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EX-32.2 - EXHIBIT 32.2 - DAVEY TREE EXPERT COdt2016q410kex322.htm
EX-32.1 - EXHIBIT 32.1 - DAVEY TREE EXPERT COdt2016q410kex321.htm
EX-31.2 - EXHIBIT 31.2 - DAVEY TREE EXPERT COdt2016q410kex312.htm
EX-31.1 - EXHIBIT 31.1 - DAVEY TREE EXPERT COdt2016q410kex311.htm
EX-23 - EXHIBIT 23 - DAVEY TREE EXPERT COdt2016q410kex23.htm
EX-21 - EXHIBIT 21 - DAVEY TREE EXPERT COdt2016q410kex21.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, 2016
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
dt2016q4davlogsma01a01a01a03.jpg
THE DAVEY TREE EXPERT COMPANY
(Exact name of registrant as specified in its charter)
Ohio
34-0176110
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
1500 North Mantua Street
P.O. Box 5193
Kent, Ohio 44240
(Address of principal executive offices) (Zip code)
(330) 673-9511
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, $1.00 par value
Indicate by check mark if the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act).  Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x   No ¨
Indicate by check mark whether the registrant has submitted electronically 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 12,465,379 Common Shares outstanding as of March 10, 2017. The aggregate market value of the Common Shares held by nonaffiliates of the registrant as of July 2, 2016 was $358,707,925. 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 2017 Annual Meeting of Shareholders, to be held on May 16, 2017, are incorporated by reference into Part III (to be filed within 120 calendar days of the registrant’s fiscal year end).
 
 
 
 
 

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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.
Various economic factors 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.
Fluctuations in foreign currency exchange rates may have a material adverse impact on our operating results.
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.
Significant increases in health care costs could negatively impact our results of operations or financial position.
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.
A disruption in our information technology systems, including a disruption related to cybersecurity, could adversely affect our financial performance.
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, 2016
 
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 arboricultural, horticultural, environmental and consulting services to our customers throughout the United States and Canada. We have two reportable operating segments organized by type or class of customer: Residential and Commercial, and Utility.

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

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

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

We provide a wide range of horticultural services to private companies, public utilities, local, state and federal agencies, and a variety of industrial, commercial and residential customers. During 2016, we had revenues of approximately $100 million, or approximately 12% 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 24-27 of this report.

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

We own several trademarks including "Davey," "Davey and Design," "Arbor Green Pro," "Arbor Green," and "Davey Resource Group." Through substantial advertising and use, we believe that these trademarks have become of value in the identification and acceptance of our products and services.

Employees
We employed approximately 8,000 employees at December 31, 2016. 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


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Item 1A.  Risk Factors.

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

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.

Economic conditions may adversely impact our customers’ future spending as well as pricing and payment for our services, thus negatively impacting our operations and growth.
Economic conditions may adversely impact the demand for our services and potentially result in depressed prices for our services and the delay or cancellation of projects. That may make it difficult to estimate our customers' requirements for our services and, therefore, add uncertainty to customer demand. Various economic factors and customers' confidence in future economic conditions may cause a reduction in our customers' spending for our services and may also impact the ability of our customers to pay amounts owed, which could reduce our cash flow and adversely impact our debt or equity financing. These events could have a material adverse effect on our operations and our ability to grow at historical levels.

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.


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

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

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

We are subject to the effect of foreign currency exchange rate fluctuations, which may have a material adverse impact on us.

We are exposed to foreign currency exchange rate risk resulting from our operations in Canada, where we provide a comprehensive range of horticultural services. Fluctuations in foreign currency exchange rates may make our services more expensive for others to purchase or increase our operating costs, affecting our competitiveness and our profitability. Our financial results could be affected by factors such as changes in the foreign currency exchange rate or differing economic conditions in the Canadian markets as compared with the markets for our services in the United States. Our earnings are affected by translation exposures from currency fluctuations in the value of the U.S. dollar as compared to the Canadian dollar.

Revenues from customers in Canada are subject to foreign currency exchange. Thus, certain revenues and expenses have been, and are expected to be, subject to the effect of foreign currency fluctuations, and these fluctuations may have a material adverse impact on our operating results, asset values and could reduce shareholders’ equity. In addition, if we expand our Canadian operations, exposures to gains and losses on foreign currency transactions may increase.

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

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

Increases in our health insurance costs and uncertainty about federal health care policies could adversely affect our results of operations and cash flows.
The costs of employee health care insurance have been increasing in recent years due to rising health care costs, legislative changes, and general economic conditions. We cannot predict what other health care programs and regulations will ultimately

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be implemented at the federal or state level or the effect of any future legislation or regulations on our business, results of operations and cash flows. In addition, we cannot predict when and if congress will repeal and/or replace certain health care programs and regulations at the federal level and the impact that such changes would have on our business. A continued increase in health care costs or additional costs incurred as a result of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 or other future health care reform laws imposed by Congress or state legislatures could have a negative impact on our financial position, results of operations and cash flows.

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.

We are subject to intense competition.

We believe that each aspect of our business is highly competitive. Principal methods of competition in our operating segments are customer service, marketing, image, performance and reputation. Pricing is not always a critical factor in a customer’s decision with respect to our Residential and Commercial segment; however, pricing is generally the principal method of competition for our Utility segment, although in most instances consideration is given to reputation and past production performance. On a national level, our competition is primarily landscape construction and maintenance companies as well as residential and commercial lawn care companies. At a local and regional level, our competition comes mainly from small, local companies which are engaged primarily in tree care and lawn services. Our Utility segment competes principally with one major national competitor, as well as several smaller regional firms. Furthermore, competitors may have lower costs because privately-owned companies operating in a limited geographic area may have significantly lower labor and overhead costs. Our competitors may develop the expertise, experience and resources to provide services that are superior in both price 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 policies regarding changing climate conditions, including legal, regulatory and social responses thereto, may have on our business.
Many scientists, environmentalists, international organizations, political activists, regulators and other commentators believe that global climate change has added, and will continue to add, to the unpredictability, frequency and severity of natural disasters in certain parts of the world. In response, a number of legal and regulatory measures and social initiatives have been introduced in an effort to reduce greenhouse gas and other carbon emissions that these parties believe may be contributors to global climate change. These proposals, if enacted, could result in a variety of regulatory programs, including potential new

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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.

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.

A disruption in our information technology systems, including a disruption related to cybersecurity, could adversely affect our financial performance.
We rely on the accuracy, capacity and security of our information technology systems. Despite the security measures that we have implemented, including those measures related to cybersecurity, our systems could be breached or damaged by computer viruses, natural or man-made incidents or disasters or unauthorized physical or electronic access. A breach could result in business disruption, theft of our intellectual property, trade secrets or customer information and unauthorized access to personnel information. To the extent that our business is interrupted or data is lost, destroyed or inappropriately used or disclosed, such disruptions could adversely affect our competitive position, reputation, relationships with our customers, financial condition, operating results and cash flows. In addition, we may be required to incur significant costs to protect against the damage caused by these disruptions or security breaches in the future.

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

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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
 
262,931

 
15
Utility
 
3
 
Owned
 
36,037

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

 
3

We also rent approximately 146 properties in 31 states and three provinces.

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


Item 3.  Legal Proceedings.

Not applicable.


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, 2017 follow:
Name
 
Position
 
Age
 
 
 
 
 
Karl J. Warnke
 
Chairman and Chief Executive Officer
 
65
 
 
 
 
 
Patrick M. Covey
 
President and Chief Operating Officer
 
53
 
 
 
 
 
Joseph R. Paul, CPA
 
Executive Vice President, Chief Financial Officer and Secretary
 
55
 
 
 
 
 
Lawrence S. Abernathy
 
Vice President and General Manager, Davey Tree Surgery Company
 
66
 
 
 
 
 
Christopher J. Bast, CPA, CTP
 
Treasurer
 
49
 
 
 
 
 
Marjorie L. Conner, Esquire
 
Assistant Secretary and Counsel
 
59
 
 
 
 
 
James E. Doyle
 
Executive Vice President and General Manager, Davey Tree Expert Co. of Canada, Limited
 
48
 
 
 
 
 
Gregory M. Ina
 
Vice President and General Manager of Research, Recruiting and Human Resource Development
 
45
 
 
 
 
 
Dan A. Joy
 
Executive Vice President and General Manager, Commercial Landscape Services and Operations Support Services
 
59
 
 
 
 
 
Steven A. Marshall
 
Executive Vice President and Assistant to the President
 
65
 
 
 
 
 
Brent R. Repenning
 
Senior Vice President of Davey Resource Group and Eastern Utility
 
45
 
 
 
 
 
Thea R. Sears, CPA
 
Controller
 
48
 
 
 
 
 
James F. Stief
 
Executive Vice President, U.S. Residential Operations
 
62
 
 
 
 
 
Mark J. Vaughn
 
Vice President and General Manager, Eastern Utility Services
 
62

Mr. Warnke was elected Chairman of the Board, effective May 20, 2009, and continues to serve as Chief Executive Officer, having been appointed in January 2007. From January 2007 until May 2009, he was Chief Executive Officer and President. 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. As previously announced, Mr. Warnke intends to retire from the role of Chief Executive Officer effective July 21, 2017. Upon his retirement as Chief Executive Officer, Mr. Warnke intends to remain as Chairman of the Board.

Page 11



Mr. Covey was elected President and Chief Operating Officer effective March 4, 2016 and has served as a Director since May 20, 2014. He previously served as President and Chief Operating Officer, U.S. Operations, having been appointed in April 2014, and as Chief Operating Officer, U.S. Operations, having been appointed in February 2012. Prior to that time, Mr. Covey served as Executive Vice President, having been appointed in January 2007, Vice President and General Manager of the Davey Resource Group, having been appointed in March 2005, and Vice President, Southern Operations, Utility Services, having been appointed in January 2003. Previously, having joined Davey Tree in August 1991, Mr. Covey held various managerial positions, including Manager of Systems and Process Management and Administrative Manager, Utility Services.

Mr. Paul was elected Executive Vice President, Chief Financial Officer and Secretary effective March 4, 2016 and served as Chief Financial Officer and Secretary, having been appointed in March 2013. Prior to that time, he served as Vice President and Treasurer, having been appointed in May 2011. Mr. Paul joined Davey Tree as Treasurer in December 2005. 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 as 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. Abernathy was elected Vice President and General Manager, Davey Tree Surgery Company, effective April 2, 2012, and served as Senior Vice President, Davey Tree Surgery Company, having been appointed in July 2010. Prior to that time, he served as Vice President, Utility Operations, having been appointed in April 1995. Previously, having joined Davey Tree in 1969, Mr. Abernathy held various managerial positions, including Operations Manager, Area Manager and Account Manager.

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. Ina was elected Vice President and General Manager of Research, Recruiting and Human Resource Development effective April 4, 2016, having previously been elected an officer effective March 4, 2016. Prior to this time, he served as Vice President and General Manager of the Davey Institute, having been appointed in May 2009, and General Manager of the Davey Institute, having been appointed in May 2006. Previously, having joined Davey Tree in 1996, Mr. Ina held various managerial and operational positions in the Davey Institute and Davey Resource Group.

Mr. Joy was elected Executive Vice President and General Manager, Commercial Landscape Services and Operations Support Services, effective August 15, 2014 and served as Executive Vice President and General Manager, Commercial Landscape Services, having been appointed May 21, 2014. Prior to that time, he served as Vice President and General Manager, Commercial Landscape Services, having been appointed in May 2013, and Vice President, Commercial Landscape Services, having been appointed in December 2004. Previously, having joined Davey Tree in 1976, Mr. Joy held various managerial positions, including Operations Manager, District Manager and Assistant District Manager.

Mr. Marshall was elected Executive Vice President and Assistant to the President, effective October 2, 2016. Prior to that time, he served as Executive Vice President, U.S. Utility Operations, having been elected in January 2007, Vice President and General Manager of Eastern Utility Services, having been appointed in January 2003, and 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.


Page 12


Mr. Repenning was elected Senior Vice President of Davey Resource Group and Eastern Utility, effective October 2, 2016 and served as Vice President and General Manager, Davey Resource Group, having been appointed in June 2010. Prior to that time, he served as Vice President, Davey Resource Group, having been appointed in October 2009. Previously, having joined Davey Tree in 1994, Mr. Repenning held various managerial and operational positions, including Regional Manager, Production Manager and Supervisor.

Ms. Sears was appointed Controller effective September 16, 2016 and prior to that, served as Assistant Controller, having been appointed in May 2010. Prior to that time, she served as Manager of Financial Accounting, having been appointed in April 1998, and as Supervisor of Financial Accounting, having been appointed in September 1995.  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.

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.; 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 March 10, 2017 we had 3,868 record holders of our common shares.

On March 10, 2017 we had 12,465,379 common shares outstanding and options exercisable to purchase 375,448 common shares, partially-paid subscriptions for 416,720 common shares and purchase rights outstanding for 169,191 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
 
2016
 
2015
1
 
5.00

 
5.00

2
 
5.00

 
5.00

3
 
5.00

 
5.00

4
 
5.00

 
5.00

Total
 
20.00

 
20.00


We presently expect to pay comparable cash dividends in 2017.

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, 2016:
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 2016
 
 
 
 
 
 
 
 
January 1 to January 30
 
804

 
$
31.50

 
n/a
 
n/a
January 31 to February 27
 
270

 
31.50

 
n/a
 
n/a
February 28 to April 2
 
51,749

 
32.70

 
n/a
 
n/a
Total First Quarter
 
52,823

 
32.68

 
 
 
 
 
 
 
 
 
 
 
 
 
April 3 to April 30
 
102,133

 
32.70

 
n/a
 
n/a
May 1 to May 28
 
109,358

 
32.70

 
n/a
 
n/a
May 29 to July 2
 
79,309

 
32.70

 
n/a
 
n/a
Total Second Quarter
 
290,800

 
32.70

 
 
 
 
 
 
 
 
 
 
 
 
 
July 3 to July 30
 
288

 
32.70

 
n/a
 
n/a
July 31 to August 27
 
31,609

 
33.90

 
n/a
 
n/a
August 28 to October 1
 
76,613

 
33.90

 
n/a
 
n/a
Total Third Quarter
 
108,510

 
33.90

 
 
 
 
 
 
 
 
 
 
 
 
 
October 2 to October 29
 
167,655

 
33.90

 
n/a
 
n/a
October 30 to December 3
 
84,087

 
33.90

 
n/a
 
n/a
December 4 to December 31
 
42,166

 
33.90

 
n/a
 
n/a
Total Fourth Quarter
 
293,908

 
33.90

 
 
 
 
 
 
 
 
 
 
 
 
 
Total Year to Date
 
746,041

 
$
33.35

 
 
 
 
 
 
 
 
 
 
 
 
 
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.; 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.

dt2016q410_chart-04442.jpg

 
 
2011
 
2012
 
2013
 
2014
 
2015
 
2016
Davey Tree
 
100
 
119
 
136
 
156
 
171
 
185
S&P 500 Index
 
100
 
116
 
154
 
175
 
177
 
198
Peer Group
 
100
 
109
 
144
 
146
 
154
 
219

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,
 
2016
 
2015
 
2014
 
2013
 
2012
 
(In thousands, except ratio and per share data)
Operating Statement Data:
 
 
 
 
 
 
 
 
 
Revenues
$
845,678

 
$
821,904

 
$
789,911

 
$
713,848

 
$
680,153

Costs and expenses:
 

 
 

 
 

 
 
 
 
Operating
541,486

 
528,899

 
508,677

 
462,646

 
437,332

Selling
152,106

 
144,234

 
140,027

 
120,842

 
111,578

General and administrative
61,789

 
59,798

 
54,970

 
50,654

 
48,171

Depreciation
47,284

 
44,677

 
40,970

 
38,231

 
37,365

Amortization of intangible assets
2,306

 
2,214

 
2,070

 
1,980

 
1,742

Gain on sale of assets, net
(4,664
)
 
(2,026
)
 
(806
)
 
(1,294
)
 
(1,802
)
Income from operations
45,371

 
44,108

 
44,003

 
40,789

 
45,767

Interest expense
(4,393
)
 
(3,355
)
 
(2,948
)
 
(2,708
)
 
(2,698
)
Interest income
255

 
249

 
295

 
311

 
200

Other expense
(3,989
)
 
(5,744
)
 
(3,050
)
 
(2,827
)
 
(2,611
)
Income before income taxes
37,244

 
35,258

 
38,300

 
35,565

 
40,658

Income taxes
14,960

 
13,460

 
15,131

 
12,712

 
16,063

Net income
$
22,284

 
$
21,798

 
$
23,169

 
$
22,853

 
$
24,595

Earnings per share--diluted
$
1.64

 
$
1.56

 
$
1.63

 
$
1.57

 
$
1.68

Shares used for computing per share amounts--diluted
13,624

 
13,977

 
14,238

 
14,602

 
14,609

 
 
 
 
 
 
 
 
 
 
Other Financial Data:
 

 
 

 
 

 
 
 
 
Depreciation and amortization
$
49,590

 
$
46,891

 
$
43,040

 
$
40,211

 
$
39,107

Capital expenditures
56,646

 
56,047

 
55,731

 
45,205

 
29,734

Cash flow provided by (used in):
 

 
 

 
 

 
 
 
 
Operating activities
55,370

 
62,689

 
49,279

 
56,310

 
43,936

Investing activities
(54,808
)
 
(56,046
)
 
(64,060
)
 
(43,205
)
 
(31,179
)
Financing activities
(7,721
)
 
(7,140
)
 
17,335

 
(16,891
)
 
(3,377
)
Cash dividends declared per share
$
.2000

 
$
.2000

 
$
.1850

 
$
.1800

 
$
.1775


Page 17


 
As of December 31,
 
2016
 
2015
 
2014
 
2013
 
2012
 
(In thousands, except ratio and per share data)
Balance Sheet Data:
 
 
 
 
 
 
 

 
 
Working capital
$
59,868

 
$
48,984

 
$
49,916

 
$
39,030

 
$
54,393

Current ratio
1.50

 
1.44

 
1.46

 
1.37

 
1.55

Property and equipment, net
179,436

 
166,422

 
160,883

 
136,884

 
125,716

Total assets
423,939

 
393,586

 
381,004

 
330,814

 
330,932

Long-term debt
92,623

 
85,104

 
81,306

 
50,034

 
54,787

Other long-term liabilities
60,565

 
55,464

 
54,854

 
44,371

 
59,498

Shareholders' equity
152,179

 
141,539

 
136,491

 
131,138

 
118,106

Common shares:
 

 
 

 
 

 
 

 
 

Issued
21,457

 
21,457

 
21,457

 
21,457

 
21,457

In treasury
8,995

 
8,714

 
8,292

 
8,018

 
7,731

Net outstanding
12,462

 
12,743

 
13,165

 
13,439

 
13,726

Stock options:
 

 
 

 
 

 
 

 
 

Outstanding
800

 
817

 
770

 
662

 
761

Exercisable
375

 
417

 
389

 
342

 
640

ESOT valuation per share
$
35.20

 
$
32.70

 
$
30.10

 
$
26.40

 
$
23.20



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 2016 Results;
Results of Operations, including fiscal 2016 compared to fiscal 2015, fiscal 2015 compared to fiscal 2014, 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 2016 RESULTS

General

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

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

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.”
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
 
2016
 
2015
 
2014
 
2016/2015
 
2015/2014
Revenues
100.0
 %
 
100.0
 %
 
100.0
 %
 
2.9
%
 
4.1
 %
Costs and expenses:
 

 
 

 
 

 
 
 
 

Operating
64.0

 
64.3

 
64.3

 
2.4

 
4.0

Selling
18.0

 
17.5

 
17.7

 
5.5

 
3.0

General and administrative
7.3

 
7.3

 
7.0

 
3.3

 
8.8

Depreciation
5.6

 
5.4

 
5.2

 
5.8

 
9.0

Amortization of intangible assets
.3

 
.3

 
.3

 
4.2

 
7.0

Gain on sale of assets, net
(.6
)
 
(.2
)
 
(.1
)
 
130.2

 
151.4

 
94.6

 
94.6

 
94.4

 
2.9

 
4.3

Income from operations
5.4

 
5.4

 
5.6

 
2.9

 
.2

Other income (expense):
 

 
 

 
 

 
 

 
 

Interest expense
(.5
)
 
(.4
)
 
(.4
)
 
30.9

 
13.8

Interest income

 

 

 
nm

 
nm

Other
(.5
)
 
(.7
)
 
(.4
)
 
nm

 
nm

Income before income taxes
4.5

 
4.3

 
4.8

 
5.6

 
(7.9
)
Income taxes
1.8

 
1.6

 
1.9

 
11.1

 
(11.0
)
Net income
2.6
 %
 
2.7
 %
 
2.9
 %
 
2.2
%
 
(5.9
)%
 
 
 
 
 
 
 
 
 
 
nm--not meaningful
 

 
 

 
 

 
 

 
 

 
Revenues of $845,678 were 2.9% higher than last year’s revenues of $821,904. Utility revenues increased .1%, and Residential and Commercial revenues increased 6.4% from the prior year.

Overall, income from operations of $45,371 increased 2.9% from the $44,108 experienced in the prior year. Income from operations was $19,256 in Utility (a 20.7% decrease as compared with 2015) and $36,640 for Residential and Commercial (a 3.9% increase as compared with 2015).

Net income of $22,284 was $486 more than the $21,798 earned in 2015. The decreases in other nonoperating expenses of $1,755, was partially offset by an increase in income taxes of $1,500 and an increase in interest expense of $1,038.

Operating activities in 2016 provided cash of $55,370 as compared to $62,689 provided in 2015. The $7,319 net decrease was primarily attributable to (i) an increase of $17,730 in cash used by accounts receivable attributable to the timing of payments from utility customers, offset by (ii) $7,942 more cash provided from changes in operating assets and liabilities excluding accounts receivable, and (iii) an increase of $2,699 in depreciation and amortization expense.

Investing activities used $54,808 in cash, or $1,238 less than that used in 2015. The decrease was primarily due to fewer expenditures for land and buildings and greater proceeds from sales of property and equipment, including the sale of a building in 2016, which were partially offset by an increase in purchases of businesses and equipment necessary to support the business growth.

Page 19



Financing activities used $7,721 in cash in 2016, $581 more than the $7,140 of cash used in 2015. Our revolving credit facility provided $12,500 in cash in 2016 as compared with the $10,000 provided during 2015. Purchases of common shares for treasury of $25,290 were partially offset by net cash received of $12,152 from the sale of common shares and cash received on our common share subscriptions. Dividends paid during 2016 totaled $2,597.

Fiscal 2016 Compared to Fiscal 2015

A comparison of our fiscal year 2016 results to 2015 follows:
 
Year Ended December 31,
 
2016
 
2015
 
Change
 
% Change
Revenues
$
845,678

 
$
821,904

 
$
23,774

 
2.9
 %
Costs and expenses:
 

 
 

 
 

 
 

Operating
541,486

 
528,899

 
12,587

 
2.4

Selling
152,106

 
144,234

 
7,872

 
5.5

General and administrative
61,789

 
59,798

 
1,991

 
3.3

Depreciation
47,284

 
44,677

 
2,607

 
5.8

Amortization of intangible assets
2,306

 
2,214

 
92

 
4.2

Gain on sale of assets, net
(4,664
)
 
(2,026
)
 
(2,638
)
 
130.2

 
800,307

 
777,796

 
22,511

 
2.9

Income from operations
45,371

 
44,108

 
1,263

 
2.9

Other income (expense):
 

 
 

 
 

 
 

Interest expense
(4,393
)
 
(3,355
)
 
(1,038
)
 
30.9

Interest income
255

 
249

 
6

 
2.4

Other
(3,989
)
 
(5,744
)
 
1,755

 
(30.6
)
Income before income taxes
37,244

 
35,258

 
1,986

 
5.6

Income taxes
14,960

 
13,460

 
1,500

 
11.1

Net income
$
22,284

 
$
21,798

 
$
486

 
2.2
 %
 
 
 
 
 
 
 
 
nm--not meaningful
 
 
 
 
 
 
 

Revenues--Revenues of $845,678 increased $23,774 compared with the $821,904 reported in 2015. Utility increased $262, or .1%, from the prior year. New contracts obtained and increases in rates and productivity on contracts within both our U.S. and Canadian operations were partially offset by contracts lost and significant reductions in contract scope with two utility providers within our U.S. Utility operations. Residential and Commercial increased $24,551, or 6.4%, from 2015.  Higher contract rates on our tree pruning, tree removal and liquid services, increased storm revenue, increased productivity and additional revenue from the purchase of businesses accounted for the increase.  Total consolidated revenue of $845,678 includes production incentive revenue, recognized under the completed-performance method, of $2,827 during 2016 as compared with $4,686 during 2015.

Operating Expenses--Operating expenses of $541,486 increased $12,587 from the prior year, and as a percentage of revenues decreased .3% to 64.0%. Utility experienced an increase of $1,971, or .6%, from 2015, and as a percentage of revenues increased .6% to 74.4%. Increases in employee labor and benefits expense, equipment repair and maintenance expense, disposal expense and subcontractor expense were partially offset by decreases in fuel expense, crew expense and material expense. Residential and Commercial increased $12,767, or 6.3%, compared with 2015 and as a percentage of revenue decreased .1% to 52.6%. Increases in employee labor and benefits expense, subcontractor expense, disposal expense, tool and saw expense and material expense were partially offset by decreases in fuel expense and crew expense.

Fuel costs decreased in 2016 as compared with fuel costs for 2015 and impacted operating expenses within all segments. During 2016, fuel expense of $22,677 decreased $3,204, or 12.4%, from the $25,881 incurred in 2015. Substantially all of the $3,204 decrease relates to a decrease in price of fuel.

Page 20


Selling Expenses--Selling expenses of $152,106 increased $7,872 from 2015 and as a percentage of revenues increased .5% to 18.0%. Utility increased $1,016, or 2.3%, from 2015. Increases in office support wages, field management travel expense, rent expense and computer expense were partially offset by reductions in field management wages and incentive expense and employee development expense. Residential and Commercial increased $7,191, or 7.0%, from 2015 and as a percentage of revenue increased .2% to 26.8%. Increases in field management wages and incentive expense, rent expense, computer expense, communication expense, professional services expense and sales and marketing expense were partially offset by reductions in field management auto expense.

General and Administrative Expenses--General and administrative expenses increased $1,991 to $61,789, an increase of 3.3% from the $59,798 experienced in 2015 and as a percentage of revenues remained at 7.3%. Increases in salary and incentive expense, office expense, and computer expense were partially offset by a decrease in professional services expense.

Depreciation and Amortization Expense--Depreciation and amortization expense of $49,590 increased $2,699 from the prior year and as a percentage of revenues increased .2% to 5.9%. 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 $4,664 increased $2,638 from the $2,026 experienced in 2015. The increase is the result of more units sold at a higher average price in 2016 as compared with 2015 and the sale of a building in 2016.

Interest Expense--Interest expense of $4,393 increased $1,038 from the $3,355 incurred in 2015. The increase is attributable to higher-average debt levels necessary to fund operations and capital expenditures.

Other, Net--Other, net of $3,989 decreased $1,755 from the $5,744 experienced in 2015. Other, net, consisted of nonoperating income and expense, including foreign currency gains on the intercompany account balances of our Canadian operations.

Income Taxes--Income taxes for 2016 were $14,960, an effective tax rate of 40.2%, compared with income taxes for 2015 of $13,460, or an effective tax rate of 38.2%. The increase of 2.0% in the effective tax rate as compared to 2015 relates primarily to changes in foreign tax credits, which had reduced the 2015 rate.

Net Income--Net income of $22,284 was $486 more than the $21,798 earned in 2015. The increase in income from operations of $1,263 and the decrease of other nonoperating expenses of $1,755, offset by the increases in interest expense of $1,038 and income taxes of $1,500, contributed to the increase in net income.

Page 21


Fiscal 2015 Compared to Fiscal 2014

A comparison of our fiscal year 2015 results to 2014 follows:
 
Year Ended December 31,
 
2015
 
2014
 
Change
 
% Change
Revenues
$
821,904

 
$
789,911

 
$
31,993

 
4.1
 %
Costs and expenses:
 

 
 

 


 
 

Operating
528,899

 
508,677

 
20,222

 
4.0

Selling
144,234

 
140,027

 
4,207

 
3.0

General and administrative
59,798

 
54,970

 
4,828

 
8.8

Depreciation
44,677

 
40,970

 
3,707

 
9.0

Amortization of intangible assets
2,214

 
2,070

 
144

 
7.0

Gain on sale of assets, net
(2,026
)
 
(806
)
 
(1,220
)
 
151.4

 
777,796

 
745,908

 
31,888

 
4.3

Income from operations
44,108

 
44,003

 
105

 
.2

Other income (expense):
 

 
 

 
 

 
 

Interest expense
(3,355
)
 
(2,948
)
 
(407
)
 
13.8

Interest income
249

 
295

 
(46
)
 
(15.6
)
Other
(5,744
)
 
(3,050
)
 
(2,694
)
 
88.3

Income before income taxes
35,258

 
38,300

 
(3,042
)
 
(7.9
)
Income taxes
13,460

 
15,131

 
(1,671
)
 
(11.0
)
Net income
$
21,798

 
$
23,169

 
$
(1,371
)
 
(5.9
)%
 
 
 
 
 
 
 
 
nm--not meaningful
 
 
 
 
 
 
 
 
Revenues--Revenues of $821,904 increased $31,993 compared with the $789,911 reported in 2014. Utility increased $28,598, or 7.1%, 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 $53 from 2014.  Increases in tree pruning and tree removal revenues, landscape revenue and additional revenue from the purchase of businesses were partially offset by a reduction in revenues related to the special contract work with a large customer related to tree damage purportedly caused by one of its products.  Total consolidated revenue of $821,904 includes production incentive revenue, recognized under the completed-performance method, of $4,686 during 2015 as compared with $5,142 during 2014.

Operating Expenses--Operating expenses of $528,899 increased $20,222 from the prior year, and as a percentage of revenues remained at 64.3%. Utility experienced an increase of $18,857, or 6.3%, from 2014, and as a percentage of revenues decreased .6% to 73.9%. Increases in employee labor and benefits expense, equipment repair and maintenance expense, crew expense, material expense, subcontractor expense and tool and saw expense were partially offset by decreases in fuel expense and disposal expense. Residential and Commercial decreased $2,026, or 1.0%, compared with 2014 and as a percentage of revenue decreased .5% to 52.7%. Decreases in fuel expense, subcontractor expense, crew expense, disposal expense and tool and saw expense were partially offset by increases in employee labor and benefits expense and material expense.

Fuel costs decreased in 2015 as compared with fuel costs for 2014 and impacted operating expenses within all segments. During 2015, fuel expense of $25,881 decreased $9,248, or 26.3%, from the $35,129 incurred in 2014. Substantially all of the $9,248 decrease relates to a decrease in price of fuel.

Selling Expenses--Selling expenses of $144,234 increased $4,207 from 2014 and as a percentage of revenues decreased .2% to 17.5%. Utility increased $3,360, or 8.2%, from 2014. Increases in field management wages and incentive expense, field management travel expense, rent expense, office expense, and employee development expense were partially offset by reductions in field management auto expense, communication expense, computer expense and professional services expense. Residential and Commercial increased $1,186, or 1.2%, from 2014 and as a percentage of revenue increased .3% to 26.6%. Increases in field management wages and incentive expense, rent expense and sales and marketing expense were partially

Page 22


offset by reductions in field management auto expense, communication expense, computer expense and professional services expense.

General and Administrative Expenses--General and administrative expenses increased $4,828 to $59,798, an increase of 8.8% from the $54,970 experienced in 2014 and as a percentage of revenues increased .3% to 7.3%. Increases in salary and incentive expense, management travel expense, office rent expense, employee development expense, stock compensation expense and pension settlement costs incurred as a result of purchasing annuities related to our defined benefit pension plans were partially offset by decreases in management auto expense, communication expense and computer expense.

Depreciation and Amortization Expense--Depreciation and amortization expense of $46,891 increased $3,851 from the prior year and as a percentage of revenues increased .2% to 5.7%. 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 $2,026 increased $1,220 from the $806 experienced in 2014. The increase is the result of the sale of aerial chassis in 2015 as compared with 2014.

Interest Expense--Interest expense of $3,355 increased $407 from the $2,948 incurred in 2014. The increase is attributable to higher-average debt levels necessary to fund operations and capital expenditures.

Other, Net--Other, net of $5,744 increased $2,694 from the $3,050 experienced in 2014. 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 2015 were $13,460, an effective tax rate of 38.2%, compared with income taxes for 2014 of $15,131, or an effective tax rate of 39.5%. The decrease of 1.3% in the effective tax rate of 38.2% for 2015, as compared to 39.5% for 2014, relates primarily to changes in foreign tax credits.

Net Income--Net income of $21,798 was $1,371 lower than the $23,169 earned in 2014. The increases in interest expense of $407 and other nonoperating expenses of $2,694, offset by the decrease in income taxes of $1,671, contributed to the decrease in net income.


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 2012. As of December 31, 2016, we believe it is reasonably possible that the total amount of unrecognized tax benefits will not significantly increase or decrease.


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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 2016 or for any prior periods. There were no events or circumstances from the date of our assessment through December 31, 2016 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 $30,305 at December 31, 2016. Based upon the goodwill impairment analysis conducted in the fourth quarter 2016, a hypothetical reduction in the fair value of the individual reporting units of approximately 44% to 65% 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, 2016 and December 31, 2015, are summarized as follows:
 
2016
 
2015
Cash provided by (used in):
 
 
 
Operating activities
$
55,370

 
$
62,689

Investing activities
(54,808
)
 
(56,046
)
Financing activities
(7,721
)
 
(7,140
)
Effect of exchange rate changes on cash
135

 
(1,888
)
Decrease in cash
$
(7,024
)
 
$
(2,385
)
 
Net Cash Provided by Operating Activities--Operating activities in 2016 provided cash of $55,370 as compared to $62,689 provided in 2015. The $7,319 net decrease was primarily attributable to (i) $7,942 more cash used from changes in operating assets and liabilities, and (ii) an increase of $2,699 in depreciation and amortization expense.


Page 24


Overall, accounts receivable dollars increased $26,133 in 2016 as compared to the increase of $8,403 experienced in 2015. The increase in 2016 was attributable to the timing of payments from utility customers. With respect to the change in accounts receivable arising from business levels, the “days-sales-outstanding” in accounts receivable (“DSO”) at the end of 2016 increased 7 days to 62 days, as compared to 2015. The DSO at December 31, 2015 was 55 days.

Accounts payable and accrued expenses increased $2,454 in 2016, $732 more than the increase of $1,722 experienced in 2015. Increases in advance payments from customers, 401KSOP liabilities, employee savings withholdings, professional service accruals and compensated absence accruals were partially offset by decreases in employee compensation accruals and health insurance accruals.

Self-insurance accruals increased $2,499 in 2016, a change of $1,053 compared to the increase of $1,446 experienced in 2015. The increase occurred within our workers compensation and general liability classifications and resulted primarily from an overall increase in deductible amounts under commercial insurance or the self-insured risk retention.

Other assets, net, decreased $7,994 in 2016, as compared to the $1,837 decrease in 2015. Decreases in refundable income taxes and an increase in pension liabilities primarily account for the difference.

Net Cash Used in Investing Activities--Investing activities used $54,808 in cash, $1,238 less than the $56,046 used in 2015. The decrease was primarily due to fewer expenditures for land and buildings and greater proceeds from equipment sales and the sale of a building which were partially offset by an increase in purchases of equipment and businesses necessary to support the business growth.

Net Cash Used in Financing Activities--Financing activities used $7,721 in cash in 2016, $581 more than the $7,140 of cash used in 2015. Our revolving credit facility provided $12,500 as compared with the $10,000 provided during 2015. We use the revolving credit facility primarily for capital expenditures and payments of notes payable, primarily related to acquisitions. Borrowings of notes payable totaled $656 and payments of long-term debt and capital leases totaled $5,142. Purchases of common shares for treasury of $25,290 were partially offset by net cash received of $12,152 from the sale of common shares and cash received on our common share subscriptions. Dividends paid during 2016 totaled $2,597.

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. 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, 2016, we were in compliance with all financial covenants contained in our revolving credit facility.

As of December 31, 2016, we had unused commitments under the facility approximating $103,929, and $71,071 committed, which consisted of borrowings of $67,000 and issued letters of credit of $4,071. 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 commenced on July 22, 2016 (the sixth anniversary of issuance), with four.  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

Page 25


ratios. As of December 31, 2016, we were in compliance with all financial covenants contained in our revolving credit facility.

Accounts Receivable Securitization Facility--On May 9, 2016, Davey Tree entered into a one-year agreement with a bank for an accounts receivable securitization facility (the “AR securitization facility”), whereby Davey Tree has pledged a first priority security interest in certain trade receivables in exchange for the bank issuing letters of credit (“LCs”) with a committed facility limit of $60,000.

As of December 31, 2016, we had issued LCs of $58,150 under the terms of the AR securitization facility.

Under the AR securitization facility, Davey Tree transfers by selling or contributing current and future trade receivables to a wholly-owned, bankruptcy-remote financing subsidiary which pledges a perfected first priority security interest in the trade receivables--equal to the issued LCs as of December 31, 2016--to the bank in exchange for the bank issuing LCs.

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

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

Contractual Obligations Summary

The following is a summary of our long-term contractual obligations, as at December 31, 2016, to make future payments for the periods indicated:
 
 
 
 
Contractual Obligations Due -- Year Ending December 31,
 
 
Description
 
Total
 
2017
 
2018
 
2019
 
2020
 
2021
 
Thereafter
Revolving credit facility
 
$
67,000

 
$

 
$
67,000

 
$

 
$

 
$

 
$

Senior unsecured notes
 
24,000

 
6,000

 
6,000

 
6,000

 
6,000

 

 

Term loans
 
16,151

 
10,701

 
829

 
160

 
169

 
4,292

 

Capital lease obligations
 
2,343

 
170

 
270

 
756

 
632

 
515

 

Operating lease obligations
 
28,397

 
7,005

 
5,214

 
4,056

 
3,093

 
1,881

 
7,148

Self-insurance accruals
 
62,936

 
23,605

 
14,825

 
9,639

 
5,399

 
2,792

 
6,676

Purchase obligations
 
12,800

 
12,800

 

 

 

 

 

Other liabilities
 
20,819

 
1,396

 
1,773

 
1,794

 
1,936

 
1,913

 
9,811

 
 
$
234,446

 
$
61,677

 
$
95,911

 
$
22,405

 
$
17,229

 
$
11,393

 
$
23,635


The self-insurance accruals in the summary above reflect the total of the undiscounted amount accrued, for which amounts estimated to be due each year may differ from actual payments required to fund claims. Purchase obligations in the summary above represent open purchase-order amounts that we anticipate will become payable within the next year for goods and services we have negotiated for delivery as of December 31, 2016. 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, 2016, 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.


Page 26


As of December 31, 2016, total commitments related to issued letters of credit were $64,225, of which $4,071 were issued under the revolving credit facility, $58,150 were issued under the AR securitization facility, and $2,004 were issued under short-term lines of credit. As of December 31, 2015, total commitments related to issued letters of credit were $59,350, of which $57,347 were issued under the Revolving Credit Facility and $2,003 were issued under short-term lines of credit.

Also, as is common with our industry, we have performance obligations that are supported by surety bonds, which expire during 2017 through 2023. We intend to renew the performance bonds where appropriate and as necessary.

Off-Balance Sheet Arrangements

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

Capital Resources

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

Cash of $9,006 as of December 31, 2016 included $3,770 in the U.S. and $5,236 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 2016 Canadian earnings to satisfy our 2016 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, 2016, we had working capital of $59,868, unused short-term lines of credit approximating $7,110, and $103,929 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 27


RECENT ACCOUNTING GUIDANCE

Recent Accounting Guidance
Accounting Standards Adopted in 2016
Accounting Standards Update 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments--In September 2015, the FASB issued Accounting Standards Update (“ASU”) 2015-16, "Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments." ASU 2015-16 simplifies the reporting of adjustments to the provisional amounts recorded for a business combination during the measurement period by eliminating the requirement to retrospectively account for those adjustments. Companies are required to present separately, on the face of the income statement, or disclose in the notes to the financial statements, the impact on current period earnings by line item that would have been recorded in previous periods if the adjustment to the provisional amounts were recognized as of the acquisition date. The amendments in ASU 2015-16 became effective January 1, 2016 and require prospective application to qualifying business combinations.
Accounting Standards Update 2015-03, Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs--In April 2015, the FASB issued ASU 2015-03, “Imputation of Interest (Sub-Topic 835-30): Simplifying the Presentation of Debt Issuance Costs.” ASU 2015-03 requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. During the first quarter of 2016, we retrospectively adopted this standard, which resulted in a reduction of other noncurrent assets and long-term debt of $471 as of December 31, 2015 in the consolidated balance sheet.
Accounting Standards Update 2014-15, Disclosure of Uncertainties About an Entity's Ability to Continue as a Going Concern--In August 2014, the FASB issued ASU 2014-15, "Disclosure of Uncertainties About an Entity's Ability to Continue as a Going Concern" to provide guidance about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related note disclosures. As of December 31, 2016, the Company adopted ASU 2014-15, which had no impact on the Company's consolidated financial statements.
Accounting Standards Not Yet Adopted
Accounting Standards Update 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)--In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which provides guidance on how cash receipts and cash payments related to eight specific cash flow issues are presented and classified in the statement of cash flows, with the objective of reducing the existing diversity in practice. The update is effective for annual periods beginning after December 15, 2017, which for Davey Tree would be January 1, 2018. Early adoption is permitted. We do not expect the adoption of ASU 2016-15 to have a material impact on our consolidated financial statements.
Accounting Standards Update 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting--In March 2016, the FASB issued ASU 2016-09, “Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” with the objective to simplify several aspects of the accounting for share-based payment transactions, including: the income tax consequences; classification of awards as either equity or liabilities; classification of certain items on the statement of cash flows; and, accounting for forfeitures. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, which for Davey Tree would be January 1, 2017. Early adoption is permitted. Management is currently in the process of evaluating the impact the new standard will have on the Company’s consolidated financial statements.
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.

Page 28


Subsequent to the issuance of ASU 2014-09, the FASB has provided additional implementation guidance updates related to ASU 2014-09, including:
a.
ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (‘Update 2015-14’),” which responded to stakeholders’ requests to defer the effective date of the guidance in ASU 2014-09.

b.
ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net ) (‘Update 2016-08’),” which clarifies the implementation guidance on principal versus agent considerations.

c.
ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (‘Update 2016-10’),” which clarifies multiple aspects of Topic 606.

d.
ASU 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (‘Update 2016-12’),” which provides clarifying guidance in a few narrow areas and adds some practical expedients to the guidance.

The effective date and the transition requirements for the Updates are the same as the effective date of Topic 606 ASU 2015-14, which becomes effective for Davey Tree beginning with the first quarter 2018 and can be adopted either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption. The FASB also affirmed its proposal to permit all entities to apply the new revenue standard early, but not before the original effective date, which for Davey Tree would be first quarter 2017. The new revenue guidance will supersede existing revenue guidance affecting our Company, and may also affect our business processes and our information technology systems.
Management has assembled an internal project team and is reviewing our contracts and agreements with our customers under the provisions of the new standard. The Company currently expects revenue recognition for many of its services to remain unchanged, except for the interim recognition of certain variable, incentive-based components of contracts due to the timing of revenue recognition. The Company is also in the process of evaluating the disclosure requirements under the standard and any necessary changes to our systems, policies and controls as a result. We plan to adopt ASU 2014-09 using the modified retrospective approach effective January 1, 2018.
Accounting Standards Update 2016-02, Leases (Topic 842)--In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” ASU 2016-02 establishes a comprehensive new lease accounting model. The new standard: (a) clarifies the definition of a lease; (b) requires a dual approach to lease classification similar to current lease classifications; and, (c) causes lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset for leases with a lease-term of more than twelve months. The new standard is effective for interim and annual periods beginning after December 15, 2018, which for Davey Tree would be January 1, 2019. Early adoption is permitted. The new standard requires a modified retrospective transition for capital or operating leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements, but it does not require transition accounting for leases that expire prior to the date of initial application. We are currently evaluating the impact of the new standard on our consolidated financial statements.


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.


Page 29


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 12% of revenues during 2016, 11% during 2015 and 8% during 2014. 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.

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 our variable debt.

The following table provides information, as of December 31, 2016, about our debt obligations, including principal cash flows, weighted-average interest rates by expected maturity dates and fair values. Weighted-average interest rates used for variable-rate obligations are based on rates as derived from published spot rates, in effect as of December 31, 2016.

Page 30


 
Expected Maturity Date
 
 
 
 
 
Fair Value
December 31,
2016
 
2017
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
Total
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate
$
15,150

 
$
6,385

 
$
6,901

 
$
6,819

 
$
4,838

 
$

 
$
40,093

 
$
42,835

Average interest rate
3.0
%
 
5.0
%
 
4.6
%
 
4.7
%
 
5.3
%
 

 
 

 
 

Variable rate
$
1,721

 
$
67,679

 
$

 
$

 
$

 
$

 
$
69,400

 
$
69,401

Average interest rate
4.5
%
 
2.2
%
 

 

 

 

 
 

 
 


Interest rates on the variable-rate debt, as of December 31, 2016, ranged from 2.7% to 13.0%.

Foreign Currency Exchange Rate Risk

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

For the year ended December 31, 2016, the result of a hypothetical 10% uniform change in the value of the U.S. dollar as compared with the Canadian dollar would not have a material effect on our results of operations or our financial position. Our sensitivity analysis of the effect of changes in foreign currency exchange rates does not factor in a potential change in sales levels or local currency prices. Presently, we do not engage in hedging activities related to our foreign currency exchange rate risk.

Commodity Price Risk

We are subject to market risk from fluctuating prices of fuel--both diesel and gasoline. In prior years we have used fuel derivatives as "economic hedges" related to fuel consumed by Davey Tree service vehicles. The objectives of the economic hedges are to fix the price of a portion of our fuel needs and mitigate the earnings and cash flow volatility attributable to the risk of changing prices. Presently, we are not engaged in any hedging or derivative activities.

Impact of Inflation

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


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

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


Item 8.  Financial Statements and Supplementary Data.

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


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

None.


Page 31


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”).

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, 2016, as to the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2016.

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/ Thea R. Sears        
Chairman and Chief Executive Officer
 
Executive Vice President, Chief Financial Officer and Secretary
 
Controller

Kent, Ohio
March 14, 2017

Page 32




(d) Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the fourth quarter 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Page 33




(e) Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm


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

We have audited The Davey Tree Expert Company’s internal control over financial reporting as of December 31, 2016, 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.

In our opinion, The Davey Tree Expert Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, 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, 2016 and 2015, 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, 2016 of The Davey Tree Expert Company and our report dated March 14, 2017 expressed an unqualified opinion thereon.  


/s/ Ernst & Young LLP
Akron, Ohio
March 14, 2017


Page 34


Item 9B.  Other Information.

None.

Page 35


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 2017 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 2017 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 2017 Proxy Statement, which is incorporated into this report by reference. See also the section titled "Shareholder Nominations for Director," which is incorporated into this report by reference.

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

Item 11.  Executive Compensation.

Information about executive and director compensation is in the sections “Compensation Discussion and Analysis,” "Report of the Compensation Committee," "Compensation Risk Analysis," "Compensation of Executive Officers," Committees of the Board of Directors; Attendance" and "Compensation of Directors" of our 2017 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 2017 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 Plan Information” of our 2017 Proxy Statement, which is incorporated into this report by reference.

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

Information about certain transactions between us and our affiliates and certain other persons and the independence of directors is in the section “Corporate Governance-Board Independence” and "Transactions with Related-Persons, Promoters and Certain Control Persons" of our 2017 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 2017 Proxy Statement, which is incorporated into this report by reference.


Page 36


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.

Item 16.  Form 10-K Summary.

None.


Page 37


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 14, 2017.
 
 
THE DAVEY TREE EXPERT COMPANY
 
 
 
 
 
 
 
 
By:    /s/ Karl J. Warnke                                       
 
 
Karl J. Warnke, Chairman 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 14, 2017.
 
 
 
 
 
 
 
 
 
/s/ Donald C. Brown          
 
/s/ John E. Warfel                                        
Donald C. Brown, Director
 
John E. Warfel, Director
 
 
 
 
 
 
 
 
 
/s/ Patrick M. Covey                                  
 
/s/ Karl J. Warnke                                        
Patrick M. Covey, Director
 
Karl J. Warnke, Director,
President and Chief Operating Officer
 
Chairman and Chief Executive Officer
 
 
(Principal Executive Officer)
 
 
 
 
 
 
/s/ J. Dawson Cunningham                          
 
 
J. Dawson Cunningham, Director
 
/s/ Joseph R. Paul                                   
 
 
Joseph R. Paul, Executive Vice President,
 
 
Chief Financial Officer and Secretary
 
 
(Principal Financial Officer)
/s/ William J. Ginn                                      
 
 
William J. Ginn, Director
 
 
 
 
 
 
 
/s/ Thea R. Sears                                    
 
 
Thea R. Sears, Controller
/s/ Douglas K. Hall                                     
 
(Principal Accounting Officer)
Douglas K. Hall, Director
 
 
 
 
 
 
 
 
 
 
 
/s/ Sandra W. Harbrecht                             
 
 
Sandra W. Harbrecht, Director
 
 
 


Page 38


EXHIBIT INDEX
 
 
 
 
 
Exhibit No.
 
Description
 
 
 
 
 
 
 
3.1.1
 
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).
 
 
 
 
 
 
 
3.1.2
 
Certificate of Amendment to the 2003 Amended Articles of Incorporation (incorporated by reference to Exhibit 3.1.2 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2015).
 
 
 
 
 
 
 
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 (Incorporated by reference to Exhibit 10.8 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014).
 
 
 
 
 
 
 
10.9
 
Receivables Financing Agreement, dated May 9, 2016, between The Davey Tree Expert Company, Davey Receivables LLC, PNC Bank, National Association, and PNC Capital Markets LLC (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 11, 2016).
 
 
 
 
 
 
 
10.10
 
Receivables Purchase Agreement, dated May 9, 2016, between The Davey Tree Expert Company, Davey Tree Surgery Company, and Davey Receivables LLC (Incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on May 11, 2016).
 
 
 
 
 
 
 

Page 39


Exhibit No.
 
Description
 
 
 
 
 
 
 
10.11
 
Second Amendment to The Davey Tree Expert Company 401KSOP Match Restoration Plan, dated March 9, 2017 (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 March 9, 2017).
 
 
 
 
 
 
 
21
 
Subsidiaries of the Registrant.
 
Filed Herewith
 
 
 
 
 
23
 
Consent of 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
 
 
 
 
 
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, 2016, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Statements of Consolidated Shareholders' Equity, (v) the Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements.
 
Filed Herewith

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 40



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, 2016

THE DAVEY TREE EXPERT COMPANY

KENT, OHIO


Page 41


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, 2016
 
 
 
 
 
 
 
 
 
 
 
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, 2016 and 2015, 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, 2016. 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, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, 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, 2016, 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 14, 2017 expressed an unqualified opinion thereon.


/s/ Ernst & Young LLP

Akron, Ohio
March 14, 2017




F-2


THE DAVEY TREE EXPERT COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share dollar amounts)
 
December 31,
 
2016