VSE Corporation Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

Fair Value Measurements

3 Months Ended

Mar. 31, 2020

The accounting standard for fair value measurements defines fair value, and establishes a market-based framework or hierarchy for measuring fair value. The standard is applicable whenever assets and liabilities are measured at fair value.

The fair value hierarchy established in the standard prioritizes the inputs used in valuation techniques into three levels as follows:

Level 1–Observable inputs – quoted prices in active markets for identical assets and liabilities;

Level 2–Observable inputs other than the quoted prices in active markets for identical assets and liabilities – includes quoted prices for similar instruments, quoted prices for identical or similar instruments in inactive markets and amounts derived from valuation models where all significant inputs are observable in active markets; and

Level 3–Unobservable inputs – includes amounts derived from valuation models where one or more significant inputs are unobservable and require us to develop relevant assumptions.

The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019 and the level they fall within the fair value hierarchy (in thousands):



Amounts Recorded at Fair Value	Financial Statement Classification	Fair Value Hierarchy	Fair Value March 31, 2020		Fair Value December 31, 2019
Non-COLI assets held in Deferred Supplemental Compensation Plan	Other assets	Level 1	$	946	$	710
Interest rate swap agreements	Accrued expenses	Level 2	$	2,636	$	1,473
Earn-out obligation - short-term	Current portion of earn-out obligation	Level 3	$	5,300	$	31,700
Earn-out obligation - long-term	Earn-out obligation	Level 3	$	—	$	5,000

Non-COLI assets held in our deferred supplemental compensation plan consist of equity funds with fair value based on observable inputs such as quoted prices for identical assets in active markets and changes in fair value are recorded as selling, general and administrative expenses.

We account for our interest rate swap agreements under the provisions of ASC 815, Derivatives and Hedging, and have determined that our swap agreements qualify as highly effective cash flow hedges. We evaluate our hedges to determine their effectiveness and as of March 31, 2020 and December 31, 2019, the swaps were determined to be fully effective. Accordingly, the fair value of the swap agreements, which is a liability recorded in accrued expenses and other current liabilities in our consolidated balance sheets, was approximately $2.6 million and $1.5 million at March 31, 2020 and December 31, 2019, respectively. The offset, net of an income tax effect of approximately $658 thousand and $367 thousand, was included in accumulated other comprehensive income in the accompanying balance sheets as of March 31, 2020 and December 31, 2019, respectively. The amounts paid and received on the swap agreements are recorded in interest expense in the period during which the related floating-rate interest is incurred. We expect the hedges to remain fully effective during the remaining terms of the swap agreements. We determine the fair value of the swap agreements based on a valuation model using primarily observable market data inputs.

We utilized an income approach to determine the fair value of our 1st Choice Aerospace acquisition earn-out obligation. Significant unobservable inputs used to value the contingent consideration include projected revenue and cost of services and the discount rate. If a significant increase or decrease in the discount rate occurred in isolation, the result could be significantly higher or lower fair value measurement.

Changes in earn-out obligation measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2020 are as follows (in thousands):



	Current portion			Long-term portion			Total
Balance as of December 31, 2019	$	31,700		$	5,000		$	36,700
Earn-out payments	(31,700		)	—			(31,700		)
Fair value adjustment included in net income	300			—			300
Reclassification from long-term to current	5,000			(5,000		)	—
Balance as of March 31, 2020	$	5,300		$	—		$	5,300