Company Quick10K Filing
Quick10K
Davey Tree Expert
10-Q 2018-09-29 Quarter: 2018-09-29
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-07-01 Quarter: 2017-07-01
10-Q 2017-04-01 Quarter: 2017-04-01
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-10-01 Quarter: 2016-10-01
10-Q 2016-07-02 Quarter: 2016-07-02
10-Q 2016-04-02 Quarter: 2016-04-02
10-K 2015-12-31 Annual: 2015-12-31
8-K 2019-02-05 Off-BS Arrangement
8-K 2019-01-29 Other Events
8-K 2019-01-24 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-09-21 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-08-07 Accountant, Exhibits
8-K 2018-05-15 Shareholder Vote
8-K 2018-05-07 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-03-28 Officers
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DAVEY 2018-09-29
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II. Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 6. Exhibits.
EX-31.1 dt2018q310qex311.htm
EX-31.2 dt2018q310qex312.htm
EX-32.1 dt2018q310qex321.htm
EX-32.2 dt2018q310qex322.htm

Davey Tree Expert Earnings 2018-09-29

DAVEY 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 dt2018q310q.htm 10-Q Document

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2018
OR
¨  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 000-11917
dt2018q3davlogsma01a01a01a05.jpg
THE DAVEY TREE EXPERT COMPANY
(Exact name of registrant as specified in its charter)
Ohio
34-0176110
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
 
 
1500 North Mantua Street
P.O. Box 5193
Kent, Ohio 44240
(Address of principal executive offices) (Zip code)
 
(330) 673-9511
(Registrant's telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically 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 x   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.
(Check one):
 
¨ Large Accelerated Filer
 
x 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 x

There were 23,082,609 Common Shares, $1.00 par value, outstanding as of November 2, 2018

 
 
 
 
 



The Davey Tree Expert Company
Quarterly Report on Form 10-Q
September 29, 2018
INDEX
 
 
Page
Part I.
Financial Information
 
 
 
Item 1. 
Financial Statements (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
We,” “us,” “our,” “Davey” and “Davey Tree,” unless the context otherwise requires, means The Davey Tree Expert Company and its subsidiaries.

- 1 -


THE DAVEY TREE EXPERT COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except per share data dollar amounts)
 
September 29,
2018
 
December 31,
2017
Assets
 
 
 
Current assets:
 
 
 
Cash
$
10,516

 
$
13,121

Accounts receivable, net
194,377

 
168,671

Operating supplies
14,181

 
10,069

Other current assets
25,839

 
17,264

Total current assets
244,913

 
209,125

 
 
 
 
Property and equipment
634,655

 
616,036

Less accumulated depreciation
431,706

 
422,853

     Total property and equipment, net
202,949

 
193,183

 
 
 
 
Other assets
26,191

 
29,156

Identified intangible assets and goodwill, net
47,602

 
41,671

Total assets
$
521,655

 
$
473,135

 
 
 
 
Liabilities and shareholders' equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
41,353

 
$
45,093

Accrued expenses
47,832

 
42,816

Other current liabilities
49,916

 
40,748

Total current liabilities
139,101

 
128,657

 
 
 
 
Long-term debt
156,625

 
119,210

Self-insurance reserve
49,260

 
43,912

Other noncurrent liabilities
9,548

 
19,966

Total liabilities
354,534

 
311,745

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

 
123,520

 
 
 
 
Common shareholders' equity:
 

 
 

Common shares, $1.00 par value, per share; 48,000 shares authorized; 36,756 and 36,447 shares issued and outstanding before deducting treasury shares and which excludes 6,158 and 6,467 shares subject to redemption as of September 29, 2018 and December 31, 2017
36,756

 
36,447

Additional paid-in capital
70,733

 
58,554

Common shares subscribed, unissued
6,924

 
7,529

Retained earnings
161,433

 
143,835

Accumulated other comprehensive loss
(9,016
)
 
(8,393
)
 
266,830

 
237,972

Less: Cost of common shares held in treasury; 19,465 shares at September 29, 2018 and 18,693 shares at December 31, 2017
220,160

 
198,327

Common shares subscription receivable
853

 
1,775

Total common shareholders' equity
45,817

 
37,870

Total liabilities and shareholders' equity
$
521,655

 
$
473,135

 
 
 
 
See notes to condensed consolidated financial statements.
 

 
 


- 2 -


THE DAVEY TREE EXPERT COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share dollar amounts)
 
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Revenues
$
265,318

 
$
249,588

 
$
744,618

 
$
687,438

 
 
 
 
 
 
 
 
Costs and expenses:
 
 
 
 
 
 
 
Operating
171,125

 
157,615

 
483,430

 
442,799

Selling
49,367

 
45,508

 
133,341

 
121,858

General and administrative
16,758

 
14,153

 
51,834

 
45,766

Depreciation and amortization
14,807

 
13,749

 
41,866

 
38,939

Gain on sale of assets, net
(1,324
)
 
(486
)
 
(4,572
)
 
(2,637
)
    Total costs and expenses
250,733

 
230,539

 
705,899

 
646,725

 
 
 
 
 
 
 
 
Income from operations
14,585

 
19,049

 
38,719

 
40,713

 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
Interest expense
(1,811
)
 
(1,278
)
 
(4,966
)
 
(3,607
)
Interest income
80

 
67

 
259

 
210

Other, net
(1,322
)
 
(1,764
)
 
(4,036
)
 
(4,242
)
 
 
 
 
 
 
 
 
Income before income taxes
11,532

 
16,074

 
29,976

 
33,074

 
 
 
 
 
 
 
 
Income taxes
3,148

 
5,837

 
6,505

 
12,501

 
 
 
 
 
 
 
 
Net income
$
8,384

 
$
10,237

 
$
23,471

 
$
20,573

 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 
 
 
 
Basic
$
.35

 
$
.41

 
$
.96

 
$
.81

Diluted
$
.34

 
$
.39

 
$
.92

 
$
.77

 
 
 
 
 
 
 
 
Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
23,768

 
25,120

 
24,443

 
25,551

Diluted
24,816

 
26,416

 
25,543

 
26,714

 
 
 
 
 
 
 
 
Dividends declared per share
$
.025

 
$
.025

 
$
.075

 
$
.075

 
 
 
 
 
 
 
 
See notes to condensed consolidated financial statements.
 
 
 
 
 
 


- 3 -


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


 
Three Months Ended
 
Nine Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Net income
$
8,384

 
$
10,237

 
$
23,471

 
$
20,573

Components of other comprehensive income/(loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
517

 
1,295

 
(1,062
)
 
2,498

Amortization of defined benefit pension items:
 
 
 
 
 
 
 
Net actuarial loss
135

 
147

 
404

 
441

Prior service cost
11

 
10

 
35

 
30

Defined benefit pension plan adjustments
146

 
157

 
439

 
471

 
 
 
 
 
 
 
 
Other comprehensive income/(loss), net of tax
663

 
1,452

 
(623
)
 
2,969

 
 
 
 
 
 
 
 
Comprehensive income
$
9,047

 
$
11,689

 
$
22,848

 
$
23,542

 
 
 
 
 
 
 
 
See notes to condensed consolidated financial statements.
 
 
 
 
 
 





- 4 -


THE DAVEY TREE EXPERT COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
 
 
Nine Months Ended
 
 
September 29,
2018
 
September 30,
2017
Operating activities
 
 
 
 
Net income
 
$
23,471

 
$
20,573

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
41,866

 
38,939

Other
 
(834
)
 
(443
)
Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
(24,370
)
 
(23,135
)
Operating liabilities
 
6,667

 
12,139

Other, net
 
(22,003
)
 
(9,644
)
Total changes in operating assets and liabilities
 
1,326

 
17,856

Net cash provided by operating activities
 
24,797

 
38,429

 
 
 
 
 
Investing activities
 
 

 
 

Capital expenditures:
 
 

 
 

Equipment
 
(47,689
)
 
(44,727
)
Land and building
 
(591
)
 
(3,641
)
Purchases of businesses, net of cash acquired
 
(8,241
)
 
(7,452
)
Other
 
5,836

 
3,372

Net cash used in investing activities
 
(50,685
)
 
(52,448
)
 
 
 
 
 
Financing activities
 
 

 
 

Revolving credit facility (payments)/proceeds, net
 
(8,000
)
 
30,000

Purchase of common shares for treasury
 
(30,958
)
 
(19,512
)
Sale of common shares from treasury
 
14,235

 
11,268

Dividends paid
 
(1,818
)
 
(1,898
)
Proceeds from notes payable
 
72,746

 
16,443

Payments of notes payable
 
(22,922
)
 
(21,053
)
Net cash provided by financing activities
 
23,283

 
15,248

 
 
 
 
 
(Decrease)/increase in cash
 
(2,605
)
 
1,229

Cash, beginning of period
 
13,121

 
9,006

Cash, end of period
 
$
10,516

 
$
10,235

 
 
 
 
 
Supplemental cash flow information follows:
 
 

 
 

Interest paid
 
$
5,163

 
$
4,079

Income taxes paid
 
7,898

 
7,189

 
 
 
 
 
See notes to condensed consolidated financial statements.
 
 

 
 



- 5 -

The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 29, 2018
(Amounts in thousands, except share data)


A.
Basis of Financial Statement Preparation
The condensed consolidated financial statements present the financial position, results of operations and cash flows of The Davey Tree Expert Company and its subsidiaries. When we refer to “we,” “us,” “our,” “Davey,” or “Davey Tree”, we mean The Davey Tree Expert Company and its subsidiaries, unless otherwise expressly stated or the context indicates otherwise.
We have prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), as codified in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), and with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. The consolidated financial statements include all adjustments which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. All such adjustments are of a normal, recurring nature. All 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, 2017 (the “2017 Annual Report”).
Use of Estimates in Financial Statement Preparation--The preparation of financial statements in accordance with U.S. GAAP requires the use of estimates and assumptions that affect reported amounts. Our consolidated financial statements include amounts that are based on management’s best estimates and judgments.  Estimates are used for, but not limited to, accounts receivable valuation, depreciable lives of fixed assets, self-insurance reserves, income taxes and revenue recognition. Actual results could differ from those estimates.
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 September 29, 2018 is referred to as the third quarter of 2018, and the fiscal quarter ended September 30, 2017 is referred to as the third quarter of 2017.
Recent Accounting Guidance
Accounting Standards Adopted in 2018
Accounting Standards Update 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business--In January 2017, the FASB issued Accounting Standard Update ("ASU") 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business," which provides guidance to evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. If substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single asset or a group of similar assets, the assets acquired (or disposed of) are not considered a business. The Company adopted the guidance effective January 1, 2018. ASU 2017-01 applies prospectively for annual and interim periods beginning after December 15, 2017. The adoption of this guidance did not have a material impact on our consolidated financial statements.
Accounting Standards Update 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force)--In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which provides guidance on how cash receipts and cash payments related to eight specific cash flow issues are presented and classified in the statement of cash flows, with the objective of reducing the existing

- 6 -

The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 29, 2018
(Amounts in thousands, except share data)

A.
Basis of Financial Statement Preparation (continued)
diversity in practice. The Company adopted ASU 2016-15 on January 1, 2018. The adoption of ASU 2016-15 did not have a material impact on our consolidated financial statements.
Accounting Standards Update 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost--In March 2017, the FASB issued ASU 2017-07, “Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” which changes the presentation of net periodic benefit cost related to employer sponsored defined benefit plans and other postretirement benefits. Under ASU 2017-07, service costs are included within the same income statement line item as other compensation costs arising from services rendered by pertinent employees during the period. The other components of net periodic benefit pension cost are presented separately outside of income from operations. Additionally, only the service cost component of the net periodic benefit cost may be capitalized in assets. The amendments under ASU 2017-07 also provide a practical expedient that permits the use of amounts disclosed in the pension and other postretirement benefit plan footnote for prior year comparative periods as the estimation basis for applying the guidance retrospectively. The Company adopted ASU 2017-07 on January 1, 2018 and chose to use the practical expedient provided when applying the guidance retrospectively. Upon adoption, service costs are recognized in our financial statements as general and administrative expenses while the remaining components of net periodic benefit cost are recognized as other income (expense). Pension expense of $348 for the third quarter 2017 and $1,042 for the first nine months of 2017 have been reclassified from general and administrative expense to other income (expense).
Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606)--In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which replaces all current U.S. GAAP guidance on revenue recognition and eliminates all industry-specific guidance.
The Company adopted ASU 2014-09 and applied it to all contracts that were not completed as of January 1, 2018 using the modified retrospective method. The cumulative effect of applying the guidance in ASU 2014-09 was not material. Further, the adoption of ASU 2014-09 did not have a significant impact on the amount or timing of revenue recognition. Therefore, we have not disclosed the amount by which each financial statement line item is affected in the current period as a result of applying ASU 2014-09 or an explanation of significant changes between our results as reported and those that would have been reported under legacy U.S. GAAP, as no significant changes were identified.
Accounting Standards Not Yet Adopted
Accounting Standards Update 2016-02, Leases (Topic 842)--In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” ASU 2016-02 establishes a comprehensive new lease accounting model. The new standard: (a) clarifies the definition of a lease; (b) requires a dual approach to lease classification similar to current lease classifications; and (c) causes lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset for leases with a lease-term of more than twelve months. The new standard is effective for interim and annual periods beginning after December 15, 2018, which for Davey Tree would be January 1, 2019. Early adoption is permitted. The new standard requires a modified retrospective transition for capital or operating leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements, but it does not require transition accounting for leases that expire prior to the date of initial application. The Company plans to adopt ASU 2016-02 on January 1, 2019. Management is evaluating all real estate, personal property and other arrangements that may meet the definition of a lease and has purchased a technology solution to assist with the management of leases. Management expects to adopt the standard using the Comparative Under ASC 840 approach and has evaluated the accounting elections and

- 7 -

The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 29, 2018
(Amounts in thousands, except share data)

A.
Basis of Financial Statement Preparation (continued)
practical expedients available under the standard, and expects to elect to use the package of practical expedients, except for the hindsight expedient. Management expects that the adoption of ASU 2016-02 will have a material impact on the Company's total assets and liabilities with a minimal impact on equity and results of operations.
Accounting Standards Update 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220)--In February 2018, the FASB issued ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220)." ASU 2018-02 provides an option to reclassify the stranded tax effects within accumulated other comprehensive income to retained earnings as a result of the Tax Cuts and Jobs Act of 2017 (the "Tax Reform Act"). This standard is effective for interim and annual reporting periods beginning after December 15, 2018, which for Davey Tree would be January 1, 2019. Early adoption is permitted. Management has not yet completed its assessment of the impact of the new standard on the Company's consolidated financial statements.
SEC Release No. 33-10532, Disclosure Update and Simplification--In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of shareholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of shareholders' equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. This final rule is effective for all filings made on or after November 5, 2018. Given the effective date and the proximity to most filers' quarterly reports, the SEC is not objecting to filers deferring the presentation of changes in shareholders' equity in their Forms 10-Q until the quarter that begins after the date of adoption, November 5, 2018. We plan to present the interim changes in shareholders' equity required by SEC Release No. 33-10532 beginning with our first quarter 2019 Form 10-Q. We do not believe that any of the additional elements of this release will have a material impact on the Company's consolidated financial statements.
B.
Seasonality of Business
Due to the seasonality of our business, our operating results for the nine months ended September 29, 2018 are not indicative of results that may be expected for any other interim period or for the year ending December 31, 2018. 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.

- 8 -

The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 29, 2018
(Amounts in thousands, except share data)

C.
Accounts Receivable, Net and Supplemental Balance-Sheet Information
Accounts receivable, net, consisted of the following:
Accounts receivable, net
September 29,
2018
 
December 31,
2017
Accounts receivable
$
150,161

 
$
143,244

Receivables under contractual arrangements
48,526

 
29,895

 
198,687

 
173,139

Less allowances for doubtful accounts
4,310

 
4,468

Accounts receivable, net
$
194,377

 
$
168,671

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

The following items comprise the amounts included in the balance sheets:
Other current assets
September 29,
2018
 
December 31,
2017
Refundable income taxes
$

 
$
587

Prepaid expense
24,997

 
15,893

Other
842

 
784

Total
$
25,839

 
$
17,264


Accrued expenses
September 29,
2018
 
December 31,
2017
Employee compensation
$
22,867

 
$
20,794

Accrued compensated absences
10,054

 
9,267

Self-insured medical claims
5,847

 
3,193

Income tax payable
2,660

 
3,443

Customer advances, deposits
439

 
1,672

Taxes, other than income
3,827

 
2,279

Other
2,138

 
2,168

Total
$
47,832

 
$
42,816


- 9 -

The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 29, 2018
(Amounts in thousands, except share data)

C.
Accounts Receivable, Net and Supplemental Balance-Sheet Information (continued)
Other current liabilities
September 29,
2018
 
December 31,
2017
Note payable
$
100

 
$
149

Current portion of:
 
 
 
Long-term debt
25,991

 
16,817

Self-insurance reserves
23,825

 
23,782

Total
$
49,916

 
$
40,748


Other noncurrent liabilities
September 29,
2018
 
December 31,
2017
Pension and retirement plans
$
6,061

 
$
14,759

Other
3,487

 
5,207

Total
$
9,548

 
$
19,966

D.
Business Combinations
Our investments in businesses during the first nine months of 2018 were $10,553, including debt issued, in the form of notes payable to the sellers of $2,312, and have been included in our residential and commercial and utility segments. Measurement-period adjustments are not complete. The measurement period for purchase price allocations ends as soon as information of the facts and circumstances becomes available, but does not exceed one year from the acquisition date. During the nine months ended September 30, 2017, our investment in businesses was $10,877, including $3,099 of debt issued.
The following table summarizes the preliminary purchase price allocation of the estimated fair values of the assets acquired and liabilities assumed:
 
Nine Months Ended
 
September 29,
2018
 
September 30,
2017
Detail of acquisitions:
 

 
 

Assets acquired:
 

 
 

Cash
$

 
$
326

Receivables
1,336

 
1,753

Operating supplies
23

 

Prepaid expense
84

 
128

Equipment
4,019

 
1,904

Deposits and other
5

 
129

Intangibles
4,617

 
4,566

Goodwill
2,603

 
5,027

Liabilities assumed
(2,134
)
 
(2,956
)
Debt issued for purchases of businesses
(2,312
)
 
(3,099
)
Cash paid
$
8,241

 
$
7,778


- 10 -

The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 29, 2018
(Amounts in thousands, except share data)

D.
Business Combinations (continued)
The results of operations of acquired businesses have been included in the consolidated statements of operations beginning as of the effective dates of acquisition. The effect of these acquisitions on our consolidated revenues and results of operations for the period ended September 29, 2018 was not significant. Pro forma net sales and results of operations for the acquisitions, had they occurred at the beginning of the nine months ended September 29, 2018 are not material and, accordingly, are not provided.
E.
Identified Intangible Assets and Goodwill, Net
The carrying amounts of the identified intangible assets and goodwill acquired were as follows:
 
September 29, 2018
 
December 31, 2017
Identified Intangible Assets and Goodwill, Net
Carrying
Amount
 
Accumulated
Amortization
 
Carrying
Amount
 
Accumulated
Amortization
Amortized intangible assets:
 
 
 
 
 
 
 
Customer lists/relationships
$
25,012

 
$
17,860

 
$
21,487

 
$
16,846

Employment-related
8,080

 
6,853

 
7,333

 
6,624

Tradenames
6,806

 
5,345

 
5,978

 
5,134

 
 
 
 
 
 
 
 
Amortized intangible assets
39,898

 
$
30,058

 
34,798

 
$
28,604

 
 
 
 
 
 
 
 
Less accumulated amortization
30,058

 
 

 
28,604

 
 

 
 
 
 
 
 
 
 
Identified intangible assets, net
9,840

 
 

 
6,194

 
 

 
 
 
 
 
 
 
 
Unamortized intangible assets:
 

 
 

 
 

 
 

Goodwill
37,762

 
 

 
35,477

 
 

 
$
47,602

 
 

 
$
41,671

 
 

The changes in the carrying amounts of goodwill, by segment, for the nine months ended September 29, 2018 follow:
 
Balance at
January 1, 2018
 
Acquisitions
 
Translation
and Other
Adjustments
 
Balance at
September 29, 2018
Utility
$
3,424

 
$
1,499

 
$

 
$
4,923

Residential and Commercial
32,053

 
1,104

 
(318
)
 
32,839

Total
$
35,477

 
$
2,603

 
$
(318
)
 
$
37,762

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

- 11 -

The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 29, 2018
(Amounts in thousands, except share data)

F.
Long-Term Debt and Commitments Related to Letters of Credit
Our long-term debt consisted of the following:
 
September 29,
2018
 
December 31,
2017
Revolving credit facility:
 
 
 
Swing-line borrowings
$
12,000

 
$

LIBOR borrowings
80,000

 
100,000

 
92,000

 
100,000

5.09% Senior unsecured notes
12,000

 
18,000

3.99% Senior unsecured notes
50,000

 

Term loans
25,481

 
16,242

Capital leases
3,781

 
2,510

 
183,262

 
136,752

Less debt issuance costs
646

 
725

Less current portion
25,991

 
16,817

 
$
156,625

 
$
119,210


Revolving Credit Facility --As of September 29, 2018, 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 29, 2018, we had unused commitments under the facility approximating $155,087, with $94,913 committed, consisting of borrowings of $92,000 and issued letters of credit of $2,913.
Borrowings outstanding bear interest, at Davey Tree’s option, of either (a) a base rate or (b) LIBOR plus a margin adjustment ranging from .875% to 1.50%--with the margin adjustments in both instances based on the Company's leverage ratio at the time of borrowing. The base rate is the greater of (i) the agent bank’s prime rate, (ii) LIBOR plus 1.50%, or (iii) the federal funds rate plus .50%. A commitment fee ranging from .10% to .225% is also required based on the average daily unborrowed commitment.
5.09% Senior Unsecured Notes--During July 2010, we issued 5.09% Senior Unsecured Notes, Series A (the "5.09% Senior Notes"), in the aggregate principal amount of $30,000 pursuant to a Master Note Purchase Agreement (the “5.09% Senior Note Purchase Agreement”) between the Company and the purchasers of the 5.09% Senior Notes. The 5.09% Senior Unsecured Notes are due July 22, 2020.
The 5.09% Senior Notes are equal in right of payment with our revolving credit facility and all other senior unsecured obligations of the Company. Interest is payable semiannually and five equal, annual principal payments commenced on July 22, 2016 (the sixth anniversary of issuance).  The 5.09% Senior Note Purchase Agreement

- 12 -

The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 29, 2018
(Amounts in thousands, except share data)

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

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

3.99% Senior Unsecured Notes--On September 21, 2018, we issued 3.99% Senior Notes, Series A (the "3.99% Senior Notes"), in the aggregate principal amount of $50,000. The 3.99% Senior Notes are due September 21, 2028.
The 3.99% Senior Notes were issued pursuant to a Note Purchase and Private Shelf Agreement (the “3.99% Senior Note Purchase Agreement”) between the Company and the purchasers of the 3.99% Senior Notes. Subsequent series of promissory notes may be issued pursuant to the 3.99% Senior Note Purchase Agreement (the "Shelf Notes") in an aggregate additional principal amount not to exceed $50,000.
The net proceeds of the 3.99% Senior Notes were used to pay down borrowings under our revolving credit facility.
The 3.99% Senior Notes are equal in right of payment with our revolving credit facility and all other senior unsecured obligations of the Company. Interest is payable semiannually and five equal, annual principal payments commence on September 21, 2024 (the sixth anniversary of issuance).  The 3.99% Senior Note Purchase Agreement contains customary events of default and covenants related to limitations on indebtedness and transactions with affiliates and the maintenance of certain financial ratios.
In conjunction with the issuance of the 3.99% Senior Notes, on September 21, 2018, the Company entered into an amendment to its revolving credit facility.
The amendment amends certain provisions and covenants in the credit agreement to generally conform them to the corresponding provisions and covenants in the 3.99% Senior Note Purchase Agreement. The amendment also permits the Company to incur indebtedness arising under the 3.99% Senior Note Purchase Agreement in an aggregate principal amount not to exceed $75,000, which includes the $50,000 of Series A Notes, plus an additional $25,000 in Shelf Notes.
Term loans--Periodically, the company will enter into term loans for the procurement of insurance or to finance acquisitions.
Accounts Receivable Securitization Facility--In May 2018, 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 6, 2019. In addition, for purposes of determining events of default, the Days' Sales Outstanding calculation was amended to include the most recent six fiscal months. The prior calculation was based on the most recent three fiscal months.
The AR Securitization program has a limit of $100,000, of which $67,438 was issued for letters of credit as of September 29, 2018.
Under the AR Securitization program, Davey Tree transfers by selling or contributing current and future trade receivables to a wholly-owned, bankruptcy-remote financing subsidiary which pledges a perfected first priority security interest in the trade receivables--equal to the issued letters of credit ("LCs") as of September 29, 2018--to the bank in exchange for the bank issuing LCs.
Fees payable to the bank include: (a) an LC issuance fee, payable on each settlement date, in the amount of .90% per annum on the aggregate amount of all LCs outstanding plus outstanding reimbursement obligations (e.g.,

- 13 -

The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 29, 2018
(Amounts in thousands, except share data)

F.    Long-Term Debt and Commitments Related to Letters of Credit (continued)
arising from drawn LCs), if any, and (b) an unused LC fee, payable monthly, equal to (i) .35% per annum for each day on which the sum of the total LCs outstanding plus any outstanding reimbursement obligations is greater than or equal to 50% of the facility limit and (ii) .45% per annum for each day on which the sum of the total LCs outstanding plus any outstanding reimbursement obligations is less than 50% of the facility limit. If an LC is drawn and the bank is not immediately reimbursed in full for the drawn amount, any outstanding reimbursement obligation will accrue interest at a per annum rate equal to a reserve-adjusted LIBOR or, in certain circumstances, a base rate equal to the higher of (i) the bank’s prime rate and (ii) the federal funds rate plus .50% and, following any default, 2.00% plus the greater of (a) adjusted LIBOR and (b) a base rate equal to the higher of (i) the bank’s prime rate and (ii) the federal funds rate plus .50%.
The agreements underlying the AR Securitization program contain various customary representations and warranties, covenants, and default provisions which provide for the termination and acceleration of the commitments under the AR Securitization program in circumstances including, but not limited to, failure to make payments when due, breach of a representation, warranty or covenant, certain insolvency events or failure to maintain the security interest in the trade receivables, and defaults under other material indebtedness.
Total Commitments Related to Issued Letters of Credit--As of September 29, 2018, total commitments related to issued letters of credit were $72,355, of which $2,913 were issued under the revolving credit facility, $67,438 were issued under the AR Securitization program, and $2,004 were issued under short-term lines of credit. As of December 31, 2017, total commitments related to issued letters of credit were $63,242, of which $3,088 were issued under the revolving credit facility, $58,150 were issued under the AR Securitization program, and $2,004 were issued under short-term lines of credit.
As of September 29, 2018, we are in compliance with all debt covenants.
G.
Stock-Based Compensation
Our shareholders approved the 2014 Omnibus Stock Plan (the “2014 Stock Plan”) at our annual meeting of shareholders on May 20, 2014. The 2014 Stock Plan replaced the expired 2004 Omnibus Stock Plan (the “2004 plan”) previously approved by the shareholders in 2004. The 2014 Stock Plan is administered by the Compensation Committee of the Board of Directors and has a term of ten years. All directors of the Company and employees of the Company and its subsidiaries are eligible to participate in the 2014 Stock Plan. The 2014 Stock Plan (similar to the 2004 plan) continues the maintenance of the Employee Stock Purchase Plan, as well as provisions for the grant of stock options and other stock-based incentives. The 2014 Stock Plan provides for the grant of five percent of the number of the Company’s common shares outstanding as of the first day of each fiscal year plus the number of common shares that were available for grant of awards, but not granted, in prior years. In no event, however, may the number of common shares available for the grant of awards in any fiscal year exceed ten percent of the common shares outstanding as of the first day of that fiscal year. Common shares subject to an award that is forfeited, terminated, or canceled without having been exercised are generally added back to the number of shares available for grant under the 2014 Stock Plan.

- 14 -

The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 29, 2018
(Amounts in thousands, except share data)

G.
Stock-Based Compensation (continued)
Stock-based compensation expense under all share-based payment plans -- our Employee Stock Purchase Plan, stock option plans, stock-settled stock appreciation rights and restricted stock units -- are included in the results of operations as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Compensation expense, all share-based payment plans
$
785

 
$
847

 
$
2,578

 
$
3,295

Stock-based compensation consisted of the following:
Employee Stock Purchase Plan--Under the Employee Stock Purchase Plan, all full-time employees with one year of service are eligible to purchase, through payroll deduction, common shares. Employee purchases under the Employee Stock Purchase Plan are at 85% of the fair market value of the common shares--a 15% discount. We recognize compensation costs as payroll deductions are made. The 15% discount of total shares purchased under the plan resulted in compensation cost of $765 being recognized for the nine months ended September 29, 2018 and $670 for the nine months ended September 30, 2017.
Stock Option Plans--The stock options outstanding were awarded under a graded vesting schedule, measured at fair value, and have a term of ten years. Compensation costs for stock options are recognized over the requisite service period on the straight-line recognition method. Compensation cost recognized for stock options was $506 for the nine months ended September 29, 2018 and $532 for the nine months ended September 30, 2017.
Stock-Settled Stock Appreciation Rights--During the nine months ended September 29, 2018, the Compensation Committee awarded 121,243 stock-settled stock appreciation rights (“SSARs”) to certain management employees, which vest ratably over five years. A SSAR is an award that allows the recipient to receive common shares equal to the appreciation in the fair market value of our common shares between the date the award was granted and the conversion date of the shares vested.

- 15 -

The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 29, 2018
(Amounts in thousands, except share data)

G.
Stock-Based Compensation (continued)
The following table summarizes our SSARs as of September 29, 2018.
Stock-Settled
Stock Appreciation Rights
 
Number
of
Rights
 
Weighted-
Average
Award Date
Value
 
Weighted-
Average
Remaining
Contractual
Life
 
Unrecognized
Compensation
Cost
 
Aggregate
Intrinsic
Value
Unvested, January 1, 2018
 
448,180

 
$
3.10

 
 
 
 
 
 
Granted
 
121,243

 
3.84

 
 
 
 
 
 
Forfeited
 

 

 
 
 
 
 
 
Vested
 
(150,120
)
 
3.01

 
 
 
 
 
 
Unvested, September 29, 2018
 
419,303

 
$
3.35

 
2.3 years
 
$
1,058

 
$
8,260

Compensation costs for SSARs are determined using a fair-value method and amortized over the requisite service period. Compensation expense for SSARs was $406 for the nine months ended September 29, 2018 and $931 for the nine months ended September 30, 2017.
Restricted Stock Units--During the nine months ended September 29, 2018, the Compensation Committee awarded 31,738 performance-based restricted stock units ("PRSUs") to certain management employees and 13,188 restricted stock units ("RSUs") to nonemployee directors. The Compensation Committee made similar awards in prior periods. The awards vest over specified periods. The following table summarizes PRSUs and RSUs as of September 29, 2018.
Restricted Stock Units
 
Number
of
Stock
Units
 
Weighted-
Average
Grant Date
Value
 
Weighted-
Average
Remaining
Contractual
Life
 
Unrecognized
Compensation
Cost
 
Aggregate
Intrinsic
Value
Unvested, January 1, 2018
 
290,666

 
$
14.41

 
 
 
 
 
 
Granted
 
44,926

 
18.55

 
 
 
 
 
 
Forfeited
 

 

 
 
 
 
 
 
Vested
 
(80,806
)
 
12.71

 
 
 
 
 
 
Unvested, September 29, 2018
 
254,786

 
$
15.67

 
2.2 years
 
$
1,996

 
$
5,019

Employee PRSUs
 
216,134

 
$
15.40

 
2.4 years
 
$
1,617

 
$
4,258

Nonemployee Director RSUs
 
38,652

 
$
17.17

 
1.6 years
 
$
379

 
$
761

Compensation cost for restricted stock awards is determined using a fair-value method and amortized on the straight-line recognition method over the requisite service period. Compensation expense on restricted stock awards totaled $901 for the nine months ended September 29, 2018 and $1,162 for the nine months ended September 30, 2017.
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

- 16 -

The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 29, 2018
(Amounts in thousands, except share data)

G.
Stock-Based Compensation (continued)
exercise behavior. Expected volatilities utilized in the binomial model are based on historical volatility of our stock prices and other factors. Similarly, the dividend yield is based on historical experience and expected future changes. The binomial model also incorporates exercise assumptions based on an analysis of historical data. The expected life of the stock-based awards is derived from the output of the binomial model and represents the period of time that awards granted are expected to be outstanding.
The fair values of stock-based awards granted were estimated at the dates of grant with the following weighted-average assumption.
 
Nine Months Ended
 
September 29,
2018
 
September 30,
2017
Volatility rate
10.1
%
 
10.3
%
Risk-free interest rate
2.7
%
 
2.2
%
Expected dividend yield
.7
%
 
.7
%
Expected life of awards (years)
9.2

 
8.9

General Stock Option Information--The following table summarizes activity under the stock option plans for the nine months ended September 29, 2018.
Stock Options
 
Number
of
Options
Outstanding
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Life
 
Aggregate
Intrinsic
Value
Outstanding, January 1, 2018
 
1,528,615

 
$
13.05

 
 
 
 
Granted
 
143,250

 
19.10

 
 
 
 
Exercised
 
(104,243
)
 
10.24

 
 
 
 
Forfeited
 
(49,000
)
 
13.43

 
 
 
 
Outstanding, September 29, 2018
 
1,518,622

 
$
13.80

 
6.0 years
 
$
8,960

 
 
 
 
 
 
 
 
 
Exercisable, September 29, 2018
 
942,172

 
$
11.66

 
4.8 years
 
$
7,577

As of September 29, 2018, there was approximately $1,558 of unrecognized compensation cost related to stock options outstanding. The cost is expected to be recognized over a weighted-average period of 2.3 years. “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.

- 17 -

The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 29, 2018
(Amounts in thousands, except share data)

H.
Net Periodic Benefit Expense--Defined Benefit Pension Plans
The results of operations included the following net periodic benefit expense (income) recognized related to our defined-benefit pension plans.
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Components of pension expense (income)
 
 
 
 
 
 
 
Service costs--increase in benefit obligation earned
$
100

 
$
132

 
$
300

 
$
397

Interest cost on projected benefit obligation
180

 
263

 
539

 
790

Expected return on plan assets
(58
)
 
(169
)
 
(173
)
 
(508
)
Amortization of net actuarial loss
181

 
237

 
545

 
712

Amortization of prior service cost
16

 
17

 
48

 
48

Net pension expense of defined benefit pension plans
$
419

 
$
480

 
$
1,259

 
$
1,439

The components of net periodic benefit expense, other than the service cost component, are included in the line item other income (expense) in the income statement.
I.
Income Taxes
Our income tax provision for interim periods is determined using an estimate of our annual effective tax rate adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter we update our estimate of the annual effective tax rate and, if our estimated annual tax rate changes, we make a cumulative adjustment. The annual effective tax rate for the nine months ended September 29, 2018 is 21.7%.  Our annual effective tax rate for the nine months ended September 30, 2017 was estimated at 37.8%. Our actual effective tax rate was 27.3% and 36.3% for the three months ended September 29, 2018 and September 30, 2017, respectively. The change in rate is primarily due to the Tax Reform Act, that was signed into law on December 22, 2017 by the President of the United States, which reduces the corporate federal income tax rate for 2018 and beyond from 35% to 21%.
As a result of the Tax Reform Act, the Company estimated a tax liability of $6,100 due to the transition toll tax on the deemed repatriation of deferred foreign earnings of non-U.S. operations, which the Company believes will be fully offset by foreign tax credits. The final amounts recorded in subsequent financial statements may differ from these provisional amounts due to, among other things, additional analysis related to foreign deferred earnings, changes in interpretations of the Tax Reform Act and related assumptions of the Company and additional regulatory guidance that may be issued.
On December 22, 2017, the SEC issued Staff Accounting Bulletin 118 (“SAB 118”). This guidance allows registrants a “measurement period”, not to exceed one year from the date of enactment, to complete their accounting for the tax effects of the Tax Reform Act. SAB 118 further directs that during the measurement period, registrants who are able to make reasonable estimates for the tax effects of the Tax Reform Act should include those amounts in their financial statements as “provisional” amounts. Registrants should reflect adjustments over

- 18 -

The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 29, 2018
(Amounts in thousands, except share data)

I.
Income Taxes (continued)
subsequent periods as they are able to refine their estimates and complete their accounting for the tax effects of the Tax Reform Act. The provisional amounts computed by the Company will be finalized in the fourth quarter of 2018.
At December 31, 2017, we had unrecognized tax benefits of $2,581, of which $1,948 would affect our effective rate if recognized, and accrued interest expense related to unrecognized benefits of $128. During the second quarter 2018 we decreased our unrecognized tax benefits by $1,547 as a result of the pending settlement of the IRS audits of our 2015 and 2016 U.S. income tax returns. As of September 29, 2018, we had unrecognized tax benefits of $1,059, of which $585 would affect our effective rate if recognized, and accrued interest expense related to unrecognized benefits of $24. 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 federal, state, local and Canadian authorities in the area of income tax. These audits include questioning the timing and the amount of income and deductions and the allocation of income and deductions among various tax jurisdictions. The IRS finalized their audit of our 2015 and 2016 U.S. income tax returns in July 2018. With the exception of U.S. state jurisdictions, the Company is no longer subject to examination by tax authorities for the years through 2016. As of September 29, 2018, we believe it is reasonably possible that the total amount of unrecognized tax benefits will not significantly increase or decrease.
J.
Accumulated Other Comprehensive Income (Loss)
Comprehensive income (or loss) is comprised of net income (or net loss) and other components, including currency translation adjustments and defined-benefit pension plan adjustments.
The following summarizes the components of other comprehensive income (loss) accumulated in shareholders’ equity for the three and nine months ended September 29, 2018 and the three and nine months ended September 30, 2017:
Three Months Ended September 29, 2018
 
Foreign
Currency
Translation
Adjustments
 
Defined
Benefit
Pension
Plans
 
Accumulated
Other
Comprehensive
Income (Loss)
Balance at July 1, 2018
 
$
(4,884
)
 
$
(4,795
)
 
$
(9,679
)
Other comprehensive income (loss) before reclassifications
 
 
 
 
 
 
Unrealized gains
 
$
517

 
$

 
$
517

Amounts reclassified from accumulated other comprehensive income (loss)
 

 
197

 
197

Tax effect
 

 
(51
)
 
(51
)
Net of tax amount
 
517

 
146

 
663

Balance at September 29, 2018
 
$
(4,367
)
 
$
(4,649
)
 
$
(9,016
)

- 19 -

The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 29, 2018
(Amounts in thousands, except share data)

J.
Accumulated Other Comprehensive Income (Loss) (continued)
Three Months Ended September 30, 2017
 
Foreign
Currency
Translation
Adjustments
 
Defined
Benefit
Pension
Plans
 
Accumulated
Other
Comprehensive
Income (Loss)
Balance at July 2, 2017
 
$
(4,297
)
 
$
(6,348
)
 
$
(10,645
)
Other comprehensive income (loss) before reclassifications
 
 
 
 
 
 
Unrealized gains
 
$
1,295

 
$

 
$
1,295

Amounts reclassified from accumulated other comprehensive income (loss)
 

 
254

 
254

Tax effect
 

 
(97
)
 
(97
)
Net of tax amount
 
1,295

 
157

 
1,452

Balance at September 30, 2017
 
$
(3,002
)
 
$
(6,191
)
 
$
(9,193
)
Nine Months Ended September 29, 2018
 
Foreign
Currency
Translation
Adjustments
 
Defined
Benefit
Pension
Plans
 
Accumulated
Other
Comprehensive
Income (Loss)
Balance at January 1, 2018
 
$
(3,305
)
 
$
(5,088
)
 
$
(8,393
)
Other comprehensive income (loss) before reclassifications
 
 
 
 
 
 
Unrealized losses
 
$
(1,062
)
 
$

 
$
(1,062
)
Amounts reclassified from accumulated other comprehensive income (loss)
 

 
593

 
593

Tax effect
 

 
(154
)
 
(154
)
Net of tax amount
 
(1,062
)
 
439

 
(623
)
Balance at September 29, 2018
 
$
(4,367
)
 
$
(4,649
)
 
$
(9,016
)

Nine Months Ended September 30, 2017
 
Foreign
Currency
Translation
Adjustments
 
Defined
Benefit
Pension
Plans
 
Accumulated
Other
Comprehensive
Income (Loss)
Balance at January 1, 2017
 
$
(5,500
)
 
$
(6,662
)
 
$
(12,162
)
Other comprehensive income (loss) before reclassifications
 
 
 
 
 
 
Unrealized gains
 
$
2,498

 
$

 
$
2,498

Amounts reclassified from accumulated other comprehensive income (loss)
 

 
760

 
760

Tax effect
 

 
(289
)
 
(289
)
Net of tax amount
 
2,498

 
471

 
2,969

Balance at September 30, 2017
 
$
(3,002
)
 
$
(6,191
)
 
$
(9,193
)
The changes in defined benefit pension plans of $197 and $593 for the three and nine months ended September 29, 2018, respectively, and the $254 and $760 for the three and nine months ended September 30, 2017, respectively,

- 20 -

The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 29, 2018
(Amounts in thousands, except share data)

J.
Accumulated Other Comprehensive Income (Loss) (continued)
are included in net periodic pension expense classified in the condensed statement of operations as general and administrative or other income (expense).
K.
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 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Income available to common shareholders:
 
 
 
 
 
 
 
Net income
$
8,384

 
$
10,237

 
$
23,471

 
$
20,573

 
 
 
 
 
 
 
 
Weighted-average shares:
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
Outstanding
23,592

 
24,925

 
23,916

 
24,965

Partially-paid share subscriptions
176

 
195

 
527

 
586

Basic weighted-average shares
23,768

 
25,120

 
24,443

 
25,551

 
 
 
 
 
 
 
 
Diluted:
 
 
 
 
 
 
 
Basic from above
23,768

 
25,120

 
24,443

 
25,551

Incremental shares from assumed:
 
 
 
 
 
 
 
Exercise of stock subscription purchase rights
151

 
158

 
146

 
148

Exercise of stock options and awards
897

 
1,138

 
954

 
1,015

Diluted weighted-average shares
24,816

 
26,416

 
25,543

 
26,714

 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 
 
 
 
Basic
$
.35

 
$
.41

 
$
.96

 
$
.81

 
 
 
 
 
 
 
 
Diluted
$
.34

 
$
.39

 
$
.92

 
$
.77


- 21 -

The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 29, 2018
(Amounts in thousands, except share data)

K.
Per Share Amounts and Common and Redeemable Shares Outstanding (continued)
Common and Redeemable Shares Outstanding--A summary of the activity of the common and redeemable shares outstanding for the nine months ended September 29, 2018 follows:
 
Common Shares
Net of Treasury Shares
 
Redeemable Shares
 
Total
Shares outstanding at January 1, 2018
17,753,832

 
6,467,027

 
24,220,859

Shares purchased
(1,053,421
)
 
(560,220
)
 
(1,613,641
)
Shares sold
369,296

 
250,767

 
620,063

Stock subscription offering -- cash purchases
80,487

 

 
80,487

Options and awards exercised
140,663

 

 
140,663

Shares outstanding at September 29, 2018
17,290,857

 
6,157,574

 
23,448,431

On September 29, 2018, we had 23,448,431 common and redeemable shares outstanding, employee options exercisable to purchase 942,172 common shares, partially-paid subscriptions for 702,984 common shares and purchase rights outstanding for 276,074 common shares.
Stock Subscription Offering--Beginning May 2012, the Company offered to eligible employees and nonemployee directors the right to subscribe to common shares of the Company at $9.85 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 promissory note for the balance due with interest at 2%. Payments on the promissory note can be made either by payroll deductions or annual lump-sum payments of both principal and interest.
Common shares purchased under the plan have been pledged as security for the payment of the promissory note and the common shares will not be issued until the promissory note is paid-in-full. Dividends will be paid on all subscribed shares, subject to forfeiture to the extent that payment is not ultimately made for the shares.
All participants in the offering purchasing in excess of $5 of common shares were granted a "right" to purchase one additional common share at a price of $9.85 per share for every three common shares purchased under the plan. As a result of the stock subscription, employees were granted rights to purchase 423,600 common shares. Each right may be exercised at the rate of one-seventh per year and will expire seven years after the date that the right was granted. Employees may not exercise a right should they cease to be employed by the Company.

- 22 -

The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 29, 2018
(Amounts in thousands, except share data)

L.
Operations by Business Segment
We provide a wide range of arboricultural, horticultural, environmental and consulting services to residential, utility, commercial and government entities throughout the United States and Canada. We have two reportable operating segments organized by type or class of customer: Residential and Commercial, and Utility.
Residential and Commercial--Residential and Commercial provides services to our residential and commercial customers including: the treatment, preservation, maintenance, removal and planting of trees, shrubs and other plant life; the practice of landscaping, grounds maintenance, tree surgery, tree feeding and tree spraying; the application of fertilizer, herbicides and insecticides; and, natural resource management and consulting, forestry research and development, and environmental planning.
Utility--Utility is principally engaged in providing services to our utility customers--investor-owned, municipal utilities, and rural electric cooperatives--including: the practice of line-clearing and vegetation management around power lines and rights-of-way and chemical brush control; and, natural resource management and consulting, forestry research and development, and environmental planning.
All other operating activities, including research, technical support and laboratory diagnostic facilities, are included in “All Other.”
Measurement of Segment Profit and Loss and Segment Assets--We evaluate performance and allocate resources based primarily on operating income and also actively manage business unit operating assets. Segment information, including reconciling adjustments, is presented consistent with the basis described in our 2017 Annual Report.    

- 23 -

The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 29, 2018
(Amounts in thousands, except share data)

L.
Operations by Business Segment (continued)
Segment information reconciled to consolidated external reporting information follows:
 
Utility
 
Residential and
Commercial
 
All
Other
 
Reconciling
Adjustments
 
 
Consolidated
Three Months Ended September 29, 2018
 
 
 
 
 
 
 
 
 
 
Revenues
$
135,768

 
$
130,408

 
$
(858
)
 
$

 
 
$
265,318

Income (loss) from operations
6,198

 
13,360

 
(3,615
)
 
(1,358
)
(a)
 
14,585

Interest expense
 
 
 
 
 
 
(1,811
)
 
 
(1,811
)
Interest income
 
 
 
 
 
 
80

 
 
80

Other income (expense), net
 
 
 
 
 
 
(1,322
)
 
 
(1,322
)
Income before income taxes
 
 
 
 
 
 
 
 
 
$
11,532

Segment assets, total
$
222,194

 
$
214,374

 
$

 
$
85,087

(b)
 
$
521,655

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2017
 
 
 
 
 
 
 
 
 
 
Revenues
$
124,540

 
$
124,678

 
$
370

 
$

 
 
$
249,588

Income (loss) from operations
6,854

 
14,616

 
(490
)
 
(1,931
)
(a)
 
19,049

Interest expense
 
 
 
 
 
 
(1,278
)
 
 
(1,278
)
Interest income
 
 
 
 
 
 
67

 
 
67

Other income (expense), net
 
 
 
 
 
 
(1,764
)
 
 
(1,764
)
Income before income taxes
 
 
 
 
 
 
 
 
 
$
16,074

Segment assets, total
$
180,031

 
$
206,946

 
$

 
$
92,632

(b)
 
$
479,609

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 29, 2018
 
 
 
 
 
 
 
 
 
 
Revenues
$
382,951

 
$
361,218

 
$
449

 
$

 
 
$
744,618

Income (loss) from operations
14,277

 
37,089

 
(10,171
)
 
(2,476
)
(a)
 
38,719

Interest expense
 
 
 
 
 
 
(4,966
)
 
 
(4,966
)
Interest income
 
 
 
 
 
 
259

 
 
259

Other income (expense), net
 
 
 
 
 
 
(4,036
)
 
 
(4,036
)
Income before income taxes
 
 
 
 
 
 
 
 
 
$
29,976

Segment assets, total
$
222,194

 
$
214,374

 
$

 
$
85,087

(b)
 
$
521,655

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2017
 
 
 
 
 
 
 
 
 
 
Revenues
$
349,921

 
$
335,564

 
$
1,953

 
$

 
 
$
687,438

Income (loss) from operations
13,782

 
34,871

 
(3,683
)
 
(4,257
)
(a)
 
40,713

Interest expense
 
 
 
 
 
 
(3,607
)
 
 
(3,607
)
Interest income
 
 
 
 
 
 
210

 
 
210

Other income (expense), net
 
 
 
 
 
 
(4,242
)
 
 
(4,242
)
Income before income taxes
 
 
 
 
 
 
 
 
 
$
33,074

Segment assets, total
$
180,031

 
$
206,946

 
$

 
$
92,632

(b)
 
$
479,609

Reconciling adjustments from segment reporting to consolidated external financial reporting include unallocated corporate items:
(a)
Reclassification of depreciation expense and allocation of corporate expenses.
(b)
Corporate assets include cash, prepaid expenses, corporate facilities, enterprise-wide information systems and other nonoperating assets. 

- 24 -

The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 29, 2018
(Amounts in thousands, except share data)

M.
Revenue Recognition
We account for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which we adopted on January 1, 2018, using the modified retrospective method. See Note A for further discussion of the adoption, including the impact on our 2018 financial statements.
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 all of the goods or services promised in the contract regardless of whether they are explicitly stated or are implied by customary business practices. A description of our performance obligations is included below.
Residential and Commercial Services - We provide a wide array of services for our residential and commercial customers including the treatment, preservation, maintenance, removal and planting of trees, shrubs and other plant life, landscaping, grounds maintenance, the application of fertilizer, herbicides and insecticides, natural resource management and consulting, forestry research and development, and environmental planning. A contract with a customer may include only one of these services, all of these services, or a combination of these services. For contracts in which we provide all, or a combination of, these services, we believe that the nature of our promise is to provide an integrated property management service for our customer. In these contracts, the customer has effectively outsourced the care and maintenance of its property grounds to us during the duration of the contract as we are responsible for providing a continuous delivery of outsourced maintenance activities over the contract term. As such, for contracts that contain a combination of services, we have concluded that we have a single performance obligation, which is accounted for as a series of distinct services.
Utility Services - We provide a suite of vegetation management or arboricultural 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, chemical brush control, natural resource management and consulting, forestry research and development, and environmental planning. A contract with a customer may include only one of these services, all of these services, or a combination of these services. For contracts in which we provide all, or a combination of, these services, we believe that the nature of our promise is to provide an integrated overall vegetation management service, rather than the performance of discrete activities or services for the customer. As such, for contracts that contain a combination of services, we have concluded that we have a single performance obligation, which is accounted for as a series of distinct services.
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.

- 25 -

The Davey Tree Expert Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 29, 2018
(Amounts in thousands, except share data)

M.
Revenue Recognition (continued)
Revenue from our residential, commercial, and utility performance obligations is recognized over time as the customer simultaneously receives and consumes the benefits of our services as we perform them. Many of our contracts compensate us based on an agreed upon price for each increment of service provided to the customer. Therefore, revenue is mainly recognized as each increment of service is provided to the customer at the amount that we are contractually entitled to. For contracts that contain a fixed price, we generally use a units-delivered based output method to measure progress. Revenue from our consulting services is also recognized over time and we use a cost-based input method to measure progress. Payment for our services is generally due within 30 days of such services being provided to the customer.
The transaction price for our contracts is determined upon establishment of the contract that contains the final terms of the sale, including the description, quantity, and price of each service purchased. Certain of our contracts contain variable consideration, including index-based pricing, chargebacks, and prompt payment discounts. The Company estimates variable consideration and performs a constraint analysis for these contracts on the basis of both historical information and current trends. However, these types of variable consideration do not have a material effect on the Company’s revenue, either individually or in the aggregate. In addition, although our contracts generally include fixed pricing for each increment of service, the ultimate quantity of services that will be required in order to fulfill our performance obligations is unknown at contract inception. Therefore, our total transaction price ultimately varies based on the quantity and types of services provided to our customer. However, this type of variable consideration is allocated entirely to the distinct services within the series to which it relates.
Disaggregation of Revenue
The following tables disaggregate our revenue for the three and nine months ended September 29, 2018 by major sources:
Three Months Ended September 29, 2018
 
Utility
 
Residential and Commercial
 
All Other
 
Consolidated
Type of service:
 
 
 
 
 
 
 
 
  Tree and plant care
 
$
99,766

 
$
79,709

 
$
(1,542
)
 
$
177,933

  Grounds maintenance
 

 
26,024

 

 
26,024

  Storm damage services
 
1,894

 
1,082

 

 
2,976

  Consulting and other
 
34,108

 
23,593

 
684

 
58,385

     Total revenues
 
$
135,768

 
$
130,408

 
$
(858
)
 
$
265,318

 
 
 
 
 
 
 
 
 
Geography:
 
 
 
 
 
 
 
 
  United States
 
$
125,302

 
$