			—			7,258			417			424
Stock-based compensation	—		592			—			—			—			—			—			592
Dividends, $.025 per share	—		—			—			(575		)	—			—			—			(575		)
Currency translation adjustments	—		—			—			—			(384		)	—			—			(384		)
Defined benefit pension plans	—		—			—			—			17			—			—			17
Shares purchased	—		—			—			—			—			(4,306		)	—			(4,306		)
Balances at September 28, 2019	$	37,623	$	91,448		$	110		$	180,470		$	(5,636	)	$	(241,631	)	$	(14	)	$	62,370

Balances at January 1, 2019	$	37,272	$	82,623		$	6,799		$	157,472		$	(5,034	)	$	(235,042	)	$	(729	)	$	43,361
Net income	—		—			—			32,688			—			—			—			32,688
Change in 401KSOP and ESOP related shares	351		6,886			—			(7,945		)	—			—			—			(708		)
Shares sold to employees	—		3,754			—			—			—			5,794			—			9,548
Options exercised	—		(793		)	—			—			—			2,572			—			1,779
Subscription shares	—		(1,981		)	(6,689		)	—			—			10,480			715			2,525
Stock-based compensation	—		959			—			—			—			—			—			959
Dividends, $.075 per share	—		—			—			(1,745		)	—			—			—			(1,745		)
Currency translation adjustments	—		—			—			—			823			—			—			823
Defined benefit pension plans	—		—			—			—			(1,425		)	—			—			(1,425		)
Shares purchased	—		—			—			—			—			(25,435		)	—			(25,435		)
Balances at September 28, 2019	$	37,623	$	91,448		$	110		$	180,470		$	(5,636	)	$	(241,631	)	$	(14	)	$	62,370

See notes to condensed consolidated financial statements.



	September 29, 2018				December 31, 2017
Identified Intangible Assets and Goodwill, Net	Carrying Amount		Accumulated Amortization		Carrying Amount		Accumulated Amortization
Amortized intangible assets:
Customer lists/relationships	$	25,012	$	17,860	$	21,487	$	16,846
Employment-related	8,080		6,853		7,333		6,624
Tradenames	6,806		5,345		5,978		5,134

Amortized intangible assets	39,898		$	30,058	34,798		$	28,604

Less accumulated amortization	30,058				28,604

Identified intangible assets, net	9,840				6,194

Unamortized intangible assets:
Goodwill	37,762				35,477
	$	47,602			$	41,671



	Common Shares Net of Treasury Shares		Redeemable Shares		Total
Shares outstanding at January 1, 2018	17,753,832		6,467,027		24,220,859
Shares purchased	(1,053,421	)	(560,220	)	(1,613,641	)
Shares sold	369,296		250,767		620,063
Stock subscription offering -- cash purchases	80,487		—		80,487
Options and awards exercised	140,663		—		140,663
Shares outstanding at September 29, 2018	17,290,857		6,157,574		23,448,431


(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.



	September 28, 2019		December 31, 2018
Contract liabilities - current	$	3,454	$	2,907
Contract liabilities - noncurrent	2,621		2,287
Net contract liabilities	$	6,075	$	5,194


O.	Fair Value Measurements and Financial Instruments (continued)



			Fair Value Measurements at September 28, 2019 Using:
Assets and Liabilities Recorded at Fair Value on a Recurring Basis	Total Carrying Value at September 28, 2019		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Assets invested for self-insurance, classified as other assets, noncurrent	$	13,302	$	13,302	$	—	$	—
Defined benefit pension plan assets	13		—		13		—

Liabilities:
Deferred compensation	$	2,605	$	—	$	2,605	$	—



			Fair Value Measurements at September 29, 2018 Using:
Assets and Liabilities Recorded at Fair Value on a Recurring Basis	Total Carrying Value at September 29, 2018		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Assets invested for self-insurance, classified as other assets, noncurrent	$	15,713	$	15,713	$	—	$	—

Liabilities:
Deferred compensation	$	2,404	$	—	$	2,404	$	—



			Fair Value Measurements at December 31, 2018 Using:
Assets and Liabilities Recorded at Fair Value on a Recurring Basis	Total Carrying Value at December 31, 2018		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Assets invested for self-insurance, classified as other assets, noncurrent	$	15,379	$	15,379	$	—	$	—
Defined benefit pension plan assets	3,758		—		3,758		—

Liabilities:
Deferred compensation	$	2,459	$	—	$	2,459	$	—


N.O.	Fair Value Measurements and Financial Instruments (continued)



	September 28, 2019				December 31, 2018
	Carrying Value		Fair Value		Carrying Value		Fair Value
Revolving credit facility, noncurrent	$	65,000	$	65,000	$	93,500	$	93,500
Senior unsecured notes, noncurrent	75,000		81,278		56,000		56,002
Term loans, noncurrent	6,031		6,425		6,662		6,868
Total	$	146,031	$	152,703	$	156,162	$	156,370


N.	~~Fair Value Measurements and Financial Instruments (continued)~~


P.	~~The Davey 401KSOP and Employee Stock Ownership Plan (continued)~~


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



			Three Months Ending December 31, 2018
					Year Ending December 31,
Description	Total				2019		2020		2021		2022		Thereafter
Revolving credit facility	$	92,000	$	—	$	—	$	—	$	—	$	92,000	$	—
Senior unsecured notes	62,000		—		6,000		6,000		—		—		50,000
Term loans	25,481		5,103		13,775		1,540		5,063		—		—
Capital lease obligations	3,781		1,132		1,166		1,060		423		—		—
Operating lease obligations	25,825		6,764		4,981		3,548		2,214		3,089		5,229
Self-insurance reserves	73,085		16,530		11,335		7,177		4,372		7,192		26,479
Purchase obligations	7,500		7,500		—		—		—		—		—
Other liabilities	9,548		990		990		1,718		2,096		1,464		2,290
	$	299,220	$	38,019	$	38,247	$	21,043	$	14,168	$	103,745	$	83,998