Index~~Index~~

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended ~~March 28,~~September 26, 2020



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

For the transition period from ______________ to ______________

Commission file number 000-11917

THE DAVEY TREE EXPERT COMPANY

(Exact name of registrant as specified in its charter)



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

1500 North Mantua Street

P.O. Box 5193

Kent,, OH44240

(Address of principal executive offices) (Zip code)

(~~330~~) (330) 673-9511

(Registrant's telephone number, including area code)

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

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

N/A

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

☐

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. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

There were ~~22,817,499~~22,651,885 Common Shares, $1.00 par value, outstanding as of ~~May 1,~~October 30, 2020.

Index

~~Index~~

The Davey Tree Expert Company

Quarterly Report on Form 10-Q

~~March 28,~~September 26, 2020

INDEX


											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 Shareholders' Equity					5
						Condensed Consolidated Statements of Cash Flows					7
						Notes to Condensed Consolidated Financial Statements
								A	—	Basis of Financial Statement Preparation	8
								B	—	Seasonality of Business	9
								C	—	Accounts Receivable, Net and Supplemental Balance-Sheet Information	9
								D	—	Business Combinations	11
								E	—	Identified Intangible Assets and Goodwill, Net	12
								F	—	Long-Term Debt and Commitments Related to Letters of Credit	13
								G	—	Leases	16
								H	—	Stock-Based Compensation	18
								I	—	Net Periodic Benefit Expense--Defined Benefit Pension Plans	21
								J	—	Income Taxes	22
								K	—	Accumulated Other Comprehensive Income (Loss)	22
								L	—	Per Share Amounts and Common and Redeemable Shares Outstanding	24
								M	—	Operations by Business Segment	26
								N	—	Revenue Recognition	29
								O	—	Fair Value Measurements and Financial Instruments	31
								P	—	Commitments and Contingencies	33
								Q	—	The Davey 401KSOP and Employee Stock Ownership Plan	35

								~~Page~~
~~Part I.~~	~~Financial Information~~

Item 1.	~~Financial Statements (Unaudited)~~
		~~Condensed Consolidated Balance Sheets~~2.					2
		~~Condensed Consolidated Statements of Operations~~					3
		~~Condensed Consolidated Statements of Comprehensive Income (Loss)~~					4
		~~Condensed Consolidated Statements of Shareholders' Equity~~					5
		~~Condensed Consolidated Statements of Cash Flows~~					6
		~~Notes to Condensed Consolidated Financial Statements~~
			A	—								~~Basis of Financial Statement Preparation~~	7
			B	—	~~Seasonality of Business~~		8
			C	—	~~Accounts Receivable, Net and Supplemental Balance-Sheet Information~~		8
			D	—	~~Business Combinations~~		10
			E	—	~~Identified Intangible Assets and Goodwill, Net~~		11
			F	—	~~Long-Term Debt and Commitments Related to Letters of Credit~~		12
			G	—	~~Leases~~		15
			H	—	~~Stock-Based Compensation~~		17
			I	—	~~Net Periodic Benefit Expense--Defined Benefit Pension Plans~~		20
			J	—	~~Income Taxes~~		21
			K	—	~~Accumulated Other Comprehensive Income (Loss)~~		21
			L	—	~~Per Share Amounts and Common and Redeemable Shares Outstanding~~		23
			M	—	~~Operations by Business Segment~~		25
			N	—	~~Revenue Recognition~~		26
			O	—	~~Fair Value Measurements and Financial Instruments~~		27
			P	—	~~Commitments and Contingencies~~		29
			Q	—	~~The Davey 401KSOP and Employee Stock Ownership Plan~~		31

~~Item 2.~~	Management's Discussion and Analysis of Financial Condition and Results of Operations						3237
						Results of Operations					3338
						Liquidity and Capital Resources					3643
								Cash Flow Summary			3643
								Contractual Obligations Summary and Commercial Commitments			3744
								Capital Resources			3744
						Critical Accounting Policies and Estimates					3845
						Note Regarding Forward-Looking Statements					3845

Item 3.			Quantitative and Qualitative Disclosures about Market Risk								4047

Item 4.			Controls and Procedures								4047

Part II.			Other Information								4047

Item 1.			Legal Proceedings								4047

Item 1A.			Risk Factors								4148

Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds								4250

Item 6.			Exhibits								4351

Exhibit Index											4452

Signatures											4553

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

~~Index~~- 1 -

Index

THE DAVEY TREE EXPERT COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands, except per share data dollar amounts)


	September 26, 2020		December 31, 2019
Assets
Current assets:
Cash	$	25,058	$	11,000
Accounts receivable, net	265,688		231,311
Operating supplies	10,984		12,127
Other current assets	34,049		26,987
Total current assets	335,779		281,425


Property and equipment, net	205,294		199,850
Right-of-use assets - operating leases	53,315		40,033
Other assets	21,298		22,335
Intangible assets, net	10,846		10,934
Goodwill	45,152		42,285
Total assets	$	671,684	$	596,862
Liabilities and shareholders' equity
Current liabilities:
Accounts payable	$	40,905	$	41,191
Accrued expenses	80,221		52,431
Current portion of long-term debt and finance lease liabilities	35,355		24,650
Other current liabilities	48,517		47,400
Total current liabilities	204,998		165,672
Long-term debt	106,551		143,354
Lease liabilities - finance leases	6,667		1,795
Lease liabilities - operating leases	35,197		25,200
Self-insurance reserve	77,169		62,113
Other noncurrent liabilities	11,343		12,268
Total liabilities	441,925		410,402
Commitments and contingencies (Note P)
Redeemable common shares related to 401KSOP and Employee Stock Ownership Plan (ESOP); 5,174 and 5,147 shares at redemption value as of September 26, 2020 and December 31, 2019	128,834		124,555
Common shareholders' equity:
Common shares, $1.00 par value, per share; 48,000 shares authorized; 37,740 and 37,767 shares issued and outstanding before deducting treasury shares and which excludes 5,174 and 5,147 shares subject to redemption as of September 26, 2020 and December 31, 2019	37,740		37,767
Additional paid-in capital	104,223		96,366

Retained earnings	229,057		179,770
Accumulated other comprehensive loss	(5,928)		(5,403)
	365,092		308,500
Less: Cost of common shares held in treasury; 20,065 shares at September 26, 2020 and 19,737 shares at December 31, 2019	264,167		246,595

Total common shareholders' equity	100,925		61,905
Total liabilities and shareholders' equity	$	671,684	$	596,862

See notes to condensed consolidated financial statements (unaudited).

- 2 -

March 28,
2020 December 31,
2019
Assets
Current assets:
Cash $ 66,829
$ 11,000
Accounts receivable, net 247,667
231,311
Operating supplies 12,493
12,127
Other current assets 19,523
26,987
Total current assets 346,512
281,425
Property and equipment, net 202,982
199,850
Right-of-use assets - operating leases 49,787
40,033
Other assets 20,994
22,335
Intangible assets, net 11,095
10,934
Goodwill 43,780
42,285
Total assets $ 675,150
$ 596,862
Liabilities and shareholders' equity

Current liabilities:

Accounts payable $ 46,052
$ 41,191
Accrued expenses 38,231
52,431
Current portion of long-term debt and finance lease liabilities 22,107
24,650
Other current liabilities 54,295
47,400
Total current liabilities 160,685
165,672
Long-term debt 220,084
143,354
Lease liabilities - finance leases 1,104
1,795
Lease liabilities - operating leases 32,712
25,200
Self-insurance reserve 66,530
62,113
Other noncurrent liabilities 12,395
12,268
Total liabilities 493,510
410,402
Commitments and contingencies (Note P)
Redeemable common shares related to 401KSOP and Employee Stock Ownership Plan (ESOP); 5,236 and 5,147 shares at redemption value as of March 28, 2020 and December 31, 2019 126,715
124,555
Common shareholders' equity:

Common shares, $1.00 par value, per share; 48,000 shares authorized; 37,678 and 37,767 shares issued and outstanding before deducting treasury shares and which excludes 5,236 and 5,147 shares subject to redemption as of March 28, 2020 and December 31, 2019 37,678
37,767
Additional paid-in capital 97,247
96,366
Retained earnings 179,368
179,770
Accumulated other comprehensive loss (7,346 ) (5,403 )
306,947
308,500
Less: Cost of common shares held in treasury; 19,848 shares at March 28, 2020 and 19,737 shares at December 31, 2019 252,022
246,595
Total common shareholders' equity 54,925
61,905
Total liabilities and shareholders' equity $ 675,150
$ 596,862

See notes to condensed consolidated financial statements.

Index~~Index~~

THE DAVEY TREE EXPERT COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In thousands, except per share dollar amounts)


	Three Months Ended				Nine Months Ended
	September 26, 2020		September 28, 2019		September 26, 2020		September 28, 2019
Revenues	$	337,453	$	307,473	$	944,980	$	856,796

Costs and expenses:
Operating	208,510		193,137		597,963		546,931
Selling	60,203		56,921		162,287		153,854
General and administrative	19,891		19,895		60,477		57,610
Depreciation and amortization	13,825		15,319		42,553		44,121
Gain on sale of assets, net	(476)		(582)		(2,045)		(1,751)
Total costs and expenses	301,953		284,690		861,235		800,765

Income from operations	35,500		22,783		83,745		56,031

Other income (expense):
Interest expense	(1,579)		(2,018)		(5,477)		(6,597)
Interest income	1,688		94		1,885		270
Other, net	(1,499)		(1,886)		(4,550)		(6,694)

Income before income taxes	34,110		18,973		75,603		43,010

Income taxes	9,483		5,539		21,018		10,322

Net income	$	24,627	$	13,434	$	54,585	$	32,688

Net income per share:

Basic	$	1.08	$	.59	$	2.38	$	1.43
Diluted	$	1.03	$	.56	$	2.27	$	1.37

Weighted-average shares outstanding:

Basic	22,874		22,793		22,956		22,830
Diluted	23,854		24,002		24,002		23,927

See notes to condensed consolidated financial statements (unaudited).

- 3 -

Three Months Ended
March 28,
2020 March 30,
2019
Revenues $ 288,280
$ 247,889

Costs and expenses:
Operating 198,393
166,016
Selling 50,112
46,304
General and administrative 21,542
19,044
Depreciation and amortization 14,604
14,212
Gain on sale of assets, net (305 ) (653 )
Total costs and expenses 284,346
244,923

Income from operations 3,934
2,966

Other income (expense):
Interest expense (1,946 ) (2,151 )
Interest income 101
83
Other, net (1,899 ) (1,655 )

Income (loss) before income taxes 190
(757 )

Income taxes (benefit) 17
(264 )

Net income (loss) $ 173
$ (493 )

Net income (loss) per share:
Basic $ .01
$ (.02 )
Diluted $ .01
$ (.02 )

Weighted-average shares outstanding:
Basic 23,187
23,072
Diluted 24,171
23,072

See notes to condensed consolidated financial statements.

Index~~Index~~

THE DAVEY TREE EXPERT COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands)


	Three Months Ended				Nine Months Ended
	September 26, 2020		September 28, 2019		September 26, 2020		September 28, 2019
Net income	$	24,627	$	13,434	$	54,585	$	32,688
Components of other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	629		(384)		(610)		823

Amortization of defined benefit pension items:
Net actuarial loss (gain)	16		5		49		(1,461)
Prior service cost	13		12		36		36
Defined benefit pension plan adjustments	29		17		85		(1,425)

Other comprehensive income (loss), net of tax	658		(367)		(525)		(602)

Comprehensive income	$	25,285	$	13,067	$	54,060	$	32,086

See notes to condensed consolidated financial statements (unaudited).

- 4 -

Three Months Ended
March 28,
2020 March 30,
2019
Net income (loss) $ 173
$ (493 )
Components of other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (1,971 ) 509
Amortization of defined benefit pension items:
Net actuarial loss 16
32
Prior service cost 12
12
Defined benefit pension plan adjustments 28
44

Other comprehensive (loss) income, net of tax (1,943 ) 553

Comprehensive (loss) income $ (1,770 ) $ 60

See notes to condensed consolidated financial statements.

Index~~Index~~

THE DAVEY TREE EXPERT COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)

(In thousands, except per share data)


	Common Shares		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss), Net of Tax		Common Shares Held in Treasury		Total Common Shareholders' Equity
Balances at June 27, 2020	$	37,784	$	103,291	$	204,999	$	(6,586)	$	(262,210)	$	77,278
Net income	—		—		24,627		—		—		24,627
Change in 401KSOP and ESOP related shares	(44)		(1,067)		0		—		—		(1,111)
Shares sold to employees	—		1,119		—		—		1,058		2,177
Options exercised	—		84		—		—		458		542

Stock-based compensation	—		796		—		—		—		796
Dividends, $.025 per share	—		—		(569)		—		—		(569)

Currency translation adjustments	—		—		—		629		—		629
Defined benefit pension plans	—		—		—		29		—		29
Shares purchased	—		—		—		—		(3,473)		(3,473)
Balances at September 26, 2020	$	37,740	$	104,223	$	229,057	$	(5,928)	$	(264,167)	$	100,925

Balances at January 1, 2020	$	37,767	$	96,366	$	179,770	$	(5,403)	$	(246,595)	$	61,905
Net income	—		—		54,585		—		—		54,585
Change in 401KSOP and ESOP related shares	(27)		(661)		(3,590)		—		—		(4,278)
Shares sold to employees	—		7,269		—		—		8,053		15,322
Options exercised	—		(489)		—		—		1,864		1,375

Stock-based compensation	—		1,738		—		—		—		1,738
Dividends, $.075 per share	—		—		(1,708)		—		—		(1,708)

Currency translation adjustments	—		—		—		(610)		—		(610)
Defined benefit pension plans	—		—		—		85		—		85
Shares purchased	—		—		—		—		(27,489)		(27,489)
Balances at September 26, 2020	$	37,740	$	104,223	$	229,057	$	(5,928)	$	(264,167)	$	100,925

- 5 -

Index

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 January 1, 2020 $ 37,767
$ 96,366
$ —
$ 179,770
$ (5,403 ) $ (246,595 ) $ —
$ 61,905
Net income —
—
—
173
—
—
—
173
Change in 401KSOP and ESOP related shares (89 ) (2,071 ) —
—
—
—
—
(2,160 )
Shares sold to employees —
2,566
—
—
—
2,438
—
5,004
Options exercised —
15
—
—
—
196
—
211
Stock-based compensation —
371
—
—
—
—
—
371
Dividends, $.025 per share —
—
—
(575 ) —
—
—
(575 )
Currency translation adjustments —
—
—
—
(1,971 ) —
—
(1,971 )
Defined benefit pension plans —
—
—
—
28
—
—
28
Shares purchased —
—
—
—
—
(8,061 ) —
(8,061 )
Balances at March 28, 2020 $ 37,678
$ 97,247
$ —
$ 179,368
$ (7,346 ) $ (252,022 ) $ —
$ 54,925

THE DAVEY TREE EXPERT COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)

(In thousands, except per share data)


	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)		—		0		—		—		—		(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 (unaudited).

- 6 -

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 January 1, 2019 $ 37,272
$ 82,623
$ 6,799
$ 157,472
$ (5,034 ) $ (235,042 ) $ (729 ) $ 43,361
Net loss —
—
—
(493 ) —
—
—
(493 )
Change in 401KSOP and ESOP related shares (195 ) (3,907 ) —
—
—
—
—
(4,102 )
Shares sold to employees —
1,953
—
—
—
2,456
—
4,409
Options exercised —
(14 ) —
—
—
81
—
67
Subscription shares —
(75 ) (391 ) —
—
465
158
157
Stock-based compensation —
621
—
—
—
—
—
621
Dividends, $.025 per share —
—
—
(590 ) —
—
—
(590 )
Currency translation adjustments —
—
—
—
509
—
—
509
Defined benefit pension plans —
—
—
—
44
—
—
44
Shares purchased —
—
—
—
—
(4,430 ) —
(4,430 )
Balances at March 30, 2019 $ 37,077
$ 81,201
$ 6,408
$ 156,389
$ (4,481 ) $ (236,470 ) $ (571 ) $ 39,553

See notes to condensed consolidated financial statements.

Index~~Index~~

THE DAVEY TREE EXPERT COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)


	Nine Months Ended
	September 26, 2020		September 28, 2019
Operating activities
Net income	$	54,585	$	32,688
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	42,553		44,121
Other	108		(1,106)
Changes in operating assets and liabilities, net of assets acquired:
Accounts receivable	(34,801)		(35,956)
Accounts payable and accrued expenses	28,389		18,691
Self-insurance reserve	14,424		5,952
Prepaid expenses	(7,506)		(10,388)
Other, net	1,676		3,212
	44,843		24,526
Net cash provided by operating activities	99,428		57,214
Investing activities
Capital expenditures:
Equipment	(38,071)		(45,148)
Land and buildings	(2,408)		(1,108)
Purchases of businesses, net of cash acquired and debt incurred	(3,826)		(3,800)
Proceeds from sales of fixed assets	2,691		2,502
Net cash used in investing activities	(41,614)		(47,554)
Financing activities
Revolving credit facility borrowings	522,500		358,000
Revolving credit facility payments	(554,500)		(386,500)
Purchase of common shares for treasury	(27,489)		(25,435)
Sale of common shares from treasury	16,698		13,852
Dividends paid	(1,708)		(1,745)

Proceeds from notes payable	152,128		95,200
Payments of notes payable	(149,843)		(71,027)
Payments of finance leases	(1,525)		(1,061)
Net cash used in financing activities	(43,739)		(18,716)
Effect of exchange rate changes on cash	(17)		97
Increase (Decrease) in cash	14,058		(8,959)

Cash, beginning of period	11,000		22,661
Cash, end of period	$	25,058	$	13,702
Supplemental cash flow information follows:
Interest paid	$	6,408	$	7,355
Income taxes paid	17,055		2,239

See notes to condensed consolidated financial statements (unaudited).

- 7 -

Three Months Ended
March 28,
2020 March 30,
2019
Operating activities
Net income (loss) $ 173
$ (493 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization 14,604
14,212
Other 810
152
Changes in operating assets and liabilities, net of assets acquired:
Accounts receivable (17,161 ) 1,934
Accounts payable and accrued expenses (7,532 ) (12,777 )
Self-insurance reserve 4,408
(1,265 )
Prepaid expenses 8,176
3,815
Other, net (710 ) 5,850
2,595
11,921
Net cash provided by operating activities 2,768
11,428
Investing activities

Capital expenditures:

Equipment (18,960 ) (22,660 )
Land and buildings (747 ) (150 )
Purchases of businesses, net of cash acquired (1,826 ) (2,916 )
Proceeds from sales of fixed assets 521
749
Net cash used in investing activities (21,012 ) (24,977 )
Financing activities

Revolving credit facility borrowings 244,500
174,000
Revolving credit facility payments (163,500 ) (178,000 )
Purchase of common shares for treasury (8,061 ) (4,430 )
Sale of common shares from treasury 5,216
4,633
Dividends paid (575 ) (590 )
Proceeds from notes payable 27,166
33,152
Payments of notes payable (29,866 ) (10,482 )
Payments of finance leases (707 ) (719 )
Net cash provided by financing activities 74,173
17,564
Effect of exchange rate changes on cash (100 ) (12 )
Increase in cash 55,829
4,003
Cash, beginning of period 11,000
22,661
Cash, end of period $ 66,829
$ 26,664
Supplemental cash flow information follows:

Interest paid $ 2,707
$ 2,938
Income taxes paid 1,910
137

See notes to condensed consolidated financial statements.

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

~~March 28,~~September 26, 2020

(Amounts in thousands, except share data)

A.Basis of Financial Statement Preparation


A.	~~Basis of Financial Statement Preparation~~

The condensed consolidated financial statements present the financial position, results of operations and cash flows of The Davey Tree Expert Company and its subsidiaries. When we refer to “we,” “us,” “our,” “Davey,” or “Davey Tree”, we mean The Davey Tree Expert Company and its subsidiaries, unless otherwise expressly stated or the context indicates otherwise.

We have prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), as codified in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), and with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. The condensed consolidated financial statements include all adjustments which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. All such adjustments are of a normal, recurring nature. All intercompany accounts and transactions have been eliminated.

Certain information and disclosures required by U.S. GAAP for complete financial statements have been omitted in accordance with the rules and regulations of the SEC. We suggest that these condensed consolidated financial statements be read in conjunction with the financial statements included in our annual report on Form 10-K for the year ended December 31, 2019 (the “2019 Annual Report”).

Use of Estimates in Financial Statement Preparation--The preparation of financial statements in accordance with U.S. GAAP requires the use of estimates and assumptions that affect reported amounts. Our condensed consolidated financial statements include amounts that are based on management’s best estimates and judgments. Estimates are used for, but not limited to, accounts receivable valuation, depreciable lives of fixed assets, self-insurance reserves, income taxes and revenue recognition. Actual results could differ from those estimates.

While the ~~recent outbreak of the~~ coronavirus ("COVID-19") pandemic did not have a material adverse effect on our reported results for the first nine months of our fiscal ~~first quarter,~~year, the overall extent and duration of thee impact of COVID-19 on businesses and economic activity generally remains unclear. The extent to which our operations may be impacted by COVID-19 will depend largely on future developments, which are highly uncertain due to its continual evolution, such as the current widespread resurgence of cases, and cannot be accurately predicted, including new information which may emerge concerning the severity of the outbreak and actions by government authorities to contain the pandemic or treat its impact, including reimposing previously-lifted measures and the possibility additional measures will be put in place, among other things.

The Company’s fiscal quarters each contain thirteen operating weeks, with the exception of the fourth quarter of a 53-week fiscal year, which contains fourteen operating weeks. The Company’s fiscal quarter that ended ~~March 28,~~September 26, 2020 is referred to as the ~~first~~third quarter of 2020, and the fiscal quarter ended ~~March 30,~~September 28, 2019 is referred to as the ~~first~~third quarter of 2019.

- 8 -

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 26, 2020

(Amounts in thousands, except share data)

Recent Accounting Guidance

Accounting Standards Adopted in 2020

Accounting Standards Update 2016-13, Financial Instruments - Credit Losses (Topic 326)--In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)." ASU 2016-13 ~~replaces~~replaced the incurred loss impairment methodology in ~~current~~U.S. GAAP for most financial instruments, including trade receivables, with an impairment model, known as the current expected credit loss model, that is

~~Index~~

~~The Davey Tree Expert Company~~

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

~~March 28, 2020~~

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

based on expected losses rather than incurred losses. The Company adopted the new standard effective January 1, 2020, and it did not have a material effect on the Company's results of operations.

Accounting Standards Not Yet Adopted

Accounting Standards Update 2019-12, Income Taxes (Topic 740)– Simplifying the Accounting for Income Taxes--In December 2019, the FASB issued ASU No. 2019-12, ~~Income~~"Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12)", which simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, including applicable interim periods. The Company will adopt ASU 2019-12 beginning January 1, 2021. The adoption of ASU 2019-12 is ~~currently evaluating~~not anticipated to have a material effect on the ~~impact of the new guidance on its consolidated~~Company's financial statements.


B.	~~Seasonality of Business~~

B. Seasonality of Business

Due to the seasonality of our business, our operating results for the three and nine months ended ~~March 28,~~September 26, 2020 are not indicative of results that may be expected for any other interim period or for the year ending December 31, 2020. Our 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 the methods of accounting for fixed costs, such as depreciation expense, amortization, rent and interest expense, are not significantly impacted by business seasonality.


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

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

Accounts receivable, net, consisted of the following:


Accounts receivable, net	September 26, 2020		December 31, 2019
Accounts receivable	$	199,749	$	176,849
Unbilled Receivables(1)	69,810		58,277
	269,559		235,126
Less allowances for doubtful accounts	3,871		3,815
Accounts receivable, net	$	265,688	$	231,311

Accounts receivable, net March 28,
2020 December 31,
2019
Accounts receivable $ 168,503
$ 176,849
Unbilled Receivables⁽¹⁾
82,051
58,277
250,554
235,126
Less allowances for doubtful accounts 2,887
3,815
Accounts receivable, net $ 247,667
$ 231,311

(1) Unbilled Receivables 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 March 28,
2020 December 31,
2019
Refundable income taxes $ 1,366
$ 339
Prepaid expense 17,364
25,664
Other 793
984
Total $ 19,523
$ 26,987

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

~~March 28,~~September 26, 2020

(Amounts in thousands, except share data)

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


Other current assets	September 26, 2020		December 31, 2019
Refundable income taxes	$	333	$	339
Prepaid expenses	33,123		25,664


Other	593		984
Total	$	34,049	$	26,987


Property and equipment, net	September 26, 2020		December 31, 2019
Land and land improvements	$	19,218	$	19,270
Buildings and leasehold improvements	46,693		44,414
Equipment	622,205		604,211
	688,116		667,895
Less accumulated depreciation	482,822		468,045
Total	$	205,294	$	199,850


Other assets, noncurrent	September 26, 2020		December 31, 2019
Assets invested for self-insurance	$	15,359	$	15,426
Investment--cost-method affiliate	1,258		1,314


Other	4,681		5,595
Total	$	21,298	$	22,335


Accrued expenses	September 26, 2020		December 31, 2019
Employee compensation	$	29,642	$	26,381
Accrued compensated absences	10,831		10,744
Self-insured medical claims	4,296		1,824
Income tax payable	10,451		6,420
Customer advances, deposits	1,528		1,674
Taxes, other than income	20,990		1,775

Other	2,483		3,613
Total	$	80,221	$	52,431


Other current liabilities	September 26, 2020		December 31, 2019
Notes payable	$	338	$	1,853
Current portion of:
Lease liability-operating leases	17,933		14,665
Self-insurance reserve	30,246		30,882
Total	$	48,517	$	47,400

Property and equipment, net March 28,
2020 December 31,
2019
Land and land improvements $ 19,106
$ 19,270
Buildings and leasehold improvements 44,267
44,414
Equipment 613,398
604,211
676,771
667,895
Less accumulated depreciation 473,789
468,045
Total $ 202,982
$ 199,850

- 10 -

Other assets, noncurrent March 28,
2020 December 31,
2019
Assets invested for self-insurance $ 14,166
$ 15,426
Investment--cost-method affiliate 1,314
1,314
Other 5,514
5,595
Total $ 20,994
$ 22,335

Index

Accrued expenses March 28,
2020 December 31,
2019
Employee compensation $ 12,317
$ 26,381
Accrued compensated absences 10,197
10,744
Self-insured medical claims 2,451
1,824
Income tax payable 5,590
6,420
Customer advances, deposits 85
1,674
Taxes, other than income 4,514
1,775
Other 3,077
3,613
Total $ 38,231
$ 52,431

Other current liabilities March 28,
2020 December 31,
2019
Notes payable $ 6,520
$ 1,853
Current portion of:
Lease liability-operating leases 16,920
14,665
Self-insurance reserve 30,855
30,882
Total $ 54,295
$ 47,400

~~Index~~

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

~~March 28,~~September 26, 2020

(Amounts in thousands, except share data)


Other noncurrent liabilities	September 26, 2020		December 31, 2019
Pension and retirement plans	$	6,943	$	6,552
Deferred income taxes	649		567
Other	3,751		5,149
Total	$	11,343	$	12,268

Other noncurrent liabilities March 28,
2020 December 31,
2019
Pension and retirement plans $ 6,804
$ 6,552
Deferred income taxes 484
567
Other 5,107
5,149
Total $ 12,395
$ 12,268

D. Business Combinations

Our investments in businesses during the first ~~three~~nine months of 2020 were ~~$2,740,~~$5,240, including liabilities assumed of $380 and debt issued, in the form of notes payable to the sellers, of ~~$534,~~$1,034, and have been included in our Residential and 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 ~~three~~nine months ended ~~March 30,~~September 28, 2019, our investment in businesses was ~~$4,056,~~$5,527, including liabilities assumed of ~~$245~~$402 and debt issued, in the form of notes payable to the sellers, of ~~$895.~~$1,322.

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

March 28,
2020 December 31,
2019
Detail of acquisitions:
Assets acquired:

Cash $ —
$ 3
Receivables —
2,332
Operating supplies 23
84
Prepaid expense —
27
Equipment 426
1,837
Deposits and other —
96
Intangibles 935
4,067
Goodwill 1,356
4,174
Liabilities assumed (380 ) (1,479 )
Debt issued for purchases of businesses (534 ) (2,612 )
Cash paid $ 1,826
$ 8,529


	September 26, 2020		December 31, 2019
Detail of acquisitions:
Assets acquired:
Cash	$	0	$	3
Receivables	0		2,332
Operating supplies	23		84
Prepaid expense	0		27
Equipment	623		1,837
Deposits and other	0		96
Intangibles	2,018		4,067
Goodwill	2,576		4,174
Liabilities assumed	(380)		(1,479)
Debt issued for purchases of businesses	(1,034)		(2,612)
Cash paid	$	3,826	$	8,529

The results of operations of acquired businesses have been included in the condensed 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 ~~March 28,~~September 26, 2020 was not significant. Pro forma net sales and results of operations for the acquisitions, had they occurred at the beginning of the ~~three~~nine months ended ~~March 28,~~September 26, 2020, are not material and, accordingly, are not provided.

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

~~March 28,~~September 26, 2020

(Amounts in thousands, except share data)

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.

E. Identified Intangible Assets and Goodwill, Net

The carrying amounts of the identified intangible assets and goodwill acquired in connection with our acquisitions were as follows:

March 28, 2020 December 31, 2019

Carrying
Amount

Accumulated
Amortization

Carrying
Amount

Accumulated
Amortization
Amortized intangible assets:
Customer lists/relationships $ 28,478
$ 20,024
$ 28,301
$ 20,024
Employment-related 8,485
7,448
8,391
7,348
Tradenames 7,393
5,789
7,402
5,788
Amortized intangible assets 44,356
$ 33,261
44,094
$ 33,160
Less accumulated amortization 33,261

33,160

Identified intangible assets, net $ 11,095

$ 10,934

Goodwill $ 43,780

$ 42,285


	September 26, 2020				December 31, 2019
	Carrying Amount		Accumulated Amortization		Carrying Amount		Accumulated Amortization
Amortized intangible assets:
Customer lists/relationships	$	29,803	$	21,528	$	28,301	$	20,024
Employment-related	8,684		7,651		8,391		7,348
Tradenames	7,629		6,091		7,402		5,788

Amortized intangible assets	46,116		$	35,270	44,094		$	33,160

Less accumulated amortization	35,270				33,160

Identified intangible assets, net	$	10,846			$	10,934

Goodwill	$	45,152			$	42,285

The changes in the carrying amounts of goodwill, by segment, for the ~~three~~nine months ended ~~March 28,~~September 26, 2020 and ~~March 30,~~September 28, 2019 follow:

Balance at
January 1, 2020
Acquisitions
Translation
and Other
Adjustments

Balance at
March 28, 2020
Utility $ 4,911
$ —
$ —
$ 4,911
Residential and Commercial 37,374
1,356
139
38,869
Total $ 42,285
$ 1,356
$ 139
$ 43,780

Balance at
January 1, 2019
Acquisitions
Translation
and Other
Adjustments

Balance at
March 30, 2019
Utility $ 4,911
$ —
$ —
$ 4,911
Residential and Commercial 33,060
1,232
125
34,417
Total $ 37,971
$ 1,232
$ 125
$ 39,328


	Balance at January 1, 2020		Acquisitions		Translation and Other Adjustments		Balance at September 26, 2020
Utility	$	4,911	$	0	$	0	$	4,911
Residential and Commercial	37,374		2,576		291		40,241

Total	$	42,285	$	2,576	$	291	$	45,152


	Balance at January 1, 2019		Acquisitions		Translation and Other Adjustments		Balance at September 28, 2019
Utility	$	4,911	$	0	$	0	$	4,911
Residential and Commercial	33,060		1,798		129		34,987

Total	$	37,971	$	1,798	$	129	$	39,898

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

~~March 28,~~September 26, 2020

(Amounts in thousands, except share data)

Estimated future aggregate amortization expense of intangible assets--The estimated future aggregate amortization expense of intangible assets, as of ~~March 28,~~September 26, 2020 iswas as follows:

Estimated Future
Amortization Expense
Remaining nine months of 2020 $ 2,053
2021 2,325
2022 2,020
2023 1,888
2024 1,431
Thereafter 1,377
$ 11,095


	Estimated Future Amortization Expense
Remaining three months of 2020	$	700
2021	2,475
2022	2,244
2023	2,076
2024	1,601
Thereafter	1,750
	$	10,846

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

Our long-term debt consisted of the following:

March 28,
2020 December 31,
2019
Revolving credit facility:
Swing-line borrowings $ 20,000
$ 10,000
LIBOR borrowings 123,000
52,000
143,000
62,000
Senior unsecured notes:
5.09% Senior unsecured notes 6,000
6,000
3.99% Senior unsecured notes 50,000
50,000
4.00% Senior unsecured notes 25,000
25,000
81,000
81,000
Term loans 17,232
24,076
241,232
167,076
Less debt issuance costs 373
420
Less current portion 20,775
23,302
$ 220,084
$ 143,354


	September 26, 2020		December 31, 2019
Revolving credit facility:
Swing-line borrowings	$	18,000	$	10,000

LIBOR borrowings	12,000		52,000
	30,000		62,000
Senior unsecured notes:
5.09% Senior unsecured notes	0		6,000
3.99% Senior unsecured notes	50,000		50,000
4.00% Senior unsecured notes	25,000		25,000
	75,000		81,000
Term loans	34,907		24,076
	139,907		167,076
Less debt issuance costs	291		420
Less current portion	33,065		23,302
	$	106,551	$	143,354

Revolving Credit Facility --As of ~~March 28,~~September 26, 2020, we had a $250,000 revolving credit facility with a group of banks, which expires in October 2022 and permits borrowings, as defined, up to $250,000, including a letter of credit sublimit of $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. 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 as described in the credit agreement. As of September 26, 2020, we had unused commitments under the facility approximating$217,123, with $32,877 committed, consisting of borrowings of$30,000 and issued letters of credit of$2,877.

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

~~March 28,~~September 26, 2020

(Amounts in thousands, except share data)

~~March 28, 2020, we had unused commitments under the facility approximating$104,123, with $145,877 committed, consisting of borrowings of$143,000 and issued letters of credit of$2,877.~~

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 “Purchase Agreement”) between the Company and the purchasers of the 5.09% Senior Notes. The 5.09% Senior Notes ~~are~~were due and repaid in full on July 22, 2020.

The 5.09% Senior Notes ~~are~~were equal in right of payment with our revolving credit facility and all other senior unsecured obligations of the Company. Interest iswas payable semiannually and 5 equal, annual principal payments commenced on July 22, 2016 (the 6th anniversary of issuance). The Purchase Agreement ~~contains~~contained 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 “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 Note Purchase and Shelf Agreement (the "Shelf Notes") in an aggregate additional principal amount not to exceed $50,000 ($25,000 of which was issued on February 5, 2019).

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 5 equal, annual principal payments commence on September 21, 2024 (the 6th anniversary of issuance). The 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 amended certain provisions and covenants in the credit agreement to generally conform them to the corresponding provisions and covenants in the Note Purchase and Shelf Agreement. The amendment also permitted the Company to incur indebtedness arising under the Note Purchase and Shelf Agreement in an aggregate principal amount not to exceed $75,000, which included the $50,000 of 3.99% Senior Notes, plus an additional $25,000 in Shelf 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~~4.00% Senior 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

~~Index~~

~~The Davey Tree Expert Company~~

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

~~March 28, 2020~~

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

~~$25,000.~~ $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

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 26, 2020

(Amounts in thousands, except share data)

all other senior unsecured 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 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 at ~~March 28,~~September 26, 2020 were as follows: 2020--$~~15,932;~~8,025; 2021--$~~6,170;~~25,768; 2022--$~~143,939; $2023--~~30,942; 2023--$~~191;~~172; 2024--$15,000; and thereafter $60,000.

Accounts Receivable Securitization Facility--In May ~~2019,~~2020, the Company amended its Accounts Receivable Securitization Facility (the "AR Securitization program") to extend the scheduled termination date for an additional one year period, to May ~~19, 2020.~~18, 2021. In addition to extending the termination date, the Amendment included a change to the letter of credit ("LC") issuance fee payable under the terms of the agreement.

The AR Securitization program has a limit of $100,000, of which $83,355 and $76,732 were issued for ~~letters of credit ("LCs")~~LCs as of ~~both March 28,~~September 26, 2020 and December 31, ~~2019.~~2019, 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 LCs as of ~~March 28,~~September 26, 2020--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 had 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 on January 29, 2019 and successfully emerged from bankruptcy on July 1, 2020, 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%~~1.00% per annum (.90% previously) on the aggregate amount of all LCs outstanding plus outstanding reimbursement obligations (e.g., 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.

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

~~March 28,~~September 26, 2020

(Amounts in thousands, except share data)

Total Commitments Related to Issued Letters of Credit--As of ~~March 28,~~September 26, 2020, total commitments related to issued LCs were ~~$81,618,~~$88,242, of which $2,877 were issued under the revolving credit facility, ~~$76,732~~$83,355 were issued under the AR Securitization program, and ~~$2,009~~$2,010 were issued under short-term lines of credit. As of December 31, 2019, total commitments related to issued LCs were $81,619, of which $2,877 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 ~~March 28,~~September 26, 2020, we were in compliance with all debt covenants.

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
March 28,
2020 December 31,
2019
Assets
Operating lease assets Right-of-use assets - operating leases $ 49,787
$ 40,033
Finance lease assets Property and equipment, net 2,832
3,183
Total lease assets $ 52,619
$ 43,216
Liabilities
Current operating lease liabilities Other current liabilities $ 16,920
$ 14,665
Non-current operating lease liabilities Lease liabilities - operating leases 32,712
25,200
Total operating lease liabilities 49,632
39,865
Current portion of finance lease liabilities Current portion of long-term debt and finance lease liabilities 1,332
1,348
Non-current finance lease liabilities Lease liabilities - finance leases 1,104
1,795
Total finance lease liabilities 2,436
3,143
Total lease liabilities $ 52,068
$ 43,008


	Condensed Consolidated Balance Sheet Classification	September 26, 2020		December 31, 2019
Assets
Operating lease assets	Right-of-use assets - operating leases	$	53,315	$	40,033
Finance lease assets	Property and equipment, net	9,118		3,183
Total lease assets		$	62,433	$	43,216
Liabilities
Current operating lease liabilities	Other current liabilities	$	17,933	$	14,665
Non-current operating lease liabilities	Lease liabilities - operating leases	35,197		25,200
Total operating lease liabilities		53,130		39,865
Current portion of finance lease liabilities	Current portion of long-term debt and finance lease liabilities	2,290		1,348
Non-current finance lease liabilities	Lease liabilities - finance leases	6,667		1,795
Total finance lease liabilities		8,957		3,143
Total lease liabilities		$	62,087	$	43,008

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

~~March 28,~~September 26, 2020

(Amounts in thousands, except share data)

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

Three Months Ended

Condensed Consolidated Statements
of Operations Classification
March 28,
2020 March 30,
2019

Operating lease cost Operating expense $ 2,239
$ 1,438
Operating lease cost Selling expense 2,393
2,167
Operating lease cost General and administrative expense 234
201
Finance lease cost:
Amortization of right-of-use assets Depreciation and amortization 351
345
Interest expense on lease liabilities Interest expense 23
34
Other lease cost ⁽¹⁾
Operating expense 1,767
719
Other lease cost ⁽¹⁾
Selling expense 371
346
Other lease cost ⁽¹⁾
General and administrative expense 9
2
Total lease cost $ 7,387
$ 5,252


		Three Months Ended				Nine Months Ended
	Condensed Consolidated Statements of Operations Classification	September 26, 2020		September 28, 2019		September 26, 2020		September 28, 2019

Operating lease cost	Operating expense	$	2,877	$	1,845	$	7,776	$	4,912
Operating lease cost	Selling expense	2,322		2,188		7,127		6,513
Operating lease cost	General and administrative expense	389		214		844		617
Finance lease cost:
Amortization of right-of-use assets	Depreciation and amortization	570		339		1,404		1,024
Interest expense on lease liabilities	Interest expense	45		28		103		91
Other lease cost (1)	Operating expense	1,216		855		3,895		2,585
Other lease cost (1)	Selling expense	284		195		953		811
Other lease cost (1)	General and administrative expense	13		12		31		15
Total lease cost		$	7,716	$	5,676	$	22,133	$	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 ~~March 28,~~September 26, 2020.



Operating leases			~~4.2~~3.9 years
Finance leases			~~2.7~~5.7 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 ~~March 28,~~September 26, 2020.



Operating leases	~~3.45~~3.12	%
Finance leases	~~3.05~~1.90	%

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

~~March 28,~~September 26, 2020

(Amounts in thousands, except share data)

Supplemental Cash Flow Information Related to Leases

Three Months Ended
March 28,
2020 March 30,
2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases $ (4,902 ) $ (3,750 )
Operating cash flows from finance leases (23 ) (34 )
Financing cash flows from finance leases (707 ) (690 )
Right-of-use assets obtained in exchange for lease obligations:
Operating leases 14,845
40,311


	Nine Months Ended
	September 26, 2020		September 28, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	(15,222)	$	(12,524)
Operating cash flows from finance leases	(103)		(91)
Financing cash flows from finance leases	(1,525)		(1,061)
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	28,246		52,889
Finance leases	7,339		0

Maturity Analysis of Lease Liabilities

As of March 28, 2020

Operating
Leases

Finance
Leases
Remaining nine months of 2020 $ 13,577
$ 700
2021 14,394
1,246
2022 10,785
320
2023 5,730
120
2024 3,450
49
Thereafter 5,545
91
Total lease payments 53,481
2,526
Less interest 3,849
90
Total $ 49,632
$ 2,436


	As of September 26, 2020
	Operating Leases		Finance Leases
Remaining three months of 2020	$	5,383	$	506
2021	18,060		2,357
2022	14,213		1,446
2023	7,995		1,246
2024	4,581		1,175
Thereafter	5,955		2,672
Total lease payments	56,187		9,402
Less interest	3,057		445
Total	$	53,130	$	8,957

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 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 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)

~~March 28,~~September 26, 2020

(Amounts in thousands, except share data)

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") -- was included in the results of operations as follows:

Three Months Ended
March 28,
2020 March 30,
2019
Compensation expense, all share-based payment plans $ 745
$ 753


	Three Months Ended				Nine Months Ended
	September 26, 2020		September 28, 2019		September 26, 2020		September 28, 2019
Compensation expense, all share-based payment plans	$	858	$	655	$	2,567	$	2,184

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 ~~$342~~$1,067 being recognized for the ~~three~~nine months ended ~~March 28,~~September 26, 2020 and ~~$276~~$866 for the ~~three~~nine months ended ~~March 30,~~September 28, 2019.

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 ~~$126~~$398 for the ~~three~~nine months ended ~~March 28,~~September 26, 2020 and ~~$149~~$444 for the ~~three~~nine months ended ~~March 30,~~September 28, 2019.

Stock-Settled Stock Appreciation Rights-- 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.

The following table summarizes our SSARs as of ~~March 28,~~September 26, 2020.

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, 2020 262,705
$ 3.47

Granted —
—

Forfeited (2,254 ) 3.53

Vested (113,757 ) 3.31

Unvested, March 28, 2020 146,694
$ 3.59
1.6 years $ 462
$ 3,550


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, 2020	262,705	$	3.47
Granted	0	0
Forfeited	(2,254)	3.53
Vested	(119,255)	3.32
Unvested, September 26, 2020	141,196	$	3.60	1.1 years	$	309	$	3,516

Compensation costs for SSARs are determined using a fair-value method and amortized over the requisite service period. “Intrinsic value” is defined as the amount by which the fair market value of a common share exceeds the grant date price of a SSAR. Compensation expense for SSARs was ~~$61~~$214 for the ~~three~~nine months ended ~~March 28,~~September 26, 2020 and ~~$95~~$269 for the ~~three~~nine months ended ~~March 30,~~September 28, 2019.

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

~~March 28,~~September 26, 2020

(Amounts in thousands, except share data)

Restricted Stock Units--During the ~~three~~nine months ended ~~March 28,~~September 26, 2020, the Compensation Committee awarded 86,959 PRSUs to certain management ~~employees.~~employees and 11,904 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 ~~March 28,~~September 26, 2020.

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, 2020 224,259
$ 17.11

Granted 86,959
23.72

Forfeited (1,871 ) 17.37

Vested (49,518 ) 14.54

Unvested, March 28, 2020 259,829
$ 19.81
3.0 years $ 3,444
$ 6,288
Employee PRSUs 228,407
$ 19.92
3.5 years $ 3,176
$ 5,528
Nonemployee Director RSUs 31,422
$ 19.01
1.1 years $ 268
$ 760


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, 2020	224,259	$	17.11
Granted	98,863	23.74
Forfeited	(1,871)	17.37
Vested	(65,944)	15.52
Unvested, September 26, 2020	255,307	$	20.09	2.7 years	$	3,056	$	6,357
Employee PRSUs	220,157	$	19.92	3.0 years	$	2,622	$	5,482
Nonemployee Director RSUs	35,150	$	21.14	1.6 years	$	434	$	875

Compensation cost for PRSUs and RSUs is determined using a fair-value method and amortized on the straight-line recognition method over the requisite service period. “Intrinsic value” is defined as the amount by which the fair market value of a common share exceeds the ~~exercise~~grant date price of a PRSU or an RSU. Compensation expense on PRSUs and RSUs totaled ~~$216~~$888 for the ~~three~~nine months ended ~~March 28,~~September 26, 2020 and ~~$233~~$605 for the ~~three~~nine months ended ~~March 30,~~September 28, 2019.

We estimated the fair value of each stock-based award on the date of grant using a binomial option-pricing model. The binomial model considers a range of assumptions related to volatility, risk-free interest rate and employee exercise behavior. Expected volatilities utilized in the binomial model are based on historical volatility of our stock prices and other factors. Similarly, the dividend yield is based on historical experience and expected future changes. The binomial model also incorporates exercise and forfeiture assumptions based on an analysis of historical data. The expected life of the stock-based awards is derived from the output of the binomial model and represents the period of time that awards granted are expected to be outstanding.

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

Three Months Ended
March 28,
2020 March 30,
2019
Volatility rate 9.7 % 9.9 %
Risk-free interest rate .6 % 2.5 %
Expected dividend yield .4 % .7 %
Expected life of awards (years) 6.2
7.4


	Nine Months Ended
	September 26, 2020		September 28, 2019
Volatility rate	9.7	%	9.9	%
Risk-free interest rate	.7	%	2.3	%
Expected dividend yield	.4	%	.7	%
Expected life of awards (years)	8.1		8.8

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

~~March 28,~~September 26, 2020

(Amounts in thousands, except share data)

General Stock Option Information--The following table summarizes activity under the stock option plans for the ~~three~~nine months ended ~~March 28,~~September 26, 2020.

Stock Options
Number
of
Options
Outstanding

Weighted-
Average
Exercise
Price

Weighted-
Average
Remaining
Contractual
Life

Aggregate
Intrinsic
Value
Outstanding, January 1, 2020 1,428,082
$ 15.13

Granted 28,397
24.20

Exercised —
—

Forfeited (7,335 ) 15.34

Outstanding, March 28, 2020 1,449,144
$ 15.30
5.5 years $ 12,897

Exercisable, March 28, 2020 936,457
$ 13.43
4.3 years $ 10,082


Stock Options	Number of Options Outstanding	Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life	Aggregate Intrinsic Value
Outstanding, January 1, 2020	1,428,082	$	15.13
Granted	174,897	24.20
Exercised	(83,769)	10.94
Forfeited	(21,645)	19.15
Outstanding, September 26, 2020	1,497,565	$	16.36	5.6 years	$	12,789

Exercisable, September 26, 2020	1,028,683	$	14.26	4.4 years	$	10,940

As of ~~March 28,~~September 26, 2020, there was approximately ~~$1,286~~$1,426 of unrecognized compensation cost related to stock options outstanding. The cost is expected to be recognized over a weighted-average period of ~~3.3~~2.8 years. “Intrinsic value” is defined as the amount by which the market price of a common share exceeds the exercise price of an option.

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

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
March 28,
2020 March 30,
2019
Components of pension expense (income)
Service costs--increase in benefit obligation earned $ —
$ 45
Interest cost on projected benefit obligation 26
75
Expected return on plan assets —
(23 )
Amortization of net actuarial loss 22
44
Amortization of prior service cost 16
16
Net pension expense of defined benefit pension plans $ 64
$ 157


	Three Months Ended				Nine Months Ended
	September 26, 2020		September 28, 2019		September 26, 2020		September 28, 2019
Components of pension expense (income)
Service costs--increase in benefit obligation earned	$	0	$	0	$	0	$	75
Interest cost on projected benefit obligation	26		31		79		167
Expected return on plan assets	0		0		0		(37)

Settlement loss	0		0		0		1,677
Amortization of net actuarial loss	22		6		66		81
Amortization of prior service cost	16		16		48		48

Net pension expense of defined benefit pension plans	$	64	$	53	$	193	$	2,011

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.

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

~~March 28,~~September 26, 2020

(Amounts in thousands, except share data)

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

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 ~~three~~nine months ended ~~March 28,~~September 26, 2020 was ~~28.5%~~27.7%. Our annual effective tax rate for the ~~three~~nine months ended ~~March 30,~~September 28, 2019 was estimated at ~~28.3%~~24.0%. Our actual effective tax rate was 27.8% and 29.2% for the three months ended September 26, 2020 and September 28, 2019, respectively. Our effective tax rate was ~~8.9%~~27.8% and ~~34.8%~~24.0% for the ~~three~~nine months ended ~~March 28,~~September 26, 2020 and ~~March 30,~~September 28, 2019, respectively. The change in the effective tax rate from statutory tax rates is primarily due to the impact of state and local taxes which are partially offset by favorable discrete items.

On March 27, 2020, Congress approved and the President signed the Coronavirus Aid, Relief, and Economic Security ("CARES") Act into law. The CARES Act is a tax-and-spending package intended to provide economic relief to address the impact of the COVID-19 ~~Pandemic.~~pandemic. The Company is currently evaluating several significant business tax provisions, such as net operating losses and employee retention credits to determine the impact on the Company.

As of ~~March 28,~~September 26, 2020, we had unrecognized tax benefits of ~~$1,869,~~$1,639, of which ~~$674~~$713 would affect our effective rate if recognized, and accrued interest expense related to unrecognized benefits of ~~$67.~~$69. At December 31, 2019, we had unrecognized tax benefits of $1,850, of which $654 would affect our effective rate if recognized, and accrued interest expense related to unrecognized benefits of $64. 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.

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 U.S. 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. With the exception of U.S. state jurisdictions and Canada, the Company is no longer subject to examination by tax authorities for the years through 2016. As of ~~March 28,~~September 26, 2020, we believe it is reasonably possible that the total amount of unrecognized tax benefits will not significantly increase or decrease.

K. Accumulated Other Comprehensive Income (Loss)

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

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

~~March 28,~~September 26, 2020

(Amounts in thousands, except share data)

The following summarizes the components of other comprehensive income (loss) accumulated in shareholders’ equity for the three and nine months ended ~~March 28,~~September 26, 2020 and the three and nine months ended September 28, 2019:


Three Months Ended September 26, 2020	Foreign Currency Translation Adjustments		Defined Benefit Pension Plans		Accumulated Other Comprehensive Income (Loss)
Balance at June 27, 2020	$	(5,872)	$	(714)	$	(6,586)
Other comprehensive income (loss) before reclassifications
Unrealized gains (losses)	$	629	$	0	$	629

Amounts reclassified from accumulated other comprehensive income (loss)	0		38		38
Tax effect	0		(9)		(9)
Net of tax amount	629		29		658
Balance at September 26, 2020	$	(5,243)	$	(685)	$	(5,928)


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 (losses)	$	(384)	$	0	$	(384)

Amounts reclassified from accumulated other comprehensive income (loss)	0		22		22
Tax effect	0		(5)		(5)
Net of tax amount	(384)		17		(367)
Balance at September 28, 2019	$	(4,996)	$	(640)	$	(5,636)


Nine Months Ended September 26, 2020	Foreign Currency Translation Adjustments		Defined Benefit Pension Plans		Accumulated Other Comprehensive Income (Loss)
Balance at January 1, 2020	$	(4,633)	$	(770)	$	(5,403)
Other comprehensive income (loss) before reclassifications
Unrealized gains (losses)	$	(610)	$	0	$	(610)

Amounts reclassified from accumulated other comprehensive income (loss)	0		114		114
Tax effect	0		(29)		(29)
Net of tax amount	(610)		85		(525)
Balance at September 26, 2020	$	(5,243)	$	(685)	$	(5,928)

~~March 30, 2019~~:Index

Three Months Ended March 28, 2020
Foreign
Currency
Translation
Adjustments

Defined
Benefit
Pension
Plans

Accumulated
Other
Comprehensive
Income (Loss)
Balance at January 1, 2020 $ (4,633 ) $ (770 ) $ (5,403 )
Other comprehensive income (loss) before reclassifications
Unrealized gains (losses) (1,971 ) —
(1,971 )
Amounts reclassified from accumulated other comprehensive income (loss) —
38
38
Tax effect —
(10 ) (10 )
Net of tax amount (1,971 ) 28
(1,943 )
Balance at March 28, 2020 $ (6,604 ) $ (742 ) $ (7,346 )

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

Three Months Ended March 30, 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 (losses) 509
—
509
Amounts reclassified from accumulated other comprehensive income (loss) —
60
60
Tax effect —
(16 ) (16 )
Net of tax amount 509
44
553
Balance at March 30, 2019 $ (5,310 ) $ 829
$ (4,481 )
September 26, 2020

(Amounts in thousands, except share data)


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 (losses)	$	823	$	0	$	823

Amounts reclassified from accumulated other comprehensive income (loss)	0		(1,573)		(1,573)
Tax effect	0		148		148
Net of tax amount	823		(1,425)		(602)
Balance at September 28, 2019	$	(4,996)	$	(640)	$	(5,636)

The change in defined benefit pension plans of $38 and $114 for the three and nine months ended ~~March 28,~~September 26, 2020, respectively, and ~~$60~~$22 and $(1,573) for the three and nine months ended ~~March 30,~~September 28, 2019, respectively, is included in net periodic pension expense classified in the condensed consolidated statement of operations as general and administrative expense or other income (expense).

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

~~March 28,~~September 26, 2020

(Amounts in thousands, except share data)

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 26, 2020		September 28, 2019		September 26, 2020		September 28, 2019
Income available to common shareholders:
Net income	$	24,627	$	13,434	$	54,585	$	32,688

Weighted-average shares (in thousands):
Basic:
Outstanding	22,874		22,790		22,956		22,822
Partially-paid share subscriptions	0		3		0		8
Basic weighted-average shares	22,874		22,793		22,956		22,830

Diluted:
Basic from above	22,874		22,793		22,956		22,830
Incremental shares from assumed:
Exercise of stock subscription purchase rights	0		13		0		73
Exercise of stock options and awards	980		1,196		1,046		1,024
Diluted weighted-average shares	23,854		24,002		24,002		23,927

Net income per share:

Basic	$	1.08	$	.59	$	2.38	$	1.43

Diluted	$	1.03	$	.56	$	2.27	$	1.37

Three Months Ended
March 28,
2020 March 30,
2019
Income available to common shareholders:
Net income (loss) $ 173
$ (493 )

Weighted-average shares:
Basic:
Outstanding 23,187
22,910
Partially-paid share subscriptions —
162
Basic weighted-average shares 23,187
23,072

Diluted:
Basic from above 23,187
23,072
Incremental shares from assumed:
Exercise of stock subscription purchase rights —
119
Exercise of stock options and awards 984
827
Diluted weighted-average shares 24,171
24,018

Net income (loss) per share:
Basic $ .01
$ (.02 )

Diluted $ .01
$ (.02 )

~~The potentially dilutive shares were excluded from the calculation of diluted net loss per share for the three months ended March 30, 2019 because their effect would have been anti-dilutive.~~

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

~~March 28,~~September 26, 2020

(Amounts in thousands, except share data)

Common and Redeemable Shares Outstanding--A summary of the activity of the common and redeemable shares outstanding for the ~~three~~nine months ended ~~March 28,~~September 26, 2020 follows:

Common
Shares
Net of Treasury
Shares

Redeemable
Shares
Total
Shares outstanding at January 1, 2020 18,029,921
5,146,882
23,176,803
Shares purchased (215,384 ) (117,918 ) (333,302 )
Shares sold 110
207,194
207,304
Options and awards exercised 15,669
—
15,669
Shares outstanding at March 28, 2020 17,830,316
5,236,158
23,066,474



	Common Shares Net of Treasury Shares	Redeemable Shares	Total
Shares outstanding at January 1, 2020	18,029,921	5,146,882	23,176,803
Shares purchased	(763,901)	(368,350)	(1,132,251)
Shares sold	263,212	395,503	658,715

Options and awards exercised	145,297	0	145,297
Shares outstanding at September 26, 2020	17,674,529	5,174,035	22,848,564

On ~~March 28,~~September 26, 2020, we had ~~23,066,474~~22,848,564 common and redeemable shares outstanding and employee options exercisable to purchase ~~936,457~~1,028,683 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 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 at $9.85 per share.

Under the plan, a participant in the offering purchasing common shares for an aggregate purchase price of less than $5 was required to pay with cash. All participants (excluding Company directors and officers) purchasing $5 or more of the common shares had an option to finance their purchase through a down-payment of at least 10% of the total purchase price and a ~~seven-year~~seven-year promissory note for the balance due with interest at 2%. Payments on the promissory note were made either by payroll deductions or annual lump-sum payments of both principal and interest.

Common shares purchased under the plan were pledged as security for the payment of the promissory note and the common shares were not issued until the promissory note was paid-in-full. Dividends were paid on all subscribed shares, subject to forfeiture to the extent that payment was not ultimately made for the shares.

All participants in the offering purchasing in excess of $5 of common shares were granted a "right" to purchase one additional common share at a price of $9.85 per share for every 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 could have been exercised at the rate of one-seventh per year and expired seven years after the date that the right was granted. Employees could not exercise a right if they ceased to be employed by the Company. All rights expired in August 2019.

~~Index~~M. Operations by Business Segment

~~The Davey Tree Expert Company~~

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

~~March 28, 2020~~

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

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 2 reportable operating segments organized by type or class of customer: Residential and Commercial, and Utility.

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 26, 2020

(Amounts in thousands, except share data)

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~~control, 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 2019 Annual Report.

~~Segment information reconciled to the condensed consolidated financial statements follows:~~

- 27 -

Utility
Residential
and
Commercial

All
Other

Reconciling
Adjustments
Consolidated
Three Months Ended March 28, 2020
Revenues $ 185,749
$ 101,953
$ 578
$ —
$ 288,280
Income (loss) from operations 15,632
(5,661 ) (4,695 ) (1,342 ) (a) 3,934
Interest expense (1,946 ) (1,946 )
Interest income 101
101
Other income (expense), net (1,899 ) (1,899 )
Income before income taxes $ 190
Segment assets, total $ 291,426
$ 221,956
$ —
$ 161,768
(b) $ 675,150

Three Months Ended March 30, 2019
Revenues $ 140,469
$ 107,395
$ 25
$ —
$ 247,889
Income (loss) from operations 5,880
507
(2,968 ) (453 ) (a) 2,966
Interest expense (2,151 ) (2,151 )
Interest income 83
83
Other income (expense), net (1,655 ) (1,655 )
Loss before income tax benefit $ (757 )
Segment assets, total $ 231,060
$ 217,044
$ —
$ 117,374
(b) $ 565,478

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

~~March 28,~~September 26, 2020

(Amounts in thousands, except share data)

Segment information reconciled to the condensed consolidated financial statements follows:


	Utility		Residential and Commercial		All Other		Reconciling Adjustments			Consolidated
Three Months Ended September 26, 2020
Revenues	$	185,500	$	151,435	$	518	$	0		$	337,453
Income (loss) from operations	20,301		20,273		(2,758)		(2,316)		(a)	35,500
Interest expense							(1,579)			(1,579)
Interest income							1,688			1,688
Other income (expense), net							(1,499)			(1,499)
Income before income taxes										$	34,110
Segment assets, total	$	296,519	$	227,977	$	0	$	147,188	(b)	$	671,684

Three Months Ended September 28, 2019
Revenues	$	160,088	$	146,769	$	616	$	0		$	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	$	0	$	115,475	(b)	$	601,198

Nine Months Ended September 26, 2020
Revenues	$	547,984	$	396,293	$	703	$	0		$	944,980
Income (loss) from operations	56,817		42,242		(11,005)		(4,309)		(a)	83,745
Interest expense							(5,477)			(5,477)
Interest income							1,885			1,885
Other income (expense), net							(4,550)			(4,550)
Income before income taxes										$	75,603
Segment assets, total	$	296,519	$	227,977	$	0	$	147,188	(b)	$	671,684

Nine Months Ended September 28, 2019
Revenues	$	451,749	$	404,134	$	913	$	0		$	856,796
Income (loss) from operations	26,816		44,772		(11,825)		(3,732)		(a)	56,031
Interest expense							(6,597)			(6,597)
Interest income							270			270
Other income (expense), net							(6,694)			(6,694)
Income before income taxes										$	43,010
Segment assets, total	$	247,031	$	238,692	$	0	$	115,475	(b)	$	601,198

Reconciling adjustments from segment reporting to the condensed consolidated financial statements include unallocated corporate items:


~~(a)~~	~~Reclassification of depreciation expense and allocation of corporate expenses.~~

~~(b)~~

(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.

- 28 -

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 26, 2020

(Amounts in thousands, except share data)

N. Revenue Recognition


N.	~~Revenue Recognition~~

We recognize revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers.

Nature of Performance Obligations and Significant Judgments

At contract inception, the Company assesses the goods and services promised in its contracts with customers and identifies a performance obligation for each promised good or service (or bundle of goods and services) that is distinct. To identify the performance obligations, the Company considers each of the goods or services promised in the contract regardless of whether they are explicitly stated or are implied by customary business practices.

Our contracts with our customers generally originate upon the completion of a quote for services for residential and commercial customers or the receipt of a purchase order (or similar work order) for utility customers. In some cases, our contracts are governed by master services agreements, in which case our contract under ASC 606 consists of the combination of the master services agreement and the quote/purchase order. Many of our contracts have a stated duration of one year or less or contain termination clauses that allow the customer to cancel the contract after a specified notice period, which is typically less than 90 days. Due to the fact that many of our arrangements allow the customer to terminate for convenience, the duration of the contract for revenue recognition purposes generally does not extend beyond the services that we have actually transferred. As a result, many of our contracts are, in effect, day-to-day or month-to-month contracts.

Disaggregation of Revenue

The following tables disaggregate our revenue for the three and nine months ended ~~March 28,~~September 26, 2020 and ~~March 30,~~September 28, 2019 by major sources:

Three Months Ended March 28, 2020 Utility
Residential
and
Commercial
All Other Consolidated
Type of service:
  Tree and plant care $ 141,743
$ 60,257
$ (25 ) $ 201,975
  Grounds maintenance —
23,066
—
23,066
  Storm damage services 523
637
—
1,160
  Consulting and other 43,483
17,993
603
62,079
     Total revenues $ 185,749
$ 101,953
$ 578
$ 288,280

Geography:
  United States $ 177,087
$ 95,052
$ 578
$ 272,717
  Canada 8,662
6,901
—
15,563
     Total revenues $ 185,749
$ 101,953
$ 578
$ 288,280


Three Months Ended September 26, 2020	Utility		Residential and Commercial		All Other		Consolidated
Type of service:
Tree and plant care	$	135,021	$	90,049	$	(10)	$	225,060
Grounds maintenance	0		36,296		0		36,296
Storm damage services	7,061		4,069		0		11,130
Consulting and other	43,418		21,021		528		64,967
Total revenues	$	185,500	$	151,435	$	518	$	337,453

Geography:
United States	$	176,528	$	140,571	$	518	$	317,617
Canada	8,972		10,864		0		19,836
Total revenues	$	185,500	$	151,435	$	518	$	337,453

- 29 -

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

~~March 28,~~September 26, 2020

(Amounts in thousands, except share data)


Three Months Ended September 28, 2019	Utility		Residential and Commercial		All Other		Consolidated
Type of service:
Tree and plant care	$	119,449	$	85,112	$	(86)	$	204,475
Grounds maintenance	0		40,721		0		40,721
Storm damage services	1,709		1,550		0		3,259
Consulting and other	38,930		19,386		702		59,018
Total revenues	$	160,088	$	146,769	$	616	$	307,473

Geography:
United States	$	150,118	$	135,868	$	616	$	286,602
Canada	9,970		10,901		0		20,871
Total revenues	$	160,088	$	146,769	$	616	$	307,473


Nine Months Ended September 26, 2020	Utility		Residential and Commercial		All Other		Consolidated
Type of service:
Tree and plant care	$	408,371	$	233,810	$	(121)	$	642,060
Grounds maintenance	0		100,352		0		100,352
Storm damage services	8,087		6,047		0		14,134
Consulting and other	131,526		56,084		824		188,434
Total revenues	$	547,984	$	396,293	$	703	$	944,980

Geography:
United States	$	522,094	$	369,297	$	703	$	892,094
Canada	25,890		26,996		0		52,886
Total revenues	$	547,984	$	396,293	$	703	$	944,980


Nine Months Ended September 28, 2019	Utility		Residential and Commercial		All Other		Consolidated
Type of service:
Tree and plant care	$	335,658	$	231,988	$	(90)	$	567,556
Grounds maintenance	0		114,320		0		114,320
Storm damage services	2,933		4,163		0		7,096
Consulting and other	113,158		53,663		1,003		167,824
Total revenues	$	451,749	$	404,134	$	913	$	856,796

Geography:
United States	$	420,701	$	376,304	$	913	$	797,918
Canada	31,048		27,830		0		58,878
Total revenues	$	451,749	$	404,134	$	913	$	856,796

Three Months Ended March 30, 2019 Utility
Residential
and
Commercial
All Other Consolidated
Type of service:
  Tree and plant care $ 103,386
$ 60,427
$ (11 ) $ 163,802
  Grounds maintenance —
27,942
—
27,942
  Storm damage services 1,072
1,625
—
2,697
  Consulting and other 36,011
17,401
36
53,448
     Total revenues $ 140,469
$ 107,395
$ 25
$ 247,889

Geography:
  United States $ 129,882
$ 100,999
$ 25
$ 230,906
  Canada 10,587
6,396
—
16,983
     Total revenues $ 140,469
$ 107,395
$ 25
$ 247,889

- 30 -

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 26, 2020

(Amounts in thousands, except share data)

Contract Balances

Our contract liabilities consist of advance payments and billings in excess of costs incurred and deferred revenue. The Company has recognized ~~$942~~$150 and $1,411 of revenue for the three and nine months ended ~~March 28,~~September 26, 2020, respectively, that was included in the contract liability balance at December 31, 2019 and ~~$1,080~~$119 and $1,925 of revenue for the three and nine months ended ~~March 30,~~September 28, 2019, respectively, that was included in the contract liability balance at December 31, 2018. Net contract liabilities consisted of the following:

March 28,
2020 December 31,
2019
Contract liabilities - current $ 4,320
$ 3,129
Contract liabilities - noncurrent 2,787
2,705
Net contract liabilities $ 7,107
$ 5,834


	September 26, 2020		December 31, 2019
Contract liabilities - current	$	3,558	$	3,129
Contract liabilities - noncurrent	1,662		2,705
Net contract liabilities	$	5,220	$	5,834


O.	~~Fair Value Measurements and Financial Instruments~~

O. Fair Value Measurements and Financial Instruments

FASB ASC 820, “Fair Value Measurements and Disclosures" (“Topic 820”) defines fair value based on the price that would be received to sell an asset or the exit price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. Market participants are defined as buyers or sellers in the principal or most advantageous market for the asset or liability that are independent of the reporting entity, knowledgeable and able and willing to transact for the asset or liability.

Valuation Hierarchy--Topic 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value. The hierarchy prioritizes the inputs into three broad levels:

Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.

~~Index~~

~~The Davey Tree Expert Company~~

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

~~March 28, 2020~~

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

Level 2 inputs are observable inputs other than prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated with observable market data.

Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

- 31 -

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 26, 2020

(Amounts in thousands, except share data)

Our assets and liabilities measured at fair value on a recurring basis at ~~March 28,~~September 26, 2020 were as follows:

Fair Value Measurements at
March 28, 2020 Using:
Assets and Liabilities Recorded at
Fair Value on a Recurring Basis
Total
Carrying
Value at
March 28,
2020

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 $ 14,152
$ 14,152
$ —
$ —
Defined benefit pension plan assets —
—
—
—
Liabilities:
Deferred compensation $ 3,013
$ —
$ 3,013
$ —


			Fair Value Measurements at September 26, 2020 Using:
Assets and Liabilities Recorded at Fair Value on a Recurring Basis	Total Carrying Value at September 26, 2020		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	$	15,359	$	15,359	$	0	$	0




Liabilities:

Deferred compensation	$	3,132	$	0	$	3,132	$	0

Our assets and liabilities measured at fair value on a recurring basis at December 31, 2019 were as follows:

Fair Value Measurements at
December 31, 2019 Using:
Assets and Liabilities Recorded at
Fair Value on a Recurring Basis
Total
Carrying
Value at
December 31,
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 $ 15,379
$ 15,379
$ —
$ —
Defined benefit pension plan assets 3,758
—
3,758
—
Liabilities:
Deferred compensation $ 2,459
$ —
$ 2,459
$ —


			Fair Value Measurements at December 31, 2019 Using:
Assets and Liabilities Recorded at Fair Value on a Recurring Basis	Total Carrying Value at December 31, 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	$	15,402	$	15,402	$	0	$	0


Liabilities:
Deferred compensation	$	2,786	$	0	$	2,786	$	0

The assets invested for self-insurance are certificates of deposit--classified as Level 1--based on quoted market prices of the identical underlying securities in active markets. The estimated fair value of the deferred compensation--classified as Level 2--is based on the value of the Company's common shares, determined by independent valuation.

~~Index~~

~~The Davey Tree Expert Company~~

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

~~March 28, 2020~~

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

Fair Value of Financial Instruments--The fair values of our current financial assets and current liabilities, including cash, accounts receivable, accounts payable, and accrued expenses, among others, approximate their reported carrying values because of their short-term nature. Financial instruments classified as noncurrent liabilities and their carrying values and fair values were as follows:


	September 26, 2020				December 31, 2019
	Carrying Value		Fair Value		Carrying Value		Fair Value
Revolving credit facility, noncurrent	$	30,000	$	30,000	$	62,000	$	62,000
Senior unsecured notes, noncurrent	75,000		83,099		75,000		79,558
Term loans, noncurrent	1,842		2,068		6,774		7,124
Total	$	106,842	$	115,167	$	143,774	$	148,682

March 28, 2020 December 31, 2019

Carrying
Value

Fair
Value

Carrying
Value

Fair
Value
Revolving credit facility, noncurrent $ 143,000
$ 143,000
$ 62,000
$ 62,000
Senior unsecured notes, noncurrent 75,000
84,935
75,000
79,558
Term loans, noncurrent 2,457
2,820
6,774
7,124
Total $ 220,457
$ 230,755
$ 143,774
$ 148,682

- 32 -

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 26, 2020

(Amounts in thousands, except share data)

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

Market Risk--In the normal course of business, we are exposed to market risk related to changes in foreign currency exchange rates, changes in interest rates and changes in fuel prices. We do not hold or issue derivative financial instruments for trading or speculative purposes. In prior years, we have used derivative financial instruments to manage risk, in part, associated with changes in interest rates and changes in fuel prices. Presently, we are not engaged in any hedging or derivative activities.


P.	~~Commitments and Contingencies~~

P. Commitments and Contingencies

We are party to a number of lawsuits, threatened lawsuits and other claims arising out of the normal course of business. 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 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"), a1 former Davey employee, 2 Wolf Tree employees, and a1 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.

~~Index~~

~~The Davey Tree Expert Company~~

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

~~March 28, 2020~~

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

In July 2018, a related survival action was filed by the deceased’s estate against Davey Tree, its subsidiary, Wolf Tree, and 4 current and former employees in Savannah, Georgia, which arises out of the same allegations, seeks compensatory and punitive damages and also includes 3 Racketeer Influenced and Corrupt Organizations Act ("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 (“Federal Court”), 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 cases were mediated unsuccessfully in December 2018 and the State Court case was originally set for trial on January 22, 2019. However, as discussed below, all of the civil cases were later stayed on December 28, 2018 and currently remain stayed.

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

- 33 -

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 26, 2020

(Amounts in thousands, except share data)

indictment was issued charging 2 former Wolf Tree employees and 1 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 during the stay of the cases.

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.

PG&E Bankruptcy Filing

On January 29, 2019, Pacific Gas & Electric Company, and its parent company PG&E Corporation, our largest utility customer, 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. PG&E accounted for approximately 12% of revenues during 2019, and 12% in 2018. As a utility company, PG&E serves residential and industrial customers in California and has an ongoing obligation to continue to serve its customers, and we continue to perform under our contracts with PG&E post-petition. As of the date of the bankruptcy filing, we had pre-petition accounts receivable of approximately $15,000.

~~Index~~

~~The Davey Tree Expert Company~~

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

~~March 28,~~On June 20, 2020,

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

~~On January 31, 2020,~~ the Court confirmed PG&E&E's Plan of Reorganization (the "Plan") filed ~~a proposed reorganization agreement~~ as part of its Chapter 11 bankruptcy proceeding. On July 1, 2020, PG&E emerged from Chapter 11, successfully completing its restructuring process and implementing the Plan. In the ~~proposed plan,~~Plan, unsecured creditors, like Davey Tree, ~~are proposed to~~will be paid in full with interest accruing on the past amounts due at the federal judgment rate. ~~The proposed reorganization agreement was approved to proceed by~~Davey Tree has received the ~~bankruptcy court, but is still subject to the objection~~majority of its pre-petition amounts outstanding and ~~confirmation process. PG&E has stated that it~~ expects to ~~complete~~receive the ~~reorganization process~~balance before the end of 2020. Further, Davey Tree's primary contracts were assumed by ~~June 2020. While uncertainty exists as~~PG&E. Due to ~~the outcome~~PG&E’s implementation of the ~~bankruptcy proceedings,~~Plan, we do not anticipate PG&E's bankruptcy towill have a material impact on our future cash flows ~~and~~or results of ~~operations.~~operations as we will receive full payment for the amounts owed.

- 34 -

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 26, 2020

(Amounts in thousands, except share data)

Northern California Wildfires

On October 7, 2019 and October 8, 2019, ~~four~~4 lawsuits were filed against multiple vegetation management contractors to PG&E, including Davey Tree, for damages resulting from the Northern California wildfires. The filing dates - exactly two years after the start of the fires - suggest that these lawsuits are intended to preserve any claims that might otherwise have become barred by the applicable statute of limitations. Davey Tree has ~~not~~ been served with ~~these~~only 1 of the 4 complaints, atin the case of Quinisha Kyree Abram v. ACRT, Inc., et. al, Case No. CGC-19-579861 filed in the Superior Court of the State of California, County of San Francisco (the “Abram case”). The Abram case was initially stayed until July 29, 2020, and later was stayed until September 30, 2020. The Court then vacated the September 30, 2020 case management conference and issued an order to show cause regarding dismissal for failure to serve the first amended complaint, which Plaintiffs had not yet served. The hearing on the order to show cause is November 24, 2020. Davey Tree has filed a demurrer and motion to dismiss in this ~~time. Further, it is unclear at this time whether plaintiffs intend~~action to ~~prosecute these claims separately from~~ the ~~PG&E bankruptcy or not.~~original complaint. In the PG&E bankruptcy, the Tort Committee, representing wildfire victims from both the 2017 and 2018 Northern California wildfires, served subpoenas related to these wildfires on numerous contractors of PG&E, including Davey Tree Surgery Company, Davey Resource Group, and Davey ~~Tree.~~Tree, to which we responded.

In addition, an action was brought against Davey Tree in Napa County Superior Court, entitled Donna Walker, et al. v. Davey Tree Surgery Company on August 8, 2019. On October 8, 2019, the court issued an order staying that action. The court deferred ruling on Davey’s demurrer and motion to dismiss the complaint based on the absence of PG&E as an indispensable party. The court ~~instead~~ stayed any activity in the case pending a status conference to be held on July 14, 2020, which is after the June 30, 2020 statutory deadline set for PG&E’s bankruptcy case to be resolved in order for PG&E to be eligible to participate in the Wildfire Fund established under Assembly Bill 1054.until until December 15, 2020.

In all cases, the Company has denied all liability and will vigorously defend the actions.


Q.	~~The Davey 401KSOP and Employee Stock Ownership Plan~~

Q. The Davey 401KSOP and Employee Stock Ownership Plan

On March 15, 1979, the Company consummated a plan, which transferred control of the Company to its employees. As a part of this plan, the Company initially sold 120,000 common shares (presently, 23,040,000 common shares adjusted for stock splits) to its Employee Stock Ownership Trust (“ESOT”) for $2,700. The Employee Stock Ownership Plan (“ESOP”), in conjunction with the related ESOT, provided for the grant to certain employees of certain ownership rights in, but not possession of, the common shares held by the trustee of the ESOT. Annual allocations of shares have been made to individual accounts established for the benefit of the participants.

Defined Contribution and Savings Plans--Most employees are eligible to participate in The Davey 401KSOP and ESOP Plan. Effective January 1, 1997, the plan commenced operations and retained the existing ESOP participant accounts and incorporated a deferred savings plan (a “401(k) plan”) feature. Participants in the 401(k) plan are allowed to make before-tax contributions, within Internal Revenue Service established limits, through payroll deductions. Effective January 1, 2020, we match, in either cash or our common shares, 100% of the first 3 percent and 50% of the next 2 percent of each participant's before-tax contribution, limited to the first 5 percent of the employee’s compensation deferred each year. All nonbargaining domestic employees who attained age 21 and completed one year of service are eligible

~~Index~~

~~The Davey Tree Expert Company~~

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

~~March 28, 2020~~

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

to participate. In May 2004, we adopted the 401K Match Restoration Plan, a defined contribution plan that supplements the retirement benefits of certain employees that participate in the savings plan feature of The Davey 401KSOP and ESOP Plan, but are limited in contributions because of tax rules and regulations.

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Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 26, 2020

(Amounts in thousands, except share data)

Our common shares are not listed or traded on an established public trading market, and market prices are, therefore, not available. Semiannually, an independent stock valuation firm determines the fair market value of our common shares based upon our performance and financial condition. The Davey 401KSOP and ESOP Plan includes a put option for shares of the Company’s common stock distributed from the plan. Shares are distributed from the Davey 401KSOP and ESOP Plan to former participants of the plan, their beneficiaries, donees or heirs (each, a “participant”). Since our common stock is not currently traded on an established securities market, if the owners of distributed shares desire to sell their shares, the Company is required to purchase the shares at fair value for 2 60-day periods after distribution of the shares from the Davey 401KSOP and ESOP. The fair value of distributed shares subject to the put option totaled ~~$2,272~~$2,978 and $4,749 as of ~~March 28,~~September 26, 2020 and December 31, 2019, respectively. The fair value of the shares held in the Davey 401KSOP and ESOP totaled ~~$124,443~~$125,856 and $119,806 as of ~~March 28,~~September 26, 2020 and December 31, 2019, respectively. Due to the Company’s obligation under the put option, the distributed shares subject to the put option and the shares held in the Davey 401KSOP and ESOP (collectively referred to as 401KSOP and ESOP related shares) are recorded at fair value, classified as temporary equity in the mezzanine section of the consolidated balance sheets and totaled ~~$126,715~~$128,834 and $124,555 as of ~~March 28,~~September 26, 2020 and December 31, 2019, respectively. Changes in the fair value of the 401KSOP and ESOP Plan related shares are reflected in retained earnings while net share activity associated with 401KSOP and ESOP Plan related shares are first reflected in additional paid-in capital and then retained earnings if additional paid-in capital is insufficient.

- 36 -

Index


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

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

(Amounts in thousands, except share data)

Management’s Discussion and Analysis of Financial Condition and Results of Operations is provided as a supplement to the accompanying condensed consolidated financial statements and notes to help provide an understanding of our financial condition, cash flows and results of operations.

We provide a wide range of arboricultural, horticultural, environmental and consulting services to residential, utility, commercial and government entities throughout the United States and Canada.

Our Business--Our operating results are reported in two segments organized by type or class of customer: Residential and Commercial, and Utility. Residential and Commercial provides services to our residential and commercial customers including: the treatment, preservation, maintenance, removal and planting of trees, shrubs and other plant life; the practice of landscaping, grounds maintenance, tree surgery, tree feeding and tree spraying; the application of fertilizer, herbicides and insecticides; and natural resource management and consulting, forestry research and development, and environmental planning. Utility is principally engaged in providing services to our utility customers--investor-owned, municipal utilities, and rural electric cooperatives--including: the practice of line-clearing and vegetation management around power lines and rights-of-way and chemical brush control, 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."

~~Index~~

Impact of COVID-19

While the ~~recent~~ coronavirus ("COVID-19") pandemic did not have a material adverse effect on our reported results for ~~our fiscal~~the first ~~quarter,~~nine months of 2020, the overall extent and duration of the impact of COVID-19 on businesses and economic activity generally remains ~~unclear.~~unclear due to the inherent uncertainty surrounding COVID-19, given its continual evolution, such as the current resurgence of cases.

We have taken steps to support our employees and protect their health and safety, while also ensuring that our business can continue to operate and provide services to our customers. Where possible, we have transitioned our employees to work from home and implemented measures to ensure social distancing when providing services to our customers, including providing personal protective equipment and limiting contact within vehicles. We have also provided additional administrative leave for employees affected by COVID-19 directly or indirectly and ~~have~~ converted our 2020 Annual Meeting of Shareholders to a virtual-only format. We also drew $50,000 from our revolving credit facility to provide us with additional liquidity in light of of the uncertainty resulting from COVID-19. The $50,000 additional borrowing from our revolving credit facility was repaid in the second quarter of 2020. In the first nine months of 2020, we incurred expenses of $3,147 as a result of the COVID-19 pandemic mainly for administrative leave and personal protective equipment. We have also experienced a reduction of travel expenses of approximately $3,700 largely related to restrictions imposed as a response to the pandemic.

The extent to which our operations may be impacted by COVID-19 will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including new information which may emerge concerning the severity of the outbreak, the current resurgence of cases in the United States and potential challenges caused by the colder winter months, including the onset of the cold and flu season, and actions by government authorities to contain the pandemic or treat its impact, including reimposing previously-lifted measures and the possibility additional restrictions will be put in place, among other things. The situation surrounding COVID-19 remains fluid, and the potential for a material impact on our business increases the longer the coronavirus impacts the level of economic

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Index

activity in the U.S. and globally. Even after the COVID-19 pandemic has subsided, we may experience an impact to our business as a result of the current economic recession and any economic downturn or recession that may occur in the future.

RESULTS OF OPERATIONS

The following table sets forth our consolidated results of operations as a percentage of revenues and the percentage change in dollar amounts of the results of operations for the periods presented.


	Three Months Ended						Nine Months Ended
	September 26, 2020		September 28, 2019		Change		September 26, 2020		September 28, 2019		Change
Revenues	100.0	%	100.0	%	—	%	100.0	%	100.0	%	—	%

Costs and expenses:
Operating	61.8		62.8		(1.0)		63.2		63.8		(.6)
Selling	17.8		18.5		(.7)		17.2		18.0		(.8)
General and administrative	5.9		6.5		(.6)		6.4		6.7		(.3)
Depreciation and amortization	4.1		5.0		(.9)		4.5		5.2		(.7)
Gain on sale of assets, net	(.1)		(.2)		.1		(.2)		(.2)		—

Income from operations	10.5		7.4		3.1		8.9		6.5		2.4

Other income (expense):
Interest expense	(.5)		(.7)		.2		(.6)		(.7)		.1
Interest income	.5		—		.5		.2		—		.2
Other, net	(.4)		(.6)		.2		(.5)		(.8)		.3

Income before income taxes	10.1		6.1		4.0		8.0		5.0		3.0

Income taxes	2.8		1.8		1.0		2.2		1.2		1.0

Net income	7.3	%	4.3	%	3.0	%	5.8	%	3.8	%	2.0	%

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Index

Three Months Ended
March 28,
2020 March 30,
2019

Change
Revenues 100.0 % 100.0 % — %

Costs and expenses:
Operating 68.8
67.0
1.8
Selling 17.4
18.7
(1.3 )
General and administrative 7.5
7.7
(.2 )
Depreciation and amortization 5.0
5.7
(.7 )
Gain on sale of assets, net (.1 ) (.3 ) .2

Income from operations 1.4
1.2
.2

Other income (expense):
Interest expense (.7 ) (.9 ) .2
Interest income —
—
—
Other, net (.6 ) (.6 ) —

Income (loss) before income taxes .1
(.3 ) .4

Income taxes (benefit) —
(.1 ) .1

Net income (loss) .1 % (.2 )% .3 %

~~Index~~

~~First Three Months—~~Third Quarter—Three Months Ended ~~March 28,~~September 26, 2020 Compared to Three Months Ended ~~March 30,~~September 28, 2019

Our results of operations for the three months ended ~~March 28,~~September 26, 2020 compared to the three months ended ~~March 30,~~September 28, 2019 follows:


	Three Months Ended												Three Months Ended
	March 28, 2020			March 30, 2019			Change			Percentage Change			September 26, 2020		September 28, 2019		Change		Percentage Change
Revenues	$	288,280		$	247,889		$	40,391		16.3	%	Revenues	$	337,453	$	307,473	$	29,980	9.8	%

Costs and expenses:												Costs and expenses:
Operating	198,393			166,016			32,377			19.5		Operating	208,510		193,137		15,373		8.0
Selling	50,112			46,304			3,808			8.2		Selling	60,203		56,921		3,282		5.8
General and administrative	21,542			19,044			2,498			13.1		General and administrative	19,891		19,895		(4)		—
Depreciation and amortization	14,604			14,212			392			2.8		Depreciation and amortization	13,825		15,319		(1,494)		(9.8)
Gain on sale of assets, net	(305		)	(653		)	348			(53.3	)	Gain on sale of assets, net	(476)		(582)		106		(18.2)
	284,346			244,923			39,423			16.1			301,953		284,690		17,263		6.1

Income from operations	3,934			2,966			968			32.6		Income from operations	35,500		22,783		12,717		55.8
Other income (expense):												Other income (expense):
Interest expense	(1,946		)	(2,151		)	205			(9.5	)	Interest expense	(1,579)		(2,018)		439		(21.8)
Interest income	101			83			18			21.7		Interest income	1,688		94		1,594		1,695.7
Other, net	(1,899		)	(1,655		)	(244		)	14.7		Other, net	(1,499)		(1,886)		387		(20.5)
Income (loss) before income taxes	190			(757		)	947			(125.1	)
Income before income taxes												Income before income taxes	34,110		18,973		15,137		79.8

Income taxes (benefit)	17			(264		)	281			(106.4	)
Income taxes												Income taxes	9,483		5,539		3,944		71.2

Net income (loss)	$	173		$	(493	)	$	666		(135.1	)%
Net income												Net income	$	24,627	$	13,434	$	11,193	83.3	%

Revenues--Revenues of ~~$288,280~~$337,453 increased ~~$40,391~~$29,980 compared with ~~$247,889~~$307,473 in the third quarter of 2019. Utility Services increased $25,412 or 15.9% compared with the third quarter of 2019. The increase is attributable to new accounts as well as increased work year-over-year and price increases on existing accounts. Most of our Utility Services segment work has been deemed essential services and has not been significantly affected by COVID-19. Residential and Commercial Services increased $4,666 or 3.2% from the third quarter of 2019. Increases in tree and plant care revenues, storm damage revenue and consulting and other were partially offset by a decrease in grounds maintenance revenue.

Operating Expenses--Operating expenses of $208,510 increased $15,373 compared with the third quarter of 2019. Utility Services increased $14,855 or 12.7% compared with the third quarter of 2019 but, as a percentage of revenue, decreased to 71.0% from 73.0%. The increase is attributable to additional expenses for labor and benefits expenses which were partially offset by decreases in fuel expense, subcontractor expense and crew meals and lodging expenses.Residential and Commercial Services increased $104 or 0.1% compared with the third quarter of 2019 but, as a percentage of revenue, decreased to 49.7% from 51.2%. Increases in labor and benefits expenses were offset by decreases in fuel expense and materials expense.

Operating expenses for the third quarter of 2020 also included $953 of expenses related directly to COVID-19, including $447 for additional administrative leave offered to employees who have been unable to work due to COVID-19 imposed restrictions whether from the virus itself or government imposed restrictions or closures.

Fuel costs of $8,100 decreased $1,620, or 16.7%, from the $9,720 incurred in the third quarter of 2019 and impacted operating expenses within all segments. The $1,620 decrease included usage decreases approximating $335 and price decreases approximating $1,285.

Selling Expenses--Selling expenses of $60,203 increased $3,282 compared with the third quarter of 2019 but, as a percentage of revenues, decreased to 17.8% from 18.5%. Utility Services increased $2,055 or 11.2% compared to the third quarter of 2019 but, as a percentage of revenue, decreased to 11.0% from 11.4%. The increase is attributable to increases in field management wages and incentive expense which were partially offset by a decrease in travel expense. Residential and Commercial Services increased $1,220 or 3.1% from the third quarter of 2019 but, as a percentage of revenue, decreased to 27.0% from 27.1%. The increase was primarily attributable to an increase in field management expense which was partially offset by decreases in travel expense and employee development expenses.

General and Administrative Expenses--General and administrative expenses of $19,891 decreased $4 from $19,895 in the third quarter of 2019. Decreases in travel and living expenses and professional fees were offset by an increase in salary and incentive expense.

Depreciation and Amortization Expense--Depreciation and amortization expense of $13,825 decreased $1,494 from $15,319 incurred in the third quarter of 2019, primarily due to decreased capital expenditures in recent years and an increase use of operating leases for equipment.

Gain on the Sale of Assets, Net--Gain on the sale of assets of $476 for the third quarter of 2020 decreased $106 from the $582 gain in the third quarter of 2019. Our average gain per unit was lower in the third quarter of 2020 as compared with the third quarter of 2019.

Interest Expense--Interest expense of $1,579 decreased $439 from the $2,018 incurred in the third quarter of 2019.The decrease is attributable to lower interest rates during the third quarter of 2020, as compared with the third quarter of 2019.

Interest Income--Interest income of $1,688 increased $1,594 from the $94 of interest income in the third quarter of 2019.The increase is attributable to interest on PG&E pre-petition receivables which was approved by the United States Bankruptcy Court and received during the third quarter of 2020.

Other, Net--Other expense, net, of $1,499 decreased $387 from the $1,886 of other expense incurred in the third quarter of 2019 and consisted of nonoperating income and expense, including pension expense and foreign currency transaction gains/losses on the intercompany account balances of our Canadian operations.

Income Taxes--Income taxes for the third quarter of 2020 were $9,483, as compared to $5,539 for the third quarter of 2019. Our 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. The effective tax rate as of the third quarter of 2020 was 27.8%, as compared with the third quarter of 2019 effective tax rate of 29.2%.

Net Income--Net income of $24,627 for the third quarter of 2020 was $11,193 more than the $13,434 net income for the third quarter of 2019.

First Nine Months—Nine Months Ended September 26, 2020 Compared to Nine Months Ended September 28, 2019

Our results of operations for the nine months ended September 26, 2020 compared to the nine months ended September 28, 2019 follows:


	Nine Months Ended
	September 26, 2020		September 28, 2019		Change		Percentage Change
Revenues	$	944,980	$	856,796	$	88,184	10.3	%

Costs and expenses:
Operating	597,963		546,931		51,032		9.3
Selling	162,287		153,854		8,433		5.5
General and administrative	60,477		57,610		2,867		5.0
Depreciation and amortization	42,553		44,121		(1,568)		(3.6)
Gain on sale of assets, net	(2,045)		(1,751)		(294)		16.8
	861,235		800,765		60,470		7.6

Income from operations	83,745		56,031		27,714		49.5
Other income (expense):
Interest expense	(5,477)		(6,597)		1,120		(17.0)
Interest income	1,885		270		1,615		598.1
Other, net	(4,550)		(6,694)		2,144		(32.0)
Income before income taxes	75,603		43,010		32,593		75.8

Income taxes	21,018		10,322		10,696		103.6

Net income	$	54,585	$	32,688	$	21,897	67.0	%

Revenues--Revenues of $944,980 increased $88,184 compared with $856,796 in the first ~~three~~nine months of 2019. Utility Services increased ~~$45,280~~$96,235 or ~~32.2%~~21.3% compared with the first ~~three~~nine months of 2019. The increase is attributable to new accounts, as well as increased work year-over-year and price increases on existing accounts within both our U.S. and Canadian operations. Most of our Utility Services segment work has been deemed essential services and has not been significantly affected by COVID-19. Residential and Commercial Services decreased ~~$5,442~~$7,841 or ~~5.1%~~1.9% compared with the first ~~three~~nine months of 2019. Decreases ~~were predominately~~ in grounds maintenance revenue were partially offset by increases in tree and plant care revenue, storm ~~work.~~damage revenue and consulting and other revenue. While our Residential and Commercial Services segment work was deemed essential services in most states, we ~~have~~ experienced temporary shutdowns or work restrictions related to ~~the~~ COVID-19 in a few states and certain Canadian provinces. Where possible, Residential and Commercial Services employees affected by a shutdown or work restrictions ~~have been~~were reassigned to assist with Utility Services operations.

Operating Expenses--Operating expenses of ~~$198,393~~$597,963 increased ~~$32,377~~$51,032 compared with the first ~~three~~nine months of 2019 ~~and,~~but, as a percentage of revenues, ~~increased~~decreased to ~~68.8%~~63.2% from ~~67.0%~~63.8%. Utility Services increased ~~$32,616~~$60,246 or ~~31.6%~~18.3% compared with the first ~~three~~nine months of 2019 but, as a percentage of revenue, decreased to ~~73.2%~~71.0% from ~~73.5%~~73.0%. The increase was attributable to increases in additional labor and benefits expense ~~equipment maintenance expense, fuel expense,~~and subcontractor expense ~~and meals and lodging~~which were partially offset by a decrease in fuel expense. Residential and Commercial Services decreased ~~$2,015~~$9,822 or ~~3.2%~~4.6% compared with the first ~~three~~nine months of 2019 ~~but,~~and, as a percentage of revenue, ~~increased~~decreased to ~~59.6%~~51.3% from ~~58.4%~~52.7%. The decrease was

primarily attributable to decreases in fuel expense, subcontractor expense and materials ~~expense and chemical expense, offset by increases in labor expense, fuel, and equipment maintenance~~ expense.

Operating expenses for the ~~quarter~~period also included ~~$812~~$3,148 of expenses related directly to COVID-19, including ~~$762~~$1,974 for additional administrative leave offered to employees who have been unable to work due to COVID-19 imposed restrictions whether from the virus itself or government imposed restrictions or closures.

Fuel costs of ~~$8,036 increased $515,~~$23,238 decreased $3,483, or ~~6.8%~~13.0%, from the ~~$7,521~~$26,721 incurred in the first ~~three~~nine months of 2019 and impacted operating expenses within all segments. The ~~$515 increase~~$3,483 decrease included usage ~~increases~~decreases approximating ~~$613~~$6 and price decreases approximating $98. While COVID-19 did not have a significant impact on our fuel costs for the first quarter, we anticipate that cost savings will potentially be recognized in future quarters due in part to current economic issues affecting oil prices and the effect of COVID-19 on our Residential and Commercial operations.$3,477.

Selling Expenses--Selling expenses of ~~$50,112~~$162,287 increased ~~$3,808~~$8,433 compared with the first ~~three~~nine months of 2019 but, as a percentage of revenue, decreased to ~~17.4%~~17.2% from ~~18.7%~~18.0%. Utility Services increased ~~$2,329~~$6,390 or ~~13.2% over~~11.9% compared to the first ~~three~~nine months of 2019 but, as a percentage of revenue, decreased to ~~10.7%~~11.0% from ~~12.5%~~11.9%. The increase was primarily attributable to additional field management wages and incentive expense, ~~office lease expense and communication~~which were partially offset by a decrease in field management travel expense. Residential and Commercial Services experienced an increase of ~~$1,429~~$1,620 or ~~4.8% over~~1.6% compared to the first ~~three~~nine months of 2019 and, as a percentage of revenue, increased to ~~30.5%~~26.4% from ~~27.6%~~25.5%. The increase was attributable to increases in field management wages and incentive expense ~~office lease expense, and~~which were partially offset by a decrease in travel expense.

General and Administrative Expenses--General and administrative expenses of ~~$21,542~~$60,477 increased ~~$2,498~~$2,867 from ~~$19,044~~$57,610 in the first ~~three~~nine months of 2019. The increase was primarily attributable to ~~increases~~an increase in salary and incentive expense ~~computer expense and~~which were partially offset by a decrease in travel expense.

Depreciation and Amortization Expense--Depreciation and amortization expense of ~~$14,604 increased $392~~$42,553 decreased $1,568 from ~~$14,212~~$44,121 incurred in the first ~~three~~nine months of 2019. The ~~increase~~decrease was attributable to ~~higher~~lower capital expenditures ~~and purchases of businesses~~ in recent years ~~necessary to support the business.~~and an increased use of operating leases for equipment.

Gain on the Sale of Assets, Net--Gain on the sale of assets of ~~$305~~$2,045 for the first ~~three~~nine months of 2020 ~~decreased $348~~increased $294 from the ~~$653~~$1,751 gain in the first ~~three~~nine months of 2019. We sold ~~fewer~~more individual units of equipment during the first ~~three~~nine months of 2020 as compared with the first ~~three~~nine months of ~~2019 at a lower average gain per unit.~~2019.

Interest Expense--Interest expense of ~~$1,946~~$5,477 decreased ~~$205~~$1,120 from the ~~$2,151~~$6,597 incurred in the first ~~three~~nine months of 2019. The decrease iswas attributable to lower interest rates during the first ~~three~~nine months of 2020, as compared with the first ~~three~~nine months of 2019.

Interest Income--Interest income of $1,885 increased $1,615 from the $270 of interest income in the first nine months of 2019.The increase is attributable to interest on PG&E pre-petition receivables which was approved by the United States Bankruptcy Court and received during the third quarter of 2020.

Other, Net--Other expense, net, of ~~$1,899 increased $244~~$4,550 decreased $2,144 from the ~~$1,655~~$6,694 expense incurred in the first ~~three~~nine months of 2019 and consisted of nonoperating income and expense, including pension expense and foreign currency gains/losses on the intercompany account balances of our Canadian operations.

Income Taxes--Income taxes for the first ~~three~~nine months of 2020 were ~~$17,~~$21,018, as compared to ~~a tax benefit of $264~~$10,322 for the first ~~three~~nine months of 2019. Our 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. The effective tax rate for the first ~~three~~nine months of 2020 was ~~28.5%~~27.8%. Our effective tax rate for the first ~~three~~nine months of 2019 was ~~28.3%~~24.0%. The change in the effective tax rate from statutory tax rates is primarily due to the impact of state and local taxes which are partially offset by favorable discrete items.

Net Income--Net income of ~~$173~~$54,585 for the first ~~three~~nine months of 2020 was ~~$666~~$21,897 more than the net ~~loss~~income of ~~$493~~$32,688 for the first ~~three~~nine months of 2019.

LIQUIDITY AND CAPITAL RESOURCES

Our principal financial requirements are for capital spending, working capital and business acquisitions. Cash generated from operations, our revolving credit facility and note issuances are our primary sources of capital.

Our cash flows from operating, investing and financing activities for the ~~three~~nine months ended ~~March 28,~~September 26, 2020 and ~~March 30,~~September 28, 2019 follow:

Cash Provided By Operating Activities--Cash provided by operating activities was ~~$2,768~~$99,428 for the first ~~three~~nine months of 2020, ~~or $8,660 less than the $11,428 provided in~~a $42,214 increase when compared to the first ~~three~~nine months of 2019. The ~~$8,660 decrease~~$42,214 increase in operating cash flow was primarily attributable to the increase in net income of $21,897 resulting from increased revenue and operating margins, a change of ~~$19,095~~$9,698 related to ~~accounts receivable, partially offset by an increase of $4,361 related to prepaid expenses, a decrease in cash used for~~ accounts payable and accrued expenses, ~~of $5,245~~ and ~~the~~a change of ~~$5,673~~$8,472 related to self-insurance ~~reserves.~~reserves partially offset by a change of $1,155 related to accounts receivable.

Overall, accounts receivable increased ~~$17,161~~$34,801 during the first ~~three~~nine months of 2020, as compared to ~~a decrease~~an increase of ~~$1,934~~$35,956 during the first ~~three~~nine months of 2019. With respect to the change in accounts receivable arising from business levels, the “days-sales-outstanding” in accounts receivable (sometimes referred to as “DSO”) at the end of the first ~~three~~nine months of 2020 increased by ~~six~~three days to 7872 days, when compared to 7269 days at the end of the first ~~three~~nine months of 2019, with the periods being impacted by the pre-petition receivables of approximately $15,000 from PG&E. DSO excluding PG&E pre-petition receivables would be 74 and 66 days at the end of the first three months of 2020 and 2019, respectively.

~~Prepaid expenses decreased $8,176 in the first three months of 2020, or $4,361 more than the $3,815 decrease in the first three months of~~ 2019. ~~The decrease was primarily related to the reduction of prepaid payroll taxes.~~

Accounts payable and accrued expenses ~~decreased $7,532~~increased $28,389 in the first ~~three~~nine months of 2020, or ~~$5,245 less~~$9,698 more than the ~~$12,777 decrease~~$18,691 increase in the first ~~three~~nine months of 2019. ~~Decreases in accrued employee compensation and advance payments from customers were partially offset by~~The increase was primarily related to increases in ~~trade payables~~income taxes and payroll taxes payable. Self-insurance reserves increased ~~$4,408~~$14,424 in the first ~~three~~nine months of 2020, which was ~~$5,673~~$8,472 more than the ~~decrease~~increase of ~~$1,265~~$5,952 experienced in the first ~~three~~nine months of 2019. The increase is attributable to increased exposures within our workers compensation, general liability and vehicle liability lines of coverage.

As we cannot predict the duration or scope of the COVID-19 pandemic and its impact on our customers and suppliers (or workforce), the negative financial impact to our results cannot be reasonably estimated, but could be material. We are actively managing the business to maintain cash flow and we have significant liquidity. We believe that these factors will allow us to meet our anticipated funding requirements.

Cash Used In Investing Activities--Cash used in investing activities for the first ~~three~~nine months of 2020 was ~~$21,012, or $3,965 less than the $24,977 used during~~$41,614, a $5,940 decrease when compared to the first ~~three~~nine months of 2019. The decrease was primarily the result of decreases in capital expenditures for equipment

of ~~$3,700 and a decrease in purchases of businesses of $1,090,~~$7,077, which was partially offset by aan increase in expenditures for land and buildings of $1,300. Our decrease in ~~proceeds from~~capital expenditures is partially the ~~sales~~result of ~~fixed assets~~our increased use of ~~$228.~~operating leases for equipment.

Cash Used In Financing Activities--Cash used in financing activities of ~~$74,173~~$43,739 increased ~~$56,609~~$25,023 during the first ~~three~~nine months of 2020 as compared with ~~$17,564~~$18,716 of cash ~~provided~~used during the first ~~three~~nine months of 2019. During the first ~~three~~nine months of 2020, our revolving credit facility, net ~~provided $81,000~~used $32,000 in cash as compared with ~~$4,000~~$28,500 used during the first ~~three~~nine months of 2019. We use the credit facility primarily for capital expenditures, redemptions of shares and payments of notes payable related to acquisitions. WeIn the first quarter of 2020, we drew $50,000 from our revolving credit facility to provide additional liquidity as a precaution because of uncertainty resulting from COVID-19. The $50,000 was repaid during the second quarter of 2020. Notes payable ~~used~~provided a net ~~$2,700,~~$2,285 during the first ~~three~~nine months of 2020, a decrease of ~~$25,370~~$21,888 when compared to the ~~$22,670~~$24,173 provided in the first ~~three~~nine months of 2019, including $25,000 provided by the issuance of 4.00% Senior Notes during the first ~~three~~nine months of 2019. Treasury share transactions (purchases and sales) used ~~$2,845~~$10,791 for the first ~~three~~nine months of 2020, ~~$3,048 less~~$792 more than the ~~$203 provided~~$11,583 used in the first ~~three~~nine months of 2019. Dividends paid of ~~$575~~$1,708 during the first ~~three~~nine months of 2020 decreased ~~$15~~$37 as compared with ~~$590~~$1,745 paid in the first ~~three~~nine months of 2019.

The Company currently repurchases common shares at shareholders’ requests in accordance with the terms of the Davey 401KSOP and ESOP Plan and also repurchases common shares from time to time at the Company’s discretion. The amount of common shares offered to the Company for repurchase by the holders of shares distributed from the Davey 401KSOP and ESOP Plan is not within the control of the Company, but is at the discretion of the shareholders. The Company expects to continue to repurchase its common shares, as offered by its shareholders from time to time, at their then current fair value. However, other than for repurchases pursuant to the put option under the Davey 401KSOP and ESOP Plan, as described in Note Q, such purchases are not required, and the Company retains the right to discontinue them at any time. Repurchases of redeemable common shares at the shareholders' request approximated ~~$49~~$5,280 and ~~$284~~$8,761 during the ~~three~~nine months ended ~~March 28,~~September 26, 2020 and ~~March 30,~~September 28, 2019, respectively. Share repurchases, other than redeemable common shares, approximated ~~$8,012~~$22,209 and ~~$4,146~~$16,674 during the ~~three~~nine months ended ~~March 28,~~September 26, 2020 and ~~March 30,~~September 28, 2019, respectively.

Contractual Obligations Summary and Commercial Commitments

As of ~~March 28,~~September 26, 2020, total commitments related to issued letters of credit were ~~$81,618,~~$88,242, of which $2,877 were issued under the revolving credit facility, ~~$76,732~~$83,355 were issued under the AR Securitization program, and ~~$2,009~~$2,010 were issued under short-term lines of credit. As of December 31, 2019, total commitments related to issued LCs were $81,619, of which $2,877 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.

Also, as is common in our industry, we have performance obligations that are supported by surety bonds, which expire during 2020 through 2023. We intend to renew the surety bonds where appropriate and as necessary.

Cash generated from operations, ~~and~~ our revolving credit facility and note issuances 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 ~~March 28,~~September 26, 2020, we had working capital of ~~$185,827,~~$130,781, and short-term lines of credit approximating ~~$9,059~~$9,112 and ~~$104,123~~$217,123 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. However, we cannot predict the full extent of the potential impact resulting from the COVID-19 pandemic on our business, results of operations and sources of capital.

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, 2019, 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.

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 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, some of which have been, and may further be, exacerbated by the COVID-19 pandemic, include:


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



	March 28, 2020				December 31, 2019
	Carrying Amount		Accumulated Amortization		Carrying Amount		Accumulated Amortization
Amortized intangible assets:
Customer lists/relationships	$	28,478	$	20,024	$	28,301	$	20,024
Employment-related	8,485		7,448		8,391		7,348
Tradenames	7,393		5,789		7,402		5,788
Amortized intangible assets	44,356		$	33,261	44,094		$	33,160
Less accumulated amortization	33,261				33,160
Identified intangible assets, net	$	11,095			$	10,934

Goodwill	$	43,780			$	42,285



	Estimated Future Amortization Expense
Remaining nine months of 2020	$	2,053
2021	2,325
2022	2,020
2023	1,888
2024	1,431
Thereafter	1,377
	$	11,095



	As of March 28, 2020
	Operating Leases		Finance Leases
Remaining nine months of 2020	$	13,577	$	700
2021	14,394		1,246
2022	10,785		320
2023	5,730		120
2024	3,450		49
Thereafter	5,545		91
Total lease payments	53,481		2,526
Less interest	3,849		90
Total	$	49,632	$	2,436



Three Months Ended March 28, 2020	Foreign Currency Translation Adjustments			Defined Benefit Pension Plans			Accumulated Other Comprehensive Income (Loss)
Balance at January 1, 2020	$	(4,633	)	$	(770	)	$	(5,403	)
Other comprehensive income (loss) before reclassifications
Unrealized gains (losses)	(1,971		)	—			(1,971		)
Amounts reclassified from accumulated other comprehensive income (loss)	—			38			38
Tax effect	—			(10		)	(10		)
Net of tax amount	(1,971		)	28			(1,943		)
Balance at March 28, 2020	$	(6,604	)	$	(742	)	$	(7,346	)



Three Months Ended March 30, 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 (losses)	509			—			509
Amounts reclassified from accumulated other comprehensive income (loss)	—			60			60
Tax effect	—			(16		)	(16		)
Net of tax amount	509			44			553
Balance at March 30, 2019	$	(5,310	)	$	829		$	(4,481	)



			Fair Value Measurements at March 28, 2020 Using:
Assets and Liabilities Recorded at Fair Value on a Recurring Basis	Total Carrying Value at March 28, 2020		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	$	14,152	$	14,152	$	—	$	—
Defined benefit pension plan assets	—		—		—		—
Liabilities:
Deferred compensation	$	3,013	$	—	$	3,013	$	—


▪	~~The coronavirus pandemic (COVID-19) has impacted, and could have a material adverse effect on our business, results of operations, financial position or cash flows.~~


▪	~~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.~~


▪	~~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.~~


▪	~~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, or the impact of costs incurred to comply with cybersecurity or data privacy regulations, 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.~~


▪	~~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, such as COVID-19, terrorist attacks or other external events.


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


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