DAVEY TREE EXPERT CO - FORM 10-Q

Attached files

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EX-32.1 - EXHIBIT 32.1 - DAVEY TREE EXPERT CO	ex321.htm
EX-31.2 - EXHIBIT 31.2 - DAVEY TREE EXPERT CO	ex312.htm
EX-32.2 - EXHIBIT 32.2 - DAVEY TREE EXPERT CO	ex322.htm
EX-31.1 - EXHIBIT 31.1 - DAVEY TREE EXPERT CO	ex311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended April 2, 2011

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

For the transition period from ______________ to ______________

Commission file number 000-11917

THE DAVEY TREE EXPERT COMPANY

(Exact name of registrant as specified in its charter)

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

1500 North Mantua Street

P.O. Box 5193

Kent, Ohio 44240

(Address of principal executive offices) (Zip code)

(330) 673-9511

(Registrant's telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes £ No £

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

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

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

There were 14,072,255 Common Shares, $1.00 par value, outstanding as of April 29, 2011.

The Davey Tree Expert Company

Quarterly Report on Form 10-Q

April 2, 2011

INDEX

	Page
Part I. Financial Information

Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets	2
Condensed Consolidated Statements of Operations	3
Condensed Consolidated Statements of Cash Flows	4
Notes to Condensed Consolidated Financial Statements
A — Basis of Financial Statement Preparation	5
B — Seasonality of Business	6
C — Accounts Receivable, Net and Supplemental Balance-Sheet Information	6
D — Business Combinations and Identified Intangible Assets and Goodwill, Net	7
E — Long-Term Debt	7
F — Stock-Based Compensation	8
G — Net Periodic Benefit Cost—Defined Benefit Pension Plans	11
H — Income Taxes	12
I — Comprehensive Income (Loss)	13
J — Per Share Amounts and Common Shares Outstanding	14
K — Operations by Business Segment	15
L — Financial Instruments and Fair Value Measurements	16
M — Contingencies	18

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Results of Operations	20
Liquidity and Capital Resources	22
Cash Flow Summary	22
Off-Balance Sheet Arrangements	23
Contractual Obligations Summary	24
Capital Resources	24
Recent Accounting Guidance	24
Critical Accounting Policies and Estimates	25
Note Regarding Forward-Looking Statements	25

Item 3. Quantitative and Qualitative Disclosures about Market Risk	26

Item 4. Controls and Procedures	26

Part II. Other Information

Item 1. Legal Proceedings	27

Item 1A. Risk Factors	28

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	28

Item 6. Exhibits	28

Signatures	29

Exhibit Index	30

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

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Index

THE DAVEY TREE EXPERT COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands, except per share data dollar amounts)

	April 2,			December 31,
	2011			2010
Assets
Current assets:
Cash and cash equivalents	$	6,083		$	12,017
Accounts receivable, net		77,982			80,432
Operating supplies		5,976			4,961
Other current assets		22,323			18,465
Total current assets		112,364			115,875

Property and equipment		428,966			416,071
Less accumulated depreciation		294,742			286,444
		134,224			129,627

Other assets		15,714			14,950
Identified intangible assets and goodwill, net		27,405			27,855
	$	289,707		$	288,307

Liabilities and shareholders' equity
Current liabilities:
Accounts payable	$	30,868		$	27,759
Accrued expenses		21,950			30,873
Other current liabilities		27,398			31,410
Total current liabilities		80,216			90,042

Long-term debt		73,341			61,591
Self-insurance accruals		33,872			30,658
Other noncurrent liabilities		7,840			7,647
		195,269			189,938

Common shareholders' equity:

Common shares, $1.00 par value, per share; 24,000 shares authorized; 21,457 shares issued		21,457			21,457
Additional paid-in capital		849			-
Retained earnings		170,260			176,800
Accumulated other comprehensive loss		(2,279	)		(3,072	)
		190,287			195,185
Less: Cost of Common shares held in treasury; 7,245 shares at
April 2, 2011 and 7,345 shares at December 31, 2010		95,849			96,816

		94,438			98,369
	$	289,707		$	288,307

See notes to condensed consolidated financial statements.

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Index

THE DAVEY TREE EXPERT COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In thousands, except per share dollar amounts)

	Three Months Ended
	April 2,			April 3,
	2011			2010

Revenues	$	131,324		$	124,478

Costs and expenses:
Operating		95,830			88,551
Selling		22,987			21,434
General and administrative		11,224			11,007
Depreciation and amortization		9,584			8,944
(Gain) loss on sale of assets, net		(81	)		181
		139,544			130,117

Loss from operations		(8,220	)		(5,639	)

Other income (expense):
Interest expense		(890	)		(500	)
Interest income		5			17
Other, net		(663	)		(738	)

Loss before income taxes		(9,768	)		(6,860	)

Income tax benefits		(3,722	)		(2,765	)

Net loss	$	(6,046	)	$	(4,095	)

Net loss per share -- basic and diluted	$	(.43	)	$	(.28	)

Weighted-average shares outstanding -- basic and diluted		14,127			14,606

Dividends declared per share	$	.043		$	.043

See notes to condensed consolidated financial statements.

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Index

THE DAVEY TREE EXPERT COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

	Three Months Ended
	April 2,			April 3,
	2011			2010
Operating activities
Net loss	$	(6,046	)	$	(4,095	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		9,584			8,944
Other		114			577
Changes in operating assets and liabilities:
Accounts receivable		2,466			(3,648	)
Operating liabilities		(2,685	)		(7,578	)
Other		(4,647	)		(2,422	)
		4,832			(4,127	)

Net cash used in operating activities		(1,214	)		(8,222	)

Investing activities
Capital expenditures:
Equipment		(13,418	)		(9,212	)
Land and buildings		(77	)		(119	)
Purchases of businesses		(162	)		-
Other		148			145
Net cash used in investing activities		(13,509	)		(9,186	)

Financing activities
Revolving credit facility proceeds, net		12,000			21,550
Purchase of common shares for treasury		(1,205	)		(1,973	)
Sale of common shares from treasury		2,922			3,416
Dividends		(604	)		(633	)
Other		(4,324	)		(4,615	)
Net cash provided by financing activities		8,789			17,745

(Decrease) Increase in cash and cash equivalents		(5,934	)		337

Cash and cash equivalents, beginning of period		12,017			2,395
Cash and cash equivalents, end of period	$	6,083		$	2,732

Supplemental cash flow information follows:
Interest paid	$	1,375		$	793
Income taxes paid		443			636

See notes to condensed consolidated financial statements.

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Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

April 2, 2011

(Amounts in thousands, except share data)

A.	Basis of Financial Statement Preparation

The condensed consolidated financial statements present the financial position, results of operations and cash flows of The Davey Tree Expert Company and its subsidiaries. “We,” “us,” “our,” “Davey,” “Davey Tree” and the “Company” means The Davey Tree Expert Company and its subsidiaries, unless the context indicates otherwise.

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

Certain information and disclosures required by U.S. GAAP for complete financial statements have been omitted in accordance with the rules and regulations of the SEC. We suggest that these condensed consolidated financial statements be read in conjunction with the financial statements included in our annual report on Form 10-K for the year ended December 31, 2010 (the “2010 Annual Report”).

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

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

Recent Accounting Guidance

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

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

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

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Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

April 2, 2011

(Amounts in thousands, except share data)

B.	Seasonality of Business

Due to the seasonality of our business, our operating results for the three months ended April 2, 2011 are not indicative of results that may be expected for any other interim period or for the year ending December 31, 2011. Business seasonality is the result of traditionally higher revenues during the second and third quarters as compared with the first and fourth quarters of the year, while the methods of accounting for fixed costs, such as depreciation expense, amortization, rent and interest expense, are not significantly impacted by business seasonality.

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

The following comprises accounts receivable, net, and other amounts included in the balance sheet:


	April 2,		December 31,
Accounts receivable, net	2011		2010


Accounts receivable	$	68,529	$	74,985
Receivables under contractual arrangements		11,478		7,557

		80,007		82,542
Less allowances for doubtful accounts		2,025		2,110

Accounts receivable, net	$	77,982	$	80,432

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

	April 2,		December 31,
Other current assets	2011		2010

Refundable income taxes	$	9,750	$	4,689
Deferred income taxes		6,684		6,813
Prepaid expenses		5,296		5,349
Other		593		1,614
Total	$	22,323	$	18,465

	April 2,		December 31,
Accrued expenses	2011		2010

Employee compensation	$	6,724	$	13,599
Accrued compensated absences		7,106		6,552
Self-insured medical claims		3,371		2,918
Customer advances, deposits		-		1,068
Taxes, other than income		1,632		2,380
Other		3,117		4,356
Total	$	21,950	$	30,873

	April 2,		December 31,
Other current liabilities	2011		2010

Notes payable	$	1,756	$	1,988
Current portion of long-term debt		1,958		5,670
Self-insurance accruals		23,684		23,752
Total	$	27,398	$	31,410

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Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

April 2, 2011

(Amounts in thousands, except share data)

D.	Business Combinations and Identified Intangible Assets and Goodwill, Net

During the first quarter 2011, we acquired two businesses for $162 cash and the assumption of certain liabilities. The cash paid of $162 was preliminarily allocated, including the liabilities assumed, to the fair value of the primary assets acquired: fixed assets, intangibles and goodwill. The measurement period for purchase price allocations ends as soon as information of the facts and circumstances becomes available, but does not exceed twelve months. During the three months ended April 3, 2010, we had no business acquisitions.

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

	April 2, 2011				December 31, 2010
	Carrying		Accumulated		Carrying		Accumulated
Identified Intangible Assets and Goodwill, Net	Amount		Amortization		Amount		Amortization

Amortized intangible assets:
Customer lists/relationships	$	11,853	$	8,646	$	11,852	$	8,453
Employment-related		5,066		4,053		5,066		3,914
Tradenames		4,249		2,355		4,226		2,197

Amortized intangible assets	$	21,168	$	15,054	$	21,144	$	14,564

Less accumulated amortization		15,054				14,564

Identified intangibles, net		6,114				6,580

Unamortized intangible assets:
Goodwill Not amortized		21,291				21,275

	$	27,405			$	27,855

E.	Long-Term Debt

Our long-term debt consisted of the following:

	April 2,		December 31,
	2011		2010
Revolving credit facility
Prime rate borrowings	$	6,000	$	-
LIBOR borrowings		36,000		30,000
		42,000		30,000
Senior unsecured notes		30,000		30,000
Term loans		3,299		7,261
		75,299		67,261
Less current portion		1,958		5,670
	$	73,341	$	61,591

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Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

April 2, 2011

(Amounts in thousands, except share data)

E.	Long-Term Debt (continued)

Revolving Credit Facility and 5.09% Senior Unsecured Notes--We have a $140,000 revolving credit facility with a group of banks, which will expire in December 2014 and permits borrowings, as defined, up to $140,000 (previously $159,000) with a letter of credit sublimit of $100,000 and which, under certain circumstances, may be increased to $160,000. The revolving credit facility contains certain affirmative and negative covenants customary for this type of facility and includes financial covenant ratios, as defined, with respect to funded debt to EBITDA (earnings before interest, taxes, depreciation and amortization), and funded debt to capitalization.

As at April 2, 2011, we had unused commitments under the facility approximating $52,208, with $87,792 committed, consisting of borrowings of $42,000 and issued letters of credit of $45,792. Borrowings outstanding bear interest, at Davey Tree’s option, of either (a) a base rate plus a margin adjustment ranging from .0% to .25% or (b) LIBOR plus a margin adjustment ranging from 1.25% to 1.75%--with the margin adjustments in both instances based on a ratio of funded debt to EBITDA. 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 .20% to .30% is also required based on the average daily unborrowed commitment.

During July 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 the Company and the purchasers of the 5.09% Senior Notes. Subsequent series of promissory notes may be issued pursuant to supplemental note purchase agreements in an aggregate additional principal amount not to exceed $20,000.

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

F.	Stock-Based Compensation

The Davey Tree Expert Company 2004 Omnibus Stock Plan (the “Stock Plan”) was approved by our shareholders at our annual shareholders' meeting in May 2004. The Stock Plan is administered by the Compensation Committee of the Board of Directors, with the maximum number of common shares that may be granted to or purchased by all employees and directors under the Stock Plan being 10,000,000. In addition to the maintenance of the Employee Stock Purchase Plan, the Stock Plan provides for the grant of stock options, restricted stock, stock appreciation rights, stock purchase rights, stock equivalent units, cash awards, and other stock or performance-based incentives. These awards are payable in cash or common shares, or any combination thereof, as established by the Compensation Committee.

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

	Three Months Ended
	April 2,		April 3,
	2011		2010

Compensation expense, all share-based payment plans	$	337	$	311

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Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

April 2, 2011

(Amounts in thousands, except share data)

F.	Stock-Based Compensation (continued)

Stock-based compensation consisted of the following:

Employee Stock Purchase Plan--Under the Employee Stock Purchase Plan, all full-time employees with one year of service are eligible to purchase, through payroll deduction, common shares. Employee purchases under the Employee Stock Purchase Plan are at 85% of the fair market value of the common shares--a 15% discount. We recognize compensation costs as payroll deductions are made. The 15% discount of total shares purchased under the plan resulted in compensation cost of $96 being recognized for the three months ended April 2, 2011 and $90 for the three months ended April 3, 2010.

Stock Option Plans--Stock options awarded before January 1, 2006 were granted at an exercise price equal to the fair market value of our common shares at the dates of grant. Stock options awarded on or after January 1, 2006 were required to be measured at fair value. At April 2, 2011, there were 663,568 stock options outstanding that were awarded after January 1, 2006. The stock options were awarded under a graded vesting schedule and have a term of ten years. Compensation costs for stock options are recognized over the requisite service period on the straight-line recognition method. Compensation cost recognized for stock options was $103 for the three months ended April 2, 2011 and $87 for the three months ended April 3, 2010.

Stock-Settled Stock Appreciation Rights--During the three months ended April 2, 2011, the Compensation Committee of the Board of Directors awarded 80,800 Stock-Settled Stock Appreciation Rights (“SSARs”) to certain management employees and nonemployee directors which vest ratably over five years. A stock-settled stock appreciation right is an award that allows the recipient to receive common stock equal to the appreciation in the fair market value of our common stock between the date the award was granted and the conversion date of the shares vested.

The following table summarizes our SSARs as of April 2, 2011.

						Weighted-
				Weighted-		Average
				Average		Remaining	Unrecognized		Aggregate
Stock-Settled	Number of			Award Date		Contractual	Compensation		Intrinsic
Stock Appreciation Rights	Rights			Value		Life	Cost		Value

Unvested, January 1, 2011		148,159		$	3.34
Granted		80,800			3.82
Forfeited		-
Vested		(30,080	)		3.36
Unvested, April 2, 2011		198,879		$	3.53	3.9 years	$	657	$	3,659

Employee SSARs		186,880		$	3.60	3.9 years	$	631	$	3,438
Nonemployee Director SSARs		11,999		$	2.58	4.0 years	$	26	$	221

Compensation costs for stock appreciation rights are determined using a fair-value method and amortized over the requisite service period. Compensation expense for stock appreciation rights was $42 for the three months ended April 2, 2011 and $26 for the three months ended April 3, 2010.

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Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

April 2, 2011

(Amounts in thousands, except share data)

F.	Stock-Based Compensation (continued)

Performance-Based Restricted Stock Units--During the first three months of 2011, the Compensation Committee of the Board of Directors awarded 27,405 Performance-Based Restricted Stock Units to certain management employees. The Compensation Committee made similar awards in prior periods. The awards vest over specified periods. The following table summarizes Performance-Based Restricted Stock Units as of April 2, 2011.

Weighted-

Average

Remaining

Unrecognized

Aggregate

Performance-Based

Number of

Grant Date

Contractual

Compensation

Intrinsic

Restricted Stock Units

Stock Units

Value

Life

Cost

Value

Unvested, January 1, 2011

126,036

14.02

Granted

27,405

17.09

Forfeited

Vested

(22,992

)

11.17

Unvested, April 2, 2011

130,449

15.17

3.1 years

$ 1,212

$ 2,400

The fair value of the restricted stock units for awards made prior to January 1, 2006 is based on the market price of our common shares on the date of award and is recognized as compensation cost on the straight-line recognition method over the vesting period. Compensation cost for awards made after December 31, 2005 is determined using a fair-value method and amortized over the requisite service period. Compensation expense on restricted stock awards totaled $96 for the three months ended April 2, 2011 and $108 for the three months ended April 3, 2010.

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

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

	Three Months Ended
	April 2,	April 3,
	2011	2010

Volatility rate	11.9%	12.2%
Risk-free interest rate	3.0%	3.5%
Expected dividend yield	1.5%	1.5%
Expected life of awards (years)	8.7	8.7

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Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

April 2, 2011

(Amounts in thousands, except share data)

F.	Stock-Based Compensation (continued)

General Stock Option Information--The following table summarizes activity under the stock option plans for the three months ended April 2, 2011.

						Weighted-
				Weighted-		Average
	Number of			Average		Remaining	Unrecognized		Aggregate
	Options			Exercise		Contractual	Compensation		Intrinsic
Stock Options	Outstanding			Price		Life	Cost		Value

Outstanding, January 1, 2011		1,256,106		$	10.27
Granted		-			-
Exercised		(9,633	)		7.46
Forfeited		-			-
Outstanding, April 2, 2011		1,246,473		$	10.29	4.7 years	$	12,826	$	10,109

Exercisable, April 2, 2011		935,673		$	8.78	3.6 years			$	9,001

“Intrinsic value” is defined as the amount by which the market price of a common share exceeds the exercise price of an option. Information regarding the stock options outstanding at April 2, 2011 is summarized below:

				Weighted-	Weighted-				Weighted-
				Average	Average				Average
Stock Options		Number		Remaining	Exercise		Number		Exercise
Exercise Price		Outstanding		Contractual Life	Price		Exercisable		Price
Employee options:
	$ 6.75		574,905	2.7 years	$	6.75		574,905	$	6.75
	11.25		372,500	5.2 years		11.25		281,300		11.25
	16.00		136,400	8.6 years		16.00		26,800		16.00
	16.60		110,000	9.6 years		16.60		-		16.60
			1,193,805	4.8 years	$	10.12		883,005	$	8.46
Director options:
	$10.00 to $16.40		52,668	2.5 years		14.20		52,668		14.20
			1,246,473	4.7 years	$	10.29		935,673	$	8.78

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

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

The results of operations included the following net periodic benefit cost recognized related to our defined-benefit pension plans.

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Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

April 2, 2011

(Amounts in thousands, except share data)

G.	Net Periodic Benefit Cost--Defined Benefit Pension Plans (continued)

	Three Months Ended
	April 2,			April 3,
	2011			2010
Components of pension cost

Service costs--increase in benefit obligation earned	$	33		$	33
Interest cost on projected benefit obligation		418			406
Expected return on plan assets		(477	)		(442	)
Amortization of net actuarial loss		134			154
Amortization of prior service cost		3			3
Amortization of transition asset		(17	)		(17	)
Net pension cost of defined-benefit pension plans	$	94		$	137

Employer Contributions--Contributions of $71 were made to our defined-benefit pension plans during the three months ended April 2, 2011. We expect, as of April 2, 2011, to make additional defined-benefit plan contributions totaling $988 before December 31, 2011.

H.	Income Taxes

Our income tax provision for interim periods is determined using an estimate of our annual effective tax rate adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter we update our estimate of the annual effective tax rate and, if our estimated annual tax rate changes, we make a cumulative adjustment. The 2011 annual effective tax rate is estimated to be 39.1%. Our annual effective tax rate for 2010 was 42.2%.

At December 31, 2010 we had unrecognized tax benefits of $1,524, of which $853 would affect our effective rate if recognized, and accrued interest expense related to unrecognized benefits of $68. At April 2, 2011, there were no significant changes in the unrecognized benefits, including the amount that would affect our effective tax rate if recognized, or the accrued interest expense related to the unrecognized tax benefits. Unrecognized tax benefits are the differences between a tax position taken, or expected to be taken in a tax return, and the benefit recognized for financial reporting purposes.

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. During the fourth quarter 2010, the U.S. Internal Revenue Service completed its audit of the Company’s U.S. income tax returns for 2007 and 2008 and Canada Revenue Agency completed its audit of the Company’s Canadian operations for 2006, 2007 and 2008. With the exception of U.S. state jurisdictions, the Company is no longer subject to examination by tax authorities for the years through 2008. Our estimate for the potential outcome for any uncertain tax issue is highly judgmental. Uncertain tax positions are recognized only if they are more-likely-than-not to be upheld during examination based on their technical merits. The measurement of the uncertain tax position is based on the largest benefit amount that is more-likely-than-not (determined on a cumulative probability basis) to be realized upon settlement of the matter. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. If the estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense may result.

As of April 2, 2011, if certain pending tax matters settle, we believe it is reasonably possible that additional payments approximating $250 will be made during the next twelve months. However, we do not anticipate an increase or decrease in our total uncertain tax positions during the next twelve months that would be material to our financial condition or the results of operations.

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Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

April 2, 2011

(Amounts in thousands, except share data)

I.	Comprehensive Income (Loss)

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

	Three Months Ended
	April 2,			April 3,
	2011			2010
Comprehensive Loss
Net loss	$	(6,046	)	$	(4,095	)
Other comprehensive income (loss)
Currency translation adjustments		585			980
Interest rate swaps, change in fair value		218			(66	)
Defined benefit pension plans -- amortization of net
actuarial loss, prior service cost and transition asset		120			140
Other comprehensive income (loss), before income taxes		923			1,054
Income tax benefit (expense), related to items of other comprehensive income		(130	)		(28	)
Other comprehensive income (loss)		793			1,026

Comprehensive loss	$	(5,253	)	$	(3,069	)

The following summarizes the components of other comprehensive income (loss) accumulated in shareholders’ equity:

						Defined			Accumulated
	Currency		Interest			Benefit			Other
	Translation		Rate			Pension			Comprehensive
	Adjustments		Swaps			Plans			Income (Loss)
Balance at January 1, 2011	$	3,459	$	(645	)	$	(5,886	)	$	(3,072	)
Unrealized gains		585		-			-			585
Unrealized gains in fair value		-		218			-			218
Unrecognized amounts from defined benefit pension plans		-		-			120			120
Tax effect		-		(84	)		(46	)		(130	)
Net of tax amount		585		134			74			793

Balance at April 2, 2011	$	4,044	$	(511	)	$	(5,812	)	$	(2,279	)

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Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

April 2, 2011

(Amounts in thousands, except share data)

J.	Per Share Amounts and Common Shares Outstanding

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

	Three Months Ended
	April 2,			April 3,
	2011			2010
Loss available to common shareholders:
Net loss	$	(6,046	)	$	(4,095	)

Weighted-average shares:
Basic:
Outstanding		14,127,312			14,603,790
Partially-paid share subscriptions		-			1,724
Basic weighted-average shares		14,127,312			14,605,514

Diluted:
Basic from above		14,127,312			14,605,514
Incremental shares from assumed:
Exercise of stock options		527,710			551,041
Diluted weighted-average shares		14,655,022			15,156,555

Net loss per share -- basic and diluted	$	(.43	)	$	(.28	)

Common Shares Outstanding--A summary of the activity of the common shares outstanding for the three months ended April 2, 2011 follows:

Shares outstanding at January 1, 2011		14,112,256

	Shares purchased	(65,607)
	Shares sold	148,186
	Options exercised	16,647
		99,226

Shares outstanding at April 2, 2011		14,211,482

On April 2, 2011, we had 14,211,482 common shares outstanding, and employee and director options exercisable to purchase 935,673 common shares.

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Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

April 2, 2011

(Amounts in thousands, except share data)

K.	Operations by Business Segment

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

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

Measurement of Segment Profit and Loss and Segment Assets--We evaluate performance and allocate resources based primarily on operating income and also actively manage business unit operating assets. Segment information, including reconciling adjustments, is presented consistent with the basis described in the 2010 Annual Report.

Segment information reconciled to consolidated external reporting information follows:

				Residential
	Utility			Commercial			All			Reconciling
	Services			Services			Other			Adjustments				Consolidated

Three Months Ended April 2, 2011
Revenues	$	74,651		$	45,659		$	11,014		$	-			$	131,324
Income (loss) from operations		(670	)		(5,840	)		(1,236	)		(474	)	(a)	(8,220		)
Interest expense											(890	)			(890	)
Interest income											5				5
Other income (expense), net											(663	)			(663	)
Loss before income taxes														$	(9,768	)

Segment assets, total	$	120,776		$	95,945		$	14,497		$	58,489		(b)	$	289,707

Three Months Ended April 3, 2010
Revenues	$	69,818		$	45,747		$	8,913		$	-			$	124,478
Income (loss) from operations		1,171			(4,802	)		(1,501	)		(507	)	(a)		(5,639	)
Interest expense											(500	)			(500	)
Interest income											17				17
Other income (expense), net											(738	)			(738	)
Loss before income taxes														$	(6,860	)

Segment assets, total	$	116,065		$	95,426		$	10,853		$	51,139		(b)	$	273,483


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

(a) Reclassification of depreciation expense and allocation of corporate expenses.
(b) Corporate assets include cash, prepaid expenses, corporate facilities, enterprise-wide information systems and other nonoperating assets.

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Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

April 2, 2011

(Amounts in thousands, except share data)

L. Financial Instruments and Fair Value Measurements

Fair Value of Financial Instruments--The fair values of our current assets and current liabilities, including cash, accounts receivable, accounts payable, and accrued expenses among others, approximate their reported carrying values because of their short-term nature. The fair value of our assets invested for self-insurance, consisting of money market savings account deposits, approximates the carrying value and is classified as other assets, noncurrent. Financial instruments classified as noncurrent liabilities and their carrying values and fair values were as follows:

	April 2, 2011				December 31, 2010
Financial Instruments Recorded at	Carrying		Fair		Carrying		Fair
Historical Carrying Value	Value		Value		Value		Value

Revolving credit facility, noncurrent	$	42,000	$	42,000	$	30,000	$	30,000
Senior unsecured notes		30,000		30,005		30,000		30,007
Term loans, noncurrent		1,341		1,331		1,591		1,593

Total	$	73,341	$	73,336	$	61,591	$	61,600

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

Market Risk and Derivative Financial Instruments

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

Foreign Currency Rate Risk--We are exposed to market risk related to foreign currency exchange rate risk resulting from our operations in Canada, where we provide a comprehensive range of horticultural services. Our financial results could be affected by factors such as changes in the foreign currency exchange rate or differing economic conditions in the Canadian markets as compared with the markets for our services in the United States. Our earnings are affected by translation exposures from currency fluctuations in the value of the U.S. dollar as compared to the Canadian dollar. Similarly, the Canadian dollar-denominated assets and liabilities may result in financial exposure as to the timing of transactions and the net asset / liability position of our Canadian operations. Presently, we do not engage in hedging activities related to our foreign currency rate risk.

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

Interest Rate Swaps--We hold interest rate swaps—cash-flow hedges—to effectively convert a portion of our variable-rate revolving credit borrowings to a fixed rate, thus reducing the impact of interest-rate changes on future interest expense. Under the contracts, we agree with the counterparty to exchange, at specified intervals, the difference between variable rate and fixed rate amounts calculated on a notional principal amount. These interest rate swaps have reset dates and fixed-rate indices that match those of our underlying variable-rate long-term debt and have been designated as cash-flow hedges for a portion of that debt. As all of the critical terms of our interest rate swap contracts match the debt to which they pertain, there was no ineffectiveness related to these interest rate swaps in 2011 or 2010 and all related unrealized gains and losses were deferred in accumulated other comprehensive income (loss). No material amounts were recognized in the results of operations related to our interest rate swaps during 2011 or 2010.

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Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

April 2, 2011

(Amounts in thousands, except share data)

L.	Financial Instruments and Fair Value Measurements (continued)

We held three interest rate swaps with the notional value totaling $30,000 as of April 2, 2011. The following summarizes the amount of the long-term debt hedged (which is the notional principal amount of the interest rate swaps), and the gross fair value of the liability position of the interest rate swaps.

	April 2,		December 31,
	2011		2010

Amount of long-term debt hedged	$	30,000	$	30,000

Gross fair value liability position, classified as accrued expenses	$	822	$	1,040

The following summarizes the amount of the gains (losses) recognized in other comprehensive income from the interest rate swaps for the three months ended April 2, 2011 and April 3, 2010:

	Three Months Ended
	April 2,		April 3,
	2011		2010
Derivatives in cash-flow hedging relationship

Interest rate swaps	$	218	$	(66	)

Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Market participants are defined as buyers or sellers in the principal or most advantageous market for the asset or liability that are independent of the reporting entity, knowledgeable, and able and willing to transact for the asset or liability.

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

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Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

April 2, 2011

(Amounts in thousands, except share data)

L.	Financial Instruments and Fair Value Measurements (continued)

Our assets and liabilities measured at fair value on a recurring basis at April 2, 2011, were as follows:

			Fair Value Measurements at April 2, 2011 Using:
	Total		Quoted prices		Significant		Significant
	Carrying		in		other observable		unobservable
Assets and Liabilities Recorded at	Value at		active markets		inputs		inputs
Fair Value on a Recurring Basis	April 2, 2011		(Level 1)		(Level 2)		(Level 3)

Assets:
Assets invested for self-insurance, classified as other assets, noncurrent	$	12,115	$	12,115	$	-	$	-

Liabilities:
Interest rate swaps, classified as accrued expenses	$	822	$	-	$	822	$	-
Deferred compensation		737		-		737		-

There were no transfers of assets or liabilities between Level 1 and Level 2 during the first quarter ended April 2, 2011.

Our assets and liabilities measured at fair value on a recurring basis at December 31, 2010 were as follows:

			Fair Value Measurements at December 31, 2010 Using:
	Total		Quoted prices		Significant		Significant
	Carrying		in		other observable		unobservable
Assets and Liabilities Recorded at	Value at		active markets		inputs		inputs
Fair Value on a Recurring Basis	December 31, 2010		(Level 1)		(Level 2)		(Level 3)

Assets:
Assets invested for self-insurance, classified as other assets, noncurrent	$	11,475	$	11,475	$	-	$	-

Liabilities:
Interest rate swaps, classified as accrued expenses	$	1,040	$	-	$	1,040	$	-
Deferred compensation		690		-		690		-

The assets invested for self-insurance are money market funds--classified as Level 1--based on quoted market prices of the identical underlying securities in active markets. The estimated fair values of our interest rate swaps are calculated based on market rates to settle the instruments--classified as Level 2--and represent the estimated amounts we would pay upon transfer, taking into consideration current market rates and creditworthiness. The estimated fair value of the deferred compensation--classified as Level 2--is based on the value of the Company’s common shares, determined by independent valuation.

M.	Contingencies

We are party to a number of lawsuits, threatened lawsuits and other claims arising out of the normal course of business. With respect to all such matters, we record an accrual for a loss contingency when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. If we can only estimate a range of probable loss, an amount representing the low end of the range of probable outcomes is recorded.

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Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

April 2, 2011

(Amounts in thousands, except share data)

M.	Contingencies (continued)

Management has assessed all such matters, including those described below, based on current information and made a judgment concerning their potential outcome, giving due consideration to the nature of the claim, the amount and nature of damages sought and the probability of success. Management’s judgment is made subject to the known uncertainty of litigation and management’s judgment as to estimates made may prove materially different from actual results.

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

Numerous lawsuits related to the Rice Canyon fire were filed against SDG&E, its parent company, Sempra Energy, and Davey. The earliest of the lawsuits naming Davey was filed on April 18, 2008. The court ordered that the lawsuits be organized into the four groups based on the type of plaintiff, namely insurance subrogation claimants, individual/business claimants, governmental claimants, and plaintiffs seeking class certification. Plaintiffs’ motions seeking class certification have since been denied. SDG&E has filed cross-complaints against Davey for contractual indemnity, declaratory relief, and breach of contract. SDG&E has reportedly settled many of the third-party claims and is now actively asserting damage claims against Davey.

Davey has notified its insurers of the Rice Canyon fire claims, is vigorously defending the third-party claims, and continues to work with the insurers both to defend the claims and to ensure coverage of any potential liabilities.

At this time, Davey believes that insurance coverage and recorded accruals are sufficient to provide for losses related to these potential liabilities.

However, due to the nature and extent of these claims, an adverse result in these proceedings leading to a loss in excess of Davey’s available insurance coverage could have a material and adverse effect on Davey’s business, financial condition, results of operations and cash flows. Adverse results, even if within the limits of Davey’s available insurance coverage, could materially and adversely (a) affect Davey’s ability to obtain comparable insurance in the future, or, (b) if such insurance were obtainable, affect the policy limits, premiums, self-insured retentions and other terms and conditions thereof.

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

(Amounts in thousands, except share data)

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

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

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

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Index

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

RESULTS OF OPERATIONS

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

	Three Months Ended
	April 2,		April 3,		Percentage
	2011		2010		Change

Revenues	100.0	%	100.0	%	5.5	%

Costs and expenses:
Operating	73.0		71.1		8.2
Selling	17.5		17.3		7.2
General and administrative	8.5		8.8		2.0
Depreciation and amortization	7.3		7.2		7.2
(Gain) loss on sale of assets, net	(.1	)	.1		nm

Loss from operations	(6.2	)	(4.	)	45.8

Other income (expense):
Interest expense	(.7	)	(.4	)	78.0
Interest income	-		-		nm
Other, net	(.5	)	(.6	)	(10.2	)

Loss before income taxes	(7.4	)	(5.5	)	42.4

Income tax benefits	(2.8	)	(2.2	)	34.6

Net loss	(4.6	)%	(3.3	)%	47.7	%

nm--not meaningful

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Index

First Quarter—Three Months Ended April 2, 2011 Compared to Three Months Ended April 3, 2011

Our results of operations for the three months ended April 2, 2011 compared to the three months ended April 3, 2010 follows:

	Three Months Ended
	April 2,			April 3,
	2011			2010			Change			% Change

Revenues	$	131,324		$	124,478		$	6,846			5.5	%

Costs and expenses:
Operating		95,830			88,551			7,279			8.2
Selling		22,987			21,434			1,553			7.2
General and administrative		11,224			11,007			217			2.0
Depreciation and amortization		9,584			8,944			640			7.2
(Gain) loss on sale of assets, net		(81	)		181			(262	)	nm
		139,544			130,117			9,427			7.2

Loss from operations		(8,220	)		(5,639	)		(2,581	)		45.8

Other income (expense):
Interest expense		(890	)		(500	)		(390	)		78.0
Interest income		5			17			(12	)	nm
Other, net		(663	)		(738	)		75			(10.2	)

Loss before income taxes		(9,768	)		(6,860	)		(2,908	)		42.4

Income tax benefits		(3,722	)		(2,765	)		(957	)		34.6

Net loss	$	(6,046	)	$	(4,095	)	$	(1,951	)		47.7	%

nm--not meaningful

Revenues--Revenues of $131,324 increased $6,846 compared with $124,478 in the first quarter 2010. Utility Services increased $4,833 or 6.9% compared with the first quarter 2010. New contracts coupled with increases on existing contracts within our U.S. and Canadian operations account for the increase. Residential and Commercial Services decreased $88 to $45,659 from the first quarter 2010. Revenues were impacted by generally unfavorable weather conditions and the lack of significant winter storms as compared to the prior year. Total revenue of $131,324 includes production incentive revenue, recognized under the completed-performance method, of $370 during the first quarter 2011 compared with $1,946 during the first quarter 2010.

Operating Expenses--Operating expenses of $95,830 increased $7,279 compared with the first quarter 2010 and, as a percentage of revenues, increased 1.9% to 73.0%. Utility Services increased $5,871 or 10.8% compared with the first quarter 2010, and as a percentage of revenues increased 2.8% to 80.5%. Increased fuel expense, equipment expense, tools expense, labor expense and subcontractor expense, associated with the increase in revenues, were partially offset by a reduction in material expense. Residential and Commercial Services increased $366 or 1.3% compared with the first quarter 2010 and, as a percentage of revenues, increased 1.0% to 61.2%. Increased labor expense, equipment maintenance expense and fuel expense were partially offset by a reduction in subcontractor expense and material expense.

Fuel costs of $6,378 increased $1,389, or 27.8%, from the $4,989 incurred in the first quarter 2010 and impacted operating expenses within all segments.

Selling Expenses--Selling expenses of $22,987 increased $1,553 compared with the first quarter 2010 and as a percentage of revenues increased .2% to 17.5%. Utility Services increased $243 or 4.2% from the first quarter 2010. Increases in field management travel expense, vehicle expense and office rent were partially offset by decreases in field management wages and incentive expense, professional services expense and communication expense. Residential and Commercial Services experienced an increase of $943 or 6.4% over the first quarter 2010. Increases in field management wages and incentive expense, rent expense, professional services expense and employee development expense were partially offset by reductions in field management vehicle expense, office expenses and sales and marketing expenses.

- 21 -

Index

General and Administrative Expenses--General and administrative expenses of $11,224 increased $217 from $11,007 in the first quarter 2010. Increases in professional service expense, travel expense, employee development expense, office rent and utilities expense and stock-based compensation expense were partially offset by decreases in salary and incentive expense, communications expense, postage expense and pension expense.

Depreciation and Amortization Expense--Depreciation and amortization expense of $9,584 increased $640 from $8,944 in the first quarter of 2010 and, as a percentage of revenues, increased .1% to 7.3%. The increase is attributable to an increase in capital expenditures for equipment in the prior year.

Gain/Loss on the Sale of Assets, Net--Gain on the sale of assets was $81 for the first quarter 2011 as compared with a loss of $181 in the first quarter 2010. The increase is the result of an increase in the number of units disposed in the first quarter 2011 as compared with the first quarter 2010.

Interest Expense--Interest expense of $890 increased $390 from the $500 incurred in the first quarter 2010. The increase is attributable to higher average debt levels necessary to fund operations and capital expenditures and higher average interest rates incurred on our 5.09% Senior Notes, issued during the third quarter 2010, as compared to the first quarter 2010.

Other, Net--Other, net, of $663 decreased $75 from the $738 incurred in the first quarter 2010 and consisted of nonoperating income and expense, primarily foreign currency losses on the intercompany account balances of our Canadian operations.

Income Taxes--Income tax benefits for the first quarter 2011 were $3,722, as compared to $2,765 for the first quarter 2010. Our tax provision for interim periods is determined using an estimate of our annual effective tax rate adjusted for discrete items, if any, that are taken into account in the relevant period. The 2011 annual effective tax rate is estimated to be 39.1%. Our annual effective tax rate for 2010 was 42.2%.

Net Loss--Net loss of $6,046 for the first quarter 2011 was $1,951 greater than the $4,095 loss experienced in the first quarter 2010.

LIQUIDITY AND CAPITAL RESOURCES

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

Cash Flow Summary

Our cash flows from operating, investing and financing activities, as reflected in the Condensed Consolidated Statements of Cash Flows for the three months ended April 2, 2011 and April 3, 2010, are summarized as follows:

	2011			2010
Cash provided by (used in):
Operating activities	$	(1,214	)	$	(8,222	)
Investing activities		(13,509	)		(9,186	)
Financing activites		8,789			17,745
(Decrease)/Increase in cash	$	(5,934	)	$	337

Cash Provided by Operating Activities--Cash used in operating activities was $1,214 for the first three months of 2011, $7,008 less than the $8,222 used in the first three months of 2010. The increase in operating cash flow was primarily attributable to $8,782 less cash used for operating assets and liabilities and an increase in depreciation and amortization of $640.

Overall, accounts receivable decreased $2,466 during the first three months of 2011, as compared to the increase of $3,648 during the first three months of 2010. With respect to the change in accounts receivable arising from business levels, the “days-sales-outstanding” in accounts receivable (sometimes referred to as “DSO”) at the end of the first three months of 2011 decreased 1 day to 54 days, as compared to the end of the first three months of 2010. The DSO at April 3, 2010 was 55 days.

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Index

Operating liabilities decreased $2,685 in the first three months of 2011, $4,893 less than the $7,578 decrease in the first three months of 2010. Accounts payable and accrued expenses decreased $5,831 during the first three months of 2011 as compared with a decrease of $9,050 for the first three months of 2010. Decreases in employee compensation, accrued interest and 401KSOP liabilities and trade payables were partially offset by increases in compensated-absence and vacation accruals, self-insured medical claims, professional services and advance payments from customers. Self-insurance accruals increased $3,146 in the first three months of 2011, which was $1,674 more than the increase of $1,472 experienced in the first three months of 2010. The increase occurred in all classifications -- workers’ compensation, general liability and vehicle liability--and resulted primarily from an overall increase in deductible amounts under commercial insurance and the self-insured risk retention.

Other, net, increased $4,647, $2,225 more than the $2,422 increase for the first three months of 2010. The increase is attributable to increases in operating supplies, prepaid expenses and tax deposits.

Cash Used In Investing Activities--Cash used in investing activities for the first three months of 2011 was $13,509, or $4,323 more than the $9,186 used during the first three months of 2010. The increase was primarily the result of increased capital expenditures for equipment and the purchases of businesses.

Cash Provided by Financing Activities--Cash provided by financing activities of $8,789 decreased $8,956 during the first three months of 2011 as compared with the $17,745 of cash provided during the first three months of 2010. During the first three months of 2011, our revolving credit facility provided $12,000 in cash as compared with the $21,550 borrowed during the first three months of 2010. We use the credit facility primarily for capital expenditures and payments of notes payable related to acquisitions. Treasury share transactions (purchases and sales) provided $274 more cash than the $1,443 provided in the first three months of 2010. Dividends paid of $604 decreased $29, as compared with $633 paid in the first three months of 2010.

Off-Balance Sheet Arrangements

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

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Contractual Obligations Summary

The following summarizes our long-term contractual obligations, as at April 2, 2011, to make future payments for the periods indicated.

			Nine
			Months Ending
			December 31,		Year Ending December 31,
Description	Total		2011		2012		2013		2014		2015		Thereafter

Revolving credit facility	$	42,000	$	-	$	-	$	-	$	42,000	$	-	$	-
Senior unsecured notes		30,000		-		-		-		-		-		30,000
Term loans		3,299		1,709		730		480		380		-		-
Operating lease obligations		10,446		3,580		2,744		1,884		914		657		667
Self-insurance accruals		57,556		22,840		14,088		7,937		3,745		1,643		7,303
Purchase obligations		6,014		6,014		-		-		-		-		-
Other liabilities		7,840		2,948		626		437		295		297		3,237
	$	157,155	$	37,091	$	18,188	$	10,738	$	47,334	$	2,597	$	41,207

The self-insurance accruals in the summary above reflect the total of the undiscounted amount accrued, for which amounts estimated to be due each year may differ from actual payments required to fund claims. Purchase obligations in the summary above represent open purchase-order amounts we anticipate will become payable for goods and services we have negotiated for delivery as of April 2, 2011. 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 April 2, 2011, have not been included in the summary above. Noncurrent deferred taxes and payments related to defined benefit pension plans are also not included in the summary.

As of April 2, 2011, we were contingently liable for letters of credit in the amount of $46,797, of which $45,792 is committed under the revolving credit facility. Substantially all of these letters of credit, which expire within a year, are planned for renewal as necessary.

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

Capital Resources

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

Business seasonality results in higher revenues during the second and third quarters as compared with the first and fourth quarters of the year, while our methods of accounting for fixed costs, such as depreciation expense, are not significantly impacted by business seasonality. Capital resources during these periods are equally affected. We satisfy seasonal working capital needs and other financing requirements with the revolving credit facility and three other short-term lines of credit. We are continually reviewing our existing sources of financing and evaluating alternatives. At April 2, 2011, we had working capital of $32,148, short-term lines of credit approximating $10,405 and $52,208 available under our revolving credit facility.

We believe our sources of capital, at this time, provide us with the financial flexibility to meet our capital-spending plans and to continue to complete business acquisitions for the foreseeable future.

RECENT ACCOUNTING GUIDANCE

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

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

As discussed in our annual report on Form 10-K for the year ended December 31, 2010, we believe that our policies related to revenue recognition, the allowance for doubtful accounts and self-insurance accruals are our “critical accounting policies and estimates”—those most important to the financial presentations and those that require the most difficult, subjective or complex judgments.

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

NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

§	Our business, other than tree services to utility customers, is highly seasonal and weather dependent.

§	The effects of the recent economic downturn and the continuing financial and credit uncertainties may reduce our customers’ spending, adversely impact pricing for our services, and impede our collection of accounts receivable.

§	Significant customers, particularly utilities, may experience financial difficulties, resulting in payment delays or delinquencies.

§	The seasonal nature of our business and changes in general and local economic conditions, among other factors, may cause our quarterly results to fluctuate, and our prior performance is not necessarily indicative of future results.

§	The uncertainties in the credit and financial markets may limit our access to capital.

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

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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, or inability to obtain, adequate insurance, or the inadequacy of our self-insurance accruals or insurance coverages, could negatively impact our liquidity.

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

§	We are subject to intense competition.

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

§	The impact of regulations initiated as a response to possible changing climate conditions could have a negative effect on our results of operations or our financial condition.

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

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

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

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

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

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

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

The factors described above, as well as other factors that may adversely impact our actual results, are discussed in our annual report on Form 10-K for the year ended December 31, 2010 in “ Part I - Item 1A. Risk Factors.”

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

During the three months ended April 2, 2011, there have been no material changes in the market risk previously presented in our Annual Report on Form 10-K for the year ended December 31, 2010.

Item 4. Controls and Procedures.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures were effective as of April 2, 2011 in ensuring that information required to be included in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

During the quarter ended April 2, 2011, there were no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

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The Davey Tree Expert Company

Part II. Other Information

Items 3, 4 and 5 are not applicable.

Item 1.	Legal Proceedings.
	We are party to a number of lawsuits, threatened lawsuits and other claims arising out of the normal course of business. With respect to all such matters, we record an accrual for a loss contingency when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In addition, narrative information is provided for matters as to which management believes a material loss is reasonably possible. Management has assessed all such matters, including those described below, based on current information and made a judgment concerning their potential outcome, giving due consideration to the nature of the claim, the amount and nature of damages sought and the probability of success. Management’s judgment is made subject to the known uncertainty of litigation and management’s judgment as to estimates made may prove materially different from actual results. California Fire Litigation: San Diego County--Davey Tree Surgery Company, a Davey subsidiary, and Davey Resource Group, a Davey division, have previously been sued, together with a utility services customer, San Diego Gas & Electric ("SDG&E"), and its parent company, as defendants, and as cross-defendants in cross-complaints filed by the utility service customer, in the Superior Court of the State of California in and for the County of San Diego, arising out of a wildfire in San Diego County that started on October 22, 2007, referred to as the Rice Canyon fire. The California Department of Forestry and Fire Protection issued a report concluding that the Rice Canyon fire was caused by SDG&E power lines and burned approximately 9,472 acres and damaged approximately 206 homes, two commercial properties and 40 outbuildings. The Consumer Protection and Safety Division of the California Public Utilities Commission issued a report concluding that the Rice Canyon fire was caused when a specific sycamore tree limb broke during Santa Ana wind conditions and fell on SDG&E's energized overhead conductors, causing the conductor to break. Numerous lawsuits related to the Rice Canyon fire were filed against SDG&E, its parent company, Sempra Energy, and Davey. The earliest of the lawsuits naming Davey was filed on April 18, 2008. The court ordered that the lawsuits be organized into the four groups based on the type of plaintiff, namely insurance subrogation claimants, individual/business claimants, governmental claimants, and plaintiffs seeking class certification. Plaintiffs’ motions seeking class certification have since been denied. SDG&E has filed cross-complaints against Davey for contractual indemnity, declaratory relief, and breach of contract. SDG&E has reportedly settled many of the third-party claims and is now actively asserting damage claims against Davey. Davey has notified its insurers of the Rice Canyon fire claims, is vigorously defending the third-party claims, and continues to work with the insurers both to defend the claims and to ensure coverage of any potential liabilities. At this time, Davey believes that insurance coverage and recorded accruals are sufficient to provide for losses related to these potential liabilities. However, due to the nature and extent of these claims, an adverse result in these proceedings leading to a loss in excess of Davey’s available insurance coverage could have a material and adverse effect on Davey’s business, financial condition, results of operations and cash flows. Adverse results, even if within the limits of Davey’s available insurance coverage, could materially and adversely (a) affect Davey’s ability to obtain comparable insurance in the future, or, (b) if such insurance were obtainable, affect the policy limits, premiums, self-insured retentions and other terms and conditions thereof. Ely v. Davey Tree Surgery Company--Davey Tree Surgery Company, a subsidiary of The Davey Tree Expert Company, has been named in a purported class-action lawsuit in the State of California filed on July 15, 2008 in the Superior Court of the State of California in and for the County of Alameda. The plaintiffs allege on behalf of themselves and a putative class that Davey Tree Surgery Company has failed to comply with California law concerning off-duty meal periods and the required content of paycheck stubs.

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	The plaintiffs allege that they and the putative “meal periods” class have not been provided with uninterrupted, duty-free 30-minute meal periods. In addition, plaintiffs allege that because they were supposedly made to work during their meal breaks, Davey Tree Surgery Company violated California’s minimum wage law because they and the putative members were not paid minimum wage for their alleged work during meal breaks. Plaintiffs also contend Davey Tree Surgery Company violated California law by not including the time they and the putative “wage statement” class members worked during their meal periods, their hourly rates of pay and number of hours worked at each hourly rate on their paycheck stubs. The Court granted plaintiffs’ motion for class certification and certified both the “meal periods” class and the “wage statements” class; some individuals are members of both classes, while others are members of only one class. A trial is scheduled for January 30, 2012. At this time, it is not reasonably possible to evaluate the likelihood of a favorable or unfavorable outcome to this matter or to estimate the amount or range of potential loss, if any. However, any potential losses from claims of this nature would not be insured, and therefore an adverse result could have a negative effect on Davey’s business, financial condition, results of operations and cash flows which could be material. We intend to vigorously defend ourselves against this lawsuit, and we believe that our defenses against these claims are meritorious.

Item 1A.	Risk Factors.

	Information regarding risk factors appears in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Note Regarding Forward-Looking Statements” in Part I – Item 2 of this Form 10-Q and in Part I – Item 1A of our annual report on Form 10-K for the year ended December 31, 2010. There have been no material changes from the risk factors described previously in our annual report on Form 10-K.

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

	The following table provides information on purchases of our common shares outstanding made by us during the first three months of 2011.

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 2011

January 1 to January 29

n/a

January 30 to February 26

963

16.60

n/a

February 27 to April 2

64,644

18.40

n/a

Total First Quarter

65,607

18.37

Total Year to Date

65,607

18.37

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

Our common shares are not listed or traded on an established public trading market and market prices are, therefore, not available. Semiannually, for purposes of the Davey 401KSOP and ESOP, the fair market value of our common shares is determined by an independent stock valuation firm, based upon our performance and financial condition, using a peer group of comparable companies selected by that firm. The peer group currently consists of ABM Industries Incorporated, Comfort Systems USA, Inc., Dycom Industries, Inc., FirstService Corporation, MYR Group, Inc., Quanta Services, Inc., Rollins, Inc., and Scotts Miracle-Gro Company. The semiannual valuations are effective for a period of six months and the per-share price established by those valuations is the price at which our Board of Directors has determined our common shares will be bought and sold during that six-month period in transactions involving Davey Tree or one of its employee benefit or stock purchase plans. Since 1979, we have provided a ready market for all shareholders through our direct purchase of their common shares, although we are under no obligation to do so. The purchases described above are added to our treasury stock.

Item 6.	Exhibits.

	See Exhibit Index page, below.

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Signatures

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

		THE DAVEY TREE EXPERT COMPANY



	By:	/s/ David E. Adante
Date: May 3, 2011		David E. Adante
		Executive Vice President, Chief Financial Officer and Secretary
		(Principal Financial Officer)



Date: May 3, 2011	By:	/s/ Nicholas R. Sucic
		Nicholas R. Sucic
		Vice President and Controller
		(Principal Accounting Officer)

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Exhibit Index

Exhibit No.	Description

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

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

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

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

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DAVEY TREE EXPERT CO - FORM 10-Q - May 3, 2011

Attached files

DAVEY TREE EXPERT CO Reports