DAVEY TREE EXPERT CO - FORM 10-Q

Attached files

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EXCEL - IDEA: XBRL DOCUMENT - DAVEY TREE EXPERT CO	Financial_Report.xls
EX-31.2 - EXHIBIT 31.2 - DAVEY TREE EXPERT CO	dt2012q110qex312.htm
EX-32.2 - EXHIBIT 32.2 - DAVEY TREE EXPERT CO	dt2012q110qex322.htm
EX-31.1 - EXHIBIT 31.1 - DAVEY TREE EXPERT CO	dt2012q110qex311.htm
EX-32.1 - EXHIBIT 32.1 - DAVEY TREE EXPERT CO	dt2012q110qex321.htm

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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 March 31, 2012

£ 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 S No £

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



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

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

There were 13,836.019 Common Shares, $1.00 par value, outstanding as of April 27, 2012.

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The Davey Tree Expert Company

Quarterly Report on Form 10-Q

March 31, 2012

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 Comprehensive Income	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements
	A — Basis of Financial Statement Preparation	6
	B — Seasonality of Business	7
	C — Accounts Receivable, Net and Supplemental Balance-Sheet Information	7
	D — Identified Intangible Assets and Goodwill, Net	8
	E — Long-Term Debt	8
	F — Stock-Based Compensation	9
	G — Net Periodic Benefit Cost—Defined Benefit Pension Plans	13
	H — Income Taxes	13
	I — Accumulated Other Comprehensive Income (Loss)	14
	J — Per Share Amounts and Common Shares Outstanding	14
	K — Operations by Business Segment	15
	L — Fair Value Measurements and Financial Instruments	16
	M — Contingencies	20

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
	Results of Operations	22
	Liquidity and Capital Resources	24
	Cash Flow Summary	25
	Off-Balance Sheet Arrangements	26
	Contractual Obligations Summary	26
	Capital Resources	27
	Recent Accounting Guidance	27
	Critical Accounting Policies and Estimates	28
	Note Regarding Forward-Looking Statements	28

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	29

Item 4.	Controls and Procedures	29

Part II.	Other Information

Item 1.	Legal Proceedings	30

Item 1A.	Risk Factors	31

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36

Item 6.	Exhibits	36

Signatures		37

Exhibit Index		38

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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THE DAVEY TREE EXPERT COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands, except per share data dollar amounts)



	March 31, 2012			December 31, 2011
Assets
Current assets:
Cash and cash equivalents	$	12,551		$	10,267
Accounts receivable, net	92,849			90,795
Operating supplies	6,558			5,586
Other current assets	20,197			23,888
Total current assets	132,155			130,536

Property and equipment	449,571			438,989
Less accumulated depreciation	315,316			308,841
	134,255			130,148

Other assets	16,826			15,969
Identified intangible assets and goodwill, net	26,662			27,081
	$	309,898		$	303,734
Liabilities and shareholders' equity
Current liabilities:
Accounts payable	$	35,303		$	35,282
Accrued expenses	25,995			34,123
Other current liabilities	30,919			32,630
Total current liabilities	92,217			102,035

Long-term debt	67,101			51,136
Self-insurance accruals	33,414			30,472
Other noncurrent liabilities	15,250			19,365
	207,982			203,008
Common shareholders' equity:

Common shares, $1.00 par value, per share; 24,000 shares authorized; 21,457 shares issued and outstanding	21,457			21,457
Additional paid-in capital	2,633			1,721
Retained earnings	187,448			188,613
Accumulated other comprehensive loss	(5,611		)	(6,344		)
	205,927			205,447
Less: Cost of Common shares held in treasury; 7,505 shares at March 31, 2012 and 7,611 shares at December 31, 2011	104,011			104,721

	101,916			100,726
	$	309,898		$	303,734
See notes to condensed consolidated financial statements.

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THE DAVEY TREE EXPERT COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In thousands, except per share dollar amounts)



	Three Months Ended
	March 31, 2012			April 2, 2011
Revenues	$	146,644		$	131,324

Costs and expenses:
Operating	99,884			95,830
Selling	24,403			22,987
General and administrative	12,598			11,224
Depreciation and amortization	9,457			9,584
Gain on sale of assets, net	(206		)	(81		)
	146,136			139,544

Income (loss) from operations	508			(8,220		)

Other income (expense):
Interest expense	(703		)	(890		)
Interest income	27			5
Other, net	(635		)	(663		)

Loss before income taxes	(803		)	(9,768		)

Income tax benefits	(232		)	(3,722		)

Net loss	$	(571	)	$	(6,046	)

Net loss per share--basic and diluted	$	(.04	)	$	(.43	)

Weighted-average shares outstanding--basic and diluted	13,863			14,127

Dividends declared per share	$	.043		$	.043

See notes to condensed consolidated financial statements.

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THE DAVEY TREE EXPERT COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(In thousands, except per share dollar amounts)



	Three Months Ended
	March 31, 2012			April 2, 2011
Net loss	$	(571	)	$	(6,046	)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	493			585
Change in deferred gains on cash flow hedges	77			134
Defined benefit pension plan adjustments	163			74

Total other comprehensive income, net of tax	733			793

Comprehensive income (loss)	$	162		$	(5,253	)

See notes to condensed consolidated financial statements.

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THE DAVEY TREE EXPERT COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)



	Three Months Ended
	March 31, 2012			April 2, 2011
Operating activities
Net loss	$	(571	)	$	(6,046	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	9,457			9,584
Other	(1,197		)	114
Changes in operating assets and liabilities:
Accounts receivable	(2,054		)	2,466
Operating liabilities	(5,214		)	(2,685		)
Other, net	220			(4,647		)
	1,212			4,832
Net cash provided by (used in) operating activities	641			(1,214		)

Investing activities
Capital expenditures:
Equipment	(13,518		)	(13,418		)
Land and buildings	(71		)	(77		)
Purchases of businesses	—			(162		)
Other	459			148
Net cash used in investing activities	(13,130		)	(13,509		)

Financing activities
Revolving credit facility proceeds, net	16,000			12,000
Purchase of common shares for treasury	(2,488		)	(1,205		)
Sale of common shares from treasury	3,552			2,922
Dividends	(594		)	(604		)
Other	(1,697		)	(4,324		)
Net cash provided by financing activities	14,773			8,789

Increase/(Decrease) in cash and cash equivalents	2,284			(5,934		)

Cash and cash equivalents, beginning of period	10,267			12,017
Cash and cash equivalents, end of period	$	12,551		$	6,083

Supplemental cash flow information follows:
Interest paid	$	1,104		$	1,375
Income taxes paid	1,263			754

See notes to condensed consolidated financial statements.

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The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2012

(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, 2011 (the “2011 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”) in the form of Accounting Standards Updates (or “ASUs”) to the FASB’s Accounting Standards Codification™ (the “Codification”). The Codification is the single source of nongovernmental authoritative U.S. GAAP as well as all relevant U.S. SEC guidance in separate sections within the Codification. All other accounting guidance not included in the Codification is considered nonauthoritative.

In the descriptions of the ASUs that follow, references relate to the Codification Topic and descriptive title.

Accounting Standards Update 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards-Fair Value Measurement--In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards,” to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. ASU 2011-04 is effective prospectively for interim and annual periods beginning after December 15, 2011 (that is, the quarter ending March 31, 2012 for us). The adoption of this ASU did not have a material impact on our financial position, results of operations or cash flow.

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The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2012

(Amounts in thousands, except share data)


A.	Basis of Financial Statement Preparation (continued)

Accounting Standards Update 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05--In December 2011, the FASB issued ASU 2011-12, “Comprehensive Income (Topic 220),” which deferred the requirement to present separate line-items on the statement of operations for reclassification adjustments of items out of accumulated other comprehensive income into net income. This deferral is temporary until the FASB reconsiders the operational concerns and needs of financial statement users. The adoption of this ASU is not expected to have a material impact on our financial position, results of operations or cash flows.


B.	Seasonality of Business

Due to the seasonality of our business, our operating results for the three months ended March 31, 2012 are not indicative of results that may be expected for any other interim period or for the year ending December 31, 2012. 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:



Accounts receivable, net	March 31, 2012		December 31, 2011
Accounts receivable	$	81,502	$	82,076
Receivables under contractual arrangements	13,865		11,194
	95,367		93,270

Less allowances for doubtful accounts	2,518		2,475

Accounts receivable, net	$	92,849	$	90,795

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



Accrued expenses	March 31, 2012		December 31, 2011
Employee compensation	$	8,212	$	15,046
Accrued compensated absences	7,716		7,138
Self-insured medical claims	3,282		2,950
Customer advances, deposits	—		1,321
Taxes, other than income	2,085		2,622
Accrued litigation settlement	2,900		2,900
Other	1,800		2,146
Total	$	25,995	$	34,123

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The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2012

(Amounts in thousands, except share data)


D.	Identified Intangible Assets and Goodwill, Net

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



	March 31, 2012				December 31, 2011
Identified Intangible Assets and Goodwill, Net	Carrying Amount		Accumulated Amortization		Carrying Amount		Accumulated Amortization
Amortized intangible assets:
Customer lists/relationships	$	12,636	$	9,762	$	12,627	$	9,570
Employment-related	5,347		4,704		5,345		4,573
Tradenames	4,359		2,908		4,358		2,783

Amortized intangible assets	$	22,342	$	17,374	$	22,330	$	16,926

Less accumulated amortization	17,374				16,926

Identified intangibles, net	4,968				5,404

Unamortized intangible assets:
Goodwill	21,694				21,677
	$	26,662			$	27,081


E.	Long-Term Debt

Our long-term debt consisted of the following:



	March 31, 2012		December 31, 2011
Revolving credit facility
Prime rate borrowings	$	5,000	$	—
LIBOR borrowings	31,000		20,000
	36,000		20,000
Senior unsecured notes	30,000		30,000
Term loans	4,560		6,973
	70,560		56,973
Less current portion	3,459		5,837
	$	67,101	$	51,136

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 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.

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The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2012

(Amounts in thousands, except share data)


E.	Long-Term Debt (continued)

As at March 31, 2012, we had unused commitments under the facility approximating $58,944, with $81,056 committed, consisting of borrowings of $36,000 and issued letters of credit of $45,056. 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
	March 31, 2012		April 2, 2011
Compensation expense, all share-based payment plans	$	631	$	337

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The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2012

(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 $104 being recognized for the three months ended March 31, 2012 and $96 for the three months ended April 2, 2011.

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 March 31, 2012, there were 642,218 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 $41 for the three months ended March 31, 2012 and $103 for the three months ended April 2, 2011.

Stock-Settled Stock Appreciation Rights--During the three months ended March 31, 2012, the Compensation Committee of the Board of Directors awarded 87,000 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 March 31, 2012.



Stock-Settled Stock Appreciation Rights	Number of Rights		Weighted- Average Award Date Value		Weighted- Average Remaining Contractual Life	Unrecognized Compensation Cost		Aggregate Intrinsic Value
Unvested, January 1, 2012	210,188		$	3.47
Granted	87,000		2.84
Forfeited	—		—
Vested	(50,440	)	3.53
Unvested, March 31, 2012	246,748		$	3.23	3.9 years	$	727	$	4,861

Employee SSARs	219,240		$	3.31	4.0 years	$	669	$	4,319
Nonemployee Director SSARs	27,508		$	2.60	3.7 years	$	58	$	542

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 $92 for the three months ended March 31, 2012 and $42 for the three months ended April 2, 2011.

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The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2012

(Amounts in thousands, except share data)


F.	Stock-Based Compensation (continued)

Performance-Based Restricted Stock Units--During the three months ended March 31, 2012, the Compensation Committee of the Board of Directors awarded 23,058 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 March 31, 2012.



Performance-Based Restricted Stock Units	Number of Stock Units		Weighted- Average Grant Date Value		Weighted- Average Remaining Contractual Life	Unrecognized Compensation Cost		Aggregate Intrinsic Value
Unvested, January 1, 2012	113,908		$	15.15
Granted	23,058		19.41
Forfeited	—		—
Vested	(58,128	)	14.51

Unvested, March 31, 2012	78,838		$	16.87	2.6 years	$	876	$	1,553

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 $394 for the three months ended March 31, 2012 and $96 for the three months ended April 2, 2011.

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
	March 31, 2012		April 2, 2011
Volatility rate	11.7	%	11.9	%
Risk-free interest rate	1.7	%	3.0	%
Expected dividend yield	1.5	%	1.5	%
Expected life of awards (years)	9.0		8.7

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The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2012

(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 March 31, 2012.



Stock Options	Number of Options Outstanding		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life	Unrecognized Compensation Cost		Aggregate Intrinsic Value
Outstanding, January 1, 2012	1,110,785		$	10.62
Granted	—		—
Exercised	(81,143	)	7.14
Forfeited	—		—
Outstanding, March 31, 2012	1,029,642		$	10.90	4.3 years	$	11,220	$	9,064

Exercisable, March 31, 2012	858,642		$	9.82	3.3 years			$	8,484

“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 March 31, 2012 is summarized below:



Stock Options Exercise Price		Number Outstanding	Weighted- Average Remaining Contractual Life	Weighted- Average Exercise Price		Number Exercisable	Weighted- Average Exercise Price
Employee options:	$ 6.75	387,424	1.7 years	$	6.75	387,424	$	6.75
	11.25	355,650	4.2 years	11.25		355,650	11.25
	16.00	132,500	7.6 years	16.00		49,500	16.00
	16.60	109,400	8.6 years	16.60		21,400	16.60
		984,974	4.2 years	$	10.71	813,974	$	9.54

Director options:	$10.00 to $16.40	44,668	1.9 years	14.95		44,668	14.95
		1,029,642	4.3 years	$	10.90	858,642	$	9.82

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.

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The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2012

(Amounts in thousands, except share data)


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.



	Three Months Ended
	March 31, 2012			April 2, 2011
Components of pension cost
Service costs--increase in benefit obligation earned	$	44		$	33
Interest cost on projected benefit obligation	417			418
Expected return on plan assets	(428		)	(477		)
Amortization of net actuarial loss	262			134
Amortization of prior service cost	3			3
Amortization of transition asset	—			(17		)
Net pension cost of defined benefit pension plans	$	298		$	94

Employer Contributions--Contributions of $203 were made to our defined-benefit pension plans during the three months ended March 31, 2012. We expect, as of March 31, 2012, to make additional defined-benefit plan contributions totaling $808 before December 31, 2012.


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 2012 annual effective tax rate is estimated to approximate 39%. Our annual effective tax rate for 2011 was 39.6%.

At December 31, 2011, we had unrecognized tax benefits of $1,825, of which $1,260 would affect our effective rate if recognized, and accrued interest expense related to unrecognized benefits of $99. At March 31, 2012, 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. With the exception of U.S. state jurisdictions, the Company is no longer subject to examination by tax authorities for the years through 2008.

As of March 31, 2012, if certain pending tax matters settle, we believe it is reasonably possible that additional tax payments will be made during the next twelve months within a range of $200 to $300. 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.

- 13 -

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2012

(Amounts in thousands, except share data)


I.	Accumulated Other 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 following summarizes the components of other comprehensive income (loss) accumulated in shareholders’ equity:



	Foreign Currency Translation Adjustments		Interest Rate Cash Flow Hedges			Defined Benefit Pension Plans			Accumulated Other Comprehensive Income (Loss)
Balance at January 1, 2012	$	2,950	$	(77	)	$	(9,217	)	$	(6,344	)
Unrealized gains	493		—			—			493
Unrealized gains in fair value	—		123			—			123
Unrecognized amounts from defined benefit pension plans	—		—			265			265
Tax effect	—		(46		)	(102		)	(148		)
Net of tax amount	493		77			163			733

Balance at March 31, 2012	$	3,443	$	—		$	(9,054	)	$	(5,611	)


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
	March 31, 2012			April 2, 2011
Income available to common shareholders:
Net loss	$	(571	)	$	(6,046	)

Weighted-average shares:
Basic:
Outstanding	13,863			14,127
Basic weighted-average shares	13,863			14,127

Diluted:
Basic from above	13,863			14,127
Incremental shares from assumed:
Exercise of stock options and awards	501			528
Diluted weighted-average shares	14,364			14,655

Net loss per share -- basic and diluted	$	(.04	)	$	(.43	)

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Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2012

(Amounts in thousands, except share data)


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

Common Shares Outstanding--A summary of the activity of the common shares outstanding for the three months ended March 31, 2012 follows:



Shares outstanding at January 1, 2012	13,845,635
Shares purchased	(126,379	)
Shares sold	147,455
Options and awards exercised	84,913
	105,989
Shares outstanding at March 31, 2012	13,951,624

On March 31, 2012, we had 13,951,624 common shares outstanding, and employee and director options exercisable to purchase 858,642 common shares.

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 2011 Annual Report.

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Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2012

(Amounts in thousands, except share data)

K. Operations by Business Segment (continued)

Segment information reconciled to consolidated external reporting information follows:



	Utility Services			Residential Commercial Services			All Other			Reconciling Adjustments				Consolidated
Three Months Ended March 31, 2012
Revenues	$	80,496		$	51,132		$	15,016						$	146,644
Income (loss) from operations	3,127			(2,734		)	(152		)	267			(a)	508
Interest expense										(703		)		(703		)
Interest income										27				27
Other income (expense), net										(635		)		(635		)
Loss before income taxes														$	(803	)
Segment assets, total	$	127,966		$	102,852		$	17,849		$	61,231		(b)	$	309,898

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

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.


L.	Fair Value Measurements and Financial Instruments

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)

March 31, 2012

(Amounts in thousands, except share data)


L.	Fair Value Measurements and Financial Instruments (continued)

Our assets and liabilities measured at fair value on a recurring basis at March 31, 2012, were as follows:



			Fair Value Measurements at March 31, 2012 Using:
Assets and Liabilities Recorded at Fair Value on a Recurring Basis	Total Carrying Value at March 31, 2012		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Assets invested for self-insurance, classified as other assets, noncurrent	$	14,039	$	14,039	$	—	$	—
Fuel derivatives, classified as other current assets	374		—		374		—
Fuel derivatives, classified as other noncurrent assets	106		—		106		—

Liabilities:
Deferred compensation	$	768	$	—	$	768	$	—

There were no transfers of assets or liabilities between Level 1 and Level 2 during the quarter ended March 31, 2012.

Our assets and liabilities measured at fair value on a recurring basis at December 31, 2011 were as follows:



			Fair Value Measurements at December 31, 2011 Using:
Assets and Liabilities Recorded at Fair Value on a Recurring Basis	Total Carrying Value at December 31, 2011		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Assets invested for self-insurance, classified as other assets, noncurrent	$	13,064	$	13,064	$	—	$	—

Liabilities:
Interest rate swaps, classified as accrued expenses	$	123	$	—	$	123	$	—
Fuel derivatives, classified as accrued expenses	108		—		108		—
Fuel derivatives, classified as other noncurrent liabilities	317		—		317		—
Deferred compensation	684		—		684		—

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.

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Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2012

(Amounts in thousands, except share data)


L.	Fair Value Measurements and Financial Instruments (continued)

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 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 derivative instruments are calculated based on market rates to settle the instruments, representing the amount we would receive upon sale or pay upon transfer. Financial instruments classified as noncurrent liabilities and their carrying values and fair values were as follows:



	March 31, 2012				December 31, 2011
Financial Instruments Recorded at Historical Carrying Value	Carrying Value		Fair Value		Carrying Value		Fair Value
Revolving credit facility, noncurrent	$	36,000	$	36,000	$	20,000	$	20,000
Senior unsecured notes	30,000		29,169		30,000		29,925
Term loans, noncurrent	1,101		1,101		1,136		1,135
Total	$	67,101	$	66,270	$	51,136	$	51,060

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, changes in interest rates and changes in fuel prices. We do not hold or issue derivative financial instruments for trading or speculative purposes. We use derivative financial instruments to manage risks, in part, associated with changes in interest rates and changes in fuel prices.

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 a portion of variable debt.

Interest Rate Swaps--From time-to-time we have held 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. As of March 31, 2012, all interest rate swap contracts previously entered into expired.

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Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2012

(Amounts in thousands, except share data)


L.	Fair Value Measurements and Financial Instruments (continued)

Fuel Derivatives--Beginning in the second quarter 2011, we entered into fuel derivatives as “economic hedges” related to fuel consumed by Davey Tree service vehicles. The objectives of the economic hedges are to fix the price of a portion of our fuel needs and mitigate the earnings and cash flow volatility attributable to the risk of changing prices.

Our fuel derivative contracts are not traded on public exchanges. The fair value of each fuel derivative contract is the sum of expected future settlements between contract counterparties. The expected future settlements are determined by comparing the contract fuel price to the expected forward fuel price as of each settlement date and applying the differences between the contract prices to the notional gallons in the fuel derivative contract. The expected forward fuel price is based on observable inputs of commodity exchange prices in an active market. The fuel derivatives are classified in Level 2 of the valuation hierarchy.

The following tables set forth quantitative information related to our derivatives instruments and where these amounts are recorded in our consolidated financial statements.



	As of
	March 31, 2012		December 31, 2011
Cash Flow Hedges - Derivatives Designated as Hedging Instruments
Interest Rate Swaps:
Liability fair value of interest rate swaps, classified as accrued expenses	$	—	$	123

Notional amount of long-term debt hedged	$	—	$	10,000

Economic Hedges - Derivatives Not Designated as Hedging Instruments
Fuel Derivatives:
Asset fair value of fuel derivatives, classified as other current assets	$	374	$	—

Asset fair value of fuel derivatives, classified as other noncurrent assets	$	106	$	—

Liability fair value of fuel derivatives, classified as accrued expenses	$	—	$	108

Liability fair value of fuel derivatives, classified as other noncurrent liabilities	$	—	$	317

Longest remaining term, in months	21		24

Notional hedged volume, in thousands of gallons	2,200		2,500

- 19 -

Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2012

(Amounts in thousands, except share data)


L.	Fair Value Measurements and Financial Instruments (continued)



	Three Months Ended
	March 31, 2012		April 2, 2011
Cash Flow Hedges - Derivatives Designated as Hedging Instruments
Interest Rate Swaps:
Hedge gains, recognized in other comprehensive income	$	123	$	218

Economic Hedges - Derivatives Not Designated as Hedging Instruments
Fuel Derivatives:
Change in fair value, recognized in results of operations, as a decrease in operating costs and expenses	$	922	$	—

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.

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.

Ely v. Davey Tree Surgery Company--Davey Tree Surgery Company, a subsidiary of The Davey Tree Expert Company, was named as a defendant in Peter Ely et al. v. Davey Tree Surgery Company, et al., 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 alleged on behalf of themselves and a putative class that Davey Tree Surgery Company failed to comply with California law concerning off-duty meal periods and the required content of paycheck stubs.

The plaintiffs alleged that they and the putative "meal periods" class were not provided with uninterrupted, duty-free 30-minute meal periods. In addition, plaintiffs claimed that because they were allegedly required to work during their meal breaks, Davey Tree Surgery Company violated California's minimum wage law because they and the putative class members were not paid minimum wage for their alleged work during meal breaks. Plaintiffs also contended that Davey Tree Surgery Company violated California law by not including the time that they and the putative "wage statement" class members worked during their meal periods, their hourly rates of pay and the 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 were members of both classes, while others were members of only one class (collectively, the "class members"). A trial was initially scheduled for January 30, 2012 and was rescheduled to March 26, 2012, pending results of a mediation process initiated in January 2012 with plaintiffs and Local Union 1245 of the International Brotherhood of Electrical Workers (the "Union").

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Index

The Davey Tree Expert Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2012

(Amounts in thousands, except share data)

M. Contingencies (continued)

As a result of the mediation, on January 6, 2012, Davey Tree Surgery Company entered into a Settlement Agreement and Release of All Claims (the "Settlement Agreement") with the plaintiffs, counsel for the class members, and the Union representing the class members.

The Settlement Agreement requires court approval of its terms. The Court, in April 2012, granted preliminary approval of the Settlement Agreement and set a hearing for final approval on the motion in August 2012. In the event that the Court denies final approval of the Settlement Agreement with prejudice and both Davey Tree Surgery Company and the plaintiffs have exhausted all means to challenge that denial, the Settlement Agreement will be void in all respects and the litigation will continue.

The Settlement Agreement provides for Davey Tree Surgery to pay a total sum of $2,900 that was recorded in the fourth quarter 2011.


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

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. 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.”

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Index

RESULTS OF OPERATIONS

(Amounts in thousands, except share data)

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.



	Three Months Ended
	March 31, 2012		April 2, 2011		Percentage Change
Revenues	100.0	%	100.0	%	11.7	%

Costs and expenses:
Operating	68.1		73.0		4.2
Selling	16.6		17.5		6.2
General and administrative	8.6		8.5		12.2
Depreciation and amortization	6.5		7.3		(1.3	)
(Gain)/loss on sale of assets, net	(.1	)	(.1	)	nm

Income from operations	.3		(6.2	)	(106.2	)

Other income (expense):
Interest expense	(.5	)	(.7	)	(21.0	)
Interest income	—		—		nm
Other, net	(.3	)	(.5	)	(4.2	)

Loss before income taxes	(.5	)	(7.4	)	(91.8	)

Income tax benefits	(.1	)	(2.8	)	(93.8	)

Net loss	(.4	)%	(4.6	)%	(90.6	)%

nm--not meaningful

- 22 -

Index

First Quarter—Three Months Ended March 31, 2012 Compared to Three Months Ended April 2, 2011

Our results of operations for the three months ended March 31, 2012 compared to the three months ended April 2, 2011 follows:



	Three Months Ended
	March 31, 2012			April 2, 2011			Change			Percentage Change
Revenues	$	146,644		$	131,324		$	15,320		11.7	%

Costs and expenses:
Operating	99,884			95,830			4,054			4.2
Selling	24,403			22,987			1,416			6.2
General and administrative	12,598			11,224			1,374			12.2
Depreciation and amortization	9,457			9,584			(127		)	(1.3	)
(Gain)/loss on sale of assets, net	(206		)	(81		)	(125		)	nm
	146,136			139,544			6,592			4.7

Income from operations	508			(8,220		)	8,728			(106.2	)
Other income (expense):
Interest expense	(703		)	(890		)	187			(21.0	)
Interest income	27			5			22			nm
Other, net	(635		)	(663		)	28			(4.2	)
Loss before income taxes	(803		)	(9,768		)	8,965			(91.8	)

Income tax benefits	(232		)	(3,722		)	3,490			(93.8	)

Net loss	$	(571	)	$	(6,046	)	$	5,475		(90.6	)%

nm--not meaningful

Revenues--Revenues of $146,644 increased $15,320 compared with $131,324 in the first quarter 2011. Utility Services increased $5,845 or 7.8% compared with the first quarter 2011. New contracts and increases on existing contracts within our U.S. and Canadian operations account for the increase. Residential and Commercial Services increased $5,473 or 12.0% from the first quarter 2011. Residential and Commercial revenues for the first quarter 2012 were favorably impacted by unseasonably warm weather conditions and an increase in demand for services. Total revenue of $146,644 includes production incentive revenue, recognized under the completed-performance method, of $3,070 during the first quarter 2012 compared with $370 during the first quarter 2011.

Operating Expenses--Operating expenses of $99,884 increased $4,054 compared with the first quarter 2011 and, as a percentage of revenues, decreased 4.9% to 68.1%. Utility Services increased $1,653 or 2.7% compared with the first quarter 2011, and as a percentage of revenues decreased 3.7% to 76.8%. Increased labor expense, fuel expense, equipment maintenance expense, materials expense and tool expense, associated with the increase in revenues, were partially offset by a reduction in subcontractor expense. Residential and Commercial Services increased $2,060 or 7.4% compared with the first quarter 2011 but, as a percentage of revenues, decreased 2.6% to 58.6%. Increased labor expense, fuel expense, crew expenses and tools and saw expense were partially offset by a reduction in subcontractor expense and material expense.

- 23 -

Index

Fuel costs of $6,949 increased $571, or 9.0%, from the $6,378 incurred in the first quarter 2011 and impacted operating expenses within all segments. The $571 increase included price increases approximating $525 and usage increases approximating $46. Operating costs and expenses include an expense reduction of $922 associated with fuel derivatives that are fair valued.

Selling Expenses--Selling expenses of $24,403 increased $1,416 compared with the first quarter 2011 but as a percentage of revenues decreased .9% to 16.6%. Utility Services increased $367 or 6.1% over the first quarter 2011 and as a percentage of revenues decreased .1% to 8.0%. Increases in field management wages and incentive expense, field management travel expense, field management vehicle expense and professional services expense were partially offset by decreases in office rent, branch office expenses, employee development expense and communication expense. Residential and Commercial Services experienced a decrease of $25 or .2% over the first quarter 2011. Decreases in office support wages, office rent, utilities expense, sales and marketing expense, employee development expense and branch office expenses were partially offset by increases in field management wages and incentive expense, field management travel expense and field management vehicle expense.

General and Administrative Expenses--General and administrative expenses of $12,598 increased $1,374 from $11,224 in the first quarter 2011. Increases in salary and incentive expense, professional service expense, travel expense, pension expense and stock-based compensation expense were partially offset by decreases in utilities expense and postage expense.

Depreciation and Amortization Expense--Depreciation and amortization expense of $9,457 decreased $127 from $9,584 in the first quarter of 2011. The decrease is attributable to a reduction in amortization expense related to acquisitions coupled with lower depreciation related to capital expenditures made in prior years.

Gain/Loss on the Sale of Assets, Net--Gain on the sale of assets was $206 for the first quarter 2012 as compared with $81 in the first quarter 2011. The increase is the result of an increase in the number of equipment units sold in the first quarter 2012 as compared with the first quarter 2011.

Interest Expense--Interest expense of $703 decreased $187 from the $890 incurred in the first quarter 2011. The decrease is attributable to lower average debt levels necessary to fund operations and capital expenditures as compared to the first quarter 2011.

Other, Net--Other, net, of $635 decreased $28 from the $663 incurred in the first quarter 2011 and consisted of nonoperating income and expense, including foreign currency gains on the intercompany account balances of our Canadian operations as compared with foreign currency losses in the first quarter 2011.

Income Taxes--Income tax benefits for the first quarter 2012 were $232, as compared to $3,722 for the first quarter 2011. 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 approximate 39%. Our annual effective tax rate for 2011 was 39.6%.

Net Loss--Net loss of $571 for the first quarter 2012 was $5,475 less than the $6,046 loss experienced in the first quarter 2011.

LIQUIDITY AND CAPITAL RESOURCES

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

- 24 -

Index

Cash Flow Summary

Our cash flows from operating, investing and financing activities, as reflected in the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and April 2, 2011, are summarized as follows:



	2012			2011
Cash provided by (used in):
Operating activities	$	641		$	(1,214	)
Investing activities	(13,130		)	(13,509		)
Financing activites	14,773			8,789
Increase/(Decrease) in cash	$	2,284		$	(5,934	)

Cash Provided by Operating Activities--Cash provided by operating activities was $641 for the first three months of 2012, or $1,855 more than the $1,214 used in the first three months of 2011. The increase in operating cash flow was primarily attributable to a reduction in our net loss and a decrease in depreciation and amortization of $127, offset by $2,182 cash used for operating assets and liabilities.

Overall, accounts receivable increased $2,054 during the first three months of 2012, as compared to the decrease of $2,466 during the first three months of 2011. 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 2012 increased 4 days to 58 days, as compared to the end of the first three months of 2011. The increase in DSO was primarily due to the timing of sales occurring during the quarter. The DSO at April 2, 2011 was 54 days.

Operating liabilities decreased $5,214 in the first three months of 2012, or $2,529 more than the $2,685 decrease in the first three months of 2011. Accounts payable and accrued expenses decreased $8,107 during the first three months of 2012 as compared with a decrease of $5,831 for the first three months of 2011. Decreases in trade payables, 401KSOP liabilities and employee compensation were partially offset by increases of $1,321 in advance payments from customers, compensated-absence accruals, self-insured medical claims and professional services. Self-insurance accruals increased $2,893 in the first three months of 2012, which was $253 more than the increase of $3,146 experienced in the first three months of 2011. 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.

The change in operating assets and liabilities other, net, was an increase in cash of $220 for the first three months of 2012 as compared with a decrease in cash of $4,647 for the first three months of 2011, with the $4,867 net change related primarily to the noncash decrease in deferred taxes being greater in 2011 as compared with 2012.

Cash Used In Investing Activities--Cash used in investing activities for the first three months of 2012 was $13,130, or $379 less than the $13,509 used during the first three months of 2011. The decrease was primarily the result of increased proceeds on the sale of equipment and a reduction in expenditures for the purchase of businesses.

Cash Provided by Financing Activities--Cash provided by financing activities of $14,773 increased $5,984 during the first three months of 2012 as compared with the $8,789 of cash provided during the first three months of 2011. During the first three months of 2012, our revolving credit facility provided $16,000 in cash as compared with the $12,000 provided during the first three months of 2011. We use the credit facility primarily for capital expenditures and payments of notes payable related to acquisitions. Payments on notes payable used $1,697 during the first three months of 2012, $2,627 less than the $4,324 used in the first three months of 2011. Treasury share transactions (purchases and sales) provided $1,064 for the first three months of 2012, or $653 less cash than the $1,717 provided in the first three months of 2011. Dividends paid of $594 decreased $10, as compared with $604 paid in the first three months of 2011.

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The 5.09% Senior Notes are equal in right of payment with our revolving credit facility and all of our 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.

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).

Contractual Obligations Summary

The following summarizes our long-term contractual obligations, as at March 31, 2012, to make future payments for the periods indicated.



			Nine Months Ending December 31, 2012
					Year Ending December 31,
Description	Total				2013		2014		2015		2016		Thereafter
Revolving credit facility	$	36,000	$	—	$	—	$	36,000	$	—	$	—	$	—
Senior unsecured notes	30,000		—		—		—		—		6,000		24,000
Term loans	4,560		3,419		620		521		—		—		—
Operating lease obligations	10,485		3,510		3,248		1,647		1,049		778		253
Self-insurance accruals	60,158		25,988		13,279		8,053		4,035		1,703		7,100
Purchase obligations	5,384		5,384		—		—		—		—		—
Other liabilities	15,250		4,475		398		609		782		572		8,414
	$	161,837	$	42,776	$	17,545	$	46,830	$	5,866	$	9,053	$	39,767

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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 March 31, 2012. 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 March 31, 2012, 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 March 31, 2012, we were contingently liable for letters of credit in the amount of $46,063, of which $45,056 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 2012 through 2016. 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 March 31, 2012, we had working capital of $39,938, short-term lines of credit approximating $10,789 and $58,944 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 at least the next twelve months and for the foreseeable future.

RECENT ACCOUNTING GUIDANCE

The FASB Accounting Standards Codification--Changes to U.S. GAAP are established by the Financial Accounting Standards Board (the “FASB”) in the form of Accounting Standards Updates (or “ASUs”) to the FASB’s Accounting Standards Codification™ (the “Codification”). 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.

In the descriptions of the ASUs that follow, references relate to the Codification Topic and descriptive title.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

As discussed in our annual report on Form 10-K for the year ended December 31, 2011, 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 with 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 are 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, 2011 in “ Part I - Item 1A. Risk Factors.”


Item 3.	Quantitative and Qualitative Disclosures about Market Risk.

During the three months ended March 31, 2012, 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, 2011.


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 March 31, 2012 in ensuring that information required to be included in the reports that we file or submit under the Securities Exchange Act of 1934 (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) 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 March 31, 2012, 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.

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The Settlement Agreement provides for Davey Tree Surgery to pay a total sum of $2,900 that was recorded in the fourth quarter 2011.

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 four groups based on type of plaintiff, namely insurance subrogation claimants, individual/business claimants, governmental claimants, and plaintiffs seeking class certification. Plaintiffs’ motions seeking class certification 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, and as previously reported, 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 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.

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

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

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

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

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

We derive approximately 50% of our total revenues from our Utility Services segment, including approximately 10% of our total revenues from PG&E. Significant adverse developments in the utility industry generally, or specifically for our major utility customers, could result in pressure to reduce costs by utility industry service providers (such as us), delays in payments of our accounts receivable, or increases in uncollectible accounts receivable, among other things. As a result, such developments could have an adverse effect on our results of operations.

Our quarterly results may fluctuate.

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


▪	the seasonality of our business;


▪	the timing and volume of customers' projects;


▪	budgetary spending patterns of customers;


▪	the commencement or termination of service agreements;


▪	costs incurred to support growth internally or through acquisitions;


▪	changes in our mix of customers, contracts and business activities;


▪	fluctuations in insurance expense due to changes in claims experience and actuarial assumptions; and


▪	general and local economic conditions.

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

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

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

We are subject to the risk of increased fuel costs.

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

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

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

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

The unavailability or cancellation of third-party insurance coverage may have a material adverse effect on our financial condition and results of operations as well as disrupt our operations.

There can be no assurance that any of our existing excess insurance coverage will be renewed upon the expiration of the coverage period or that future coverage will 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.

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

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

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

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

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

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

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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.

We are subject to claims and litigation.

From time-to-time, customers, vendors, employees 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 financial liability could have a material adverse effect on our financial condition and results of operations. Any such claims and legal actions may also require significant management attention and may detract from management's focus on our operations.

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

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

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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 2012.



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 2012
January 1 to January 28	902	$	18.00	n/a	n/a
January 29 to February 25	298	18.00		n/a	n/a
February 26 to March 31	125,179	19.70		n/a	n/a
Total First Quarter	126,379	19.68

Total Year to Date	126,379	19.68

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 2, 2012		David E. Adante
			Executive Vice President, Chief Financial Officer and Secretary
			(Principal Financial Officer)

Date:	May 2, 2012	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

101.INS*	XBRL Instance Document	Submitted Herewith

101.SCH*	XBRL Schema Document	Submitted Herewith

101.CAL*	XBRL Calculation Linkbase Document	Submitted Herewith

101.DEF*	XBRL Definition Linkbase Document	Submitted Herewith

101.LAB*	XBRL Label Linkbase Document	Submitted Herewith

101.PRE*	XBRL Presentation Linkbase Document	Submitted Herewith

* Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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DAVEY TREE EXPERT CO - FORM 10-Q - May 2, 2012

Attached files

DAVEY TREE EXPERT CO Reports