Fair Value Measurements and Financial Instruments

6 Months Ended

Jun. 29, 2024

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 June 29, 2024 were as follows:


			Fair Value Measurements at June 29, 2024 Using:
Assets and Liabilities Recorded at Fair Value on a Recurring Basis	Total Carrying Value at June 29, 2024		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Assets invested for self-insurance
Certificates of deposits, current	$	3,109	$	3,109	$	—	$	—
Certificates of deposits, noncurrent	3,000		3,000		—		—


Available-for-sale debt securities:
United States Government and agency securities	41,008		41,008		—		—

Total available-for-sale debt securities	41,008		41,008		—		—

Marketable equity securities:
Mutual funds	11,946		11,946		—		—


Exchange traded funds	1,614		1,614		—		—

Total marketable equity securities	13,560		13,560		—		—

Liabilities:
Deferred compensation	$	1,458	$	—	$	—	$	1,458

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


			Fair Value Measurements at December 31, 2023 Using:
Assets and Liabilities Recorded at Fair Value on a Recurring Basis	Total Carrying Value at December 31, 2023		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (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

The assets invested for self-insurance are certificates of deposit, 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.

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 June 29, 2024 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 Q).

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.

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:


	June 29, 2024				December 31, 2023
	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets:
Available-for-sale debt securities	$	41,008	$	41,008	$	37,062	$	37,062
Marketable equity securities	13,560		13,560		12,102		12,102

Liabilities:
Revolving credit facility, noncurrent	$	194,258	$	194,258	$	141,616	$	141,616
Senior unsecured notes, noncurrent	135,000		131,803		135,000		130,959
Term loans, noncurrent	9,483		9,822		7,012		7,252
Total	$	338,741	$	335,883	$	283,628	$	279,827

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.

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.