Attached files

file filename
EX-99 - EXHIBIT 99 - DAVEY TREE EXPERT COex99.htm
EX-21 - EXHIBIT 21 - DAVEY TREE EXPERT COex21.htm
EX-31.2 - EXHIBIT 31.2 - DAVEY TREE EXPERT COex312.htm
EX-31.1 - EXHIBIT 31.1 - DAVEY TREE EXPERT COex311.htm
EX-23.2 - EXHIBIT 23.2 - DAVEY TREE EXPERT COex232.htm
EX-23.1 - EXHIBIT 23.1 - DAVEY TREE EXPERT COex231.htm
EX-32.2 - EXHIBIT 32.2 - DAVEY TREE EXPERT COex322.htm
EX-32.1 - EXHIBIT 32.1 - DAVEY TREE EXPERT COex321.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2010

OR

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

For the transition period from ______________ to ______________

Commission file number 000-11917

THE DAVEY TREE EXPERT COMPANY
(Exact name of registrant as specified in its charter)

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

1500 North Mantua Street
P.O. Box 5193
Kent, Ohio 44240
(Address of principal executive offices) (Zip code)

(330) 673-9511
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Common Shares, $1.00 par value

Indicate by check mark if the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act).  Yes £  No S

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes £  No S

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes £  No £

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. S

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 £     Accelerated Filer S     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 Act).  Yes £  No S

There were 14,114,470 Common Shares outstanding as of March 4, 2011. The aggregate market value of the Common Shares held by nonaffiliates of the registrant as of July 4, 2010 was $205,315,125. For purposes of this calculation, it is assumed that the registrant's affiliates include the registrant's Board of Directors and its executive officers.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement for the 2011 Annual Meeting of Shareholders, to be held on May 17, 2011, are incorporated by reference into Part III (to be filed within 120 calendar days of the registrant’s fiscal year end).


Page 1
 
 

 

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This annual report on Form 10-K contains forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995) in "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations," "Item 7A - Quantitative and Qualitative Disclosures About Market Risk," and elsewhere. These statements relate to future events or our future financial performance. In some cases, forward-looking statements may be identified by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors that may cause our or our industry's actual results, levels of activity, performance or achievements to differ materially from what is expressed or implied in these forward-looking statements. Some important factors that could cause actual results to differ materially from those in the forward-looking statements include:

§  
Our business, other than tree services to utility customers, is highly seasonal and weather dependent.
 
§  
The effects of the recent economic downturn and the continuing financial and credit uncertainties may reduce our customers’ spending, adversely impact pricing for our services, and impede our collection of accounts receivable.
 
§  
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.
 
§  
The uncertainties in the credit and financial markets may limit our access to capital.
 
§  
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 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.
 
§  
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.
 
§  
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.
 
§  
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 annual report on Form 10-K to conform these statements to actual future results.

Page 2
 
 

 


THE DAVEY TREE EXPERT COMPANY
FORM 10-K
For the Year Ended December 31, 2010
 
   
 
Page
Note Regarding Forward-Looking Statements
  2
   
PART I
 
  4
  5
  9
  9
  9
 
10
   
PART II
 
11
15
16
27
27
27
27
29
   
PART III
 
30
30
30
30
30
   
PART IV
 
30
   
    Signatures
31
   
32










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


Page 3
 
 


PART I


General

The Davey Tree Expert Company, which was founded in 1880 and incorporated in 1909, and its subsidiaries ("we" or "us") have two primary operating segments that provide a variety of horticultural services to our customers throughout the United States and Canada.

Our Residential and Commercial Services segment provides for the treatment, preservation, maintenance, cultivation, planting and removal of trees, shrubs and other plant life. Its services also include landscaping, tree surgery, tree feeding, and tree spraying, as well as the application of fertilizers, herbicides and insecticides.

Our Utility Services segment is principally engaged in line clearing for public utilities, including the clearing of tree growth from power lines, clearance of rights-of-way and chemical brush control.

We also provide other services related to natural resource management and consulting, urban and utility forestry research and development and environmental planning. We also maintain research, technical support and laboratory diagnostic facilities.

Competition and Customers

Our Residential and Commercial Services group is one of the largest national tree care organizations, and competes with other national and local firms with respect to its services. On a national level, our competition is primarily landscape construction and maintenance companies as well as residential and commercial lawn care companies. At a local and regional level, our competition comes mainly from small, local companies which are engaged primarily in tree care and lawn services. Our Utility Services group is the second largest organization in the industry, and competes principally with one major national competitor, as well as several smaller regional firms.

Principal methods of competition in both operating segments are customer service, marketing, image, performance and reputation. Our program to meet our competition stresses the necessity for our employees to have and project to customers a thorough knowledge of all horticultural services provided, and utilization of modern, well-maintained equipment. Pricing is not always a critical factor in a customer's decision with respect to Residential and Commercial Services; however, pricing is generally the principal method of competition for our Utility Services, although in most instances consideration is given to reputation and past production performance.

We provide a wide range of horticultural services to private companies, public utilities, local, state and federal agencies, and a variety of industrial, commercial and residential customers. During 2010, we had revenues of approximately $65.2 million, or approximately 11% of total revenues, from Pacific Gas & Electric Company (“PG&E”), one of our largest customers.

Regulation and Environment

Our facilities and operations, in common with those of the industry generally, are subject to governmental regulations designed to protect the environment. This is particularly important with respect to our services regarding insect and disease control, because these services involve to a considerable degree the blending and application of spray materials, which require formal licensing in most areas. Constant changes in environmental conditions, environmental awareness, technology and social attitudes make it necessary for us to maintain a high degree of awareness of the impact such changes have on the market for our services. We believe that we comply in all material respects with existing federal, state and local laws regulating the use of materials in our spraying operations as well as the other aspects of our business that are subject to any such regulation.

Marketing

We solicit business from residential customers principally through referrals, direct mail programs and to a lesser extent through the placement of advertisements in national magazines and trade journals, local newspapers and "yellow pages" telephone directories. Business from utility and commercial customers is obtained principally through negotiated contracts and competitive bidding. We carry out all of our sales and services through our employees. We generally do not use agents, and do not franchise our name or business.


Page 4
 
 


Seasonality

Our business is seasonal, primarily due to fluctuations in horticultural services provided to Residential and Commercial customers and to a lesser extent by budget constraints imposed on our Utility customers. Because of this seasonality, we have historically incurred losses in the first quarter, while sales and earnings are generally highest in the second and third quarters of the calendar year. Consequently, this has created heavy demands for additional working capital at various times throughout the year. We borrow primarily against bank commitments in the form of a revolving credit facility to provide the necessary funds for our operations. You can find more information about our bank commitments in “Liquidity and Capital Resources” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages 16-27 of this report.

Other Factors

Due to rapid changes in equipment technology and intensity of use, we must constantly update our equipment and processes to ensure that we provide competitive services to our customers and continue our compliance with the Occupational Safety and Health Act.

We own several trademarks including "Davey," "Davey and design," "Arbor Green Pro," "Arbor Green," "Davey Tree and design," "Davey Expert Co. and design" and "Davey and design (Canada)." Through substantial advertising and use, we believe that these trademarks have become of value in the identification and acceptance of our products and services.

Employees

We employed approximately 6,800 employees at December 31, 2010. However, employment levels fluctuate due to seasonal factors affecting our business. We consider our employee relations to be good.

Domestic and Foreign Operations

We sell our services to customers in the United States and Canada.

We do not consider the risks attendant to our business with foreign customers, other than currency exchange risks, to be materially different from those attendant to our business with domestic customers.

Financial Information About Segments and Geographic Areas

Certain financial information regarding our operations by segment and geographic area is contained in Note R to our consolidated financial statements, which are included in Part II, Item 8 of this report.

Access to Company Information

Davey Tree’s internet address is http://www.davey.com. Through our internet website, by hyperlink to the Securities and Exchange Commission (“SEC”) website (http://www.sec.gov), we make available, free of charge, our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports. Availability of the reports occurs contemporaneously with the electronic posting to the SEC’s website as the reports are electronically filed with or furnished to the SEC.

The following documents are also made available on our website and a copy will be mailed, without charge, upon request to our Corporate Secretary:

§  
Code of Ethics
§  
Code of Ethics for Financial Matters


The factors described below represent the principal risks we face. Except as otherwise indicated, these factors may or may not occur and we are not in a position to express a view on the likelihood of any such factor occurring. Other factors may exist that we do not consider to be significant based on information that is currently available or that we are not currently able to anticipate.


Page 5
 
 


Our business is highly seasonal and weather dependent.

Our business, other than tree services to utility customers, is highly seasonal and weather dependent, primarily due to fluctuations in horticultural services provided to Residential and Commercial customers. We have historically incurred losses in the first quarter, while revenue and operating income are generally highest in the second and third quarters of the calendar year. Inclement weather, such as uncharacteristically low or high (drought) temperatures, in the second and third quarters could dampen the demand for our horticultural services, resulting in reduced revenues that would have an adverse effect on our results of operations.

The effects of the recent economic downturn and the continuing financial and credit uncertainties may adversely impact our customers’ future spending as well as pricing and payment for our services, thus negatively impacting our operations and growth.

The rate at which the economy will recover and the length of time that the economy will remain slow continues to be uncertain. Slow economic activity may adversely impact the demand for our services and potentially result in depressed prices for our services and the delay or cancellation of projects. This makes it difficult to estimate our customers’ requirements for our services and, therefore, adds uncertainty to the determination of our backlog. A reduction in cash flow and the lack of availability of debt or equity financing may result in a reduction in our customers’ spending for our services and may also impact the ability of our customers to pay amounts owed to us, which could have a material adverse effect on our operations and our ability to grow at historical levels.

Financial difficulties or the bankruptcy of one or more of our major customers could adversely affect our results.

Our ability to collect our accounts receivable and future sales depends, in part, on the financial strength of our customers. We grant credit, generally without collateral, to our customers. Consequently, we are subject to credit risk related to changes in business and economic factors throughout the United States and Canada. In the event customers experience financial difficulty, and particularly if bankruptcy results, our profitability may be adversely impacted by our failure to collect our accounts receivable in excess of our estimated allowance for uncollectible accounts. Additionally, our future revenues could be reduced by the loss of a customer due to bankruptcy. Our failure to collect accounts receivable and/or the loss of one or more major customers could have an adverse effect on our net income and financial condition.

Our business is dependent upon service to our utility customers and we may be affected by developments in the utility industry.

We derive approximately 51% of our total revenues from our Utility Services segment, including approximately 11% of our total revenues from PG&E. Significant adverse developments in the utility industry generally, or specifically for our major utility customers, could result in pressure to reduce costs by utility industry service providers (such as us), delays in payments of our accounts receivable, or increases in uncollectible accounts receivable, among other things. As a result, such developments could have an adverse effect on our results of operations.

Our quarterly results may fluctuate.

We have experienced and expect to continue to experience quarterly variations in revenues and operating income as a result of many factors, including:

§  
the seasonality of our business;
§  
the timing and volume of customers' projects;
§  
budgetary spending patterns of customers;
§  
the commencement or termination of service agreements;
§  
costs incurred to support growth internally or through acquisitions;
§  
changes in our mix of customers, contracts and business activities;
§  
fluctuations in insurance expense due to changes in claims experience and actuarial assumptions; and
§  
general and local economic conditions.

Accordingly, our operating results in any particular quarter may not be indicative of the results that you can expect for any other quarter or for the entire year.


Page 6
 
 


We may not have access to capital in the future due to continuing uncertainties in the financial and credit markets.

We may need new or additional financing in the future to conduct our operations, expand our business or refinance existing indebtedness. Continued weakness in the general economic conditions and/or financial markets in the United States or globally could affect adversely our ability to raise capital on favorable terms or at all. From time-to-time we have relied, and may also rely in the future, on access to financial markets as a source of liquidity for working capital requirements, acquisitions and general corporate purposes. Our access to funds under our revolving credit facility is dependent on the ability of the financial institutions that are parties to the facility to meet their funding commitments. Those financial institutions may not be able to meet their funding commitments if they experience shortages of capital and liquidity or if they experience excessive volumes of borrowing requests within a short period of time. The continuation of economic disruptions and any resulting limitations on future funding, including any restrictions on access to funds under our revolving credit facility, could have a material adverse effect on us.

We are subject to the risk of increased fuel costs.

The cost of fuel is a major operating expense of our business. Significant increases in fuel prices for extended periods of time will increase our operating expenses. An increase in cost with partial or no corresponding compensation from customers leads to lower margins that would have an adverse effect on our results of operations.

We could be negatively impacted if our self-insurance accruals or our insurance coverages prove to be inadequate.

We are generally self-insured for losses and liabilities related to workers' compensation, vehicle liability and general liability claims (including California fire-suppression claims). A liability for unpaid claims and associated expenses, including incurred but not reported losses, is actuarially determined and reflected in our consolidated balance sheet as an accrued liability. The determination of such claims and expenses, and the extent of the need for accrued liabilities, are continually reviewed and updated. If we were to experience insurance claims or costs above our estimates and were unable to offset such increases with earnings, our business could be adversely affected. Also, where we self-insure, a deterioration in claims management, whether by our management or by a third-party claims administrator, could lead to delays in settling claims, thereby increasing claim costs, particularly as it relates to workers’ compensation. In addition, catastrophic uninsured claims filed against us or the inability of our insurance carriers to pay otherwise-insured claims would have an adverse effect on our financial condition.

Furthermore, many customers, particularly utilities, prefer to do business with contractors with significant financial resources, who can provide substantial insurance coverage. Should we be unable to renew our excess liability insurance and other commercial insurance policies at competitive rates, this loss would have an adverse effect on our financial condition and results of operations.

Because no public market exists for our common shares, your ability to sell your common shares may be limited.

Our common shares are not traded on any national exchange, market system or over-the-counter bulletin board. Because no public market exists for our common shares, your ability to sell these shares is limited.

We are subject to intense competition.

We believe that each aspect of our business is highly competitive. Principal methods of competition in both operating segments are customer service, marketing, image, performance and reputation. Pricing is not always a critical factor in a customer’s decision with respect to Residential and Commercial Services; however, pricing is generally the principal method of competition for our Utility Services, although in most instances consideration is given to reputation and past production performance. On a national level, our competition is primarily landscape construction and maintenance companies as well as residential and commercial lawn care companies. At a local and regional level, our competition comes mainly from small, local companies which are engaged primarily in tree care and lawn services. Our Utility Services group competes principally with one major national competitor, as well as several smaller regional firms. Furthermore, competitors may have lower costs because privately-owned companies operating in a limited geographic area may have significantly lower labor and overhead costs. We cannot be certain that our competitors will not develop the expertise, experience and resources to provide services that are superior in both price and quality to our services. These strong competitive pressures could inhibit our success in bidding for profitable business.


Page 7
 
 


Our failure to comply with environmental laws could result in significant liabilities.

Our facilities and operations are subject to governmental regulations designed to protect the environment, particularly with respect to our services regarding insect and disease control, because these services involve to a considerable degree the blending and application of spray materials, which require formal licensing in most areas. Continual changes in environmental laws, regulations and licensing requirements, environmental conditions, environmental awareness, technology and social attitudes make it necessary for us to maintain a high degree of awareness of the impact such changes have on our compliance programs and the market for our services. We believe that we comply in all material respects with existing federal, state and local laws, regulations and licensing requirements regulating the use of materials in our spraying operations as well as the other aspects of our business that are subject to any such regulation. However, if we fail to comply with such laws, regulations or licensing requirements, we may become subject to significant liabilities, fines and/or penalties, which could adversely affect our financial condition and results of operations.

We cannot predict the impact that the debate on changing climate conditions, including legal, regulatory and social responses thereto, may have on our business.

Various scientists, environmentalists, international organizations, political activists, regulators and other commentators believe that global climate change has added, and will continue to add, to the unpredictability, frequency and severity of natural disasters in certain parts of the world. In response, a number of legal and regulatory measures and social initiatives have been introduced in an effort to reduce greenhouse gas and other carbon emissions that these parties believe may be contributors to global climate change. These proposals, if enacted, could result in a variety of regulatory programs, including potential new regulations, additional charges and taxes to fund energy efficiency activities, or other regulatory actions. Any of these actions could result in increased costs associated with our operations and impact the prices we charge our customers.

We cannot predict the impact that changing climate conditions, if any, will have on us or our customers. However, it is possible that the legal, regulatory and social responses to real or imagined climate change could have a negative effect on our results of operations or our financial condition.

We may be adversely affected if we are unable to obtain necessary surety bonds or letters of credit.

Surety market conditions are currently difficult as a result of significant losses incurred by many sureties in recent years, both in the construction industry as well as in certain larger corporate bankruptcies. As a result, less bonding capacity is available in the market and terms have become more expensive and restrictive. Further, under standard terms in the surety market, sureties issue or continue bonds on a project-by-project basis and can decline to issue bonds at any time or require the posting of collateral as a condition to issuing or renewing any bonds. If surety providers were to limit or eliminate our access to bonding, we would need to post other forms of collateral for project performance, such as letters of credit or cash. We may be unable to secure sufficient letters of credit on acceptable terms, or at all. Accordingly, if we were to experience an interruption or reduction in the availability of bonding capacity, our liquidity may be adversely affected.

We may be adversely affected if our reputation is damaged.

We are dependent, in part, upon our reputation of quality, integrity and performance. If our reputation were damaged in some way, it may impact our ability to grow or maintain our business.

We may be unable to employ a sufficient workforce for our field operations.

Our industry operates in an environment that requires heavy manual labor. We may experience slower growth in the labor force for this type of work than in the past. As a result, we may experience labor shortages or the need to pay more to attract and retain qualified employees.

We may be unable to attract and retain skilled management.

Our success depends, in part, on our ability to attract and retain key managers. Competition for the best people can be intense and we may not be able to promote, hire or retain skilled managers. The loss of services of one or more of our key managers could have a material adverse impact on our business because of the loss of the manager's skills, knowledge of our industry and years of industry experience, and the difficulty of promptly finding qualified replacement personnel.



Page 8
 
 


Natural disasters, pandemics, terrorist attacks and other external events could adversely affect our business.

Natural disasters, pandemics, terrorist attacks and other adverse external events could materially damage our facilities or disrupt our operations, or damage the facilities or disrupt the operations of our customers or vendors. The occurrence of any such event could adversely affect our business, financial condition and results of operations.

We are subject to claims and litigation.

From time-to-time, customers, vendors or employees may make claims and take legal action against us. Whether these claims and legal actions are founded or unfounded, if such claims and legal actions are not resolved in our favor, they may result in significant financial liability. Any financial liability could have a material adverse effect on our financial condition and results of operations. Any such claims and legal actions may also require significant management attention and may detract from management's focus on our operations.

We may be adversely affected if we enter into a major unprofitable contract.

Our Residential and Commercial Services and our Utility Services segments frequently operate in a competitive bid contract environment. As a result, we may misjudge a bid and be contractually bound to an unprofitable contract, which could adversely affect our results of operations.


Item 1B.  Unresolved SEC Staff Comments.

There are no unresolved comments from the Staff of the Securities and Exchange Commission.



Our corporate headquarters campus is located in Kent, Ohio which, along with several other properties in the surrounding area, includes the Davey Institute's research, technical support and laboratory diagnostic facilities.

We conduct administrative functions through our headquarters and our offices in Livermore, California (Utility Services). Our Canadian operations’ administrative functions are conducted through properties located in the provinces of Ontario and British Columbia. We believe our properties are well maintained, in good condition and suitable for our present operations. A summary of our properties follows:

Segment
Number of Properties
How Held
Square Footage
Number of
States or Provinces
         
Residential and Commercial Services
27
Owned
173,138
14
         
Utility Services
3
Owned
36,037
3
         
Residential and Commercial, and Utility
2
Owned
12,400
2

We also rent approximately 119 properties in 30 states and three provinces.

None of our owned or rented properties used by our business segments is individually material to our operations.



We are a party to routine litigation incidental to our business. We do not believe that this litigation, individually or in the aggregate, will have a material effect on our business, financial condition or results of operations.



Pursuant to Instruction G of Form 10-K the following is included as an unnumbered item to PART I.

Page 9
 
 



Our executive officers and their present positions and ages as of March 2, 2011 follow:
     
Name
Position
Age
     
Karl J. Warnke
Chairman, President and Chief Executive Officer
59
     
David E. Adante
Executive Vice President, Chief Financial Officer and Secretary
59
     
Howard D. Bowles
Senior Vice President and General Manager, Davey Tree Surgery Company
67
     
Marjorie L. Conner, Esquire
Assistant Secretary and Counsel
53
     
Patrick M. Covey
Executive Vice President, Operations
47
     
George M. Gaumer
Vice President and General Manager, Commercial Landscape Services
58
     
Fred W. Johnson
Vice President, Operations Support Services
66
     
Steven A. Marshall
Executive Vice President, Operations
59
     
Gordon L. Ober
Vice President, Personnel Recruiting and Development
61
     
Joseph R. Paul, CPA
Treasurer
49
     
Richard A. Ramsey
Vice President and General Manager, Canadian Operations
61
     
Thea R. Sears, CPA
Assistant Controller
42
     
James F. Stief
Vice President and General Manager, Residential/Commercial Services
57
     
Nicholas R. Sucic, CPA
Vice President and Controller
64

Mr. Warnke was elected Chairman of the Board, effective May 20, 2009, and continues to serve as President and Chief Executive Officer, having been appointed in January 2007. He was President and Chief Operating Officer from 1999 through December 31, 2006. Prior to that time, he served as Executive Vice President and General Manager - Utility Services, having been appointed in January 1993. Previously, having joined Davey Tree in 1980, Mr. Warnke performed all aspects of tree services and also held various managerial positions, including Operations Manager, Operations Support Services, Equipment and Safety functions and Operations Vice President.

Mr. Adante was elected Executive Vice President, Chief Financial Officer and Secretary in May 1993.

Mr. Bowles was elected Senior Vice President and General Manager of Davey Tree Surgery Company in January 2000. Prior to that time, he served as Vice President and General Manager of Davey Tree Surgery Company.

Ms. Conner was elected Assistant Secretary and Counsel in May 1998. Prior to that time, she served as Manager of Legal and Treasury Services.

Mr. Covey was elected Executive Vice President, Operations, effective January 1, 2007, and served as Vice President and General Manager of the Davey Resource Group, having been appointed in March 2005. Prior to that time, Mr. Covey was Vice President, Southern Operations, Utility Services, having been appointed in January 2003. Previously, having joined Davey Tree in August 1991, Mr. Covey held various managerial positions, including Manager of Systems and Process Management and Administrative Manager, Utility Services.

Mr. Gaumer was elected Vice President and General Manager of Commercial Landscape Services in March 2005. Prior to that time, he served as Vice President of Commercial Grounds Management, having been appointed in 2001.

Mr. Johnson was elected Vice President, Operations Support Services, a corporate vice-president, in January 2003. From 1999 to January 2003, he served as Vice President of Operations Support Services. Prior to joining us, Mr. Johnson served in various capacities, including director of operations and director of sales, at Lesco, Inc., a specialty provider of products for the professional turf care and green industry markets, from 1986 to 1999. Prior to joining Lesco, Mr. Johnson held various management positions at TruGreen/ChemLawn, a provider of lawn care, tree and shrub services and a segment of The ServiceMaster Company, from 1979 to 1986.

Page 10
 
 


Mr. Marshall was elected Executive Vice President, Operations, effective January 1, 2007, and served as Vice President and General Manager of Eastern Utility Services, having been appointed in January 2003. Prior to that time, he served as Vice President, Southern Operations, Utility Services, having been appointed in January 1997. Previously, having joined Davey Tree in 1977, Mr. Marshall held various managerial positions, including Operations Manager, Regional Manager and District Manager.

Mr. Ober was elected Vice President, Personnel Recruiting and Development in February 2000. Prior to that time, he served as Vice President - New Ventures.

Mr. Paul was elected Treasurer in December 2005 when he joined Davey Tree. He is a certified public accountant. Prior to joining us, Mr. Paul served as corporate controller for AccessPoint Openings, LLC, a holding company of distribution and manufacturing companies in the building products industry, having been associated with that firm since 1998. Mr. Paul served in various capacities including director of business expansion and integration at Applied Industrial Technologies, an industrial distributor, from 1993 to 1998. Prior to joining Applied Industrial Technologies, Mr. Paul was an audit manager with Deloitte & Touche, having been associated with that firm since 1986.

Mr. Ramsey was elected Vice President and General Manager, Canadian Operations in January 2000. Prior to that time, he served as Vice President and General Manager, Commercial Services.

Ms. Sears was elected Assistant Controller in May 2010, and served as Manager of Financial Accounting having been appointed in April 1998.  Prior to that time she served as Supervisor of Financial Accounting, having been appointed in September 1995.  During her 18-year tenure with Davey Tree, Ms. Sears’ responsibilities have included a variety of roles in financial reporting, managerial reporting and operations accounting.  She is a certified public accountant.

Mr. Stief was elected Vice President and General Manager, Residential/Commercial Services in January 2010 and served as Vice President and General Manager - South, West and Central Residential/Commercial Operations, having been appointed in January 2007. Prior to that time Mr. Stief served as Vice President South, West and Central Residential/Commercial Operations, having been appointed in January 1997. Previously, having joined Davey Tree in 1978, Mr. Stief held various managerial positions, including Operations Manager and District Manager.

Mr. Sucic was elected Vice President and Controller, effective January 1, 2007, and served as Corporate Controller and Chief Accounting Officer since having joined Davey Tree in November 2001. He is a certified public accountant. Prior to joining us, Mr. Sucic served as chief financial officer of Vesper Corporation, a manufacturer of products for industry, from 2000 to 2001; of Advanced Lighting Technologies, Inc., a designer, manufacturer and marketer of metal halide lighting products, from 1996 to 2000; and of various asset management units at The Prudential Investment Corporation, from 1989 to 1996. Prior to joining Prudential, Mr. Sucic was a partner with Ernst & Young LLP, having been associated with that firm since 1970.

Our officers serve from the date of their election to the next organizational meeting of the Board of Directors and until their respective successors are elected.

PART II


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. The purchases described above are added to our treasury stock.

Record Holders and Common Shares

On March 4, 2011 we had 3,124 record holders of our common shares.

Page 11
 
 


On March 4, 2011 we had 14,114,470 common shares outstanding and options exercisable to purchase 944,906 common shares.

During the second quarter 2010, the promissory notes related to the common share subscription offering completed in August 2002, were paid-in-full for stock subscription financing payments made by biweekly payroll deduction.  All other promissory notes related to the common share 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 have been paid or, in a few instances, canceled.  The promissory notes outstanding were collateralized with the common shares subscribed and the common shares were only issued when the related promissory note was paid-in-full.  Dividends were paid on all unissued subscribed shares.

Dividends

The following table sets forth, for the periods indicated, the dividends declared per common share (in cents):

   
Year Ended December 31,
Quarter
 
2010
 
2009
1
 
4.25
 
4.25
2
 
4.25
 
4.25
3
 
4.25
 
4.25
4
 
4.25
 
4.25
Total
 
17.00
 
17.00

We presently expect to pay comparable cash dividends in 2011.

Recent Sale of Unregistered Securities

None.


Page 12
 
 


Purchases of Equity Securities

The following table provides information on purchases made by the Company of our common shares during the fiscal year ended December 31, 2010:

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 2010
                       
                         
January 1 to January 30
    726     $ 16.00       n/a       n/a  
January 31 to February 27
    -       -       n/a       n/a  
February 28 to April 3
    119,606       16.60       n/a       n/a  
  Total First Quarter
    120,332       16.60                  
                                 
April 4 to May 1
    119,290       16.60       n/a       n/a  
May 2 to May 29
    170,007       16.60       n/a       n/a  
May 30 to July 3
    271,478       16.60       n/a       n/a  
  Total Second Quarter
    560,775       16.60                  
                                 
July 4 to July 31
    942       16.60       n/a       n/a  
August 1 to August 28
    20,699       16.60       n/a       n/a  
August 29 to October 2
    95,544       16.60       n/a       n/a  
  Total Third Quarter
    117,185       16.60                  
                                 
October 3 to October 30
    220,243       16.60       n/a       n/a  
October 31 to December 4
    191,350       16.60       n/a       n/a  
December 5 to December 31
    39,170       16.60       n/a       n/a  
  Total Fourth Quarter
    450,763       16.60                  
                                 
Total Year to Date
    1,249,055       16.60                  
                                 
n/a--Not applicable. There are no publicly announced plans or programs to purchase common shares.
 
                                 




Page 13
 
 


Stock Performance Graph

Comparison of five-year cumulative return among The Davey Tree Expert Company, S&P 500 Stock Index and Selected Peer Group Companies Index

The following Performance Graph compares cumulative total shareholder returns for The Davey Tree Expert Company common shares during the last five years to the Standard & Poor’s 500 Stock Index and to an index of selected peer group companies. The peer group, which is the same group used by Davey’s independent stock valuation firm, consists of: ABM Industries Incorporated; Comfort Systems USA, Inc.; Dycom Industries, Inc.; FirstService Corporation; MYR Group, Inc.; Quanta Services, Inc.; Rollins, Inc.; and Scotts Miracle-Gro Company. Each of the three measures of cumulative total return assumes reinvestment of dividends.




 
2005
2006
2007
2008
2009
2010
Davey Tree
100
117
144
151
154
173
S&P 500 Index
100
116
122
77
97
112
Peer Group
100
118
133
100
115
142

The Performance Graph and related information above shall not be deemed “soliciting material” or be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.

Page 14
 
 



   
Fiscal Year Ended December 31,
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
   
(In thousands, except ratio and per share data)
 
Operating Statement Data:
                             
                               
Revenues
  $ 591,732     $ 562,111     $ 595,797     $ 506,138     $ 467,534  
                                         
Costs and expenses:
                                       
Operating
    387,272       360,623       382,143       324,415       305,106  
Selling
    97,794       89,266       95,327       82,449       74,513  
General and administrative
    40,170       47,077       45,607       38,476       34,126  
Depreciation
    35,530       36,280       34,374       28,085       26,991  
Amortization of intangible assets
    1,791       1,677       1,482       1,148       1,291  
Gain on sale of assets, net
    (437 )     (623 )     (992 )     (515 )     (309 )
Income from operations
    29,612       27,811       37,856       32,080       25,816  
                                         
Interest expense
    (2,803 )     (2,380 )     (3,417 )     (3,422 )     (2,768 )
Interest income
    46       25       220       404       176  
Other expense
    (2,521 )     (1,880 )     (2,920 )     (542 )     (1,301 )
                                         
Income before income taxes
    24,334       23,576       31,739       28,520       21,923  
Income taxes
    10,281       9,199       12,718       10,441       7,906  
Net income
  $ 14,053     $ 14,377     $ 19,021     $ 18,079     $ 14,017  
                                         
Earnings per share--diluted
  $ .93     $ .92     $ 1.14     $ 1.07     $ .80  
                                   
Shares used for computing per share amounts--diluted
    15,031       15,636       16,751       16,844       17,460  
                                         
Other Financial Data:
                                       
                                         
Depreciation and amortization
  $ 37,321     $ 37,957     $ 35,856     $ 29,233     $ 28,282  
                                         
Capital expenditures
    34,753       21,838       37,033       37,587       32,435  
                                         
Cash flow provided by (used in):
                                       
Operating activities
    49,275       53,538       55,282       52,341       38,372  
Investing activities
    (39,304 )     (21,457 )     (51,356 )     (38,801 )     (34,419 )
Financing activities
    (349 )     (33,049 )     (2,382 )     (13,822 )     (5,297 )
                                         
Cash dividends declared per share
  $ .1700     $ .1700     $ .1700     $ .1625     $ .1525  
                                         



Page 15
 
 


   
As of December 31,
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
   
(In thousands, except ratio and per share data)
 
 Balance Sheet Data:
                             
                               
Working capital
  $ 25,833     $ 16,306     $ 20,803     $ 20,443     $ 24,598  
                                         
Current ratio
    1.29       1.20       1.23       1.29       1.38  
                                         
Property and equipment, net
    129,627       128,802       141,013       108,239       96,522  
                                         
Total assets
    288,307       266,072       291,002       231,649       207,980  
                                         
Long-term debt
    61,591       45,843       60,187       32,099       31,951  
                                         
Other long-term liabilities
    38,305       41,494       45,523       33,728       29,283  
                                         
Shareholders' equity
    98,369       97,223       94,783       94,382       82,076  
                                         
Common shares:
                                       
Issued
    21,457       21,457       21,457       21,457       21,457  
In treasury
    7,345       6,885       6,939       6,926       6,436  
Net outstanding
    14,112       14,572       14,518       14,531       15,021  
                                         
Stock options:
                                       
Outstanding
    1,256       1,324       1,331       1,422       1,536  
Exercisable
    945       1,003       1,039       848       666  
                                         
ESOT valuation per share
  $ 18.40     $ 16.60     $ 16.40     $ 15.80     $ 12.95  
                                         

 
 

(Amounts in thousands, except share data)

Management’s Discussion and Analysis of Results of Operations and Financial Condition (“MD&A”) is provided as a supplement to the accompanying consolidated financial statements and notes to help provide an understanding of our financial condition, cash flows and results of operations. MD&A is organized as follows:

§  
Overview of 2010 Results;
§  
Results of Operations, including fiscal 2010 compared to fiscal 2009, fiscal 2009 compared to fiscal 2008, and Canadian dollar translation adjustments and rate-change effects, and other matters;
§  
Liquidity and Capital Resources, including cash flow summary, off-balance sheet arrangements, and capital resources;
§  
Recent Accounting Guidance;
§  
Critical Accounting Policies and Estimates; and
§  
Market Risk Information, including interest rate risk and foreign currency rate risk.


OVERVIEW OF 2010 RESULTS

General

We provide a wide range of horticultural services to residential, commercial, utility and institutional customers throughout the United States and Canada.


Page 16
 
 


Our Business--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 includes the treatment, preservation, maintenance, cultivation, planting and removal of trees, shrubs and other plant life; its services also include landscaping, tree surgery, tree feeding, and tree spraying, as well as the application of fertilizer, herbicides and insecticides. Utility Services includes 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, is included in “All Other.”

Results of Operations

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

   
Year Ended December 31,
   
Percentage Change
 
   
2010
   
2009
   
2008
      2010/2009       2009/2008  
                                   
Revenues
    100.0 %     100.0 %     100.0 %     5.3 %     (5.7 %)
Costs and expenses:
                                       
   Operating
    65.5       64.1       64.1       7.4       (5.6 )
   Selling
    16.5       15.9       16.0       9.6       (6.4 )
   General and administrative
    6.8       8.4       7.7       (14.7 )     3.2  
   Depreciation
    6.0       6.5       5.8       (2.1 )     5.5  
   Amortization of intangible assets
    .3       .3       .2       6.8       13.2  
   Gain on sale of assets, net
    (.1 )     (.1 )     (.2 )     (29.9 )     (37.2 )
      95.0       95.1       93.6       5.2       (4.2 )
Income from operations
    5.0       4.9       6.4       6.5       (26.5 )
                                         
Other income (expense):
                                       
   Interest expense
    (.5 )     (.4 )     (.6 )     17.8       (30.3 )
   Interest income
    -       -       -    
nm
   
nm
 
   Other
    (.4 )     (.3 )     (.5 )  
nm
   
nm
 
Income before income taxes
    4.1       4.2       5.3       3.2       (25.7 )
Income taxes
    1.7       1.6       2.1       11.8       (27.7 )
Net income
    2.4 %     2.6 %     3.2 %     (2.3 %)     (24.4 %)
                                         
nm--not meaningful
                                       
                                         
 
Revenues of $591,732 were 5.3% higher than last year’s revenues of $562,111. Utility Services revenues increased 2.8% and Residential and Commercial Services increased 9.6%.
 
Overall, income from operations of $29,612 increased 6.5% from the $27,811 experienced in the prior year. Income from operations was $14,851 in Utility Services (a 17.5% decrease as compared with 2009) and $17,776 for Residential and Commercial Services (a 78.3% increase as compared with 2009).

Net income of $14,053 was $324, or 2.3%, lower than the $14,377 earned in 2009. The decrease in net income was due to a higher effective tax rate in 2010.

Operating activities in 2010 provided cash of $49,275 as compared to $53,538 provided in 2009. The $4,263 net decrease was primarily attributable to (i) a decrease in net income of $324, (ii) a decrease of $636 in depreciation and amortization expense, and (iii) cash used of $5,062 from changes in other operating assets and liabilities.

Investing activities used $39,304 in cash, or $17,847 more than that used in 2009, the result of additional expenditures for equipment, land and buildings and purchases of businesses.

Page 17
 
 


Financing activities used $349 in 2010, a decrease of $32,700 compared with $33,049 used in 2009. Our unsecured borrowings, consisting of $30,000 senior unsecured notes issued less $12,550 paid-down on our revolving credit facility, provided $17,450 in cash as compared with the $13,900 paid down during 2009. Purchases of common shares for treasury of $20,711 were partially offset by net cash received of $7,240 from the sale of common shares and common shares subscriptions. Dividends paid during 2010 totaled $2,436.

Fiscal 2010 Compared to Fiscal 2009

A comparison of our fiscal year 2010 results to 2009 follows:

   
Year Ended December 31,
 
   
2010
   
2009
   
Change
   
% Change
 
                         
Revenues
  $ 591,732     $ 562,111     $ 29,621       5.3 %
                                 
Costs and expenses:
                               
   Operating
    387,272       360,623       26,649       7.4  
   Selling
    97,794       89,266       8,528       9.6  
   General and administrative
    40,170       47,077       (6,907 )     (14.7 )
   Depreciation
    35,530       36,280       (750 )     (2.1 )
   Amortization of intangible assets
    1,791       1,677       114       6.8  
   Gain on sale of assets, net
    (437 )     (623 )     (186 )     (29.9 )
      562,120       534,300       27,820       5.2  
                                 
Income from operations
    29,612       27,811       1,801       6.5  
                                 
Other income (expense):
                               
   Interest expense
    (2,803 )     (2,380 )     (423 )     17.8  
   Interest income
    46       25       21       84.0  
   Other
    (2,521 )     (1,880 )     641       34.1  
                                 
Income before income taxes
    24,334       23,576       758       3.2  
                                 
Income taxes
    10,281       9,199       1,082       11.8  
                                 
                                 
Net income
  $ 14,053     $ 14,377     $ (324 )     (2.3 %)
                                 

Revenues--Revenues of $591,732 increased $29,621 compared with the $562,111 reported in 2009. Utility Services increased $8,168, or 2.8%, from the prior year. Additional production incentives offered during the fourth quarter by certain U.S. Utility customers and new accounts obtained during the third quarter offset the reductions on existing contracts within our U.S. and Canadian operations. Residential and Commercial Services increased $22,135, or 9.6%, from 2009. Residential and Commercial revenues for 2010 were favorably impacted by winter and spring storms that occurred across the eastern and midwest parts of the U.S., the acquisition of a company at the end of the second quarter and a general increase in customer demand for our services.  Total consolidated revenue of $591,732 includes production incentive revenue, recognized under the completed-performance method, of $3,749 during 2010 as compared with $6,388 during 2009.

Operating Expenses--Operating expenses of $387,272 increased $26,649 from the prior year, and as a percentage of revenues increased 1.4% to 65.5%. Utility Services experienced an increase of $10,908, or 5.0%, from 2009, and as a percentage of revenues increased 1.6% to 75.8%. Increases in employee labor and benefits expense, fuel expense, material and tools expense and equipment repair expense associated with the increased revenues were partially offset by a decrease in subcontractor expense and materials expense. Residential and Commercial Services increased $12,884, or 10.7%, compared with 2009 and as a percentage of revenue increased .6% to 52.5%. Increased employee labor and benefit expense, subcontractor expense, fuel expense and material expense, the result of the increased revenues, account for the increase.

Fuel costs increased in 2010 as compared with fuel costs for 2009 and impacted operating expenses within all segments. During 2010, fuel expense of $24,213 increased $3,574, or 17%, from the $20,639 incurred in 2009. Substantially all of the $3,574 increase relates to an increase in the price of fuel.

Page 18
 
 


Selling Expenses--Selling expenses of $97,794 increased $8,528 from 2009 and as a percentage of revenues increased .6% to 16.5%. Utility Services decreased $679, or 2.8%, from 2009, primarily related to reductions in field management wages and incentives, travel expense, communication expense, branch office wages and rent expense and were partially offset by increases in field management auto expense and professional services expense. Residential and Commercial Services increased $8,725, or 14.0%, from 2009. Increases in field management wages and incentive expense, travel expense, communication expense and professional services expense were partially offset by reductions in branch office expense, field management auto expense and sales and marketing expenses.

General and Administrative Expenses--General and administrative expenses decreased $6,907 to $40,170, a 14.7% decrease, from the $47,077 experienced in 2009 and as a percentage of revenues decreased 1.6% to 6.8%. Decreases in salary and incentive expense, professional service expense, stock compensation expense, office rent and utilities expense and pension expense were partially offset by increases in office rent expense, real estate tax expense, postage expense and relocation expense.
 
Depreciation and Amortization Expense--Depreciation and amortization expense of $37,321 decreased $636 from the prior year and as a percentage of revenues decreased .5% to 6.3%. The dollar decrease is attributable to a reduction in capital expenditures for equipment in the prior year.

Gain on Sale of Assets--Gain on the sale of assets of $437 decreased $186 from the $623 experienced in 2009. The decrease is the result of a change in the mix of units sold in 2010 as compared with 2009.

Interest Expense--Interest expense of $2,803 increased $423, or 17.8%, from the $2,380 incurred in 2009. The increase is attributable to slightly higher average debt levels and higher interest rates incurred on our Senior Notes issued during the third quarter of 2010 as compared to 2009.

Other, Net--Other, net of $2,521 increased $641 from the $1,880 experienced in 2009. Other, net, includes foreign currency losses of $379 for 2010 as compared with foreign currency gains of $176 for 2009 on the intercompany balances of our Canadian operations.

Income Taxes--Income taxes for 2010 were $10,281 on income before income taxes of $24,334, an effective tax rate of 42.2%, compared with income taxes for 2009 of $9,199 on income before income taxes of $23,576, or an effective tax rate of 39.0%. The increase in the effective tax rate for 2010 from 2009 is a result of a net increase of 3.5% in 2010 related to the U.S. tax benefit of foreign source income from our Canadian operations, offset by a valuation allowance of $1,014 provided on foreign tax credits.  The 2010 effective tax rate of 42.2% includes a 3.2% state income tax rate, net of federal benefit and the 2009 tax rate of 39.0% included a 2.9% state income tax rate, net of federal benefit.

Net Income--Net income of $14,053 was $324 lower than the $14,377 earned in 2009. The 2.3% decrease in net income was primarily due to a higher effective tax rate in 2010 as compared to 2009.


Page 19
 
 


Fiscal 2009 Compared to Fiscal 2008

A comparison of our fiscal year 2009 results to 2008 follows:

   
Year Ended December 31,
 
   
2009
   
2008
   
Change
   
% Change
 
                         
Revenues
  $ 562,111     $ 595,797     $ (33,686 )     (5.7 %)
                                 
Costs and expenses:
                               
   Operating
    360,623       382,143       (21,520 )     (5.6 )
   Selling
    89,266       95,327       (6,061 )     (6.4 )
   General and administrative
    47,077       45,607       1,470       3.2  
   Depreciation
    36,280       34,374       1,906       5.5  
   Amortization of intangible assets
    1,677       1,482       195       13.2  
   Gain on sale of assets, net
    (623 )     (992 )     (369 )     (37.2 )
      534,300       557,941       (23,641 )     (4.2 )
                                 
Income from operations
    27,811       37,856       (10,045 )     (26.5 )
                                 
Other income (expense):
                               
   Interest expense
    (2,380 )     (3,417 )     1,037       (30.3 )
   Interest income
    25       220       (195 )     (88.6 )
   Other
    (1,880 )     (2,920 )     (1,040 )     (35.6 )
                                 
Income before income taxes
    23,576       31,739       (8,163 )     (25.7 )
                                 
Income taxes
    9,199       12,718       (3,519 )     (27.7 )
                                 
Net income
  $ 14,377     $ 19,021     $ (4,644 )     (24.4 %)
                                 
 
Revenues--Revenues of $562,111 decreased $33,686 compared with the $595,797 reported in 2008. Utility Services decreased $16,939, or 5.5%, from the prior year. Additional revenues of $8,486 from a business acquired in March 2008 were offset by reduced revenue from existing contracts. Revenues for 2008 also included incremental storm damage work of approximately $7,000 arising from hurricane damage in the southern United States. Residential and Commercial Services decreased $18,045, or 7.2%, from 2008. Revenues of $19,360 from a new business acquired in June 2008 were offset by reductions in tree surgery and landscape services in all other residential and commercial operations due to lower customer demand, which has been affected by the current economic conditions. Total consolidated revenue of $562,111 includes production incentive revenue, recognized under the completed-performance method, of $6,388 during 2009 as compared with $4,671 during 2008.

Operating Expenses--Operating expenses of $360,623 decreased $21,520 from the prior year, and as a percentage of revenues remained stable at 64.1%. Utility Services experienced a decrease of $11,699, or 5.1%, from 2008, but as a percentage of revenues increased .2% to 74.2%. Decreases in employee labor and benefits expense, fuel expense, subcontractor expense and material and tools expense associated with the decreased revenues were partially offset by an increase in equipment expense. Residential and Commercial Services decreased $10,956, or 8.4%, compared with 2008 and as a percentage of revenue decreased .6% to 51.9% and includes $9,720 of expenses related to the business acquired in the second quarter of 2008. The additional expenses associated with the acquired business were offset by reductions in all other residential and commercial operations. Decreases in labor expense, material expense, fuel expense and subcontractor expense associated with the decrease in revenues was partially offset by an increase in equipment expense.

Fuel costs declined in 2009 as compared with fuel costs for 2008 and impacted operating expenses within all segments. During 2009, fuel expense of $20,639 decreased $10,564, or 34%, from the $31,203 incurred in 2008. Substantially all of the $10,564 decrease relates to a decrease in the price of fuel.


Page 20
 
 


Selling Expenses--Selling expenses of $89,266 decreased $6,061 from 2008 and as a percentage of revenues decreased .1% to 15.9%. Utility Services decreased $3,718, or 13.5%, from 2008, primarily related to field management wages and incentives, travel expense, vehicle expense, communication expense and employee development expense and were partially offset by increases in branch office wages, office rent and utilities expense. Residential and Commercial Services decreased $3,283, or 5.0%, from the prior year 2008 and include $5,023 related to the business acquired in the second quarter of 2008. The increase in expense from the acquired business was offset by reductions in all other residential and commercial operations. Decreases in field management wages and incentive expense, field management travel expense, auto expense, employee development expense and marketing expense was partially offset by increases in office rent, utilities and branch office wages.

General and Administrative Expenses--General and administrative expenses increased $1,470 to $47,077, a 3.2% increase, from the $45,607 experienced in 2008 and as a percentage of revenues increased .7% to 8.4%. The increase is attributable to an increase in salary and incentive expense, professional services expense, communication expense and office rent and maintenance expense, partially offset by reductions in pension expense and relocation expense. The general and administrative expenses for the business acquired in June 2008 were $4,007 in 2008 and $7,733 in 2009. Excluding the business acquired in June 2008, total general and administrative expenses for 2009 would have approximated $43,060 as compared with $45,607 in 2008.

Depreciation and Amortization Expense--Depreciation and amortization expense of $37,957 increased $2,101 from the prior year and as a percentage of revenues increased .8% to 6.8%. The dollar increase is attributable to additional capital expenditures for equipment, buildings and the businesses that were purchased in 2008.

Gain on Sale of Assets--Gain on the sale of assets of $623 decreased $369 from the $992 experienced in 2008. The decrease is the result of fewer units being disposed of in addition to a change in the mix of equipment disposed of in 2009. Gain on the sale of assets in 2008 included the sale of aerial trucks, while none were disposed of in 2009.

Interest Expense--Interest expense of $2,380 decreased $1,037, or 30.3%, from the $3,417 incurred in 2008. The decrease is attributable to lower interest rates on bank borrowings and lower average debt levels as compared with the prior year.

Other, Net--Other, net of $1,880 decreased $1,040 from the $2,920 experienced in 2008. Other, net, includes foreign currency gains of $176 for 2009 as compared with foreign currency losses of $1,029 for 2008 on the intercompany balances of our Canadian operations.

Income Taxes--Income tax expense for 2009 was $9,199. The 2009 effective tax rate of 39.0% includes a 2.9% state income tax rate, net of federal benefit. The 2008 tax rate of 40.1% included a 3.9% state income tax rate, net of federal benefit.

Net Income--Net income of $14,377 was $4,644 lower than the $19,021 earned in 2008. The 24.4% decrease in net income was primarily due to lower revenues in 2009.

Canadian Dollar Translation Adjustments and Rate-Change Effects

Currency Translation Adjustments--All assets and liabilities of our Canadian operations are translated into United States dollars at balance-sheet date exchange rates while revenues and expenses are translated at weighted-average exchange rates in effect during the interim periods of operations reported. Currency translation adjustments are a component of other comprehensive income or loss and are recorded as accumulated other comprehensive loss in shareholders’ equity.

Canadian Dollar Rate-Change Effects--During 2010, the United States dollar weakened in relation to the Canadian dollar. As a result, the weighted-average exchange rate for the year ended December 31, 2010 compared favorably with the weighted-average Canadian-dollar exchange rates that existed for the year ended December 31, 2009.

It is not possible to precisely measure the impact on operating results from Canadian dollar exchange rate changes. However, if Canadian operating results for the year ended December 31, 2010 were translated at the exchange rates in effect during the comparable period of 2009, revenues would have been approximately $5,181 lower and income from operations would have been approximately $595 lower.

The effect of exchange rate changes on cash balances held in Canadian dollars was not significant.


Page 21
 
 


Income Tax—Liabilities for Uncertain Tax Positions

The amount of income taxes we pay is subject to audit by U.S. federal, state and Canadian tax authorities, which may result in proposed assessments. Our estimate for the potential outcome for any uncertain tax issue is highly judgmental. Uncertain tax positions are recognized only if they are more-likely-than-not to be upheld during examination based on their technical merits. The measurement of the uncertain tax position is based on the largest benefit amount that is more-likely-than-not (determined on a cumulative probability basis) to be realized upon settlement of the matter. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. If the estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense may result.

During the fourth quarter 2010, the U.S. Internal Revenue Service completed its audit of the Company’s U.S. income tax returns for 2007 and 2008 and Canada Revenue Agency completed its audit of the Company’s Canadian operations for 2006, 2007 and 2008. With the exception of U.S. state jurisdictions, the Company is no longer subject to examination by tax authorities for the years through 2008.

As of December 31, 2010, if certain pending tax matters settle, we believe it is reasonably possible that additional payments approximating $250 will be made during the next twelve months. However, we do not anticipate an increase or decrease in our total uncertain tax positions during the next twelve months that would be material to our financial condition or the results of operations.

Goodwill—Impairment Tests

Annually, we perform the impairment tests for goodwill during the fourth quarter. Impairment of goodwill is tested at the reporting-unit level, which for us are also our business segments. Impairment of goodwill is tested by comparing the reporting unit’s carrying value, including goodwill, to the fair value of the reporting unit. The fair values of the reporting units are estimated using discounted projected cash flows. If the carrying value of the reporting unit exceeds its fair value, goodwill is considered impaired and a second step is performed to measure the amount of impairment loss, if any. We conducted our annual impairment tests and determined that no impairment loss was required to be recognized in 2010 or for any prior periods. There were no events or circumstances from the date of our assessment through December 31, 2010 that would impact this conclusion.

The fair values of the reporting units were estimated using discounted projected cash flows for the goodwill impairment tests and analysis that required judgmental assumptions about revenues, operating margins, growth rates, discount rates, and working capital requirements. In determining those judgmental assumptions, we consider data, including--for each reporting unit--its annual budget for the upcoming year, its longer-term performance expectations, anticipated future cash flows and market data. Assumptions were also made for perpetual growth rates for periods beyond the forecast period.

If the fair values of the reporting units were less than the carrying values of the reporting units (including recorded goodwill), determined through the discounted projected cash flow methodology, goodwill impairment may be present. In such an instance, we would measure the goodwill impairment loss, if any, based upon the fair value of the underlying assets and liabilities of the impacted reporting unit, including any unrecognized intangible assets, and estimate the implied fair value of goodwill. An impairment loss would be recognized to the extent that a reporting unit’s recorded goodwill exceeded the implied fair value of goodwill.

The carrying value of the recorded goodwill for all reporting units totaled $21,275 at December 31, 2010. Based upon the goodwill impairment analysis conducted in the fourth quarter 2010, a hypothetical reduction in the fair value of the individual reporting units, ranging from approximately 58% to 76%, would not have resulted in the carrying value of the individual reporting units exceeding the reduced fair value.


LIQUIDITY AND CAPITAL RESOURCES

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


Page 22
 
 


Cash Flow Summary

Our cash flows from operating, investing and financing activities, as reflected in the Consolidated Statements of Cash Flow for the years ended December 31, 2010 and December 31, 2009, are summarized as follows:

   
2010
   
2009
 
Cash provided by (used in):
           
Operating activities
  $ 49,275     $ 53,538  
Investing activities
    (39,304 )     (21,457 )
Financing activities
    (349 )     (33,049 )
Increase(Decrease) in cash
  $ 9,622     $ (968 )
                 
 
Net Cash Provided by Operating Activities--Operating activities in 2010 provided cash of $49,275 as compared to $53,538 provided in 2009. The $4,263 net decrease was primarily attributable to (i) a decrease in net income of $324, (ii) a decrease of $636 in depreciation and amortization expense, and (iii) cash used of $5,062 from changes in other operating assets and liabilities.

Overall, accounts receivable dollars increased $8,726 in 2010 as compared to the $10,060 decrease experienced in 2009. With respect to the change in accounts receivable arising from business levels, the “days-sales-outstanding” in accounts receivable (“DSO”) at the end of 2010 decreased 2 days to 49 days, as compared to 2009. The DSO at December 31, 2009 was 51 days.

Accounts payable and accrued expenses increased $5,229 in 2010, $11,982 more than the decrease of $6,753 experienced in 2009.  Increases in employee compensation expense, compensated-absence accruals, self-insured medical claims and interest accruals were partially offset by a reduction in trade payables.

Self-insurance accruals increased $717 in 2010, as compared to the decrease of $3,326 experienced in 2009. The increase occurred in all classifications—workers’ compensation, general liability and vehicle liability--and resulted primarily from an overall decrease in deductible amounts under commercial insurance or the self-insured risk retention.

Other assets, net, increased $371 in 2010, as compared to the $1,930 decrease in 2009. Increases in tax and other deposits were partially offset by a decrease in prepaid expenses and pension assets.

Net Cash Used in Investing Activities--Investing activities used $39,304 in cash, $17,847 more than the $21,457 used in 2009. The increase is a result of additional capital expenditures for equipment, land and buildings as well as the purchases of businesses.

Net Cash Used in Financing Activities--Financing activities used $349 in 2010, $32,700 less than the $33,049 used in 2009. Our unsecured borrowings, consisting of $30,000 senior unsecured notes issued less $12,550 paid-down on our revolving credit facility, provided $17,450 in cash as compared with the $13,900 paid down during 2009. We use the revolving credit facility primarily for capital expenditures and payments of notes payable, primarily related to acquisitions. Payments of long-term debt and capital leases totaled $1,569. Purchases of common shares for treasury of $20,711 were partially offset by net cash received of $7,240 from the sale of common shares and common shares subscriptions. Dividends paid during 2010 totaled $2,436.

Revolving Credit Facility and 5.09% Senior Unsecured Notes--On July 22, 2010, we issued $30,000 of 5.09% Senior Unsecured Notes, Series A, due July 22, 2020 and amended the Amended and Restated Credit Agreement dated November 21, 2006 to provide a revolving credit facility under which up to an aggregate of $140,000 is available (previously $159,000), with the term extended to December 19, 2014 (the “Amended Credit Agreement”).

The 5.09% Senior Unsecured Notes, Series A, due July 22, 2020 (the “5.09% Senior Notes”), were issued pursuant to a Master Note Purchase Agreement (the “Purchase Agreement”), between Davey Tree and the purchasers of the 5.09% Senior Notes.  Subsequent series of promissory notes may be issued pursuant to supplemental note purchase agreements in an aggregate additional principal amount not to exceed $20,000.

The net proceeds of the 5.09% Senior Notes were used to pay down borrowings under our revolving credit facility.

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

Page 23
 
 


The Amended Credit Agreement provides a revolving credit facility with a group of banks under which up to an aggregate of $140,000 is available, with a letter of credit sublimit of $100,000. Under certain circumstances, the amount available under the revolving credit facility may be increased to $160,000.

The Amended Credit Agreement extended the term of the revolving credit facility to December 19, 2014 from December 15, 2011. 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.

Contractual Obligations Summary

The following is a summary of our long-term contractual obligations, as at December 31, 2010, to make future payments for the periods indicated:
 
         
Contractual Obligations Due -- Year Ending December 31,
       
Description
 
Total
   
2011
   
2012
   
2013
   
2014
   
2015
   
Thereafter
 
                                           
Revolving credit facility
  $ 30,000     $ -     $ -     $ -     $ 30,000     $ -     $ -  
Senior unsecured notes
    30,000       -       -       -       -       -       30,000  
Term loans
    7,261       5,670       731       480       380       -       -  
Operating lease obligations
    11,411       4,611       2,687       1,875       914       657       667  
Self-insurance accruals
    56,405       23,752       14,076       7,937       3,745       1,643       5,252  
Purchase obligations
    4,740       4,740       -       -       -       -       -  
Other liabilities
    7,647       2,690       598       428       287       289       3,355  
    $ 147,464     $ 41,463     $ 18,092     $ 10,720     $ 35,326     $ 2,589     $ 39,274  
                                                         
 
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 year for goods and services we have negotiated for delivery as of December 31, 2010. Other liabilities include estimates of future expected funding requirements related to retirement plans and other sundry items. Because their future cash outflows are uncertain, accrued income tax liabilities for uncertain tax positions, as of December 31, 2010, 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 at December 31, 2010, we were contingently liable to our principal banks for letters of credit in the amount of $50,047 of which $49,033 is committed under the revolving credit facility. Substantially all of these letters of credit, which expire within a year, are planned for renewal as appropriate.

Also, as is common with our industry, we have performance obligations that are supported by surety bonds, which expire during 2011 through 2014. We intend to renew the performance bonds where appropriate and as necessary.

Off-Balance Sheet Arrangements

There are no “off-balance sheet arrangements” as that term is defined in Regulation S-K, Item 303(a)(4)(ii) under the Securities Exchange Act of 1934, as amended.

Capital Resources

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

Business seasonality results in higher revenues during the second and third quarters as compared with the first and fourth quarters of the year, while our methods of accounting for fixed costs, such as depreciation and interest expense, are not significantly impacted by business seasonality. Capital resources during these periods are equally affected. We satisfy seasonal working capital needs and other financing requirements with the revolving credit facility and several other short-term lines of credit. We are continually reviewing our existing sources of financing and evaluating alternatives. At December 31, 2010, we had working capital of $25,833, unused short-term lines of credit approximating $10,005, and $60,967 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 for at least the next twelve months and for the foreseeable future.

Page 24
 
 


RECENT ACCOUNTING GUIDANCE

The FASB Accounting Standards Codification--In 2009, the Financial Accounting Standards Board (the “FASB”) established the Accounting Standards Codification™ (the “Codification” or “FASB ASC”) as the single source of nongovernmental authoritative U.S. GAAP.  All other accounting guidance not included in the Codification is considered nonauthoritative. The Codification also includes all relevant U.S. Securities and Exchange Commission guidance organized using the same topical structure in separate sections within the Codification. The FASB updates the Codification by issuing Accounting Standards Updates (or “ASUs”). The Accounting Standards Updates are not authoritative in their own right; these updates serve only to update the Codification, provide background information about the guidance, and provide the bases for conclusions on the changes in the Codification.

New Accounting Standards Updates

In the description of the Accounting Standards Update that follows, references relate to Codification Topic and descriptive titles, as appropriate.

Accounting Standards Update 2010-06, Improving Disclosures about Fair Value Measurements--In January 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-06, “Fair Value Measurements and Disclosures (ASC Topic 820): Improving Disclosures about Fair Value Measurements,” which adds disclosure requirements for transfers in and out of Levels 1 and 2, requires separate disclosures for activity relating to Level 3 measurements and clarifies input and valuation techniques. This ASU was effective for interim and annual periods beginning after December 15, 2009 (that is, the quarter ended April 3, 2010 for us), except for the Level 3 disclosures, which are effective for fiscal years beginning after December 15, 2010 (that is, the quarter ending April 2, 2011 for us) and for interim periods within those years. The adoption of the revised guidance in FASB ASC Topic 820 did not affect our financial position, results of operations or cash flows.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

On an ongoing basis, we evaluate our estimates and assumptions, including those related to accounts receivable, specifically those receivables under contractual arrangements primarily arising from Utility 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.

We believe the following are our “critical accounting policies and estimates”--those most important to the financial presentations and those that require the most difficult, subjective or complex judgments.

Revenue Recognition--Revenues from Residential and Commercial Services are recognized as the services are provided and amounts are determined to be collectible. Revenues from contractual arrangements, primarily with Utility Services customers, are recognized based on costs incurred to total estimated contract costs. Changes in estimates and assumptions related to total estimated contract costs may have a material effect on the amounts reported as receivables arising from contractual arrangements and the corresponding amounts of revenues and profit.

Utility Services Customers--We generate a significant portion of revenues and corresponding accounts receivable from our Utility Services customers in the utility industry. One Utility Services customer, PG&E, approximated 11% of revenues during 2010, 11% during 2009 and 11% during 2008. Adverse conditions in the utility industry or individual utility customer operations may affect the collectibility of our receivables or our ability to generate ongoing revenues.

Allowance for Doubtful Accounts--In determining the allowance for doubtful accounts, we evaluate the collectibility of our accounts receivable based on a combination of factors. In circumstances where we are aware of a specific customer’s inability to meet its financial obligations to us (e.g., bankruptcy filings), we record a specific allowance for doubtful accounts against amounts due to reduce the net recognized receivable to the amount we reasonably believe will be collected. For all other customers, we recognize allowances for doubtful accounts based on the length of time the receivables are past due. If circumstances change (e.g., unexpected material adverse changes in a major customer’s ability to meet its financial obligation to us or higher than expected customer defaults), our estimates of the recoverability of amounts could differ from the actual amounts recovered.

Page 25
 
 


Self-Insurance Accruals--We are generally self-insured for losses and liabilities related primarily to workers’ compensation, vehicle liability and general liability claims. We use commercial insurance as a risk-reduction strategy to minimize catastrophic losses. We accrue ultimate losses based upon estimates of the aggregate liability for claims incurred using certain actuarial assumptions followed in the insurance industry and based on our specific experience.

Our self-insurance accruals include claims for which the ultimate losses will develop over a period of years. Accordingly, our estimates of ultimate losses can change as claims mature. Our accruals also are affected by changes in the number of new claims incurred and claim severity. The methodology for estimating ultimate losses and the total cost of claims were determined by third-party consulting actuaries; the resulting accruals are continually reviewed by us, and any adjustments arising from changes in estimates are reflected in income.

Our self-insurance accruals are based on estimates and, while we believe that the amounts accrued are adequate, the ultimate claims may be in excess of or less than the amounts provided.


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.

The following table provides information, as of December 31, 2010, 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 the 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 contract at December 31, 2010. Weighted-average interest rates used for variable-rate obligations are based on rates as derived from published spot rates, in effect as at December 31, 2010.

                                             
Fair Value
 
   
Expected Maturity Date
               
December 31,
 
   
2011
   
2012
   
2013
   
2014
   
2015
   
Thereafter
   
Total
   
2010
 
                                                 
Liabilities
                                               
Long-term debt:
                                               
Fixed rate
  $ 3,121     $ 101     $ 100     $ -     $ -     $ 30,000     $ 33,322     $ 33,324  
Average interest rate
    4.8 %     5.1 %     5.1 %     -       -       5.1 %                
                                                                 
Variable rate
  $ 24,537     $ 10,630     $ 380     $ 380     $ -     $ -     $ 35,927     $ 35,927  
Average interest rate
    2.0 %     2.5 %     3.6 %     4.6 %     -       -                  
                                                                 
Interest rate derivative instruments
                                                               
Interest rate contracts:
                                                               
Pay fixed, notional amount
  $ 20,000     $ 10,000     $ -     $ -     $ -     $ -     $ 30,000     $ (1,040 )
Average pay rate
    2.56 %     5.15 %                                                
Average receive rate
    1.76 %     1.76 %                                                
                                                                 
 
Interest rates on the variable-rate debt, as of December 31, 2010, ranged from 1.8% to 3.3%.

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 December 31, 2010 (fair value), we would have paid $1,040.

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.

Page 26
 
 


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

For the year ended December 31, 2010, 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.

Impact of Inflation

The impact of inflation on the results of operations has not been significant in recent years.


Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.

The information set forth in “Market Risk Information” under Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is incorporated herein by reference.


Item 8.  Financial Statements and Supplementary Data.

Our consolidated financial statements are attached hereto and listed on page F-1 of this annual report.


Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.



(a) Management’s Discussion of Controls Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control framework and processes were designed to provide reasonable assurance to management and the Board of Directors that our financial reporting is reliable and that our consolidated financial statements for external purposes have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).

Our management recognizes its responsibility for fostering a strong ethical climate so that our affairs are conducted according to the highest standards of personal and corporate conduct.

Our internal controls over financial reporting include policies and procedures that:

§  
provide for the maintenance of records that, in reasonable detail, accurately and fairly reflect our business transactions;

§  
provide reasonable assurance that transactions are recorded properly to allow for the preparation of financial statements in accordance with U.S. GAAP; and

§  
provide reasonable assurance that the unauthorized acquisition, use, or disposition of our assets will be prevented, or at the minimum, detected in a timely manner.

We maintain a dynamic system of internal controls and processes--including internal controls over financial reporting--designed to ensure reliable financial recordkeeping, transparent financial reporting and protection of physical and intellectual property.

Page 27
 
 


No system of internal control over financial reporting can provide absolute guarantees, but only reasonable assurances of the prevention or detection of misstatements. Our processes, however, contain self-monitoring mechanisms, and actions will be taken to correct deficiencies as they are identified.

Our management assessed the effectiveness of our internal control over financial reporting and concluded that, as of December 31, 2010, such internal control is effective. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in “Internal Control--Integrated Framework.” To comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, we designed and implemented a structured and comprehensive compliance process to evaluate our internal control over financial reporting across the enterprise.

In addition, we maintain a testing program that assesses the effectiveness of internal control over financial reporting, including testing of the five COSO elements, and recommend improvements.

Our independent auditor, Ernst & Young LLP, with direct access to our Board of Directors through our Audit Committee, has audited the consolidated financial statements prepared by us. Their report on the consolidated financial statements is included elsewhere herein.

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

As of the end of the period covered by this Form 10-K, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 as amended (the “Exchange Act”)). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures were effective as of the end of the period covered by this Form 10-K in ensuring that information required to be disclosed in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

(c) Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2010 based on the framework in “Internal Control--Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2010.

Our independent auditor, Ernst & Young LLP, an independent registered public accounting firm, has issued an audit report on our internal control over financial reporting, which is included in this report.

/s/ Karl J. Warnke          
 
 /s/ David E. Adante                    
 
 /s/ Nicholas R. Sucic        
Chairman, President and
Chief Executive Officer
 
Executive Vice President,
Chief Financial Officer and Secretary
 
Vice President and Controller

Kent, Ohio
March 10, 2011


(d) Changes in Internal Control Over Financial Reporting

There have been no significant changes in our internal control over financial reporting or in other factors that have materially affected or are reasonably likely to materially affect these internal controls over financial reporting subsequent to the date we carried out our evaluation, the quarter ended December 31, 2010.


Page 28
 
 


(e) Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of
The Davey Tree Expert Company

We have audited The Davey Tree Expert Company’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Davey Tree Expert Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, The Davey Tree Expert Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the COSO criteria.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of The Davey Tree Expert Company as of December 31, 2010 and 2009, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010 of The Davey Tree Expert Company and our report dated March 10, 2011 expressed an unqualified opinion thereon.  We did not audit the 2010 financial statements of Davey Tree Expert Co. of Canada, Limited, a wholly-owned subsidiary, which statements reflect total assets constituting 6% and total revenues constituting 10% of the related consolidated totals.  Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Davey Tree Expert Co. of Canada, Limited, is based solely on the report of the other auditors.

/s/ Ernst & Young LLP
Akron, Ohio
March 10, 2011



None.

Page 29
 
 


PART III


Information about our executive officers is included in the section "Executive Officers of the Company,” pursuant to Instruction G of Form 10-K as an unnumbered item to Part I of this report.

Information about our directors is in the section "Election of Directors" of our 2011 Proxy Statement, which is incorporated into this report by reference.

Information about our audit committee and our audit committee financial experts is in the section “Committees of the Board of Directors; Shareholder Nominations; Attendance” of our 2011 Proxy Statement, which is incorporated into this report by reference.

Information required by Item 405 of Regulation S-K is in the section “Section 16(a) Beneficial Ownership Reporting Compliance” of our 2011 Proxy Statement, which is incorporated into this report by reference.

We have adopted a Code of Ethics for Financial Matters that applies to our principal executive officer, principal financial officer and principal accounting officer, or persons performing similar functions. That Code is available on our website or upon request, as described in this report in Item 1. “Business - Access to Company Information.” We intend to disclose, on our website, any amendments to, or waiver of, any provision of that Code that would otherwise be required to be disclosed under the rules of the Securities and Exchange Commission.



Information about executive and director compensation is in the sections “Compensation Discussion and Analysis,” "Compensation of Executive Officers" and "Compensation of Directors" of our 2011 Proxy Statement, which are incorporated into this report by reference.



Information about ownership of our common shares by certain persons is in the section "Ownership of Common Shares" of our 2011 Proxy Statement, which is incorporated into this report by reference. Information about our securities authorized for issuance under equity compensation plans is in the section “Equity Compensation Plans Information” of our 2011 Proxy Statement, which is incorporated into this report by reference.



Information about certain transactions between us and our affiliates and certain other persons and the independence of directors is in the section “Corporate Governance” of our 2011 Proxy Statement, which is incorporated into this report by reference.



Information about our principal accountant’s fees and services is in the section “Independent Auditors” of our 2011 Proxy Statement, which is incorporated into this report by reference.

PART IV


(a) (1) and (a) (2) Financial Statements and Schedules.

The response to this portion of Item 15 is set forth on page F-1 of this report.

(b) Exhibits.

The exhibits to this Form 10-K are submitted as a separate section of this report. See Exhibit Index.

Page 30
 
 


 
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 10, 2011.

     
   
THE DAVEY TREE EXPERT COMPANY
     
     
   
By:     /s/Karl J. Warnke                                       
   
Karl J. Warnke, Chairman, President and
   
Chief Executive Officer
     
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 10, 2011.
     
     
     
/s/ R. Douglas Cowan                                  
 
/s/ John E. Warfel                                        
R. Douglas Cowan, Director
 
John E. Warfel, Director
     
     
     
/s/ J. Dawson Cunningham                          
 
/s/ Karl J. Warnke                                        
J. Dawson Cunningham, Director
 
Karl J. Warnke, Director,
   
Chairman, President and Chief Executive Officer
   
(Principal Executive Officer)
     
/s/ William J. Ginn                                      
   
William J. Ginn, Director
   
   
/s/ David E. Adante                                      
   
David E. Adante, Executive Vice President,
   
Chief Financial Officer and Secretary
/s/ Douglas K. Hall                                     
 
(Principal Financial Officer)
Douglas K. Hall, Director
   
     
     
   
/s/ Nicholas R. Sucic                                    
/s/ Sandra W. Harbrecht                             
 
Nicholas R. Sucic, Vice President and Controller
Sandra W. Harbrecht, Director
 
(Principal Accounting Officer)
     
     
     
     
     
     
 
 
 
Page 31
 
 



         
Exhibit No.
 
Description
   
         
3.1
 
2003 Amended Articles of Incorporation (Incorporated by reference to Exhibit 3.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 27, 2003).
   
         
3.2
 
1987 Amended and Restated Regulations of The Davey Tree Expert Company (Incorporated by reference to Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2006).
   
         
10.1
 
Amended and Restated Credit Agreement among the Company, as borrower, Various Lending Institutions, as banks, KeyBank National Association, as lead arranger, syndication agent and administrative agent, and National City Bank, as documentation agent, dated as of November 21, 2006 (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated November 22, 2006).
   
         
10.2
 
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 (Incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 28, 2008).
   
         
10.3
 
1994 Omnibus Stock Plan (Incorporated by reference to Exhibit 10.1 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004).
   
         
10.4
 
2004 Omnibus Stock Plan (Incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 3, 2004).