Woodward, Inc. Q1 FY2026 Earnings Call

Ladies and gentlemen, thank you for standing by. Welcome to the Woodward Incorporated First Quarter Fiscal Year 2026 Earnings Call. At this time, I would like to inform you that this call is being recorded for rebroadcast and that all participants are in a listen-only mode. Following the presentation, you are invited to participate in a question and answer session. Joining us today from the company are Chip Blankenship, Chairman and Chief Executive Officer, Bill Lacey, Chief Financial Officer, and Dan Pravosnick, Director of Investor Relations. I would now like to turn the call over to Dan Pravosnick.

Thank you, Operator. I'd like to welcome all of you to Woodward's first quarter fiscal year 2026 earnings call. In today's call, Chip will comment on our strategies and related markets. Bill will then discuss our financial results as outlined in our earnings release. At the end of our presentations, we will take questions. For those who have not seen today's earnings release, you can find it on our website at www.woodward.com. We have included some presentation materials to go along with today's call that are also accessible on our website. A webcast of this call will be available on our website for one year. All references to years in this call are references to the company's fiscal year unless otherwise I would like to highlight our cautionary statement as shown on slide two of the presentation materials. As always, elements of this presentation are forward looking, including our guidance and are based on our current outlook and assumptions for the global economy and our businesses more specifically. Those elements can and do frequently change. Our forward looking statements are subject to a number of risks and uncertainties surrounding including those elements, including the risks we identify in our filings with the SEC. These statements are made as of today, and we do not intend to update them except as required by law. In addition, we are providing certain non-US GAAP financial measures. We direct your attention to the reconciliations of non-US GAAP financial measures, which are included in today's slide presentation and our earnings. We believe this additional financial information will help in understanding our results.

Now, I'll turn the call over to Chip.

Thank you, Dan, and good afternoon to all who are joining our first quarter 2026 earnings call. I'm pleased to report that 2026 is off to an exceptional start for Woodward. Robust demand across both our aerospace and industrial segments, combined with disciplined execution by our teams, drove out performance in the first quarter. I want to start by thanking Woodward members around the world for accepting the challenge of increasing output in response to rising demand across all our end markets and continuing to improve our operations. These collective efforts resulted in a standout first quarter for 2026. In this first quarter, Woodward sales grew 29% year over year, and earnings per share increased 54%. We also achieved strong cash generation compared to historical first quarters. I'm also grateful for our customers' continued trust and collaboration to stabilize and optimize demand signal so we can take a disciplined approach to capacity increases in our factories and with our suppliers. This is an industry-wide opportunity to move from the supply chain crisis we've been embroiled in to precision alignment that results in stable inventory levels and predictable component availability. While we are not where we want to be on every product line we have a good vision for the path forward as we continue to work through the supply chain alignment with our customers and suppliers we anticipate that inventory turns will not improve as much as we would like in 2026. inventory efficiency is a priority and we are investing substantial resources in process improvement and control but the impact of these efforts are likely to be felt in late calendar 2026 or even early 2027. In aerospace, demand growth in commercial and defense OEM aligned to our expectations, while commercial services exceeded our forecast. Commercial services activity was robust across narrowbody, widebody, and regional platforms. Leak, GTF, and legacy narrowbody repair volume was up year-over-year and relatively flat compared to the fourth quarter of 2025. Also, like the previous quarter, we experienced elevated spare LRU provisioning orders and we were able to execute and deliver these orders to customers. Very strong execution by our aerospace team enabled us to capture growth profitably with 420 basis point segment margin increase. Industrial also continued on its positive trajectory with robust growth across power generation, transportation, and oil and gas. Price as well as operational improvement and volume leverage translated into a 410 basis point margin expansion for industrial. These combined results build on the momentum of a strong 2025 performance and reflect outstanding work across the company. So what's ahead for the rest of 2026? We continue to expand our services capacity to address increasing demand and improve turnaround times for our customers. This includes our Presswick, Scotland facility, where we are in the planning phase to add square footage and optimize the layout to reduce turn times while supporting growth at this well-positioned Woodward MRO Center. In Rockford, we are commissioning additional test stands and optimizing the layout for improved flow based on Kaizen events and benchmarking exercises our team conducted. We are working with industry-leading MRO providers to deliver Woodward licensed support offerings, which will give our customers more choice and additional capacity to address the growth. In our industrial segment, we recently announced an important strategic decision to wind down our China on Highway product lines. As we've discussed in the past, the China on Highway market has provided us limited order visibility and overall performance has been inconsistent from a revenue and profitability standpoint. We have been evaluating strategic options for this business for quite some time. The decision to wind down by the end of this fiscal year supports our long-term growth strategy for Woodward's industrial segment. Throughout the year, we expect to see continued benefits from our focus on operational excellence. This includes further stabilizing our end-to-end supply chain to improve on-time delivery, increase inventory turns eventually, and increase resilience to better serve our customers. Our near-term strategic priorities are clear. First, we will meet OEM demand growth, whether that is rate breaks for airplane and engine OEMs in aerospace or data center-related power generation demand increases for industrial controls and components. Second, we will provide world-class service to deliver on the promise of repair and overhaul of our Woodward product install base, whether that is aerospace legacy, LEAP GTF, or industrial gas turbine systems. Last but not least, we are shifting our R&D focus from baseline technology development to customer value demonstration on selected technologies to position Woodward for increased content on next single aisle platforms. From a capital allocation standpoint, our ongoing organic growth and strong balance sheet provide us with flexibility to evaluate potential inorganic opportunities that are a strategic fit with the right risk-adjusted returns while investing in ourselves and returning cash to shareholders. Given the strength of our first quarter performance and our outlook across our markets, we are confident in raising our full year sales and earnings guidance, which Bill will outline in his section after sharing more detailed financial information regarding our first quarter performance. Over to you, Bill.

Thank you, Jeff, and good evening, everyone. As a reminder, all references to years are references to the company's fiscal year unless unless otherwise stated, and all comparisons are year over year, unless otherwise stated. As Chip mentioned, we had a very strong start to 2026. Net sales in the first quarter of 2026 were 996 million, an increase of 29%, reflecting strong demand and consistent execution. We achieved earnings per share in the first quarter of 2026 of $2.17, compared to $1.42, and adjusted earnings per share of $1.35. There were no adjustments in the first quarter of 2026. We generated $70 million of free cash flow in the first quarter. First quarter performance exceeded our expectations, primarily driven by strong aerospace commercial services and higher China on holiday revenue in our industrial segment. Importantly, we did not experience the typical seasonal drop-off in demand, and we maintained steady production levels despite fewer working days in the quarter. At the segment level, aerospace segment sales for the first quarter of 2026 were $635 million, compared to $494 million, an increase of 29%. The substantial year-over-year growth was primarily driven by commercial services sales, which increased 50%. This reflects higher volumes to support sustained high utilization of legacy aircraft, as well as increased LEAP and GTF activity. In addition, we experienced significantly higher spare LRU volumes during the quarter, primarily for China. This appears to have been driven by a customer under-provisioning, rather than a pull forward of domains, as these are short cycle orders often placed and fulfilled within the same quarter. We don't expect the same level of commercial services growth going forward as comps get more difficult, and we are not forecasting spare LRU sales at the level that we experienced in the last couple of quarters. In line with our expectations, airframe production rates increased and commercial OEM sales were up 22% as de-stocking began to taper off. Defense OEM sales increased 23%, primarily driven by new JDAM prices, which took effect last quarter. Overall, we continue to see strong demand for our defense programs. First quarter aerospace segment earnings were 148 million or 23.4% of segment sales compared to 95 million or 19.2% of segment sales. The 420 basis point improvement reflects solid price realization, primarily driven by the new JDAM prices, higher volumes and favorable net, primarily due to strong commercial services growth in the quarter. Partially offset by strategic investments in manufacturing capabilities and inflation. Industrial segment sales for the first quarter were $362 million, up 30% from $279 million. Core industrial sales, which excluded the impact of China on highways, increased 22% in the quarter, with broad-based growth across our in-market, price, and FX. Marine transportation sales increased 38% during primarily by increases in services and shipyard output. Oil and gas sales increased 28% as volume growth was driven by greater midstream gas investment. Power generation sales increased 7%, which included the impact of the combustion business divestiture in the prior year, excluding the impact of the divestiture, which averaged approximately $15 million of quarterly sales, power generation sales grew in the mid-20s on a percentage basis, in line with the broader power generation market. China on highway sales were $32 million in the quarter, higher than we planned, further demonstrating the visibility challenge and significant quarter to quarter volatility of this business. Industrial segment earnings for the first quarter of 2026 were 67 million or 18.5 percent of segment sales compared to 40 million or 14.4 percent of segment sales. Within our core industrial business, margins expanded 200 basis points to 17.3% of core industrial sales driven by higher sales volume, strong price realization and favorable mix partially offset by inflation. Significant progress on our operational excellence pillar enabled us to increase output to meet strong customer demand and achieve improved operating leverage. The China on Highway business added an additional 210 basis points of margin growth. As Chip mentioned in his comments, we announced that after a multi-year evaluation of strategic alternatives, including potential divestiture, we made the decision to wind down the China on Highway business by the end of the fiscal year. This business often drove Corley volatility within our industrial segment. It has been an inconsistent contributor to our overall financial results and operates in a highly unpredictable environment. This decision further aligns the industrial portfolio with our long-term growth strategy and priority in market, marine transportation, power generation, and oil and gas. We do not expect a significant long-term impact on our financial performance. However, we will incur certain costs associated with the wind down, which will be adjusted out of our future results. The remaining operational activity for this business year will continue to be reported in our industrial results during the wind down period. Non-segment expenses were $37 million for the first quarter of 2026, compared to $22 million. Adjusted non-segment expenses in the first quarter of 2025 were $28 million. There were no adjustments to non-segment expenses in the first quarter of 2026. At the consolidated Woodward level, net cash provided by operating activities for fiscal 2026 was $114 million compared to $35 million, largely driven by higher net earnings. Capital expenditures were $44 million for fiscal 2026. We expect capital spending to meaningfully increase over the remaining three quarters due primarily to the Spartanburg facility build out, as well as other ongoing automation projects. We generated strong free cash flow of 70 million in the first quarter compared to 1 million, driven primarily by higher earnings related to the outperformance in the quarter. As of December 31st, 2026-25, debt leverage was 1.2 times either die. We are allocating capital according to our priorities, supporting organic growth, selectively pursuing strategic M&A opportunities, and returning capital to shareholders through dividends and share repurchase. We continue to prioritize organic growth through ongoing automation investments and the construction of our new Spartanburg, South Carolina facility. We are always evaluating selective returns driven M&A opportunities, and our strong balance sheet provides the flexibility to move decisively as compelling opportunities emerge. Our fiscal 2026 guidance still assumes returning between $650 million and $700 million through dividends and share repurchases. Turning to our 2026 guidance, based on our strong start to the year, we are raising our 2026 guidance for sales and earnings and reaffirming the other elements of our four-year guidance. We are layering in the first quarter outperformance while keeping changes to the remaining quarter minus. For fiscal 2026, we now expect the following. Aerospace sales growth to be between 15% and 20%, with margins holding between 22% and 23%. Industrial sales growth to be between 11% and 14%, with margins increasing to be between 16% and 17%. We are raising both Woodward-level sales and EPS guidance. We now expect consolidated sales growth to be between 14% and 18%, and EPS to be between $8.20 and $8.60. free cash flow is still expected to be between 300 and 350 million as chip mentioned earlier we expect to continue maintain higher levels of inventory than we anticipated as we prioritize the customer's demand while we strive for better alignment for the end-to-end supply chain all other aspects of our guidance remain unchanged this concludes our comments on the business and results for the first quarter of 2026. Operator, we are now ready to open the call to questions.

Thank you. And the question and answer session will begin at this time. If you are using a speakerphone, please pick up the handset before pressing any numbers. Should you have a question, please press star 1 on your touchtone phone. If you wish to withdraw your question, press star 1 a second time. Your question will be taken in the order it is received And please stand by for your first question. And our first question comes from the line of Scott Mikus with Milius Research. Your line is open.

Good evening, Chip and Bill. Very nice results. Quick question on the commercial aftermarket sales. Normally, we would see a sequential decline due to the fewer working days, another very strong quarter for LRU sales. But given that price increases are usually more pronounced in your second quarter, Will the $245 million of commercial aftermarket sales in the first quarter be the low point for the year?

I don't think it's going to be the low point, Scott. It's hard to see exact numbers from here. We don't anticipate the same amount of spare LRU shipping, so certainly that'll knock the peak of that revenue off. But we do, we have modeled, you know, increasing repair and spare parts sales. We think that the market demand is strong. In some ways, our turn times may be somewhat limiting in our ability to fulfill all that So we are investing in capacity to, you know, drive those turn times down and provide even better customer service. So I think it's hard to say whether that's really going to be the peak. There's plenty of opportunity to grow.

Okay. And then presumably in the aero guide, there's some conservatism regarding Boeing and Airbus's production rates.

If Boeing and Airbus do hit their production rates, could that drive more upside through higher initial provisioning sales for your aftermarket? it we that's one of the reasons why I hesitated a little bit on the the the answer on the revenue for the services side we don't we don't see new tail logos in the in the horizon which can drive some of that increased provisioning volume so we think that over the long period hitting those higher output rates will drive more spare LRUs but not in the not necessarily in the near term over time that does that does correlate pretty well but as we don't see any new logos in the near future we don't we don't see that as a 2026 opportunity all right thanks for taking as far Yeah, as far as the volume goes, you know, I would say that the challenge to our volume on the low side would be, you know, softer demand from the OEMs not quite hitting the rates. And the opportunities on the earning side is from having more spare LRUs that we have in the forecast or more repair volume than we have in the forecast. That's kind of how I characterize the arrow looking forward. All right. Welcome.

And our next question comes from the line of Scott Duschell with Deutsche Bank. Your line is open.

Hey, good evening. Bill, just to be clear, was the 5% increase in the aerospace sales outlook primarily an increase in the aftermarket, or was it more broad?

Yeah, it was the first quarter driven, Scott. So, given that that was mainly driven by commercial services, that is a fair conclusion.

Okay. Then why does the margin guidance for aerospace not benefit from the higher aftermarket mix and operating leverage that's implied in what you just said?

Yeah. So, it does, as you see, it did flow through in Q1. Again, in the remaining year, we are – remaining portion of the year, we are seeing increased OEM sales, and with that increased OEM sales, that mix will temper the margin rate going forward.

Okay, that's clear. And then, Chip, can you walk through the drivers behind the growth acceleration in oil and gas in marine transportation? This quarter looked like around 30% growth in both of them. So I'm curious if you can unpack that and talk through the outlook from here.

On the oil and gas, I think we've said a few times it can be a little bit lumpy in terms of the order profile for that end market. It's both OEM and services driven. Quite a bit of the oil and gas midstream and application for us is gas turbine related. Sometimes it's the overhaul of the valves and components that we supply and other times we can participate with an OEM partner or independently for a control systems upgrade for a unit or a series of units at an end customer. And it's that activity that drove most of the growth this quarter. As far as marine transportation, marine transportation is kind of the same thing where the shipyards are full and expanding and, you know, having year-over-year growth in their outputs. So there's some new unit impact to the growth, but as well the high utilization of the fleet that has Woodward fuel injection and control systems and pumps in it is seeing quite a bit of overhaul activity and service activity that uses our spare parts. Thank you. You're welcome.

And our next question comes from the line of Noah Papanok with Goldman Sachs. Your line is open.

Hey good afternoon, good evening guys. No, thank you. Should we interpret the total company full-year guidance revision as you left the remaining nine months of the year, the same as the prior plan, roughly, and that the upside to the full year is basically the upside to just one queue?

No, that is – yes, that's correct.

And so I guess the follow-up to that is, does that make sense? Was all of the upside in 1Q things that you see as, you know, they were nice to see in the quarter, but they don't sustain as upside drivers to your prior?

Yeah, I'll take a start at it. I do think it makes sense. In the rest of the year, we did put in the, you know, additional growth related to the build rates that we think we are, that are there, the services growth, and so that is all in the total year guide. The part which Chip mentioned is the spare LRUs. Potential upside there, which may or may not come, that is not something that we put And that's what was one of the larger drivers of our Q1 outperformance, along with the China on highway increase. We do not see that happening going forward. So with that, Noah, we do think that the remaining of the year guidance makes sense. Jeff, I don't know if you have.

I guess I'd also characterize it in terms of risks and opportunities maybe, Bill, that we recognized almost zero risks in the first quarter and all opportunities came through and as we look at the rest of the year we feel like we have a balanced view of things that could take us a little bit higher within the guide which is the airframe and OEM demand remains strong all the power gen demand comes through the somewhat lumpy oil and gas maybe stays high I mean these are things that would drive us to the top side of the guide and then there's some things that could get in the way of that you know we still have some supplier challenges in terms of meeting all of the demand and some of our hard capacity constraints and our factories have been limiting our ability to respond to all this demand and the timing that it comes through so I think that you know a few suppliers could get in the way and and and knock down our ability to hit the very highest part of the guide and then you know some of our customers could have problems with other suppliers and they could reduce their demand to us so a lot of things can still happen in the in the nine months coming along the supply chain is not as smooth as we'd like it to be at our customers or with our suppliers so I think there's plenty of room in the guide to manage those

risk and opportunities okay that makes sense I appreciate that detail and then um could you could you quantify is it possible to quantify for us either in absolute dollars or or points of growth or anyway what the leap and GTF contribution to the aftermarket was and what the spare the initial spares LRU contribution to the aftermarket was I don't think we're going to be quantifying that for you but just to I mean when you think about a spare LRU it's a it's a it's a high dollar revenue item and a and a good profitability item

whereas repairs are a good percentage profitability but you know nowhere near the kind of top-level dollar so we like the repair business it just doesn't have that this doesn't have as much of a weight per per unit turned or anywhere near as a spare LRU so you know we like the year-over-year growth that we saw from elite GTF it's it's still tracking to the the plans that we forecast the legacy narrow body units are still coming in strong stronger than we would predicted a couple years ago I really liked the the growth that we saw year over year in both wide body and regional which says that our portfolio is really playing well across all of those different platforms in commercial aerospace so chip the bit it sounds like you know the LR use can be chunky 50 50 is a big number we're not going to model 50 for the rest of the year but all the upside in the quarter was the LRU it sounds like you saw it in maybe in the LEAP GTF plan as well and also in the legacy aircraft dimension yeah the wide body in the regional was probably a little bit more than we would have we would have forecast so that was that was robust the LEAP GTF and narrow body we're starting to get we have a pretty good beat on that and that was kind of in line with what we expected from a growth standpoint okay all right thanks a lot. You're welcome.

And our next question comes from the line of Sheila Keoglu with Jeffries. Your line is open.

Hi guys, congrats on the great quarter. This is Kyle on for Sheila. Thanks Kyle. Hey Joe. On the LEAP GTF mix, I know you also said legacy narrowbody was up year on year and also flat relative to the fourth quarter, obviously counter seasonal from what we would expect can you sort of just pick apart whether that was you know you catching up on test-throughs was it just really volume unlock of the factories and and ultimately how we should think about that cadence as we go through the quarters yeah I'll agree that it was you know counter seasonal to the past but I think you know what we've been working on you know really hard over the past couple years is consistent output and as we've been getting

consistent inputs to the system and bringing our turn times you know down some we've achieved that benefit and so you know we didn't have a big jump across the goal line at the end of Q4 to sort of make the year we just had steady output the last week of the year we had steady up with the first week of the year and we've been working really hard to streamline input process the induction process when a customer sends us a unit for repair or overhaul and I you know all these operational factors helped us maintain a steady performance operationally and that shows too in the financials okay that's helpful and then

just one follow-on on the LRUs and I think it was Bill's commentary you mentioned you guys have more confidence that this was prior under provisioning rather than pull forward related to tariff say in the prior year. Can you just kind of give us an update on why the kind of shift in signaling there and what you're seeing out of that customer base? Thank you. Sure.

And I think the way I characterize it is there was an open window for trade really was what I think. And the concern that that window might close is my hypothesis for why that activity was so strong in recent quarters you know our team took a look at calculating all the units in the field and doing the percentages and the statistical analysis for the recommendations we put out for the spares provisioning levels and our team determined that those customers were a little bit behind the curve in provisioning and so that's kind of how we come up with with that conclusion And our next question comes from the line of Gavin Persons with UBS Financial.

Your line is open.

Do you mind breaking down for us the growth rates by the aerospace subsegments assumed for the year?

I think we talked about that last quarter that I didn't do a very good job at that the year before. My hypotheses did not come to fruition. So, I retired that process with last year. Look, we see strong demand in OEM, both defense and commercial. We see reasonably good demand on top of very hard comps coming up on the commercial services. And then defense services is kind of, you know, flattish. we're on the right programs in defense it's just that MRO for us isn't growing very fast in defense so that's as much color as I put on it at this time if that's okay Gavin. Understood, appreciate that you mentioned to some extent term times limiting growth but you've been investing, hiring, working on productivity at some point are you capacity constrained here or are the predict productivity initiatives starting to show through we're reaching our part of our capacity plan where we're adding on to our Prestwick facility in Scotland I kind of characterized that as a well-positioned facility not just from a technical standpoint but it's in an aerospace park that has great you know workforce reputation and pipeline it's right across the fence line from GE's Cal facility so we have we're in a really good neighborhood there we're going to be you know almost you know 50% to doubling that facility when we when we add on to it we're still in the in the planning phase but it's pretty it's a premature part of the planning phase so we're pushing forward to do that we've we've put a couple test cells in there on on on LEAP so far and we're we're putting more test cells into our Rockford facility so we have enough space in Rockford but we needed more space in in Presswick and as far as the Woodward facility build out that's what we have in in our plans for for our own in-house service footprint and we're we're partnering with some external MRO providers to you know give some more choice and some more capacity to customers so that that's up-and-coming how does the how does that agreement work in terms of revenue and margin contribution so it's just like you you might imagine for an independent provider that is going that we're going to provide technical support and materials and repair support to that MRO provider so that they'll contract with a customer or they may have a fleet they're already managing, and then we'll provide them fair parts and kits and documentation and technical support. Thank you.

You're welcome.

And our next question comes from the line of Pete Skavisky with Alembic Global. Your line is open.

Hey, good evening, guys, and I think you can usually disclose this in the queue, but But how is pricing this quarter in terms of relative to your 5% expectation for the full I imagine maybe with the LRUs, it was above the expectation.

Yeah, Pete, this quarter we saw at the Woodward level, price come in about 8%, so slightly higher than our 5%, which we would expect it to be slightly higher as the price compared gets harder as you go through the year having said that it was still a little bit higher than we thought so we're actually revising that 5% total year peak to be closer to 7% and we would expect aero will contribute a little bit more to that than industrial but industrial still contributing nicely okay I appreciate that and then um maybe one for ship here a ship what do you

guys say you're investing in commercial aftermarket capacity, do you have a sense or how much of your installed base, maybe, you know, on a percentage basis, you're serving right now in the aftermarket? And then if you have a goal on that front, because, I don't know, it sounds like maybe you feel like you're missing out on some sales that you could get because of the quick turn nature of the aftermarket. Maybe there's some, I don't know, PMA or somebody else is taking sales that you think are rightfully yours.

So I was just wondering if you could illuminate that yes so on on leaked GTF we don't feel like we're missing out we're just we're delaying you know both our revenue recognition and our customers ready for install spare status that's that's what's behind the turn time approach we're not we're not concerned about losing market share on that activity at the moment we've been expanding the capacity with the intent to to be right online with what the demand is externally so we understand you know where that demand is we've got a pretty good prediction for removal rates and we're trying to stay ahead of that you know we may have gotten a little bit behind on test stand capacity which is one of our constraints and so we're eager to have one or two of those commissioning here in the next couple of months in in our Rockford facility which should alleviate some of that work in process that we have and improve turn time so it's not a necessarily a market share driven decision we're just trying to stay ahead of the growth that we're predicting great thank you welcome and our next question comes from the line of Louis Raffetto with wolf research your line is

Hey, good evening, guys. Hey, Louis. Maybe just talk to the free cash flow. So, obviously, you didn't raise it. I think you were kind of implying that a few things were maybe a little bit worse than you expected, so just can you help me walk through that again?

Yeah. So, Louis, that's right. You would imply that from the earnings gain that we had that we would have, you know, roughly maybe 40 million dollars of free cash flow that would fall through as a result of that. As we've gotten into the year and looked at sort of the supply chain and meeting our customer's demand, we felt that it was best to probably keep our working capital level a little higher, mainly through inventory. And as a result of that, where we are today, we thought it best to hold our free cash flow guide to where it is. I think we understand why we're doing it. We're working through things, but we want to make sure we see that efficiency before we pull the inventory down to make sure that we can meet that customer output.

Okay, great.

And then maybe just back to the question on, you know, the licensing, how are you thinking about balancing expanding your capacity with extending these licenses yeah so you know when we even started the leap gtf program you know in our mind um we we were looking at the at the size of the fleet that was going to you know be in service and say does woodward really want to invest in brick and mortar and all the equipment to service that entire fleet or or do we want to Do we want to let some others, you know, bear those investments? And then the other thing is, in some cases, it's sort of a win-win because some of our customers would prefer to do that work on site to support either their array of customers or their own airline, let's say. And so for us, that's a win-win proposition where our materials, our work scopes, and our technical approach gets utilized and somebody else does the wrench turning and the customer support. I think it's a pretty efficient way to think about it where we're angling to do a significant amount of the work ourselves, but yet share in a percentage of it.

Great. I appreciate it. Welcome.

And our next question comes from the line of Gautam Khanna with T.D. Cowan. Your line is open.

Yeah, thanks. Good morning – or afternoon, I should say.

Definitely, guys.

I was curious, just in terms of, you know, bookings, if you will, in the quarter and since the quarter's end, have you seen any – and just – we're trying to all assess whether the guidance is conservative for the next nine months. Is there anything that slows down in the March quarter? And maybe if you could just talk to broader visibility at both segments of the next, you know, six months, call it.

The easiest way to characterize it, Adam, in terms of orders are that we have plenty of orders to achieve the high end of the guide. It's really a question of can we in our supply chain deliver that much output, continuing to work on our constraints and improve our efficiency and thereby gain some capacity, but also our suppliers delivering on time to support that. It's a delicate dance right now. You know, we maintain a forward deployment at a number of suppliers. We still have 30-ish suppliers on, you know, risk watch and, you know, behind on deliveries and holding up. That's another reason why we have, you know, more inventory than we want is because in some cases we're missing one or two parts to accomplish some key deliveries to customers. And so, really, it's a question of our ability in our supply chain to deliver and some cases, we're actually at the mercy of other supply chains to our customers who are a customer that we have a min-max kind of delivery arrangement with. They may hold us off for a while while they let their supply chain catch up. So, you know, in terms of being conservative, it's the way I would say is we're managing the risks and opportunities and calling it as well as we can see it from today. But the orders are strong and the orders support the high end of our guide. Okay, that's very helpful.

I'm also wondering if you could comment on how the profitability of the commercial aerospace OE business has trended over the last, call it, year or so, now that you're getting efficiencies and ramping rates, how does that compare to the segment average margin at aero?

Well, it's considerably below the blended margin, obviously, but, you know, So the opportunity for us to improve there is really at least twofold. One is if our customers can consistently remain at the higher rates and achieve the rate breaks that are in this year's plan, obviously we'll get volume leverage, which is good. And then if we can get our supply chain aligned in such a way that we can build more efficiently, that we're clear to build for the entire week, all week, and we can run the schedule that we wanted to run at the start of the week, all of that will flow through in terms of waste reduction and impact our financials favorably. So it's really those two things that, you know, we need to come to fruition to keep improving our OE margins on the commercial side.

Is there any way you can give us a dimension for how profitable it is? Is it a 10% business, is it a 5% margin business today?

We have a variety of margins depending on which application it is and what type of product it is. And, you know, we like to think about overall business lifecycle margin, and that's what it's about is getting this installed base out in the field so we can service it. That's probably all we'll say about that.

Thank you.

You're welcome.

And our next question comes from the line of Alexandra Mandry with Truist Securities. Your line is open.

Hi, this is Alexandra Mandry on for Michael Tremoli with Truist Securities. Thanks for taking my question. I was wondering if you could size the China on Highway cost for the divestiture and will there be any revenue spillover into FY27 and are expectations still around $60 million in for FY26, kind of similar to the 2025 results?

Yeah, so as relates to the wind down costs, we're expecting somewhere between 20 and 25 million of cost for related to the restructuring. A lot of that will be related to people cost, and that would be, that would be cash. There might be some expense related to dealing with some canceling contracts and some lingering inventory. So that's kind of on the cost side. The sales for 2027, I do not believe that we will have revenue that leaks over into to 2027, and we currently believe that our $60 million is still correct, even with the wind down.

Okay, great. And then you mentioned you're on the right defense programs, but defense aftermarket appears to be lagging behind defense OEM. Can you provide any additional color there, or are there other opportunities on the horizon that you guys are looking at?

I guess the way I characterize our defense services is it's in some product lines it's relatively steady but in a number of product lines we get a batch of work in from the customer repair depots and we have batches of spare parts orders for the work that's being done in the repair depots and we have so some product lines are steady and then some are kind of lumpy so you can see some quarters we have you know single to double digits growth and other quarters were were flat to down and it's hard to give you much more characterization than that because our visibility into that customer order pattern is somewhat limited we are working we are working hard to try to get some more stable demand and some you know private public partnership kind of operation opportunities uh so we're off working the pipeline but it's a little early to say that we'll have a better handle on that order stream anytime soon great and i just had one last one recently the commander of the air combat command commented that the hypothetical 1.5 trillion 2027 and fence package would be sent spent on spare parts to give aircraft ability a boost how would you see this playing out and what impact could you see for Woodward it's hard to say how how that would work for Woodward because we don't have a visibility into the current inventory that's already out there to know whether there would be a gap for our hardware or not that would need to be fulfilled but that's something that if they're they're serious about that priority I I assume they'll start interrogating suppliers for capacity to deliver, and that might be our first indication that that could be an opportunity for Woodward.

Great. Thank you.

You're welcome.

And Mr. Blankenship, there are no further questions at this time. I will now turn the conference back over to you.

All right. I'd just like to thank everyone for joining us on the first quarter call. Look forward to talking with you next time.

And ladies and gentlemen, that concludes our conference call today. A rebroadcast will be available on the company's website, www.woodward.com, for one year. We thank you for your participation in today's conference call, and you may now disconnect.