Good day, and thank you for standing by. Welcome to the VSE Corporation's third quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Michael Perlman. Please go ahead.
Thank you. Welcome to VSE Corporation's third quarter 2026 results conference call. We will begin with remarks from John Cuomo, President and CEO, followed by a financial update from Adam Cohn, our Chief Financial Officer. The presentation we are sharing today is on our website, and we encourage you to follow along. Today's discussion contains forward-looking statements about future business and financial expectations.
Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including those described in our periodic reports filed with the SEC. Except as required by law, we undertake no obligation to update our forward-looking statements. We are using non-GAAP financial measures in our presentation. Where available, the appropriate GAAP financial reconciliations are incorporated into our presentation and posted on our website. All percentages in today's discussion refer to year-over-year progress, except where noted.
Before we begin, I'd like to remind participants that we'll be hosting an investor day on Wednesday, December 9, at Current at Pier 59 in New York City. Both in-person and webcast registration details can be found on our investor relations page on our website. We hope that you will join us in person or by webcast as we discuss our strategy and long-term outlook in greater detail. At the conclusion of our prepared remarks, we will open the line for questions. With that, I'd like to turn the call over to John.
Good morning, everyone, and thank you for joining us today. We delivered an exceptional third quarter. Revenue reached a record $541 million, adjusted EBITDA grew 126% to a record $107 million, and our adjusted EBITDA margin reached a record 19.8%. In addition, we delivered outstanding organic growth of approximately 17% and strong free cash flow of $47 million in the quarter. These results demonstrate the strength of our aviation aftermarket platform and outstanding execution by our teams.
The progress behind these numbers is just as important. Our core businesses are gaining market share, integration synergies are contributing to margin expansion, and we're expanding our proprietary repair portfolio. That performance and our confidence in the rest of the year support raising both our full-year revenue and adjusted EBITDA margin guidance. Let's now begin by reviewing three key quarterly highlights on slide three.
First, our operating results in the quarter. Revenue grew 91% to $541 million, including 17% organic growth. Growth was broad-based across repair and distribution, led by strong engine aftermarket demand. Contributions from new OEM distribution agreements and added repair capacity also supported the growth. Acquisitions accounted for the rest of the increase, with PAG being the largest contributor. Adjusted EBITDA margin reached a new record of 19.8% in the quarter. Adjusted EBITDA grew 126%, significantly outpacing revenue growth.
Our core aviation business was the primary contributor behind the margin expansion. In addition, synergies from previously acquired businesses and contributions from PAG also supported the record margin. We are raising our full-year 2026 revenue and adjusted EBITDA margin guidance. This reflects our outstanding third quarter results, continued strong demand, and confidence in the rest of the year. Adam will walk through the details in a few minutes. Second, integration.
At VSE, integration means bringing our businesses together across systems, processes, controls, organizational structure, and branding. We do that while preserving the agility, customer focus, and center of excellence model. All business integrations are tracking at or ahead of schedule. We have completed several acquisitions, and the integration work is substantial. These businesses are already contributing meaningfully to our results. Synergy capture plans have exceeded initial estimates and supported our record third quarter margin performance.
We look forward to sharing more during our December investor day. Across VSE and PAG, our teams are pursuing joint commercial opportunities, bringing more repair work in-house and improving operational efficiency. As integration progresses, we expect synergy contributions to grow through 2027. Third, Atech. We acquired Atech Turbine Components during the quarter. The business specializes in hot-section repairs for aircraft turbine engines, primarily on Pratt & Whitney Canada platforms.
Atech expands our intellectual property portfolio and proprietary engine repair capabilities. It adds OEM-approved repairs covering more than 300 part numbers. We plan to continue to invest in capacity and technical capabilities to develop new repairs and support expanded organic growth. Atech is a well-led business with a strong culture, deep OEM relationships, and a track record of execution. Its strategy and capabilities are an excellent fit with VSE. Let me turn to the aviation aftermarket. The economic, geopolitical, and fuel price environment remains uncertain. So far, higher oil prices have not had a meaningful effect on customer demand, order patterns, or operator behavior. Customers continue to plan their maintenance and parts needs much as they have throughout the year. In commercial aviation, demand remains strong. Aircraft and engines are staying in service longer and flying more.
With new aircraft and engine deliveries still constrained, operators continue to rely on their existing fleet. That supports demand for our parts and repair services. The engine aftermarket continues to lead, delivering the strongest growth across our core businesses in 2026. We expect that strength to continue into 2027. Business and general aviation represents more than half of our business. Demand was healthy in the third quarter, with flight activity and utilization above last year.
The active fleet continues to grow, and the used aircraft market remains tight. As in commercial aviation, engine aftermarket demand is particularly strong and is leading growth across our business and general aviation portfolio. These aircraft are essential to the customers who operate them. The breadth of that customer base supports durable demand for our parts and repair services. Overall, the aftermarket environment remains supportive.
Our exposure to both commercial and business and general aviation gives us a broad customer base. Serving those customers through both repair and distribution adds to the durability of our business. We will share 2027 guidance and forward outlook during our December investor day. Let's now walk through our third quarter 2026 financial highlights on slide four. We delivered record revenue and profitability in the quarter, a result of strong execution by our core aviation business, robust organic growth, and contributions from recent acquisitions. Revenue of $541 million was up 91%. Organic growth was approximately 17% in the quarter. Acquisitions also contributed, including a full quarter of PAG. Adjusted EBITDA reached $107 million in the quarter. Margin expanded approximately 310 basis points to a record 19.8%. That reflects core business margin expansion, integration synergies, and acquisition contributions.
Adjusted net income grew 128% to $64 million in the quarter. Adjusted diluted earnings per share increased 49% to $2.01 in the quarter. I'll now turn the call over to Adam for the financial detail.
Thank you, John. Let's turn to slide five of the conference call materials, where I will provide an overview of our third quarter consolidated financial results. Third quarter revenue was $541 million, up 91%. Excluding recent acquisitions, organic revenue grew approximately 17%, with similar growth across MRO and distribution. This reflects strong underlying demand and the resilience of our core businesses. Including contributions from recent acquisitions, MRO revenue increased 198%, and distribution revenue increased 27% year-over-year. The 198% increase in MRO activity was driven by expanded repair capabilities and capacity, strong growth in engine content across commercial and business and general aviation, market share gains, increased share of wallet with existing OEM partners, and contributions from recent acquisitions, primarily PAG and Aero 3.
The 27% increase in distribution revenue was driven by solid execution on new business wins, product line expansion, market share gains, strong engine and market demand, and contributions from the Aero 3 acquisition. Consolidated adjusted EBITDA increased 126% to $107 million. Adjusted EBITDA margin was a record 19.8%, an increase of approximately 310 basis points from the prior year period. The expansion can be primarily attributed to our core aviation business, driven by greater mix of higher-margin product and repair activity and synergies from previously acquired businesses, complemented by contributions from PAG. Adjusted net income was $64 million, and adjusted diluted earnings per share was $2.01. Turning to slide six and our balance sheet. Our third quarter results demonstrate continued progress in reducing leverage and increasing cash generation.
We ended the quarter with adjusted net leverage of 2.3x, down from 2.4x at the end of the second quarter. We achieved this reduction while completing the Atech acquisition. Operating cash flow was $56 million, and free cash flow was approximately $47 million. Free cash flow increased from $19 million in the second quarter and $18 million in the prior year period.
This improvement reflects record profitability, a greater mix of MRO revenue, and better working capital performance. Free cash flow represented approximately 44% of adjusted EBITDA. At quarter end, net debt was approximately $894 million. We had $66 million of cash and $479 million of availability under our revolving credit facility. We expect strong cash flow in the fourth quarter to support continued deleveraging. Our liquidity position also provides the flexibility to invest in organic growth and pursue disciplined acquisitions.
Let's turn to slide seven and our updated full-year outlook. Our strong third quarter and positive outlook for the rest of the year support an increase in guidance. We now expect full-year revenue growth of 65%-66.5%, up from our prior outlook of 61%-64%. Our updated guidance reflects expected seasonality, with fourth-quarter revenue anticipated to be lower sequentially compared to the third quarter. We are increasing our full-year 2026 adjusted EBITDA margin outlook, reflecting record third-quarter profitability and continued operating execution on our recent acquisitions. We now expect full-year adjusted EBITDA margin of 18.9%-19.1%, compared with our prior outlook of 18.7%-19%. We expect another strong quarter of free cash flow, supported by earnings growth, better working capital efficiency, and returns on earlier program investments. Our additional modeling assumptions are in the appendix.
For the full year 2026, we expect interest expense net, excluding interest income on the note receivable, projected at approximately $36 million-$38 million. Depreciation and amortization are expected to be approximately $96 million-$100 million in aggregate. The effective tax rate is projected to be approximately 25% blended for the full year. Stock-based compensation is expected to be approximately $18 million-$19 million. Capital expenditures are expected to be approximately 2%-2.25% of revenue. With that, I'll turn the call back over to John.
Thanks, Adam. Let me close with our priorities on slide eight. First, integration and synergies. Our joint commercial work across VSE and PAG has moved from planning to specific opportunities. PAG's capabilities and market position strengthen our approach to new and existing customer and OEM relationships. We're also focused on insourcing and operating efficiencies.
We expect these benefits to build through 2027 as we launch the complete integration plan in the first quarter of 2027. Second, new distribution and OEM programs. Our Pratt & Whitney Canada APU agreement is fully ramped and contributing to distribution results. It exceeded our expectations in the third quarter. Our CFM56 engines, purchased earlier this year, are at different stages of teardown and repair within our operations. Sales have begun, and we expect contributions to build in the fourth quarter and continue into 2027. Third, engine repair capacity and technical capabilities.
Capacity added earlier this year contributed to third-quarter MRO growth. We also signed new OEM licenses during the quarter, expanding the range of repairs we can now perform. We are working with our OEM partners on opportunities to develop new proprietary repairs and have a robust outlook for 2027. Fourth, organic growth. Several business opportunities we have pursued for some time were signed in the third quarter. New supplier relationships also added authorized positions.
We expanded our commercial coverage, including in Europe, and that work is already producing results. Our focus now is turning to the next set of opportunities into new business. Fifth, systems and processes. We are strengthening both to support growth and future integrations. That includes using AI tools to work more efficiently and make better decisions. And sixth, cash generation. We focused on generating strong free cash flow and continue to deleverage while funding disciplined growth.
I am proud of our third-quarter performance and the outstanding global team that delivered it. We delivered record results this quarter. We generated strong cash flow, reduced adjusted net leverage, and raised our full-year guidance. Our core businesses are performing well, our market positions are strengthening, and our expanded platform gives us more opportunities for growth and margin expansion. We look forward to sharing more at our Investor Day in New York City on December 9. Registration details are on our Investor Relations page. Thank you for your continued support and confidence in VSE. Operator, we are ready to take questions.
Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment while we compile our Q&A roster. And our first question will come from Ken Herbert from RBC Capital Markets. Your line is open.
Yeah. Good morning, John, Adam, and Michael. Nice results.
Thank you.
Yeah, maybe just to start, I wanted to follow up, maybe Adam, on your comments around the margin expansion in the quarter. I'm wondering if you can give a little bit more detail or quantify how much the core business saw margin expansion in the quarter as we think about that relative to M&A and synergy on the PAG deal.
Yeah. I mean, it's a good question, Ken. I'd say, as we said, a majority of the expansion is really coming from the core business. And of the core business, that really includes multiple things. One is just we continue to see very strong organic growth, especially in the higher margin engine aftermarket businesses. A few of those businesses are some of the legacy acquisitions that we've acquired, like a TCI or a Kellstrom, which are more focused on the commercial engine aftermarket. We've seen very strong growth in those businesses above the organic growth that we're reporting, and also very strong margin expansion. So, I'd say that's a combination of the growth and then the integration of those businesses into the one VSE. So, it's a combination.
We continue to focus on insourcing activities, both on the distribution and the repair side, which is contributing to higher margin percentages. And obviously, PAG is contributing as well, given the margin profile of that business. But that's less than a majority of the overall margin increase year-on-year. But it's a combination of all those factors.
Great. Thanks, Adam. If I could, the fourth quarter in guide implies a fairly material sort of step-down in organic growth. You call out seasonality. I am just curious, is that seasonality predominantly isolated to the PAG business, and that is what is driving some of the conservatism on the fourth quarter? It does not look like historically the core business had much seasonality. Maybe if you could talk about just conservatism or anything else in particular we should keep in mind as we think about fourth quarter and the implied growth.
Yeah. No changes in the demand environment or anything like that. It is more about seasonality and just some of the quarterly variability. You mentioned PAG. That business tends to be a little bit more seasonal. Aero three, in particular, tends to be more seasonal, where their Q4 historically has been lower than their Q3. Our business historically predominantly distribution, that is flipped to repair, and the repair business tends to be a little bit more seasonal in the fourth quarter. I think it is just really about the mix and the shift.
The last thing I would add is, we had a very, very odd fourth quarter of December last year, meaning that it was probably one of the strongest Decembers in the seven years I have been in the business. Extremely kind of out of character, and there is just a little caution around that December comp year-over-year. Were there one-off sales, or are we going to see a level of consistency in December demand in 2026 compared to 2025? That December 2025 demand was extremely high and kind of uncharacteristic. So, it is just a little comp issue. But no concerns on kind of organic growth for the fourth quarter. A little bit of conservatism, I guess.
Perfect. Thanks, John. If I could, just one final question, John. You talked about a focus on new distribution agreements. You specifically called out, obviously, Pratt Canada and CFM56 and some of the other work. Are you getting any indication that you are seeing slower pull through your distribution channel, or there is any elevated de-stocking or inventory risk as we head into 2027? Thank you.
No, it's a great question. I mean, our business isn't as much subject to de-stocking as maybe some other businesses are, because north of 80%, 85% of our distribution revenue is exclusive. We're controlling that market, and there's not a lot of inventory that we kind of allow to just flow in the market that would allow de-stocking. We have things like tires, tubes, batteries, those types of things.
You could see those are areas I would tell you I can give you some trends, but we are not seeing any de-stocking there. On our USM business, it is not core to us. It's a critical part, a necessary part of our exchange programs with our repairs. But if retirements pick up a bit and that supply-demand curve shifts a bit, we won't be overly subject to any risk there. That's on the VSE side.
On the market side, though, we're not seeing kind of any de-stocking concerns, just market in general, in a generalized comment for 2027 at this point.
Great. Thank you.
Thank you. Our next question will come from Sheila Kahyaoglu from Jefferies. Your line is open.
Good morning, guys, and great quarter as always. Maybe if I could ask first on organic growth. It accelerated sequentially by 3 points, and I know, John, you called out it was equal across the MRO business, repairs, and distribution. Maybe if you could give us a little more color, perhaps, on repairs versus distribution and engine and non-engine.
Yeah, I was going to highlight that. I don't have the precise percentages. I don't know, Adam, if you have just kind of a range for Sheila, just to get a feel. But I would tell you that the core business non-engine was still performing well. Think kind of high single digits to low double-digit growth, depending on the capability set. And then the engine business, commercial- faster than business in general aviation, but both of them still having strong growth in the quarter.
Those were the businesses that you saw closer to that, let's say, the high end, closer to that 20% growth in the quarter. And we have parts that are on kind of legacy engines as well as LEAP. We have repairs that support both, and it was quite consistent. I don't have the exact percentage off the top of my head, Adam. I don't know if you want to give any more color on that.
No, I think the percentages that you gave are directionally correct.
Okay, perfect. Then if I could ask one more question, and I know, John, you will release this with chapter three of your book on December 9th, but since you acquired Atech in the quarter and the theme has been between PAG and Atech to meaningfully expand the portfolio of potential repairs, can you talk about what Atech adds that you did not previously have when it comes to engine repair and capability and how we think about the margin profile of that business?
Yeah. I will show you, I think I have kind of shown it before, kind of how we look at the business with repair and distribution capabilities, and then our proprietary solutions business, which we will talk a lot more about during our Investor Day. That is obviously on the higher end of the margin profile because we own the IP. So Atech is building proprietary repairs.
They are very OEM aligned in how they are building them, but there is about 300 repairs where they essentially own the IP. They are creating the repair, and they are in the manual. So you think of them more at the high end of an IP profile business rather than as a commoditized profile business. So we did not give the exact margins, but I would tell you well north of where we are performing today.
Great. Thank you.
Thank you. Our next question will come from Louis DiPalma from William Blair. Your line is now open.
John, Adam, and Michael, good morning. Congrats on another quarter. It was very like the Miami Hurricanes.
We got an injury now, though, Louis. I am a little nervous about the Hurricanes.
I think they will be okay. But in the past, John, you discussed your land and expand strategy with your existing OEM partners, Pratt & Whitney Canada, Eaton, TransDigm, and Honeywell, and often you have been able to win distribution deals without them coming out to bid. Has this continued in terms of your organic growth strategy, and what do you see in terms of the pipeline for other distribution and MRO deals over the next year or so?
Yeah, I mean, the pipeline looks good. Candidly, the conversations. When I look at kind of what the pipeline looks like, how I feel about it, I feel great. I think that it still remains 75% plus of the work, I think, is work that we are solving problems rather than going through a competitive RFP process. Where I caution is just, it is difficult to always time the execution and when you can convert those into actual contracts and then when you can convert those contracts into revenue and earnings. That is kind of the color we have to get around. But when we look at the next three years, and as we look at as the OEMs continue to shift their focus onto next-gen platforms, we see bold opportunities to support them there.
And as some of the legacy work becomes more non-core, to continue to expand our share with those OEMs on those legacy platforms as well.
John, and for Adam, I know that the team has discussed how increasing proprietary content will be a major source of margin expansion for the next three years, and you are going to provide more commentary on this on December 9th. But how much more margin potential is there also with just scaling MRO in terms of the traditional, like, insourcing driver that you discussed as one of the main synergies with the PAG acquisition?
Yeah.
Is that still in the early innings and-
Yeah, you can run a low 20s EBITDA margin business with kind of commoditized-type work if you can optimize price and efficiencies on the SG&A line. I mean, you run a good business, you can break that 20% barrier. You want to start to move into the big leagues on the margin percentage and move more towards that mid-20s. Mix becomes a bigger conversation, and having more proprietary content definitely becomes a bigger discussion.
Great. That's it for me. Thanks, everyone.
Thank you.
Thank you. Our next question will come from John Godyn from Citi. Your line is open.
Hey, guys. Thanks for taking my question. I wanted to just talk a bit more about M&A. Normally, we all ask for a temperature check on the M&A pipeline, which I would love to get, but I also want to chat about whether your experience with PAG, which is just such a strong example of your ability to integrate transformational deals, and that's not something every company can do, has perhaps reframed the art of the possible for you. Has it opened up the aperture in a way that maybe a year ago you would have been shyer about?
Yeah. That's a good philosophical question to think through. I'd say absolutely. I think on the positive side, I think that we have a very, and we'll talk more about this at the Investor Day, is we build the framework and the platform for how do you become a business that's doing, let's say, $800 of EBITDA. We feel very confident in the platform that we can build that can not just double revenue, but double plus earnings. I think that the model where it drives concern is the pace in which we can do deals that need to be integrated, because you can only integrate so much at a given time.
We constantly are looking at prioritization, which businesses can operate on their own and can be at the back end of the integration cycle, versus which ones need to be at the forefront, where we potentially have cracks in the foundation that we need to fill, and then what does that framework look like so that we can start to really look at doubling the business in the next chapter. Absolutely, I think we've developed a level of confidence in that integration muscle and our ability from an organizational design perspective as well to put the right capabilities together. I'd add one more thing, that what PAG showed me is the optionality in the strategy. The strategy is still very tight in what we want to do, but it's broad in terms of customer base, capability sets.
It does give us a lot more optionality, and it's opened my aperture a bit on M&A pipeline as well.
Okay, great. I'm sure we'll hear more about that at the Investor Day. Can I just ask one more on visibility? When we just think about the stock this year, if oil prices go up, the stock goes down. If oil prices go down, the stock goes up. Investors seem to tie visibility and organic growth to the price of oil. I was hoping maybe you could just sort of reflect on that and maybe offer some data points on the visibility that you guys have going forward, because clearly your results have not been as sensitive to macro as maybe the stock would suggest.
Yeah. It's tough to post a quarter like we're posting today knowing that fuel prices and global wars and such create a cloud over results as strong as we posted today. We look at near 30, 60, 90, 180-day demand and what that looks like from our customers. We look at how OEMs are investing in us and in their own aftermarket and the trend data that they see. Then we look at the longer tail, heavy checks, both in terms of airframe and in terms of engines, and none of those trends have shifted. What you see in terms of airlines modifying schedules or slowing down of RPKs, that was all going to happen regardless of the war.
I think one of the things to clarify, and everyone's got their own data on how they're looking at the markets, but as we've recovered from COVID, as the markets have scaled, we've all been able to post low to mid double-digit growth rates organically. Regardless of anything on the global economic situation, we saw those growth rates moderating a bit. Not in a bad way. It's still a nice high single-digit growth rate, and I believe that's going to be consistent for the next two to three years, subject to no global recessionary impacts. I think that what we had forecasted out over, let's say, a year and a half ago, as we looked at the next three to four years, we don't see any change near term in that demand profile.
Great. Appreciate the color. Thank you.
Thank you. Our next question will come from Scott Deuschle from Deutsche Bank. Your line is open.
Hi, good morning. John or Adam, can you say how much B&GA engine aftermarket has been growing in recent quarters and how that compares to commercial engine?
Yeah, we don't break it out precisely. I would tell you that the commercial is definitely growing at a faster pace. Think more in the, like above where we posted for the quarter is where the commercial is, and slightly below where we posted, but still double-digit growth rate on the bizav side. So there is a difference there. But if you were ranking them, it's commercial engines, B&GA engines, and then the airframe work for the two together is the third bucket.
Okay, that's helpful. Adam, can you walk through what drove the continued growth in the inventory balance in the third quarter? I think the burn's $150 million year to date. Should inventory be a source of cash in the fourth quarter?
Yeah, thanks for the question. It was really just aligning with our growth, some of the opportunistic buys that we had in the quarter, more ordinary course growth, nothing out of the ordinary. Typical replenishment on some of the inventory distribution programs, and then just more of the ordinary course buy. I wouldn't say it will completely be a source of cash in Q4, given where we've been growing organically. I think it'll be flatter, maybe a slight use, but much less so than what we've seen in the first half and in the third quarter. Obviously, third quarter was an improvement over the first two quarters of the year, but still a use of cash in that quarter.
Okay. John, where does free cash flow rank on your list of priorities for financial metrics over the coming years?
Yeah, it's a good question because I've joked in the past that we were building a business with only two legs of a three-legged stool, and it wasn't a key priority for the business. It is. Definitely, I would say equal weight in terms of priorities at this point. We always look at how do we continue to drive above-market revenue with quality revenue? How do we continue to focus on margin expansion to get our margin?
We want to break that 20% margin, adjusted EBITDA consolidated margin. Then, really free cash flow has become kind of equal weight in terms of focus, and you'll see much more of that focus as we get into 2027 as well. So I'd say as the business is maturing, it's become a much more balanced, equal-weighted business, and you'll see it in our incentive plans and metrics as well.
Thank you.
Thank you. Our next question will come from Kristine Liwag from Morgan Stanley. Your line is open.
Hey, good morning, everyone. I wanted to follow up on PAG. Hey, John. You guys recorded approximately $34 million of contingent consideration at the acquisition, and I think that was against a maximum contract of $125 million. When we look at 3Q, we saw that you recognized about $8.9 million in reduction in fair value for this earn-out contingency. Can you walk us through what drove that remeasurement? Particularly, how is PAG tracking against that original 2026 adjusted EBITDA assumption, and how should we think about the current expected payout relative to that initial $34 million versus the $125 million maximum?
Yeah, I can take that one, Kristine. I would say the entirety of the fair value adjustment is because of the mathematical modeling. Essentially, we run a Monte Carlo simulation, and as you get further through the year, there's less of a projected period, and so the models run less upside scenarios. That's strictly a function of the mathematical modeling. Our expectations in the business have really not changed at all. Performance has been very consistent with our expectation, so that's entirely what's driving that change in the fair value.
I see. When we look at 4Q, when you think about the performance where the upside might be a little bit lower than what you would have expected, are there areas that you could highlight that if it would have gone better, maybe this adjustment wouldn't have occurred? What were those considerations, and what would have had to happen for that $125 million maximum payout to have occurred?
Yeah, I mean, we talked about in the past, that payout was really aligned to when you go through these processes, you have a seller sell-side forecast and a buy-side forecast. The earn-out was really to give the opportunity for payout relative to that sell-side forecast. Like I said, our buy-side forecast has really been unchanged. The business is performing very consistent to what we expected.
Great. Thank you.
Thanks, Kristine.
Thank you. Our next question will come from Jeff Van Sinderen from B. Riley Securities. Your line is open.
Hi. Good morning, everyone, and let me add my congratulations on the strong metrics for the quarter. John, could you maybe speak more on your latest thoughts regarding leaning into the proprietary nature of some parts of your business as we head into 2027? Also, would incremental acquisitions emphasize proprietary, and are you seeing targets with that quality in the pipeline?
Yeah, I mean, it absolutely is core to our next chapter to think through kind of the and we'll walk much more through this at the Investor Day, the three kind of buckets, for lack of a better word, of proprietary solutions where we are focusing on repairs, manufacturing, and parts of where we want to focus the next phase of growth. It will come from a balance of organic and inorganic. Atech was an absolutely outstanding acquisition. Rita is an amazing leader, and thrilled to have her on the team. Those are absolutely the core type of deals that we'd like to have out there. I'd say we feel good about the inorganic pipeline as well as the organic pipeline, and it'll be slow and steady kind of growth.
As a percentage of total sales, the goal is how do you double that percentage of sales that come from the proprietary solutions bucket over the next chapter. So expect it to be kind of a combination of organic and inorganic.
Okay, great. Thanks for taking my question. I'll take the rest offline.
Thank you. Our next question will come from Louis Raffetto from Wolfe Research. Your line is open.
Hey, good morning.
Morning.
Hey.
Adam, just to follow up on the free cash flow. I guess, is there any reason that, you mentioned it would be strong in the fourth quarter, any reason we don't see acceleration like we saw Q3 to Q4 last year?
Yeah, I don't want to say acceleration. The third quarter was very, very strong result for us, much stronger than last year's third quarter. I think we were up close to $30 million free cash flow. So I would say strong. We're expected to see continued earnings growth. Obviously, working capital continues to be less of a use, just naturally, and then obviously the business has shifted to less working capital intensive MRO, especially with PAG. So we're expecting another strong result. I don't want to say above third quarter, but it'll be a good result.
Okay. Then maybe just on the interest expense, just trying to understand what drives the sequential pickup there, given you should be generating cash in the third quarter and the fourth quarter. Is there something that's driving up that expense sequentially?
No, it's really just the timing of the ATech acquisition, increasing our debt for that purchase, and then just some of the interest rates that have been going up. We're seeing some sequential increase. It's really, there's probably a little bit of conservatism in the implied 4Q guide, but you should see some sequential increase.
All right, perfect. Thank you.
Thank you.
Thank you. Our next question comes from Jonathan Siegmann from Stifel. Your line is open.
Hey, good morning. Thanks for taking my question. Great results.
Thank you.
Last quarter, you talked about supply availability improving in some areas and getting worse in others. Just how's the state of the land now? What's getting better? What's getting worse?
Yeah, I mean, it's the same this quarter. I'd say we saw a few areas of improvement where our pipeline of products are stronger. Bearings is a recurring issue and a hot topic inside of our business, and specifically in our MRO shops today. I would say the concept of overall market improvement on supply chain, we at VSE are not specifically seeing. It's still that whack-a-mole game, and we still tend to see the bearing and a few other products continuing to be the most concerning for us in the pipeline.
Thank you. Maybe just as a follow-up at a higher level, John, we're probably causing some of your procurement guys headaches, but you guys are making some deals based on solving the problems for the OEMs. Can you talk about those two countervailing forces, and are you cheering for these kind of industry positions to persist? Is it more positive versus negative? Anything on that? Thank you.
I'm a believer in, you want the large OEMs to always be successful because you want to have a healthy market. You want the airlines to be successful and profitable because that drives a healthy market. I think some people feel that when the OEMs struggle or the airlines struggle more than normal, they need more of our parts and services. I don't necessarily come from that ilk. I think that there's plenty of work for us when there's a healthy market. Retirements have been at record lows, so having the OEMs build more airplanes and meeting demand is not necessarily a bad thing for us in totality. I'm kind of agnostic.
Our job is to stay ahead of it and make sure as things happen that we can pivot faster than anybody else to continue to support both the end users and the OEM partners as needed.
Look forward to the summer night. Thank you.
Thank you. Appreciate it.
Thank you. Our next question will come from Michael Leshock from KeyBanc Capital Markets. Your line is open.
Hey, good morning. Just wanted to follow up on the fuel prices. You had mentioned you are not seeing any demand disruption at all from that. I know the situation remains dynamic, but do you have a sense of how much longer an extended duration of higher fuel prices would have to last before you would start seeing an impact? Did you initially expect demand would remain this strong in light of higher fuel prices for the better part of a year? Was this a surprise to you, or is it consistent with what you have seen in past cycles?
I think there is a couple of differences in this cycle. I think it all starts with the end user demand and the profitability of the airlines. I think the profitability of the airlines concerns me more right now than the end user demand. I think it is all about how many conferences do you go to a year, how many vacations do you go to, do you take a year, and when do you change your decision point because ticket prices are too high?
The biggest difference in this cycle is there is just not the knee-jerk reaction from anybody because we all went through that in the past, and what we have learned is turning the spigot off is easy, turning it back on is difficult. I think there is a lot more disciplined approach to how to manage a slight downturn if it happens.
So, that's kind of what I would anticipate. As I said a little bit earlier to another question, I believed that the market was going to moderate slightly to kind of a high single-digit growth rate market in 2027, 2028 anyway. Right now, those trends are holding tight. I do think that if fuel prices stay high and inflation stays high, eventually you have some consumer decision-making points that can impact the market. I would say, though, that if the markets are impacted in a low single-digit percentage in terms of fleet, whether it's hold and rotate aircraft, holding on schedules, it's not going to have a dramatic impact on a business like ours. Will it slow growth 100 basis points? Maybe, but it's not going to really negatively impact my revenue or earning forecast that I put out there.
For us, we need to see a little bit more of a significant slowdown. At this point, right now, we don't see that impact at this point.
Great. Then just on the footprint, wanted to ask on your current capacity and slated expansions that you've talked about. What's the latest on where you stand today in that regard, and any new thoughts on expansions or any additional areas of capacity that you might be contemplating over the mid to longer term? Thank you.
Yeah. We'll lay out kind of the capital allocation strategy, both for organic and inorganic, in December. Just to give you a preview, we have some of our commercial and B&GA engine business markets that we think will be the most resilient, regardless of kind of downturn or continued kind of robust market, that we will invest in, where we're a little bit more capacity constrained. Then there's some of our international opportunities that we believe it's kind of easier and more financially beneficial for us to do it organically versus inorganically. So, we'll talk about those markets as well. So expect to be more engine-focused and to a little bit of international, and mostly on the repair side is where we'll add capacity.
Great. Thanks so much.
No, thank you. Appreciate the question.
Thank you. As a reminder, to ask a question, please press star 11. Our next question will come from Michael Ciarmoli from Guggenheim Securities. Your line is open.
Hey. Morning, guys. Nice results. Thanks for taking the question. John, so you're clearly not building a commoditized aftermarket big business. Not to put the cart ahead of the horse here, but if you want to get to the big leagues and do mid-20% margins, are there any holes in the portfolio that you need to fill? Do you think you've got sort of what it takes currently? I think maybe I've asked this before of you guys. Do you think you need defense aftermarket? Is that something you would add to the portfolio? Even, I don't think pricing came up as it related to margins currently in this quarter, or how to think about pricing in terms of margin expansion going forward.
Yeah, you got two questions in there. I think first on the capabilities, what's unique about what we're building is it's far more of a center of excellence model than an exact tip-to-tail model. There are areas, whether they're on airframes or engines, more on legacy products that we think we can provide more of a tip-to-tail model to some of our end users, where they want it, and we think it's the right model for us because the margin profile across that capability set makes sense for us. For other capabilities or customer bases, we don't think it makes sense for us or for the market for us to provide a tip-to-tail market. So, we'll have more of a center of excellence model where it's capability by capability or airframe or engine by airframe or engine.
What that allows us to do is be far more disciplined about what we add, and it also brings a broader perspective. There's nothing I need. It's just finding what's the right fit and continuing to look at where we actually add value, where the OEMs and the end users are very comfortable with our positioning and the IP that we will kind of own and bring to the market.
So, I know it's a generalized answer, but that's kind of more how we approach it than I'd say, "I need this to get to a 20% margin." It's not the way we look at the business or what we need. With regard to defense aftermarket, there are many areas of defense. By the way, we've been growing our defense business organically. The PAG team has done an outstanding job.
They had a great quarter in terms of their defense aftermarket business. So we continue to look at that as opportunities. You just haven't seen me make a big play inorganically. There's a few assets that really are high quality that I think would really propel us in the right direction. If the stars align there, it works. If not, we'll continue our organic approach.
There are things just like on the commercial side that we want to do in defense and things that don't fit us for a number of reasons and areas that we don't want to play. I wouldn't say it's a necessity, but if and when we find the right opportunities, I think it would be a nice diversification strategy in terms of customer mix. The last question on price. I think where we looked at price volume mix very much in the aggregate.
We are a every part has a story business, but let's just say, as you were coming out of COVID, inflationary issues on both labor and product costs, price might have been 60%+ of the total revenue growth. It's moderating to 50/50 or even slightly less than that in terms of total growth.
Got it. Helpful. I will take the rest offline. Thanks, guys.
Talk to you later, Mike. Thank you.
Thanks.
Thank you. I am showing no further questions from our phone lines. I would now like to turn the conference back over to John Cuomo for any closing remarks.
Thanks, Crystal. Appreciate the support today. Thank you to our investors, to our shareholders, to our customer and supplier partners, and most importantly, to our teams for delivering an outstanding quarter and the confidence in VSE specifically during these slightly turbulent global times. We continue to remain extremely focused and disciplined on our strategy and execution, and look forward to seeing and talking to many of you during our Investor Day in December. Have a great rest of the day, great rest of the week. Thanks, everyone.
Thank you for participating in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a wonderful day.