VSE CORP 10-K

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risks Interest Rates Our bank loan agreement provides available borrowing to us at variable interest rates. Accordingly, future interest rate changes could potentially put us at risk for a material adverse impact on future earnings and cash flows. To mitigate the risks associated with future interest rate movements we have employed interest rate hedges to fix the rate on a portion of our outstanding borrowings for various periods. In February 2019, we entered into a LIBOR based interest rate swap on our revolving loan for a term of three years with a notional amount of $75 million. This swap amount decreases in increments on an annual basis to $45 million for the second year and to $25 million for the third year. We pay an effective interest rate of 2.805% plus our base margin on the debt matched to it. In March 2020, we entered into a LIBOR based interest rate swap on our revolving loan for a term of two years with a notional amount of $50 million. We pay an effective interest rate of 0.73% plus our base margin on the debt matched to this swap. A hypothetical 1% increase to interest rates would have increased interest expense by approximately $2.9 million, and would have decreased our net income and operating cash flows by a comparable amount. For additional information related to our debt and interest rate swap agreements, see Note (8) and Note (16), respectively, to our Consolidated Financial Statements contained in this report. LIBOR is used as a reference rate for borrowings under our loan agreement and related interest rate swap agreements. The LIBOR benchmark has been the subject of regulatory guidance and proposals for reform and replacement, with most LIBOR tenors, including those that we most commonly use, expected to no longer be available under our loan agreement after June 30, 2023. In connection with our loan amendment in July 2021, language was added to the agreement to provide procedures for determining a replacement or alternative rate in the event that LIBOR becomes unavailable. At this time, there is no definitive information regarding the future transition of LIBOR to a replacement rate; however, we continue to monitor the developments with respect to the potential discontinuance of LIBOR and intend to work with our bank group to minimize the impact of such discontinuance on our financial condition and results of operations. The consequences of the discontinuance of LIBOR cannot be entirely predicted but could result in an increase in our variable rate debt. -34- Table of Contents