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

9 Months Ended

Sep. 30, 2022

The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2022 and December 31, 2021 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 September 30, 2022		Fair Value December 31, 2021
Non-COLI assets held in Deferred Supplemental Compensation Plan	Other assets	Level 1	$	515	$	598
Interest rate swaps	Other assets	Level 2	$	7,131	$	—
Interest rate swaps	Accrued expenses and other current liabilities	Level 2	$	—	$	234
Earn-out obligation - short-term	Accrued expenses and other current liabilities	Level 3	$	—	$	1,000
Earn-out obligation - long-term	Other long-term liabilities	Level 3	$	—	$	250

Non-Company Owned Life Insurance ("COLI")

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.

Interest Rate Swap Derivatives

On July 22, 2022, we executed two SOFR-based forward-starting fixed interest rate swaps with a fixed rate of 2.8% that hedge the variability in interest payments of $150 million of floating rate debt. The tenor of these five-year swaps will begin on October 31, 2022. We have designated, and will account for, these fixed interest rate swaps as cash flow hedges. As of September 30, 2022, we had $5.4 million. net of an income tax effect of $1.8 million, included in accumulated other comprehensive income in the accompanying balance sheets related to these cash flow hedges. We estimate that we will reclassify $2.0 million of unrealized gains from accumulated other comprehensive income into earnings in the twelve months following September 30, 2022.

We were a party to two fixed interest rate swaps, entered into in fiscal 2011 and 2012, qualifying as cash flow hedges under which we hedged a portion of our variable-rate debt until the swaps expired in February and March 2022. As of December 31, 2021, the fair value of such swaps was $0.2 million, a liability recorded in accrued expenses and other current liabilities in our consolidated balance sheets. As of December 31, 2021, we had $0.2 million, net of an income tax effect of $58 thousand, included in accumulated other comprehensive income in the accompanying balance sheets related to the cash flow hedges. The amounts paid and received on the swaps are recorded in interest expense in the period during which the related floating-rate interest is incurred.

Contingent Consideration

In connection with the acquisition of Global Parts in July 2021, we were required to pay earn-out obligation payments of up to $2.0 million should Global Parts meet certain financial targets during the twelve months following the acquisition and meet a certain milestone event on or before March 2023. Final settlement of the obligation was made during the three months ended September 30, 2022. Changes in the earn-out obligation measured at fair value on a recurring basis using unobservable inputs (Level 3) for the nine months ended September 30, 2022 are as follows (in thousands):


	Current portion		Long-term portion		Total
Balance as of December 31, 2021	$	1,000	$	250	$	1,250
Reclassification from long-term to current	250		(250)		—
Earn-out payments	(1,250)		—		(1,250)

Balance as of September 30, 2022	$	—	$	—	$	—

Other Financial Instruments

The carrying amounts of cash and cash equivalents, receivables, accounts payable and amounts included in other current assets and accrued expenses and other current liabilities that meet the definition of a financial instrument approximate fair value due to their relatively short maturity. The carrying value of our outstanding debt obligations approximates its fair value. The fair value of long-term debt is calculated using Level 2 inputs based on interest rates available for debt with terms and maturities similar to our existing debt arrangements.