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EX-21 - EXHIBIT 21 - DAVEY TREE EXPERT COdavey123114ex21.htm
EX-23 - EXHIBIT 23 - DAVEY TREE EXPERT COdavey123114ex23.htm
EX-10.8 - EXHIBIT 10.8 - DAVEY TREE EXPERT COdavey123114ex108.htm
EX-31.2 - EXHIBIT 31.2 - DAVEY TREE EXPERT COdavey123114ex312.htm
EX-32.2 - EXHIBIT 32.2 - DAVEY TREE EXPERT COdavey123114ex322.htm
EX-31.1 - EXHIBIT 31.1 - DAVEY TREE EXPERT COdavey123114ex311.htm
EX-32.1 - EXHIBIT 32.1 - DAVEY TREE EXPERT COdavey123114ex321.htm

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
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 x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x   No ¨
Indicate by check mark whether the registrant has submitted electronically 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 x   No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 x    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 x
There were 13,168,800 Common Shares outstanding as of February 27, 2015. The aggregate market value of the Common Shares held by nonaffiliates of the registrant as of July 1, 2014 was $330,928,487. 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 2015 Annual Meeting of Shareholders, to be held on May 19, 2015, 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 uneven economic recovery and the continuing financial and credit uncertainties may adversely impact our customers’ spending and 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 and financial condition.
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 are subject to third-party and governmental regulatory 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.

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THE DAVEY TREE EXPERT COMPANY
FORM 10-K
For the Year Ended December 31, 2014
 
TABLE OF CONTENTS
 
 
 
Page
 
 
PART I
 
 
 
PART II
 
 
 
PART III
 
 
 
PART IV
 
 
 
 
 




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

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PART I

Item 1.  Business.

General
The Davey Tree Expert Company, which was founded in 1880 and incorporated in Ohio in 1909, and its subsidiaries ("we" or "us") provides a wide range of arboriculture, horticulture, environmental and consulting services to our customers throughout the United States and Canada. We have two reportable operating segments organized by type or class of customer: Residential and Commercial, and Utility.

Our Residential and Commercial segment provides services to our residential and commercial customers including: the treatment, preservation, maintenance, removal, planting of trees, shrubs and other plant life; the practice of landscaping, grounds maintenance, tree surgery, tree feeding and tree spraying; the application of fertilizer, herbicides and insecticides; and, natural resource management and consulting, forestry research and development, and environmental planning.
Our Utility segment is principally engaged in providing services to our utility customers--investor-owned, municipal utilities, and rural electric cooperatives--including: the practice of line-clearing and vegetation management around power lines, rights-of-way and chemical brush control; and, natural resource management and consulting, forestry research and development and environmental planning.
We also maintain research, technical support and laboratory diagnostic facilities.

Competition and Customers
Our Residential and Commercial segment is one of the largest national tree care organizations in the United States, and competes with other national and local firms with respect to its services. On a national level, our competition is primarily landscape construction and maintenance companies as well as residential and commercial lawn care companies. At a local and regional level, our competition comes mainly from small, local companies which are engaged primarily in tree care and lawn services. Our Utility segment is the second largest organization in the industry in the United States, and competes principally with one major national competitor, 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 segment; however, pricing is generally the principal method of competition for our Utility segment, although in most instances consideration is given to reputation and past production performance.

We provide a wide range of horticultural services to private companies, public utilities, local, state and federal agencies, and a variety of industrial, commercial and residential customers. During 2014, we had revenues of approximately $66 million, or approximately 8% 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. We also employ online marketing and lead generation strategies including email marketing campaigns, search engine optimization, search engine marketing, and social media communication. Business from utility and commercial

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customers is obtained principally through negotiated contracts and competitive bidding. We carry out all of our sales and services through our employees. We generally do not use agents, and do not franchise our name or business.

Seasonality
Our business is seasonal, primarily due to fluctuations in horticultural services provided to Residential and Commercial customers and to a lesser extent by budget constraints imposed on our Utility customers. Because of this seasonality, we have historically incurred losses in the first quarter, while sales and earnings are generally highest in the second and third quarters of the calendar year. Consequently, this has created heavy demands for additional working capital at various times throughout the year. We borrow primarily against bank commitments in the form of a revolving credit facility 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 24-25 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," and "Davey Resource Group." Through substantial advertising and use, we believe that these trademarks have become of value in the identification and acceptance of our products and services.

Employees
We employed approximately 7,600 employees at December 31, 2014. 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 S 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 information on our website is not a part of this Annual Report on Form 10-K.

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

Item 1A.  Risk Factors.

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

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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 unpredictable economic recovery 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.
While the economy has shown signs of improvement, sustainability of economic recovery remains uncertain. A slowing or stoppage in economic recovery 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 customer demand. Increased uncertainty about the economy may cause a reduction in our customers' spending for our services and may also impact the ability of our customers to pay amounts owed, which could reduce our cash flow and adversely impact our debt or equity financing. These events could have a material adverse effect on our operations and our ability to grow at historical levels.

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 segment. 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.


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

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

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

The unavailability or cancellation of third-party insurance coverage may have a material adverse effect on our financial condition and results of operations as well as disrupt our operations.
Any of our existing excess insurance coverage may not be renewed upon the expiration of the coverage period or future coverage may not be available at competitive rates for the required limits. In addition, our third-party insurers could fail, suddenly cancel our coverage or otherwise be unable to provide us with adequate insurance coverage. If any of these events occur, they may have a material adverse effect on our financial condition and results of operations as well as disrupt our operations. For example, we have operations in California, which has an environment prone to wildfires. Should our third-party insurers determine to exclude coverage for wildfires in the future, we could be exposed to significant liabilities, having a material adverse effect on our financial condition and results of operations and potentially disrupting our California operations.

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.


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

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

We cannot predict the impact that the debate on changing climate conditions, including legal, regulatory and social responses thereto, may have on our business.
Many scientists, environmentalists, international organizations, political activists, regulators and other commentators believe that global climate change has added, and will continue to add, to the unpredictability, frequency and severity of natural disasters in certain parts of the world. In response, a number of legal and regulatory measures and social initiatives have been introduced in an effort to reduce greenhouse gas and other carbon emissions that these parties believe may be contributors to global climate change. These proposals, if enacted, could result in a variety of regulatory programs, including potential new regulations, additional charges and taxes to fund energy efficiency activities, or other regulatory actions. Any of these actions could result in increased costs associated with our operations and impact the prices we charge our customers.

We cannot predict the impact, if any, that changing climate conditions will have on us or our customers. However, it is possible that the legal, regulatory and social responses to real or 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.


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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.

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 third-party and governmental regulatory claims and litigation.
From time-to-time, customers, vendors, employees, governmental regulatory authorities and others 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 such 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 segment and our Utility segment frequently operate in a competitive bid contract environment. As a result, we may misjudge a bid and be contractually bound to an unprofitable contract, which could adversely affect our results of operations.


Item 1B.  Unresolved SEC Staff Comments.

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


Item 2.  Properties.

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

We conduct administrative functions through our headquarters and our offices in Livermore, California (Utility Services). Our Canadian operations’ administrative functions are conducted through properties located in the provinces of Ontario and British Columbia. We believe our properties are well maintained, in good condition and suitable for our present operations. A summary of our properties follows:
Segment
 
Number of Properties
 
How Held
 
Square Footage
 
Number of
States or Provinces
Residential and Commercial
 
29
 
Owned
 
263,231
 
14
Utility
 
3
 
Owned
 
36,037
 
3
Residential and Commercial, and Utility
 
2
 
Owned
 
12,400
 
2

We also rent approximately 135 properties in 29 states and three provinces.

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

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Item 3.  Legal Proceedings.

We are party to a number of lawsuits, threatened lawsuits and other claims arising out of the normal course of business.
     
With respect to all such matters, we record an accrual for a loss contingency when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In addition, narrative information is provided for matters as to which management believes a material loss is reasonably possible.
 
Management has assessed all such matters, including the matter described below, based on current information and made a judgment concerning their potential outcome, giving due consideration to the nature of the claim, the amount and nature of damages sought and the probability of success.  Management's judgment is made subject to the known uncertainty of litigation and management's judgment as to estimates made may prove materially different from actual results.

California Fire Litigation: San Diego County--Davey Tree Surgery Company, a Davey subsidiary, and Davey Resource Group, a Davey division, along with the Company have previously been sued, together with a utility services customer, San Diego Gas & Electric ("SDG&E"), and its parent company, as defendants, and as cross-defendants in cross-complaints filed by SDG&E, in the Superior Court of the State of California in and for the County of San Diego, arising out of a wildfire in San Diego County that started on October 22, 2007, referred to as the Rice Canyon fire.

Numerous lawsuits related to the Rice Canyon fire were filed against SDG&E, its parent company, Sempra Energy, and Davey. The earliest of the lawsuits naming Davey was filed on April 18, 2008. The Court ordered that the lawsuits be organized into four groups based on type of plaintiff, namely insurance subrogation claimants, individual/business claimants, governmental claimants, and plaintiffs seeking class certification. Plaintiffs' motions seeking class certification were denied and the orders denying class certification were affirmed on appeal. SDG&E filed cross-complaints against Davey for contractual indemnity, declaratory relief, and breach of contract.

During the third quarter 2012, Davey entered into a Settlement and Release Agreement (the “Agreement”) among Davey, SDG&E and Davey's insurers.

Under the Agreement (a) Davey paid SDG&E an amount previously expensed and accrued as self-insurance, (b) Davey's insurers paid SDG&E amounts under Davey's insurance policies in effect during the period of the Rice Canyon fire, and (c) SDG&E dismissed its cross-complaints against Davey and agreed to defend and hold harmless Davey from any and all claims that are currently asserted against Davey.


Item 4.  Mine Safety Disclosures.

Not applicable.


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Executive Officers of the Company.

Our executive officers and their present positions and ages as of March 1, 2015 follow:
Name
 
Position
 
Age
 
 
 
 
 
Karl J. Warnke
 
Chairman, President and Chief Executive Officer
 
63
 
 
 
 
 
Patrick M. Covey
 
President and Chief Operating Officer, U.S. Operations
 
51
 
 
 
 
 
Joseph R. Paul, CPA
 
Chief Financial Officer and Secretary
 
53
 
 
 
 
 
Christopher J. Bast, CPA, CTP
 
Treasurer
 
47
 
 
 
 
 
Marjorie L. Conner, Esquire
 
Assistant Secretary and Counsel
 
57
 
 
 
 
 
James E. Doyle
 
Executive Vice President and General Manager, Davey Tree Expert Co. of Canada, Limited
 
46
 
 
 
 
 
Dan A. Joy
 
Executive Vice President and General Manager, Commercial Landscape Services
 
57
 
 
 
 
 
Steven A. Marshall
 
Executive Vice President, U.S. Utility Operations
 
63
 
 
 
 
 
Richard A. Ramsey
 
Corporate Vice President, Canadian Operations
 
65
 
 
 
 
 
Brent R. Repenning
 
Vice President and General Manager, Davey Resource Group
 
43
 
 
 
 
 
Thea R. Sears, CPA
 
Assistant Controller
 
46
 
 
 
 
 
James F. Stief
 
Executive Vice President, U.S. Residential Operations
 
60
 
 
 
 
 
Nicholas R. Sucic, CPA
 
Vice President and Controller
 
68
 
 
 
 
 
Mark J. Vaughn
 
Vice President and General Manager, Eastern Utility Services
 
60

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. Covey was elected President and Chief Operating Officer, U.S. Operations effective April 14, 2014 and served as Chief Operating Officer, U.S. Operations having been appointed in February 2012. Prior to that time, Mr. Covey served as Executive Vice President, having been appointed in January 2007, Vice President and General Manager of the Davey Resource Group, having been appointed in March 2005 and 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.



Page 11


Mr. Paul was elected Chief Financial Officer and Secretary, effective March 23, 2013, and served as Vice President and Treasurer, having been appointed in May 2011. Mr. Paul joined Davey Tree as Treasurer in December 2005. 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 LLP, having been associated with that firm since 1986.

Mr. Bast was elected Treasurer in April 2013, having joined Davey Tree in March 2013. He is a certified public accountant and a certified treasury professional. Prior to joining us, Mr. Bast served in various management positions from 1994 to 2013 at Diebold, Incorporated, a provider of self-service delivery and security systems, including senior director of North America Finance, a director of investor relations and director of treasury. Prior to joining Diebold, Mr. Bast was an auditor with Deloitte LLP, having been associated with that firm since 1991.

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. Doyle was elected Executive Vice President and General Manager, Davey Tree Expert Co. of Canada, Limited (“Davey Tree Limited”), effective May 21, 2014 and served as Vice President and General Manager, Davey Tree Limited, having been appointed in February 2012. Prior to that time, he served as Vice President and General Manager, Operations, Davey Tree Limited, having been appointed in May 2011 and Vice President, Operations, Davey Tree Limited, having been appointed in January 2006. Previously, having joined Davey Tree in 1989, Mr. Doyle held various managerial positions, including District Manager and Operations Manager.

Mr. Joy was elected Executive Vice President and General Manager, Commercial Landscape Services, effective May 21, 2014 and served as Vice President and General Manager, Commercial Landscape Services, having been appointed in May 2013. Prior to that time, he served as Vice President, Commercial Landscape Services, having been appointed in December 2004 and Operations Manager, Commercial Landscape Services, having been appointed in January 2000. Previously, having joined Davey Tree in 1976, Mr. Joy held various managerial positions, including District Manager and Assistant District Manager.

Mr. Marshall was elected Executive Vice President, U.S. Utility 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. Ramsey was elected Corporate Vice President, Canadian Operations, in May 2013 and previously served as Vice President and General Manager, Canadian Operations, since January 2000. Prior to that time, he served as Vice President and General Manager, Commercial Services.

Mr. Repenning was elected Vice President and General Manager, Davey Resource Group, effective June 6, 2010 and served as Vice President, Davey Resource Group, having been appointed in October 2009. Prior to that time, he served as Regional Manager, Davey Resource Group, having been appointed in February 2007. Previously, having joined Davey Tree in 1994, Mr. Repenning held various managerial and operational positions, including Production Manager and Supervisor.

Ms. Sears was elected Assistant Controller in May 2010, and previously 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 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 Executive Vice President, U.S. Residential Operations, effective February 12, 2012 and previously served as Vice President and General Manager, Residential/Commercial Services, since January 2010. Prior to that time Mr. Stief served as Vice President and General Manager, South, West and Central Residential/Commercial Operations, having been appointed in January 2007 and Vice President South, West and Central Residential/Commercial Operations, having been appointed in January 1997. Previously, having joined Davey Tree in 1978, Mr. Stief held various managerial positions, including Operations Manager and District Manager.


Page 12


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.

Mr. Vaughn was elected Vice President and General Manager, Eastern Utility Services, effective June 6, 2010, and served as Vice President, Eastern Utility Services, having been appointed in December 2007. Prior to that time, he served as Vice President, Northern Operating Group, Utility Services, having been appointed in July 2002. Previously, having joined Davey Tree in 1972, Mr. Vaughn held various managerial positions, including Operations Manager and Regional Manager.
 
Our officers serve from the date of their election to the next organizational meeting of the Board of Directors and until their respective successors are elected.




Page 13


PART II

Item 5.  Market for Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our common shares are not listed or traded on an established public trading market and market prices are, therefore, not available. Semiannually, for purposes of the Davey 401KSOP and ESOP, the fair market value of our common shares is determined by an independent stock valuation firm, based upon our performance and financial condition, using a peer group of comparable companies selected by that firm. The peer group currently consists of: ABM Industries Incorporated; Comfort Systems USA, Inc.; Dycom Industries, Inc.; 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. These purchases are added to our treasury stock.

Record Holders and Common Shares

On February 27, 2015 we had 3,635 record holders of our common shares.

On February 27, 2015 we had 13,168,800 common shares outstanding and options exercisable to purchase 389,251 common shares, partially-paid subscriptions for 476,197 common shares and purchase rights outstanding for 195,029 common shares.

Dividends

The following table sets forth, for the periods indicated, the dividends declared per common share (in cents):
 
 
Year Ended December 31,
Quarter
 
2014
 
2013
1
 
4.50

 
4.50

2
 
4.50

 
4.50

3
 
4.50

 
4.50

4
 
5.00

 
4.50

Total
 
18.50

 
18.00


We presently expect to pay comparable cash dividends in 2015.

Recent Sales of Unregistered Securities

None.


Page 14


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, 2014:
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 2014
 
 
 
 
 
 
 
 
January 1 to January 25
 
1,318

 
$
23.90

 
n/a
 
n/a
January 26 to February 22
 
332

 
23.90

 
n/a
 
n/a
February 23 to March 29
 
87,380

 
26.40

 
n/a
 
n/a
Total First Quarter
 
89,030

 
26.35

 
 
 
 
 
 
 
 
 
 
 
 
 
March 30 to April 26
 
162,903

 
26.40

 
n/a
 
n/a
April 27 to May 24
 
97,801

 
26.40

 
n/a
 
n/a
May 25 to June 28
 
88,061

 
26.40

 
n/a
 
n/a
Total Second Quarter
 
348,765

 
26.40

 
 
 
 
 
 
 
 
 
 
 
 
 
June 29 to July 26
 
387

 
26.40

 
n/a
 
n/a
July 27 to August 23
 
12,142

 
27.80

 
n/a
 
n/a
August 24 to September 27
 
48,360

 
27.80

 
n/a
 
n/a
Total Third Quarter
 
60,889

 
27.79

 
 
 
 
 
 
 
 
 
 
 
 
 
September 28 to October 25
 
79,692

 
27.80

 
n/a
 
n/a
October 26 to November 29
 
92,991

 
27.80

 
n/a
 
n/a
November 30 to December 31
 
56,069

 
27.80

 
n/a
 
n/a
Total Fourth Quarter
 
228,752

 
27.80

 
 
 
 
 
 
 
 
 
 
 
 
 
Total Year to Date
 
727,436

 
$
26.95

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


Page 15


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.


 
 
2009
 
2010
 
2011
 
2012
 
2013
 
2014
Davey Tree
 
100
 
112
 
121
 
144
 
165
 
189
S&P 500 Index
 
100
 
115
 
117
 
136
 
180
 
205
Peer Group
 
100
 
123
 
125
 
137
 
181
 
187

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 16


Item 6.  Selected Financial Data.
 
Fiscal Year Ended December 31,
 
2014
 
2013
 
2012
 
2011
 
2010
 
(In thousands, except ratio and per share data)
Operating Statement Data:
 
 
 
 
 
 
 
 
 
Revenues
$
789,911

 
$
713,848

 
$
680,153

 
$
646,034

 
$
591,732

Costs and expenses:
 

 
 

 
 

 
 
 
 

Operating
508,677

 
462,646

 
437,332

 
426,626

 
387,272

Selling
140,027

 
120,842

 
111,578

 
104,871

 
97,794

General and administrative
54,970

 
50,654

 
48,171

 
42,793

 
40,170

Depreciation
40,970

 
38,231

 
37,365

 
37,818

 
35,530

Amortization of intangible assets
2,070

 
1,980

 
1,742

 
1,908

 
1,791

Gain on sale of assets, net
(806
)
 
(1,294
)
 
(1,802
)
 
(783
)
 
(437
)
Income from operations
44,003

 
40,789

 
45,767

 
32,801

 
29,612

Interest expense
(2,948
)
 
(2,708
)
 
(2,698
)
 
(3,794
)
 
(2,803
)
Interest income
295

 
311

 
200

 
43

 
46

Litigation settlement

 

 

 
(2,900
)
 

Other expense
(3,050
)
 
(2,827
)
 
(2,611
)
 
(2,850
)
 
(2,521
)
Income before income taxes
38,300

 
35,565

 
40,658

 
23,300

 
24,334

Income taxes
15,131

 
12,712

 
16,063

 
9,235

 
10,281

Net income
$
23,169

 
$
22,853

 
$
24,595

 
$
14,065

 
$
14,053

Earnings per share--diluted
$
1.63

 
$
1.57

 
$
1.68

 
$
.97

 
$
.93

Shares used for computing per share amounts--diluted
14,238

 
14,602

 
14,609

 
14,537

 
15,031

 
 
 
 
 
 
 
 
 
 
Other Financial Data:
 

 
 

 
 

 
 
 
 

Depreciation and amortization
$
43,040

 
$
40,211

 
$
39,107

 
$
39,726

 
$
37,321

Capital expenditures
55,731

 
45,205

 
29,734

 
34,701

 
34,753

Cash flow provided by (used in):
 

 
 

 
 

 
 
 
 

Operating activities
49,279

 
56,310

 
43,936

 
54,422

 
49,275

Investing activities
(64,060
)
 
(43,205
)
 
(31,179
)
 
(34,128
)
 
(39,304
)
Financing activities
17,335

 
(16,891
)
 
(3,377
)
 
(22,044
)
 
(349
)
Cash dividends declared per share
$
.1850

 
$
.1800

 
$
.1775

 
$
.1700

 
$
.1700


Page 17


 
As of December 31,
 
2014
 
2013
 
2012
 
2011
 
2010
 
(In thousands, except ratio and per share data)
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Working capital
$
58,843

 
$
46,745

 
$
63,208

 
$
28,501

 
$
25,833

Current ratio
1.54

 
1.44

 
1.64

 
1.28

 
1.29

Property and equipment, net
160,883

 
136,884

 
125,716

 
130,148

 
129,627

Total assets
381,004

 
333,378

 
330,932

 
303,734

 
288,307

Long-term debt
81,306

 
50,034

 
54,787

 
51,136

 
61,591

Other long-term liabilities
54,854

 
46,935

 
59,498

 
49,837

 
38,305

Shareholders' equity
136,491

 
131,138

 
118,106

 
100,726

 
98,369

Common shares:
 

 
 

 
 

 
 

 
 

Issued
21,457

 
21,457

 
21,457

 
21,457

 
21,457

In treasury
8,292

 
8,018

 
7,731

 
7,611

 
7,345

Net outstanding
13,165

 
13,439

 
13,726

 
13,846

 
14,112

Stock options:
 

 
 

 
 

 
 

 
 

Outstanding
770

 
662

 
761

 
1,111

 
1,256

Exercisable
389

 
342

 
640

 
942

 
945

ESOT valuation per share
$
30.10

 
$
26.40

 
$
23.20

 
$
19.70

 
$
18.40



Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations.

(Amounts in thousands, except share data)

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

Overview of 2014 Results;
Results of Operations, including fiscal 2014 compared to fiscal 2013, fiscal 2013 compared to fiscal 2012, and liabilities for uncertain income tax positions, and other matters;
Liquidity and Capital Resources, including cash flow summary, off-balance sheet arrangements, and capital resources;
Recent Accounting Guidance;
Critical Accounting Policies and Estimates; and
Market Risk Information, including interest rate risk and foreign currency exchange rate risk.

OVERVIEW OF 2014 RESULTS

General

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

Our Business--We have two reportable operating segments organized by type or class of customer: Residential and Commercial, and Utility.

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

Page 18


Utility--Utility is principally engaged in providing services to our utility customers--investor-owned, municipal utilities, and rural electric cooperatives--including: the practice of line-clearing and vegetation management around power lines, rights-of-way and chemical brush control; and, natural resource management and consulting, forestry research and development and environmental planning.
All other operating activities, including research, technical support and laboratory diagnostic facilities, are included in “All Other.”
During the fourth quarter 2013, the Company realigned its reporting to more closely reflect the manner in which performance is assessed and decisions are made in allocating resources to the segments. Our two reportable operating segments are organized by type or class of customer: Residential and Commercial and Utility. The amounts in the table below for 2012 have been conformed to the 2014 and 2013 reporting.
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
 
2014
 
2013
 
2012
 
2014/2013
 
2013/2012
Revenues
100.0
 %
 
100.0
 %
 
100.0
 %
 
10.7
 %
 
5.0
 %
Costs and expenses:
 

 
 

 
 

 
 

 
 

Operating
64.3

 
64.8

 
64.3

 
9.9

 
5.8

Selling
17.7

 
16.9

 
16.4

 
15.9

 
8.3

General and administrative
7.0

 
7.1

 
7.1

 
8.5

 
5.2

Depreciation
5.2

 
5.4

 
5.5

 
7.2

 
2.3

Amortization of intangible assets
.3

 
.3

 
.3

 
4.5

 
13.7

Gain on sale of assets, net
(.1
)
 
(.2
)
 
(.3
)%
 
(37.7
)
 
(28.2
)
 
94.4

 
94.3

 
93.3

 
10.8

 
6.1

Income from operations
5.6

 
5.7

 
6.7

 
7.9

 
(10.9
)%
Other income (expense):
 

 
 

 
 

 
 

 
 

Interest expense
(.4
)
 
(.3
)
 
(.4
)%
 
8.9

 
.4

Interest income

 

 

 
nm

 
nm

Other
(.4
)
 
(.4
)
 
(.3
)%
 
nm

 
nm

Income before income taxes
4.8

 
5.0

 
6.0

 
7.7

 
(12.5
)
Income taxes
1.9

 
1.8

 
2.4

 
19.0

 
(20.9
)
Net income
2.9
 %
 
3.2
 %
 
3.6
 %
 
1.4
 %
 
(7.1
)%
 
 
 
 
 
 
 
 
 
 
nm--not meaningful
 

 
 

 
 

 
 

 
 

 
Revenues of $789,911 were 10.7% higher than last year’s revenues of $713,848. Utility revenues increased 7.4%, and Residential and Commercial increased 15.3%.

Overall, income from operations of $44,003 increased 7.9% from the $40,789 experienced in the prior year. Income from operations was $21,382 in Utility (a 33.1% increase as compared with 2013) and $37,232 for Residential and Commercial (a 10.9% increase as compared with 2013).

Net income of $23,169 was $316 more than the $22,853 earned in 2013. The increase in net income was attributable to higher income from operations.

Operating activities in 2014 provided cash of $49,279 as compared to $56,310 provided in 2013. The $7,031 net decrease was primarily attributable to (i) an increase in net income of $316, (ii) an increase of $2,829 in depreciation and amortization expense, and (iii) $3,859 more cash used from changes in operating assets and liabilities.


Page 19


Investing activities used $64,060 in cash, or $20,855 more than that used in 2013, the result of additional expenditures for purchases of equipment and land and building necessary to support additional business growth and the purchases of businesses.

Financing activities provided $17,335 in cash in 2014, $34,226 more than the $16,891 of cash used in 2013. Our revolving credit facility provided $24,500 in cash in 2014 as compared with the $4,200 used during 2013. Purchases of common shares for treasury of $19,598 were partially offset by net cash received of $10,503 from the sale of common shares and cash received on our common share subscriptions. Dividends paid during 2014 totaled $2,674.

Fiscal 2014 Compared to Fiscal 2013

A comparison of our fiscal year 2014 results to 2013 follows:
 
Year Ended December 31,
 
2014
 
2013
 
Change
 
% Change
Revenues
$
789,911

 
$
713,848

 
$
76,063

 
10.7
 %
Costs and expenses:
 

 
 

 
 

 
 

Operating
508,677

 
462,646

 
46,031

 
9.9

Selling
140,027

 
120,842

 
19,185

 
15.9

General and administrative
54,970

 
50,654

 
4,316

 
8.5

Depreciation
40,970

 
38,231

 
2,739

 
7.2

Amortization of intangible assets
2,070

 
1,980

 
90

 
4.5

Gain on sale of assets, net
(806
)
 
(1,294
)
 
488

 
(37.7
)
 
745,908

 
673,059

 
72,849

 
10.8

Income from operations
44,003

 
40,789

 
3,214

 
7.9

Other income (expense):
 

 
 

 
 

 
 

Interest expense
(2,948
)
 
(2,708
)
 
(240
)
 
8.9

Interest income
295

 
311

 
(16
)
 
(5.1
)
Other
(3,050
)
 
(2,827
)
 
(223
)
 
7.9

Income before income taxes
38,300

 
35,565

 
2,735

 
7.7

Income taxes
15,131

 
12,712

 
2,419

 
19.0

Net income
$
23,169

 
$
22,853

 
$
316

 
1.4
 %
 
 
 
 
 
 
 
 
nm--not meaningful
 
 
 
 
 
 
 

Revenues--Revenues of $789,911 increased $76,063 compared with the $713,848 reported in 2013. Utility increased $27,999, or 7.4%, from the prior year. Contract rate increases with one of our largest utility customers, new contracts and increased productivity within our U.S. and Canadian operations account for the increase. Residential and Commercial increased $51,396, or 15.3%, from 2013.  Increased snow plowing revenue, added revenues from business acquisitions, additional tree pruning and tree removal revenues and increased production on our liquid service applications account for the increase.  Total consolidated revenue of $789,911 includes production incentive revenue, recognized under the completed-performance method, of $4,725 during 2014 as compared with $8,120 during 2013.

Operating Expenses--Operating expenses of $508,677 increased $46,031 from the prior year, and as a percentage of revenues decreased .5% to 64.3%. Utility experienced an increase of $15,596, or 5.5%, from 2013, and as a percentage of revenues decreased 1.3% to 74.5%. Increases in employee labor and benefits expense, equipment repair and maintenance expense, travel expense, fuel expense, subcontractor expense and tool and saw expense were partially offset by decreases in material expense, damage expense and equipment transfer expense. Residential and Commercial increased $30,601, or 17.5%, compared with 2013 and as a percentage of revenue increased .9% to 53.2%. Increased employee labor and benefit expense, repair and maintenance expense, fuel expense, material expense, tool and saw expense, subcontractor expense and disposal expense, were partially offset by a reduction in equipment transfer expense and damage expense.


Page 20


Fuel costs increased in 2014 as compared with fuel costs for 2013 and impacted operating expenses within all segments. During 2014, fuel expense of $35,129 increased $2,201, or 6.7%, from the $32,928 incurred in 2013. Substantially all of the $2,201 increase relates to an increase in volume of fuel.

Selling Expenses--Selling expenses of $140,027 increased $19,185 from 2013 and as a percentage of revenues increased .8% to 17.7%. Utility increased $5,648, or 15.9%, from 2013. Increases in field management wages and incentive expense, field management travel expense, office expense, computer expense, communication expense and employee development expense were partially offset by a reduction in field management auto expense, office rent expense and utilities expense. Residential and Commercial increased $13,415, or 15.2%, from 2013 but as a percentage of revenue remained at 26.3%. Increases in field management wages and incentive expense, field management auto expense, rent expense, computer expense, communication expense, employee development expense, professional services expense and sales and marketing expense were partially offset by a reduction in field management travel expense.

General and Administrative Expenses--General and administrative expenses increased $4,316 to $54,970, a 8.5% increase, from the $50,654 experienced in 2013 and as a percentage of revenues decreased .1% to 7.0%. Pension settlement costs incurred, the result of purchasing annuities related to our defined benefit pension plans, along with increases in salary and incentive expense, office rent and utilities expense, computer expense, office expense and stock compensation expense were partially offset by decreases in management travel expense, communication expense and employee development expense.
 
Depreciation and Amortization Expense--Depreciation and amortization expense of $43,040 increased $2,829 from the prior year but as a percentage of revenues decreased .2% to 5.4%. The increase is attributable to higher capital expenditures for equipment and an increase in amortization expense related to our purchases of businesses.

Gain on Sale of Assets--Gain on the sale of assets of $806 decreased $488 from the $1,294 experienced in 2013. The decrease is the result of a reduction in the number of equipment units sold in 2014 as compared with 2013.

Interest Expense--Interest expense of $2,948 increased $240 from the $2,708 incurred in 2013. The increase is attributable to higher-average debt levels necessary to fund operations and capital expenditures, partially offset by lower-average interest rates, during the 2014 as compared with 2013.

Other, Net--Other, net of $3,050 increased $223 from the $2,827 experienced in 2013. Other, net, consisted of nonoperating income and expense, including foreign currency losses on the intercompany account balances of our Canadian operations.

Income Taxes--Income taxes for 2014 were $15,131, an effective tax rate of 39.5%, compared with income taxes for 2013 of $12,712, or an effective tax rate of 35.7%. The increase of 3.8% in the effective tax rate of 39.5% for 2014, as compared to 35.7% for 2013, relates primarily to changes in audit settlements and uncertain tax position adjustments.

Net Income--Net income of $23,169 was $316 higher than the $22,853 earned in 2013, the result of higher income from operations.


Page 21


Fiscal 2013 Compared to Fiscal 2012

A comparison of our fiscal year 2013 results to 2012 follows:
 
Year Ended December 31,
 
2013
 
2012
 
Change
 
% Change
Revenues
$
713,848

 
$
680,153

 
$
33,695

 
5.0
 %
Costs and expenses:
 

 
 

 


 
 

Operating
462,646

 
437,332

 
25,314

 
5.8

Selling
120,842

 
111,578

 
9,264

 
8.3

General and administrative
50,654

 
48,171

 
2,483

 
5.2

Depreciation
38,231

 
37,365

 
866

 
2.3

Amortization of intangible assets
1,980

 
1,742

 
238

 
13.7

Gain on sale of assets, net
(1,294
)
 
(1,802
)
 
508

 
(28.2
)
 
673,059

 
634,386

 
38,673

 
6.1

Income from operations
40,789

 
45,767

 
(4,978
)
 
(10.9
)
Other income (expense):
 

 
 

 
 

 
 

Interest expense
(2,708
)
 
(2,698
)
 
(10
)
 
.4

Interest income
311

 
200

 
111

 
55.5

Other
(2,827
)
 
(2,611
)
 
(216
)
 
8.3

Income before income taxes
35,565

 
40,658

 
(5,093
)
 
(12.5
)
Income taxes
12,712

 
16,063

 
(3,351
)
 
(20.9
)
Net income
$
22,853

 
$
24,595

 
$
(1,742
)
 
(7.1
)%
 
 
 
 
 
 
 
 
nm--not meaningful
 
 
 
 
 
 
 
 
Revenues--Revenues of $713,848 increased $33,695 compared with the $680,153 reported in 2012. Utility increased $1,220, or .3%, from the prior year. Additional work obtained on two existing contracts as well as new contracts acquired in our U.S. operations were partially offset by a reduction in revenue on our largest utility account, the result of client-imposed production changes and losses of contracts within both our U.S. and Canadian operations. Residential and Commercial increased $31,458, or 10.4%, from 2012.  Despite a slow start in the first quarter of 2013 due to poor weather conditions which delayed our ability to perform liquid service applications, the remainder of the year was strong for our Residential and Commercial operations. Continued contract work with a large customer related to tree damage purportedly caused by one of its products and the addition of a business acquired in the fourth quarter 2012 located in the midwest United States also contributed to the increase. Total consolidated revenue of $713,848 includes production incentive revenue, recognized under the completed-performance method, of $8,120 during 2013 as compared with $5,004 during 2012.

Operating Expenses--Operating expenses of $462,646 increased $25,314 from the prior year, and as a percentage of revenues increased .5% to 64.8%. Utility experienced an increase of $3,801, or 1.3%, from 2012, and as a percentage of revenues increased .7% to 75.8%. Increases in employee labor and benefits expense, equipment repair and maintenance expense, travel expense, fuel expense, tool expense and material expense were partially offset by decreases in subcontractor expense, fuel expense and disposal expense. Residential and Commercial increased $18,531, or 11.9%, compared with 2012 and as a percentage of revenue increased .7% to 52.2%. Increased employee labor and benefit expense, repair and maintenance expense, fuel expense, material expense, tool and saw expense, subcontractor expense and disposal expense, associated with the increased revenue, account for the increase.

Fuel costs increased in 2013 as compared with fuel costs for 2012 and impacted operating expenses within all segments. During 2013, fuel expense of $32,928 increased $639, or 2.0%, from the $32,289 incurred in 2012. Substantially all of the $639 increase relates to an increase in the price of fuel.




Page 22


Selling Expenses--Selling expenses of $120,842 increased $9,264 from 2012 and as a percentage of revenues increased .5% to 16.9%. Utility increased $1,637, or 4.8%, from 2012. Increases in field management wages and incentive expense, office expense and employee development expense were partially offset by a reduction in field management travel expense, computer expense, field management auto expense, professional services expense and communication expense. Residential and Commercial increased $7,024, or 8.6%, from 2012 but as a percentage of revenue decreased .5% to 26.3%. Increases in field management wages and incentive expense, field management auto expense, travel expense, rent expense, computer expense and sales and marketing expense were partially offset by a reduction in communication expense.

General and Administrative Expenses--General and administrative expenses increased $2,483 to $50,654, a 5.2% increase, from the $48,171 experienced in 2012 and as a percentage of revenues remained unchanged from the prior year at 7.1%. Increases in salary and incentive expense, professional services expense, communication expenses and computer expense were partially offset by decreases in pension expense, personal development expense and stock compensation expense.
 
Depreciation and Amortization Expense--Depreciation and amortization expense of $40,211 increased $1,104 from the prior year but as a percentage of revenues decreased .1% to 5.7%. The increase is attributable to an increase in depreciation expense related to higher capital expenditures for equipment and an increase in amortization expense related to our purchases of businesses.

Gain on Sale of Assets--Gain on the sale of assets of $1,294 decreased $508 from the $1,802 experienced in 2012. Fewer equipment units were sold in 2013 as compared with 2012 which accounts for the decreased gain.

Interest Expense--Interest expense of $2,708 increased $10 from the $2,698 incurred in 2012. The increase is attributable to higher average borrowing levels necessary to fund capital expenditures and operations during the 2013 as compared with 2012.

Other, Net--Other, net of $2,827 increased $216 from the $2,611 experienced in 2012. Other, net, consisted of nonoperating income and expense, including foreign currency losses on the intercompany account balances of our Canadian operations of $146 for 2013 as compared to gains of $11 for 2012.

Income Taxes--Income taxes for 2013 were $12,712, an effective tax rate of 35.7%, compared with income taxes for 2012 of $16,063, or an effective tax rate of 39.5%. The decrease of 3.8% in the effective tax rate of 35.7% for 2013, as compared to 39.5% for 2012, relates primarily to changes in audit settlements and uncertain tax position adjustments.

Net Income--Net income of $22,853 was $1,742 lower than the $24,595 earned in 2012, the result of lower income from operations.


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 settlement, a further charge to expense may result.

The Company is routinely under audit by U.S. federal, state, local and Canadian authorities in the area of income tax. These audits include questioning the timing and the amount of income and deductions and the allocation of income and deductions among various tax jurisdictions. During the fourth quarter 2013, the U.S. Internal Revenue Service completed its audit of the Company's U.S. income tax returns for 2010 and 2011 and, during 2010, 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 2009. As of December 31, 2014, we believe it is reasonably possible that the total amount of unrecognized tax benefits will not significantly increase or decrease.


Page 23


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 2014 or for any prior periods. There were no events or circumstances from the date of our assessment through December 31, 2014 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 $28,164 at December 31, 2014. Based upon the goodwill impairment analysis conducted in the fourth quarter 2014, a hypothetical reduction in the fair value of the individual reporting units, ranging from approximately 46% to 63%, 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. Cash generated from operations and our revolving credit facility are our primary sources of capital.

Cash Flow Summary

Our cash flows from operating, investing and financing activities, as reflected in the Consolidated Statements of Cash Flow for the years ended December 31, 2014 and December 31, 2013, are summarized as follows:
 
2014
 
2013
Cash provided by (used in):
 
 
 
Operating activities
$
49,279

 
$
56,310

Investing activities
(64,060
)
 
(43,205
)
Financing activities
17,335

 
(16,891
)
Increase (Decrease) in cash
$
2,554

 
$
(3,786
)
 
Net Cash Provided by Operating Activities--Operating activities in 2014 provided cash of $49,279 as compared to $56,310 provided in 2013. The $7,031 net decrease was primarily attributable to (i) an increase in net income of $316, (ii) an increase of $2,829 in depreciation and amortization expense, and (iii) $3,859 more cash used from changes in operating assets and liabilities.


Page 24


Overall, accounts receivable dollars increased $4,489 in 2014 as compared to the $10,307 decrease experienced in 2013. With respect to the change in accounts receivable arising from business levels, the “days-sales-outstanding” in accounts receivable (“DSO”) at the end of 2014 decreased 4 days to 50 days, as compared to 2013. The DSO at December 31, 2013 was 54 days.

Accounts payable and accrued expenses increased $1,206 in 2014, $3,514 more than the decrease of $2,308 experienced in 2013. Increases in trade payables, health insurance expense, professional service accruals, compensated absence accruals and employee compensation accruals were partially offset by a decrease in advance payments from customers and real estate tax accruals.

Self-insurance accruals increased $2,116 in 2014, a change of $7,137 compared to the decrease of $5,021 experienced in 2013. The increase occurred within our general liability and vehicle liability classifications and resulted primarily from an overall increase in deductible amounts under commercial insurance or the self-insured risk retention.

Other assets, net, increased $6,640 in 2014, as compared to the $6,926 increase in 2013. Increases in prepaid expenses, other deposits and operating supplies were partially offset by decreases in tax deposits.

Net Cash Used in Investing Activities--Investing activities used $64,060 in cash, $20,855 more than the $43,205 used in 2013. The increase was primarily the result of additional expenditures for the purchase of equipment and land and building necessary to support additional business growth as well as the purchases of businesses.

Net Cash Used in Financing Activities--Financing activities provided $17,335 in cash in 2014, $34,226 more than the $16,891 of cash used in 2013. Our revolving credit facility provided $24,500 as compared with the $4,200 used during 2013. We use the revolving credit facility primarily for capital expenditures and payments of notes payable, primarily related to acquisitions. Borrowings of long-term debt and capital leases totaled $5,695. Purchases of common shares for treasury of $19,598 were partially offset by net cash received of $10,503 from the sale of common shares and cash received on our common share subscriptions. Dividends paid during 2014 totaled $2,674.

Revolving Credit Facility and 5.09% Senior Unsecured Notes--In November 2013, the Company amended its revolving credit facility. The Amended and Restated Credit Agreement provides for a revolving credit facility with a group of banks under which up to an aggregate of $175,000 is available, with a letter of credit sublimit of $100,000 and a swing line commitment of $15,000 (the previous agreement permitted borrowings up to $140,000 with a letter of credit sublimit of $100,000). Under certain circumstances, the amount available under the revolving credit facility may be increased to $210,000.

The Amended and Restated Credit Agreement extended the term of the revolving credit facility to November 7, 2018 from December 19, 2014. The revolving credit facility contains certain affirmative and negative covenants customary for this type of facility and includes financial covenant ratios with respect to a maximum leverage ratio and a maximum balance sheet leverage ratio. As of December 31, 2014, we were in compliance with all financial covenants contained in our revolving credit facility.

As of December 31, 2014, we had unused commitments under the facility approximating $70,964, and $104,036 committed, which consisted of borrowings of $44,500 and issued letters of credit of $59,536. Borrowings outstanding bear interest, at Davey Tree’s option, of either (a) the base rate or (b) LIBOR plus a margin adjustment ranging from .75% to 1.50%--with the margin adjustments in both instances based on the Company's leverage ratio at the time of borrowing. The base rate is the greater of (i) the agent bank’s prime rate, (ii) LIBOR plus 1.5%, or (iii) the federal funds rate plus .5%. A commitment fee ranging from .10% to .25% is also required based on the average daily unborrowed commitment.

On July 22, 2010, we issued $30,000 of 5.09% Senior Unsecured Notes, Series A, due July 22, 2020 (the "5.09% Senior Notes"). The 5.09% Senior Notes were issued pursuant to a Master Note Purchase Agreement (the “Purchase Agreement”), between Davey Tree and the purchasers of the 5.09% Senior Notes. The net proceeds of the 5.09% Senior Notes were used in 2010 to pay down borrowings under our revolving credit facility.

The 5.09% Senior Notes are equal in right of payment with our revolving credit facility and all other senior unsecured obligations of the Company. Interest is payable semiannually and five equal, annual principal payments 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. As of December 31, 2014, we were in compliance with all financial covenants contained in our revolving credit facility.

Page 25


Contractual Obligations Summary

The following is a summary of our long-term contractual obligations, as at December 31, 2014, to make future payments for the periods indicated:
 
 
 
 
Contractual Obligations Due -- Year Ending December 31,
 
 
Description
 
Total
 
2015
 
2016
 
2017
 
2018
 
2019
 
Thereafter
Revolving credit facility
 
$
44,500

 
$

 
$

 
$

 
$
44,500

 
$

 
$

Senior unsecured notes
 
30,000

 

 
6,000

 
6,000

 
6,000

 
6,000

 
6,000

Term loans
 
15,087

 
8,281

 
1,234

 
803

 
150

 
159

 
4,460

Operating lease obligations
 
17,231

 
5,813

 
4,470

 
2,918

 
1,764

 
868

 
1,398

Self-insurance accruals
 
57,934

 
23,384

 
13,707

 
8,627

 
4,747

 
2,299

 
5,170

Purchase obligations
 
11,145

 
11,145

 

 

 

 

 

Other liabilities
 
18,968

 
8,022

 
1,076

 
1,143

 
1,144

 
757

 
6,826

 
 
$
194,865

 
$
56,645

 
$
26,487

 
$
19,491

 
$
58,305

 
$
10,083

 
$
23,854


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, 2014. 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, 2014, 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, 2014, we were contingently liable to our principal banks for letters of credit in the amount of $61,540 of which $59,536 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 2015 through 2017. We intend to renew the performance bonds where appropriate and as necessary.

Off-Balance Sheet Arrangements

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

Capital Resources

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

Cash of $18,415 as of December 31, 2014 included $8,120 in the U.S. and $10,295 in Canada, all of which is subject to U.S. federal income taxes and Canadian taxes if repatriated to the U.S. Currently, we do not expect to repatriate a portion of our 2014 Canadian earnings to satisfy our 2014 U.S. based cash flow needs.

Business seasonality results in higher revenues during the second and third quarters as compared with the first and fourth quarters of the year, while our methods of accounting for fixed costs, such as depreciation and interest expense, are not significantly impacted by business seasonality. Capital resources during these periods are equally affected. We satisfy seasonal working capital needs and other financing requirements with the revolving credit facility and several other short-term lines of credit. We are continually reviewing our existing sources of financing and evaluating alternatives. At December 31, 2014, we had working capital of $58,843, unused short-term lines of credit approximating $7,281, and $70,964 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 26


RECENT ACCOUNTING GUIDANCE

Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606)--In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers ("Topic 606"),” which will replace all current U.S. GAAP guidance on revenue recognition and eliminate all industry-specific guidance.

The new revenue recognition guidance provides a unified model to determine when and how revenue is recognized. The underlying principle is that an entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration for which the entity expects in exchange for those goods and services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of the time value of money in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The guidance also requires enhanced information to be presented in the financial statements regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers.

Unless the FASB delays the effective date of the new guidelines, it will be effective for Davey Tree beginning January 1, 2017 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. Early adoption is not permitted. We are currently evaluating the methods of adoption as well as the impact that it may have, if any, on our consolidated financial statements. The new revenue guidance will supersede existing revenue guidance affecting our Company, and may also affect our business processes and our information technology systems. As a result, our evaluation of the effect of the new revenue guidance will extend over future periods.


CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

On an ongoing basis, we evaluate our estimates and assumptions, including those related to accounts receivable, specifically those receivables under contractual arrangements primarily arising from Utility customers; allowance for doubtful accounts; and self-insurance accruals. We base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.

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

Revenue Recognition--Revenues from Residential and Commercial customers are recognized as the services are provided and amounts are determined to be collectible. Revenues from contractual arrangements, primarily with Utility 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 Customers--We generate a significant portion of revenues and corresponding accounts receivable from our Utility customers in the utility industry. One Utility customer, PG&E, approximated 8% of revenues during 2014, 9% during 2013 and 10% during 2012. 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 27


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

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

The workers' compensation accruals are discounted as the amount and timing of cash payments related to those accruals are reliably determinable given the nature of workers' compensation benefits and the level of historical claim volume to support the actuarial assumptions and judgments used to derive the expected loss payment pattern. The workers' compensation accruals are discounted using an interest rate that approximates the long-term investment yields over the expected payment pattern of unpaid losses.

Our self-insurance accruals are based on estimates and, while we believe that the amounts accrued are adequate and not excessive, the ultimate claims may be in excess of or less than the amounts provided.


MARKET RISK INFORMATION

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

Interest Rate Risk

We are exposed to market risk related to changes in interest rates on long-term debt obligations. We regularly monitor and measure our interest rate risk and, to the extent that we believe we are exposed, from time-to-time we have entered into interest rate swap contracts--derivative financial instruments--with the objective of altering interest rate exposures related to a portion of variable debt.

The following table provides information, as of December 31, 2014, about our debt obligations, including principal cash flows, weighted-average interest rates by expected maturity dates and fair values. Weighted-average interest rates used for variable-rate obligations are based on rates as derived from published spot rates, in effect as at December 31, 2014.
 
Expected Maturity Date
 
 
 
 
 
Fair Value
December 31,
2014
 
2015
 
2016
 
2017
 
2018
 
2019
 
Thereafter
 
Total
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate
$
7,232

 
$
6,136

 
$
6,141

 
$
6,150

 
$
6,159

 
$
10,461

 
$
42,278

 
$
36,123

Average interest rate
4.7
%
 
5.1
%
 
5.1
%
 
5.1
%
 
5.1
%
 
5.1
%
 
 

 
 

Variable rate
$
45,549

 
$
1,098

 
$
662

 
$

 
$

 
$

 
$
47,309

 
$
46,259

Average interest rate
1.4
%
 
2.0
%
 
2.8
%
 

 

 

 
 

 
 


Interest rates on the variable-rate debt, as of December 31, 2014, ranged from .9% to 3.3%.

Foreign Currency Exchange Rate Risk

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

Page 28


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, 2014, 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. Presently, we do not engage in hedging activities related to our foreign currency exchange rate risk.

Commodity Price Risk

We are subject to market risk from fluctuating prices of fuel--both diesel and gasoline. Beginning in the second quarter 2011, we entered into fuel derivatives as "economic hedges" related to fuel consumed by Davey Tree service vehicles. The objectives of the economic hedges are to fix the price of a portion of our fuel needs and mitigate the earnings and cash flow volatility attributable to the risk of changing prices. As of December 31, 2013, all fuel derivatives previously entered into expired.

Impact of Inflation

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

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

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

Item 8.  Financial Statements and Supplementary Data.

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

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

None.

Item 9A.  Controls and Procedures.

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

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


(b) Management’s Discussion of Internal 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”).

Page 29



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: (i) provide for the maintenance of records that, in reasonable detail, accurately and fairly reflect our business transactions; (ii) provide reasonable assurance that transactions are recorded properly to allow for the preparation of financial statements in accordance with U.S. GAAP; and (iii) provide reasonable assurance that the unauthorized acquisition, use, or disposition of our assets will be prevented or detected in a timely manner. We maintain a dynamic system of internal controls and processes--including internal controls over financial reporting--designed to ensure reliable financial recordkeeping, transparent financial reporting and protection of physical and intellectual property.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.


(c) Management’s Annual Report on 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 as of December 31, 2014, as to the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO 2013”).

As permitted by the Securities and Exchange Commission, our evaluation of, and conclusion on, the effectiveness of internal control over financial reporting did not include the internal controls of Wetland Studies and Solutions, Inc., acquired as of the beginning of the second quarter 2014, which is included in our 2014 consolidated financial statements and represented approximately 2% of our total assets as of December 31, 2014 and 1% of our total revenues for the year ended December 31, 2014.

Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2014.

Our independent registered public accounting firm has issued an audit report on our internal control over financial reporting, which is included in this report.
/s/ Karl J. Warnke          
 
/s/ Joseph R. Paul                  
 
/s/ Nicholas R. Sucic        
Chairman, President and Chief Executive Officer
 
Chief Financial Officer and Secretary
 
Vice President and Controller

Kent, Ohio
March 10, 2015


(d) Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the fourth quarter 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.










Page 30


(e) Report of Independent Registered Public Accounting Firm

Report of Ernst & Young, LLP
Independent Registered Public Accounting Firm
Regarding Internal Control over Financial Reporting


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, 2014, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (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.

As indicated in the accompanying Management's Annual Report on Internal Control over Financial Reporting, management's assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Wetland Studies and solutions, Inc., which is included in the 2014 consolidated financial statements of The Davey Tree Expert Company and constituted 2% of total assets as of December 31, 2014 and 1% of revenues, for the year then ended. Our audit of internal control over financial reporting of The Davey Tree Expert Company also did not include an evaluation of internal control over financial reporting Wetland Studies and Solutions, Inc.
 
In our opinion, The Davey Tree Expert Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, 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, 2014 and 2013, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014 of The Davey Tree Expert Company and our report dated March 10, 2015 expressed an unqualified opinion thereon.  
/s/ Ernst & Young LLP
Akron, Ohio
March 10, 2015

Page 31



Item 9B.  Other Information.

None.
PART III

Item 10.  Directors, Executive Officers and Corporate Governance.

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

Information about our directors is in the section "Election of Directors" of our 2015 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; Attendance” of our 2015 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 2015 Proxy Statement, which is incorporated into this report by reference. See also the section titled "Shareholders Nominations for Director," which is incorporated into this report by reference.

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

Item 11.  Executive Compensation.

Information about executive and director compensation is in the sections “Compensation Discussion and Analysis,” "Report of the Compensation Committee," "Compensation of Executive Officers" and "Compensation of Directors" of our 2015 Proxy Statement, which are incorporated into this report by reference.

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Information about ownership of our common shares by certain persons is in the section "Ownership of Common Shares" of our 2015 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 2015 Proxy Statement, which is incorporated into this report by reference.

Item 13.  Certain Relationships and Related Transactions, and Director Independence.

Information about certain transactions between us and our affiliates and certain other persons and the independence of directors is in the section “Corporate Governance” of our 2015 Proxy Statement, which is incorporated into this report by reference.

Item 14.  Principal Accountant Fees and Services.

Information about our principal accountant’s fees and services is in the section “Independent Auditors” of our 2015 Proxy Statement, which is incorporated into this report by reference.

PART IV

Item 15.  Exhibits and Financial Statement Schedules.

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

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

(b) Exhibits.

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

Page 32


SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 10, 2015.
 
 
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, 2015.
 
 
 
 
 
 
 
 
 
/s/ Patrick M. Covey                                  
 
/s/ John E. Warfel                                        
Patrick M. Covey, Director
 
John E. Warfel, Director
Chief Operating Officer
 
 
 
 
 
 
 
 
 
 
/s/ Karl J. Warnke                                        
/s/ J. Dawson Cunningham                          
 
Karl J. Warnke, Director,
J. Dawson Cunningham, Director
 
Chairman, President and Chief Executive Officer
 
 
(Principal Executive Officer)
 
 
 
 
 
 
/s/ William J. Ginn                                      
 
 
William J. Ginn, Director
 
/s/ Joseph R. Paul                                   
 
 
Joseph R. Paul, Chief Financial Officer and Secretary
 
 
(Principal Financial Officer)
 
 
 
/s/ Douglas K. Hall                                     
 
 
Douglas K. Hall, Director
 
 
 
 
/s/ Nicholas R. Sucic                                    
 
 
Nicholas R. Sucic, Vice President and Controller
 
 
(Principal Accounting Officer)
/s/ Sandra W. Harbrecht                             
 
 
Sandra W. Harbrecht, Director
 
 
 


Page 33


EXHIBIT INDEX
 
 
 
 
 
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
 
Second Amended and Restated Credit Agreement among The Davey Tree Expert Company, as borrower, various lending institutions party thereto, as banks, KeyBank National Association, as lead arranger, syndication agent and administrative agent, and PNC Bank, National Association and Wells Fargo Bank, N.A., as co-documentation agents, dated as of November 7, 2013 (Incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on November 12, 2013).
 
 
 
 
 
 
 
10.2
 
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).
 
 
 
 
 
 
 
10.3
 
2004 401KSOP Match Restoration Plan (Incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 3, 2004).
 
 
 
 
 
 
 
10.4
 
Supplemental Executive Retirement Plan (Incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 3, 2004).
 
 
 
 
 
 
 
10.5
 
Retirement Benefit Restoration Plan (Incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 3, 2004).
 
 
 
 
 
 
 
10.6
 
The Davey Tree Expert Company Board of Directors Revised Deferred Compensation Plan (Incorporated by reference to Exhibit 10.7 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2013).
 
 
 
 
 
 
 
10.7
 
2014 Omnibus Stock Plan (Incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on May 21, 2014).
 
 
 
 
 
 
 
10.8
 
Stock Subscription Agreement.
 
Filed Herewith
 
 
 
 
 
21
 
Subsidiaries of the Registrant.
 
Filed Herewith
 
 
 
 
 
23
 
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.
 
Filed Herewith
 
 
 
 
 
31.1
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
Filed Herewith
 
 
 
 
 
31.2
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
Filed Herewith
 
 
 
 
 
32.1
 
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
 
Furnished Herewith
 
 
 
 
 

Page 34


Exhibit No.
 
Description
 
 
 
 
 
 
 
32.2
 
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
 
Furnished Herewith
 
 
 
 
 
101
 
The following materials from the Company's Annual Report on Form 10-K for the year ended December 31, 2014, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Statements of Consolidated Shareholders' Equity, (v) the Consolidated Statement of Cash Flows, and (vi) Notes to Consolidated Financial Statements.
 
Filed Herewith

The documents listed as Exhibits 10.2 through 10.8 constitute management contracts or compensatory plans or arrangements.
 
The Registrant is a party to certain instruments, copies of which will be furnished to the Securities and Exchange Commission upon request, defining the rights of holders of long-term debt.

Page 35



ANNUAL REPORT ON FORM 10-K

ITEM 8, ITEM 15(a)(1) and (2)

LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CERTAIN EXHIBITS

FINANCIAL STATEMENTS SCHEDULES

YEAR ENDED DECEMBER 31, 2014

THE DAVEY TREE EXPERT COMPANY

KENT, OHIO


Page 36


LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
 
 
FORM 10-K - ITEM 15(a)(1) AND (2)
 
THE DAVEY TREE EXPERT COMPANY
 
The following consolidated financial statements of The Davey Tree Expert Company are included in Item 8:
 
Audited Consolidated Financial Statements:
Page
Notes to Consolidated Financial Statements -- December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Financial Statement Schedules:
 
None.
 
All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
 

F-1


Report of Independent Registered Public Accounting Firm



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

We have audited the accompanying consolidated balance sheets of The Davey Tree Expert Company as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2014.  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits. 

We conducted our audits 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 the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Davey Tree Expert Company at December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), The Davey Tree Expert Company's internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) and our report dated March 10, 2015 expressed an unqualified opinion thereon.


/s/ Ernst & Young LLP

Akron, Ohio
March 10, 2015




F-2


THE DAVEY TREE EXPERT COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share dollar amounts)
 
December 31,
 
2014
 
2013
Assets
 
 
 
Current assets:
 
 
 
Cash
$
18,415

 
$
15,861

Accounts receivable, net
111,598

 
105,256

Operating supplies
6,968

 
5,661

Prepaid expenses
14,088

 
11,393

Other current assets
16,127

 
13,845

Total current assets
167,196

 
152,016

Property and equipment:
 

 
 

Land and land improvements
16,553

 
13,904

Buildings and leasehold improvements
33,644

 
27,364

Equipment
482,752

 
442,882

 
532,949

 
484,150

Less accumulated depreciation
372,066

 
347,266

 
160,883

 
136,884

Other assets
18,862

 
16,917

Identified intangible assets and goodwill, net
34,063

 
27,561

 
$
381,004

 
$
333,378

Liabilities and shareholders' equity
 

 
 

Current liabilities:
 

 
 

Short-term debt
$
8,281

 
$
8,434

Accounts payable
42,140

 
37,922

Accrued expenses
34,925

 
36,858

Self-insurance accruals
23,007

 
22,057

Total current liabilities
108,353