Fair Value Measurements and Financial Instruments

12 Months Ended

Dec. 31, 2023

Fair value measurements and financial instruments

Fair Value Measurements and Financial Instruments

FASB ASC 820, "Fair Value Measurements and Disclosures" ("Topic 820") defines fair value based on the price that would be received to sell an asset or the exit price that would be 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--Topic 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value. The hierarchy prioritizes the inputs into three broad levels:

Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.

Level 2 inputs are observable inputs other than prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated with observable market data.

Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

Our assets and liabilities measured at fair value on a recurring basis at December 31, 2023 and December 31, 2022, were as follows:


			Fair Value Measurements at December 31, 2023 Using:
	Total Carrying Value at		Quoted prices in active markets		Significant other observable inputs		Significant unobservable inputs
Description	December 31, 2023		(Level 1)		(Level 2)		(Level 3)
Assets:
Assets invested for self-insurance
Certificates of deposits, current	$	2,859	$	2,859	$	—	$	—
Certificates of deposits, noncurrent	3,500		3,500		—		—


Available-for-sale debt securities:
United States Government and agency securities	36,802		36,802		—		—
Corporate notes and bonds	260		260		—		—
Total available-for-sale debt securities	37,062		37,062		—		—

Marketable equity securities:
Mutual funds	6,842		6,842		—		—
Corporate stocks	3,780		3,780		—		—

Exchange traded funds	1,480		1,480		—		—

Total marketable equity securities	12,102		12,102		—		—

Liabilities:
Deferred compensation	$	1,572	$	—	$	—	$	1,572


			Fair Value Measurements at December 31, 2022 Using:
	Total Carrying Value at		Quoted prices in active markets		Significant other observable inputs		Significant unobservable inputs
Description	December 31, 2022		(Level 1)		(Level 2)		(Level 3)
Assets:
Assets invested for self-insurance
Certificates of deposits, current	$	3,750	$	3,750	$	—	$	—
Certificates of deposits, noncurrent	6,359		6,359		—		—


Available-for-sale debt securities:
United States Government and agency securities	25,254		25,254		—		—
Corporate notes and bonds	264		264		—		—
Total available-for-sale debt securities	25,518		25,518		—		—

Marketable equity securities:
Mutual funds	13,873		13,873		—		—
Corporate stocks	3,007		3,007		—		—

Exchange traded funds	1,230		1,230		—		—

Total marketable equity securities	18,110		18,110		—		—

Liabilities:
Deferred compensation	$	4,597	$	—	$	4,597	$	—

The assets invested for self-insurance are certificates of deposits, stocks, bonds, mutual funds and exchange traded funds--classified as Level 1--based on quoted market prices of the identical underlying securities in active markets. The estimated fair value of the deferred compensation--classified as Level 3--is based on the value of the Company's common shares, determined by independent valuation.

The Company's 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 the common shares is determined by an independent stock valuation firm. The semiannual valuations utilize two approaches in determining the fair value of the common shares, a market approach and an income approach. Each approach utilizes Company performance and financial condition, using a peer group of comparable companies selected by the firm as well as significant unobservable inputs such as projected earnings and cash flow, EBITDA and cost of capital. The results of each valuation approach are utilized in a weighted average calculation to arrive at the fair market value.

The peer group at December 31, 2023 consisted 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 the Board of Directors of the Company has determined that the common shares will be bought and sold during that six-month period in transactions involving the Company or one of its employee benefit or stock purchase plans. The Company provides a ready market for all shareholders

through its direct purchase of their common shares, although the Company is under no obligation to do so (other than for repurchases pursuant to the put option, as described in Note N).

Fair Value of Financial Instruments--The fair values of our current financial 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. Financial instruments classified as noncurrent assets and liabilities and their carrying values and fair values were as follows:


	December 31, 2023				December 31, 2022
	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets:
Available-for-sale debt securities	$	37,062	$	37,062	$	25,518	$	25,518
Marketable equity securities	12,102		12,102		18,110		18,110

Liabilities:
Revolving credit facility, noncurrent	141,616		141,616		150,433		150,433
Senior unsecured notes	135,000		130,959		75,000		74,968
Term loans, noncurrent	7,012		7,252		5,854		5,610
Total	$	283,628	$	279,827	$	231,287	$	231,011

The carrying value of our revolving credit facility approximates fair value--classified as Level 2--as the interest rates on the amounts outstanding are variable. The fair value of our senior unsecured notes and term loans--classified as Level 2--is determined based on expected future weighted-average interest rates with the same remaining maturities.

Management has evaluated the classification of the common shares and determined that due to significant unobservable inputs used in the independent stock valuation, the shares are more appropriately categorized as Level 3 investments.

Market Risk--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. In prior years, we have used derivative financial instruments to manage risk, in part, associated with changes in interest rates and changes in fuel prices. Presently, we are not engaged in any hedging or derivative activities.