Index~~Index~~

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended September ~~28, 2019~~26, 2020



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

For the transition period from ______________ to ______________

Commission file number 000-11917

THE DAVEY TREE EXPERT COMPANY

(Exact name of registrant as specified in its charter)



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

1500 North Mantua Street

P.O. Box 5193

Kent,, OH44240

(Address of principal executive offices) (Zip code)

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

(Registrant's telephone number, including area code)

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

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

N/A

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

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

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

Large Accelerated Filer

☐

Accelerated Filer

☒

Emerging Growth Company

☐

Non-Accelerated Filer

☐

Smaller Reporting Company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange ~~Act~~Act. ☐

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

There were ~~23,177,264~~22,651,885 Common Shares, $1.00 par value, outstanding as of ~~November 1, 2019.~~

October 30, 2020.

Index

~~Index~~

The Davey Tree Expert Company

Quarterly Report on Form 10-Q

September ~~28, 2019~~26, 2020

INDEX


											Page
Part I.			Financial Information

Item 1.			Financial Statements (Unaudited)
						Condensed Consolidated Balance Sheets					2
						Condensed Consolidated Statements of Operations					3
						Condensed Consolidated Statements of Comprehensive Income (Loss)					4
						Condensed Consolidated Statements of Shareholders' Equity					5
						Condensed Consolidated Statements of Cash Flows					7
						Notes to Condensed Consolidated Financial Statements
								A	—	Basis of Financial Statement Preparation	8
								B	—	Seasonality of Business	9
								C	—	Accounts Receivable, Net and Supplemental Balance-Sheet Information	9
								D	—	Business Combinations	11
								E	—	Identified Intangible Assets and Goodwill, Net	12
								F	—	Long-Term Debt and Commitments Related to Letters of Credit	13
								G	—	Leases	16
								H	—	Stock-Based Compensation	18
								I	—	Net Periodic Benefit Expense--Defined Benefit Pension Plans	21
								J	—	Income Taxes	22
								K	—	Accumulated Other Comprehensive Income (Loss)	22
								L	—	Per Share Amounts and Common and Redeemable Shares Outstanding	24
								M	—	Operations by Business Segment	26
								N	—	Revenue Recognition	29
								O	—	Fair Value Measurements and Financial Instruments	31
								P	—	Commitments and Contingencies	33
								Q	—	The Davey 401KSOP and Employee Stock Ownership Plan	35

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

Item 1.	~~Financial Statements (Unaudited)~~
		~~Condensed Consolidated Balance Sheets~~2.					2
		~~Condensed Consolidated Statements of Operations~~					3
		~~Condensed Consolidated Statements of Comprehensive Income (Loss)~~					4
		~~Condensed Consolidated Statements of Shareholders' Equity~~					5
		~~Condensed Consolidated Statements of Cash Flows~~					7
		~~Notes to Condensed Consolidated Financial Statements~~
			A	—								~~Basis of Financial Statement Preparation~~	8
			B	—	~~Seasonality of Business~~		9
			C	—	~~Accounts Receivable, Net and Supplemental Balance-Sheet Information~~		9
			D	—	~~Business Combinations~~		11
			E	—	~~Identified Intangible Assets and Goodwill, Net~~		12
			F	—	~~Long-Term Debt and Commitments Related to Letters of Credit~~		13
			G	—	~~Leases~~		16
			H	—	~~Stock-Based Compensation~~		19
			I	—	~~Net Periodic Benefit Expense--Defined Benefit Pension Plans~~		22
			J	—	~~Income Taxes~~		22
			K	—	~~Accumulated Other Comprehensive Income (Loss)~~		23
			L	—	~~Per Share Amounts and Common and Redeemable Shares Outstanding~~		25
			M	—	~~Operations by Business Segment~~		27
			N	—	~~Revenue Recognition~~		29
			O	—	~~Fair Value Measurements and Financial Information~~		31
			P	—	~~Commitments and Contingencies~~		33
			Q	—	~~The Davey 401KSOP and Employee Stock Ownership Plan~~		35

~~Item 2.~~	Management's Discussion and Analysis of Financial Condition and Results of Operations						3637
						Results of Operations					3738
						Liquidity ofand Capital Resources					4143
								Cash Flow Summary			4243
								Contractual Obligations Summary and Commercial Commitments			4344
								Capital Resources			4344
						Critical Accounting Policies and Estimates					4345
						Note Regarding Forward-Looking Statements					4445

Item 3.			Quantitative and Qualitative Disclosures about Market Risk								4547

Item 4.			Controls and Procedures								4547

Part II.			Other Information								4547

Item 1.			Legal Proceedings								4547

Item 1A.			Risk Factors								4648

Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds								4750

Item 6.			Exhibits								4851

Exhibit Index											4952

Signatures											5053

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

~~Index~~- 1 -

Index

THE DAVEY TREE EXPERT COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands, except per share data dollar amounts)


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


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

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

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

See notes to condensed consolidated financial statements (unaudited).

- 2 -

September 28,
2019 December 31,
2018
Assets
Current assets:
Cash $ 13,702
$ 22,661
Accounts receivable, net 232,245
195,906
Operating supplies 12,030
14,415
Other current assets 30,884
22,086
Total current assets 288,861
255,068
Property and equipment 662,256
639,396
Less accumulated depreciation 461,705
437,111
Total property and equipment, net 200,551
202,285
Right-of-use assets - operating leases 40,189
—
Other assets 21,677
21,769
Intangible assets and goodwill, net 49,920
47,501
Total assets $ 601,198
$ 526,623
Liabilities and shareholders' equity

Current liabilities:

Accounts payable $ 39,276
$ 43,958
Accrued expenses 61,220
44,061
Current portion of long-term debt and finance lease liabilities 30,532
23,859
Other current liabilities 41,683
27,434
Total current liabilities 172,711
139,312
Long-term debt 145,564
155,563
Lease liabilities - finance leases 1,787
2,862
Lease liabilities - operating leases 25,878
—
Self-insurance reserve 62,643
56,351
Other noncurrent liabilities 10,487
10,125
Total liabilities 419,070
364,213
Commitments and contingencies (Note P)
Redeemable common shares related to 401KSOP and Employee Stock Ownership Plan (ESOP); 5,299 and 5,642 shares at redemption value as of September 28, 2019 and December 31, 2018 119,758
119,049
Common shareholders' equity:

Common shares, $1.00 par value, per share; 48,000 shares authorized; 37,615 and 37,272 shares issued and outstanding before deducting treasury shares and which excludes 5,299 and 5,642 shares subject to redemption as of September 28, 2019 and December 31, 2018 37,623
37,272
Additional paid-in capital 91,448
82,623
Common shares subscribed, unissued 110
6,799
Retained earnings 180,470
157,472
Accumulated other comprehensive loss (5,636 ) (5,034 )
304,015
279,132
Less: Cost of common shares held in treasury; 19,671 shares at September 28, 2019 and 20,033 shares at December 31, 2018 241,631
235,042
Common shares subscription receivable 14
729
Total common shareholders' equity 62,370
43,361
Total liabilities and shareholders' equity $ 601,198
$ 526,623

See notes to condensed consolidated financial statements.

Index~~Index~~

THE DAVEY TREE EXPERT COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In thousands, except per share dollar amounts)


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

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

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

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

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

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

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

Net income per share:

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

Weighted-average shares outstanding:

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

See notes to condensed consolidated financial statements (unaudited).

- 3 -

Three Months Ended Nine Months Ended
September 28,
2019 September 29,
2018 September 28,
2019 September 29,
2018
Revenues $ 307,473
$ 265,318
$ 856,796
$ 744,618

Costs and expenses:
Operating 193,137
171,125
546,931
483,430
Selling 56,921
49,367
153,854
133,341
General and administrative 19,895
16,758
57,610
51,834
Depreciation and amortization 15,319
14,807
44,121
41,866
Gain on sale of assets, net (582 ) (1,324 ) (1,751 ) (4,572 )
Total costs and expenses 284,690
250,733
800,765
705,899

Income from operations 22,783
14,585
56,031
38,719

Other income (expense):
Interest expense (2,018 ) (1,811 ) (6,597 ) (4,966 )
Interest income 94
80
270
259
Other, net (1,886 ) (1,322 ) (6,694 ) (4,036 )

Income before income taxes 18,973
11,532
43,010
29,976

Income taxes 5,539
3,148
10,322
6,505

Net income $ 13,434
$ 8,384
$ 32,688
$ 23,471

Net income per share:
Basic $ .59
$ .35
$ 1.43
$ .96
Diluted $ .56
$ .34
$ 1.37
$ .92

Weighted-average shares outstanding:
Basic 22,793
23,768
22,830
24,443
Diluted 24,002
24,816
23,927
25,543

See notes to condensed consolidated financial statements.

Index~~Index~~

THE DAVEY TREE EXPERT COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands)


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

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

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

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

See notes to condensed consolidated financial statements (unaudited).

- 4 -

Three Months Ended Nine Months Ended
September 28,
2019 September 29,
2018 September 28,
2019 September 29,
2018
Net income $ 13,434
$ 8,384
$ 32,688
$ 23,471
Components of other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (384 ) 517
823
(1,062 )
Amortization of defined benefit pension items:
Net actuarial (gain) loss 5
135
(1,461 ) 404
Prior service cost 12
11
36
35
Defined benefit pension plan adjustments 17
146
(1,425 ) 439

Other comprehensive income (loss), net of tax (367 ) 663
(602 ) (623 )

Comprehensive income $ 13,067
$ 9,047
$ 32,086
$ 22,848

See notes to condensed consolidated financial statements.

Index~~Index~~

THE DAVEY TREE EXPERT COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)

(In thousands, except per share data)


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

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

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

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

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

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

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

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

See notes to condensed consolidated financial statements.

~~Index~~

- 5 -

Index

THE DAVEY TREE EXPERT COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)

(In thousands, except per share data)


	Common Shares		Additional Paid-in Capital		Common Shares Subscribed, Unissued		Retained Earnings		Accumulated Other Comprehensive Income (Loss), Net of Tax		Common Shares Held in Treasury		Common Shares Subscription Receivable		Total Common Shareholders' Equity
Balances at June 29, 2019	$	37,617	$	91,921	$	5,948	$	167,611	$	(5,269)	$	(245,116)	$	(431)	$	52,281
Net income	—		—		—		13,434		—		—		—		13,434
Change in 401KSOP and ESOP related shares	6		(61)		—		0		—		—		—		(55)
Shares sold to employees	—		193		—		—		—		250		—		443
Options exercised	—		216		—		—		—		283		—		499
Subscription shares	—		(1,413)		(5,838)		—		—		7,258		417		424
Stock-based compensation	—		592		—		—		—		—		—		592
Dividends, $.025 per share	—		—		—		(575)		—		—		—		(575)

Currency translation adjustments	—		—		—		—		(384)		—		—		(384)
Defined benefit pension plans	—		—		—		—		17		—		—		17
Shares purchased	—		—		—		—		—		(4,306)		—		(4,306)
Balances at September 28, 2019	$	37,623	$	91,448	$	110	$	180,470	$	(5,636)	$	(241,631)	$	(14)	$	62,370

Balances at January 1, 2019	$	37,272	$	82,623	$	6,799	$	157,472	$	(5,034)	$	(235,042)	$	(729)	$	43,361
Net income	—		—		—		32,688		—		—		—		32,688
Change in 401KSOP and ESOP related shares	351		6,886		—		(7,945)		—		—		—		(708)
Shares sold to employees	—		3,754		—		—		—		5,794		—		9,548
Options exercised	—		(793)		—		—		—		2,572		—		1,779
Subscription shares	—		(1,981)		(6,689)		—		—		10,480		715		2,525
Stock-based compensation	—		959		—		—		—		—		—		959


Dividends, $.075 per share	—		—		—		(1,745)		—		—		—		(1,745)

Currency translation adjustments	—		—		—		—		823		—		—		823
Defined benefit pension plans	—		—		—		—		(1,425)		—		—		(1,425)
Shares purchased	—		—		—		—		—		(25,435)		—		(25,435)
Balances at September 28, 2019	$	37,623	$	91,448	$	110	$	180,470	$	(5,636)	$	(241,631)	$	(14)	$	62,370

See notes to condensed consolidated financial statements (unaudited).

- 6 -

Common
Shares
Additional
Paid-in
Capital
Common
Shares
Subscribed,
Unissued
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss),
Net of Tax
Common
Shares
Held in
Treasury
Common
Shares
Subscription
Receivable
Total Common
Shareholders'
Equity
Balances at June 30, 2018 $ 36,745
$ 69,810
$ 7,131
$ 153,647
$ (9,679 ) $ (216,065 ) $ (1,447 ) $ 40,142
Net income —
—
—
8,384
—
—
—
8,384
Change in 401KSOP and ESOP related shares 11
209
—
—
—
—
—
220
Shares sold to employees —
131
—
—
—
175
—
306
Options exercised —
(25 ) —
—
—
359
—
334
Subscription shares —
(40 ) (207 ) —
—
329
594
676
Stock-based compensation —
648
—
—
—
—
—
648
Dividends, $.025 per share —
—
—
(598 ) —
—
—
(598 )
Currency translation adjustments —
—
—
—
517
—
—
517
Defined benefit pension plans —
—
—
—
146
—
—
146
Shares purchased —
—
—
—
—
(4,958 ) —
(4,958 )
Balances at September 29, 2018 $ 36,756
$ 70,733
$ 6,924
$ 161,433
$ (9,016 ) $ (220,160 ) $ (853 ) $ 45,817

Balances at January 1, 2018 $ 36,447
$ 58,554
$ 7,529
$ 143,835
$ (8,393 ) $ (198,327 ) $ (1,775 ) $ 37,870
Net income —
—
—
23,471
—
—
—
23,471
Change in 401KSOP and ESOP related shares 309
5,607
—
(3,700 ) —
—
—
2,216
Shares sold to employees —
4,575
—
—
—
6,697
—
11,272
Options exercised —
239
—
—
—
1,561
—
1,800
Subscription shares —
(20 ) (605 ) —
—
867
922
1,164
Stock-based compensation —
1,778
—
—
—
—
—
1,778
Dividends, $.075 per share —
—
—
(1,818 ) —
—
—
(1,818 )
Adoption of ASU 2014-09 —
—
—
(355 ) —
—
—
(355 )
Currency translation adjustments —
—
—
—
(1,062 ) —
—
(1,062 )
Defined benefit pension plans —
—
—
—
439
—
—
439
Shares purchased —
—
—
—
—
(30,958 ) —
(30,958 )
Balances at September 29, 2018 $ 36,756
$ 70,733
$ 6,924
$ 161,433
$ (9,016 ) $ (220,160 ) $ (853 ) $ 45,817

See notes to condensed consolidated financial statements.

Index~~Index~~

THE DAVEY TREE EXPERT COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)


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

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

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

See notes to condensed consolidated financial statements (unaudited).

- 7 -

Nine Months Ended
September 28,
2019 September 29,
2018
Operating activities
Net income $ 32,688
$ 23,471
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 44,121
41,866
Other (1,106 ) (834 )
Changes in operating assets and liabilities, net of assets acquired:
Accounts receivable (35,956 ) (24,370 )
Accounts payable and accrued expenses 18,691
1,276
Self-insurance reserve 5,952
5,391
Prepaid expenses (10,388 ) (9,020 )
Other, net 3,212
(12,983 )
24,526
1,326
Net cash provided by operating activities 57,214
24,797
Investing activities

Capital expenditures:

Equipment (45,148 ) (47,689 )
Land and building (1,108 ) (591 )
Purchases of businesses, net of cash acquired (3,800 ) (8,241 )
Proceeds from sales of fixed assets 2,502
5,836
Net cash used in investing activities (47,554 ) (50,685 )
Financing activities

Revolving credit facility borrowings 358,000
396,500
Revolving credit facility payments (386,500 ) (404,500 )
Purchase of common shares for treasury (25,435 ) (30,958 )
Sale of common shares from treasury 13,852
14,235
Dividends paid (1,745 ) (1,818 )
Proceeds from notes payable 95,200
72,746
Payments of notes payable (71,027 ) (22,258 )
Payments of finance leases (1,061 ) (664 )
Net cash (used in) provided by financing activities (18,716 ) 23,283
Effect of exchange rate changes on cash 97
—
Decrease in cash (8,959 ) (2,605 )
Cash, beginning of period 22,661
13,121
Cash, end of period $ 13,702
$ 10,516
Supplemental cash flow information follows:

Interest paid $ 7,355
$ 5,163
Income taxes paid 2,239
7,898

See notes to condensed consolidated financial statements.

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September ~~28, 2019~~26, 2020

(Amounts in thousands, except share data)

A.Basis of Financial Statement Preparation


A.	~~Basis of Financial Statement Preparation~~

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

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

Certain information and disclosures required by U.S. GAAP for complete financial statements have been omitted in accordance with the rules and regulations of the SEC. We suggest that these condensed consolidated financial statements be read in conjunction with the financial statements included in our annual report on Form 10-K for the year ended December 31, ~~2018~~2019 (the ~~“2018~~“2019 Annual Report”).

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

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

The Company’s fiscal quarters each contain thirteen operating weeks, with the exception of the fourth quarter of a 53-week fiscal year, which contains fourteen operating weeks. The Company’s fiscal quarter that ended September 26, 2020 is referred to as the third quarter of 2020, and the fiscal quarter ended September 28, 2019 is referred to as the third quarter of ~~2019, and the fiscal quarter ended September 29, 2018 is referred to as the third quarter of 2018.~~

~~Recent Accounting Guidance~~

~~Accounting Standards Adopted in 2019~~

~~Accounting Standards Update 2016-02, Leases (Topic 842)~~--In February 2016, the FASB issued Accounting Standards Update ("ASU") 2016-02, “Leases (Topic 842).” ASU 2016-02, along with several subsequent updates, requires lessees to recognize assets and liabilities created by leases on their balance sheet along with additional disclosure information. The Company adopted the standard on January 1, 2019 using the Comparative Under ASC 840 approach, which permitted the Company to not recast historical periods for the adoption, and utilized practical expedients as available. The adoption of the new standard resulted in the recording, as of January 1, 2019, of operating right-of-use assets and lease liabilities of $37,429. The adoption of the new standard did not impact our consolidated results of operations and had no impact on our cash flows.

~~Accounting Standards Update 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220)~~--In February 2018, the FASB issued ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220)." ASU 2018-02 provides an option to reclassify the stranded tax effects within accumulated other comprehensive income to retained earnings as a result of the Tax Cuts and Jobs Act of 2017. The Company adopted ASU 2018-02 effective January 1, 2019 and did not elect to reclassify the income tax effects of the Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings.2019.

- 8 -

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September ~~28, 2019~~26, 2020

(Amounts in thousands, except share data)


A.	~~Basis of Financial Statement Preparation (continued)~~

~~SEC Release No. 33-10532, Disclosure Update and Simplification~~--In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of shareholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of shareholders' equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. We have incorporated the changes required by SEC Release No. 33-10532 in this report.Recent Accounting Guidance

Accounting Standards Adopted ~~Not Yet Adopted~~in 2020

Accounting Standards Update 2016-13, Financial Instruments - Credit Losses (Topic 326)--In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)." ASU 2016-13 ~~replaces~~replaced the incurred loss impairment methodology in ~~current~~U.S. GAAP for most financial instruments, including trade receivables, with an impairment model, known as the current expected credit loss model, that is based on expected losses rather than incurred losses. The Company adopted the new standard effective January 1, 2020, and it did not have a material effect on the Company's results of operations.

Accounting Standards Not Yet Adopted

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


B.	~~Seasonality of Business~~

B. Seasonality of Business

Due to the seasonality of our business, our operating results for the three and nine months ended September ~~28, 2019~~26, 2020 are not indicative of results that may be expected for any other interim period or for the year ending December 31, ~~2019.~~2020. Our business seasonality traditionally results in higher revenues during the second and third quarters as compared with the first and fourth quarters of the year, while the methods of accounting for fixed costs, such as depreciation expense, amortization, rent and interest expense, are not significantly impacted by business seasonality.


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

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

Accounts receivable, net, consisted of the following:


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

Accounts receivable, net September 28,
2019 December 31,
2018
Accounts receivable $ 177,644
$ 158,556
Receivables under contractual arrangements⁽¹⁾
57,430
40,671
235,074
199,227
Less allowances for doubtful accounts 2,829
3,321
Accounts receivable, net $ 232,245
$ 195,906
(1) Unbilled Receivables consist of work-in-process in accordance with the terms of contracts, primarily with utility services customers.


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

- 9 -

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September ~~28, 2019~~26, 2020

(Amounts in thousands, except share data)


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

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


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


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

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


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


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


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


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

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


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

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

- 10 -

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

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

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September ~~28, 2019~~26, 2020

(Amounts in thousands, except share data)


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

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


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


D.	~~Business Combinations~~

D. Business Combinations

Our investments in businesses during the first nine months of ~~2019~~2020 were ~~$5,527,~~$5,240, including liabilities assumed of ~~$402~~$380 and debt issued, in the form of notes payable to the sellers, of ~~$1,322,~~$1,034, and have been included in our Residential and Commercial segment. Measurement-period adjustments are not complete. The measurement period for purchase price allocations ends as soon as information of the facts and circumstances becomes available, but does not exceed one year from the acquisition date. During the nine months ended September ~~29, 2018,~~28, 2019, our investment in businesses was ~~$10,553,~~$5,527, including liabilities assumed of $402 and debt issued, in the form of notes payable to the sellers, of ~~$2,312.~~$1,322.

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

September 28,
2019 December 31,
2018
Detail of acquisitions:
Assets acquired:

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


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

The results of operations of acquired businesses have been included in the condensed consolidated statements of operations beginning as of the effective dates of acquisition. The effect of these acquisitions on our consolidated revenues and results of operations for the period ended September ~~28, 2019~~26, 2020 was not significant. Pro forma net sales and results of operations for the acquisitions, had they occurred at the beginning of the nine months ended September ~~28, 2019,~~26, 2020, are not material and, accordingly, are not provided.

- 11 -

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 26, 2020

(Amounts in thousands, except share data)

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

~~Index~~

~~The Davey Tree Expert Company~~

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

~~September 28, 2019~~

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


D.	~~Business Combinations (continued)~~

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


E.	~~Identified Intangible Assets and Goodwill, Net~~

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

September 28, 2019 December 31, 2018

Carrying
Amount

Accumulated
Amortization

Carrying
Amount

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

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

Less accumulated amortization 32,508

30,640

Identified intangible assets, net 10,022

9,530

Goodwill 39,898

37,971

$ 49,920

$ 47,501


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

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

Less accumulated amortization	35,270				33,160

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

Goodwill	$	45,152			$	42,285

The changes in the carrying amounts of goodwill, by segment, for the nine months ended September 26, 2020 and September 28, 2019 ~~and September 29, 2018~~ follow:

Balance at
January 1, 2019
Acquisitions
Translation
and Other
Adjustments

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

Balance at
January 1, 2018
Acquisitions
Translation
and Other
Adjustments

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


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

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


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

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

- 12 -

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September ~~28, 2019~~26, 2020

(Amounts in thousands, except share data)


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

Estimated future aggregate amortization expense of intangible assets--The estimated future aggregate amortization expense of intangible assets, as of September ~~28, 2019 is~~26, 2020 was as follows:

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


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


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

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

Our long-term debt consisted of the following:

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


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

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

Revolving Credit Facility --As of September ~~28, 2019,~~26, 2020, we had a $250,000 revolving credit facility with a group of banks, which expires in October 2022 and permits borrowings, as defined, up to $250,000, including a letter of credit sublimit of $100,000 and a swing-line commitment of $25,000. Under certain circumstances, the amount available under the revolving credit facility may be increased to $325,000. The revolving credit facility contains certain affirmative and negative covenants customary for this type of facility and includes financial covenant ratios with respect to a maximum leverage ratio (not to exceed 3.00 to 1.00 with exceptions in case of material acquisitions) and a minimum interest coverage ratio (not less than 3.00 to 1.00), in each case subject to certain further restrictions as described in the credit agreement. As of September 26, 2020, we had unused commitments under the facility approximating$217,123, with $32,877 committed, consisting of borrowings of$30,000 and issued letters of credit of$2,877.

- 13 -

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September ~~28, 2019~~26, 2020

(Amounts in thousands, except share data)


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

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

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

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

The 5.09% Senior Notes ~~are~~were equal in right of payment with our revolving credit facility and all other senior unsecured obligations of the Company. Interest iswas payable semiannually and 5 equal, annual principal payments commenced on July 22, 2016 (the 6th anniversary of issuance). The Purchase Agreement ~~contains~~contained customary events of default and covenants related to limitations on indebtedness and transactions with affiliates and the maintenance of certain financial ratios.

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

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

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

In conjunction with the issuance of the 3.99% Senior Notes, on September 21, 2018, the Company entered into an amendment to its revolving credit facility. The amendment amended certain provisions and covenants in the credit agreement to generally conform them to the corresponding provisions and covenants in the Note Purchase and Shelf Agreement. The amendment also permitted the Company to incur indebtedness arising under the Note Purchase and Shelf Agreement in an aggregate principal amount not to exceed $75,000, which included the $50,000 of 3.99% Senior Notes, plus an additional $25,000 in Shelf Notes (which were issued on February 5, 2019).

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

- 14 -

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September ~~28, 2019~~26, 2020

(Amounts in thousands, except share data)


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

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

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

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

Aggregate Maturities of Long-Term Debt--Aggregate maturities of long-term debt based on the principal amounts outstanding at September ~~28, 2019~~26, 2020 were as follows: ~~2019--$6,460;~~ 2020--$~~22,871;~~8,025; 2021--$~~5,558;~~25,768; 2022--$~~65,328;~~30,942; 2023--$~~37;~~172; 2024--$15,000; and thereafter ~~$75,000.~~$60,000.

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

The AR Securitization program has a limit of $100,000, of which ~~$76,732~~$83,355 and ~~$67,438~~$76,732 were issued for ~~letters of credit ("LCs")~~LCs as of September ~~28, 2019~~26, 2020 and December 31, ~~2018,~~2019, respectively.

Under the AR Securitization program, Davey Tree transfers by selling or contributing current and future trade receivables to a wholly-owned, bankruptcy-remote financing subsidiary which pledges a perfected first priority security interest in the trade receivables--equal to the issued LCs as of September ~~28, 2019--to~~26, 2020--to the bank in exchange for the bank issuing LCs.

Pre-petition receivables from PG&E Corporation and its regulated utility subsidiary, Pacific Gas and Electric Company (collectively, "PG&E"), which had filed voluntary bankruptcy petitions under Chapter 11 of the United States Bankruptcy Code in the U.S. Bankruptcy Court for the Northern District of California on January 29, 2019 and successfully emerged from bankruptcy on July 1, 2020, while remaining in the securitized pool, are considered ineligible and are excluded from performance ratios and reserves.

Fees payable to the bank include: (a) an LC issuance fee, payable on each settlement date, in the amount of ~~.90%~~1.00% per annum (.90% previously) on the aggregate amount of all LCs outstanding plus outstanding reimbursement obligations (e.g., arising from drawn LCs), if any, and (b) an unused LC fee, payable monthly, equal to (i) .35% per annum for each day on which the sum of the total LCs outstanding plus any outstanding reimbursement obligations is greater than or equal to 50% of the facility limit and (ii) .45% per annum for each day on which the sum of the total LCs outstanding plus any outstanding reimbursement obligations is less than 50% of the facility limit. If an LC is drawn and the bank is not immediately reimbursed in full for the drawn amount, any outstanding reimbursement obligation will accrue interest at a per annum rate equal to a reserve-adjusted LIBOR or, in certain circumstances, a base rate equal to the higher of (i) the bank’s prime rate and (ii) the federal funds rate plus .50% and, following any default, 2.00% plus the greater of (a) adjusted LIBOR and (b) a base rate equal to the higher of (i) the bank’s prime rate and (ii) the federal funds rate plus .50%.

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

- 15 -

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 26, 2020

(Amounts in thousands, except share data)

Total Commitments Related to Issued Letters of Credit--As of September ~~28,~~26, 2020, total commitments related to issued LCs were $88,242, of which $2,877 were issued under the revolving credit facility, $83,355 were issued under the AR Securitization program, and $2,010 were issued under short-term lines of credit. As of December 31, 2019, total commitments related to issued LCs were ~~$81,655,~~$81,619, of which ~~$2,913~~$2,877 were issued under the revolving credit facility, $76,732 were issued under the AR Securitization program, and $2,010 were issued under short-term lines of credit. ~~As of December 31, 2018,~~

~~Index~~

~~The Davey Tree Expert Company~~

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

~~September 28, 2019~~

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


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

total commitments related to issued LCs were $72,565, of which $3,123 were issued under the revolving credit facility, $67,438 were issued under the AR Securitization program, and $2,004 were issued under short-term lines of credit.

As of September ~~28, 2019,~~26, 2020, we ~~are~~were in compliance with all debt covenants.


G.	~~Leases~~

G. Leases

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

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


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

- 16 -

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September ~~28, 2019~~26, 2020

(Amounts in thousands, except share data)


G.	~~Leases (continued)~~

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


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

Operating lease cost	Operating expense	$	2,877	$	1,845	$	7,776	$	4,912
Operating lease cost	Selling expense	2,322		2,188		7,127		6,513
Operating lease cost	General and administrative expense	389		214		844		617
Finance lease cost:
Amortization of right-of-use assets	Depreciation and amortization	570		339		1,404		1,024
Interest expense on lease liabilities	Interest expense	45		28		103		91
Other lease cost (1)	Operating expense	1,216		855		3,895		2,585
Other lease cost (1)	Selling expense	284		195		953		811
Other lease cost (1)	General and administrative expense	13		12		31		15
Total lease cost		$	7,716	$	5,676	$	22,133	$	16,568

Three Months Ended Nine Months Ended

Condensed Consolidated Statement
of Operations Classification
September 28,
2019 September 28,
2019

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

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

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

We often have options to renew lease terms for buildings and other assets. The exercise of lease renewal options is generally at our sole discretion. In addition, certain lease agreements may be terminated prior to their original expiration date at our discretion. We evaluate each renewal and termination option at the lease commencement date to determine if we are reasonably certain to exercise the option on the basis of economic factors. The table below summarizes the weighted average remaining lease term as of September ~~28, 2019.~~26, 2020.



Operating leases			~~3.5~~3.9 years
Finance leases			~~2.5~~5.7 years

The discount rate implicit within our leases is generally not determinable and therefore the Company determines the discount rate based on its incremental borrowing rate. The incremental borrowing rate for each lease is determined based on its term and the currency in which lease payments are made, adjusted for the impacts of collateral. The table below summarizes the weighted average discount rate used to measure our lease liabilities as of September ~~28, 2019.~~26, 2020.



Operating leases	~~3.82~~3.12	%
Finance leases	~~3.36~~1.90	%

- 17 -

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September ~~28, 2019~~26, 2020

(Amounts in thousands, except share data)


G.	~~Leases (continued)~~

Supplemental Cash Flow Information Related to Leases

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


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

Maturity Analysis of Lease Liabilities


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

H. Stock-Based Compensation

As of September 28, 2019

Operating
Leases

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

December 31, 2018

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

~~Index~~

~~The Davey Tree Expert Company~~

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

~~September 28, 2019~~

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


H.	~~Stock-Based Compensation~~

Our shareholders approved the 2014 Omnibus Stock Plan (the “2014 Stock Plan”) at our annual meeting of shareholders on May 20, 2014. The 2014 Stock Plan replaced the expired 2004 Omnibus Stock Plan (the “2004 plan”) previously approved by the shareholders in 2004. The 2014 Stock Plan is administered by the Compensation Committee of the Board of Directors and has a term of ten years. All directors of the Company and employees of the Company and its subsidiaries are eligible to participate in the 2014 Stock Plan. The 2014 Stock Plan (similar to the 2004 plan) continues the maintenance of the Employee Stock Purchase Plan, as well as provisions for the grant of stock options and other stock-based incentives. The 2014 Stock Plan provides for the grant of 5 percent of the number of the Company’s common shares outstanding as of the first day of each fiscal year plus the number of common shares that were available for grant of awards, but not granted, in prior years. In no event, however, may the number of common shares available for the grant of awards in any fiscal year exceed 10 percent of the common shares outstanding as of the first day of that fiscal year. Common shares subject to an award that is forfeited, terminated, or canceled without having been exercised are generally added back to the number of shares available for grant under the 2014 Stock Plan.

- 18 -

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 26, 2020

(Amounts in thousands, except share data)

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

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


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

Stock-based compensation consisted of the following:

Employee Stock Purchase Plan--Under the Employee Stock Purchase Plan, all full-time employees with one year of service are eligible to purchase, through payroll deduction, common shares. Employee purchases under the Employee Stock Purchase Plan are at 85% of the fair market value of the common shares--a 15% discount. We recognize compensation costs as payroll deductions are made. The 15% discount of total shares purchased under the plan resulted in compensation cost of ~~$866~~$1,067 being recognized for the nine months ended September ~~28, 2019~~26, 2020 and ~~$765~~$866 for the nine months ended September ~~29, 2018.~~28, 2019.

Stock Option Plans--The stock options outstanding were awarded under a graded vesting schedule, measured at fair value, and have a term of ten years. Compensation costs for stock options are recognized over the requisite service period on the straight-line recognition method. Compensation cost recognized for stock options was $398 for the nine months ended September 26, 2020 and $444 for the nine months ended September 28, ~~2019 and $506 for the nine months ended September 29, 2018.~~2019.

Stock-Settled Stock Appreciation Rights-- A SSAR is an award that allows the recipient to receive common shares equal to the appreciation in the fair market value of our common shares between the date the award was granted and the conversion date of the shares vested. Effective January 1, 2019, management and the Compensation Committee replaced the issuance of future SSARs with performance-based restricted stock units ("PRSUs") for certain management employees.

~~Index~~

~~The Davey Tree Expert Company~~

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

~~September 28, 2019~~

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


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

The following table summarizes our SSARs as of September ~~28, 2019~~.26, 2020.

Stock-Settled
Stock Appreciation Rights

Number
of
Rights

Weighted-
Average
Award Date
Value

Weighted-
Average
Remaining
Contractual
Life

Unrecognized
Compensation
Cost

Aggregate
Intrinsic
Value
Unvested, January 1, 2019 380,982
$ 3.42

Granted —
—

Forfeited (3,197 ) 3.43

Vested (115,080 ) 3.31

Unvested, September 28, 2019 262,705
$ 3.47
1.7 years $ 631
$ 5,937


Stock-Settled Stock Appreciation Rights	Number of Rights	Weighted- Average Award Date Value		Weighted- Average Remaining Contractual Life	Unrecognized Compensation Cost		Aggregate Intrinsic Value
Unvested, January 1, 2020	262,705	$	3.47
Granted	0	0
Forfeited	(2,254)	3.53
Vested	(119,255)	3.32
Unvested, September 26, 2020	141,196	$	3.60	1.1 years	$	309	$	3,516

Compensation costs for SSARs are determined using a fair-value method and amortized over the requisite service period. “Intrinsic value” is defined as the amount by which the fair market value of a common share exceeds the grant date price of a SSAR. Compensation expense for SSARs was $214 for the nine months ended September 26, 2020 and $269 for the nine months ended September 28, ~~2019 and $406 for the nine months ended~~ 2019.

- 19 -

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September ~~29, 2018.~~26, 2020

(Amounts in thousands, except share data)

Restricted Stock Units--During the nine months ended September ~~28, 2019,~~26, 2020, the Compensation Committee awarded ~~29,046~~86,959 PRSUs to certain management employees and ~~11,942~~11,904 RSUs to nonemployee directors. The Compensation Committee made similar awards in prior periods. The awards vest over specified periods. The following table summarizes PRSUs and RSUs as of September ~~28, 2019.~~26, 2020.

Restricted Stock Units
Number
of
Stock
Units

Weighted-
Average
Grant Date
Value

Weighted-
Average
Remaining
Contractual
Life

Unrecognized
Compensation
Cost

Aggregate
Intrinsic
Value
Unvested, January 1, 2019 247,838
$ 15.68

Granted 40,988
20.45

Forfeited (4,093 ) 16.39

Vested (60,474 ) 13.55

Unvested, September 28, 2019 224,259
$ 17.11
2.1 years $ 1,839
$ 5,068
Employee PRSUs 192,837
$ 16.80
2.3 years $ 1,474
$ 4,358
Nonemployee Director RSUs 31,422
$ 19.01
1.7 years $ 365
$ 710


Restricted Stock Units	Number of Stock Units	Weighted- Average Grant Date Value		Weighted- Average Remaining Contractual Life	Unrecognized Compensation Cost		Aggregate Intrinsic Value
Unvested, January 1, 2020	224,259	$	17.11
Granted	98,863	23.74
Forfeited	(1,871)	17.37
Vested	(65,944)	15.52
Unvested, September 26, 2020	255,307	$	20.09	2.7 years	$	3,056	$	6,357
Employee PRSUs	220,157	$	19.92	3.0 years	$	2,622	$	5,482
Nonemployee Director RSUs	35,150	$	21.14	1.6 years	$	434	$	875

Compensation cost for PRSUs and RSUs is determined using a fair-value method and amortized on the straight-line recognition method over the requisite service period. “Intrinsic value” is defined as the amount by which the fair market value of a common share exceeds the grant date price of a PRSU or an RSU. Compensation expense on PRSUs and RSUs totaled $888 for the nine months ended September 26, 2020 and $605 for the nine months ended September 28, ~~2019 and $901 for the nine months ended September 29, 2018.~~2019.

We estimated the fair value of each stock-based award on the date of grant using a binomial option-pricing model. The binomial model considers a range of assumptions related to volatility, risk-free interest rate and employee exercise behavior. Expected volatilities utilized in the binomial model are based on historical volatility of our stock prices and other factors. Similarly, the dividend yield is based on historical experience and expected future changes. The

~~Index~~

~~The Davey Tree Expert Company~~

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

~~September 28, 2019~~

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


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

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

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


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

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

- 20 -

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 26, 2020

(Amounts in thousands, except share data)

General Stock Option Information--The following table summarizes activity under the stock option plans for the nine months ended September ~~28, 2019.~~26, 2020.

Stock Options
Number
of
Options
Outstanding

Weighted-
Average
Exercise
Price

Weighted-
Average
Remaining
Contractual
Life

Aggregate
Intrinsic
Value
Outstanding, January 1, 2019 1,466,264
$ 13.94

Granted 151,145
21.10

Exercised (91,739 ) 10.48

Forfeited (20,160 ) 17.67

Outstanding, September 28, 2019 1,505,510
$ 14.82
5.7 years $ 11,713

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


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

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

As of September ~~28, 2019,~~26, 2020, there was approximately ~~$1,484~~$1,426 of unrecognized compensation cost related to stock options outstanding. The cost is expected to be recognized over a weighted-average period of ~~2.7~~2.8 years. “Intrinsic value” is defined as the amount by which the market price of a common share exceeds the exercise price of an option.

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

~~Index~~I. Net Periodic Benefit Expense--Defined Benefit Pension Plans

~~The Davey Tree Expert Company~~

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

~~September 28, 2019~~

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


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

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

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


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

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

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

During April 2019, we entered into an agreement to purchase a guaranteed group annuity contract from a third-party insurance company which unconditionally and irrevocably guarantees the full-payment of all annuity payments to the remaining 231 participants in our Employee Retirement Plan (“ERP”) for which benefits were frozen effective December 31, 2008. The April 2019 agreement transferred all remaining ERP benefit obligations to the third-party insurance company, resulting in a pretax actuarial settlement loss of $1,677.

- 21 -

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 26, 2020

(Amounts in thousands, except share data)

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


J.	~~Income Taxes~~

J. Income Taxes

Our income tax provision for interim periods is determined using an estimate of our annual effective tax rate adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter we update our estimate of the annual effective tax rate and, if our estimated annual tax rate changes, we make a cumulative adjustment. The estimated annual effective tax rate for the nine months ended September ~~28, 2019~~26, 2020 was ~~24.0%~~27.7%. Our annual effective tax rate for the nine months ended September ~~29, 2018~~28, 2019 was estimated at ~~21.7%~~24.0%. Our actual effective tax rate was ~~29.2%~~27.8% and ~~27.3%~~29.2% for the three months ended September 26, 2020 and September 28, 2019, respectively. Our effective tax rate was 27.8% and 24.0% for the nine months ended September 26, 2020 and September ~~29, 2018,~~28, 2019, respectively. The change in the effective tax rate from statutory tax rates is primarily due to the impact of state and local taxes which are partially offset by favorable discrete items.

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

As of September ~~28, 2019,~~26, 2020, we had unrecognized tax benefits of ~~$1,323,~~$1,639, of which ~~$597~~$713 would affect our effective rate if recognized, and accrued interest expense related to unrecognized benefits of ~~$40.~~$69. At December 31, ~~2018,~~2019, we had unrecognized tax benefits of ~~$1,325,~~$1,850, of which ~~$599~~$654 would affect our effective rate if recognized, and accrued interest expense related to unrecognized benefits of ~~$35.~~$64. Unrecognized tax benefits are the differences between a tax position taken, or expected to be taken in a tax return, and the benefit recognized for financial reporting purposes.

~~Index~~

~~The Davey Tree Expert Company~~

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

~~September 28, 2019~~

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


J.	~~Income Taxes (continued)~~

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

The Company is routinely under audit by U.S. federal, state, local and Canadian authorities in the area of income tax. These audits include questioning the timing and the amount of income and deductions and the allocation of income and deductions among various tax jurisdictions. ~~The Company has been audited by the Internal Revenue Service through 2016.~~ With the exception of U.S. state jurisdictions and Canada, the Company is no longer subject to examination by tax authorities for the years through 2016. As of September ~~28, 2019,~~26, 2020, we believe it is reasonably possible that the total amount of unrecognized tax benefits will not significantly increase or decrease.


K.	~~Accumulated Other Comprehensive Income (Loss)~~

K. Accumulated Other Comprehensive Income (Loss)

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

- 22 -

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 26, 2020

(Amounts in thousands, except share data)

The following summarizes the components of other comprehensive income (loss) accumulated in shareholders’ equity for the three and nine months ended September ~~28, 2019~~26, 2020 and the three and nine months ended September ~~29, 2018:~~28, 2019:


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

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


Three Months Ended September 28, 2019	Foreign Currency Translation Adjustments		Defined Benefit Pension Plans		Accumulated Other Comprehensive Income (Loss)
Balance at June 29, 2019	$	(4,612)	$	(657)	$	(5,269)
Other comprehensive income (loss) before reclassifications
Unrealized gains (losses)	$	(384)	$	0	$	(384)

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


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

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

- 23 -

Three Months Ended September 28, 2019
Foreign
Currency
Translation
Adjustments

Defined
Benefit
Pension
Plans

Accumulated
Other
Comprehensive
Income (Loss)
Balance at June 29, 2019 $ (4,612 ) $ (657 ) $ (5,269 )
Other comprehensive income (loss) before reclassifications
Unrealized losses $ (384 ) $ —
$ (384 )
Amounts reclassified from accumulated other comprehensive income (loss) —
22
22
Tax effect —
(5 ) (5 )
Net of tax amount (384 ) 17
(367 )
Balance at September 28, 2019 $ (4,996 ) $ (640 ) $ (5,636 )

Three Months Ended September 29, 2018
Foreign
Currency
Translation
Adjustments

Defined
Benefit
Pension
Plans

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

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September ~~28, 2019~~26, 2020

(Amounts in thousands, except share data)


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

Nine Months Ended September 28, 2019
Foreign
Currency
Translation
Adjustments

Defined
Benefit
Pension
Plans

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

Nine Months Ended September 29, 2018
Foreign
Currency
Translation
Adjustments

Defined
Benefit
Pension
Plans

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


Nine Months Ended September 28, 2019	Foreign Currency Translation Adjustments		Defined Benefit Pension Plans		Accumulated Other Comprehensive Income (Loss)
Balance at January 1, 2019	$	(5,819)	$	785	$	(5,034)
Other comprehensive income (loss) before reclassifications
Unrealized gains (losses)	$	823	$	0	$	823

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

The change in defined benefit pension plans of $38 and $114 for the three and nine months ended September 26, 2020, respectively, and $22 and $(1,573) for the three and nine months ended September 28, 2019, ~~and $197 and $593 for the three and nine months ended September 29, 2018~~respectively, is included in net periodic pension expense classified in the condensed consolidated statement of operations as general and administrative expense or other income (expense).

- 24 -

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September ~~28, 2019~~26, 2020

(Amounts in thousands, except share data)

L. Per Share Amounts and Common and Redeemable Shares Outstanding


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

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


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

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

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

Net income per share:

Basic	$	1.08	$	.59	$	2.38	$	1.43

Diluted	$	1.03	$	.56	$	2.27	$	1.37

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

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

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

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

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

- 25 -

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September ~~28, 2019~~26, 2020

(Amounts in thousands, except share data)


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

Common and Redeemable Shares Outstanding--A summary of the activity of the common and redeemable shares outstanding for the nine months ended September ~~28, 2019~~26, 2020 follows:

Common
Shares
Net of Treasury
Shares

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



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

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

On September ~~28, 2019,~~26, 2020, we had ~~23,242,361~~22,848,564 common and redeemable shares outstanding and employee options exercisable to purchase ~~1,015,025 common shares and partially-paid subscriptions for 11,122~~1,028,683 common shares.

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

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

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

All participants in the offering purchasing in excess of $5 of common shares were granted a "right" to purchase one additional common share at a price of $9.85 per share for every 3 common shares purchased under the plan. As a result of the stock subscription, employees were granted rights to purchase 423,600 common shares. Each right ~~may be~~could have been exercised at the rate of one-seventh per year and ~~will expire~~expired seven years after the date that the right was granted. Employees ~~may~~could not exercise a right ~~should~~if they ~~cease~~ceased to be employed by the Company. All rights expired in August 2019.

~~Index~~M. Operations by Business Segment

~~The Davey Tree Expert Company~~

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

~~September 28, 2019~~

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


M.	~~Operations by Business Segment~~

We provide a wide range of arboricultural, horticultural, environmental and consulting services to residential, utility, commercial and government entities throughout the United States and Canada. We have 2 reportable operating segments organized by type or class of customer: Residential and Commercial, and Utility.

- 26 -

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 26, 2020

(Amounts in thousands, except share data)

Residential and Commercial--Residential and Commercial provides services to our residential and commercial customers including: the treatment, preservation, maintenance, removal and planting of trees, shrubs and other plant life; the practice of landscaping, grounds maintenance, tree surgery, tree feeding and tree spraying; the application of fertilizer, herbicides and insecticides; and natural resource management and consulting, forestry research and development, and environmental planning.

Utility--Utility is principally engaged in providing services to our utility customers--investor-owned, municipal utilities, and rural electric cooperatives--including: the practice of line-clearing and vegetation management around power lines and rights-of-way and chemical brush ~~control; and~~control, natural resource management and consulting, forestry research and development, and environmental planning.

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

Measurement of Segment Profit and Loss and Segment Assets--We evaluate performance and allocate resources based primarily on operating income and also actively manage business unit operating assets. Segment information, including reconciling adjustments, is presented consistent with the basis described in our ~~2018~~2019 Annual Report.

- 27 -

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September ~~28, 2019~~26, 2020

(Amounts in thousands, except share data)


M.	~~Operations by Business Segment (continued)~~

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


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

Three Months Ended September 28, 2019
Revenues	$	160,088	$	146,769	$	616	$	0		$	307,473
Income (loss) from operations	10,941		17,667		(3,456)		(2,369)		(a)	22,783
Interest expense							(2,018)			(2,018)
Interest income							94			94
Other income (expense), net							(1,886)			(1,886)
Income before income taxes										$	18,973
Segment assets, total	$	247,031	$	238,692	$	0	$	115,475	(b)	$	601,198

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

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

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

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

(b)Corporate assets include cash, prepaid expenses, corporate facilities, enterprise-wide information systems and other nonoperating assets.

- 28 -

Utility
Residential
and
Commercial

All
Other

Reconciling
Adjustments
Consolidated
Three Months Ended September 28, 2019
Revenues $ 160,088
$ 146,769
$ 616
$ —
$ 307,473
Income (loss) from operations 10,941
17,667
(3,456 ) (2,369 ) (a) 22,783
Interest expense (2,018 ) (2,018 )
Interest income 94
94
Other income (expense), net (1,886 ) (1,886 )
Income before income taxes $ 18,973
Segment assets, total $ 247,031
$ 238,692
$ —
$ 115,475
(b) $ 601,198

Three Months Ended September 29, 2018
Revenues $ 135,768
$ 130,408
$ (858 ) $ —
$ 265,318
Income (loss) from operations 6,198
13,360
(3,615 ) (1,358 ) (a) 14,585
Interest expense (1,811 ) (1,811 )
Interest income 80
80
Other income (expense), net (1,322 ) (1,322 )
Income before income taxes $ 11,532
Segment assets, total $ 222,194
$ 214,374
$ —
$ 85,087
(b) $ 521,655

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

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

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September ~~28, 2019~~26, 2020

(Amounts in thousands, except share data)

N. Revenue Recognition


M.	~~Operations by Business Segment (continued)~~

~~Reconciling adjustments from segment reporting to consolidated external financial reporting include unallocated corporate items:~~


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


~~(b)~~	~~Corporate assets include cash, prepaid expenses, corporate facilities, enterprise-wide information systems and other nonoperating assets.~~


N.	~~Revenue Recognition~~

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

Nature of Performance Obligations and Significant Judgments

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

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

Disaggregation of Revenue

The following tables disaggregate our revenue for the three and nine months ended September ~~28, 2019~~26, 2020 and September ~~29, 2018~~28, 2019 by major sources:


Three Months Ended September 28, 2019	Utility		Residential and Commercial		All Other			Consolidated
Three Months Ended September 26, 2020										Three Months Ended September 26, 2020	Utility		Residential and Commercial		All Other		Consolidated
Type of service:										Type of service:
Tree and plant care	$	119,449	$	85,112	$	(86	)	$	204,475	Tree and plant care	$	135,021	$	90,049	$	(10)	$	225,060
Grounds maintenance	—		40,721		—			40,721		Grounds maintenance	0		36,296		0		36,296
Storm damage services	1,709		1,550		��			3,259		Storm damage services	7,061		4,069		0		11,130
Consulting and other	38,930		19,386		702			59,018		Consulting and other	43,418		21,021		528		64,967
Total revenues	$	160,088	$	146,769	$	616		$	307,473	Total revenues	$	185,500	$	151,435	$	518	$	337,453

Geography:										Geography:
United States	$	150,118	$	135,868	$	616		$	286,602	United States	$	176,528	$	140,571	$	518	$	317,617
Canada	9,970		10,901		—			20,871		Canada	8,972		10,864		0		19,836
Total revenues	$	160,088	$	146,769	$	616		$	307,473	Total revenues	$	185,500	$	151,435	$	518	$	337,453

- 29 -

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September ~~28, 2019~~26, 2020

(Amounts in thousands, except share data)


N.	~~Revenue Recognition (continued)~~


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

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


Three Months Ended September 29, 2018	Utility		Residential and Commercial		All Other			Consolidated
Nine Months Ended September 26, 2020										Nine Months Ended September 26, 2020	Utility		Residential and Commercial		All Other		Consolidated
Type of service:										Type of service:
Tree and plant care	$	99,766	$	79,709	$	(1,542	)	$	177,933	Tree and plant care	$	408,371	$	233,810	$	(121)	$	642,060
Grounds maintenance	—		26,024		—			26,024		Grounds maintenance	0		100,352		0		100,352
Storm damage services	1,894		1,082		—			2,976		Storm damage services	8,087		6,047		0		14,134
Consulting and other	34,108		23,593		684			58,385		Consulting and other	131,526		56,084		824		188,434
Total revenues	$	135,768	$	130,408	$	(858	)	$	265,318	Total revenues	$	547,984	$	396,293	$	703	$	944,980

Geography:										Geography:
United States	$	125,302	$	120,105	$	(858	)	$	244,549	United States	$	522,094	$	369,297	$	703	$	892,094
Canada	10,466		10,303		—			20,769		Canada	25,890		26,996		0		52,886
Total revenues	$	135,768	$	130,408	$	(858	)	$	265,318	Total revenues	$	547,984	$	396,293	$	703	$	944,980


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

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

Nine Months Ended September 28, 2019 Utility
Residential
and
Commercial
All Other Consolidated
Type of service:
  Tree and plant care $ 335,658
$ 231,988
$ (90 ) $ 567,556
  Grounds maintenance —
114,320
—
114,320
  Storm damage services 2,933
4,163
—
7,096
  Consulting and other 113,158
53,663
1,003
167,824
     Total revenues $ 451,749
$ 404,134
$ 913
$ 856,796
Geography:
  United States $ 420,701
$ 376,304
$ 913
$ 797,918
  Canada 31,048
27,830
—
58,878
     Total revenues $ 451,749
$ 404,134
$ 913
$ 856,796

- 30 -

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September ~~28, 2019~~26, 2020

(Amounts in thousands, except share data)


N.	~~Revenue Recognition (continued)~~

Nine Months Ended September 29, 2018 Utility
Residential
and
Commercial
All Other Consolidated
Type of service:
  Tree and plant care $ 283,200
$ 222,646
$ (1,553 ) $ 504,293
  Grounds maintenance —
86,612
—
86,612
  Storm damage services 5,729
2,892
—
8,621
  Consulting and other 94,022
49,068
2,002
145,092
     Total revenues $ 382,951
$ 361,218
$ 449
$ 744,618
Geography:
  United States $ 354,416
$ 332,488
$ 449
$ 687,353
  Canada 28,535
28,730
—
57,265
     Total revenues $ 382,951
$ 361,218
$ 449
$ 744,618

Contract Balances

Our contract liabilities consist of advance payments and billings in excess of costs incurred and deferred revenue. The Company has recognized $150 and $1,411 of revenue for the three and nine months ended September 26, 2020, respectively, that was included in the contract liability balance at December 31, 2019 and $119 and $1,925 of revenue for the three and nine months ended September 28, 2019, respectively, that was included in the contract liability balance at December 31, ~~2018 and $149 and $1,371 of revenue for the three and nine months ended September 29, 2018 that was included in the contract liability balance at December 31, 2017.~~2018. Net contract liabilities consisted of the following:

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


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


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

O. Fair Value Measurements and Financial Instruments

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

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

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

~~Index~~

~~The Davey Tree Expert Company~~

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

~~September 28, 2019~~

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


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

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

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

~~Our assets and liabilities measured at fair value on a recurring basis at~~ ~~September 28, 2019~~ ~~were as follows:~~

Fair Value Measurements at
September 28, 2019 Using:
Assets and Liabilities Recorded at
Fair Value on a Recurring Basis
Total
Carrying
Value at
September 28,
2019

Quoted
Prices in
Active
Markets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)
Assets:
Assets invested for self-insurance, classified as other assets, noncurrent $ 13,302
$ 13,302
$ —
$ —
Defined benefit pension plan assets 13
—
13
—

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

- 31 -

~~Our assets and liabilities measured at fair value on a recurring basis at~~ ~~December 31, 2018~~ ~~were as follows:~~

Fair Value Measurements at
December 31, 2018 Using:
Assets and Liabilities Recorded at
Fair Value on a Recurring Basis
Total
Carrying
Value at
December 31,
2018

Quoted
Prices in
Active
Markets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)
Assets:
Assets invested for self-insurance, classified as other assets, noncurrent $ 15,379
$ 15,379
$ —
$ —
Defined benefit pension plan assets 3,758
—
3,758
—

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

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September ~~28, 2019~~26, 2020

(Amounts in thousands, except share data)

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


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


			Fair Value Measurements at September 26, 2020 Using:
Assets and Liabilities Recorded at Fair Value on a Recurring Basis	Total Carrying Value at September 26, 2020		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Assets invested for self-insurance, classified as other assets, noncurrent	$	15,359	$	15,359	$	0	$	0




Liabilities:

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

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


			Fair Value Measurements at December 31, 2019 Using:
Assets and Liabilities Recorded at Fair Value on a Recurring Basis	Total Carrying Value at December 31, 2019		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Assets invested for self-insurance, classified as other assets, noncurrent	$	15,402	$	15,402	$	0	$	0


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

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

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


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

September 28, 2019 December 31, 2018

Carrying
Value

Fair
Value

Carrying
Value

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

- 32 -

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 26, 2020

(Amounts in thousands, except share data)

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

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


P.	~~Commitments and Contingencies~~

P. Commitments and Contingencies

We are party to a number of lawsuits, threatened lawsuits and other claims arising out of the normal course of business. On a quarterly basis, we assess our liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information available. Where it is probable that we will incur a loss and the amount of the loss can be reasonably estimated, we record a liability in our consolidated financial statements. These legal accruals may be increased or decreased to reflect any relevant developments on a quarterly basis. Where a loss is not probable or the amount of the loss is not estimable, we do not ~~accrue~~record a legal ~~reserves,~~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 ~~reserves~~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 ~~reserves.~~accruals. As a result, the outcome of a particular matter or a combination of matters may be material to our results of operations for a particular period, depending upon the size of the loss or our income for that particular period.

In November 2017, a suit was filed in Savannah, Georgia state court (“State Court”) against Davey Tree, its subsidiary, Wolf Tree, Inc. ("Wolf Tree"), a1 former Davey employee, 2 Wolf Tree employees, and a1 former Wolf Tree employee alleging various acts of negligence and seeking compensatory and punitive damages for wrongful death and assault

~~Index~~

~~The Davey Tree Expert Company~~

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

~~September 28, 2019~~

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


P.	~~Commitments and Contingencies (continued)~~

and battery of the plaintiff’s husband, a Wolf Tree employee, who was shot and killed in August 2017. ~~The case was mediated unsuccessfully in December 2018 and was set for trial on January 22, 2019.~~

In July 2018, a related survival action was filed by the deceased’s estate against Davey Tree, its subsidiary, Wolf Tree, and 4 current and former employees in Savannah, Georgia, which arises out of the same allegations, seeks compensatory and punitive damages and also includes 3 Racketeer Influenced and Corrupt Organizations Act ("RICO") claims under Georgia law seeking compensatory damages, treble damages, and punitive damages. The 2018 case was removed to the United States District Court for the Southern District of Georgia, Savannah Division (“Federal Court”), on August 2, ~~2018 (“Federal Court”).~~2018. The Company filed a motion to dismiss the RICO claims. Plaintiffs filed a motion to remand the case to state court, which the Company has opposed.

The ~~motions are pending.~~cases were mediated unsuccessfully in December 2018 and the State Court case was originally set for trial on January 22, 2019. However, as discussed below, all of the civil cases were later stayed on December 28, 2018 and currently remain stayed.

- 33 -

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 26, 2020

(Amounts in thousands, except share data)

indictment was issued charging 2 former Wolf Tree employees and 1 other individual with various crimes, including conspiracy to murder the deceased. On December 17, 2018, the United States Attorney’s Office for the Southern District of Georgia informed the Company and Wolf Tree that they are also under investigation for potential violations of immigration and other laws relating to the subject matter of the ongoing criminal investigation referenced above. The Company and Wolf Tree are cooperating with the investigation.

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

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

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

PG&E Bankruptcy Filing

On January 29, 2019, Pacific Gas & Electric Company, and its parent company PG&E Corporation, our largest utility customer, filed voluntary bankruptcy petitions under Chapter 11 of the United States Bankruptcy Code in the U.S. Bankruptcy Court for the Northern District of California. PG&E accounted for approximately 12% of revenues during ~~2018,~~2019, and ~~11%~~12% in ~~2017.~~2018. As a utility company, PG&E serves residential and industrial customers in California and has an ongoing obligation to continue to serve its customers, and we continue to perform under our contracts with PG&E post-petition. As of the date of the bankruptcy filing, we had pre-petition accounts receivable of approximately ~~$15,000 which we believe~~$15,000.

On June 20, 2020, the Court confirmed PG&E's Plan of Reorganization (the "Plan") filed as part of its Chapter 11 bankruptcy proceeding. On July 1, 2020, PG&E emerged from Chapter 11, successfully completing its restructuring process and implementing the Plan. In the Plan, unsecured creditors, like Davey Tree, will be paid in full with interest accruing on the past amounts due at the federal judgment rate. Davey Tree has received the majority of its pre-petition amounts outstanding and expects to ~~be collectible. While uncertainty exists as~~receive the balance before the end of 2020. Further, Davey Tree's primary contracts were assumed by PG&E. Due to ~~the outcome~~PG&E’s implementation of the ~~bankruptcy proceedings,~~Plan, we do not anticipate PG&E's bankruptcy towill have a material impact on our future cash flows ~~and~~or results of ~~operations.~~operations as we will receive full payment for the amounts owed.

- 34 -

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September ~~28, 2019~~26, 2020

(Amounts in thousands, except share data)


P.	~~Commitments and Contingencies (continued)~~

Northern California Wildfires

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

the Tort Committee, representing wildfire victims from both the 2017 and 2018 Northern California wildfires, served subpoenas related to these wildfires on numerous contractors of PG&E, including Davey Tree Surgery Company, Davey Resource Group, and Davey Tree, to which we responded.

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

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


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

Q. The Davey 401KSOP and Employee Stock Ownership Plan

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

Defined Contribution and Savings Plans--Most employees are eligible to participate in The Davey 401KSOP and ESOP Plan. Effective January 1, 1997, the plan commenced operations and retained the existing ESOP participant accounts and incorporated a deferred savings plan (a “401(k) plan”) feature. Participants in the 401(k) plan are allowed to make before-tax contributions, within Internal Revenue Service established limits, through payroll deductions. Effective January 1, ~~2009~~2020, we match, in either cash or our common shares, 100% of the first 13 percent and 50% of the next 32 percent of each participant's before-tax contribution, limited to the first 45 percent of the employee’s compensation deferred each year. All nonbargaining domestic employees who attained age 21 and completed one year of service are eligible to participate. In May 2004, we adopted the 401K Match Restoration Plan, a defined contribution plan that supplements the retirement benefits of certain employees that participate in the savings plan feature of The Davey 401KSOP and ESOP Plan, but are limited in contributions because of tax rules and regulations.

- 35 -

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 26, 2020

(Amounts in thousands, except share data)

Our common shares are not listed or traded on an established public trading market, and market prices are, therefore, not available. Semiannually, an independent stock valuation firm determines the fair market value of our common shares based upon our performance and financial condition. The Davey 401KSOP and ESOP Plan includes a put option for shares of the Company’s common stock distributed from the plan. Shares are distributed from the Davey 401KSOP and ESOP Plan to former participants of the plan, their beneficiaries, donees or heirs (each, a “participant”). Since our common stock is not currently traded on an established securities market, if the owners of distributed shares desire to sell their shares, the Company is required to purchase the shares at fair value for 2 60-day periods after distribution of the shares from the Davey 401KSOP and ESOP. The fair value of distributed shares subject to the put option totaled ~~$3,992~~$2,978 and ~~$6,288~~$4,749 as of September ~~28, 2019~~26, 2020 and December 31, ~~2018,~~2019, respectively. The fair value of the shares held in the Davey 401KSOP and ESOP totaled ~~$115,766~~$125,856 and ~~$112,761~~$119,806 as of September ~~28, 2019~~

~~Index~~

~~The Davey Tree Expert Company~~

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

~~September 28, 2019~~

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


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

26, 2020 and December 31, ~~2018,~~2019, respectively. Due to the Company’s obligation under the put option, the distributed shares subject to the put option and the shares held in the Davey 401KSOP and ESOP (collectively referred to as 401KSOP and ESOP related shares) are recorded at fair value, classified as temporary equity in the mezzanine section of the consolidated balance sheets and totaled ~~$119,758~~$128,834 and ~~$119,049~~$124,555 as of September ~~28, 2019~~26, 2020 and December 31, ~~2018,~~2019, respectively. Changes in the fair value of the 401KSOP and ESOP Plan related shares are reflected in retained earnings while net share activity associated with 401KSOP and ESOP Plan related shares are first reflected in additional paid-in capital and then retained earnings if additional paid-in capital is insufficient.

- 36 -

Index


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

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

(Amounts in thousands, except share data)

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

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

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

Impact of COVID-19

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

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

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

- 37 -

Index~~Index~~

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

RESULTS OF OPERATIONS

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


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

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

Income from operations	10.5		7.4		3.1		8.9		6.5		2.4

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

Income before income taxes	10.1		6.1		4.0		8.0		5.0		3.0

Income taxes	2.8		1.8		1.0		2.2		1.2		1.0

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

- 38 -

Index

Three Months Ended Nine Months Ended
September 28,
2019 September 29,
2018
Percentage
Change
September 28,
2019 September 29,
2018
Percentage
Change
Revenues 100.0 % 100.0 % — % 100.0 % 100.0 % — %

Costs and expenses:
Operating 62.8
64.5
(1.7 ) 63.8
64.9
(1.1 )
Selling 18.5
18.6
(.1 ) 18.0
17.9
.1
General and administrative 6.5
6.3
.2
6.7
7.0
(.3 )
Depreciation and amortization 5.0
5.6
(.6 ) 5.2
5.6
(.4 )
Gain on sale of assets, net (.2 ) (.5 ) .3
(.2 ) (.6 ) .4

Income from operations 7.4
5.5
1.9
6.5
5.2
1.3

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

Income before income taxes 6.1
4.3
1.8
5.0
4.0
1.0

Income taxes 1.8
1.2
.6
1.2
.9
.3

Net income 4.3 % 3.1 % 1.2 % 3.8 % 3.1 % .7 %

~~Index~~

Third Quarter—Three Months Ended September ~~28, 2019~~26, 2020 Compared to Three Months Ended September ~~29, 2018~~28, 2019

Our results of operations for the three months ended September ~~28, 2019~~26, 2020 compared to the three months ended September ~~29, 2018~~28, 2019 follows:

Three Months Ended
September 28,
2019 September 29,
2018 Change
Percentage
Change
Revenues $ 307,473
$ 265,318
$ 42,155
15.9 %

Costs and expenses:

Operating 193,137
171,125
22,012
12.9
Selling 56,921
49,367
7,554
15.3
General and administrative 19,895
16,758
3,137
18.7
Depreciation and amortization 15,319
14,807
512
3.5
Gain on sale of assets, net (582 ) (1,324 ) 742
(56.0 )
284,690
250,733
33,957
13.5

Income from operations 22,783
14,585
8,198
56.2
Other income (expense):

Interest expense (2,018 ) (1,811 ) (207 ) 11.4
Interest income 94
80
14
17.5
Other, net (1,886 ) (1,322 ) (564 ) 42.7
Income before income taxes 18,973
11,532
7,441
64.5

Income taxes 5,539
3,148
2,391
76.0

Net income $ 13,434
$ 8,384
$ 5,050
60.2 %


	Three Months Ended
	September 26, 2020		September 28, 2019		Change		Percentage Change
Revenues	$	337,453	$	307,473	$	29,980	9.8	%

Costs and expenses:
Operating	208,510		193,137		15,373		8.0
Selling	60,203		56,921		3,282		5.8
General and administrative	19,891		19,895		(4)		—
Depreciation and amortization	13,825		15,319		(1,494)		(9.8)
Gain on sale of assets, net	(476)		(582)		106		(18.2)
	301,953		284,690		17,263		6.1

Income from operations	35,500		22,783		12,717		55.8
Other income (expense):
Interest expense	(1,579)		(2,018)		439		(21.8)
Interest income	1,688		94		1,594		1,695.7
Other, net	(1,499)		(1,886)		387		(20.5)
Income before income taxes	34,110		18,973		15,137		79.8

Income taxes	9,483		5,539		3,944		71.2

Net income	$	24,627	$	13,434	$	11,193	83.3	%

Revenues--Revenues of ~~$307,473~~$337,453 increased ~~$42,155~~$29,980 compared with ~~$265,318~~$307,473 in the third quarter of ~~2018.~~2019. Utility Services increased ~~$24,320~~$25,412 or ~~17.9%~~15.9% compared with the third quarter of ~~2018.~~2019. The increase is attributable to new accounts as well as increased work year-over-year and price increases on existing accounts. Most of our Utility Services segment work has been deemed essential services and has not been significantly affected by COVID-19. Residential and Commercial Services increased ~~$16,361~~$4,666 or ~~12.5%~~3.2% from the third quarter of ~~2018.~~2019. Increases ~~were primarily~~ in ~~grounds maintenance and~~ tree and plant care ~~revenues.~~revenues, storm damage revenue and consulting and other were partially offset by a decrease in grounds maintenance revenue.

Operating Expenses--Operating expenses of ~~$193,137~~$208,510 increased ~~$22,012~~$15,373 compared with the third quarter of ~~2018.~~2019. Utility Services increased ~~$15,157~~$14,855 or ~~14.9%~~12.7% compared with the third quarter of ~~2018~~2019 but, as a percentage of revenue, decreased to ~~73.0%~~71.0% from ~~74.9%~~73.0%. The increase is attributable to additional expenses for labor and benefits expenses which were partially offset by decreases in fuel expense, subcontractor expense and crew meals and lodging ~~expenses, which were partially offset by a decrease in chemical expense.~~expenses. Residential and Commercial Services increased ~~$6,144~~$104 or ~~8.9%~~0.1% compared with the third quarter of ~~2018~~2019 but, as a percentage of revenue, decreased to ~~51.2%~~49.7% from ~~52.8%~~51.2%. ~~The increase is primarily attributable to additional~~Increases in labor and benefits expenses ~~for labor, equipment maintenance, subcontractor~~were offset by decreases in fuel expense and materials expense.

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

- 39 -

Index

Fuel costs of ~~$9,720 increased $350,~~$8,100 decreased $1,620, or ~~3.7%~~16.7%, from the ~~$9,370~~$9,720 incurred in the third quarter of ~~2018~~2019 and impacted operating expenses within all segments. The ~~$350 increase~~$1,620 decrease included usage ~~increases~~decreases approximating ~~$344~~$335 and price ~~increases~~decreases approximating ~~$6.~~

~~Index~~

$1,285.

Selling Expenses--Selling expenses of ~~$56,921~~$60,203 increased ~~$7,554~~$3,282 compared with the third quarter of ~~2018~~2019 but, as a percentage of revenues, decreased to ~~18.5%~~17.8% from ~~18.6%~~18.5%. Utility Services increased ~~$3,625~~$2,055 or ~~24.7%~~11.2% compared to the third quarter of ~~2018 and,~~2019 but, as a percentage of revenue, ~~increased~~decreased to ~~11.4%~~11.0% from ~~10.8%~~11.4%. The increase is attributable to increases in field management wages and incentive expense ~~and~~which were partially offset by a decrease in travel expense. Residential and Commercial Services increased ~~$4,043~~$1,220 or ~~11.3% over~~3.1% from the third quarter of ~~2018~~2019 but, as a percentage of revenue, decreased to ~~27.1%~~27.0% from ~~27.4%~~27.1%. ~~Increases~~The increase was primarily attributable to an increase in field management ~~wages and incentive~~ expense ~~rent and communication expenses were~~which was partially offset by ~~a decrease~~decreases in ~~office support wages.~~travel expense and employee development expenses.

General and Administrative Expenses--General and administrative expenses of ~~$19,895 increased $3,137~~$19,891 decreased $4 from ~~$16,758~~$19,895 in the third quarter of ~~2018. The increases are attributable to salary and incentive expense,~~2019. Decreases in travel and living expenses ~~computer expenses, general insurance expense~~ and ~~a $1,200 settlement of a class action wage~~professional fees were offset by an increase in salary and ~~hour lawsuit.~~incentive expense.

Depreciation and Amortization Expense--Depreciation and amortization expense of ~~$15,319 increased $512~~$13,825 decreased $1,494 from ~~$14,807~~$15,319 incurred in the third quarter of ~~2018,~~2019, primarily due to ~~increased~~decreased capital expenditures ~~and purchases of businesses~~ in recent ~~years.~~years and an increase use of operating leases for equipment.

Gain on the Sale of Assets, Net--Gain on the sale of assets of ~~$582~~$476 for the third quarter of ~~2019~~2020 decreased ~~$742~~$106 from the ~~$1,324~~$582 gain in the third quarter of ~~2018. We sold fewer units of equipment but experienced a higher~~2019. Our average gain per unit was lower in the third quarter of ~~2019~~2020 as compared with ~~the third quarter of 2018. In the third quarter of 2018, we also sold a parcel of real estate at a gain, while we did not have any real estate sales in~~ the third quarter of 2019.

Interest Expense--Interest expense of ~~$2,018 increased $207~~$1,579 decreased $439 from the ~~$1,811~~$2,018 incurred in the third quarter of ~~2018.~~2019.The decrease is attributable to lower interest rates during the third quarter of 2020, as compared with the third quarter of 2019.

Interest Income--Interest income of $1,688 increased $1,594 from the $94 of interest income in the third quarter of 2019. The increase is attributable to ~~higher~~ interest ~~rates~~on PG&E pre-petition receivables which was approved by the United States Bankruptcy Court and ~~higher average debt levels necessary to fund operations and capital expenditures~~received during the third quarter of ~~2019, as compared with the third quarter of 2018.~~2020.

Other, Net--Other expense, net, of ~~$1,886 increased $564~~$1,499 decreased $387 from the ~~$1,322~~$1,886 of other expense incurred in the third quarter of ~~2018~~2019 and consisted of nonoperating income and expense, including pension expense and foreign currency transaction gains/losses on the intercompany account balances of our Canadian operations.

Income Taxes--Income taxes for the third quarter of ~~2019~~2020 were ~~$5,539,~~$9,483, as compared to ~~$3,148~~$5,539 for the third quarter of ~~2018.~~2019. Our tax provision for interim periods is determined using an estimate of our annual effective tax rate adjusted for discrete items, if any, that are taken into account in the relevant period. The effective tax rate as of the third quarter of ~~2019~~2020 was ~~29.2%~~27.8%, as compared with the third quarter of ~~2018~~2019 effective tax rate of ~~27.3%~~29.2%.

Net Income--Net income of ~~$13,434~~$24,627 for the third quarter of ~~2019~~2020 was ~~$5,050~~$11,193 more than the ~~$8,384~~$13,434 net income for the third quarter of ~~2018.~~2019.

- 40 -

Index~~Index~~

First Nine Months—Nine Months Ended September ~~28, 2019~~26, 2020 Compared to Nine Months Ended September ~~29, 2018~~28, 2019

Our results of operations for the nine months ended September ~~28, 2019~~26, 2020 compared to the nine months ended September ~~29, 2018~~28, 2019 follows:


	Nine Months Ended												Nine Months Ended
	September 28, 2019			September 29, 2018			Change			Percentage Change			September 26, 2020		September 28, 2019		Change		Percentage Change
Revenues	$	856,796		$	744,618		$	112,178		15.1	%	Revenues	$	944,980	$	856,796	$	88,184	10.3	%

Costs and expenses:												Costs and expenses:
Operating	546,931			483,430			63,501			13.1		Operating	597,963		546,931		51,032		9.3
Selling	153,854			133,341			20,513			15.4		Selling	162,287		153,854		8,433		5.5
General and administrative	57,610			51,834			5,776			11.1		General and administrative	60,477		57,610		2,867		5.0
Depreciation and amortization	44,121			41,866			2,255			5.4		Depreciation and amortization	42,553		44,121		(1,568)		(3.6)
Gain on sale of assets, net	(1,751		)	(4,572		)	2,821			(61.7	)	Gain on sale of assets, net	(2,045)		(1,751)		(294)		16.8
	800,765			705,899			94,866			13.4			861,235		800,765		60,470		7.6

Income from operations	56,031			38,719			17,312			44.7		Income from operations	83,745		56,031		27,714		49.5
Other income (expense):												Other income (expense):
Interest expense	(6,597		)	(4,966		)	(1,631		)	32.8		Interest expense	(5,477)		(6,597)		1,120		(17.0)
Interest income	270			259			11			4.2		Interest income	1,885		270		1,615		598.1
Other, net	(6,694		)	(4,036		)	(2,658		)	65.9		Other, net	(4,550)		(6,694)		2,144		(32.0)
Income before income taxes	43,010			29,976			13,034			43.5		Income before income taxes	75,603		43,010		32,593		75.8

Income taxes	10,322			6,505			3,817			58.7		Income taxes	21,018		10,322		10,696		103.6

Net income	$	32,688		$	23,471		$	9,217		39.3	%	Net income	$	54,585	$	32,688	$	21,897	67.0	%

Revenues--Revenues of ~~$856,796~~$944,980 increased ~~$112,178~~$88,184 compared with ~~$744,618~~$856,796 in the first nine months of ~~2018.~~2019. Utility Services increased ~~$68,798~~$96,235 or ~~18.0%~~21.3% compared with the first nine months of ~~2018.~~2019. The increase is attributable to new accounts, as well as increased work year-over-year and price increases on existing accounts within both our U.S. and Canadian operations. Most of our Utility Services segment work has been deemed essential services and has not been significantly affected by COVID-19. Residential and Commercial Services ~~increased $42,916~~decreased $7,841 or ~~11.9% from~~1.9% compared with the first nine months of ~~2018. Increases~~2019. Decreases in grounds maintenance revenue were ~~predominately~~partially offset by increases in tree and plant care revenue, storm damage revenue and consulting and ~~grounds maintenance.~~other revenue. While our Residential and Commercial Services segment work was deemed essential services in most states, we experienced temporary shutdowns or work restrictions related to COVID-19 in a few states and certain Canadian provinces. Where possible, Residential and Commercial Services employees affected by a shutdown or work restrictions were reassigned to assist with Utility Services operations.

Operating Expenses--Operating expenses of ~~$546,931~~$597,963 increased ~~$63,501~~$51,032 compared with the first nine months of ~~2018~~2019 but, as a percentage of revenues, decreased to ~~63.8%~~63.2% from ~~64.9%~~63.8%. Utility Services increased ~~$40,473~~$60,246 or ~~14.0%~~18.3% compared with the first nine months of ~~2018~~2019 but, as a percentage of revenue, decreased to ~~73.0%~~71.0% from ~~75.5%~~73.0%. The increase was attributable to increases in additional labor ~~expense, equipment maintenance expense, fuel expense, subcontractor~~and benefits expense and ~~meals and lodging~~subcontractor expense which were partially offset by a decrease in ~~materials~~fuel expense. Residential and Commercial Services ~~increased $22,126~~decreased $9,822 or ~~11.6%~~4.6% compared with the first nine months of ~~2018~~2019 and, as a percentage of revenue, decreased to 51.3% from 52.7%. The decrease was primarily attributable to decreases in fuel expense, subcontractor expense and materials expense.

- 41 -

Index

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

Fuel costs of $23,238 decreased $3,483, or 13.0%, from the $26,721 incurred in the first nine months of 2019 and impacted operating expenses within all segments. The $3,483 decrease included usage decreases approximating $6 and price decreases approximating $3,477.

Selling Expenses--Selling expenses of $162,287 increased $8,433 compared with the first nine months of 2019 but, as a percentage of revenue, decreased to ~~52.7%~~17.2% from ~~52.9%~~18.0%. ~~The increase was attributable~~Utility Services increased $6,390 or 11.9% compared to ~~increases in labor expense, fuel, equipment maintenance expense, subcontractor expense, materials expense, disposal expense and meals and lodging expense.~~

~~Fuel costs of $26,721 increased $1,709, or 6.8%, from the $25,012 incurred in~~ the first nine months of ~~2018 and impacted operating expenses within all segments. The $1,709 increase included usage increases approximating $1,117 and price increases approximating $592.~~

~~Index~~

~~Selling Expenses--Selling expenses of $153,854 increased $20,513 compared with the first nine months of 2018 and,~~2019 but, as a percentage of revenue, ~~increased~~decreased to ~~18.0%~~11.0% from ~~17.9%. Utility Services increased $12,705 or 30.9% over the first nine months of 2018 and, as a percentage of revenue, increased to~~ 11.9% ~~from 10.7%~~. The increase was primarily attributable to additional field management wages and incentive expense, which were partially offset by a decrease in field management travel ~~expense and communication~~ expense. Residential and Commercial Services experienced an increase of ~~$7,961~~$1,620 or ~~8.4% over~~1.6% compared to the first nine months of ~~2018 but,~~2019 and, as a percentage of revenue, ~~decreased~~increased to ~~25.5%~~26.4% from ~~26.3%~~25.5%. ~~Increases~~The increase was attributable to increases in field management wages and incentive expense ~~office rent expense, and communication expense~~which were partially offset by a decrease in ~~office support wages.~~travel expense.

General and Administrative Expenses--General and administrative expenses of ~~$57,610~~$60,477 increased ~~$5,776~~$2,867 from ~~$51,834~~$57,610 in the first nine months of ~~2018. Increases~~2019. The increase was primarily attributable to an increase in salary and incentive expense ~~computer expense, travel expense, general insurance expense and a $1,200 settlement of a class action wage and hour lawsuit~~which were partially offset by ~~decreases~~a decrease in ~~professional services and rent~~travel expense.

Depreciation and Amortization Expense--Depreciation and amortization expense of ~~$44,121 increased $2,255~~$42,553 decreased $1,568 from ~~$41,866~~$44,121 incurred in the first nine months of ~~2018.~~2019. The ~~increase~~decrease was attributable to ~~higher~~lower capital expenditures ~~and purchases of businesses~~ in recent years ~~necessary to support the business.~~and an increased use of operating leases for equipment.

Gain on the Sale of Assets, Net--Gain on the sale of assets of ~~$1,751~~$2,045 for the first nine months of ~~2019 decreased $2,821~~2020 increased $294 from the ~~$4,572~~$1,751 gain in the first nine months of ~~2018.~~2019. We sold ~~fewer~~more individual units of equipment during the first nine months of ~~2019~~2020 as compared with ~~the first nine months of 2018 at a lower average gain per unit. In 2018, we also sold two parcels of real estate at gains, while we did not have any real estate sales in~~ the first nine months of 2019.

Interest Expense--Interest expense of ~~$6,597 increased $1,631~~$5,477 decreased $1,120 from the ~~$4,966~~$6,597 incurred in the first nine months of ~~2018.~~2019. The ~~increase is~~decrease was attributable to ~~higher~~lower interest rates ~~and higher average debt levels~~ during the first nine months of ~~2019,~~2020, as compared with the first nine months of ~~2018.~~2019.

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

Other, Net--Other expense, net, of ~~$6,694 increased $2,658~~$4,550 decreased $2,144 from the ~~$4,036~~$6,694 expense incurred in the first nine months of ~~2018~~2019 and consisted of nonoperating income and expense, including pension expense and foreign currency gains/losses on the intercompany account balances of our Canadian operations.

Income Taxes--Income taxes for the first nine months of ~~2019~~2020 were ~~$10,322,~~$21,018, as compared to ~~$6,505~~$10,322 for the first nine months of ~~2018.~~2019. Our tax provision for interim periods is determined using an estimate of our annual effective tax rate adjusted for discrete items, if any, that are taken into account in the relevant period. The effective tax rate for the first nine months of ~~2019 is 24.0%~~2020 was 27.8%. Our effective tax rate for the first nine months of ~~2018~~2019 was ~~21.7%~~24.0%. The change in the effective tax rate from statutory tax rates is primarily due to the impact of state and local taxes which are partially offset by favorable discrete items.

- 42 -

Index

Net Income--Net income of $54,585 for the first nine months of 2020 was $21,897 more than the net income of $32,688 for the first nine months of ~~2019 was $9,217 more than the net income of $23,471 for the first nine months of 2018.~~2019.

LIQUIDITY AND CAPITAL RESOURCES

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

~~Index~~

Cash Flow Summary

Our cash flows from operating, investing and financing activities for the nine months ended September 26, 2020 and September 28, 2019 ~~and~~ ~~September 29, 2018~~ follow:


	Nine Months Ended							Nine Months Ended
	September 28, 2019			September 29, 2018				September 26, 2020		September 28, 2019
Cash provided by (used in):							Cash provided by (used in):
Operating activities	$	57,214		$	24,797		Operating activities	$	99,428	$	57,214
Investing activities	(47,554		)	(50,685		)	Investing activities	(41,614)		(47,554)
Financing activities	(18,716		)	23,283			Financing activities	(43,739)		(18,716)
Effect of exchange rate changes on cash	97			—			Effect of exchange rate changes on cash	(17)		97
Decrease in cash	$	(8,959	)	$	(2,605	)
Increase (decrease) in cash							Increase (decrease) in cash	$	14,058	$	(8,959)

Cash Provided By Operating Activities--Cash provided by operating activities was ~~$57,214~~$99,428 for the first nine months of ~~2019, or $32,417 more than the $24,797 provided in~~2020, a $42,214 increase when compared to the first nine months of ~~2018.~~2019. The ~~$32,417~~$42,214 increase in operating cash flow was primarily attributable to anthe increase in net income of ~~$17,415 in~~$21,897 resulting from increased revenue and operating margins, a change of $9,698 related to accounts payable and accrued expenses, and a ~~$16,195~~ change ~~in other assets and liabilities,~~of $8,472 related to self-insurance reserves partially offset by ~~an increase~~a change of ~~$11,586 in~~$1,155 related to accounts receivable.

Overall, accounts receivable increased $34,801 during the first nine months of 2020, as compared to an increase of $35,956 during the first nine months of ~~2019, as compared to an increase of $24,370 during the first nine months of 2018.~~2019. With respect to the change in accounts receivable arising from business levels, the “days-sales-outstanding” in accounts receivable (sometimes referred to as “DSO”) at the end of the first nine months of ~~2019~~2020 increased by ~~two~~three days to 6972 days, when compared to 67 days at the end of the first nine months of 2018, with the current nine months being impacted by the pre-petition receivables of approximately $15,000 from PG&E. DSO excluding PG&E pre-petition receivables would be 6569 days at the end of the first nine months of 2019.

Accounts payable and accrued expenses increased ~~$18,691~~$28,389 in the first nine months of ~~2019,~~2020, or ~~$17,415~~$9,698 more than the ~~$1,276~~$18,691 increase in the first nine months of ~~2018. Increases~~2019. The increase was primarily related to increases in income taxes ~~payable, advance payments from customers,~~ and ~~trade payables were partially offset by a decrease in accrued employee compensation.~~payroll taxes payable. Self-insurance reserves increased ~~$5,952~~$14,424 in the first nine months of ~~2019,~~2020, which was ~~$561~~$8,472 more than the increase of ~~$5,391~~$5,952 experienced in the first nine months of ~~2018.~~2019. The increase is attributable to increased exposures within our workers compensation, general liability and vehicle liability lines of coverage.

~~Operating assets~~As we cannot predict the duration or scope of the COVID-19 pandemic and ~~liabilities other, net, provided $3,212 of~~its impact on our customers and suppliers (or workforce), the negative financial impact to our results cannot be reasonably estimated, but could be material. We are actively managing the business to maintain cash ~~for the first nine months of 2019 as compared with using $12,983 of cash for the first nine months of 2018. The $16,195 net change related primarily~~flow and we have significant liquidity. We believe that these factors will allow us to ~~decreases in operating supplies, deposits and pension contributions.~~meet our anticipated funding requirements.

- 43 -

Index

Cash Used In Investing Activities--Cash used in investing activities for the first nine months of ~~2019~~2020 was ~~$47,554, or $3,131 less than the $50,685 used during~~$41,614, a $5,940 decrease when compared to the first nine months of ~~2018.~~2019. The decrease was primarily the result of decreases in capital expenditures for equipment of ~~$2,541 and a decrease in purchases of businesses of $4,441,~~$7,077, which was partially offset by aan increase in expenditures for land and buildings of $1,300. Our decrease in ~~proceeds from~~capital expenditures is partially the ~~sales~~result of ~~fixed assets~~our increased use of ~~$3,334.~~operating leases for equipment.

Cash Used In Financing Activities--Cash used in financing activities of ~~$18,716~~$43,739 increased ~~$41,999~~$25,023 during the first nine months of ~~2019~~2020 as compared with ~~$23,283~~$18,716 of cash ~~provided during the first nine months of 2018. During the first nine months of 2019, our revolving credit facility, net used $28,500 in cash as compared with $8,000~~ used during the first nine months of ~~2018.~~2019. During the first nine months of 2020, our revolving credit facility, net used $32,000 in cash as compared with $28,500 used during the first nine months of 2019. We use the credit facility primarily for capital expenditures, redemptions of shares and payments of notes payable related to acquisitions. In the first quarter of 2020, we drew $50,000 from our revolving credit facility to provide additional liquidity as a precaution because of uncertainty resulting from COVID-19. The $50,000 was repaid during the second quarter of 2020. Notes payable provided a net $2,285 during the first nine months of 2020, a decrease of $21,888 when compared to the $24,173 provided in the first nine months of 2019, including $25,000 ~~of cash~~ provided by the issuance of 4.00% Senior Notes during the first nine months of 2019, a decrease of $26,315 when compared to the $50,488 provided in the first nine months of 2018, including $50,000 provided by the issuance of 3.99% Senior Notes during the first nine months of 2018. The proceeds of the 4.00% Senior Notes were used to pay down the revolving credit facility.2019. Treasury share transactions (purchases and sales) used ~~$11,583~~$10,791 for the first nine months of ~~2019, $5,140 less~~2020, $792 more than the ~~$16,723~~$11,583 used in the first nine months of ~~2018, and included $715 of cash received from our common share subscriptions.~~2019. Dividends paid of ~~$1,745~~$1,708 during the first nine months of ~~2019~~2020 decreased ~~$73~~$37 as compared with ~~$1,818~~$1,745 paid in the first nine months of ~~2018.~~2019.

~~Index~~

The Company currently repurchases common shares at ~~the~~ shareholders’ ~~request~~requests in accordance with the terms of the Davey 401KSOP and ESOP Plan and also repurchases common shares from time to time at the Company’s discretion. The amount of common shares offered to the Company for repurchase by the holders of shares distributed from the Davey 401KSOP and ESOP Plan is not within the control of the Company, but is at the discretion of the shareholders. The Company expects to continue to repurchase its common shares, as offered by its shareholders from time to time, at their then current fair value. However, other than for repurchases pursuant to the put option under ~~The~~the Davey 401KSOP and ESOP Plan, as described in Note Q, such purchases are not required, and the Company retains the right to discontinue them at any time. Repurchases of redeemable common shares at the shareholders' request approximated ~~$8,761~~$5,280 and ~~$20,353~~$8,761 during the nine months ended September ~~28, 2019~~26, 2020 and September ~~29, 2018,~~28, 2019, respectively. Share repurchases, other than redeemable common shares, approximated ~~$16,674~~$22,209 and ~~$10,960~~$16,674 during the nine months ended September 26, 2020 and September 28, 2019, ~~and September 29, 2018,~~ respectively.

Contractual Obligations Summary and Commercial Commitments

As of September ~~28, 2019,~~26, 2020, total commitments related to issued letters of credit were ~~$81,655,~~$88,242, of which ~~$2,913~~$2,877 were issued under the revolving credit facility, ~~$76,732~~$83,355 were issued under the AR Securitization program, and $2,010 were issued under short-term lines of credit. As of December 31, ~~2018,~~2019, total commitments related to issued LCs were ~~$72,565,~~$81,619, of which ~~$3,123~~$2,877 were issued under the revolving credit facility, ~~$67,438~~$76,732 were issued under the AR Securitization program, and ~~$2,004~~$2,010 were issued under short-term lines of credit.

Also, as is common in our industry, we have performance obligations that are supported by surety bonds, which expire during ~~2019~~2020 through 2023. We intend to renew the surety bonds where appropriate and as necessary.

Capital Resources

Cash generated from operations, ~~and~~ our revolving credit facility and note issuances are our primary sources of capital.

Business seasonality traditionally results in higher revenues during the second and third quarters as compared with the first and fourth quarters of the year, while our methods of accounting for fixed costs, such as depreciation and amortization expense, rent and interest expense, are not significantly impacted by business seasonality. Capital resources during these periods are equally affected. We satisfy

- 44 -

Index

seasonal working capital needs and other financing requirements with the revolving credit facility and other short-term lines of credit. We are continually reviewing our existing sources of financing and evaluating alternatives. At September ~~28, 2019,~~26, 2020, we had working capital of ~~$116,150,~~$130,781, and short-term lines of credit approximating ~~$6,696~~$9,112 and ~~$182,087~~$217,123 available under our revolving credit facility.

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

We believe our sources of capital, at this time, provide us with the financial flexibility to meet our capital-spending plans and to continue to complete business acquisitions for at least the next twelve months and for the reasonably foreseeable future. However, we cannot predict the full extent of the potential impact resulting from the COVID-19 pandemic on our business, results of operations and sources of capital.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

As discussed in our annual report on Form 10-K for the year ended December 31, ~~2018,~~2019, we believe that our policies related to revenue recognition, the allowance for doubtful accounts, stock valuation and self-insurance reserves are our “critical accounting policies and estimates”--those most important to the financial presentations and those that require the most difficult, subjective or complex judgments.

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

~~Index~~

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

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. These statements relate to future events or our future financial performance. In some cases, forward-looking statements may be identified by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors that may cause our or our industry's actual results, levels of activity, performance or achievements to differ materially from what is expressed or implied in these forward-looking statements. Some important factors that could cause actual results to differ materially from those in the forward-looking statements, some of which have been, and may further be, exacerbated by the COVID-19 pandemic, 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.~~

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

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

▪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

- 45 -

Index~~Index~~

adequate insurance, or the inadequacy of our self-insurance reserves or insurance coverages, could negatively impact our liquidity and financial condition.


▪	~~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.~~

▪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, or the impact of costs incurred to comply with cybersecurity or data privacy regulations, could adversely affect our financial performance.

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

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

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

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

▪The uncertainties in the credit and financial markets, including the negative impact of COVID-19, may limit our access to capital.

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

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

▪Our facilities could be damaged or our operations could be disrupted, or our customers or vendors may be adversely affected, by events such as natural disasters, pandemics, such as COVID-19, terrorist attacks or other external events.

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

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

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Index

The factors described above, as well as other factors that may adversely impact our actual results, are discussed in "Part I - Item 1A. Risk Factors." of our annual report on Form 10-K for the year ended December 31, ~~2018.~~2019, as well as in "Part II-Item 1. Risk Factors" of this quarterly report on Form 10-Q.


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

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

With the ~~nine months ended September 28, 2019,~~exception of the impacts of COVID-19, which are discussed elsewhere in this document, there ~~were~~have been no material changes in our reported market risks or risk management policies since the ~~market risk previously presented in~~filing of our ~~annual report~~2019 Annual Report on Form 10-K, ~~for~~which was filed with the ~~year ended December 31, 2018.~~Securities and Exchange Commission on March 9, 2020.


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

Item 4.Controls and Procedures.

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

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

(b) Changes in Internal Control over Financial Reporting

~~There were~~In response to the COVID-19 pandemic, we have required certain employees, some of whom are involved in the operation of our internal control over financial reporting, to work from home. Despite working remotely, there have been no changes in our internal control over financial reporting during the fiscal quarter ended September ~~28, 2019~~26, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

~~The Davey Tree Expert Company~~Part II. Other Information


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

Items 3, 4 and 5 are not applicable.


~~Item 1.~~	~~Legal Proceedings.~~

Item 1. Legal Proceedings.

~~Index~~

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

- 47 -

Index

of matters may be material to our results of operations for a particular period, depending upon the size of the loss or our income for that particular period.

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

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

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


~~Item 1A.~~	~~Risk Factors.~~

Item 1A.Risk Factors.

Our Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, includes a detailed discussion of our risk factors. There have been no material changes to the risk factors as previously ~~disclosed.~~

disclosed other than as described below. However, some of the risk factors

- 48 -

Index~~Index~~

disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019 have been, and we expect will continue to further be, exacerbated by the impact of the COVID-19 pandemic.

Our business, results of operations, financial position or cash flow could in the future be materially adversely impacted by the coronavirus pandemic (COVID-19).

The global spread of the coronavirus pandemic (COVID-19) has created significant volatility and uncertainty and economic disruption. The extent to which COVID-19 impacts our business, operations and financial results will depend on numerous evolving factors that we may not be able to accurately predict including: the duration and scope of the pandemic, including the current resurgence of cases in the United States and potential challenges caused by the colder winter months, including the onset of the cold and flu season; the impact of the pandemic on economic activity, including the possibility that any future recovery from the COVID-19 pandemic and related impact may also be slowed or reversed by a number of factors, including new or additional resurgences in COVID-19 infections; government imposed restrictions in response to the pandemic, including the temporary shutdowns and work restrictions related to COVID-19 in a few states and certain Canadian provinces impacting our Residential and Commercial Services segment and the possibility that previously-lifted restrictions will be reimposed, or additional restrictions put in place; the effect on our customers and their demand for our services; and the ability of our customers to pay for our services. Clients may slow down decision making, delay planned work or seek to terminate existing agreements. The degree of impact of COVID-19 on our customer sales demand will depend on the extent and duration of the economic contraction.

We have taken steps to support our employees and protect their health and safety, while also ensuring that our business can continue to operate and provide services to our customers. Where possible, we have transitioned our employees to work from home and implemented measures to ensure social distancing when providing services to our customers. The resources available to employees working remotely may not enable them to maintain the same level of productivity and efficiency, and these and other employees may face additional demands on their time, such as increased responsibilities resulting from school closures or the illness of family members. Our increased reliance on remote access to our information systems could also increase our exposure to potential data breaches. There is no certainty that such measures will be sufficient to mitigate the risks posed by COVID-19, in which case our employees may become sick, our ability to perform critical functions could be harmed, and our business and operations could be negatively impacted.

While COVID-19 did not have a material adverse effect on our reported results for the first nine months of 2020, due to the inherent uncertainty surrounding COVID-19 given its continual evolution, such as the current resurgence in cases, we are unable to predict the ultimate impact that it may have on our business, including how it will impact our customers, employees, supply chain and liquidity. The situation surrounding COVID-19 remains fluid, and the potential for a material impact on our business increases the longer the coronavirus impacts the level of economic activity in the U.S. and globally. Even after the COVID-19 pandemic has subsided, we may experience an impact to our business as a result of the current economic recession and any economic downturn or recession that may occur in the future.

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

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

The following table provides information on purchases of our common shares outstanding made by us during the first nine months of ~~2019~~.2020.

Period
Total
Number of
Shares
Purchased

Average
Price
Paid per
Share

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

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

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

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

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


Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
Fiscal 2020
January 1 to January 25	1,005	$	22.60	—	866,570
January 26 to February 22	645	22.60		—	866,570
February 23 to March 28	331,652	24.20		—	866,570
Total First Quarter	333,302	24.19		—

March 29 to April 25	297,079	24.20		—	866,570
April 26 to May 23	251,981	24.20		—	866,570
May 24 to June 27	110,488	24.20		—	866,570
Total Second Quarter	659,548	24.20		—

June 28 to July 25	1,128	24.20		—	866,570
July 26 to August 22	51,039	24.90		—	866,570
August 23 to September 26	87,434	24.90		—	866,570
Total Third Quarter	139,601	24.89		—

Total Year-to-Date	1,132,451	$	24.28	—

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.; FirstService Corporation; 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 Q, The Davey 401KSOP and Employee Stock Ownership Plan). The purchases described above were added to our treasury stock.

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

~~Index~~

- 50 -

Index

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

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

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

In accordance with the amendments to the Articles approved by the Company's shareholders at the 2017 Annual Meeting, on May 17, 2017, the Company's Board of Directors authorized the Company to repurchase up to 200,000 common shares, which authorization was increased by an additional 1,000,000 common shares in May 2018. Of the 1,200,000 total shares authorized, ~~913,044~~866,570 remain available under the program. Share repurchases may be made from time to time and the timing of any repurchases and the actual number of shares repurchased will depend on a variety of factors. The Company is not obligated to purchase any shares, and repurchases may be commenced, suspended or discontinued from time to time without prior notice. The repurchase program does not have an expiration date.


~~Item 6.~~	~~Exhibits.~~

Item 6.Exhibits.

See Exhibit Index page below.

~~Index~~- 51 -

Index

Exhibit Index

Exhibit No.

Description

~~Exhibit No.~~

~~Description~~

31.1

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

Filed Herewith

31.2

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

Filed Herewith

32.1

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

Furnished Herewith

32.2

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

Furnished Herewith

101

The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended September ~~28, 2019,~~26, 2020, formatted in iXBRL (inline eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets (unaudited), (ii) the Condensed Consolidated Statements of Operations (unaudited), (iii) the Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited), (iv) the Condensed Consolidated Statements of Shareholders' Equity (unaudited), (v) the Condensed Consolidated Statements of Cash Flows (unaudited), and (vi) Notes to Condensed Consolidated Financial Statements (unaudited). The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.

Filed Herewith

104

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

Filed Herewith

~~Index~~

- 52 -

Index

Signatures

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

THE DAVEY TREE EXPERT COMPANY

Date:

November ~~5, 2019~~3, 2020

By:

/s/ Joseph R. Paul

Joseph R. Paul

Executive Vice President, Chief Financial Officer and Secretary

(Principal Financial Officer)

Date:

November ~~5, 2019~~3, 2020

By:

/s/ Thea R. Sears

Thea R. Sears

Vice President and Controller

(Principal Accounting Officer)

- 5053 -



	September 28, 2019			December 31, 2018
Assets
Current assets:
Cash	$	13,702		$	22,661
Accounts receivable, net	232,245			195,906
Operating supplies	12,030			14,415
Other current assets	30,884			22,086
Total current assets	288,861			255,068
Property and equipment	662,256			639,396
Less accumulated depreciation	461,705			437,111
Total property and equipment, net	200,551			202,285
Right-of-use assets - operating leases	40,189			—
Other assets	21,677			21,769
Intangible assets and goodwill, net	49,920			47,501
Total assets	$	601,198		$	526,623
Liabilities and shareholders' equity
Current liabilities:
Accounts payable	$	39,276		$	43,958
Accrued expenses	61,220			44,061
Current portion of long-term debt and finance lease liabilities	30,532			23,859
Other current liabilities	41,683			27,434
Total current liabilities	172,711			139,312
Long-term debt	145,564			155,563
Lease liabilities - finance leases	1,787			2,862
Lease liabilities - operating leases	25,878			—
Self-insurance reserve	62,643			56,351
Other noncurrent liabilities	10,487			10,125
Total liabilities	419,070			364,213
Commitments and contingencies (Note P)
Redeemable common shares related to 401KSOP and Employee Stock Ownership Plan (ESOP); 5,299 and 5,642 shares at redemption value as of September 28, 2019 and December 31, 2018	119,758			119,049
Common shareholders' equity:
Common shares, $1.00 par value, per share; 48,000 shares authorized; 37,615 and 37,272 shares issued and outstanding before deducting treasury shares and which excludes 5,299 and 5,642 shares subject to redemption as of September 28, 2019 and December 31, 2018	37,623			37,272
Additional paid-in capital	91,448			82,623
Common shares subscribed, unissued	110			6,799
Retained earnings	180,470			157,472
Accumulated other comprehensive loss	(5,636		)	(5,034		)
	304,015			279,132
Less: Cost of common shares held in treasury; 19,671 shares at September 28, 2019 and 20,033 shares at December 31, 2018	241,631			235,042
Common shares subscription receivable	14			729
Total common shareholders' equity	62,370			43,361
Total liabilities and shareholders' equity	$	601,198		$	526,623

See notes to condensed consolidated financial statements.



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

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

Less accumulated amortization	32,508				30,640

Identified intangible assets, net	10,022				9,530

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



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



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

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

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



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



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



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



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

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