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, quoted prices for identical or similar assets in markets that are not active, or other observable characteristics for the asset or liability, including interest rates, yield curves, or inputs that are derived principally from or corroborated by observable market data through correlation. 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.

Our assets and liabilities measured at fair value on a recurring basis at September 29, 2012, were as follows:



			Fair Value Measurements at September 29, 2012 Using:
Assets and Liabilities Recorded at Fair Value on a Recurring Basis	Total Carrying Value at September 29, 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	$	14,429	$	14,429	$	—	$	—
Fuel derivatives, classified as other current assets	109		—		109		—

Liabilities:
Fuel derivatives, classified as other noncurrent liabilities	$	66	$	—	$	66	$	—
Deferred compensation	853		—		853		—


L.	Fair Value Measurements and Financial Instruments (continued)

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 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-Level 2 inputs. 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.

Fair Value of Financial Instruments-- Fair value information is required to be presented for all financial instruments, whether reported at fair value or historical carrying value.

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 and derivative instruments are reported at fair value. Financial instruments classified as noncurrent liabilities and their carrying values and fair values were as follows:



	September 29, 2012				December 31, 2011
Financial Instruments Recorded at Historical Carrying Value	Carrying Value		Fair Value		Carrying Value		Fair Value
Revolving credit facility, noncurrent	$	27,500	$	27,500	$	20,000	$	20,000
Senior unsecured notes	30,000		30,158		30,000		29,925
Term loans, noncurrent	588		588		1,136		1,135
Total	$	58,088	$	58,246	$	51,136	$	51,060


L.	Fair Value Measurements and Financial Instruments (continued)

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--Level 2 inputs.

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

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. During the first quarter 2012, all interest rate swap contracts previously entered into expired.

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.


L.	Fair Value Measurements and Financial Instruments (continued)

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
	September 29, 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	$	109	$	—

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

Liability fair value of fuel derivatives, classified as other noncurrent liabilities	$	66	$	317

Longest remaining term, in months	15		24

Notional hedged volume, in thousands of gallons	1,600		2,500



	Three Months Ended				Nine Months Ended
	September 29, 2012		October 1, 2011		September 29, 2012		October 1, 2011
Cash Flow Hedges - Derivatives Designated as Hedging Instruments
Interest Rate Swaps:
Hedge gains, recognized in other comprehensive income	$	—	$	244	$	123	$	685

Economic Hedges - Derivatives Not Designated as Hedging Instruments
Fuel Derivatives:
Change in fair value, recognized in results of operations, as an (increase in)/decrease in operating costs and expenses	$	616	$	809	$	650	$	787