Davey Tree Expert 10Q 2008 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 28, 2008

£ 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, Ohio 44240

(Address of principal executive offices) (Zip code)

(330) 673-9511

(Registrant's telephone number, including area code)

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

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

(Check one):	£ Large Accelerated Filer	S Accelerated Filer
	£ Non-Accelerated Filer	£ Smaller Reporting Company

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

There were 7,635,598 Common Shares, $1.00 par value, outstanding as of August 1, 2008.

Index

The Davey Tree Expert Company

Quarterly Report on Form 10-Q

June 28, 2008

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 Cash Flows			4
Notes to Condensed Consolidated Financial Statements
A - Basis of Financial Statement Preparation			5
B - Seasonality of Business			6
C - Business Combinations			6
D - Accounts Receivable, Net			7
E – Identified Intangible Assets and Goodwill, Net			8
F - Long-Term Debt			8
G - Fair Value Measurements			9
H - Stock-Based Compensation			10
I - Net Periodic Benefit Cost—Defined Benefit Pension Plans			13
J - Income Taxes			13
K - Comprehensive Income (Loss)			14
L - Per Share Amounts and Common Shares Outstanding			14
M - Operations by Business Segment			15

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
Results of Operations			17
Liquidity and Capital Resources			21
Off-Balance Sheet Arrangements			23
Contractual Obligations Summary			24
Capital Resources			24
New Accounting Pronouncements			25
Critical Accounting Policies and Estimates			25
Market Risk Information			25
Note Regarding Forward-Looking Statements			27

Item 3. Quantitative and Qualitative Disclosures about Market Risk			28

Item 4. Controls and Procedures			28

Part II. Other Information

Item 1A. Risk Factors			29

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			29

Item 4. Submission of Matters to a Vote of Security Holders			30

Item 5. Other Information			30

Item 6. Exhibits			30

Signatures			31

Exhibit Index			32

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

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Index

THE DAVEY TREE EXPERT COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except per share data dollar amounts)


	June 28,			December 31,
	2008			2007
Assets
Current assets:
Cash	$	2,218		$	1,819
Accounts receivable, net		104,381			72,011
Operating supplies		5,758			3,688
Other current assets		14,054			14,365
Total current assets		126,411			91,883

Property and equipment		380,522			340,032
Less accumulated depreciation		239,508			231,793
		141,014			108,239

Other assets		20,861			19,797
Identified intangible assets and goodwill, net		31,243			11,730
	$	319,529		$	231,649

Liabilities and shareholders' equity
Current liabilities:
Accounts payable	$	31,224		$	20,419
Accrued expenses		25,532			26,311
Other current liabilities		27,073			24,710
Total current liabilities		83,829			71,440

Long-term debt		82,756			32,099
Self-insurance accruals		38,188			28,710
Other noncurrent liabilities		4,599			5,018
		209,372			137,267

Common shareholders' equity:
Common shares, $1.00 par value, per share; 24,000 shares authorized; 10,728 shares issued		10,728			10,728
Additional paid-in capital		14,261			7,953
Common shares subscribed, unissued		7,176			7,571
Retained earnings		144,065			137,132
Accumulated other comprehensive income (loss)		(44	)		400
		176,186			163,784
Less: Cost of Common shares held in treasury; 3,130 shares at June 28, 2008 and 3,463 shares at December 31, 2007		64,231			67,310
Common shares subscription receivable		1,798			2,092
		110,157			94,382
	$	319,529		$	231,649


See notes to condensed consolidated financial statements.

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Index

THE DAVEY TREE EXPERT COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)

	Three Months Ended						Six Months Ended
	June 28,			June 30,			June 28,			June 30,
	2008			2007			2008			2007

Revenues	$	158,826		$	143,380		$	274,425		$	247,221

Costs and expenses:
Operating		100,815			87,736			180,136			159,576
Selling		22,155			21,692			41,417			38,848
General and administrative		10,376			9,970			21,077			19,278
Depreciation and amortization		8,423			7,130			15,899			13,856
Loss (gain) on sale of assets, net		(108	)		1			(329	)		(3	)
		141,661			126,529			258,200			231,555

Income from operations		17,165			16,851			16,225			15,666

Other income (expense):
Interest expense		(924	)		(1,065	)		(1,619	)		(1,928	)
Interest income		66			104			146			219
Other, net		(480	)		130			(1,118	)		(344	)

Income before income taxes		15,827			16,020			13,634			13,613

Income tax		6,204			6,167			5,345			5,241

Net income	$	9,623		$	9,853		$	8,289		$	8,372

Net income per share:
Basic	$	1.31		$	1.30		$	1.10		$	1.08
Diluted	$	1.23		$	1.24		$	1.04		$	1.03

Weighted average shares outstanding:
Basic		7,365			7,559			7,546			7,779
Diluted		7,821			7,932			8,007			8,163

Dividends declared per share	$	.09		$	.08		$	.17		$	.16

See notes to condensed consolidated financial statements.

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Index

THE DAVEY TREE EXPERT COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)

	Six Months Ended
	June 28,			June 30,
	2008			2007
Operating activities
Net income	$	8,289		$	8,372
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		15,899			13,856
Other		1,026			116
Changes in operating assets and liabilities:
Accounts receivable		(24,008	)		(19,476	)
Operating liabilities		3,356			4,032
Other assets, net		(2,006	)		3,059
		(5,733	)		1,587

Net cash provided by operating activities		2,556			9,959

Investing activities
Capital expenditures:
Equipment		(20,775	)		(23,989	)
Land and buildings		(634	)		(4,696	)
Purchases of businesses		(17,773	)		(2,441	)
Other		485			(215	)
Net cash used in investing activities		(38,697	)		(31,341	)

Financing activities
Revolving credit facility proceeds, net		46,000			32,400
Purchase of common shares for treasury		(9,974	)		(11,382	)
Sale of common shares from treasury		3,893			6,120
Dividends		(1,356	)		(1,270	)
Other		(2,023	)		(4,582	)
Net cash provided by financing activities		36,540			21,286

Increase (Decrease) in cash		399			(96	)
Cash, beginning of period		1,819			2,101
Cash, end of period	$	2,218		$	2,005

Supplemental cash flow information follows:
Interest paid	$	1,578		$	1,642
Income taxes paid		5,672			5,451

Noncash transactions:
Debt issued for purchases of businesses	$	5,639		$	-
Common shares issued for purchase of business		14,692			-
Common shares issuable for purchase of business		891			-
Cash to be paid for purchase of business		239			-

Detail of acquisitions:
Assets acquired:
Cash	$	55		$	-
Receivables		8,366			-
Operating supplies		1,008			-
Prepaid expense		339			-
Equipment		27,157			798
Deposits and other		738			-
Intangibles		20,166			3,744
Liabilities assumed		(18,540	)		(316	)
Debt issued for purchases of businesses		(5,639	)		(1,785	)
Common shares issued for purchase of business		(14,692	)		-
Common shares issuable for purchase of business		(891	)		-
Cash to be paid for purchase of business		(239	)		-
Cash paid	$	17,828		$	2,441

See notes to condensed consolidated financial statements.

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Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 28, 2008

(Amounts in thousands, except share data)

A.	Basis of Financial Statement Preparation

The condensed consolidated financial statements present the financial position, results of operations and cash flows of The Davey Tree Expert Company and its subsidiaries. “We,” “us,” “our,” “Davey,” “Davey Tree” and the “Company” means The Davey Tree Expert Company and its subsidiaries, unless 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”) and with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. The consolidated financial statements include all adjustments which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. All such adjustments are of a normal, recurring nature. All significant 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. It is suggested 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, 2007 (the “2007 Annual Report”).

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

Interim Results of Operations--Interim results may not be indicative of calendar year performance because of seasonal and short-term variations.

New Accounting Pronouncement Adopted--In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement No. 157, “Fair Value Measurements” (“FAS 157”), which establishes a framework for measuring fair value and requires expanded presentations regarding fair value measurements. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”), which allows for the deferral of the adoption date of FAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or presented at fair value in the financial statements on a recurring basis. We have elected to defer the adoption of FAS 157 for the assets and liabilities within the scope of FSP FAS 157-2. The effective provisions of FAS 157, adopted January 1, 2008, are included in Note G, “Fair Value Measurements.” The adoption of FAS 157 for those assets and liabilities within the scope of FSP FAS 157-2 is not expected to have a material impact on our financial position, results of operations or cash flows.

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Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 28, 2008

(Amounts in thousands, except share data)

A.	Basis of Financial Statement Preparation (continued)

New Accounting Pronouncements Requiring Adoption--In March 2008, the FASB issued FAS 161, “Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement 133” (“FAS 161”). FAS 161 requires entities to provide enhanced disclosures relating to: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedge items are accounted for under FAS 133, “Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”) and its related interpretations; and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. FAS 161 must be applied prospectively to all derivative instruments and nonderivative instruments that are designated and qualify as hedging instruments and related hedged items accounted for under FAS 133 for all financial statements issued for fiscal years and interim periods beginning after November 15, 2008, which for us begins with our 2009 calendar year, with early application encouraged. The adoption of FAS 161 will not have a material effect on our financial position, results of operation or cash flows.

In December 2007, the FASB issued Statement No. 141 (revised 2007), “Business Combinations” (“FAS 141R”), which replaces FAS 141, “Business Combinations.” FAS 141R retains the underlying concepts of FAS 141 in that all business combinations are still required to be accounted for at fair value under the acquisition method of accounting but FAS 141R changes the method of applying the acquisition method in a number of significant aspects. Early adoption is not permitted. We are required to adopt FAS 141R prospectively for any acquisitions on or after January 1, 2009.

In April 2008, the FASB issued FASB Staff Position No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP FAS 142-3”), which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FAS 142, “Goodwill and Other Intangible Assets.” Early adoption is not permitted. We are required to adopt FSP FAS 142-3 prospectively for any intangibles acquired on or after January 1, 2009. The adoption of FSP FAS 142-3 will not have a material effect on our financial position, results of operation or cash flows.

B.	Seasonality of Business

Due to the seasonality of our business, our operating results for the six months ended June 28, 2008 are not indicative of results that may be expected for any other interim period or for the year ending December 31, 2008. Business seasonality is the result of traditionally 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.	Business Combinations

We made investments in six businesses during the six months ended June 28, 2008 for an aggregate purchase price of $39,289, including cash payment of $17,828, common shares of $15,583 (both issued and issuable of $891), debt issued of $5,639 and cash to be paid of $239. Additional consideration for these acquisitions is contingent upon continued employment, which is expensed as compensation over the employment period and not included in the purchase price.

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Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 28, 2008

(Amounts in thousands, except share data)

C.	Business Combinations (continued)

Our latest acquisition, which was effective June 27, 2008, had post-closing transactions to be completed at our June 28, 2008 balance-sheet date that included common shares issuable of $891 and cash to be paid of $239. Our allocation of the purchase price for this acquisition was based on historical cost of net assets acquired with the excess of the purchase price being included in goodwill.

Acquired amortizable intangibles totaled $3,271 and have estimated useful lives of between three and seven years. The excess of purchase price over the fair value of the net assets acquired was $16,895 of goodwill and is classified in our consolidated balances sheets with identified intangibles and goodwill, net.

The purchase price allocation for each acquisition is preliminary and subject to revision, and any change to the fair value of net assets acquired will lead to a corresponding change to the purchase price allocable to goodwill. The results of operations of the acquired businesses have been included in our consolidated results of operations from each acquisition-date forward. The effect of these acquisitions on consolidated revenues and the results of operations for the six months ended June 28, 2008 was not significant.

D.	Accounts Receivable, Net

Our accounts receivable, net, consisted of the following:

	June 30,		December 31,
	2008		2007

Accounts receivable	$	95,390	$	69,326
Receivables under contractual arrangements		11,100		5,426

		106,490		74,752
Less allowances for doubtful accounts		2,109		2,741

	$	104,381	$	72,011

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

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Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 28, 2008

(Amounts in thousands, except share data)

E.	Identified Intangible Assets and Goodwill, Net

The carrying amount of the identified intangibles and goodwill acquired in connection with our investments in businesses were as follows:

	June 28, 2008				December 31, 2007
	Carrying		Accumulated		Carrying		Accumulated
Identified Intangible Assets and Goodwill, Net	Amount		Amortization		Amount		Amortization

Amortized intangible assets:
Customer lists/relationships	$	9,150	$	6,978	$	8,435	$	6,509
Employment-related		4,628		2,520		2,847		2,235
Tradenames		2,530		1,021		1,489		866

Amortized intangible assets	$	16,308	$	10,519	$	12,771	$	9,610

Less accumulated amortization		10,519				9,610

Identified intangibles, net		5,789				3,161

Unamortized intangible assets:
Goodwill and other Not amortized		25,454				8,569

	$	31,243			$	11,730

F.	Long-Term Debt

Our long-term debt consisted of the following:

	June 28,		December 31,
	2008		2007
Revolving credit facility
Prime rate borrowings	$	6,300	$	7,800
LIBOR borrowings		65,000		17,000
Term loan		6,500		7,000
		77,800		31,800
Term loans		9,189		4,142
		86,989		35,942
Less current portion		4,233		3,843
	$	82,756	$	32,099

Revolving Credit Facility--We have a $159,000 revolving credit facility with a group of banks, which will expire in December 2011 and permits borrowings, as defined, up to $159,000 (increased in May 2008 from $147,000) with a letter of credit sublimit of $100,000. The revolving credit facility contains certain affirmative and negative covenants customary for this type of facility and includes financial covenant ratios, as defined, with respect to funded debt to EBITDA (earnings before interest, taxes, depreciation and amortization), and funded debt to capitalization. Included in the credit facility is a $7,000 seven-year term loan entered into in November 2007 that requires quarterly principal installments of $250, plus interest.

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The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 28, 2008

(Amounts in thousands, except share data)

F.	Long-Term Debt (continued)

As of June 28, 2008, we had unused commitments under the facility approximating $25,201, with $133,799 committed, consisting of borrowings of $77,800 (including the $6,500 term loan) and issued letters of credit of $55,999. Borrowings outstanding bear interest, at Davey Tree’s option, at the agent bank’s prime rate or LIBOR plus a margin adjustment ranging from .65% to 1.45%, based on a ratio of funded debt to EBITDA. A commitment fee ranging from .11% to ..19% is also required based on the average daily unborrowed commitment.

G.	Fair Value Measurements

On January 1, 2008, we adopted Financial Accounting Standards Board (“FASB”) Statement No. 157, “Fair Value Measurements” (“FAS 157”) for our financial assets and financial liabilities, which had no effect on our financial position, results of operations or cash flows. FAS 157 establishes a common definition for fair value to be applied to U.S. GAAP requiring use of fair value, establishes a framework for measuring fair value, and expands presentations about such fair value measurements. FAS 157 indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. FAS 157 defines fair value based upon an exit price model.

Valuation Hierarchy--FAS 157 establishes a valuation hierarchy for presentation of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

As of June 28, 2008, we held interest rate contracts—cash-flow hedges—to effectively convert a portion of our variable-rate revolving credit borrowings to a fixed rate, thus reducing the impact of interest-rate changes on future interest expense. The cash-flow hedges are classified as assets or liabilities in the consolidated balance sheets, with changes in their fair value included in other comprehensive income.

Our assets and liabilities measured at fair value on a recurring basis subject to the presentation requirements of FAS 157 at June 28, 2008, were as follows:


			Fair Value Measurements at June 28, 2008 Using:
	Total		Quoted prices		Significant		Significant
	Carrying		in		other observable		unobservable
	Value at		active markets		inputs		inputs
Description	June 28, 2008		(Level 1)		(Level 2)		(Level 3)

Assets:	$	-	$	-	$	-	$	-

Liabilities:
Interest rate contracts, classified as accrued expenses	$	413	$	-	$	413	$	-

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The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 28, 2008

(Amounts in thousands, except share data)

H.	Stock-Based Compensation

The Davey Tree Expert Company 2004 Omnibus Stock Plan (the “Stock Plan”) was approved by our shareholders at our annual shareholders' meeting in May 2004. The Stock Plan is administered by the Compensation Committee of the Board of Directors, with the maximum number of common shares that may be granted to or purchased by all employees and directors under the Stock Plan being 5,000,000. In addition to the maintenance of the Employee Stock Purchase Plan, the Stock Plan provides for the grant of stock options, restricted stock, stock appreciation rights, stock purchase rights, stock equivalent units, cash awards, and other stock or performance-based incentives. These awards are payable in cash or common shares, or any combination thereof, as established by the Compensation Committee.

Stock-based compensation expense under all share-based payment plans -- our Employee Stock Purchase Plan, stock option plans, and performance-based restricted stock units - -- included in the results of operations follows:

	Three Months Ended				Six Months Ended
	June 28,		June 30,		June 28,		June 30,
	2008		2007		2008		2007

Compensation expense, all share-based payment plans	$	299	$	379	$	675	$	711

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 $149 being recognized for the six months ended June 28, 2008 and $121 for the six months ended June 30, 2007.

Stock Option Plans--Since adopting FASB Statement No. 123 (revised), “Share-Based Payment” (“FAS 123R”) on January 1, 2006 and through the end of the second quarter, June 28, 2008, we have granted 258,000 stock option awards. The stock option awards were granted at an exercise price equal to the fair market value of our common shares at the dates of grant. The stock options were awarded under a graded vesting schedule and the stock options 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 expense for stock options was $153 for the six months ended June 28, 2008 and $152 for the six months ended June 30, 2007.

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The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 28, 2008

(Amounts in thousands, except share data)

H.	Stock-Based Compensation (continued)

Performance-Based Restricted Stock Units--During February 2008, the Compensation Committee of the Board of Directors awarded 15,535 Performance-Based Restricted Stock Units to certain management employees. The Compensation Committee made similar awards in prior periods. The awards vest over specified periods. The following table summarizes Performance-Based Restricted Stock Units as of June 28, 2008.

					Weighted-
				Weighted-	Average
Unvested				Average	Remaining	Unrecognized	Aggregate
Performance-Based	Number of			Grant Date	Contractual	Compensation	Intrinsic
Restricted Stock Units	Stock Units			Value	Life	Cost	Value

Unvested, January 1, 2008		142,841
Granted		15,535
Forfeited		-
Vested		(96,386	)
Unvested, June 28, 2008		61,990		$ 23.93	3.3 years	$ 971	$ 1,959

The fair value of the restricted stock units for awards made prior to January 1, 2006 is based on the market price of our common shares on the date of award and is recognized as compensation cost on the straight-line recognition method over the vesting period. Under the provisions of FAS 123R, compensation cost for awards made after December 31, 2005 is determined using a fair-value method and amortized over the requisite service period. Compensation expense on restricted stock awards totaled $373 for the six months ended June 28, 2008 and $438 for the six months ended June 30, 2007.

For stock-based awards issued on or after January 1, 2006, we estimated the fair value of each award on the date of grant using a binomial option-pricing model. The binomial model considers a range of assumptions related to volatility, risk-free interest rate and employee exercise behavior. Expected volatilities utilized in the binomial model are based on historical volatility of our stock prices and other factors. Similarly, the dividend yield is based on historical experience and expected future changes. The binomial model also incorporates exercise and forfeiture assumptions based on an analysis of historical data. The expected life of the stock-based awards is derived from the output of the binomial model and represents the period of time that awards granted are expected to be outstanding.

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The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 28, 2008

(Amounts in thousands, except share data)

H.	Stock-Based Compensation (continued)

General Stock Option Information--The following table summarizes activity under the stock option plans for the six months ended June 28, 2008.

						Weighted-
				Weighted-		Average
	Number of			Average		Remaining	Unrecognized		Aggregate
	Options			Exercise		Contractual	Compensation		Instrinic
	Outstanding			Price		Life	Cost		Value
Outstanding, January 1, 2008		710,958		$	16.69
Granted		12,000			31.60
Exercised		(29,333	)		13.79
Forfeited		(7,000	)		16.07
Outstanding, June 28, 2008		686,625			17.08	6.2 years	$	11,728	$	9,970

Exercisable, June 28, 2008		434,125			15.81	5.8 years			$	6,855

“Intrinsic value” is defined as the amount by which the market price of a common share exceeds the exercise price of an option. Information regarding the stock options outstanding at June 28, 2008 is summarized below:

		Weighted-	Weighted-		Weighted-
		Average	Average		Average
	Number	Remaining	Exercise	Number	Exercise
Exercise Price	Outstanding	Contractual Life	Price	Exercisable	Price
Employee options:
$13.50	419,325	5.4 years	$13.50	316,825	$13.50
22.50	223,700	7.9 years	22.50	85,700	22.50
	643,025	6.3 years	16.62	402,525	15.42
Director options:
$12.00 to $31.60	43,600	4.0 years	23.74	31,600	20.76
	686,625	6.2 years	17.08	434,125	15.81

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

- 12 - -

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 28, 2008

(Amounts in thousands, except share data)

I.	Net Periodic Benefit Cost--Defined Benefit Pension Plans

Substantially all of our domestic employees are covered by noncontributory defined benefit pension plans. The results of operations included the following net periodic benefit cost recognized related to our defined-benefit pension plans.

	Three Months Ended						Six Months Ended
	June 28,			June 30,			June 28,			June 30,
	2008			2007			2008			2007
Components of pension cost

Service costs--increase in benefit obligation earned	$	452		$	396		$	903		$	791
Interest cost on projected benefit obligation		415			397			830			794
Expected return on plan assets		(562	)		(537	)		(1,123	)		(1,073	)
Amortization of net actuarial loss		10			64			20			128
Amortization of prior service cost		7			8			15			16
Amortization of transition asset		(17	)		(18	)		(34	)		(36	)
Net pension cost of defined-benefit pension plans	$	305		$	310		$	611		$	620

Employer Contributions--Contributions of $124 were made to our defined-benefit pension plans during the six months ended June 28, 2008. We expect, as of June 28, 2008, to make additional defined-benefit plan contributions totaling $151 before December 31, 2008.

J.	Income Taxes

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. Each quarter we update our estimate of the annual effective tax rate and if our estimated tax rate changes we make a cumulative adjustment. The 2008 annual effective tax rate is estimated to be 39.2%. We estimated 38.5% as the annual effective tax rate in reporting the results of operations for the first six months of 2007.

We adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” an interpretation of FASB Statement No. 109, “Accounting for Income Taxes” (“FIN 48”) effective January 1, 2007. At December 31, 2007, we had $918 of unrecognized tax benefits, substantially all which would affect our effective tax rate if recognized, and accrued interest expense related to the unrecognized tax benefits of $202. At June 28, 2008, there were no significant changes in the unrecognized tax benefits, including the amount that would affect our effective tax rate if recognized, or the accrued interest expense related to the unrecognized tax benefits.

We do not anticipate that total unrecognized tax benefits will change significantly in the next 12 months, based on tax years open to examination.

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Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 28, 2008

(Amounts in thousands, except share data)

K.	Comprehensive Income (Loss)

Comprehensive income (or loss) is comprised of net income (or net loss) and other components, including currency translation adjustments, changes in the fair value of interest rate contracts qualifying as cash flow hedges, and adjustments to defined-benefit pension plans. The components of comprehensive income (loss) follow:

	Three Months Ended						Six Months Ended
	June 28,			June 30,			June 28,			June 30,
	2008			2007			2008			2007
Comprehensive Income
Net income	$	9,623		$	9,853		$	8,289		$	8,372
Other comprehensive income (loss)
Currency translation adjustments		105			1,043			(529	)		1,090
Interest rate contracts, change in fair value		606			241			137			95
Other comprehensive income (loss), before income taxes		711			1,284			(392	)		1,185
Income tax benefit (expense), related to items of other comprehensive income		(230	)		(91	)		(52	)		(36	)
Other comprehensive income (loss)		481			1,193			(444	)		1,149

Comprehensive income	$	10,104		$	11,046		$	7,845		$	9,521

L. Per Share Amounts and Common 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				Six Months Ended
	June 28,		June 30,		June 28,		June 30,
	2008		2007		2008		2007
Income available to common shareholders:
Net income	$	9,623	$	9,853	$	8,289	$	8,372

Weighted-average shares:
Basic:
Outstanding		7,216,357		7,394,608		7,248,290		7,452,611
Partially-paid share subscriptions		149,098		164,332		298,196		326,857
Basic weighted-average shares		7,365,455		7,558,940		7,546,486		7,779,468

Diluted:
Basic from above		7,365,455		7,558,940		7,546,486		7,779,468
Incremental shares from assumed:
Exercise of stock subscription purchase rights		149,253		130,036		149,253		130,102
Exercise of stock options		306,051		243,251		311,056		253,467
Diluted weighted-average shares		7,820,759		7,932,227		8,006,795		8,163,037

Net income per share
Basic	$	1.31	$	1.30	$	1.10	$	1.08

Diluted	$	1.23	$	1.24	$	1.04	$	1.03

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Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 28, 2008

(Amounts in thousands, except share data)

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

Common Shares Outstanding--A summary of the activity of the common shares outstanding for the six months ended June 28, 2008 follows:

Shares outstanding at December 31, 2007	7,265,890

Shares purchased	(315,809	)
Shares sold	120,814
Shares issued for purchase of business	464,945
Stock subscription offering -- cash purchases	32,917
Options exercised	29,333
	332,200

Shares outstanding at June 28, 2008	7,598,090

On June 28, 2008, we had 7,598,090 common shares outstanding, 28,196 common shares issuable in connection with the purchase of a business, options exercisable to purchase 434,125 common shares, partially-paid subscriptions for 598,030 common shares and purchase rights outstanding for 247,932 common shares.

The partially-paid subscriptions relate to common shares purchased at $12.00 per share, in connection with the stock subscription offering completed in August 2002, whereby some employees opted to finance their subscription with a down-payment of at least 10% of their total purchase price and a seven- year promissory note for the balance due, with interest at 4.75% per year. Promissory note payments, of both principal and interest, are made either by payroll deduction or annual lump-sum payment. The promissory notes are collateralized with the common shares subscribed and the common shares are only issued when the related promissory note is paid-in-full. Dividends are paid on all unissued subscribed shares.

The purchase rights outstanding were granted to employees (excluding directors, officers and certain operations management) to purchase one additional common share at the price of $12.00 per share for every two common shares purchased in connection with the stock subscription offering completed in August 2002. Each right may be exercised at the rate of one-seventh per year and will expire seven years after the date that the right was granted. Employees may not exercise a right should they cease to be employed by Davey Tree.

M.	Operations by Business Segment

Our operating results are reported in two segments: Residential and Commercial Services, and Utility Services.

Residential and Commercial Services provides for the treatment, preservation, maintenance, cultivation, planting and removal of trees, shrubs and other plant life; its services also include the practice of landscaping, tree surgery, tree feeding, and tree spraying, as well as the application of fertilizer, herbicides and insecticides. Utility Services is principally engaged in the practice of line clearing for investor-owned and municipal utilities, including the clearing of tree growth from power lines, clearance of rights-of-way and chemical brush control. Davey Resource Group, which provides services related to natural resource management and consulting, forestry research and development, and environmental planning and also maintains research, technical support and laboratory diagnostic facilities, is a nonreportable segment and, along with other operating activities, are included in “All Other.”

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Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 28, 2008

(Amounts in thousands, except share data)

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 consistently with the basis described in the 2007 Annual Report.

Segment information reconciled to consolidated external reporting information follows:

			Residential
	Utility		Commercial		All			Reconciling
	Services		Services		Other			Adjustments			Consolidated

Three Months Ended June 28, 2008
Revenues	$	75,675	$	71,302	$	11,849		$	-		$	158,826
Income (loss) from operations		4,459		12,146		1,374			(814	)		17,165
Interest expense									(924	)		(924	)
Interest income									66			66
Other income (expense), net									(480	)		(480	)
Income before income taxes											$	15,827

Segment assets, total	$	128,942	$	122,115	$	68,472		$	-		$	319,529

Three Months Ended June 30, 2007
Revenues	$	62,709	$	68,674	$	11,997		$	-		$	143,380
Income (loss) from operations		5,990		11,680		252			(1,071	)		16,851
Interest expense									(1,065	)		(1,065	)
Interest income									104			104
Other income (expense), net									130			130
Income before income taxes											$	16,020

Segment assets, total	$	98,785	$	86,012	$	61,631		$	-		$	246,428

Six Months Ended June 28, 2008
Revenues	$	142,672	$	111,626	$	20,127		$	-		$	274,425
Income (loss) from operations		9,430		7,817		195			(1,217	)		16,225
Interest expense									(1,619	)		(1,619	)
Interest income									146			146
Other income (expense), net									(1,118	)		(1,118	)
Income before income taxes											$	13,634

Segment assets, total	$	128,942	$	122,115	$	68,472		$	-		$	319,529

Six Months Ended June 30, 2007
Revenues	$	119,127	$	109,090	$	19,004		$	-		$	247,221
Income (loss) from operations		8,334		9,712		(614	)		(1,766	)		15,666
Interest expense									(1,928	)		(1,928	)
Interest income									219			219
Other income (expense), net									(344	)		(344	)
Income before income taxes											$	13,613

Segment assets, total	$	98,785	$	86,012	$	61,631		$	-		$	246,428

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Index

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 Results of Operations and Financial Condition (“MD&A”) 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 horticultural services to residential, commercial, utility and institutional customers throughout the United States and Canada.

Our operating results are reported in two segments: Residential and Commercial Services, and Utility Services for operations in the United States and Canada. Residential and Commercial Services provides for the treatment, preservation, maintenance, cultivation, planting and removal of trees, shrubs and other plant life; its services also include the practice of landscaping, tree surgery, tree feeding and tree spraying, as well as the application of fertilizer, herbicides and insecticides. Utility Services is principally engaged in the practice of line clearing for investor-owned and municipal utilities, including the clearing of tree growth from power lines, clearance of rights-of-way and chemical brush control.

Davey Resource Group, which provides services related to natural resource management and consulting, forestry research and development, and environmental planning and also maintains research, technical support and laboratory diagnostic facilities, is a nonreportable segment and, along with other operating activities, are included in “All Other.”

RESULTS OF OPERATIONS

The following table sets forth our consolidated results of operations as a percentage of revenues.

	Three Months Ended									Six Months Ended
	June 28,			June 30,			Percentage			June 28,			June 30,			Percentage
	2008			2007			Change			2008			2007			Change

Revenues		100.0	%		100.0	%		10.8	%		100.0	%		100.0	%		11.0	%

Costs and expenses:
Operating		63.6			61.2			14.9			65.6			64.5			12.9
Selling		13.9			15.1			2.1			15.1			15.7			6.6
General and administrative		6.5			7.0			4.1			7.7			7.8			9.3
Depreciation and amortization		5.3			5.0			18.1			5.8			5.7			14.7
Gain on sale of assets, net		(.1	)		-		nm				(.1	)		-		nm


Income from operations		10.8			11.7			1.9			5.9			6.3			3.6

Other income (expense):
Interest expense		(.6	)		(.7	)		(13.2	)		(.6	)		(.8	)		(16.0	)
Interest income		.1			.1		nm				.1			.1		nm
Other, net		(.3	)		.1		nm				(.4	)		(.1	)	nm

Income before income taxes		10.0			11.2			(1.2	)		5.0			5.5			.2

Income taxes		3.9			4.3			.6			2.0			2.1			2.0


Net income		6.1	%		6.9	%		(2.3	%)		3.0	%		3.4	%		(1.0	%)


nm--not meaningful

- 17 - -

Index

Second Quarter--Three Months Ended June 28, 2008 Compared to Three Months Ended June 30, 2007

	Three Months Ended
	June 28,			June 30,
	2008			2007			Change			% Change

Revenues	$	158,826		$	143,380		$	15,446			10.8	%

Costs and expenses:
Operating		100,815			87,736			13,079			14.9
Selling		22,155			21,692			463			2.1
General and administrative		10,376			9,970			406			4.1
Depreciation and amortization		8,423			7,130			1,293			18.1
Loss (gain) on sale of assets, net		(108	)		1			(109	)	nm
		141,661			126,529			15,132			12.0

Income (loss) from operations		17,165			16,851			314			1.9

Other income (expense):
Interest expense		(924	)		(1,065	)		141			(13.2	)
Interest income		66			104			(38	)	nm
Other, net		(480	)		130			(610	)	nm

Income before income taxes		15,827			16,020			(193	)		(1.2	)

Income tax		6,204			6,167			37			0.6


Net income	$	9,623		$	9,853		$	(230	)		(2.3	%)

nm--not meaningful

Revenues--Consolidated revenues of $158,826 increased $15,446 compared with $143,380 in the second quarter of 2007. The increase of $15,446 includes revenues related to acquisitions approximating $10,100. Revenues for Utility Services increased $12,966 or 20.7% compared with the second quarter of 2007. In addition to acquisitions, new contracts and increases in existing contracts within all utility operations account for the increase. Revenues for Residential and Commercial Services increased $2,628 to $71,302 from the second quarter of 2007. New and expanded operations and more favorable weather conditions account for the increase. The remaining change between consolidated revenues and segment revenues, a decrease of $148, occurred in all other.

Operating Expenses--Consolidated operating expenses of $100,815 increased $13,079 compared with the second quarter of 2007 and, as a percentage of revenues, increased 2.4% to 63.6%. The increase of $13,079 includes operating expense related to acquisitions approximating $8,680. Utility Services increased $12,444 or 27.9% compared with the second quarter of 2007. Increases in labor, equipment, crew travel and subcontractor expense associated with the increase in revenue in all utility operations account for the increase. Residential and Commercial Services increased $1,273 or 3.7% compared with the second quarter 2007. Increases in labor, equipment, material and subcontractor expense were partially offset by reductions in rented equipment. The remaining change between consolidated operating expenses and segment operating expenses was a decrease of $638.

The increase in fuel prices impacted operating expenses within all segments. During the second quarter 2008, fuel expense of $8,282 increased $2,805, or 51.2%, more than the fuel expense of $5,477 for the second quarter 2007. Approximately $450 of the 2008 increase related to usage.

- 18 - -

Index

Selling Expenses--Consolidated selling expenses of $22,155 increased $463 over the second quarter of 2007 and as a percentage of revenues decreased 1.2% to 13.9%. Utility Services experienced an increase of $372 or 6.3% over the second quarter of 2007. Increases in field management wages, vehicle expense and employee development expenses were partially offset by a reduction in field management incentive expense. Residential and Commercial Services experienced an increase of $375 or 2.4% over the second quarter 2007. Increases in vehicle expense, rent expense, employee development and marketing expenses were partially offset by a reduction in field management wages and incentive expense. The remaining change between consolidated selling expenses and segment selling expenses was a decrease of $284.

General and Administrative Expenses--General and administrative expenses of $10,376 increased $406 from $9,970 in the second quarter of 2007 and, as a percentage of revenues, decreased .5% to 6.5%. The increase is attributable to an increase in salary and incentive expense, travel expense and office supplies and computer expenses partially offset by a reduction in professional services and stock-based compensation expense.

Depreciation and Amortization Expense--Depreciation and amortization expense of $8,423 increased $1,293 from $7,130 in the second quarter of 2007 and, as a percentage of revenues, increased .3% to 5.3%. The increase is attributable to additional capital expenditures for buildings, purchases of businesses and equipment necessary to support the increase in business levels.

Gain on the Sale of Assets, Net--Gain on the sale of assets of $108 increased $109 from the loss of $1 in the second quarter of 2007. The increase is the result of additional units disposed of in the second quarter of 2008 as compared to the second quarter of 2007.

Interest Expense--Interest expense of $924 decreased $141 from the $1,065 incurred in the second quarter of 2007. The decrease is the result of lower interest rates on our bank borrowings as compared to the second quarter of 2007.

Other, Net--Other, net, was $480 of expense for the three months ended June 28, 2008 compared with $130 of income for the comparable period of 2007, and consisted of nonoperating income and expense. The fluctuation was primarily due to foreign currency gains and losses on the intercompany account balances of our Canadian subsidiary being $35 of gains for the three months ended June 28, 2008 compared to $513 of gains for the comparable period of 2007.

Income Taxes--Income tax for the second quarter was $6,204, as compared to $6,167 for the second quarter of 2007. Our income tax provisions for interim periods are determined using an estimate of our annual effective tax rate. We estimated that our effective tax rate was 39.2% for the second quarter of 2008, as compared to 38.5% for the second quarter of 2007.

Net Income--Net income for the second quarter of $9,623 was $230 less than the $9,853 experienced in the second quarter of 2007.

- 19 - -

Index

First Half--Six Months Ended June 28, 2008 Compared to Six Months Ended June 30, 2007

	Six Months Ended
	June 28,			June 30,
	2008			2007			Change			% Change

Revenues	$	274,425		$	247,221		$	27,204			11.0	%

Costs and expenses:
Operating		180,136			159,576			20,560			12.9
Selling		41,417			38,848			2,569			6.6
General and administrative		21,077			19,278			1,799			9.3
Depreciation and amortization		15,899			13,856			2,043			14.7
Gain on sale of assets, net		(329	)		(3	)		(326	)	nm
		258,200			231,555			26,645			11.5

Income (loss) from operations		16,225			15,666			559			3.6

Other income (expense):
Interest expense		(1,619	)		(1,928	)		309			(16.0	)
Interest income		146			219			(73	)	nm
Other, net		(1,118	)		(344	)		(774	)	nm

Income before income taxes		13,634			13,613			21			0.2

Income tax		5,345			5,241			104			2.0


Net income	$	8,289		$	8,372		$	(83	)		(1.0	%)

nm--not meaningful

Revenues--Consolidated revenues of $274,425 increased $27,204 compared with $247,221 in the first half of 2007. The increase of $27,204 includes revenues related to acquisitions approximating $12,538. Revenues for Utility Services increased $23,545 or 19.8% compared with the first half of 2007. In addition, to a business acquisition, Utility revenue increases arose from new contracts, increases in existing contracts and production incentives. Revenues for Residential and Commercial Services increased $2,536 or 2.3% from the first half of 2007. New and expanded operations and more favorable weather conditions account for the increase. The remaining change between consolidated revenues and segment revenues, an increase of $1,123, occurred in all other.

Operating Expenses--Consolidated operating expenses of $180,136 increased $20,560 compared with the first half of 2007 and, as a percentage of revenues, increased 1.1% to 65.6%. The increase of $20,560 includes operating expense related to acquisitions approximating $10,787. Utility Services increased $18,460 or 21.1% compared with the first half of 2007. Increases in labor, equipment, crew travel and subcontractor expense associated with the increase in revenue in all utility operations account for the increase. Residential and Commercial Services increased $1,860 or 3.2% compared with the first half of 2007. Increases in labor, equipment and subcontractor expense were partially offset by a reduction in material and tool expense. The remaining change between consolidated operating expenses and segment operating expenses was an increase of $240.

The increase in fuel prices impacted operating expenses within all segments. During the first half of 2008, fuel expense of $13,758 increased $4,268, or 44.9%, more than the fuel expense of $9,490 for the first half of 2007. Approximately $900 of the 2008 increase related to usage.

- 20 - -

Index

Selling Expenses--Consolidated selling expenses of $41,417 increased $2,569 over the first half of 2007 but, as a percentage of revenues, decreased .6% to 15.1%. Utility Services experienced an increase of $1,195 or 10.7% over the first half of 2007. Field management wages, auto and travel expense and employee development expense account for the increase. Residential and Commercial Services experienced an increase of $1,377 or 5.1% over the first half of 2007. Increases in field management wages and incentives expense, auto and travel expense, and employee development and marketing expense account for the increase. The remaining change between consolidated selling expenses and segment selling expenses was a decrease of $3.

General and Administrative Expenses--General and administrative expenses of $21,077 increased $1,799 from $19,278 in the first half of 2007 and, as a percentage of revenues, decreased .1% to 7.7%. The increase is attributable to an increase in salary and incentive expense, travel expense and office supplies and computer expenses.

Depreciation and Amortization Expense--Depreciation and amortization expense of $15,899 increased $2,043 from $13,856 in the first half of 2007 and, as a percentage of revenues, increased .1% to 5.8%. The increase is attributable to additional capital expenditures for buildings, purchases of businesses and equipment necessary to support the increase in business levels.

Gain on the Sale of Assets, Net--Gain on the sale of assets of $329 increased $326 from the $3 experienced in the first half of 2007. The increase is the result of additional units disposed of in the first half of 2008 as compared to the first half of 2007.

Interest Expense--Interest expense of $1,619 decreased $309 from the $1,928 incurred in the first half of 2007. The decrease is the result of lower interest rates on our bank borrowings as compared to the first half of 2007.

Other, Net--Other, net, was $1,118 of expense for the six months ended June 28, 2008 compared to $344 of expense for the comparable period of 2007, and consisted of nonoperating income and expense. The fluctuation was primarily due to foreign currency gains and losses on the intercompany account balances of our Canadian subsidiary being $169 of losses for the six months ended June 28, 2008 compared to $545 of gains for the comparable period of 2007.

Income Taxes--Income tax was $5,345, as compared to $5,241 for the first half of 2007. Our income tax provisions for interim periods are determined using an estimate of our annual effective tax rate. We estimated that our effective tax rate was 39.2% for the first half of 2008, as compared to 38.5% for first half of 2007.

Net Income--Net income of $8,289 was $83 less than the $8,372 experienced in the first half of 2007.

LIQUIDITY AND CAPITAL RESOURCES

Our principal financial requirements are for capital spending, working capital and business acquisitions.

- 21 - -

Index

Cash Flow Summary

Our cash flows from operating, investing and financing activities, as reflected in the Condensed Consolidated Statements of Cash Flows for the six months ended June 28, 2008 and June 30, 2007, are summarized as follows:

	2008			2007
Cash provided by (used in):
Operating activities	$	2,556		$	9,959
Investing activities		(38,697	)		(31,341	)
Financing activites		36,540			21,286
Increase (Decrease) in cash	$	399		$	(96	)

Cash Provided by Operating Activities--Cash provided by operating activities for the first six months of 2008 was $7,403 less than the $9,959 provided in the first six months of 2007. The decrease was primarily attributable to $10,073 more cash used from changes in operating assets and liabilities offset by a $2,043 increase in depreciation and amortization.

Overall, accounts receivable dollars increased $24,008 during the first six months of 2008, as compared to the $19,476 increase experienced in the first six months of 2007. With respect to the change in accounts receivable arising from business levels, the “days-sales-outstanding” in accounts receivable (“DSO”) at the end of the first six months of 2008 increased three days to 60 days, as compared to the end of the first six months of 2007. The increase is primarily the result of additional businesses acquired during the first six months of 2008. Excluding 2008 acquisitions, the DSO for the first six months of 2008 would have been 58 days.

Operating liabilities increased $3,356 in the first six months of 2008, $676 less than the $4,032 increase in the first six months of 2007. Accounts payable and accrued expenses decreased $1,171 during the first six months of 2008 as compared with a decrease of $2,130 for the first six months of 2007. Decreases in employee compensation, self-insured medical claims, customer deposits and trade payables were partially offset by increases in tax liabilities, 401KSOP liabilities and vacation accruals. Self-insurance accruals increased $4,527 in the first six months of 2008, which was $1,635 less than the increase of $6,162 experienced in the first six months of 2007. The increase occurred in all classifications -- workers’ compensation, general liability and vehicle liability--and resulted primarily from an overall increase in deductible amounts under commercial insurance or the self-insured risk retention.

Other assets, net increased $2,006 in the first six months of 2008, $5,065 more than the $3,059 decrease for the first six months of 2007. The increase is attributable to increases in operating supplies, prepaid expenses related to insurance coverage and tax deposits.

Cash Used In Investing Activities--Cash used in investing activities for the first six months of 2008 was $38,697 or $7,356 more than the $31,341 used during the first six months of 2007. The use of cash for the 2008 period includes purchases of businesses totaling $17,773, offset by a $7,276 decrease in capital expenditures for equipment and land and building as compared with the first six months of 2008. Capital expenditures for the 2008 period were $21,409.

Cash Provided by Financing Activities--Cash provided by financing activities increased by $15,254 during the first six months of 2008 as compared with the first six months of 2007. Our revolving credit facility provided $13,600 more in the first six months of 2008 compared with the first six months of 2007. We use the credit facility primarily for capital expenditures and payments of notes payable, primarily related to acquisitions completed in prior periods. Included in the revolving credit facility borrowings for the first six months of 2008 was $17,773 related to our investment in six businesses. Treasury share transactions (purchases and sales) used $819 more than the $5,262 used in the first six months of 2007. Dividends paid increased to $1,356, as compared with $1,270 paid in the first six months of 2007.

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Debt Issued in Connection with Our Investments in Businesses--Debt issued in connection with our investments in six businesses during the first six months of 2008 totaled $5,639. During first six months of 2007, we issued $1,785 of debt in connection with our investments in businesses.

As of June 28, 2008, our unused commitments under the facility approximated $25,201, with $133,799 committed, consisting of borrowings of $77,800 and issued letters of credit of $55,999. Borrowings outstanding bear interest, at our option, at the agent bank’s prime rate or LIBOR plus a margin adjustment ranging from .65% to 1.45%, based on a ratio of funded debt to EBITDA. A commitment fee ranging from .11% to .19% is also required based on the average daily unborrowed commitment.

Off-Balance Sheet Arrangements

There are no “off-balance sheet arrangements” as that term is defined in Securities and Exchange Commission (“SEC”) Regulation S-K, Item 303(a)(4)(ii).

Contractual Obligations Summary

The following summarizes our long-term contractual obligations, as at June 28, 2008, to make future payments for the periods indicated.

			Six Months Ending
			December 31,		Year Ending December 31,
Description	Total		2008		2009		2010		2011		2012		Thereafter

Revolving credit facility	$	77,800	$	500	$	1,000	$	1,000	$	72,300	$	1,000	$	2,000
Term loans		9,189		553		4,207		2,372		2,057		-		-
Capital lease obligations		1,431		419		816		196		-		-		-
Operating lease obligations		16,851		2,485		4,178		3,040		2,016		1,100		4,032
Self-insurance accruals		59,791		11,474		16,260		11,243		6,274		2,892		11,648
Purchase obligations		3,492		3,492		-		-		-		-		-
Other liabilities		4,050		1,790		437		249		407		478		689
	$	172,604	$	20,713	$	26,898	$	18,100	$	83,054	$	5,470	$	18,369

The self-insurance accruals in the summary above reflect the total of the undiscounted amount accrued, for which amounts estimated to be due each year may differ from actual payments required to fund claims. Purchase obligations in the summary above represent open purchase-order amounts we anticipate will become payable within the next six months for goods and services we have negotiated for delivery as of June 28, 2008. Other liabilities include estimates of future expected funding requirements related to retirement plans and other sundry items. Because their future cash outflows are uncertain, accrued income tax liabilities for uncertain tax positions, as of June 28, 2008, have not been included in the summary above. Noncurrent deferred taxes and payments related to defined benefit pension plans are also not included in the summary.

As of June 28, 2008, we were contingently liable for letters of credit in the amount of $58,254, of which $55,999 is committed under the revolving credit facility. Substantially all of these letters of credit, which expire within a year, are planned for renewal as necessary.

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Also, as is common in our industry, we have performance obligations that are supported by surety bonds, which expire during 2008 through 2010. We intend to renew the surety bonds where appropriate and as necessary.

Capital Resources

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

Business seasonality results in higher revenues during the second and third quarters as compared with the first and fourth quarters of the year, while our methods of accounting for fixed costs, such as depreciation expense, are not significantly impacted by business seasonality. Capital resources during these periods are equally affected. We satisfy seasonal working capital needs and other financing requirements with the revolving credit facility and two other short-term lines of credit. We are continually reviewing our existing sources of financing and evaluating alternatives. At June 28, 2008, we had working capital of $42,582, short-term lines of credit approximating $8,388 and $25,201 available under our revolving credit facility.

Our sources of capital presently allow us the financial flexibility to meet our capital-spending plan and to complete business acquisitions.

NEW ACCOUNTING PRONOUNCEMENTS

New Accounting Pronouncement Adopted--In September 2006, the Financial Accounting Standards Board (“FASB”) issued FAS No. 157, which establishes a framework for measuring fair value and requires expanded presentations regarding fair value measurements (“FAS 157”). In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”), which allows for the deferral of the adoption date of FAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or presented at fair value in the financial statements on a recurring basis. We have elected to defer the adoption of FAS 157 for the assets and liabilities within the scope of FSP FAS 157-2. The effective provisions of FAS 157 are included in Note G, “Fair Value Measurements,” to the condensed consolidated financial statements included in this Form 10-Q. The adoption of FAS 157 for those assets and liabilities within the scope of FSP FAS 157-2 is not expected to have a material impact on our financial position, results of operations or cash flows.

New Accounting Pronouncements Requiring Adoption--In March 2008, the FASB issued FAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133” (“FAS 161”). FAS 161, requires entities to provide enhanced disclosures relating to: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedge items are accounted for under FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”), and its related interpretations; and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. FAS 161 must be applied prospectively to all derivative instruments and nonderivative instruments that are designated and qualify as hedging instruments and related hedged items accounted for under FAS 133 for all financial statements issued for fiscal years and interim periods beginning after November 15, 2008, which for us begins with our 2009 calendar year, with early application encouraged. The adoption of FAS 161 will not have a material effect on our financial position, results of operation or cash flows.

In December 2007, the FASB issued Statement No. 141 (revised 2007), “Business Combinations” (“FAS 141R”), which replaces FAS No. 141, “Business Combinations.” FAS 141R retains the underlying concepts of FAS 141 in that all business combinations are still required to be accounted for at fair value under the acquisition method of accounting, but FAS 141R changed the method of applying the acquisition method in a number of significant aspects. Early adoption is not permitted. We are required to adopt FAS 141R prospectively for any acquisitions on or after January 1, 2009.

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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, 2007, we believe that our policies related to revenue recognition, the allowance for doubtful accounts and self-insurance accruals 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 arising from Utility Services customers; allowance for doubtful accounts; and self-insurance accruals. We base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.

MARKET RISK INFORMATION

In the normal course of business, we are exposed to market risk related to changes in interest rates and changes in foreign currency exchange rates. We do not hold or issue derivative financial instruments for trading or speculative purposes.

Interest Rate Risk

We are exposed to market risk related to changes in interest rates on long-term debt obligations. The interest rates on substantially all of our long-term debt outstanding are variable. We have entered into interest rate contracts -- derivative financial instruments with the objective of altering interest rate exposures related to variable debt.

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The following table provides information, as of June 28, 2008, about our debt obligations and interest rate contracts. For debt obligations, the table presents principal cash flows, weighted-average interest rates by expected maturity dates and fair values. For interest rate contracts, the table presents the underlying face (notional) amount, weighted-average interest rate by contractual maturity dates and the fair value to settle the contracts at June 28, 2008. Weighted-average interest rates used for variable rate obligations are based on rates as derived from published spot rates, in effect as at June 28, 2008.

																					Fair Value
	Expected Maturity Date																				June 28,
	2009			2010			2011			2012			2013			Thereafter			Total		2008

Liabilities
Long-term debt:
Fixed rate	$	677		$	1,467		$	55		$	27		$	-		$	-		$	2,226	$	2,266
Average interest rate		6.1	%		7.1	%		7.8	%		7.8	%


Variable rate	$	3,631		$	3,331		$	3,001		$	72,300		$	1,000		$	1,500		$	84,763	$	84,763
Average interest rate		4.0	%		4.9	%		5.5	%		5.7	%		5.9	%		6.1	%

Interest rate derivative instrument
Interest rate contracts:
Pay fixed, notional amount	$	10,000		$	-		$	-		$	20,000		$	-		$	-		$	30,000	$	413
Average pay rate		4.96	%								4.29	%
Average receive rate		2.83	%								2.64	%

Interest rates, as of June 28, 2008, on the variable-rate debt ranged from 3.2% to 5.0%.

The interest rate contracts each have an underlying face (notional) amount of $10,000, which is used to calculate the cash flow to be exchanged and does not represent the exposure to credit loss. If we were to have settled the contracts at June 28, 2008 (fair value), we would have paid $413.

Foreign Currency Rate Risk

We are exposed to market risk related to foreign currency exchange rate risk resulting from our operations in Canada, where we provide a comprehensive range of horticultural services.

Our financial results could be affected by factors such as changes in the foreign currency exchange rate or differing economic conditions in the Canadian markets as compared with the markets for our services in the United States. Our earnings are affected by translation exposures from currency fluctuations in the value of the U.S. dollar as compared to the Canadian dollar. Similarly, the Canadian dollar-denominated assets and liabilities may result in financial exposure as to the timing of transactions and the net asset / liability position of our Canadian operations.

For the six-months ended June 28, 2008, the result of a hypothetical 10% uniform change in the value of the U.S. dollar as compared with the Canadian dollar would not have a material effect on our results of operations or our financial position. Our sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in a potential change in sales levels or local currency prices.

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

§	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.

§	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.

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

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 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.

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

§	We are subject to intense competition.

§	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.

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

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

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

§	We may become subject to claims and litigation that may have an adverse effect on us.

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

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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The factors described above, as well as other factors that may adversely impact our actual results, are discussed in our annual report on Form 10-K for the year ended December 31, 2007 in “Item 1A. Risk Factors.”

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

The information set forth in “Market Risk Information” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in Part 1 – Item 2 of this Quarterly Report on Form 10-Q is incorporated herein by reference.

Item 4. 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 pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 28, 2008 in ensuring that information required to be included in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

During the quarter ended June 28, 2008, there were no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

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The Davey Tree Expert Company

Part II. Other Information

Items 1 and 3 are not applicable.

Item 1A.	Risk Factors.

	Information regarding risk factors appears in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Note Regarding Forward-Looking Statements” in Part I – Item 2 of this Form 10-Q and in Part I – Item 1A of our annual report on Form 10-K for the year ended December 31, 2007. There have been no material changes from the risk factors described previously in our annual report on Form 10-K.

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 six months of 2008.

Period	Total Number of Shares Purchased	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs

Fiscal 2008

January 1 to January 26	-	-	n/a	n/a
January 27 to February 23	-	-	n/a	n/a
February 24 to March 29	38,908	$ 31.60	n/a	n/a

Total First Quarter	38,908	31.60

March 30 to April 26	138,679	31.60	n/a	n/a
April 27 to May 24	74,449	31.60	n/a	n/a
May 25 to June 28	63,773	31.60	n/a	n/a

Total Second Quarter	276,901	31.60


Total Year-to-Date	315,809	31.60

n/a--Not applicable. There are no publicly announced plans or programs of the Company to purchase our common shares.

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 our 401KSOP, 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, 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 the Company or one of our 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. We added the purchases to our treasury stock.

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Item 4.	Submission of Matters to a Vote of Security Holders

	An annual meeting of shareholders was held on May 20, 2008. The following sets forth the actions considered and the results of the voting:

	Election of Directors Nominees for director for the term expiring on the date of the annual meeting in 2011 -- All elected.	Number of Shares
		For	Against	Nonvotes

	Dr. Carol A. Cartwright	5,654,166	629,769	1,609,752
	R. Douglas Cowan	6,246,540	37,395	1,609,752
	J. Dawson Cunningham	6,270,135	13,800	1,609,752

	Directors whose terms in office as directors continued after the annual meeting of shareholders were William L. Phipps, Robert A. Stefanko, Karl J. Warnke, William J. Ginn and Douglas K. Hall.


Item 5.	Other Information.

	On May 15, 2008, we entered into an Acknowledgment of Commitment Increase (the “Acknowledgement”) to the Amended and Restated Credit Agreement, originally entered into as of November 21, 2006 among us, as borrower, the lending institutions named therein, as banks, and KeyBank National Association, as administrative agent for the banks. The Acknowledgment increased the commitment to $159,000 from $147,000. The description above is qualified in its entirety by the terms of the Acknowledgment, which is filed as Exhibit 10.1 to this Quarterly Report on Form 10-Q.


Item 6.	Exhibits.

	See Exhibit Index page, below.

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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



	By:	/s/ David E. Adante
Date: August 5, 2008		David E. Adante
		Executive Vice President, Chief Financial Officer and Secretary
		(Principal Financial Officer)



Date: August 5, 2008	By:	/s/ Nicholas R. Sucic
		Nicholas R. Sucic
		Vice President and Controller
		(Principal Accounting Officer)

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Exhibit Index

Exhibit No.	Description

10.1	Acknowledgment of Commitment Increase, dated as of May 15, 2008, made to the Amended and Restated Credit Agreement among the Company, as borrower, Various Lending Institutions, as banks, and KeyBank National Association, as administrative agent for the banks, dated as of November 21, 2006.	Filed Herewith

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

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

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

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

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Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. freshman Avg

Davey Tree Expert 10-Q2008 Q2 Quarterly report

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