Company Quick10K Filing
Quick10K
Davey Tree Expert
10-K 2018-12-31 Annual: 2018-12-31
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
10-Q 2015-10-03 Quarter: 2015-10-03
10-Q 2015-07-04 Quarter: 2015-07-04
10-Q 2015-04-04 Quarter: 2015-04-04
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-27 Quarter: 2014-09-27
10-Q 2014-06-28 Quarter: 2014-06-28
10-Q 2014-03-29 Quarter: 2014-03-29
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-03-07 Officers, Exhibits
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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KINS Kingstone Companies 146
VIST Vist Financial 0
BTHT Best Hometown Bancorp 0
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PEPT Peptide Technologies 0
TYGS TYG Solutions 0
DAVEY 2018-12-31
Part I
Item 1. Business.
Item 1A. Risk Factors.
Item 1B. Unresolved Sec Staff Comments.
Item 2. Properties.
Item 3. Legal Proceedings.
Item 4. Mine Safety Disclosures.
Part II
Item 5. Market for Company's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Item 6. Selected Financial Data.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Item 8. Financial Statements and Supplementary Data.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Item 9A. Controls and Procedures.
Item 9B. Other Information.
Part III
Item 10. Directors, Executive Officers and Corporate Governance.
Item 11. Executive Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Item 14. Principal Accountant Fees and Services.
Part IV
Item 15. Exhibits and Financial Statement Schedules.
Item 16. Form 10-K Summary.
Item 8, Item 15(A)(1) and (2)
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Davey Tree Expert Earnings 2018-12-31

DAVEY 10K Annual Report

Balance SheetIncome StatementCash Flow

10-K 1 dt2018q410k-q42018.htm 10-K Document

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, $1.00 par value
Indicate by check mark if the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act).  Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes ¨ No x
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
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
 
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 Act).  Yes ¨ No x
There were 22,922,773 Common Shares outstanding as of March 8, 2019. The aggregate market value of the Common Shares held by nonaffiliates of the registrant as of June 30, 2018 was $417,618,382. For purposes of this calculation, it is assumed that the registrant's affiliates include the registrant's Board of Directors and its executive officers.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 2019 Annual Meeting of Shareholders, to be held on May 21, 2019, are incorporated by reference into Part III (to be filed within 120 calendar days of the registrant’s fiscal year end).
 
 
 
 
 



NOTE REGARDING FORWARD-LOOKING STATEMENTS

This annual report on Form 10-K contains forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995) in "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations," "Item 7A - Quantitative and Qualitative Disclosures About Market Risk," and elsewhere. These statements relate to future events or our future financial performance. In some cases, forward-looking statements may be identified by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors that may cause our or our industry's actual results, levels of activity, performance or achievements to differ materially from what is expressed or implied in these forward-looking statements. Some important factors that could cause actual results to differ materially from those in the forward-looking statements include:
We may be unable to attract and retain a sufficient number of qualified employees for our field operations, and we may be unable to attract and retain qualified management personnel.
We have significant contracts with our utility, commercial and government customers that include liability risk exposure as part of those contracts. Consequently, we have substantial excess-umbrella liability insurance, and increases in the cost of obtaining adequate insurance, or the inadequacy of our self-insurance accruals or insurance coverages, could negatively impact our liquidity and financial condition.
The unavailability or cancellation of third-party insurance coverage may have a material adverse effect on our financial condition and results of operations as well as disrupt our operations.
We could be materially adversely affected by wildfires in California and other areas as well as other severe weather events and natural disasters, including negative impacts to our business, reputation, financial condition, results of operations, liquidity and cash flows.
Our business, other than tree services to utility customers, is highly seasonal and weather dependent.
Significant customers, particularly utilities, may experience financial difficulties, resulting in payment delays or delinquencies.
We are subject to litigation and third-party and governmental regulatory claims and adverse litigation judgments or settlements resulting from those claims could materially adversely affect our business.
Significant increases in fuel prices for extended periods of time will increase our operating expenses.
We are subject to intense competition.
Various economic factors may adversely impact our customers’ spending and pricing for our services, and impede our collection of accounts receivable.
The impact of regulations initiated as a response to possible changing climate conditions could have a negative effect on our results of operations or our financial condition.
The seasonal nature of our business and changes in general and local economic conditions, among other factors, may cause our quarterly results to fluctuate, and our prior performance is not necessarily indicative of future results.
We may misjudge a competitive bid and be contractually bound to an unprofitable contract.
A disruption in our information technology systems, including a disruption related to cybersecurity, could adversely affect our financial performance.
We are dependent, in part, on our reputation of quality, integrity and performance. If our reputation is damaged, we may be adversely affected.
Because no public market exists for our common shares, the ability of shareholders to sell their common shares is limited.
Our failure to comply with environmental laws could result in significant liabilities, fines and/or penalties.
We may encounter difficulties obtaining surety bonds or letters of credit necessary to support our operations.
The uncertainties in the credit and financial markets may limit our access to capital.
Fluctuations in foreign currency exchange rates may have a material adverse impact on our operating results.
Significant increases in health care costs could negatively impact our results of operations or financial position.
Our facilities could be damaged or our operations could be disrupted, or our customers or vendors may be adversely affected, by events such as natural disasters, pandemics, terrorist attacks or other external events.
Our inability to properly verify the employment eligibility of our employees could adversely affect our business.

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

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THE DAVEY TREE EXPERT COMPANY
FORM 10-K
For the Year Ended December 31, 2018
 
TABLE OF CONTENTS
 
 
 
Page
 
 
PART I
 
 
 
PART II
 
 
 
PART III
 
 
 
PART IV
 
 
 
 
 



“We,” “Us,” “Our,” “Davey” and “Davey Tree,” unless the context otherwise requires, means The Davey Tree Expert Company and its subsidiaries.

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PART I

Item 1.  Business.
General
The Davey Tree Expert Company, which was founded in 1880 and incorporated in Ohio in 1909, and its subsidiaries ("we" or "us") provide a wide range of arboricultural, horticultural, environmental and consulting services to our customers throughout the United States and Canada. We have two reportable operating segments organized by type or class of customer: Residential and Commercial, and Utility.
Our Residential and Commercial segment 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.
Our Utility segment is principally engaged in providing services to our utility customers--investor-owned, municipal utilities, and rural electric cooperatives--including: the practice of line-clearing and vegetation management around power lines, rights-of-way and chemical brush control; and, natural resource management and consulting, forestry research and development and environmental planning.
We also maintain research, technical support and laboratory diagnostic facilities.
Competition and Customers
Our Residential and Commercial segment is one of the largest national tree care organizations in the United States, and competes with other national and local firms with respect to its services. On a national level, our competition is primarily landscape construction and maintenance companies as well as residential and commercial lawn care companies. At a local and regional level, our competition comes mainly from small, local companies which are engaged primarily in tree care and lawn services. Our Utility segment is the second largest organization in the industry in the United States, and competes principally with one major national competitor, The Asplundh Tree Expert Co., as well as several smaller regional firms.
Principal methods of competition in both operating segments are customer service, marketing, image, performance and reputation. Our program to meet our competition stresses the necessity for our employees to have and project to customers a thorough knowledge of all horticultural services provided, and utilization of modern, well-maintained equipment. Pricing is not always a critical factor in a customer's decision with respect to our Residential and Commercial segment; however, pricing is generally the principal method of competition for our Utility segment, although in most instances consideration is given to reputation and past production performance.
We provide a wide range of horticultural services to private companies, public utilities, local, state and federal agencies, and a variety of industrial, commercial and residential customers. During 2018, we had revenues of approximately $125 million, or approximately 12% of total revenues, from Pacific Gas & Electric Company ("PG&E"), our largest customer. On January 29, 2019, PG&E filed for Chapter 11 bankruptcy. As a utility company, PG&E serves residential and industrial customers in California and has an ongoing obligation to continue to serve its customers. Therefore, we do not anticipate PG&E's bankruptcy to have a material impact on our future cash flows and results of operations.
Regulation and Environment
Our facilities and operations, in common with those of the industry generally, are subject to governmental regulations designed to protect the environment. This is particularly important with respect to our services regarding insect and disease control, because these services involve, to a considerable degree, the blending and application of spray materials, which require formal licensing in most areas. Constant changes in environmental conditions, environmental awareness, technology and social attitudes make it necessary for us to maintain a high degree of awareness of the impact such changes have on the market for our services. We believe that we comply in all material respects with existing federal, state and local laws regulating the use of materials in our spraying operations as well as the other aspects of our business that are subject to any such regulation.

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Marketing
We solicit business from residential customers principally through referrals, direct mail programs and to a lesser extent through the placement of advertisements in national magazines and trade journals, local newspapers and "yellow pages" telephone directories. We also employ online marketing and lead generation strategies, including email marketing campaigns, search engine optimization, search engine marketing, and social media communication. Business from utility and commercial customers is obtained principally through negotiated contracts and competitive bidding. We carry out all of our sales and services through our employees. We generally do not use agents, and do not franchise our name or business.
Seasonality
Our business is seasonal, primarily due to fluctuations in horticultural services provided to Residential and Commercial customers and to a lesser extent by budget constraints imposed on our Utility customers. Because of this seasonality, we have historically incurred losses in the first quarter, while sales and earnings are generally highest in the second and third quarters of the calendar year. Consequently, this has created heavy demands for additional working capital at various times throughout the year. We borrow primarily against bank commitments in the form of a revolving credit facility and issue notes to provide the necessary funds for our operations. You can find more information about our bank commitments in “Liquidity and Capital Resources” of this report under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Other Factors
Due to rapid changes in equipment technology and intensity of use, we must constantly update our equipment and processes to ensure that we provide competitive services to our customers and continue our compliance with the Occupational Safety and Health Act.
We own several trademarks including "Davey," "Davey and Design," "Arbor Green Pro," "Arbor Green," and "Davey Resource Group." Through substantial advertising and use, we believe that these trademarks have become of value in the identification and acceptance of our products and services.
Employees
We employed approximately 8,900 employees at December 31, 2018. However, employment levels fluctuate due to seasonal factors affecting our business. We consider our employee relations to be good.
Domestic and Foreign Operations
We sell our services to customers in the United States and Canada.
We do not consider the risks attendant to our business with foreign customers, other than currency exchange risks, to be materially different from those attendant to our business with domestic customers.
Access to Company Information
Davey Tree’s internet address is http://www.davey.com. Through our internet website, by hyperlink to the Securities and Exchange Commission (“SEC”) website (http://www.sec.gov), we make available, free of charge, our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports. Availability of the reports occurs contemporaneously with the electronic posting to the SEC’s website as the reports are electronically filed with or furnished to the SEC. The information on our website is not a part of this Annual Report on Form 10-K.
The following documents are also made available on our website and a copy will be mailed, without charge, upon request to our Corporate Secretary:
Code of Ethics
Code of Ethics for Financial Matters


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Item 1A.  Risk Factors.
The factors described below represent the principal risks we face. Except as otherwise indicated, these factors may or may not occur and we are not in a position to express a view on the likelihood of any such factor occurring. Other factors may exist that we do not consider to be significant based on information that is currently available or that we are not currently able to anticipate.
We may be unable to employ a sufficient workforce for our field operations.
Our industry operates in an environment that requires heavy manual labor. We may experience slower growth in the labor force for this type of work than in the past. As a result, we may experience labor shortages or the need to pay more to attract and retain qualified employees.
We could be negatively impacted if our self-insurance accruals or our insurance coverages prove to be inadequate.
We are generally self-insured for losses and liabilities related to workers' compensation, vehicle liability and general liability claims (including any wildfire-related claims, up to certain retained coverage limits). A liability for unpaid claims and associated expenses, including incurred but not reported losses, is actuarially determined and reflected in our consolidated balance sheet as an accrued liability. The determination of such claims and expenses, and the extent of the need for accrued liabilities, are continually reviewed and updated. If we were to experience insurance claims or costs above our estimates and were unable to offset such increases with earnings, our business could be adversely affected. Also, where we self-insure, a deterioration in claims management, whether by our management or by a third-party claims administrator, could lead to delays in settling claims, thereby increasing claim costs, particularly as it relates to workers’ compensation. In addition, catastrophic uninsured claims filed against us or the inability of our insurance carriers to pay otherwise-insured claims would have an adverse effect on our financial condition.
Furthermore, many customers, particularly utilities, prefer to do business with contractors with significant financial resources, who can provide substantial insurance coverage. Should we be unable to renew our excess liability insurance and other commercial insurance policies at competitive rates, this loss would have an adverse effect on our financial condition and results of operations.
The unavailability or cancellation of third-party insurance coverage may have a material adverse effect on our financial condition and results of operations as well as disrupt our operations.
Any of our existing excess insurance coverage may not be renewed upon the expiration of the coverage period or future coverage may not be available at competitive rates for the required limits. In addition, our third-party insurers could fail, suddenly cancel our coverage or otherwise be unable to provide us with adequate insurance coverage. If any of these events occur, they may have a material adverse effect on our financial condition and results of operations as well as disrupt our operations. For example, we have operations in California, which has an environment prone to wildfires. Should our third-party insurers determine to exclude coverage for wildfires in the future, we could be exposed to significant liabilities, having a material adverse effect on our financial condition and results of operations and potentially disrupting our California operations.
We could be materially adversely affected by wildfires in California and other areas and other severe weather events and natural disasters, including negative impacts to our business, reputation, financial condition, results of operations, liquidity and cash flows.
Our financial condition, results of operations, liquidity and cash flows could be materially affected by potential losses resulting from the impact of wildfires and other major weather events and natural disasters, in California and other areas, which have in the past and could in the future expose the Company to litigation and liabilities pursuant to the Company’s indemnification obligations to its customers. Such weather events and natural disasters could result in severe business disruptions, property damage, injuries or loss of life. Such events could result in significant decreases in revenues, cost increases, and other financial difficulties to the Company’s customers and could cause them to file for bankruptcy protection, as has occurred with PG&E in 2019. Any such event could have a material adverse effect on our business, reputation, financial condition, results of operations, liquidity and cash flows. Further, these events could result in government enforcement actions or regulatory penalties, litigation and/or civil or governmental actions, including investigations, citations and fines, against our customers and against us if any related losses are found to be the result of their or our activities and services. Any litigation relating to wildfires could take a number of years to resolve due to the complexity of the matters, including ongoing investigations into the cause of the fire and the number of claims or parties that may be involved.

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Any regulatory responses or wildfire reforms taken by the state of California or any other jurisdiction where we have operations could adversely impact our business, financial condition, results of operations, liquidity and cash flows.
Our business is highly seasonal and weather dependent.
Our business, other than tree services to utility customers, is highly seasonal and weather dependent, primarily due to fluctuations in horticultural services provided to Residential and Commercial customers. We have historically incurred losses in the first quarter, while revenue and operating income are generally highest in the second and third quarters of the calendar year. Inclement weather, such as uncharacteristically low or high (drought) temperatures, in the second and third quarters could dampen the demand for our horticultural services, resulting in reduced revenues that would have an adverse effect on our results of operations.
Financial difficulties or the bankruptcy of one or more of our major customers could adversely affect our results.
Our ability to collect our accounts receivable and future sales depends, in part, on the financial strength of our customers. We grant credit, generally without collateral, to our customers. Consequently, we are subject to credit risk related to changes in business and economic factors throughout the United States and Canada. In the event customers experience financial difficulty, and particularly if bankruptcy results, our profitability may be adversely impacted by our failure to collect our accounts receivable in excess of our estimated allowance for uncollectible accounts. Additionally, our future revenues could be reduced by the loss of a customer due to bankruptcy. Our failure to collect accounts receivable and/or the loss of one or more major customers could have an adverse effect on our net income and financial condition.
On January 29, 2019, our largest customer, PG&E, filed for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. Our total outstanding receivables from PG&E as of December 31, 2018 was approximately $13 million and we continue to perform work for PG&E under the terms of our contract.
We are subject to third-party and governmental regulatory claims and litigation and adverse litigation judgments or settlements resulting from those claims could materially adversely affect our business.
From time-to-time, customers, vendors, employees, governmental regulatory authorities and others may make claims and take legal action against us. Allegations, claims or proceedings may, for example, relate to personal injury, property damage, general liability claims, vehicle accidents involving our vehicles and our employees, regulatory issues, contract disputes or employment matters and may include class actions. Defending against these and other such claims and proceedings is costly and time consuming and may divert management’s attention and personnel resources from our normal business operations, and the outcome of many of these claims and proceedings cannot be predicted. Whether these claims and legal actions are founded or unfounded, if such claims and legal actions are not resolved in our favor, they may result in significant financial liability. Any such financial liability could have a material adverse effect on our financial condition and results of operations. While we carry a broad range of insurance for the protection of our assets and operations, such insurance may not fully cover all material expenses related to potential allegations, claims and proceedings, or any adverse judgments, fines or settlements that may result. We reserve currently for anticipated losses and related expenses in excess of anticipated insurance coverage that may exist.
We are subject to the risk of changes in fuel costs.
The cost of fuel is a major operating expense of our business. Significant increases in fuel prices for extended periods of time will cause our operating expenses to fluctuate. An increase in cost with partial or no corresponding compensation from customers would lead to lower margins that would have an adverse effect on our results of operations.
We are subject to intense competition.
We believe that each aspect of our business is highly competitive. Principal methods of competition in our operating segments are customer service, marketing, image, performance and reputation. Pricing is not always a critical factor in a customer’s decision with respect to our Residential and Commercial segment; however, pricing is generally the principal method of competition for our Utility segment, although in most instances consideration is given to reputation and past production performance. On a national level, our competition is primarily landscape construction and maintenance companies as well as residential and commercial lawn care companies. At a local and regional level, our competition comes mainly from small, local companies which are engaged primarily in tree care and lawn services. Our Utility segment competes principally with one major national competitor, as well as several smaller regional firms. Furthermore, competitors may have lower costs because privately-owned companies operating in a limited geographic area may have significantly lower labor and overhead costs. Our competitors may develop the expertise, experience and resources to provide services that are superior in both price

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and quality to our services. These strong competitive pressures could inhibit our success in bidding for profitable business and may have a material adverse effect on our business, financial condition and results of operations.
Our business is dependent upon service to our utility customers and we may be affected by developments in the utility industry.
We derive approximately 52% of our total revenues from our Utility segment. Significant adverse developments in the utility industry generally, or specifically for our major utility customers, including the January 2019 Chapter 11 filing by PG&E, could result in pressure to reduce costs by utility industry service providers (such as us), delays in payments of our accounts receivable, or increases in uncollectible accounts receivable, among other things. As a result, such developments could have an adverse effect on our results of operations.
We cannot predict the impact that policies regarding changing climate conditions, including legal, regulatory and social responses thereto, may have on our business.
Many scientists, environmentalists, international organizations, political activists, regulators and other commentators believe that global climate change has added, and will continue to add, to the unpredictability, frequency and severity of natural disasters in certain parts of the world. In response, a number of legal and regulatory measures and social initiatives have been introduced in an effort to reduce greenhouse gas and other carbon emissions that these parties believe may be contributors to global climate change. These proposals, if enacted, could result in a variety of regulatory programs, including potential new regulations, additional charges and taxes to fund energy efficiency activities, or other regulatory actions. Any of these actions could result in increased costs associated with our operations and impact the prices we charge our customers.
We cannot predict the impact, if any, that changing climate conditions will have on us or our customers. However, it is possible that the legal, regulatory and social responses to real or perceived climate change could have a negative effect on our results of operations or our financial condition.
Our quarterly results may fluctuate.
We have experienced and expect to continue to experience quarterly variations in revenues and operating income as a result of many factors, including:
the seasonality of our business;
the timing and volume of customers' projects;
budgetary spending patterns of customers;
the commencement or termination of service agreements;
costs incurred to support growth internally or through acquisitions;
changes in our mix of customers, contracts and business activities;
fluctuations in insurance expense due to changes in claims experience and actuarial assumptions; and
general and local economic conditions.
Accordingly, our operating results in any particular quarter may not be indicative of the results that you can expect for any other quarter or for the entire year.
We may be adversely affected if we enter into a major unprofitable contract.
Our Residential and Commercial segment and our Utility segment frequently operate in a competitive bid contract environment. As a result, we may misjudge a bid and be contractually bound to an unprofitable contract, which could adversely affect our results of operations.
We may be unable to attract and retain skilled management.
Our success depends, in part, on our ability to attract and retain key managers. Competition for the best people can be intense and we may not be able to promote, hire or retain skilled managers. The loss of services of one or more of our key managers could have a material adverse impact on our business because of the loss of the manager's skills, knowledge of our industry and years of industry experience, and the difficulty of promptly finding qualified replacement personnel.

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A disruption in our information technology systems, including a disruption related to cybersecurity, could adversely affect our financial performance.
We rely on the accuracy, capacity and security of our information technology systems. Despite the security measures that we have implemented, including those measures related to cybersecurity, our systems, or the systems of third parties upon whom we rely, could be breached or damaged by computer viruses, natural or man-made incidents or disasters or unauthorized physical or electronic access. A cyberattack or breach involving our information technology systems or those of our suppliers or other partners could result in business disruption including disruptions in critical systems, corruption or loss of data, loss or theft of funds, theft of our intellectual property, trade secrets, customer information or other data and unauthorized access to, or release of, personnel information. To the extent that our business is interrupted or data is lost, destroyed or inappropriately used or disclosed, such disruptions could adversely affect our competitive position, reputation, relationships with our customers, financial condition, operating results and cash flows and could expose us to data loss, allow others to unfairly compete with us, and subject us to litigation, government enforcement actions, regulatory penalties and costly response measures. In addition, we may be required to incur significant costs to protect against the damage caused by these disruptions or security breaches in the future, and we may not have adequate insurance coverage to compensate us for any losses relating to such events.
Because the techniques used to obtain unauthorized access to, or disable, degrade or sabotage, information technology systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques, implement adequate preventative measures or remediate any intrusion on a timely or effective basis. Moreover, the development and maintenance of these preventative and detective measures is costly and requires ongoing monitoring and updating as technologies change and efforts to overcome security measures become more sophisticated. We, therefore, remain potentially vulnerable to additional known or yet unknown threats, as in some instances, we, or our suppliers and other partners, may be unaware of an incident or its magnitude and effects. We also face the risk that we may expose our customers or partners to cybersecurity attacks. Any of these factors could have a material adverse effect on us.
We may be adversely affected if our reputation is damaged.
We are dependent, in part, upon our reputation of quality, integrity and performance. If our reputation were damaged in some way, it may impact our ability to grow or maintain our business.
Because no public market exists for our common shares, your ability to sell your common shares may be limited.
Our common shares are not traded on any national exchange, market system or over-the-counter bulletin board. Because no public market exists for our common shares, your ability to sell these shares is limited.
Natural disasters, pandemics, terrorist attacks and other external events could adversely affect our business.
Natural disasters, pandemics, terrorist attacks and other adverse external events could materially damage our facilities or disrupt our operations, or damage the facilities or disrupt the operations of our customers or vendors. The occurrence of any such event could adversely affect our business, financial condition and results of operations.
Our failure to comply with environmental laws could result in significant liabilities.
Our facilities and operations are subject to governmental regulations designed to protect the environment, particularly with respect to our services regarding insect and tree, shrub and lawn disease management, because these services involve to a considerable degree the blending and application of spray materials, which require formal licensing in most areas. Continual changes in environmental laws, regulations and licensing requirements, environmental conditions, environmental awareness, technology and social attitudes make it necessary for us to maintain a high degree of awareness of the impact such changes have on our compliance programs and the market for our services. We are subject to existing federal, state and local laws, regulations and licensing requirements regulating the use of materials in our spraying operations as well as certain other aspects of our business. If we fail to comply with such laws, regulations or licensing requirements, we may become subject to significant liabilities, fines and/or penalties, which could adversely affect our financial condition and results of operations.
We may be adversely affected if we are unable to obtain necessary surety bonds or letters of credit.
Surety market conditions are currently difficult as a result of significant losses incurred by many sureties in recent years, both in the construction industry as well as in certain larger corporate bankruptcies. As a result, less bonding capacity is available in the market and terms have become more expensive and restrictive. Further, under standard terms in the surety market, sureties issue or continue bonds on a project-by-project basis and can decline to issue bonds at any time or require the posting of collateral as a condition to issuing or renewing any bonds. If surety providers were to limit or eliminate our access to

Page 9


bonding, we would need to post other forms of collateral for project performance, such as letters of credit or cash. We may be unable to secure sufficient letters of credit on acceptable terms, or at all. Accordingly, if we were to experience an interruption or reduction in the availability of bonding capacity, our liquidity may be adversely affected.
Economic conditions may adversely impact our customers’ future spending as well as pricing and payment for our services, thus negatively impacting our operations and growth.
Various economic factors may adversely impact the demand for our services and potentially result in depressed prices for our services and the delay or cancellation of projects. That may make it difficult to estimate our customers' requirements for our services and, therefore, add uncertainty to customer demand. Various economic factors and customers' confidence in future economic conditions may cause a reduction in our customers' spending for our services and may also impact the ability of our customers to pay amounts owed, which could reduce our cash flow and adversely impact our debt or equity financing. These events could have a material adverse effect on our operations and our ability to grow at historical levels.
We may not have access to capital in the future due to uncertainties in the financial and credit markets.
We may need new or additional financing in the future to conduct our operations, expand our business or refinance existing indebtedness. Future changes in the general economic conditions and/or financial markets in the United States or globally could affect adversely our ability to raise capital on favorable terms or at all. From time-to-time we have relied, and may also rely in the future, on access to financial markets as a source of liquidity for working capital requirements, acquisitions and general corporate purposes. Our access to funds under our revolving credit facility is dependent on the ability of the financial institutions that are parties to the facility to meet their funding commitments. Those financial institutions may not be able to meet their funding commitments if they experience shortages of capital and liquidity or if they experience excessive volumes of borrowing requests within a short period of time. Economic disruptions and any resulting limitations on future funding, including any restrictions on access to funds under our revolving credit facility, could have a material adverse effect on us.
We are subject to the effect of foreign currency exchange rate fluctuations, which may have a material adverse impact on us.
We are exposed to foreign currency exchange rate risk resulting from our operations in Canada, where we provide a comprehensive range of horticultural services. Fluctuations in foreign currency exchange rates may make our services more expensive for others to purchase or increase our operating costs, affecting our competitiveness and our profitability. Our financial results could be affected by factors such as changes in the foreign currency exchange rate or differing economic conditions in the Canadian markets as compared with the markets for our services in the United States. Our earnings are affected by translation exposures from currency fluctuations in the value of the U.S. dollar as compared to the Canadian dollar.
Revenues from customers in Canada are subject to foreign currency exchange. Thus, certain revenues and expenses have been, and are expected to be, subject to the effect of foreign currency fluctuations, and these fluctuations may have a material adverse impact on our operating results, asset values and could reduce shareholders’ equity. In addition, if we expand our Canadian operations, exposures to gains and losses on foreign currency transactions may increase.
Increases in our health insurance costs and uncertainty about federal health care policies could adversely affect our results of operations and cash flows.
The costs of employee health care insurance have been increasing in recent years due to rising health care costs, legislative changes, and general economic conditions. We cannot predict what other health care programs and regulations will ultimately be implemented at the federal or state level or the effect of any future legislation or regulations on our business, results of operations and cash flows. In addition, we cannot predict when and if Congress will repeal and/or replace certain health care programs and regulations at the federal level and the impact that such changes would have on our business. A continued increase in health care costs or additional costs incurred as a result of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 or other future health care reform laws imposed by Congress or state legislatures could have a negative impact on our financial position, results of operations and cash flows.
Our inability to properly verify the employment eligibility of our employees could adversely affect our business.
We utilize the U.S. government’s E-Verify program to assist in verifying the employment eligibility of potential new employees and require all new potential employees provide us with government-specified documentation evidencing their employment eligibility. However, the use of E-Verify does not guarantee that we will successfully identify all applicants who are ineligible for employment. While we believe we are in compliance with applicable laws and regulations of U.S. Immigration and Customs Enforcement, it is possible some of our employees may, without our knowledge, be unauthorized

Page 10


workers. The employment of unauthorized workers may subject the Company to fines, penalties and other costs related to compliance with laws and regulations as well as adverse publicity that negatively impacts our reputation and brand and may make it more difficult to hire and retain qualified employees. Our operations may also be impacted by additional costs to hire and train new employees. Furthermore, immigration laws have been an area of considerable political focus in recent years, and, from time-to-time, the U.S. government considers or implements changes to federal immigration laws, regulations or enforcement programs. Changes in immigration or work authorization laws may increase our obligations for compliance and oversight, which could subject us to additional costs and potential liability and make our hiring process more cumbersome, or reduce the availability of potential employees.
Item 1B.  Unresolved SEC Staff Comments.
There are no unresolved comments from the Staff of the Securities and Exchange Commission.
Item 2.  Properties.
Our corporate headquarters campus is located in Kent, Ohio, which, along with several other properties in the surrounding area, includes The Davey Institute's research, technical support and laboratory diagnostic facilities.
We conduct administrative functions through our headquarters and our offices in Livermore, California (Utility Services). Our Canadian operations’ administrative functions are conducted through properties located in the provinces of Ontario and British Columbia. We believe our properties are well maintained, in good condition and suitable for our present operations. A summary of our properties follows:
Segment
 
Number of Properties
 
How Held
 
Square Footage
 
Number of
States or Provinces
Residential and Commercial
 
28
 
Owned
 
284,180

 
15
Utility
 
3
 
Owned
 
36,307

 
3
Residential and Commercial, and Utility
 
3
 
Owned
 
30,080

 
3
We also rent approximately 201 properties in 32 states and five provinces.
None of our owned or rented properties used by our business segments is individually material to our operations.
Item 3.  Legal Proceedings.
We are party to a number of lawsuits, threatened lawsuits and other claims arising out of the normal course of business. 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 an 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., a former Davey employee, two Wolf employees, and a former Wolf employee alleging various acts of negligence and seeking compensatory and punitive damages for wrongful death and assault and battery of the plaintiff’s husband, a Wolf Tree employee, who was shot and killed in August 2017. The case was mediated unsuccessfully in December 2018 and was set for trial on January 22, 2019.
In July 2018, a related survival action was filed by the deceased’s estate against Davey Tree, its subsidiary, Wolf Tree, Inc., and four current and former employees in Savannah, Georgia, which arises out of the same allegations, seeks compensatory and punitive damages and also includes three Racketeer Influence 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, on August 2, 2018 (“Federal Court”).

Page 11


The Company filed a motion to dismiss the RICO claims. Plaintiffs filed a motion to remand the case to state court, which the Company has opposed. The motions are pending.
On December 6, 2018, a former Wolf Tree employee pled guilty to conspiracy to conceal, harbor, and shield illegal aliens. On December 21, 2018, the United States federal prosecutors filed a motion to stay both actions on the grounds that on December 13, 2018, an indictment was issued charging two former Wolf employees and one other individual with various crimes, including conspiracy to murder the deceased. On December 17, 2018, the United States Attorney’s Office for the Southern District of Georgia informed the Company and Wolf Tree that they are also under investigation for potential violations of immigration and other laws relating to the subject matter of the ongoing criminal investigation referenced above. The Company and Wolf Tree are cooperating with the investigation.
On December 28, 2018, the State Court granted the United States’ motion to stay but indicated that it would nonetheless consider certain pending matters, including: (1) Plaintiff and a co-defendant’s motions that Davey Tree be forced to produce privileged documents and testimony, which had been submitted to a Special Master for recommendation; and (2) the Defendants’ motions for summary judgment. On January 11, 2019, the Special Master issued his recommendation that both Plaintiff and the co-defendant’s motions to force Davey to disclose privileged information be denied. The State Court judge has not yet moved on the recommendation. On January 29, 2019, the State Court heard oral argument on Defendants’ motions for summary judgment, and the motions remain pending.
On January 28, 2019, the Federal Court also granted the United States’ motion to stay. On January 29, 2019, the State Court ordered the parties to return to mediation; the case is now set for mediation on April 17, 2019.
In both cases, the Company has denied all liability and is vigorously defending the action. It also has retained separate counsel for some of the individual defendants, each of whom has denied all liability and also is vigorously defending the action.
Item 4.  Mine Safety Disclosures.
Not applicable.

Page 12


Executive Officers of the Company.
Our executive officers and their present positions and ages as of March 1, 2019 follow:
Name
Age
Position
Years
with
Company
Served
as an Executive
Officer
Since
 
 
 
 
 
Patrick M. Covey
55
President and Chief Executive Officer
27
2007
 
 
 
 
 
Joseph R. Paul, CPA
57
Executive Vice President, Chief Financial Officer and Secretary
13
2005
 
 
 
 
 
Christopher J. Bast, CPA, CTP
51
Vice President and Treasurer
5
2013
 
 
 
 
 
James E. Doyle
50
Executive Vice President and General Manager, Davey Tree Expert Co. of Canada, Limited
29
2014
 
 
 
 
 
Gregory M. Ina
47
Executive Vice President, The Davey Institute and Employee Development
23
2016
 
 
 
 
 
Dan A. Joy
61
Executive Vice President and General Manager, Commercial Landscape Services and Operations Support Services
42
2013
 
 
 
 
 
Brent R. Repenning
47
Executive Vice President, U.S. Utility and Davey Resource Group
24
2014
 
 
 
 
 
Erika J. Schoenberger
39
Vice President, General Counsel and Assistant Secretary
1
2018
 
 
 
 
 
Thea R. Sears, CPA
50
Vice President and Controller
25
2010
 
 
 
 
 
James F. Stief
64
Executive Vice President, U.S. Residential Operations
40
2010
 
 
 
 
 
Mark J. Vaughn
64
Vice President and General Manager, Eastern Utility Services
46
2013
Mr. Covey was appointed Chief Executive Officer effective July 21, 2017 and served as President and Chief Operating Officer since March 4, 2016 and as a Director since May 20, 2014. He previously served as President and Chief Operating Officer, U.S. Operations, having been appointed in April 2014, and as Chief Operating Officer, U.S. Operations, having been appointed in February 2012. Prior to that time, Mr. Covey served as Executive Vice President, having been appointed in January 2007, Vice President and General Manager of the Davey Resource Group, having been appointed in March 2005, and Vice President, Southern Operations, Utility Services, having been appointed in January 2003. Previously, having joined Davey Tree in August 1991, Mr. Covey held various managerial positions, including Manager of Systems and Process Management and Administrative Manager, Utility Services.
Mr. Paul was elected Executive Vice President, Chief Financial Officer and Secretary effective March 4, 2016 and served as Chief Financial Officer and Secretary, having been appointed in March 2013. Prior to that time, he served as Vice President and Treasurer, having been appointed in May 2011. Mr. Paul joined Davey Tree as Treasurer in December 2005.

Page 13


Mr. Bast was elected Vice President effective September 18, 2017 having previously served as Treasurer since April 2013. Mr. Bast joined Davey Tree in March 2013 and prior to joining us, served in various management positions from 1994 to 2013 at Diebold, Incorporated, a provider of self-service delivery and security systems.
Mr. Doyle was elected Executive Vice President and General Manager, Davey Tree Expert Co. of Canada, Limited (“Davey Tree Limited”), effective May 21, 2014 and served as Vice President and General Manager, Davey Tree Limited, having been appointed in February 2012. Prior to that time, he served as Vice President and General Manager, Operations, Davey Tree Limited, having been appointed in May 2011 and Vice President, Operations, Davey Tree Limited, having been appointed in January 2006. Previously, having joined Davey Tree in 1989, Mr. Doyle held various managerial positions, including District Manager and Operations Manager.
Mr. Ina was elected Executive Vice President, The Davey Institute and Employee Development in July 2017, having previously served as Vice President and General Manager of Research, Recruiting and Human Resource Development effective April 4, 2016, and having previously been elected an officer effective March 4, 2016. Prior to this time, he served as Vice President and General Manager of the Davey Institute, having been appointed in May 2009, and General Manager of the Davey Institute, having been appointed in May 2006. Previously, having joined Davey Tree in 1996, Mr. Ina held various managerial and operational positions in the Davey Institute and Davey Resource Group.
Mr. Joy was elected Executive Vice President and General Manager, Commercial Landscape Services and Operations Support Services, effective August 15, 2014 and served as Executive Vice President and General Manager, Commercial Landscape Services, having been appointed in May 2014. Prior to that time, he served as Vice President and General Manager, Commercial Landscape Services, having been appointed in May 2013, and Vice President, Commercial Landscape Services, having been appointed in December 2004. Previously, having joined Davey Tree in 1976, Mr. Joy held various managerial positions, including Operations Manager, District Manager and Assistant District Manager.
Mr. Repenning was elected Executive Vice President, U.S. Utility and Davey Resource Group in July 2017, having previously served as Senior Vice President, Davey Resource Group and Eastern Utility, effective October 2, 2016 and served as Vice President and General Manager, Davey Resource Group, having been appointed in June 2010. Prior to that time, he served as Vice President, Davey Resource Group, having been appointed in October 2009. Previously, having joined Davey Tree in 1994, Mr. Repenning held various managerial and operational positions, including Regional Manager, Production Manager and Supervisor.
Ms. Schoenberger was elected Assistant Secretary in September 2018 having joined the Company in August of 2018 as Vice President and General Counsel. Prior to joining Davey Tree, Ms. Schoenberger served as General Counsel, Corporate Secretary and Senior Vice President at the Oneida Group, Inc., a global marketer of tabletop and food preparation products from September 2013 until she joined the Company. Prior to that, she was a Partner at Frost Brown Todd, LLC, a national full service law firm.
Ms. Sears was elected Vice President effective September 18, 2017 having served as Controller since September 16, 2016 and prior to that, served as Assistant Controller, having been appointed in May 2010. Prior to that time, she served as Manager of Financial Accounting, having been appointed in April 1998, and as Supervisor of Financial Accounting, having been appointed in September 1995.  Having joined Davey Tree in 1993, Ms. Sears has held a variety of roles in financial reporting, managerial reporting and operations accounting.  
Mr. Stief was elected Executive Vice President, U.S. Residential Operations, effective February 12, 2012 and previously served as Vice President and General Manager, Residential/Commercial Services, since January 2010. Prior to that time, Mr. Stief served as Vice President and General Manager, South, West and Central Residential/Commercial Operations, having been appointed in January 2007, and Vice President South, West and Central Residential/Commercial Operations, having been appointed in January 1997. Previously, having joined Davey Tree in 1978, Mr. Stief held various managerial positions, including Operations Manager and District Manager.
Mr. Vaughn was elected Vice President and General Manager, Eastern Utility Services, effective June 6, 2010, and served as Vice President, Eastern Utility Services, having been appointed in December 2007. Prior to that time, he served as Vice President, Northern Operating Group, Utility Services, having been appointed in July 2002. Previously, having joined Davey Tree in 1972, Mr. Vaughn held various managerial positions, including Operations Manager and Regional Manager.
Our officers serve from the date of their election to the next organizational meeting of the Board of Directors and until their respective successors are elected.

Page 14


PART II
Item 5.  Market for Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common shares are not listed or traded on an established public trading market and market prices are, therefore, not available. Semiannually, for purposes of the Davey 401KSOP and ESOP, the fair market value of our common shares is determined by an independent stock valuation firm, based upon our performance and financial condition, using a peer group of comparable companies selected by that firm. The peer group currently consists of: ABM Industries Incorporated; Comfort Systems USA, Inc.; Dycom Industries, Inc.; MYR Group, Inc.; Quanta Services, Inc.; Rollins, Inc.; and Scotts Miracle-Gro Company. The semiannual valuations are effective for a period of six months and the per-share price established by those valuations is the price at which our Board of Directors has determined our common shares will be bought and sold during that six-month period in transactions involving Davey Tree or one of its employee benefit or stock purchase plans. Since 1979, we have provided a ready market for all shareholders through our direct purchase of their common shares, although we are under no obligation to do so (other than for repurchases pursuant to the put option under The Davey 401KSOP and ESOP Plan, as described in Note N). These purchases are added to our treasury stock.
The following table sets forth, for the periods indicated, the high and low common share price (in dollars) and the cash dividends declared per common share (in cents).
 
Common Stock Price
Range
 
Cash
Dividends
Declared
 
 
High
 
Low
 
 
Fiscal Year 2018
 
 
 
 
 
 
        First quarter ended March 31, 2018
$
19.10

 
$
18.30

 
2.50

 
        Second quarter ended June 30, 2018
19.10

 
19.10

 
2.50

 
        Third quarter ended September 29, 2018
19.10

 
19.70

 
2.50

 
        Fourth quarter ended December 31, 2018
19.70

 
19.70

 
2.50

 
Fiscal Year 2017
 
 
 
 
 
 
        First quarter ended April 1, 2017
16.95

 
17.60

 
2.50

*
        Second quarter ended July 1, 2017
17.60

 
17.60

 
2.50

 
        Third quarter ended September 30, 2017
17.60

 
18.30

 
2.50

 
        Fourth quarter ended December 31, 2017
18.30

 
18.30

 
2.50

 
 
 
 
 
 
 
 
* - Adjusted for a two-for-one stock split, effected in the form of a 100% stock dividend paid on June 15, 2017 to shareholders of record at the close of business on June 1, 2017.
We presently expect to pay comparable cash dividends in 2019.
Record Holders and Common Shares
On March 8, 2019 we had 3,771 record holders of our common shares.
On March 8, 2019 we had 22,922,773 common shares outstanding and options exercisable to purchase 889,814 common shares, partially-paid subscriptions for 690,260 common shares and purchase rights outstanding for 241,236 common shares.
Recent Sales of Unregistered Securities
None.

Page 15


Purchases of Equity Securities
The following table provides information on purchases made by the Company of our common shares during the fiscal year ended December 31, 2018.
Period
 
Total
Number
of Shares
Purchased
 
Average
Price Paid
per Share
 
Total
Number of
Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs
 
Maximum
Number (or
Approximate
Dollar Value) of
Shares that May
Yet Be
Purchased
Under the Plans
or Programs
Fiscal 2018
 
 
 
 
 
 
 
 
January 1 to January 27
 
1,052

 
$
18.30

 

 
129,761

January 28 to February 24
 
213

 
18.30

 

 
129,761

February 25 to March 31
 
299,799

 
19.10

 

 
129,761

Total First Quarter
 
301,064

 
19.10

 

 
 

 
 
 
 
 
 
 
 
 
April 1 to April 28
 
336,766

 
19.10

 

 
129,761

April 29 to May 26
 
250,173

 
19.10

 

 
1,129,761

May 27 to June 30
 
473,939

 
19.10

 
127,486

 
1,002,275

Total Second Quarter
 
1,060,878

 
19.10

 
127,486

 
 

 
 
 
 
 
 
 
 
 
July 1 to July 28
 
1,267

 
19.10

 

 
1,002,275

July 29 to August 25
 
100,651

 
19.70

 

 
1,002,275

August 26 to September 29
 
149,781

 
19.70

 

 
1,002,275

Total Third Quarter
 
251,699

 
19.70

 

 
 

 
 
 
 
 
 
 
 
 
September 30 to October 27
 
419,477

 
19.70

 

 
1,002,275

October 28 to December 1
 
521,662

 
19.70

 
47,783

 
954,492

December 2 to December 31
 
82,163

 
19.70

 

 
954,492

Total Fourth Quarter
 
1,023,302

 
19.70

 
47,783

 
 

 
 
 
 
 
 
 
 
 
Total Year to Date
 
2,636,943

 
$
19.39

 
175,269

 
 
At the Annual Meeting of Shareholders of the Company held on May 16, 2017, the shareholders of the Company approved proposals to amend the Company's Articles of Incorporation to (i) expand the Company's current right of first refusal with respect to proposed transfers of shares of the Company's common shares, (ii) clarify provisions regarding when the Company may provide notice of its decision to exercise its right of first refusal with respect to proposed transfers of common shares by the estate or personal representative of a deceased shareholder, and (iii) grant the Company a right to repurchase common shares held by certain shareholders of the Company.
On May 10, 2017, the Board of Directors of the Company adopted a policy regarding the Company's exercise of the repurchase right granted to the Company through amendments to the Company's Articles of Incorporation, as approved by shareholders on May 16, 2017.
Until further action by the Board, it will be the policy of the Company not to exercise its repurchase rights under the amended Articles with respect to shares of the Company's common shares held by current and retired employees and current and former directors of the Company (subject to exceptions set forth in the policy) (collectively, "Active Shareholders"), their spouses, their first-generation descendants and trusts established exclusively for their benefit.
Until further action by the Board, it will also be the policy of the Company not to exercise its rights under the amended Articles to repurchase shares of the Company's common shares proposed to be transferred by an Active Shareholder to his or

Page 16


her spouse, a first-generation descendant, or a trust established exclusively for the benefit of one or more of an Active Shareholder, his or her spouse and first-generation descendants of an Active Shareholder, or upon the death of an Active Shareholder, such transfers from the estate or personal representative of a deceased Active Shareholder. The Board may suspend, change or discontinue the policy at any time without prior notice.
In accordance with the amendments to the Articles approved by the Company's shareholders at the 2017 Annual Meeting on May 17, 2017, the Company's Board of Directors authorized the Company to repurchase up to 200,000 common shares, which authorization was increased by an additional 1,000,000 common shares in May 2018. Of the 1,200,000 total shares authorized, 954,492 remain available under the program. Share repurchases may be made from time to time and the timing of any repurchases and the actual number of shares repurchased will depend on a variety of factors. The Company is not obligated to purchase any shares, and repurchases may be commenced, suspended or discontinued from time to time without prior notice. The repurchase program does not have an expiration date.

Page 17


Stock Performance Graph
Comparison of five-year cumulative return among The Davey Tree Expert Company, S&P 500 Stock Index and Selected Peer Group Companies Index
The following Performance Graph compares cumulative total shareholder returns (assuming reinvestment of dividends) for The Davey Tree Expert Company common shares during the last five years to the Standard & Poor’s 500 Stock Index (the "S&P 500 Index") and to an index of selected peer group companies. The peer group, which is the same group used by Davey’s independent stock valuation firm, consists of: ABM Industries Incorporated; Comfort Systems USA, Inc.; Dycom Industries, Inc.; MYR Group, Inc.; Quanta Services, Inc.; Rollins, Inc.; and Scotts Miracle-Gro Company.
chart-7c380db57288531591a.jpg
 
 
2013
 
2014
 
2015
 
2016
 
2017
 
2018
Davey Tree
 
100
 
115
 
126
 
136
 
148
 
165
S&P 500 Index
 
100
 
114
 
115
 
129
 
157
 
150
Peer Group
 
100
 
102
 
107
 
153
 
187
 
161
The Performance Graph and related information above shall not be deemed “soliciting material” or be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.

Page 18


Item 6.  Selected Financial Data.
 
Fiscal Year Ended December 31,
 
2018
 
2017
 
2016
 
2015
 
2014
 
(In thousands, except ratio and per share data)
Operating Statement Data:
 
 
 
 
 
 
 
 
 
Revenues
$
1,024,791

 
$
915,958

 
$
845,678

 
$
821,904

 
$
789,911

Costs and expenses:
 

 
 

 
 

 
 
 
 
Operating
665,388

 
587,333

 
541,486

 
528,899

 
508,677

Selling
184,388

 
167,934

 
152,106

 
144,234

 
140,027

General and administrative
67,462

 
59,403

 
58,293

 
55,518

 
52,558

Depreciation
54,914

 
50,702

 
47,284

 
44,677

 
40,970

Amortization of intangible assets
2,055

 
2,384

 
2,306

 
2,214

 
2,070

Gain on sale of assets, net
(5,106
)
 
(3,989
)
 
(4,664
)
 
(2,026
)
 
(806
)
Income from operations
55,690

 
52,191

 
48,867

 
48,388

 
46,415

Interest expense
(7,039
)
 
(4,886
)
 
(4,393
)
 
(3,355
)
 
(2,948
)
Interest income
350

 
292

 
255

 
249

 
295

Other expense
(11,505
)
 
(9,603
)
 
(7,485
)
 
(10,024
)
 
(5,462
)
Income before income taxes
37,496

 
37,994

 
37,244

 
35,258

 
38,300

Income taxes
9,519

 
15,874

 
14,960

 
13,460

 
15,131

Net income
$
27,977

 
$
22,120

 
$
22,284

 
$
21,798

 
$
23,169

Earnings per share--diluted *
$
1.10

 
$
.83

 
$
.82

 
$
.78

 
$
.81

Shares used for computing per share amounts--diluted *
25,481

 
26,697

 
27,247

 
27,955

 
28,477

 
 
 
 
 
 
 
 
 
 
Other Financial Data:
 

 
 

 
 

 
 
 
 
Depreciation and amortization
$
56,969

 
$
53,086

 
$
49,590

 
$
46,891

 
$
43,040

Capital expenditures
60,410

 
57,100

 
56,646

 
56,047

 
55,731

Cash flow provided by (used in):
 

 
 

 
 

 
 
 
 
Operating activities
62,104

 
56,776

 
55,370

 
62,689

 
49,279

Investing activities
(61,377
)
 
(59,518
)
 
(54,808
)
 
(56,046
)
 
(64,060
)
Financing activities
9,956

 
6,410

 
(7,721
)
 
(7,140
)
 
17,335

Cash dividends declared per share *
$
.1000

 
$
.1000

 
$
.1000

 
$
.1000

 
$
.0925


Page 19


 
As of December 31,
 
2018
 
2017
 
2016
 
2015
 
2014
 
(In thousands, except ratio and per share data)
Balance Sheet Data:
 
 
 
 
 
 
 

 
 
Working capital
$
115,756

 
$
80,468

 
$
59,868

 
$
48,984

 
$
49,916

Current ratio
1.83

 
1.63

 
1.50

 
1.44

 
1.46

Property and equipment, net
202,285

 
193,183

 
179,436

 
166,422

 
160,883

Total assets
526,623

 
473,135

 
423,939

 
393,586

 
381,004

Long-term debt
158,425

 
119,210

 
92,623

 
85,104

 
81,306

Other long-term liabilities
66,476

 
63,878

 
60,565

 
55,464

 
54,854

Redeemable common shares related to 401KSOP and Employee Stock Ownership Plan (ESOP)
119,049

 
123,520

 
124,201

 
127,089

 
123,668

Total common shareholders' equity
43,361

 
37,870

 
27,978

 
14,450

 
12,826

Redeemable common shares *
5,642

 
6,467

 
7,057

 
7,773

 
8,217

Common shares: *
 

 
 

 
 

 
 

 
 

Issued
37,272

 
36,447

 
35,857

 
35,141

 
34,697

Less: In treasury
20,033

 
18,693

 
17,991

 
17,427

 
16,584

Net outstanding
22,881

 
24,221

 
24,923

 
25,487

 
26,330

Stock options: *
 

 
 

 
 

 
 

 
 

Outstanding
1,466

 
1,529

 
1,599

 
1,634

 
1,540

Exercisable
890

 
801

 
751

 
834

 
778

ESOT valuation per share *
$
21.10

 
$
19.10

 
$
17.60

 
$
16.35

 
$
15.05

* Years 2014 to 2016 have been adjusted for the two-for-one stock split, effective June 1, 2017, as discussed in Note B to the audited financial statements included in Item 8.
Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations.
(Amounts in thousands, except share data)
Management’s Discussion and Analysis of Results of Operations and Financial Condition (“MD&A”) is provided as a supplement to the accompanying consolidated financial statements and notes to help provide an understanding of our financial condition, cash flows and results of operations. MD&A is organized as follows:
Overview of 2018 Results;
Results of Operations, including fiscal 2018 compared to fiscal 2017, fiscal 2017 compared to fiscal 2016 and other matters;
Liquidity and Capital Resources, including cash flow summary, off-balance sheet arrangements, and capital resources;
Recent Accounting Guidance;
Critical Accounting Policies and Estimates; and
Market Risk Information, including interest rate risk and foreign currency exchange rate risk.
OVERVIEW OF 2018 RESULTS
General
We provide a wide range of horticultural, arboricultural, environmental and consulting services to residential, commercial, utility and institutional customers throughout the United States and Canada.
Our Business--We have two reportable operating segments organized by type or class of customer: Residential and Commercial, and Utility.

Page 20


Residential and Commercial--Residential and Commercial provides services to our residential and commercial customers including: the treatment, preservation, maintenance, removal and planting of trees, shrubs and other plant life; the practice of landscaping, grounds maintenance, tree surgery, tree feeding and tree spraying; the application of fertilizer, herbicides and insecticides; and natural resource management and consulting, forestry research and development, and environmental planning.
Utility--Utility is principally engaged in providing services to our utility customers--investor-owned, municipal utilities, and rural electric cooperatives--including: the practice of line-clearing and vegetation management around power lines, rights-of-way and chemical brush control; and natural resource management and consulting, forestry research and development and environmental planning.
All other operating activities, including research, technical support and laboratory diagnostic facilities, are included in “All Other.”
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:
 
Year Ended December 31,
 
Percentage Change
 
2018
 
2017
 
2016
 
2018/2017
 
2017/2016
Revenues
100.0
 %
 
100.0
 %
 
100.0
 %
 
11.9
%
 
8.3
 %
Costs and expenses:
 

 
 

 
 

 
 
 
 

Operating
64.9

 
64.1

 
64.0

 
13.3

 
8.5

Selling
18.0

 
18.3

 
18.0

 
9.8

 
10.4

General and administrative
6.6

 
6.5

 
6.9

 
13.6

 
1.9

Depreciation
5.4

 
5.5

 
5.6

 
8.3

 
7.2

Amortization of intangible assets
.2

 
.3

 
.3

 
(13.8
)
 
3.4

Gain on sale of assets, net
(.5
)
 
(.4
)
 
(.6
)
 
28.0

 
(14.5
)
 
94.6

 
94.3

 
94.2

 
12.2

 
8.4

Income from operations
5.4

 
5.7

 
5.8

 
6.7

 
6.8

Other income (expense):
 

 
 

 
 

 
 

 
 

Interest expense
(.7
)
 
(.5
)
 
(.5
)
 
44.1

 
11.2

Interest income

 

 

 

 

Other
(1.1
)
 
(1.1
)
 
(.9
)
 
19.8

 
28.3

Income before income taxes
3.6

 
4.1

 
4.4

 
(1.3
)
 
2.0

Income taxes
.9

 
1.7

 
1.8

 
(40.0
)
 
6.1

Net income
2.7
 %
 
2.4
 %
 
2.6
 %
 
26.5
 %
 
(.7
)%

Page 21


Fiscal 2018 Compared to Fiscal 2017
A comparison of our fiscal year 2018 results to 2017 follows:
 
Year Ended December 31,
 
2018
 
2017
 
Change
 
% Change
Revenues
$
1,024,791

 
$
915,958

 
$
108,833

 
11.9
 %
Costs and expenses:
 

 
 

 
 

 
 

Operating
665,388

 
587,333

 
78,055

 
13.3

Selling
184,388

 
167,934

 
16,454

 
9.8

General and administrative
67,462

 
59,403

 
8,059

 
13.6

Depreciation
54,914

 
50,702

 
4,212

 
8.3

Amortization of intangible assets
2,055

 
2,384

 
(329
)
 
(13.8
)
Gain on sale of assets, net
(5,106
)
 
(3,989
)
 
1,117

 
28.0

 
969,101

 
863,767

 
105,334

 
12.2

Income from operations
55,690

 
52,191

 
3,499

 
6.7

Other income (expense):
 

 
 

 
 

 
 

Interest expense
(7,039
)
 
(4,886
)
 
(2,153
)
 
44.1

Interest income
350

 
292

 
58

 
19.9

Other
(11,505
)
 
(9,603
)
 
(1,902
)
 
19.8

Income before income taxes
37,496

 
37,994

 
(498
)
 
(1.3
)
Income taxes
9,519

 
15,874

 
(6,355
)
 
(40.0
)
Net income
$
27,977

 
$
22,120

 
$
5,857

 
26.5
 %
 
 
 
 
 
 
 
 
Revenues--Revenues of $1,024,791 increased $108,833 compared with the $915,958 reported in 2017. Utility increased $70,757, or 15.2%, from the prior year. The increase is attributable to additional revenues from increased work year-over-year on existing accounts, including special project work with PG&E related to wild-fire risk remediation, rate increases as well as new accounts. Residential and Commercial increased $39,977, or 9.0%, from 2017. Increases primarily in tree surgery, plant care and consulting services were partially offset by decreases in storm damage services. Total consolidated revenue of $1,024,791 includes production incentive revenue of $627 during 2018 as compared with $2,336 during 2017.
Operating Expenses--Operating expenses of $665,388 increased $78,055 from the prior year, and as a percentage of revenues increased .8% to 64.9%. Utility experienced an increase of $45,066, or 12.9%, from 2017, but as a percentage of revenues decreased 1.4% to 73.6%. Increases in employee labor and benefits expense, fuel expense, equipment expense, tools and parts expense, subcontractor expense, disposal expense and crew expenses associated with the increased revenues were partially offset by decreases in material expense. Residential and Commercial increased $23,823, or 10.3%, compared with 2017 and as a percentage of revenue increased .6% to 52.8%. Increases primarily in employee labor and benefits expense, repair and maintenance expense, fuel expense, materials expense, subcontractor expense and crew expense account for the increase.
Fuel costs increased in 2018 as compared with fuel costs for 2017 and impacted operating expenses within both segments. During 2018, fuel expense of $34,546 increased $7,119, or 26.0%, from the $27,427 incurred in 2017. The $7,119 increase included price increases approximating $1,570 and usage increases approximating $5,549.
Selling Expenses--Selling expenses of $184,388 increased $16,454 from 2017 but as a percentage of revenues decreased .3% to 18.0%. Utility increased $7,122, or 14.1%, from 2017 but as a percentage of revenue decreased .1% to 10.7%. Increases primarily in field management wages and incentive expense, rent expense and computer expense account for the increase. Residential and Commercial increased $9,557, or 7.9%, from 2017 but as a percentage of revenue decreased .2% to 26.9%. Increases primarily in field management wages and incentive expense, sales and marketing expense, office rent, employee development expense and field management auto expense account for the increase.
General and Administrative Expenses--General and administrative expenses increased $8,059 to $67,462, an increase of 13.6% from the $59,403 experienced in 2017 and as a percentage of revenues increased .1% to 6.6%. Increases in salary and incentive expense, insurance expense, professional services, computer expense, travel expense and office expense were partially offset by a reduction in stock compensation expense.

Page 22


Depreciation and Amortization Expense--Depreciation and amortization expense of $56,969 increased $3,883 from the prior year but as a percentage of revenues decreased .2% to 5.6%. The increase is attributable to higher capital expenditures for equipment partially offset by a decrease in amortization expense related to our acquired intangible assets.
Gain on Sale of Assets--Gain on the sale of assets of $5,106 increased $1,117 from the $3,989 experienced in 2017. The increase is the result of the sale of two properties in 2018 compared to one property sold in 2017, partially offset by lower average sales prices on fewer trucks disposed of in 2018 as compared with 2017.
Interest Expense--Interest expense of $7,039 increased $2,153 from the $4,886 incurred in 2017. The increase is attributable to higher average debt levels and borrowing rates necessary to fund operations and capital expenditures.
Other, Net--Other, net of $11,505 increased $1,902 from the $9,603 experienced in 2017. Other, net, consisted of nonoperating income and expense, including pension expense and foreign currency gains/losses on the intercompany account balances of our Canadian operations. An increase in pension expense accounted for the increase.
Income Taxes--Income taxes for 2018 were $9,519, an effective tax rate of 25.4%, compared with income taxes for 2017 of $15,874, or an effective tax rate of 41.8%. The decrease of 16.4% in the effective tax rate as compared to 2017 relates primarily to changes in the statutory rate as a result of the Tax Cuts and Jobs Act (the "Tax Reform Act"), as described in Note Q, enacted in the fourth quarter of 2017.
Net Income--Net income of $27,977 was $5,857 more than the $22,120 earned in 2017. The increase in income from operations of $3,499 and decrease in income taxes of $6,355 was offset by increases in other nonoperating expenses of $1,902, and interest expense of $2,153.
Fiscal 2017 Compared to Fiscal 2016
A comparison of our fiscal year 2017 results to 2016 follows:
 
Year Ended December 31,
 
2017
 
2016
 
Change
 
% Change
Revenues
$
915,958

 
$
845,678

 
$
70,280

 
8.3
 %
Costs and expenses:
 

 
 

 


 
 

Operating
587,333

 
541,486

 
45,847

 
8.5

Selling
167,934

 
152,106

 
15,828

 
10.4

General and administrative
59,403

 
58,293

 
1,110

 
1.9

Depreciation
50,702

 
47,284

 
3,418

 
7.2

Amortization of intangible assets
2,384

 
2,306

 
78

 
3.4

Gain on sale of assets, net
(3,989
)
 
(4,664
)
 
675

 
(14.5
)
 
863,767

 
796,811

 
66,956

 
8.4

Income from operations
52,191

 
48,867

 
3,324

 
6.8

Other income (expense):
 

 
 

 
 

 
 

Interest expense
(4,886
)
 
(4,393
)
 
(493
)
 
11.2

Interest income
292

 
255

 
37

 
14.5

Other
(9,603
)
 
(7,485
)
 
(2,118
)
 
28.3

Income before income taxes
37,994

 
37,244

 
750

 
2.0

Income taxes
15,874

 
14,960

 
914

 
6.1

Net income
$
22,120

 
$
22,284

 
$
(164
)
 
(.7
)%
Revenues--Revenues of $915,958 increased $70,280 compared with the $845,678 reported in 2016. Utility increased $33,348, or 7.7%, from the prior year. The increase is attributable to additional revenues from storm-related services provided as a result of Hurricane Irma in the Southeast United States and increased work year-over-year on existing accounts as well as new accounts. Residential and Commercial increased $35,150, or 8.6%, from 2016. Increases in tree surgery, spraying, landscaping, pest management as well as storm-related work as a result of Hurricane Irma were partially offset by decreases in snow removal and mowing revenues. Higher contract rates on our tree pruning, tree removal and liquid services, increased storm revenue, increased productivity and additional revenue from the purchase of businesses accounted for the increase. 

Page 23


Total consolidated revenue of $915,958 includes production incentive revenue, recognized under the completed-performance method, of $2,336 during 2017 as compared with $2,827 during 2016.
Operating Expenses--Operating expenses of $587,333 increased $45,847 from the prior year, and as a percentage of revenues increased .1% to 64.1%. Utility experienced an increase of $28,043, or 8.7%, from 2016, and as a percentage of revenues increased .6% to 75.0%. Increases in employee labor and benefits expense, fuel expense, subcontractor expense, disposal expense and crew expenses associated with the increased revenues were partially offset by decreases in repair and maintenance expense and material expense. Residential and Commercial increased $16,234, or 7.5%, compared with 2016 but as a percentage of revenue decreased .4% to 52.2%. Increases primarily in employee labor and benefits expense, repair and maintenance expense, fuel expense, materials expense, subcontractor expense and crew expense account for the increase.
Fuel costs increased in 2017 as compared with fuel costs for 2016 and impacted operating expenses within both segments. During 2017, fuel expense of $27,427 increased $4,750, or 20.9%, from the $22,677 incurred in 2016. The $4,750 increase included price increases approximating $3,861 and usage increases approximating $889.
Selling Expenses--Selling expenses of $167,934 increased $15,828 from 2016 and as a percentage of revenues increased .3% to 18.3%. Utility increased $4,916, or 10.8%, from 2016 and as a percentage of revenue increased .3% to 10.8%. Increases in field management wages and incentive expense, office support wage expense, field management auto expense, rent expense and communication expense were partially offset by reductions in field management travel expense, local office expense, computer expense and employee development expense. Residential and Commercial increased $11,062, or 10.1%, from 2016 and as a percentage of revenue increased .3% to 27.1%. Increases primarily in field management wages and incentive expense, office support wage expense, sales and marketing expense, employee development expense, communication expense and field management travel expense were partially offset by a reduction in computer expense.
General and Administrative Expenses--General and administrative expenses increased $1,110 to $59,403, an increase of 1.9% from the $58,293 experienced in 2016 but as a percentage of revenues decreased .4% to 6.5%. Increases in salary and incentive expense, stock compensation expense, computer expense and office rent expense were partially offset by a decrease in office expenses, communication expense and management travel expense.
Depreciation and Amortization Expense--Depreciation and amortization expense of $53,086 increased $3,496 from the prior year and as a percentage of revenues decreased .1% to 5.8%. The increase is attributable to higher capital expenditures for equipment, land and buildings and an increase in amortization expense related to our acquired intangible assets.
Gain on Sale of Assets--Gain on the sale of assets of $3,989 decreased $675 from the $4,664 experienced in 2016. The decrease is the result of lower average sales prices on units disposed of in 2017 as compared with 2016. In addition, the gain of $4,664 in 2016 also included the sale of a building.
Interest Expense--Interest expense of $4,886 increased $493 from the $4,393 incurred in 2016. The increase is attributable to higher average debt levels and borrowing rates necessary to fund operations and capital expenditures.
Other, Net--Other, net of $9,603 increased $2,118 from the $7,485 experienced in 2016. Other, net, consisted of nonoperating income and expense, including pension expense and foreign currency gains on the intercompany account balances of our Canadian operations. An increase in pension expense accounted for the increase.
Income Taxes--Income taxes for 2017 were $15,874, an effective tax rate of 41.8%, compared with income taxes for 2016 of $14,960, or an effective tax rate of 40.2%. The increase of 1.6% in the effective tax rate as compared to 2016 relates primarily to changes in our deferred taxes as a result of the Tax Reform Act, as described in Note Q, enacted in the fourth quarter of 2017.
Net Income--Net income of $22,120 was $164 less than the $22,284 earned in 2016. The increase in income from operations of $3,324 was offset by increases in other nonoperating expenses of $2,118, interest expense of $493 and income taxes of $914.
Goodwill—Impairment Tests
Annually, we perform the impairment tests for goodwill during the fourth quarter. Impairment of goodwill is tested at the reporting-unit level, which for us are also our business segments. Impairment of goodwill is tested by comparing the reporting unit’s carrying value, including goodwill, to the fair value of the reporting unit. The fair values of the reporting units are estimated using discounted projected cash flows. If the carrying value of the reporting unit exceeds its fair value, goodwill is considered impaired and an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the carrying value of the goodwill allocated to that reporting unit. We

Page 24


conducted our annual impairment tests and determined that no impairment loss was required to be recognized in 2018 or for any prior periods. There were no events or circumstances from the date of our assessment through December 31, 2018 that would impact this conclusion.
The fair values of the reporting units were estimated using discounted projected cash flows for the goodwill impairment tests and analysis that required judgmental assumptions about revenues, operating margins, growth rates, discount rates, and working capital requirements. In determining those judgmental assumptions, we consider data, including--for each reporting unit--its annual budget for the upcoming year, its longer-term performance expectations, anticipated future cash flows and market data. Assumptions were also made for perpetual growth rates for periods beyond the forecast period.
If the fair values of the reporting units were less than the carrying values of the reporting units (including recorded goodwill), determined through the discounted projected cash flow methodology, goodwill impairment may be present. In such an instance, an impairment charge would be recognized for the amount by which the reporting unit’s carrying amount of goodwill exceeded the reporting unit's fair value of goodwill, not to exceed the carrying value of the goodwill allocated to that reporting unit.
The carrying value of the recorded goodwill for all reporting units totaled approximately $38,000 at December 31, 2018. Based upon the goodwill impairment analysis conducted in the fourth quarter 2018, the determined fair value of the reporting units exceeded their carrying value by more than a significant amount.
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.
Cash Flow Summary
Our cash flows from operating, investing and financing activities, as reflected in the Consolidated Statements of Cash Flow for the years ended December 31, 2018 and December 31, 2017, are summarized as follows:
 
2018
 
2017
Cash provided by (used in):
 
 
 
Operating activities
$
62,104

 
$
56,776

Investing activities
(61,377
)
 
(59,518
)
Financing activities
9,956

 
6,410

Effect of exchange rate changes on cash
(252
)
 
447

Increase in cash
$
10,431

 
$
4,115

Net Cash Provided by Operating Activities--Operating activities in 2018 provided cash of $62,104 as compared to $56,776 provided in 2017. The $5,328 net increase was primarily attributable to (i) an increase of $11,235 of cash provided by self-insurance accruals, offset by (ii) $6,045 more cash used in accounts receivable, (iii) $8,134 more cash used in accounts payable and accrued expenses, and (iv) $1,835 more cash used in other assets, net.
Overall, accounts receivable increased $26,829 in 2018 as compared to the increase of $20,784 experienced in 2017. The increase in 2018 was attributable to the timing of payments from utility segment customers. With respect to the change in accounts receivable arising from business levels, the “days-sales-outstanding” in accounts receivable (“DSO”) at the end of 2018 decreased by three days to 64 days, as compared to 2017. The DSO at December 31, 2017 was 67 days.
Accounts payable and accrued expenses decreased $1,970 in 2018, $8,134 less than the increase of $6,164 experienced in 2017. Decreases in trade payables and income taxes were partially offset by increases in employee compensation accruals and compensated absence accruals.
Self-insurance accruals increased $16,091 in 2018, a change of $11,235 compared to the increase of $4,856 experienced in 2017. The increase occurred within all classifications (workers compensation, vehicle liability and general liability) and resulted primarily from an overall increase in deductible amounts under commercial insurance or the self-insured risk retention.
Other assets, net, increased $9,176 in 2018, as compared to the $11,011 increase in 2017. Decreases in pension liabilities and increases in operating supplies and prepaid expenses account for the change.

Page 25


Net Cash Used in Investing Activities--Investing activities used $61,377 in cash, $1,859 more than the $59,518 used in 2017. Increases in expenditures for equipment and purchases of businesses were offset by a decrease in expenditures for land and buildings and greater proceeds from the sales of assets.
Net Cash Provided by Financing Activities--Financing activities provided $9,956 in cash in 2018, $3,546 more than the $6,410 of cash provided in 2017. Our revolving credit facility used $6,500 as compared with the $33,000 provided during 2017. We use the revolving credit facility primarily for capital expenditures and payments of notes payable, primarily related to acquisitions. Proceeds from notes payable totaled $74,716 and payments of long-term debt and capital leases totaled $26,339 during 2018. Purchases of common shares for treasury of $51,116 were partially offset by net cash received of $21,582 from the sale of common shares and cash received on our common share subscriptions. Dividends paid during 2018 totaled $2,387.
The Company currently repurchases common shares at the shareholders’ request 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 repurchases pursuant to the put option under the Davey 401KSOP and ESOP Plan, as described in Note N) such purchases are not required, and the Company retains the right to discontinue them at any time. Repurchases of redeemable common shares from the Davey 401KSOP and ESOP at the shareholders’ request approximated $30,059 and $14,587 in 2018 and 2017, respectively. Purchases of common shares, other than redeemable common shares, approximated $21,057 and $15,979 in 2018 and 2017, respectively.
Revolving Credit Facility and Senior Unsecured Notes--In October 2017, we amended and restated our revolving credit facility, as further amended in September 2018, as discussed below. The Amended and Restated Credit Agreement provides for a revolving credit facility with a group of banks under which up to an aggregate of $250,000 is available, with 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 Amended and Restated Credit Agreement extended the term of the revolving credit facility to October 6, 2022 from November 7, 2018. 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 December 31, 2018, we were in compliance with all financial covenants contained in our revolving credit facility.
As of December 31, 2018, we had unused commitments under the facility approximating $153,377, and $96,623 committed, which consisted of borrowings of $93,500 and issued letters of credit of $3,123. Borrowings outstanding bear interest, at our option, of either (a) the 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 1.5%, or (iii) the federal funds rate plus .5%. A commitment fee ranging from .10% to .225% is also required based on the average daily unborrowed commitment.
On July 22, 2010, we issued $30,000 of 5.09% Senior Unsecured Notes, Series A, due July 22, 2020 (the "5.09% Senior Notes"). The 5.09% Senior Notes were issued pursuant to a Master Note Purchase Agreement (the “Purchase Agreement”), between Davey Tree and the purchasers of the 5.09% Senior Notes. The net proceeds of the 5.09% Senior Notes were used in 2010 to pay down borrowings under our revolving credit facility.
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 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. As of December 31, 2018, we were in compliance with all financial covenants.
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. 
The net proceeds of the 3.99% Senior Notes were used to pay down borrowings under our revolving credit facility.

Page 26


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 of $10,000 commence on September 21, 2024 (the sixth 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. As of December 31, 2018, we are in compliance with all debt covenants.
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. An additional $25,000 of Shelf Notes was issued in early 2019, as discussed below.
Issuance of Debt Subsequent to December 31, 2018--On February 5, 2019 we issued 4.00% Senior Notes, Series B (the 4.00% Senior Notes") pursuant to the Note Purchase and Shelf Agreement in the aggregate principal amount of $25,000. The notes are due September 21, 2028. Subsequent series of promissory notes may be issued pursuant to the 3.99% Shelf Notes in an aggregate additional principal amount not to exceed $25,000. The 4.00% 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 of the 3.99% Senior 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, Davey Tree amended its Accounts Receivable Securitization Facility (the “AR securitization facility”), 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 December 31, 2018.
Under the AR Securitization facility, 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 December 31, 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., 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 facility contain various customary representations and warranties, covenants, and default provisions which provide for the termination and acceleration of the commitments under the AR securitization facility 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.
On January 24, 2019, we amended our AR securitization facility to address insolvency proceedings, specifically those receivables from PG&E Corporation and its regulated utility subsidiary, Pacific Gas and Electric Company (collectively “Pacific Gas & Electric”), which filed voluntary bankruptcy petitions under Chapter 11 of the United States Bankruptcy Code in the U.S. Bankruptcy Court for the Northern District of California. Under the terms of the receivable financing agreement,

Page 27


receivables from Pacific Gas and Electric, while remaining in the securitized pool, will be considered ineligible and are excluded from performance ratios and reserves.
Contractual Obligations Summary
The following is a summary of our long-term contractual obligations, as at December 31, 2018, to make future payments for the periods indicated:
 
 
 
 
Contractual Obligations Due -- Year Ending December 31,
 
 
Description
 
Total
 
2019
 
2020
 
2021
 
2022
 
2023
 
Thereafter
Revolving credit facility
 
$
93,500

 
$

 
$

 
$

 
$
93,500

 
$

 
$

Senior unsecured notes
 
79,182

 
8,606

 
8,606

 
1,995

 
1,995

 
1,995

 
55,985

Term loans
 
24,339

 
17,229

 
1,935

 
5,175

 

 

 

Capital lease obligations
 
4,323

 
1,426

 
1,371

 
1,183

 
272

 
71

 

Operating lease obligations
 
42,119

 
14,023

 
11,272

 
7,712

 
5,129

 
2,060

 
1,923

Self-insurance accruals
 
86,884

 
28,218

 
19,323

 
14,449

 
8,870

 
4,492

 
11,532

Purchase obligations
 
7,145

 
7,145

 

 

 

 

 

Other liabilities
 
10,125

 
1,512

 
1,816

 
2,051

 
1,418

 
1,001

 
2,327

 
 
$
347,617

 
$
78,159

 
$
44,323

 
$
32,565

 
$
111,184

 
$
9,619

 
$
71,767

The self-insurance accruals in the summary above reflect the total of the undiscounted amount accrued, for which amounts estimated to be due each year may differ from actual payments required to fund claims. Purchase obligations in the summary above represent open purchase-order amounts that we anticipate will become payable within the next year for goods and services we have negotiated for delivery as of December 31, 2018. Other liabilities include estimates of future expected funding requirements related to retirement plans and other sundry items. Because their future cash outflows are uncertain, accrued income tax liabilities for uncertain tax positions, as of December 31, 2018, have not been included in the summary above. Noncurrent deferred taxes are also not included in the summary.
As of December 31, 2018, total commitments related to issued letters of credit were $72,565, of which $3,123 were issued under the revolving credit facility, $67,438 were issued under the AR securitization facility, 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 facility, and $2,004 were issued under short-term lines of credit.
Also, as is common with our industry, we have performance obligations that are supported by surety bonds, which expire during 2019 through 2023. We intend to renew the performance bonds where appropriate and as necessary.
Off-Balance Sheet Arrangements
There are no “off-balance sheet arrangements” as that term is defined in Regulation S-K, Item 303(a)(4)(ii) under the Securities Exchange Act of 1934, as amended.
Capital Resources
Cash generated from operations and our revolving credit facility are our primary sources of capital.
Cash of $22,661 as of December 31, 2018 included $19,801 in the U.S. and $2,860 in Canada, all of which is subject to U.S. federal income taxes and Canadian taxes if repatriated to the U.S. Currently, we do not expect to repatriate any portion of our 2018 Canadian earnings to satisfy our 2019 U.S. based cash flow needs.
Business seasonality 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 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 several other short-term lines of credit. We are continually reviewing our existing sources of financing and evaluating alternatives. At December 31, 2018, we had working capital of $115,756, unused short-term lines of credit approximating $7,097, and $153,377 available under our revolving credit facility.

Page 28


Our sources of capital presently allow us the financial flexibility to meet our capital spending plan and to complete business acquisitions for at least the next twelve months and for the foreseeable future.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented.
On an ongoing basis, we evaluate our estimates and assumptions, including those related to accounts receivable, specifically those receivables under contractual arrangements primarily arising from Utility customers; allowance for doubtful accounts; and self-insurance accruals. 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.
We believe the following 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.
Revenue Recognition--We recognize 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 C for further discussion of the adoption, including the impact on our 2018 financial statements. Performance obligations are satisfied as our services are provided to customers. See Note T for a detailed description of our revenue recognition policy.
Allowance for Doubtful Accounts--In determining the allowance for doubtful accounts, we evaluate the collectibility of our accounts receivable based on a combination of factors. In circumstances where we are aware of a specific customer’s inability to meet its financial obligations to us (e.g., bankruptcy filings), we evaluate each specific situation to determine the collectibility given the facts and circumstances and if necessary, record a specific allowance for doubtful accounts against amounts due to reduce the net recognized receivable to the amount we reasonably believe will be collected. For all other customers, we recognize allowances for doubtful accounts based on the length of time the receivables are past due. If circumstances change (e.g., unexpected material adverse changes in a major customer’s ability to meet its financial obligation to us or higher than expected customer defaults), our estimates of the recoverability of amounts could differ from the actual amounts recovered.
Self-Insurance Accruals--We are generally self-insured for losses and liabilities related primarily to workers’ compensation, vehicle liability and general liability claims. We use commercial insurance as a risk-reduction strategy to minimize catastrophic losses. Ultimate losses are accrued based upon estimates of the aggregate liability for claims incurred using certain actuarial assumptions followed in the insurance industry and based on Company-specific experience.
Our self-insurance accruals include claims for which the ultimate losses will develop over a period of years. Accordingly, our estimates of ultimate losses can change as claims mature. Our accruals also are affected by changes in the number of new claims incurred and claim severity. The methods for estimating the ultimate losses and the total cost of claims were determined by third-party consulting actuaries; the resulting accruals are reviewed by management, and any adjustments arising from changes in estimates are reflected in income.
The workers' compensation accruals are discounted as the amount and timing of cash payments related to those accruals are reliably determinable given the nature of workers' compensation benefits and the level of historical claim volume to support the actuarial assumptions and judgments used to derive the expected loss payment pattern. The workers' compensation accruals are discounted using an interest rate that approximates the long-term investment yields over the expected payment pattern of unpaid losses.
Our self-insurance accruals are based on estimates and, while we believe that the amounts accrued are adequate and not excessive, the ultimate claims may be in excess of or less than the amounts provided.
Stock Valuation--On March 15, 1979, we consummated a plan, which transferred control of the Company to our employees. 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

Page 29


established for the benefit of the participants. 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 two 60-day periods after distribution of the shares from the Davey 401KSOP and ESOP.
Because there is no trading of the Company’s common stock on an established securities market, the market price of the Company’s common stock is determined by its Board of Directors. As part of the process to determine the market price, an independent valuation is obtained. The process includes comparing the Company’s financial results to those of comparable companies that are publicly traded (comparable publicly traded companies). The purpose of the process is to determine a value for the Company’s common stock that is comparable to the stock value of comparable publicly traded companies by considering both the results of the stock market and the relative financial results of comparable publicly traded companies. The fair valuation of the shares utilizes two valuation approaches, the Market Approach and the Income Approach to derive a basis of value. Some key assumptions used in the stock valuation include growth rate, discount rate, rate of capital expenditures, net worth, earnings and appropriate valuation multiples.
If circumstances change (e.g., change in the macro economic factors, key assumptions included within valuation), our estimates of the share price could differ from time to time.
MARKET RISK INFORMATION
In the normal course of business, we are exposed to market risk related to changes in interest rates, changes in foreign currency exchange rates and changes in the price of fuel. We do not hold or issue derivative financial instruments for trading or speculative purposes. We use derivative financial instruments to manage risk, in part, associated with changes in interest rates and changes in fuel prices.
Interest Rate Risk
We are exposed to market risk related to changes in interest rates on long-term debt obligations. We regularly monitor and measure our interest rate risk and, to the extent that we believe we are exposed, from time-to-time we have entered into interest rate swap contracts--derivative financial instruments--with the objective of altering interest rate exposures related to a portion of our variable debt.
The following table provides information, as of December 31, 2018, about our debt obligations, including principal cash flows, weighted-average interest rates by expected maturity dates and fair values. Weighted-average interest rates used for variable-rate obligations are based on rates as derived from published spot rates, in effect as of December 31, 2018.
 
Expected Maturity Date
 
 
 
 
 
Fair Value
December 31,
2018
 
2019
 
2020
 
2021
 
2022
 
2023
 
Thereafter
 
Total
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate
$
23,666

 
$
8,890

 
$
6,297

 
$
267

 
$
70

 
$
50,000

 
$
89,190

 
$
86,810

Average interest rate
4.0
%
 
4.6
%
 
5.1
%
 
4.8
%
 
5.0
%
 
4.0
%
 
 

 
 

Variable rate
$
222

 
$
30

 
$
30

 
$
93,500

 
$

 
$

 
$
93,782

 
$
93,782

Average interest rate
5.5
%
 
5.5
%
 
5.5
%
 
3.5
%
 
%
 
%
 
 

 
 

Interest rates on the variable-rate debt, as of December 31, 2018, ranged from 3.1% to 5.5%.

Page 30


Foreign Currency Exchange Rate Risk
We are exposed to market risk related to foreign currency exchange rate risk resulting from our operations in Canada, where we provide a comprehensive range of horticultural services. Our financial results could be affected by factors such as changes in the foreign currency exchange rate or differing economic conditions in the Canadian markets as compared with the markets for our services in the United States. Our earnings are affected by translation exposures from currency fluctuations in the value of the U.S. dollar as compared to the Canadian dollar. Similarly, the Canadian dollar-denominated assets and liabilities may result in financial exposure as to the timing of transactions and the net asset / liability position of our Canadian operations.
For the year ended December 31, 2018, the result of a hypothetical 10% uniform change in the value of the U.S. dollar as compared with the Canadian dollar would not have a material effect on our results of operations or our financial position. Our sensitivity analysis of the effect of changes in foreign currency exchange rates does not factor in a potential change in sales levels or local currency prices. Presently, we do not engage in hedging activities related to our foreign currency exchange rate risk.
Commodity Price Risk
We are subject to market risk from fluctuating prices of fuel--both diesel and gasoline. In prior years we have used fuel derivatives as "economic hedges" related to fuel consumed by Davey Tree service vehicles. The objectives of the economic hedges are to fix the price of a portion of our fuel needs and mitigate the earnings and cash flow volatility attributable to the risk of changing prices. Presently, we are not engaged in any hedging or derivative activities.
Impact of Inflation
The impact of inflation on the results of operations has not been significant in recent years.
Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.
The information set forth in “Market Risk Information” under Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is incorporated herein by reference.
Item 8.  Financial Statements and Supplementary Data.
Our consolidated financial statements are attached hereto and listed on page F-1 of this annual report.
Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A.  Controls and Procedures.
Management’s Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Form 10-K, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 as amended (the “Exchange Act”)). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this Form 10-K in ensuring that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control framework and processes were designed to provide reasonable assurance to management and the Board of

Page 31


Directors that our financial reporting is reliable and that our consolidated financial statements for external purposes have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).
Our management recognizes its responsibility for fostering a strong ethical climate so that our affairs are conducted according to the highest standards of personal and corporate conduct.
Our internal control over financial reporting includes policies and procedures that: (i) provide for the maintenance of records that, in reasonable detail, accurately and fairly reflect our business transactions; (ii) provide reasonable assurance that transactions are recorded properly to allow for the preparation of financial statements in accordance with U.S. GAAP; and (iii) provide reasonable assurance that the unauthorized acquisition, use, or disposition of our assets will be prevented or detected in a timely manner. We maintain a dynamic system of internal controls and processes--including internal control over financial reporting--designed to ensure reliable financial recordkeeping, transparent financial reporting and protection of physical and intellectual property.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation as of December 31, 2018, as to the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2018.
Our independent registered public accounting firm has issued an audit report on our internal control over financial reporting, which is included in this report.

/s/ Patrick M. Covey
 
/s/ Joseph R. Paul
 
/s/ Thea R. Sears
Patrick M. Covey
President and Chief Executive Officer
 
Joseph R. Paul
Executive Vice President, Chief Financial Officer and Secretary
 
Thea R. Sears
Vice President and Controller
Kent, Ohio
March 11, 2019
(d) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the fourth quarter 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Page 32


(e) Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of The Davey Tree Expert Company
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of The Davey Tree Expert Company (the “Company”) as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2018, of the Company and our report dated March 11, 2019, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.  
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Cleveland, Ohio
March 11, 2019

Item 9B.  Other Information.
None.

Page 33


PART III
Item 10.  Directors, Executive Officers and Corporate Governance.
Information about our executive officers is included in the section "Executive Officers of the Company,” pursuant to Instruction G of Form 10-K as an unnumbered item to Part I of this report.
Information about our directors is in the section "Proposal One-Election of Directors" and "Corporate Governance-Transactions with Related Persons, Promoters and Certain Control Persons" of our 2019 Proxy Statement, which is incorporated into this report by reference.
Information about our audit committee and our audit committee financial experts is in the section "Corporate Governance- Audit Committee” of our 2019 Proxy Statement, which is incorporated into this report by reference.
Information required by Item 405 of Regulation S-K is in the section "Ownership of Common Shares-Section 16(a) Beneficial Ownership Reporting Compliance” of our 2019 Proxy Statement, which is incorporated into this report by reference. See also the section titled "Corporate Governance-Shareholder Nominations for Director," which is incorporated into this report by reference.
We have adopted a Code of Ethics for Financial Matters that applies to our principal executive officer, principal financial officer and principal accounting officer, or persons performing similar functions. That Code is available on our website or upon request, as described in this report in Item 1. “Business - Access to Company Information.” We intend to disclose, on our website at www.davey.com, any amendments to, or waiver of, any provision of that Code that would otherwise be required to be disclosed under the rules of the Securities and Exchange Commission.
Item 11.  Executive Compensation.
Information about executive and director compensation is in the sections “Compensation Discussion and Analysis,” "Report of the Compensation Committee," "Compensation Risk Analysis," "Compensation of Executive Officers," "2018 Director Compensation", "Corporate Governance-Compensation Committee Interlocks and Insider Participation," and "Corporate Governance-Role of the Board in Risk Oversight" of our 2019 Proxy Statement, which are incorporated into this report by reference.
Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Information about ownership of our common shares by certain persons is in the section "Ownership of Common Shares" of our 2019 Proxy Statement, which is incorporated into this report by reference. Information about our securities authorized for issuance under equity compensation plans is in the section “Compensation of Executive Officers-Equity Compensation Plan Information” of our 2019 Proxy Statement, which is incorporated into this report by reference.
Item 13.  Certain Relationships and Related Transactions, and Director Independence.
Information about certain transactions between us and our affiliates and certain other persons and the independence of directors is in the section “Corporate Governance-Board Independence” and "Corporate Governance-Transactions with Related Persons, Promoters and Certain Control Persons" of our 2019 Proxy Statement, which is incorporated into this report by reference.
Item 14.  Principal Accountant Fees and Services.
Information about our principal accountant’s fees and services is in the section “The Independent Registered Public Accounting Firm” of our 2019 Proxy Statement, which is incorporated into this report by reference.

Page 34


PART IV
Item 15.  Exhibits and Financial Statement Schedules.
(a) (1) and (a) (2) Financial Statements and Schedules.
The response to this portion of Item 15 is set forth on page F-1 of this report.
(b) Exhibits.
The exhibits to this Form 10-K are submitted as a separate section of this report. See Exhibit Index.

Page 35


EXHIBIT INDEX
Exhibit No.
 
Description
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.1 *
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.4 *
 
 
 
 
 
 
 
 
10.5 *
 
 
 
 
 
 
 
 
10.6 *
 
 
 
 
 
 
 
 
10.7 *
 
 
 
 
 
 
 
 
10.8 *
 
 
 
 
 
 
 
 
10.9 *
 
 
 
 
 
 
 
 
 
 
 

Page 36


EXHIBIT INDEX
Exhibit No.
 
Description
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Filed Herewith
 
 
 
 
 
 
 
Filed Herewith
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Page 37


EXHIBIT INDEX
Exhibit No.
 
Description
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Filed Herewith
 
 
 
 
 
 
 
Filed Herewith
 
 
 
 
 
 
 
Filed Herewith
 
 
 
 
 
 
 
Filed Herewith
 
 
 
 
 
 
 
Filed Herewith
 
 
 
 
 
 
 
Filed Herewith
 
 
 
 
 
 
 
Filed Herewith
 
 
 
 
 
 
 
Filed Herewith
 
 
 
 
 
 
 
Filed Herewith
 
 
 
 
 
 
 
Furnished Herewith
 
 
 
 
 
 
 
Furnished Herewith
 
 
 
 
 
 
 
 
 
 
 
 
 
101
 
The following materials from the Company's Annual Report on Form 10-K for the year ended December 31, 2018, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Statements of Consolidated Shareholders' Equity, (v) the Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements.
 
Filed Herewith
 
 
 
 
 
* Management contracts or compensatory plans or arrangements.
The Registrant is a party to certain instruments, copies of which will be furnished to the Securities and Exchange Commission upon request, defining the rights of holders of long-term debt.

Page 38


Item 16.  Form 10-K Summary.
None.

Page 39


SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 11, 2019.
 
 
THE DAVEY TREE EXPERT COMPANY
 
 
 
 
 
 
 
 
/s/ Patrick M. Covey
 
 
Patrick M. Covey
President and Chief Executive Officer
 
 
 
 
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 11, 2019.
 
 
 
 
 
 
/s/ Donald C. Brown          
 
/s/ John E. Warfel                                        
Donald C. Brown
Director
 
John E. Warfel
Director