Woodward, Inc. Aktie

Ladies and gentlemen, thank you for standing by. Welcome to the Woodward, Inc. Second Quarter Fiscal Year 2026 Earnings Call. At this time I would like to inform you that this call is being recorded for rebroadcast. [Operator Instructions]

Joining us today from the company are Chip Blankenship, Chairman and Chief Executive Officer; Bill Lacy, Chief Financial Officer; and Dan Provaznik, Director of Investor Relations.

I would now like to turn the call over to Daniel Provaznik.

Thank you, operator. We'd like to welcome all of you to Woodward's Second Quarter Fiscal Year 2026 Earnings Call. In today's call, Chip will ment on our strategies and related markets, Bill will then discuss our financial results as outlined in our earnings release. At the end of our presentation, we will take questions.

For those who have not seen today's earnings release, you can find it on our website at woodward.com. We have included some presentation materials to go along with today's call that are also accessible on our website, and a webcast of this call will be available on our website for 1 year. All references to years in this call are references to the company's fiscal year unless otherwise stated.

I would like to highlight our cautionary statement as shown on Slide 2 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. These elements can and do frequently change. Our forward-looking statements are subject to a number of risks and uncertainties surrounding 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-U.S. GAAP financial measures. We direct your attention to the reconciliations of non-U.S. GAAP financial measures, which are included in today's slide presentation and our earnings release. 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 second quarter 2026 earnings call. I'm pleased to report that Woodward delivered an exceptionally strong second quarter. Our team continues to execute with focus and discipline to meet ongoing robust demand across both our Aerospace and Industrial segments. Before we get into the results, I want to take a moment to acknowledge the complex global environment we're operating in.

I'd like to thank our Woodward security professionals, our leaders and members in the region for their vigilance in keeping our team members operating in the Middle East safe.

I also greatly appreciate our customers in the region for their collaboration on safety and coordination as we adjust projects that are underway there.

While the safety of our team is our first priority, we're also closely monitoring broader geopolitical developments and how those might impact defense spending or airline traffic. If those impacts do occur, we expect them to be felt in fiscal 2027.

Let me turn to a few financial highlights for the quarter. The second quarter marked a significant milestone for Woodward as we surpassed $1 billion in quarterly sales for the first time in our history.

Sales increased 23% year-over-year reaching all-time highs in both aerospace and industrial. We also delivered margin expansion, including record quarterly adjusted earnings per share, up 34% from the prior year. These results reflect the strength of our end markets, the benefits of our strategic focus and the steady progress we're making in our operations.

Our members' tremendous efforts and dedication to continuous improvement not only enabled us to deliver another quarter of outperformance but also positioned us well for the second half of the year.

While we are monitoring uncertainties in the geopolitical environment, we're raising our full year sales and earnings guidance based on our second quarter results and confidence in the remainder of 2026.

Turning to our markets. Here's a breakdown of what's driving the robust demand in aerospace and industrial and what it means to Woodward. In Aerospace, commercial aircraft build rate increases are coupled with overlapping maintenance cycles of legacy and current generation fleets. In Industrial, we see power generation demand expressed in both power gen and oil and gas end markets. These market drivers create durable growth opportunities for Woodward.

Our challenge in this environment is to continue to expand our capacity and that of our supply chain in ways that are well managed and resilient. We are doing the right work to achieve these outcomes.

At times, however, we've seen demand outstrip our activities like dual sourcing projects or our additional test and procurement, installation and calibration, which are 2 real examples of what constrained output for us last quarter.

In Aerospace, we saw expected growth in both commercial and defense OEM along with continued strength in commercial services. Legacy services activity remains solid, and we're seeing steady increases in volume for our control systems on LEAP and GTF engines. Shop inputs remained steady and we haven't seen any decreases as a result of airlines recently announced capacity and utilization reductions.

In Industrial, Momentum continued across all our major markets, including oil and gas, transportation and power generation. Our ability to deliver on this robust demand reflects strong execution across the company. Moreover, our team is managing order growth while simultaneously undertaking numerous critical projects to optimize our portfolio, strengthen our competitiveness and position Woodward for long-term growth.

We remain focused on our value drivers: growth, operational excellence and innovation. Our profitable growth pillar contains both organic and inorganic lines of effort along with selective divestitures and investments in capability, efficiency and capacity. These projects are changing the game in how we operate. They're also allowing us to focus on areas with the greatest potential to strengthen value creation.

Our recent announcements reflect purposeful portfolio management decisions that our team has been working to activate over the last 1 to 2 years. In March, we closed the acquisition of Valve Research and Manufacturing, adding the premier designer and manufacturer of solenoids to the Woodward portfolio of control systems. These are critical enabling technologies for current and future aircraft with next-generation single-aisle platforms clearly in our sites.

We also see opportunities related to industrial gas turbine control systems. Integration is progressing well as we welcome our new team members in Southeastern Florida.

We also announced the sale of our Niles-based pilot controls product line to Ontic, a mutually beneficial transaction that will enable us to refocus resources.

In addition, we communicated the relocation of servo valve production lines from our facility in Santa Clarita to Rockford. Rockford is our world-class servo technology design and manufacturing center where we intend to achieve the necessary quality and delivery improvements required for our customers and shareholders.

In Industrial, our actions to wind down the China On-Highway product line remain on track and last-time buy volumes are reflected in our second quarter results.

All of these actions streamline and strengthen our portfolio and sharpen our focus on our most attractive near- and long-term growth opportunities. These decisions allow us to serve customers better on our current book of business. And by trimming product lines that don't have a path for us to be best-in-class and by moving work to where we can be more effective and efficient, we can focus on partnering with our customers to tackle their biggest challenges with their next generation of products.

Our 2 biggest construction projects, Spartanburg and Glatten are both on track. Our new facility in Spartanburg, which will be the location for Airbus A350 spoiler actuation systems is on schedule. Walls are erected and floors are being poor as we speak. We are on target to be operational in 2027 and begin deliveries the following year.

Our Glatten expansion to deliver more diesel fuel injectors for data center backup power is almost complete. We have moved over 100 machines within the new hall and legacy areas to perfect flow. Our teams have demonstrated the major achievement of small batch flow and customers will see substantial capacity increases with reduced lead times. This will translate into cost productivity and better inventory turns.

While I've been vocal with many analysts and investors that Woodward has the facilities and capacity to support the ongoing power generation demand and data center accelerator to that demand growth, multiple customers have recently shared potential increases to their forecasts. We are working with our customers to evaluate the opportunities and capacity options.

Shifting to growth in ARO MRO, the volume on LEAP and GTF is growing quickly. We continue to increase capacity at our Rockford and Prestwick sites with Kaizen activities focused on flow and turn time. We have added test and capacity at Rockford, and we are progressing with the expansion plans for Prestwick.

As we've indicated in prior earnings calls, we have a strategy to perform repair and overhaul service in-house as well as through license providers that will deliver to OEM standards. This approach allows us to optimize our capital and internal resources and support our airline customers in the way they prefer to contract for maintenance and repair. It is a well-respected open maintenance model that we have refined to suit Woodward's strategy on LEAP controls components.

Last week, we announced new partnerships at MRO Americas, including new licensed repair service facility agreements with Lufthansa technique and Air France KLM as well as a new distribution agreement with AAR. We are thrilled to be partnering with industry leaders in MRO and material support. These partnerships expand our global service network, increase capacity and give airlines flexibility in how they contract for service.

Moving to our operational excellence pillar. Investments in automation continue as we execute projects as simple as increasing the closed door machining time as a total percent of the job and as complex as full assembly and test automation with vision systems and integrated inspection.

We're also introducing repeat automation projects to additional sites leveraging the automation lab in our Rock Cut facility. This lab was recently recognized by the Manufacturing Leadership Council as leading the way in manufacturing excellence.

I see firsthand the results of continuous improvement nearly every day. I was recently visiting the industrial SOGAV value stream in our Fort Collins site and was impressed with an automated cell that allows 1 operator to manage 3 machines and turn a production bottleneck and staffing challenge into a high-speed machining cell that can outrun our current demand forecast. We need both capacity and productivity to achieve our goals in the long term. To us, it's equally exciting to create value for customers and for shareholders.

As indicated by the list of projects I described above, our team is managing a high level of activity across the company, while at the same time, improving delivery to our customers and our financial results.

We continue to invest in our people and our talent pipeline to make sure we have the engineering, manufacturing, business support and leadership needed to enable our growth trajectory.

For example, we recently launched a rotational program to develop the next generation of Woodward leaders with the first cohort starting in June, yet another step to build a high-performing organization designed for the future.

Turning to innovation. Innovation has always been and will continue to be a major competitive differentiator for Woodward. As I said last quarter, we're turning from pure technology development to more technology demonstration activities with our aerospace customers. We have entered into collaborative agreements with many of our current customers to work together on trade studies and demonstration programs. This is an exciting time to be an innovator with a track record of industrialization. We will speak more about this trend at Investor Day late this calendar year, but you will see aerospace R&D expenses beginning to tick up this year and more so in the years that follow as future aircraft time lines firm up.

In Industrial, 1 focus is on a new actuation platform to provide precise fuel and error control on reciprocating engines that will deliver more customer value and is designed for a more efficient automated production system. It is more compact in size and produces a broader torque range than prior models, which allows us to simplify the product portfolio and use this platform in many applications. The product will enter service in 2027.

Our priorities remain clear as we head into the second half of the year, meet OEM demand growth deliver world-class service across our installed base, including legacy aerospace, LEAP GTF and industrial gas turbine systems and demonstrate customer value on key technologies to position Woodward for increased content on next-generation single-aisle aircraft. We are entering the second half of the year from a position of strength, and we'll continue to invest with discipline and focus to deliver long-term shareholder value.

With that, I'll turn it over to Bill to take you through the financials in more detail. Over to you, Bill.

Thank you, Chip, and good evening, everyone. As Chip mentioned, Q2 was a strong quarter. Quarterly net sales exceeded $1 billion for the first time in Woodward's history coming in at $1.1 billion in the second quarter of 2026, an increase of 23%. The significant growth reflects strong demand and increased output in both aerospace and industrial. We achieved earnings per share in the second quarter of 2026 of compared to $1.78. Adjusted earnings per share were $2.27 compared to $1.69. We generated $38 million of free cash flow in the second quarter.

At the segment level, Aerospace segment sales for the second quarter of 2026, were $703 million, an increase of 25%. The strong growth was primarily driven by commercial aerospace. Commercial Services increased 36% and reflecting higher repair volume to support the continued high utilization of legacy aircraft as well as increased LEAP and GTF activity.

In addition, spare LRU sales growth was strong in the quarter, with volume consistent with the previous 2 quarters.

Commercial OEM sales were up 30% and we believe destocking is largely behind us as their output is now more aligned with current airframers build rate.

Defense OEM sales grew 9% and primarily due to increased JDAM pricing that took effect in the fourth quarter of 2025, and defense services grew 8%.

Second quarter Aerospace segment earnings were $158 million or 22.5% of segment sales compared to $125 million or 22.2% of segment sales.

While the strength in commercial services, higher commercial OEM volumes and solid price realization drove meaningful margin expansion, this was largely offset by planned strategic investments to support future growth and inflationary pressures. This reduced the aerospace flow-through in the quarter resulting in a net margin increase of 30 basis points. These strategic investments include enhancements to our manufacturing capabilities to deliver the content on current platforms, incremental R&D tied to early-stage efforts to compete for the next single aisle aircraft platform and an enterprise-wide ERP upgrade.

While these initiatives are impacting margins, they are critical to positioning the company for sustained long-term growth, and we expect these investments to continue.

The flow-through in the full year 2026 Aerospace guide is expected to be at our targeted rate of approximately 30% to 35%.

Turning to Industrial. Industrial segment sales for the second quarter were $387 million, an increase of 20%. Core industrial sales, which exclude the impact of China on highway, increased 19% in the quarter, driven by higher volume, price and favorable foreign currency impacts.

Marine Transportation sales were strong, increasing 34% and reflecting higher shipyard output and services activity.

Oil and gas sales grew 18%, driven by higher volume, primarily related to greater midstream and downstream gas investment.

Power generation sales increased 7%. Excluding the impact of the prior year combustion business divestiture power generation sales grew in the high teens on a percentage basis. This was driven by increasing data center demand for both base and backup power generation.

Outside of our core industrial business, China on-highway sales were $29 million in the quarter. We expect approximately $30 million of sales in the third quarter and minimal sales in the fourth quarter.

Industrial segment earnings for the second quarter of 2026 were $66 million or 17% of segment sales compared to $46 million or 14.3% of segment sales.

Within our core industrial business, margins were approximately flat at 14.7% of core industrial sales, as strong price realization and higher sales volume were partially offset by inflation.

In addition, margins were negatively impacted in the quarter due to a reserve for a product performance claim.

Excluding the reserve, core industrial margins would have been in line with Q1. The China on-highway business added an additional 230 basis points of margin growth in the quarter.

Nonsegment expenses were $45 million for the second quarter of 2026 compared to $27 million.

Adjusted nonsegment expenses in the second quarter of 2026 were $38 million compared to $34 million.

At the consolidated Woodward level, net cash provided by operating activities for the first half of 2026 was $205 million compared to $112 million largely driven by higher earnings.

Capital expenditures totaled $97 million for the first half of 2026. We continue to expect a meaningful increase in capital expenditures over the next 2 quarters consistent with our guidance for the full year.

As Chip mentioned, construction of the Spartanburg facility to support future A350 production is progressing as planned. We remain on track to finish the building over the next few quarters and are beginning to purchase production equipment with the site expected to become operational in 2027.

In addition, we continue to make strategic investments to support growth related to current platforms, including automation, preparing for increased LEAP and GTF service activity our ERP upgrade and product line moves.

We generated $109 million of free cash flow in the first half of 2026 compared to $60 million, driven primarily by higher earnings, partially offset by higher capital expenditures.

As of March 31, 2026, debt leverage was 1.4x EBITDA. We continue to allocate capital according to our priorities, supporting organic growth, selectively pursuing strategic M&A opportunities and returning capital to shareholders through dividends and share repurchases.

Regarding strategic M&A, we recently completed the acquisition of Valve Research & Manufacturing. Consistent with our strategy of pursuing targeted, high return opportunities that enhance our capabilities and improve our position to compete for the next single aisle aircraft.

In addition, in line with our portfolio optimization efforts, we recently announced the divestiture of our pilot controls product line, which we expect to close by the end of the year. We are building a stronger, more focused Woodward as we invest in high-growth opportunities and expand in the right areas to position Woodward to create additional value for shareholders.

In the first half of 2026, we returned over $355 million to stockholders through share repurchases and $36 million in dividends. Our strong balance sheet provides flexibility to move decisively as compelling opportunities emerge.

Lastly, our fiscal 2026 guidance still assumes the return of between $650 million and $700 million through dividends and share repurchases.

Turning to our 2026 guidance. Based on our strong second quarter performance and confidence in the second half outlook, we are raising our 2026 sales and earnings guidance. For 2026, we now expect the following: Aerospace sales growth between 21% and 24% and with margins increasing to be between 23% and 23.5%. Industrial sales growth between 18% and 20%, and with margins increasing to be between 18% and 18.5%. We now expect total wider sales growth between 20% and 23%, and adjusted EPS between $9.15 and $9.45. Free cash flow is still expected to be between $300 million and $350 million, and capital expenditures are still expected to be approximately $290 million.

We expect to continue to maintain higher levels of inventory than previously anticipated as we prioritize mean customer demand while we strive for better alignment for the end-to-end supply chain. We have a number of inventory initiatives underway, which should drive improved free cash flow generation in 2027. We now expect our average diluted shares outstanding to be approximately $61.5 million. Adjusted effective tax rate guidance is unchanged.

This concludes our prepared remarks on the business and results for the second quarter of fiscal year 2026. Operator, we are now ready to open the call to questions.

[Operator Instructions] And our first question comes from the line of Scott Mikus with Melius Research.

On a sequential basis, your commercial aftermarket sales were up 12% in the opening remarks, I think it was mentioned that the LRU volumes were roughly consistent with the prior 2 quarters. Since the quarter has ended, have you seen a drop-off in orders for spare LRUs. And are you concerned that if there is a broader slowdown in the aftermarket the amount of LRUs in the field could result in destocking pressures in the back half of this year or early in '27?

Yes, Scott. Let me jump on the front part of that. And then Chip, maybe the second part. But as we head into third quarter, and as we've mentioned, the these orders for these spare LRUs are rather short cycle, so we don't have a ton of visibility. But we're comfortable that sequentially, Q3 spare are used are in line with what we've seen in the first 2 quarters. And again, from a financial forecasting standpoint, tough to say what Q4 looks like currently. But Chip, I don't know if you want to...

Yes, we've certainly seen some airline signaling that they're removing a little bit of capacity. They're parking some planes. But none of the parking activity exceeds any of the forecasts that were already in play. And we haven't seen any drop-off in inputs to our shop for -- from LRUs for repair. And we haven't seen any slowdown in the order rate for spare LRUs. And so there's always assumptions in the forecast, but we haven't seen any indications in our direct connections with customers to indicate that we're going to see a slowdown inside our fiscal year.

That being said though, we are obviously monitoring the situation at the higher level, geopolitical and macroeconomic. And as far as what that means for FY '27, we'll all have to ride a little further along to see where that goes.

Okay. And then a lot of energy infrastructure in the Middle East has been damaged in the ongoing conflict and it will need to be rebuilt. Just curious how you're thinking about that opportunity for your industrial business are you receiving RFPs from your customers to support that reconstruction, fully understanding that, that probably won't hit the P&L for next year, though?

I think we're a little bit further down in the supply chain to be seeing initial outreach on that for anything except service activity. So we have some ongoing projects, and a number of them are back up and running as far as service for our customers, be it on the valve type equipment or on the control -- electronic control systems for gas turbines and power plants. So that activity is ongoing. Some of the things that need to be rebuilt as the customers and operators reach out to EPC type companies that will flow down to us and we haven't seen anything along those lines yet. But there'll probably be some opportunity.

And our next question comes from the line of Sheila Kahyaoglu with Jefferies.

We could focus on margins for both Aerospace and Industrial. So first on Aerospace, just first half margins just under 23% with fiscal Q2 at 22.5%, yet you raised the full year to 23% at the high end. Can you just talk about what drives that second half margin expansion? What are the puts and takes?

Yes, I'll just let Bill start there, and I'll jump in at the end.

Yes. So Sheila, we do continue to see good growth in -- on the services side of the business. And obviously, that helps our margin rates while we continue to see the volume growth, which creates leverage. And then as we've been talking about Chile, we've been investing and working hard on our lean activity and that work is paying off as we see the shipments increase. So those are some of the key things we continue to have good pricing in aero and are managing our inflation well. So our -- so we're seeing that positive flow through to our bottom line as well.

Okay. And then maybe on Industrial core margins, they stepped down almost 300 bps.

Yes. Sorry, Sheila, you ask that. Sorry, in Q2, we did have a reserve that we put up and that impacted Q2 margins for core industrial. If you back that out, the margin rates are on the bottom line with what we saw in Q1, and we expect the second half to be more aligned to that -- what we saw in Q1. And operationally, what we saw in Q2, we expect that to continue in the second half.

Yes. Maybe just -- sorry, can you expand on what that product reserve was? What drove that? How big was it?

Yes. So it's simply a matter of a long-standing product development program with the results that we see a little bit differently than our customer sees it. And that's about all we'll able to share at this time, it's a matter that's being undertaken to the legal process. So we're not going to comment much more on it.

And our next question comes from the line of Noah Poponak with Goldman Sachs.

Chip, everyone is trying to figure out what's going to happen with aerospace aftermarket. I guess as you described not really seeing much yet. I'd be curious to just hear given your experience in the market over a long time, like why do you think you haven't seen anything yet? Why do you think the airlines are not responding that much yet? And when you talk about the possibility of there eventually being a response and seeing that in your fiscal '27? If it were to happen, what would make it happen? What's the threshold? Is it a higher fuel price the duration of fuel price, just what are your customers telling you? And then is there any way to frame or think about Woodward relative to the market because you have so much more content on newer products versus older product, if capacity is trimmed or things are retired out of the back end of the fleet, is it safe to assume you see much less of that than the average player in the space?

Okay. Noah, I may ask you for a repeat of the second half of the questioning, but I'll jump on the first half. I think you used the word duration, and I think that's the main question that is unanswered at this time in terms of what happens to fuel prices.

My experience in situations like this is the reason things haven't happened very quickly from a negative standpoint is that there's still a strong traffic demand out there. And then the airlines that have decided to try to pass along price to the airline customer that has not resulted in destruction of demand. And so I think everyone is kind of a little bit walking on egg shells, trying to see how much of this cost impact that airlines are seeing from oil prices can be passed on from passengers about reducing load factors on flights. They've taken some very smart decisions to take out some lower load factor mid-day, mid-week city payers, I think, and put some higher fuel-burning aircraft to the site. So all those are sort of prudent actions to take a look and see what's going to happen next from a traffic standpoint. Demand is still strong. So I think people are continuing as they were with their maintenance programs. And if the duration and the price of fuel continues to climb, then load factor breakeven points between city payers is going to cause more planes to be parked and maybe there'll be some destruction of demand if prices go up too much. So none of those if statements that I said have happened yet. So I think it's business as usual, a little bit on the maintenance side. Some of our peers are -- may seem like they're being a little more cautious with their quarterly results announcements. But if I remind everybody, we're halfway through our year. So we've got a little bit more in the rearview mirror already accomplished on the books. We've got a little less in front of us to ride on this duration question than our peers do. So hopefully, that sorts that out.

Second question, I think you asked was about what's specific for Woodward having higher content on the current generation of narrow-body, the higher technology fleet with better fuel consumption performance. I think from our standpoint, legacy narrowbody repair business continues to grow much to my -- a little bit of a surprise, and we didn't forecast it growing quite as much year-over-year or quarter-to-quarter as it did in Q2. So things are still looking good on legacy utilization front. But if we come to an oil shock that's even more and longer duration than we see right now. If the newer technology fleet gets utilized much more than the older technology fleet for Woodward, it happens to be good math. It's not good for the whole industry. We don't wish that on the industry. But if that does happen, we have a little bit of a hedge there because we have a faster growing, higher content position on that fleet.

Okay. That is super helpful. I appreciate all that. And then just a follow-up on the Aerospace margin. Would it be possible to quantify the incremental investments you made in the quarter, just so we can all sort of keep tracking the underlying trend you've been experiencing there? And then on the pricing front, you guys have been providing kind of total company and then directional within the aftermarket pricing any update you could provide on what happened there in the quarter?

On the first piece, Noah, I -- what I'll say is we're focused on making sure that we've got the systems, the processes, in place for us to continue to execute on our key imperatives. We are going to be diligent and thoughtful about how we increase that investment, not getting too ahead of the volume, 2 ahead of the volume growth, but not being so far back that we can't execute on it. And so as you can see, there's still margin expansion that we're looking for in the results based off of our guide. And so I think we're being responsible and reasonable but reasonable with how we are increasing the spend as it relates to those strategic projects.

Yes. And I'll just jump in and say that Bill had alluded to this in some of his remarks, but we have increased our R&D spend a little bit in aerospace. Much of that is aimed at the preparation, the technology demonstration projects. We're working with our customers. We've invested in manufacturing engineering to accelerate our automation journey, which also feeds how we will industrialize for the next single aisle aircraft components that we win. And as well, we've been building that plant in South Carolina and we are starting to staff up there some of our very key positions like plant leader and value stream leaders and some advanced manufacturing engineers. And so some of these our longer-term investments, some of the automation investments will provide returns sooner. But some of the staffing up that we're doing and the R&D expenses are really aimed towards the next generation.

And then Noah, I think you had a question on price, if that's right. And the price in the quarter was around 6.5%, 7% and that's roughly what we projected to be for the total year. Aero being a little bit stronger on the price side than industrial.

And our next question comes from the line of Gavin Parsons with UBS.

What drove the Aero revenue guidance raise kind of between the subsegments? And then within aftermarket, how much of that is kind of the spares provisioning drop in versus repair and overhaul work?

Without getting quantitative about it, I'd say that the commercial services is really the largest piece of the increased revenue gain. We had forecast the OEM to be growing substantially and maybe hedge it back a little bit in terms of how we were thinking about it based on what the aircraft and engine OEMs would actually come through with orders for and sort of meter us to. But it's been a little bit more on the demand side from the OEM. So it's driven a little bit of the gain and the forecast guide the commercial services kind of looking in the rearview mirror and thinking that, that will sustain at least through 3Q, as Bill said, with the higher LRU orders. But the repair is strong across the board in commercial services, wide-body, legacy narrow-body, regional and the LEAP GTF, all contributing to revenue and earnings growth.

And Gavin, just to expand on that again. Obviously, the raise and guide was partly recognized a strong Q2 performance, but also second half performance. Commercial defense OEM on the industrial side, most of that OEM and we see, especially in the fourth quarter, OEM being -- growing nicely, and that's a big part of the rates for the second half. And obviously, that will that has a different kind of flow-through pattern than the services that we saw in the second quarter and in the first quarter.

Okay. That's very helpful. And then, Chip, you pointed out that airlines are maybe sidelining some of the least fuel-efficient aircraft. I think over the long run, you guys have talked about flight hours as being the key metric driving your aftermarket growth. But if it's those older, less fuel-efficient aircraft being sidelines, is the risk going forward more about accelerated permanent retirements, delayed shop visits or maybe cut shop visit scope?

Just to clarify, are you talking about for the legacy fleet or in general?

In general, is the risk more about shop visits or retirements and less about flight hours?

Yes. I think for the legacy retirement for the legacy fleet, certainly, the risk is about retirement and part out and not getting another shop visit on our LRU, whether it's a V2500 fuel control or CFM56-5 HMU. And so that risk though, is like the end-of-life risk for the oldest part of that fleet they still pick a number of 40% of airplanes with engines and LRUs that only seen 1 shop visit and are quite capable assets. The airlines are going to continue to fly. So flight hours is still going to correlate with how that equipment comes off and comes in for shop visits with us. And -- but the sort of end of life for the oldest A320 from our CEOs from our standpoint, that's going to happen based on a combination of traffic demand, price of fuel and OEM delivery rates, and we'll monitor that closely.

And our next question comes from the line of Pete Skibitski with Alembic Global.

Great quarter. Yes. I just want to circle back to Sheila's question on Industrial margin. I just want to think about the right way to think about it going forward. If we exclude the provision in the second quarter, it sounds like you're maybe a tad over 17% on core industrial margin in the first half. And with the new guide, you get a little bit of a boost in the third quarter from China on-highway, but then nothing in the fourth quarter, but it seems like you'd still be exiting around 18% or so in the fourth quarter. So it just seems like a lot of nice momentum in core industrial margin year-over-year. And so is the right way to think about it, the 18% to 18.5% is a reasonable range to think about for 2027 or maybe 17.5% in the low end? Or is there any logic wrong there?

Yes. We're -- just I'm real happy about 2026, Pete, and where that is. And I think how you laid it out is right. We continue to work hard on all our margin and productivity margin expansion and operational excellence initiatives. And we'll be talking to you real soon about how that all comes to play. But I think if Randy was here, he says he's not -- he would say he's not planning on giving up any ground, but we'll see how it all comes out in the mix. as we start talking about '27.

Okay. Fair enough. Just 1 follow-up. On the pilot controls product line sale, is it fair to conclude that this product line has less aftermarket than the engine portion of aerospace. And so I'm just wondering if the divestiture is sort of margin accretive for you in aerospace? And how much revenue is involved in that product line?

Well, I don't think we'll share the revenue specifics there, but it's not super significant. It is accretive to carve that out for us. That's 1 of the criteria we would use to examine a divestiture opportunity a while back in our strategic review process, we just identified this as an area where we would have to put a lot more resources into this to become a leader in the industry in this area. Where we are a leader is in some of the enabling technology components and subsystems that go into pilot controls like throttle quadrants. So some of the precise motor controls and motors themselves as well as sensors and the LVDTs and hall effect sensors and things like that, things that we can bring to the party, and we will remain a supplier of those components to the company that we sold the main business line too. So we'll retrench into the places where we're the most competitive and have the most value add for customers. and pass that along. Now it does have a good amount of service business to it, which made it kind of an attractive product line to sell for the buyer. So -- but still, from our standpoint, it was -- it's accretive to let it go.

Okay. So Niles will remain open. There are more production there than the pilot controls, that's right?

Yes. This was a relatively small value stream in the Niles facility.

And our next question comes from the line of David Strauss with Wells Fargo.

Chip, I think if I caught it correctly in your prepared remarks, you talked about additional step up in interest from your IT customers and the potential that you might be looking at some sort of capacity expansion to be able to handle that interest. Did I get that right? And maybe if you could expand on that?

Yes, not just our IGT customers. So gas turbine, reciprocating engines, diesel powered, natural gas-powered backup prime power applications. So it's like across the board, multiple OEMs in each of those categories over the last really a month or so have come to us and said, we want some capacity studies for these kinds of forecast between now and 2030 plus. And so we've been sort of digesting those requests. And it's not 1 customer. It's not 1 technology, but it's largely driven by data center caused power generation demand. And so we're looking to respond to these customers. But the reason I wanted to lay that out and what may seem like an early way in this earnings call is that as I've been meeting with investors and analysts, I've really kind of been firm that based on everything I see from our customers, we have the footprint, and we have the ability through Kaizen and other continuous improvement, elimination of waste, lead time reductions, things like that, we could make our way to sale for the capacity that's needed. But this new later breaking information says that maybe we need to consider capacity increases.

SP29154009 Okay. I guess we'll check back in on that later, where you come out. .

If I missed it, I apologize. Did you talk about where LEAP GTF aftermarket revenue volumes, however you quantify are relative to legacy at this point and where -- if the crossover point has changed?

Yes. So I didn't mention it in the prepared remarks, but thanks for the question because it's 1 that we talk about quite a bit. What's really interesting to me and our team is that as we grow LEAP in a substantial way, the legacy narrowbody fleet continues to provide inputs to our shop, and we're like, okay, it's kind of growing at a good clip still for the legacy fuel control units, especially I'm not changing the forecast right now. We said sort of end of '26, sometime in '27. We still think that's a reasonable assumption. The things that could pull that in, the fuel price shock that we talked about could reduce the rate of input for the legacy. And that would be like a not so interesting way to have the crossover be pulled in. we like it to go further to the right. The other thing I would say, just to give a little bit more color to what we're talking about is that right now, this quarter and even last quarter, the total amount of service revenue is about the same for LEAP GTF compared to the legacy narrow-body, if you include the spare LRU items. So from a repair standpoint is the crossover that we keep talking about looking for is a few quarters out in the future. But I just wanted to share that we're already kind of in the very similar numbers from LEAP GTF compared to V2500 and CFM-5, if you include all the different kinds of service products that we offer.

That's great. You predicted my next question or follow-up question.

And our next question comes from the line of Ken Herbert with RBC Capital Markets.

I just wanted to maybe follow up on the free cash flow guide. It didn't change with the sales and EBIT increases. Is that just reflecting as you continue to talk about higher working capital spend or working capital as a percent of sales? Is that the right way to think about it? Or is there anything else impacting on the free cash flow side?

No, Ken, I think that is the right way to think about it to simply stated.

Okay. Okay. That's helpful. And I wanted to follow up on the announcements with LHT and Air France KLM. How quickly will those scale as sort of third-party MRO providers? And should we expect maybe a movement of a block movement of spare parts or inventory at some point in the next few quarters as they ramp or maybe as part of these agreements?

Yes. So the rate-limiting step for any of our licensed service providers is going to be getting test stands in procured, installed and calibrated. So that's 9 to 12-plus months away depending on where each of the folks are in the procurement cycle of that. So it's definitely not a 2026 kind of thing, and we'll give some color to how we expect the standing up of these partner providers to affect our service business is along with our Investor Day information late in the calendar year.

And our next question comes from the line of Christopher Glynn with Oppenheimer.

So I was curious if you've -- curious, have you guys evolved any like different angles on visibility to the China LRU markets?

As far as new angles, I would just like the easy answer is no on that. But what I would say is that we're starting to see just like more across the board as expected, based on airplane deliveries, customers ordering spare LRUs to provision for their fleet uninterrupted operations and the maintenance cycles that are coming. So I think we can kind of take the China moniker off the table for now, and they're ordering kind of like you'd expect them to order based on how many planes they have.

Okay. So maybe a little bit of a tempest in the TPO discussion for the past couple of quarters, sounds like. And then curious on the L'Orange model, don't recall like really discussing if they have much military in there. I suspect they do. I don't think your guided missile destroyer program was L'Orange, but rather your power gen business. But I just wanted to check in on that the military business pipeline overall for industrial and as it resides or doesn't within L'Orange?

Yes. So I would consider L'Orange to be 99-point something commercial as far as I know, I don't want to say 100% here, but it's just -- it's not something we think about or consider for what our diesel fuel system business contributes to. As far as the destroyer DDG class that are powered by gas turbines, both for propulsion as well as for onboard power gen, that's really the business that we participate in. It's the electronic control systems for controlling the power from the gas turbine as well as controlling the propulsion systems.

And our next question comes from the line of Louis Raffetto with Wolfe Research.

Maybe, Bill, just on the China on-highway. I know you said $30 million of sales in 3Q. Should we expect to see similar levels of of profitability that we saw in the last 2 quarters?

For Q3, that's correct. Obviously, there is going to be a restructuring charge that flows through. So operationally, Louis, correct, but I do want to make sure I highlight that there is going to be a restructuring cost that comes off. That will be separate as we go through the quarter.

Okay. Great. And then, Chip, maybe just to come back to what you just mentioned about the LRUs. So obviously, as we get to your fiscal fourth quarter, you're going to be coming up on a tough comp. But what I'm trying to understand, based on what you just said is are the LRU sales that you saw this quarter? Are they not China? And it's -- you're kind of saying don't think of this as a separate bucket anymore and everything is kind of 1 big bucket nowadays? Or is there still sort of a China bucket out there that we need to be mindful of?

I'm seeing the former, which is there's really not a China bucket anymore. That was when we had our first step-up in LRU -- unforecasted LRU sales within a quarter, that was due to a little bit of a surprise order stream starting from China. That lasted a couple of quarters. And then as I kind of was alluding to, the rest of the orders inside the quarter are more spread out to European and U.S. and Latin America and in every other airline that's ordering aircraft and provisioning to support their fleet. So I would put the China bucket behind us for now. and kind of how we see the rest of the year shaping up. We -- as Bill said, we have -- we largely have the LRU orders in hand for 3Q. We have good visibility to 3Q, and it is a good mix of customers. So less risk of being a nonrepeat kind of thing. But our visibility into 4Q is what we would normally see at this point, not fully clear in terms of who's going to order and how much it's going to be. But we have enough confidence in all the different levers of our OE and service businesses in both segments to say we're confident in what we've put up for our guide.

And our final question comes from the line of Gautam Khanna with TD Cowen.

Thanks for getting to me guys. Yes. Good to talk to you guys. I was curious, just, could you quantify what the guidance revision was for just China OH relative to the prior outlook?

What the guidance revision was for...

You really [indiscernible] take that.

Yes. Yes, Gautam. Not much. I mean I think the guide, the upper end to the lower end considered what we're seeing in there for China OH. So I think at the beginning of the year, we said it was going to be around $60 million, and where we've ended up with what we've had and the last time buy, it will probably be somewhere around $90 million in total. So that was sort of within the range of our guide. And so we -- so anyway, that's how we handled it.

Okay. And in terms of profit variance, when you had the $60 million, what was the expected profit? And then if it's 90, what's the new expected profit?

Yes. So we talked a bit about at certain levels, it starts to go beyond breakeven and then it flows through quickly through that point. We are at that point, and so that's what sort of generated. I think in the comments, we said it was worth about 230 basis points this quarter to the overall industrial earnings increase.

Okay. I was just curious what the revision is related to that. We can take it off-line.

Yes, I would just emphasize, Gautam, that the China OH wasn't really driving the revision to guidance. It's more the success we've had in the first half with commercial Aero services and continued strong OE in both segments.

Yes. No, I got you. That's clear too. The -- to Pete's earlier question on industrial underlying margins kind of over time, how far along are you guys in that process of kind of looking at which SKUs to stock, which ones to retire kind of the operational turnaround within the Industrial business. How far along are you in that journey? And do you have any ballpark sense for where margins ultimately can get to in that segment?

Yes. So far, I've always answered that question saying we're in the early innings. But I feel, honestly, like we're in the middle innings in the industrial portfolio rationalization, turnaround, use the word turnaround. I've not really use that, but I think it's an apt description. That team is just really pulled together and made some difficult decisions. You see the China on-highway exit that we're doing, that was a difficult call. Some of the product lines we've exited were difficult calls around small engine and other things like that. But what we're doing now and what you can see now is that we are more introducing a more standard disciplined product management approach to the business. And so I talked about this actuator in my prepared remarks that is going to enter into service in 2027 that's now in the test phase, and we're industrializing that's going to replace a pretty complicated portfolio of actuation for reciprocating engines. So it's not like we looked at the portfolio and said, we don't want to be in that business anymore. We said there's a better way to serve customers here that's going to be more efficient in our factory. It's going to be more resilient in the supply chain and then we're going to -- and the customers are going to get more value from a broader torque range and lower form factor. And so that's the kind of work that's going on in industrial right now. So that's why I think it's the middle innings because we've kind of evolved from -- these are the things we want to stop and these are the things we want to keep doing. And now we're just refining the approach within the places we want to compete.

And if I can add to that, Gautam, as you're talking about where can it go? As Chip has spoken about previously is we're focused heavily on recouping our service franchise there. And we've got to see -- we have a plan. We got to see what the [indiscernible] possible is and how we can get there. But I think that will -- if we're in the middle innings, we've got half game coal on the productivity, the other piece of margin expansion will be how we can grow that service franchise. And I think we can talk more about that when we get to Investor Day and what's the art of the possible for industrial margin rates.

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

Thank you. I'd just like to thank everybody for joining our 2Q call and look forward to talking to you again soon.

And ladies and gentlemen, that concludes our conference call today. A rebroadcast will be available at the company's website, www.woodward.com for 1 year. We thank you for your participation in today's conference call. You may now disconnect.

Ladies and gentlemen, thank you for standing by. Welcome to the Woodward, Inc. First Quarter Fiscal Year 2026 Earnings Call. [Operator Instructions] At this time, I would like to inform you that this call is being recorded for rebroadcast. [Operator Instructions]

Joining us today from the company are Chip Blankenship, Chairman and Chief Executive Officer; Bill Lacey, Chief Financial Officer; and Dan Provaznik, Director of Investor Relations.

I would now like to turn the call over to Dan Provaznik.

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 presentation, we will take questions.

For those who have not seen today's earnings release, you can find it on our website at 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 stated.

I would like to highlight our cautionary statement as shown on Slide 2 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 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 U.S. GAAP -- certain non-U.S. GAAP financial measures. We direct your attention to the reconciliations of non-U.S. GAAP financial measures, which are included in today's slide presentation and our earnings release. 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 outperformance 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 the 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 narrow-body, wide-body and regional platforms. LEAP, GTF and legacy narrow-body 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 improvements 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 Prestwick, 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 license 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 installed 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, Chip, and good evening, everyone. As a reminder, all references to years are references to the company's fiscal year 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-highway 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 volume during the quarter, primarily for China. This appears to have been driven by customer underprovisioning rather than a pull forward of demand 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 destocking began to taper off. Defense OEM sales increased 23%, primarily driven by new JDAM pricing, which took effect last quarter. Overall, we continue to see strong demand for our defense program. 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 pricing, higher volumes and favorable mix, 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-highway, increased 22% in the quarter with broad-based growth across our end markets, price and FX. Marine transportation sales increased 38%, driven 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% of segment sales compared to $40 million or 14.4% 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 multiyear 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 quarterly 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 end markets, 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.

Nonsegment expenses were $37 million for the first quarter of 2026 compared to $22 million. Adjusted nonsegment expenses in the first quarter of 2025 were $28 million. There were no adjustments to nonsegment 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 31, 2026 -- '25, debt leverage was 1.2x EBITDA. 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 full year guidance. We are layering in the first quarter outperformance while keeping changes to the remaining quarters minor. 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 million and $350 million.

As Chip mentioned earlier, we expect to continue to maintain higher levels of inventory than we anticipated as we prioritize the customers' 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.

[Operator Instructions] And our first question comes from the line of Scott Mikus with Melius Research.

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, 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 will knock the peak of that revenue off. But we do -- we have modeled 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 demand. So we are investing in capacity to 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' production rates. If Boeing and Airbus do hit their production rates, could that drive more upside through higher initial provisioning sales for your aftermarket?

We -- that's one of the reasons why I hesitated a little bit on the answer on the revenue for the services side. We don't see new tail logos 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 necessarily in the near term. Over time, that does correlate pretty well. But as we don't see any new logos in the near future, we don't see that as a 2026 opportunity.

As far as the volume goes, I would say that the challenge to our volume on the low side would be softer demand from the OEMs not quite hitting the rates. And the opportunities on the earnings 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'd characterize the arrow looking forward.

And our next question comes from the line of Scott Deuschle with Deutsche Bank.

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?

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

Okay. And 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?

Yes. So, it does. As you see, it did flow through in Q1. 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 and marine transportation this quarter? It looks like around 30% growth in both of them. So, curious if you can unpack that and talk to 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 end 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 is kind of the same thing where the shipyards are full and expanding and having year-over-year growth in their outputs. So there is 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.

And our next question comes from the line of Noah Poponak with Goldman Sachs.

Should we interpret the total company full year guidance revision as you left the remaining 9 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 1Q?

Noah, that is -- yes, that's correct.

Okay. 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 -- they were nice to see in the quarter, but they don't sustain as upside drivers to your prior plan?

Yes. Let me -- I'll take a shot at it. I do think it makes sense. In the rest of the year, we did put in the additional growth related to the build rates that we think 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 in, and that's 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.

Chip, 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. We still have some supplier challenges in terms of meeting all of the demand. And some of our hard capacity constraints in our factories have been limiting our ability to respond to all this demand and the timing that it comes through.

So, I think, that a few suppliers could get in the way and knock down our ability to hit the very highest part of the guide. And then 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 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 risks and opportunities.

Okay. That makes sense. I appreciate that detail. And then could you quantify -- is it possible to quantify for us either in absolute dollars 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 high dollar revenue item and a good profitability item, whereas repairs are a good percentage profitability, but nowhere near the kind of top level dollar. So we like the repair business. It just doesn't have that -- doesn't have as much of a weight per unit turned or anywhere near as a spare LRU. So we like the year-over-year growth that we saw from LEAP GTF. It's still tracking to the plans that we forecast. The legacy narrow-body units are still coming in strong, stronger than we would have predicted a couple of years ago. I really like 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, it sounds like the LRUs can be chunky. 550 is a big number. We're not going to model 50 for the rest of the year. But it also sounds like it wasn't the case that all the upside in the quarter was the LRU. It sounds like you saw it in -- maybe in the LEAP GTF plan and also in the legacy aircraft and engine.

Yes. The wide-body and the regional was probably a little bit more than we would have forecast. So 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.

And our next question comes from the line of Sheila Kahyaoglu with Jefferies.

Congrats on the great quarter. This is [ Kyle ] on for Sheila. On the LEAP GTF mix, I know you also said legacy narrow-body 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 catching up on past dues? Was it just really volume unlock of the factories? And ultimately, how we should think about that cadence as we go through the quarters?

Yes, I'll agree that it was counterseasonal to the past. But I think what we've been working on really hard over the past couple of years is consistent output. And as we've been getting consistent inputs to the system and bringing our turn times down some, we've achieved that benefit. And so 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 output the first week of the year. And we've been working really hard to streamline the input process, the induction process when a customer sends us a unit for repair or overhaul. And I think all these operational factors helped us maintain a steady performance operationally, and that shows through 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 underprovisioning rather than pull forward related to tariffs, 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?

Sure. And I think the way I characterize it as there was an open window for trade really with what I think -- and the concern that, that window might close is my hypothesis for why that activity was so strong in recent quarters. 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 that conclusion.

And our next question comes from the line of Gavin Parsons with UBS Financial.

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

Yes. I think we talked about that last quarter that I didn't do a very good job at that the year before. My hypothesis 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 flattish. We're on the right programs in defense. It's just the MRO for us isn't growing very fast in defense. And that's as much color as I'd put on it at this time, if that's okay, Gavin.

Understood. Appreciate that. And you mentioned, to some extent, turn times limiting growth, but you've been investing, hiring, working on productivity. At some point, are you capacity constrained here? Or are the productivity initiatives starting to show through?

So we're reaching our -- part of our capacity plan where we're adding on to our Prestwick facility in Scotland. I kind of characterize it as a well-positioned facility, not just from a technical standpoint, but it's in an aerospace park that has great workforce reputation and pipeline. It's right across the fence line from GE's Cal facility. So we're in a really good neighborhood there. We're going to be almost 50% to doubling that facility when we add on to it. We're still in the planning phase, but it's a pretty mature part of the planning phase. So we're pushing forward to do that. We've put a couple of test cells in there on LEAP so far, and we're putting more test cells into our Rockford facility. So we have enough space in Rockford, but we needed more space in Prestwick.

And as far as the Woodward facility build-out, that's what we have in our plans for our own in-house service footprint. And we're partnering with some external MRO providers to give some more choice and some more capacity to customers. So that's up and coming.

How does that agreement work in terms of revenue and margin contribution?

So it's just like 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 they'll contract with a customer or they may have a fleet they're already managing. And then we'll provide them spare parts and kits and documentation and technical support.

And our next question comes from the line of Pete Skibitski with Alembic Global.

I think you guys usually disclose this in the Q, but how was pricing this quarter in terms of -- relative to your 5% expectation for the full year? I imagine maybe with LRUs, it was above the expectation.

Yes, Pete. This quarter, we saw at the Woodward level, price come in at about 8%. So slightly higher than a 5%, which we would expect it to be slightly higher as the price compare 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, Pete to be closer to 7% -- and we would expect aero will contribute a little bit more to that than industrial, but industrial is still contributing nicely.

Okay. I appreciate that. And then maybe one for Chip here. Chip, when you guys say you're investing in commercial aftermarket capacity, do you have a sense for how much of your installed base, maybe 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 and 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 can illuminate that.

Yes. So, on LEAP GTF, we don't feel like we're missing out. We're just -- we're delaying both our revenue recognition and our customers ready for install spare status. That's what's behind the turn time approach. We're not concerned about losing market share on that activity at the moment. We've been expanding the capacity with the intent to be right on line with what the demand is externally. So we understand where that demand is. We've got a pretty good prediction for removal rates, and we're trying to stay ahead of that.

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 on or two of those commissioning here in the next couple of months in our Rockford facility, which should alleviate some of that work in process that we have and improve turn times. So it's not necessarily a market share-driven decision. We're just trying to stay ahead of the growth that we're predicting.

And our next question comes from the line of Louis Raffetto with Wolfe Research.

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?

Yes. So, Louis, that's right. You would imply that from the earnings gain that we had that we would have roughly maybe $40 million 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 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 the licensing. How are you thinking about balancing expanding your capacity with extending these licenses?

Yes. So when we even started the LEAP GTF program in our mind, we were looking at the size of the fleet that was going to 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 do we want to do we want to let some others bear those investments? And then the other thing is in many -- 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.

And our next question comes from the line of Gautam Khanna with TD Cowen.

I was curious, just in terms of bookings, if you will, in the quarter and since the quarter's end, have you seen any -- I'm 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 over the next six months, call it? Yes.

The easiest way to characterize it, Gautam, 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 and 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. We maintain a forward deployment at a number of suppliers. We still have 30-ish suppliers on risk watch and behind on deliveries and holding up -- that's another reason why we have 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 and our supply chain to deliver. And in some cases, we're actually counting -- we're actually at the mercy of other supply chains to our customers for 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, in terms of being conservative, I guess 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 the opportunity for us to improve there is really at least twofold. One is the -- if the -- 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 we need to come to fruition to keep improving our OE margins on the commercial side.

Is 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 we like to think about overall business life cycle 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.

And our next question comes from the line of Alexandra Mandery with Truist Securities.

This is Alexandra Mandery on for Michael Ciarmoli with Truist Securities. I was wondering if you could size the China on-highway costs for the divestiture? And will there be any revenue spillover into FY '27? And our expectations still around $60 million for FY '26 kind of similar to the 2025 results?

Yes. So, as it relates to the wind down costs, we're expecting somewhere between $20 million and $25 million of costs related to the restructuring. A lot of that will be related to people costs, and 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 -- see the 2027. I do not believe that we will have revenue that leaks over into 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. The 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'd 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 so some product lines are steady and then some are kind of lumpy. So you can see some quarters we have single to double-digit growth and other quarters 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 hard to try to get some more stable demand and some private public partnership kind of opportunities. 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 defense package would be 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 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 serious about that priority, I assume they'll start interrogating suppliers for capacity to deliver. And that might be our first indication that could be an opportunity for Woodward.

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.

Ladies and gentlemen, thank you for standing by. Welcome to the Woodward, Inc. Fourth Quarter and Fiscal Year 2025 Earnings Call. At this time, I would like to inform you that this call is being recorded for rebroadcast [Operator Instructions].

Joining us today from the company are Chip Blankenship, Chairman and Chief Executive Officer; Bill Lacey, Chief Financial Officer; and Dan Provaznik, Director of Investor Relations.

I would now like to turn the call over to Dan Provaznik.

Thank you, operator. We would like to welcome all of you to Woodward's Fourth Quarter and Fiscal Year 2025 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 presentation, we will take questions.

For those who have not seen today's earnings release, you can find it on our website at woodward.com. We have included some presentation materials to go along with today's call that are also accessible on the website.

Please note that based on changes in market dynamics, the company has refined its industrial end-to-market presentation to better align certain sales within power generation, transportation and oil and gas. Accordingly, sales for the quarters and years ended September 30, 2025 and 2024, have been reclassified for comparability. The reclassification had no impact on total industrial or the consolidated financial results.

A webcast of this call will be available on our website for 1 year. All references to years in this call are references to the company's fiscal year, unless otherwise stated. I would like to highlight our cautionary statement as shown on Slide 2 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 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-U.S. GAAP financial measures. We direct your attention to the reconciliations of non-U.S. GAAP financial measures, which are included in today's slide presentation and our earnings release. We believe this additional financial information will help in understanding our results.

And now I'll turn the call over to Chip.

Thank you, Dan. 2025 was another remarkable year for Woodward. Our team continues to make significant progress, motivated by our purpose to design and deliver energy control systems that our partners count on to power a clean future. Our members' dedication to serving our customers and meeting our commitments to all stakeholders, drove record performance in a number of areas.

Our annual revenue exceeded $3.5 billion for the first time, which was the result of strong performance in both business segments. Aerospace sales increased 14% to record levels with margin expansion of 290 basis points. Industrial delivered healthy sales growth of approximately 10% and excluding China OH and core industrial margin expansion of 110 basis points.

As a result, we delivered all-time high adjusted earnings per share, up nearly 13% compared to the prior year. We achieved these results through a keen focus on our strategy, guided by our values, including integrity, respect and accountability and showing up as humble, yet driven industry leaders as we continue to improve how Woodward serves customers.

Next, I'd like to highlight some notable achievements that created value from last year driven by our pillars of growth, operational excellence and innovation. Starting with growth. Our aerospace team delivered strong growth in defense OEM as predicted and rose to the occasion to deliver on higher-than-expected commercial services demand.

Commercial aircraft delivery rates were lower than originally planned, including impacts of destocking of some Woodward components and systems. In commercial services, our team successfully captured volume growth and pricing opportunities. We experienced more legacy engine MRO volume than planned, coupled with the expected increase in LEAP and GTF demand, which is rising to levels of significant contribution to overall commercial services revenue and earnings. We expect LEAP and GTF repair revenue to surpass legacy repair revenue in late calendar 2026 or early 2027.

For this compare, I'm speaking specifically to the repair activity and excluding spare LRU sales associated with fleet spares provisioning as these sales can be lumpy over short periods of time, but generally correlate with total aircraft delivered over the long term. For example, this past quarter, we received more orders for spare end item than we anticipated with trade and tariff uncertainty contributing to the order surge.

Our Industrial segment delivered double-digit growth in oil and gas and power generation and high single-digit growth in marine transportation. Notably, our industrial services portfolio, ranging from component MRO to Powerplant controls upgrade projects, achieved substantial growth contributing to topline sales and improved mix.

Overall, our strong performance in the fourth quarter and full year 2025 reflects the strength of our strategy and our team's ability to execute. We have increased content on growing platforms in growing markets. We believe we are well positioned for future success. Over the past year, we achieved several key milestones supporting our long-term growth strategy. We completed a strategic transaction to add capability and pedigree to our electromechanical actuation business unit. The acquisition included state-of-the-art horizontal stabilizer trim actuator products on business jet, regional and wide-body commercial aircraft, including the Airbus A350.

This represents our first direct supply contract to Airbus. Integration of the acquired people and products is progressing on plan to capture the full value of the transaction. We won a competitive selection to design and deliver A350 wing spoiler actuators, further increasing our Airbus business portfolio and A350 shipset content. This organic growth project proves our position on a very successful wide-body program as well as prepares us for the next single aisle opportunity by demonstrating our technology, design and industrialization capability.

This win, coupled with our recent acquisition of electromechanical actuation capability, including the A350 HSTA, will raise our total A350 shipset value to approximately $550,000 once we start shipping the wings spoiler actuators, currently scheduled for late calendar 2028.

To that end, we broke ground on our Spartanburg, South Carolina facility construction project in November. This facility is intended to be another showcase advanced manufacturing site, building on our experience with our Rock Cut campus, highly automated and vertically integrated. We will produce the A350 spoiler plus additional aerospace products at this facility.

Within Industrial, our Glatten expansion is ahead of schedule and on track to become operational by mid-2026. This expansion will provide increased capacity to meet the growing demand for data center backup power with enhanced levels of automation, improved flow and higher inventory turns.

To support our growth, we're making increased strategic investments in our company with robust returns for projects that increase capacity and improve productivity with a specific focus on automation.

Turning to operational excellence. We continue to make steady progress. We are focused on improving the fundamentals, and I expect our teams to pick up the pace to improve flow and unlock more productivity in this coming year. Everything starts with safety at Woodward. We continue to roll out our human and organizational performance program to reduce injury risks and increased levels of protection, and we are on track to have HOP in place at all of our sites this calendar year. We're also investing in immersive training for our team leads and first-level supervisors. We are starting to see the benefits as they apply what they've learned, solving problems within cycle time, rebalancing work to optimize labor and create flow and coaching their teams more effectively. I'm excited by our progress so far.

We're also making strides in stabilizing our supply chain. Although we are still experiencing some supplier performance shortfalls, Woodward has made progress in optimizing our supplier network, while helping our strategic suppliers improve their own quality and delivery when required. Industry-wide efforts to stabilize demand signals are benefiting our planning and delivery performance. I'm pleased to see our investments in automation paying off by reducing our demand for labor. We're also realizing the expected benefits in safety, quality, delivery and cost as we refine our project execution and rebalance value streams.

Our automation focus is on jobs with high turnover repetitive or economically challenged tasks and high applied force requirements. Our workforce is embracing these projects and understands the benefit in their daily work. We will continue to invest in automation in 2026 and beyond.

Innovation is alive and well at Woodward, and we made prudent investments in technology development for new military programs, the next single aisle, alternative fuels, automation and services delivery. We continue partnering with our customers to shape how our technology solutions and elevate the value of their next-generation products.

As we look ahead, our priorities for 2026 are centered on strong execution, including capturing continued growth in our markets, driving operational excellence and meeting our customers' evolving expectations.

In Aerospace, we are prepared for increased OEM orders as the aircraft manufacturers stabilize and increase production rates and as defense customers continue to signal strong demand. In commercial services, we are prepared for MRO growth as legacy aircraft continue to fly longer and more LEAP and GTF engines enter their maintenance cycles. We do expect somewhat muted topline growth in commercial services compared to 2025, which benefited from outsized demand for spare end items and some advanced buying.

In Industrial, we are ready to meet sustained demand across our core markets of transportation, power generation and oil and gas and continue to expand our capabilities and global presence in industrial or regional repair, overhaul and upgrade offerings.

Our guidance for 2026 reflects our continued confidence in the growth trajectory across our segments and our continued operational discipline. We are on track to deliver the 3-year sales and earnings targets we set at December 2023 Investor Day. We do expect a modest adjustment to our cumulative free cash flow target as we make the strategic decision to allocate more capital toward organic, high-return growth investments, including automation at multiple sites and the Spartanburg facility.

2025 was a year of record performance and significant progress as we executed on our strategy and delivered on the commitments we've made to shareholders. We intend to build on the strong momentum in 2026 and beyond. And now I'll turn it over to Bill to share more detail around our financial performance in 2025 and our outlook for 2026. Ready Bill?

I'm ready. Thank you, Chip, and good evening, everyone. As a reminder, all references to years are references to the company's fiscal year unless otherwise stated. And all comparisons are year-over-year unless otherwise stated.

Net sales for the fourth quarter of 2025 totaled $995 million, an increase of 16%. Net sales for 2025 were $3.6 billion, an increase of 7% and the highest on record. Earnings per share for the fourth quarter of 2025 were $2.23 compared to $1.36.

Adjusted earnings per share for the fourth quarter of 2025 were $2.09 compared to $1.41. For 2025, earnings per share were $7.19 compared to $6.01, and adjusted earnings per share were $6.89 compared to $6.11.

At the segment level, our Aerospace segment delivered double-digit sales growth in substantial earnings expansion for both the fourth quarter and full year, driven by strong performance in commercial services and defense OEM. Fourth quarter Aerospace segment sales were $661 million, up 20%. Commercial Services sales increased 40%, while commercial OEM sales were essentially flat.

Defense OEM sales increased 27%, and defense services were up 80%. Aerospace segment earnings for the fourth quarter were $162 million, with margins expanding 520 basis points to 24.4% of segment sales. The improvement was driven by strong price realization and higher volume, partially offset by strategic investments in our Aerospace Manufacturing capabilities as well as inflation.

For the full year, the Aerospace segment delivered record annual sales and earnings. Segment sales were $2.3 billion, up 14%. Commercial Services sales increased 29% reflecting both favorable pricing and higher volumes, supported by sustained high utilization of legacy aircraft and improved throughput by the MRO shops. LEAP and GTF activity also continues to increase, further contributing to commercial services growth.

I do want to note that toward the end of the fiscal year, while underlying commercial services demand remained strong we believe a portion of the growth was influenced by certain customers making advanced purchases to take advantage of a window of trade stability.

Defense OEM sales increased 38%, primarily driven by strong demand for smart Defense. In addition, new JDAM pricing took effect during the fourth quarter, which contributed to the strong year-end performance. Aerospace segment sales growth was partially offset by a 6% decrease in commercial OEM sales. The decrease was largely due to the Boeing work stoppage earlier in the year and our disciplined and measured production ramp that followed along with inventory normalization by air framers that occurred in the second half of the year.

Moving into 2026, we expect these headwinds to ease as air framer production rates increase. Defense services sales were down 2%. As a reminder, while the timing of this business can be lumpy, demand signals remain healthy. Aerospace earnings for 2025 were $507 million or 21.9% of segment sales compared to $385 million or 19% of segment sales. The 290 basis point improvement reflects solid price realization and higher sales volumes, partially offset by strategic investments in manufacturing capabilities unfavorable mix and inflation.

We're making these strategic investments to enable future growth by expanding manufacturing engineers to support our ongoing efforts to increase automation. In addition, we have been increasing and developing our production frontline and team leaders to improve supervision, training and problem solving to drive productivity, improved cycle times and increase output.

Turning to Industrial. As a reminder, my comments reflect the reclassification of certain sales between the end markets that Dan mentioned earlier. Industrial segment sales for the fourth quarter were $334 million, up 11% from $302 million. Our core industrial sales, which excluded the impact of China on-highway, grew 15% in the quarter.

Transportation sales increased 15% and oil and gas sales grew 13%, while power generation grew only 6% due to the impact of the divestiture of our combustion business in the second quarter of this year which had averaged approximately $15 million of quarterly sales. Excluding the impact of the divestiture, power generation sales grew in the mid-teens on a percentage basis.

Industrial segment earnings for the fourth quarter were $49 million or 14.6% of segment sales compared to $38 million or 12.6% of segment sales. Within our core industrial business, margins expanded 330 basis points to 15.2% of core industrial sales, driven by price realization, partially offset by expected inflation and planned strategic investments in manufacturing capabilities.

For 2025, Industrial segment sales were $1.25 billion compared to $1.3 billion, a decrease of 3%. Excluding the impact of China on-highway sales, core industrial sales increased 10% to $1.2 billion compared to $1.1 billion for the prior year. Marine transportation grew 9% driven by both price and volume. As elevated ship build rate supports strong OEM engine demand and lay the groundwork for future services opportunities.

Oil and gas sales grew by 14% as volume growth was driven by greater midstream and downstream gas investment. Power generation, excluding the impact from the divestiture of our combustion business grew 22% driven by our operational improvements and increased output to meet growing demand in various gas turbine systems value stream.

Industrial segment earnings for 2025 and were $183 million or 14.6% of segment sales compared to $230 million or 17.7% of segment sales. This decrease was largely a result of lower sales volume and unfavorable mix, both related to reduced China on-highway demand, partially offset by price realization.

Core industrial margins for 2025 were 15.2% of segment sales, an increase of 110 basis points. This expansion reflects strong operational execution, price realization across the portfolio and our ability to drive incremental margins from higher volumes, partly offset by expected inflation in planned manufacturing investments to further improve productivity.

Nonsegment expenses were $41 million for the fourth quarter of 2025 compared to $31 million. Adjusted nonsegment expenses were $35 million in the fourth quarter compared to $27 million. Nonsegment expenses were $126 million in 2025 compared to $120 million. Adjusted nonsegment expenses were $133 million in 2025 compared to $112 million.

At the consolidated Woodward level, net cash provided by operating activities for fiscal 2025 was $471 million compared to $439 million. Capital expenditures were $131 million for fiscal 2025 compared to $96 million. The increase in capital expenditure was driven by ongoing investment in automation and production to improve operations and prepare for growth.

In addition, in 2025, we purchased the land for our new facility in Spartanburg, South Carolina and this project is rapidly moving forward. Free cash flow was $340 million for fiscal 2025 compared to $343 million. The decline in free cash flow was primarily due to higher capital expenditures, partially offset by higher earnings.

As of September 30, 2025, debt leverage was 1x EBITDA. During fiscal 2025, as anticipated, we returned over $238 million to stockholders, including $173 million of share repurchases and $65 million in dividends.

In November 2025, we successfully completed our previous 3-year $600 million share repurchase authorization more than 1 year ahead of schedule, reflecting our ongoing commitment to return cash to shareholders. We recently announced a new 3-year sheer repurchase program, authorizing the repurchase of up to $1.8 billion of common stock. This significant expansion reflects the Board's confidence in Woodward's strategy, long-term growth outlook and ability to consistently generate strong free cash flow.

In fiscal year 2026, our guidance assumes returning between $650 million to $700 million to shareholders in the form of dividends and share repurchases. From a capital allocation perspective, we remain committed to a disciplined and balanced approach that fully leverages our strong balance sheet to drive growth. We are investing organically to advance automation and complete our new Spartanburg, South Carolina facility, while also actively evaluating selective returns-driven M&A opportunities. Our strong balance sheet positions us to act decisively when the right opportunities arise.

Now turning to our 2026 guidance. As we look ahead, we remain focused on our value drivers, growth, operational excellence and innovation. Our fiscal 2026 guidance assumes a sustained strong demand environment, supporting continued sales growth and further margin expansion. At the consolidated level, Woodward net sales growth is expected to be between 7% and 12%. Aerospace sales growth is expected to be between 9% and 15%. Industrial sales are expected to grow 5% to 9%. In Aerospace, we expect sales growth across the segment weighted towards OEM driven by a return to growth in commercial OEM and continued strength in defense OEM. Commercial Services growth is expected to moderate as 2025 include a high level of spare LRU purchases as well as the advanced purchases I mentioned earlier.

Defense Services are expected to show modest growth. Industrial sales are anticipated to grow across all of our primary markets. Note, we expect power generation growth to be muted in the first half due to the divestiture of our combustion product line. We anticipate China and highway sales in 2026 to be approximately $60 million, in line with 2025.

Woodward adjusted earnings per share are expected to be between $7.50 and $80 based on approximately 61 million fully diluted weighted average shares outstanding and an effective tax rate of approximately 22%.

Aerospace segment earnings are expected to be 22% to 23% in segment sales. Industrial segment earnings are expected to be 14.5% to 15.5% of segment sales. Adjusted free cash flow is expected to be between $300 million and $350 million. Capital expenditures are expected to be approximately $290 million, which includes continued investment in automation and approximately $130 million dedicated to the build-out of our new production facility in Spartanburg, South Carolina. The increased spend also includes investment in MRO readiness and the start of a multiyear ERP upgrade project.

Some additional items to help you with your modeling. We expect year-over-year price realization of approximately 5%. Nonsegment expenses should be approximately 3.5% of sales. Consistent with historical trends, we anticipate performance to strengthen across the quarters of fiscal year 2026. Our fiscal 2026 guidance positions us to meet or exceed the long-term sales and earnings commitments for 2024 through 2026 which were established at our last Investor Day.

Free cash flow is expected to be below our 3-year target, reflecting higher strategic investments to support sustained long-term growth. including our new Spartanburg facility. We plan to introduce our next 3-year outlook at our Investor Day in December of 2026.

This concludes our comments on the business and results for the fourth quarter and fiscal year 2025.

Operator, we are now ready to open the call to questions.

[Operator Instructions]

And our first question comes from the line of Scott Mikus with Melius Research.

Chip, I had a question kind of on the aftermarket dynamics, particularly in engines. So the LEAP MRO network is much more internal relative to the CFM56 network. So when you ship a fuel metering unit component on the LEAP engine. Just how are you sure whether it's going to the aftermarket or OE channel? Are you being paid at different price versus both? Just given that GE and CFM more broadly is trying to route as many component sales through the LEAP MRO premier network?

So we're -- thanks for the question, Scott. We're sure about the PO status that comes to us, whether it's an install or a spare end item in terms of what customer is ordering it. So we have clear line of sight to what type of unit that is.

Okay. And then given the investments that you're making in automation, when I was at the Rock Cut campus, it was very impressive there. Is there anything structurally that you see that would potentially prevent your LEAP or GTF aftermarket margins to where they couldn't potentially reach CFM56 or V2500 margin levels?

Well, Scott, there's nothing structurally in the way of that. It's kind of up to us to understand what the customers are seeing in the field with the units and developing the right repairs and overall procedures. And we're learning -- we've learned a lot with the first units that have come back, whether it be the pump or SCU or FMU on LEAP or it's the GTF fuel nozzles or actuation. So we're pretty confident that we have the right design for repairability and service solutions for our customers that we'll achieve the right profitability.

And our next question comes from the line of Scott Deuschle with Deutsche Bank.

Bill, what growth are you assuming for legacy narrow body engine aftermarket in 2026?

Scott, for you said legacy narrow body for...

For narrow-body engines, yes.

Yes. So we -- obviously, we saw a really good growth in '25. And based off of that, we would expect sort of single-digit growth rates coming through in 2026 on the legacy narrow-body. We expect to see some price obviously come through and volume at these levels will be tough. But the MRO shop surprised us last year, so we'll see if they get some more productivity. But I would say, single digit.

Okay. And then, Bill, does the EPS guide include any benefit of the recent share repurchase authorization increase? Or do you not really assume that authorization or repurchases -- excuse me, the guide?

Yes. We do expect and put that into the guide.

Okay. And then last question, Chip. Can you give us any sense as to how much your current power generation revenue is tied to Caterpillar? And I'd be curious if you could talk a little bit about the growth outlook you expect from that customer in the years ahead.

Well, we've been receiving pretty healthy growth from all of our power gen customers. And Bill and Dan talked about a little bit of reclass that went on. And it was really by examining where all of our customers and products were being used some traditional oil and gas customers have been involved in more power gen type applications, maybe not utility-grade but behind the meter type applications and folks like Caterpillar and NEO and Baker Hughes are all kind of playing in that segment of the market. So it's a very interesting aspect of the power gen growth opportunity that we're capitalizing on.

But as far as carving out just a single customer like Caterpillar, we don't do that. But I think you can be satisfied that as they grow, we grow, we're on some of their gas engines with SOGAV and valves and actuation and we're on some of their liquid fuel engines with actuation and governor products. So we've got a good staple of products distributed on their products, and it varies by application.

And our next question comes from the line of Sheila Kahyaoglu with Jefferies.

This is Kyle on for Sheila. I hope that -- can you kind of extend the question here on the commercial aftermarket because I think you said muted next year. So you gave -- the prepared remarks are pretty helpful. I think you said LEAP GTF by the end of calendar year '26, the same size or larger than legacy. So when I take that in connection with the single-digit comment you just gave to Scott, I mean, I guess it implies that maybe the pull forward that you saw in this quarter and prior quarters is significantly larger than maybe I expected.

So maybe if you can just kind of walk through those puts and takes to round out that comment. What are you thinking about LEAP GTF growth next year in light of what the OEMs are saying and the magnitude of the pull forward that you saw this year and whether you're sure that's not repeating or whether there's potential that was actually restocking?

Yes. Thanks for the question. We really do believe there will be strong repair growth for LEAP and GTF. We believe like Bill was saying there'll be either flat to a little bit of repair growth on V2500 and CFM-5, But the thing, the big variable is this lumpy order behavior that we saw last quarter on spare end items, but pretty substantial demand there. And those are quite high-priced individual items to be ordered compared to repair.

So when you think about the total top line, it has an outsized effect on that top line as well as the earnings. So we don't forecast that happening again. There could be additional activity. We don't rule that out, and we're prepared to capture that if it shows up. But we -- I don't think it's prudent to forecast that or put that in our plan because we don't have any line of sight to that at this time.

And if I could just follow up on the price comment, Bill, you said 5% next year. I assume that's more weighted to aerospace and increasingly weighted to aftermarket. So maybe any additional color by segment and by subsegment within that.

Yes. Correct. At the total Woodward level 5% in the comments we talked about, the JDAM price increase in the fourth quarter '25, we'll see that flow through the first 3 quarters of '26. And so with that and some catalog growth, we will -- aero will outpace industrial slightly, but we still also will see good price results from our industrial team as well.

And our next question comes from the line of Noah Poponak with Goldman Sachs.

Can you quantify in absolute dollars, whatever you're deeming to have been lumpy or pulled forward in the aerospace aftermarket in 2025 revenue?

Yes. Noah, it's -- as you can imagine, it's hard to quantify because the customer isn't telling us exactly kind of their thought. But here, I'll give you a few numbers that will be in the footnotes of the 10-K. Back where we lay out by segment sales by region. And you'll see that from 20 -- from '24 to '25, sales grew $50 million. So some part of that $50 million is normal growth. And then some part of that is a part of this advanced purchases. It's just hard to quantify exactly.

Okay. That's helpful. And can you quantify where LEAP and GTF aftermarket came in for the year 2025 versus 2024?

So the LEAP and GTF are gaining on the legacy, let's put it that way. And like I said before, they're kind of in the same ZIP code, but not equal. So -- and we're just talking repair activity, not including spare end items. So we really do think that that's going to cross over in the late '26, early '27 time period. And that may sound like an earlier crossover compared to what we said at Investor Day back in 2023. But that original graph in 2023, the legacy items that included some widebody and regional component repair and then it also in the new included GEnx.

So we're trying to strip out some of that other information and make it cleaner for you. Like last quarter, I committed that we would clarify that. And when we do run our model out and look at kind of how fourth quarter ended, how inputs are coming in for both the legacy as well as the LEAP GTF. That's how we come up with that sort of crossover period, which I hope clarifies things for you.

Okay. Great. That's super helpful. And then just on the Aerospace segment margin, the guidance requires a pretty significant slowdown in the incrementals. I guess in the fourth quarter, you're seeing incremental benefits from the items we just discussed and therefore, it's sort of a leveling out over the 2 years? Or is there more to it?

Yes. So the -- no, I think your question is about the incremental coming down from about 42.5 for aero and coming down in '26. And it's a few things. It's our OEM mix growing on the aero side, which is a mix down. And then, yes, the -- and so that's the main driver is just the amount of OEM that we expect to come through in '26.

And just a reminder about that is a good thing. So we're creating the installed base to get the services revenue and earnings on later.

And our next question comes from the line of Christopher Glynn with Oppenheimer.

Curious on the defense side, a specific and a general question. Where are you with guided weapons clarity longer term, how those programs and lot orders are flowing through? Should we anticipate that growth is kind of leveling off on a sequential basis? Or is the volume still ramping? I know you have a big price aspect to growth in that category?

So our guided weapons programs, Pearl, JDAM, small diameter bomb SDB and the team 9X are all kind of having a little different behavior. JDAM is up substantially, but we feel like that will remain level for a good while. And then we don't have any orders for the other 2, but we have indications that customers are asking us to do capacity studies and work with our supply chain and capacity studies. So some of these things are leading indicators that these other product lines might experience some growth opportunities. But we don't have anything specific, Chris, on that right now.

Okay. Great. And you mentioned global capacity investment for the industrial aftermarket. I'm guessing that's oriented towards the marine side, but just wondering if we could drilling to that investment element there.

Yes. So we've been doing a little bit of flag planting here and there on MRO shops. So when you think about a powerplant, and all of the scope of supply that we could provide to aeroderivative or heavy-duty frame power plant installations. Just like an aircraft engine, they undergo maintenance cycles, and we're finding that we have the ability to grow our service content with these customers when we're a little closer to that region.

So we've done some of that in the prior couple of years, and we anticipate doing a little bit more of it just to try and get closer to the customers. and grow the opportunity to service our fuel metering valves and other types of scope of supply like that, that are on our customers' gas turbines and as well, reaching out with the opportunity to do some repair and reciprocity engines.

And our next question comes from the line of Gavin Parsons with UBS.

Guys, what are you assuming for OE destocking? And it would be helpful if you could parse that out kind of by airframe and engine.

Thanks for the question, Gavin. It's a little difficult to parse that out for you that detail of a way from a customer standpoint. But we feel like, broadly speaking, somewhere in our second quarter sort of time period. If airframe customers and engine customers hit the rates and pull like they've forecast for us. We could be destocked by some time in that second quarter towards the end of our first half fiscal year.

Okay. That's helpful. And then on CapEx going forward, should we kind of assume that normalizes once you finish kind of the A350 buildout? Or by the end of the decade? Or are we starting to look at build out for maybe a new single aisle?

Yes. For right now, Gavin, we'll say that the Spartanburg is investment is causing that peak. We're going to continue to kind of look through '27, '28, '29, and we'll give you a clearer view in December of what's out there. We're looking -- understanding our next single aisle investments. But right now, the Spartanburg is sort of what we see there on the near horizon.

And our next question comes from the line of Michael Ciarmoli with Truist Securities.

Nice results. Just to stay on Gavin's question there. The CapEx for Spartanburg. Can you support or will that have enough capacity to support programs beyond the A350? I mean is there kind of does this build out contemplate next-gen single-aisle.

Thanks for the question. The investment in Spartanburg, that facility has additional capacity over and above the A350 for us to put select product lines in there that make sense and are synergistic. But we're betting on a successful campaign for next single aisle scope, so that facility would not by itself be able to support NSA volumes.

We have bought enough land there to build a sister facility for NSA support. So we are thinking ahead where it makes sense on small amounts of investment dollars, but we're not putting any big investment dollars on NSA capacity. We'll have to really take a look at what that horizon and life cycle looks like from the design phase through the build and flight test phase and lay that out in comparison to our facilities and what's going on with legacy programs before we decide kind of how much additional capacity we need.

So that's a thought exercise even like Bill was saying, we'll share more at Investor Day in December. But some of that NSA thought exercise will mature as we understand from the Airbuses and Boeings of this world about what that time frame looks like.

Okay. Fair. And then just back to Noah's question actually. You were talking about incrementals, but I guess just absolute margins looking at the low end of the range, really no margin expansion. You're obviously hitting and exceeding the targets, and you talked about the OEM mix, which makes sense. But as you're seeing this ramp on LEAP and GTF, is there margin dilution there on services? I mean do you have to get over some learning curves? I mean, I'm assuming scrape spare sales would be highly accretive on those platforms. But is there anything else dilutive with the LEAP and the GTF ramp up there?

Yes. I'll jump on that and Chip maybe cover me if I miss a part. But no, the LEAP GTF service margins are good. It really is the impact of the overall OE and how that impacts things. Obviously, on the low end of the range, it contemplates some other headwinds. But to the point about the LEAP GTF margins are good. Again, OE mix is a primary driver of our -- of the rate expansion that you're seeing in our guide.

Yes. I would just follow up and say that we intend to expand margins, and that's what you see a guide there that allows for some headwinds to get in the way of that intent. But we've got plans in place and programs and the automation benefit that we're planning some realization of for 2026. We intend to get productivity.

And our next question comes from the line of Gautam Khanna with TD Cowen.

Just to elaborate on the first question, which we've written about before, which is this LTSA versus spot aftermarket dynamic on LEAP versus CFM. Is it -- do you guys -- I'm just curious like on CFM56, when you sell into -- a spare part into the GE network, I presume that's a lower price than what you would sell into if it's an MRO or airline outside the network? And does that same logic apply for LEAP when you're selling a spare part to a direct user like an airline versus when you sell it through the GE internal MRO network? And if that's true, why wouldn't there be structural differences in profitability between those 2 platforms in the aftermarket over time?

Well, the reason why there's no structural difference is because there's really no structural difference to the contracting, Gautam. And when we sell spare end items, it can be to an airline, it can be to an MRO shop that has a variety of people under different agreements. We have some asset management contracts with some of the bigger MROs just like us CFM or GE or Safran network. So the whole landscape is similar between the previous generation and this generation.

So when you think about repair, it's also the same thing. So whether it's the spare end item, spare parts or a repair, we have fairly similar contracting principles in the LEAP ecosystem that we do to the CFM-5. And so I think there's nothing really there to explore further except that we have a lot more LRUs to take care of.

Got you. And then a follow-up on the mix dynamic within the aftermarket. I know you talked about repairs, and I think that's distinct from spares. So I just wanted to get a sense, is the overall aftermarket profitability next year a little bit softer than it was in '25, just based on kind of more repair, less spares? Or was there any nuance here that you were trying to convey?

Really no nuance to convey there. We have a good blended service earnings profile for 2026. We're pretty happy with that. We'll see if the spare end item, if more comes through than we forecast, like it did last year, I mean it's really hard to tell. We'll have some upside if that happens.

And our final question comes from the line of Louis Raffetto with Wolfe Research.

Bill, how should we think about the return of capital to shareholders is going to be balanced across the year? Or is there any reason to think it will be skewed one way or the other?

Yes. Louis, our point is to spread it out evenly through the year. We'll see how things go, but the plan is to stay in the market throughout the year.

All right. And then I guess on FSG margins, the last several years, the first quarter has been, I would say, substantially below the rest of the year. Is that something we should sort of expect again here in fiscal '26?

I'm sorry, Louis, the margins in Q1?

We missed your first words.

Sorry, FSG margins in Q1 have been below sort of the second quarter, third quarter? Should we...

I'm not quite sure we say FSU.

I'm sorry. I mean aerospace process.

Okay. Yes, correct. That is normal trend in Aerospace and in Industrial, that Q1 is usually our lowest margin quarter and it sort of grows sequentially throughout the rest of the year.

And then just last one on tax rate. You've had some benefit from option exercises in the last few years. I assume with the 22% rate, you're not expecting anything like that, but certainly could have that benefit depending on how that plays out?

That's exactly right, Louis. With the prices that we've seen over the last couple of years. And as we estimate out, we don't foresee that outsized tax benefit from option exercises. So that is what is behind that 22% effective tax rate.

That concludes our question-and-answer session. Mr. Blankenship, I will now turn the conference back to you.

Thanks, everyone, for joining today's call. We hope you all have a wonderful Thanksgiving holiday.

Ladies and gentlemen, that concludes our conference call today. A rebroadcast will be available at the company's website, www.woodward.com for 1 year. We thank you for your participation in today's conference call, and you may now disconnect.

Thank you for standing by. Welcome to the Woodward, Inc. Third Quarter Fiscal Year 2025 Earnings Call. At this time, I would like to inform you that this call is being recorded for rebroadcast. [Operator Instructions] Joining us today from the company are Chip Blankenship, Chairman and Chief Executive Officer; Bill Lacey, Chief Financial Officer; and Dan Provaznik, Director of Investor Relations. I would now like to turn the call over to Dan Provaznik.

Thank you, operator. We'd like to welcome all of you to Woodward's Third Quarter Fiscal Year 2025 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 presentation, we will take questions. For those who have not seen today's earnings release, you can find it on our website at woodward.com.

We've included some presentation materials to go along with today's call that are also accessible on our website, and a webcast of this call will be available on our website for 1 year. All references to years in this call are references to the company's fiscal year unless otherwise stated.

I would like to highlight our cautionary statement as shown on Slide 2 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. These elements can and do frequently change. Our forward-looking statements are subject to a number of risks and uncertainties surrounding 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-U.S. GAAP financial measures. We direct your attention to the reconciliations of non-U.S. GAAP financial measures, which are included in today's slide presentation and our earnings release. We believe this additional financial information will help in understanding our results. Now I'll turn the call over to Chip.

Thank you, Dan. Good evening, everyone, and thank you for joining us. We're pleased to report strong third quarter results that exceeded our sales and earnings expectations. This strong performance was driven by ongoing robust demand across both our Aerospace and Industrial segments, along with disciplined execution by our global teams. Our members remain focused on safety, quality, delivery and cost improvements with safety always coming first.

While our traditional safety metrics are currently world-class, we are focused on making Woodward the safest work environment through our Human and Organizational Performance program, also known as HOP, which we rolled out to 7 more sites this year. The new sites are embracing the program and growing their capability to identify risks, add layers of protection and use HOP learning teams to solve more complex problems related to workplace safety. We also play a role in the safety of our customers' products, and we are laser-focused on ensuring that we meet the product safety and quality requirements our customers are counting on from Woodward.

Looking at a few highlights from our third quarter financial results. Woodward posted record sales, up 8% year-over-year, and earnings per share came in at $1.76, up 8% year-over-year. Aerospace also had record sales, up 15% and Aero margins expanded 140 basis points to 21.1%. In Industrial, our reported sales declined 3%. When China OH and the divested combustion product lines are excluded, Industrial delivered double-digit growth. Our year-to-date performance reaffirms our midterm and long-term growth trajectory as we strengthen our capability to meet sustained demand across our markets.

Based on our strong year-to-date performance, increased macro environment clarity and expected sustained growth, we are raising full year sales and earnings guidance. Bill will take you through more details on that and other changes to our guidance. I'm also excited to share with you updates on 2 important milestones for Woodward. At the Paris Air Show, we held an event with Airbus to announce that we've been selected to provide spoiler control actuators for the Airbus A350. This is a major achievement for Woodward and is our first actuation LRU win for a primary flight control surface on a commercial platform. The A350 spoiler award enables us to apply our deep expertise in military hydraulic flight controls to a very important and already successful key commercial aircraft program.

In addition to OEM chipset delivery, the program includes a sizable installed base with long-term service opportunities, including for our own hardware and strategic upgrades to legacy configurations. It is also significant because successful execution on this opportunity will position us to be competitive on the next single-aisle aircraft. This win with Airbus is a key component of our long-term hydraulic flight control growth strategy. To support that growth, we're investing in a new manufacturing facility for the A350 spoiler actuation production in the U.S. We'll be able to share more details on the location as agreements are finalized.

What I can tell you is that we're designing a showcase facility, vertically integrated, highly automated, special processes included, and built on the lessons learned at our Rock Cut facility during the LEAP and GTF programs. It's a significant yet manageable investment that will be spread over multiple years and is fully aligned with our organic growth strategy. The A350 spoiler facility is a perfect example of how we're investing in ourselves for the highest return.

In addition, last week, we completed the acquisition of Safran's North American electromechanical actuation business. This is a key inorganic play that places us at the heart of industry-leading horizontal stabilizer trim actuation technology, serving platforms including the Airbus A350, Embraer E175 and E190-E2, Gulfstream 650, 700, and 800 and Dassault Falcon 7X and 8X Together, these 2 strategic moves, 1 organic, 1 inorganic, strengthen our core capabilities and commercial aircraft pedigree ahead of the next single aisle competition. These developments, along with our automation acceleration, will require increased capital allocation to CapEx in 2026 and 2027 as we invest in future growth and productivity.

Turning to what's happening in our end markets, we remain extremely optimistic about developments that matter to Woodward. In Aerospace, supply chain challenges across the industry continue to impact aircraft deliveries. But air traffic is still growing globally. Airlines are optimizing load factors and fleet utilization to keep pace. Aero services exhibited sustained strong growth in the third quarter. The softening in services we had anticipated in our plans and guidance hasn't materialized as airline customers continue to invest in their legacy fleets to ensure they have enough capacity to meet travel demand in the face of slower deliveries of new aircraft.

In fact, legacy engine LRU overhauls for both narrow-body and regional aircraft grew compared to last year and show few signs of declining as yet. Widebody engine control system service demand remains steady. In addition, as I have mentioned in previous earnings reports, LEAP and GTF service activity continues to grow steeply, but it is no longer doubling in size year-over-year as the base numbers grow. The great news is that LEAP and GTF revenue is now approaching that of legacy products and is delivering a meaningful impact to our Aero services growth profile. We expect service volumes to continue increasing through 2026 and 2027 as LEAP and GTF hours and cycles continue to drive service inputs.

Commercial OEM was softer this quarter as airframers managed supply chain disruptions and all our customers managed elevated inventory buffers. Defense OEM was again a significant growth driver for Aero as expected, led by strong performance in smart defense. The defense services environment overall remains solid though inputs to Woodward have varied quarter-to-quarter.

In Industrial, our gas turbine portfolio was a standout performer, particularly in LNG and broader oil and gas applications. Growing global electric power demand remains a key growth driver for our Industrial segment. Based on conversations I've had with customers, along with what we see directly in orders, we're getting confirmation that the growth predictions are real and we're prepared to serve that growth. We're focusing our lean transformation on capacity and lead time improvements on our model gas turbine control valve production line to better serve customers. In fact, we've increased output more than 30% year-to-date.

We're more than halfway through the Glatten expansion project to increase capacity to meet data center backup power demand. With construction tracking ahead of schedule, we've ordered all remaining machines in July, and we will be ready to begin moving into the new hall in November. This value stream has been completely redesigned with 3P principles, that is production, preparation, and process. We are using this expansion opportunity to create better flow, introduce higher levels of automation and improve inventory turns.

In transportation, marine demand remains exceptionally strong. Shipyards are full and they continue to expand capacity. In the quarter, more than half of all new ship orders included alternative fuel specifications, which resulted in a strong pull for Woodward's solutions. As expected, demand for China on-highway heavy-duty trucks declined primarily due to local economic headwinds. Overall, we see continued momentum in the macro growth drivers across both our Aero and Industrial segments into 2026 and beyond.

A few comments on the macro environment. We remain vigilant and agile as we navigate tariffs, geopolitical matters, supply chain dynamics and other expected and unexpected external factors. Our focus is on developing even more resilience and continuing to serve our customers regardless of the external conditions we face. Based on our consistent performance, it's clear we're on the right path to deliver on the commitments we made to you. We will continue to create shareholder value through our value drivers of profitable growth, operational excellence and innovation. Now I'll hand it over to Bill for more detail on our third quarter financial performance and the specifics of our updated guidance. Bill?

Thank you, Chip, and good evening, everyone. As a reminder, all references to years are references to the company's fiscal year unless otherwise stated, and all comparisons are year-over-year unless otherwise stated. We delivered record net sales in the third quarter of 2025 of $915 million, an increase of 18%, reflecting the strong demand across our end markets. Earnings per share for the third quarter of 2025 were $1.76 compared to $1.63.

At the segment level, Aerospace segment sales for the third quarter of 2025 were a record $596 million compared to $518 million, an increase of 15%. Defense OEM sales were strong in the quarter, up 56%, largely driven by increased demand for our smart defense programs. Commercial services sales rose 30%, exceeding our expectations, driven by both pricing and increased volume tied to continued high utilization of legacy aircraft, which is extending their current service cycles.

As Chip highlighted, LEAP and GTF service activity continues to increase. Commercial OEM sales were down 8% as airframers navigated supply chain disruptions and all our customers managed inventory levels. We expect these headwinds to moderate as airframes continue to increase production rates in the coming quarters. Sales for defense services were down 16%. While the market demand environment is solid, the timing and flow-through of orders to Woodward can fluctuate considerably from quarter-to-quarter.

Earnings in the third quarter for the Aerospace segment were $126 million. Margins expanded 140 basis points to 21.1% of segment sales. The increase in segment earnings was primarily driven by price realization and higher volumes, supported by our ongoing operational excellence and lean initiatives that enhanced output and efficiency. These gains were partially offset by planned strategic investments in our Aerospace manufacturing capabilities to meet our current and future growth. Inflation also contributed to the cost pressure. The margin rate was tempered by unfavorable mix, driven by growth in our defense OEM products, which carry lower margins relative to other parts of the portfolio.

Turning to Industrial. Segment sales for the third quarter of 2025 were $319 million compared to $330 million, a decrease of 3%. This was primarily due to the expected decline in China on-highway sales, which were down $36 million or 69%. Our core Industrial sales, which exclude China on-highway, grew by 9% in the quarter. Oil and gas was up 16%, driven by price as well as volume related to increased activity in midstream and downstream gas investments.

Marine transportation was up 16%, driven by both price and volume. Power generation was flat due to the impact of the divestiture of our combustion business in the second quarter of this year. Excluding that impact, power generation sales grew double digits. For context, the combustion business averaged approximately [ $50 million ] of sales per quarter. Going forward, the best way to think about our Industrial products and services portfolio is excluding China on-highway and combustion. As Chip highlighted earlier, using this view, Industrial grew double digits in the third quarter.

Industrial segment earnings for the third quarter of 2025 were $48 million or 14.9% of segment sales compared to $60 million or 18.1% of segment sales. The decrease was primarily due to lower China on-highway volume. Looking at our core Industrial business, we expanded margins to 15.6% of sales, up approximately 90 basis points. This expansion was driven by our progress in operational excellence, including price realization across the portfolio and our ability to generate incremental margins from higher volumes. Given these strong results, we now expect Woodward's core industrial margin for the year to be approximately 15% of sales, the high end of our previous range.

Nonsegment expenses were $36 million for the third quarter of 2025 compared to $30 million. We expect adjusted nonsegment expenses to finish the year close to the same rate that we have been running year-to-date. At the consolidated Woodward level, net cash provided by activities for the first 9 months of 2025 was $238 million compared to $297 million. Capital expenditures were $79 million for the first 9 months compared to $72 million. Free cash flow was $159 (sic) [ $159 million ] for the first 9 months of 2025 compared to $225 million. The decrease in free cash flow was primarily due to an increase in working capital.

As of June 30, 2025, debt leverage was 1.5x EBITDA. During the third quarter, we returned over $62 million to stockholders, including $45 million in share repurchases and $17 million in dividends. Through the first 9 months of 2025, we returned $172 million to stockholders, including $124 million in share repurchases and $48 million in dividends. We now expect to return approximately $235 million to stockholders in 2025, exceeding our initial goal of returning $250 million. This should consist of $170 million of share repurchases and $65 million in dividends. We will continue to manage this with flexibilities as conditions evolve.

We remain disciplined in deploying capital across 3 priorities: reinvesting for growth, returning cash to shareholders, and selective returns-focused M&A. As Chip highlighted, we will be making a multiyear investment in a new state-of-the-art facility to support the Airbus A350 spoiler actuation win and long-term organic growth. In addition, the recent acquisition strengthens our position in electromechanical actuation systems and meet our strategy-driven deal criteria. These growth investments, along with our accelerated automation initiatives, will increase capital spend over the next couple of years as we invest in growth and productivity. We will provide more details on these capital allocation plans during our fourth quarter earnings call.

Now turning to our 2025 guidance. We are raising our sales and earnings guidance, revising our adjusted effective tax rate down and lowering our free cash flow range. We are reaffirming the other elements of our full year guidance. This updated guidance reflects our year-to-date performance, a more stable macro environment and strong fourth quarter outlook. For 2025, we now expect consolidated sales of $3.45 billion to $3.525 billion, which includes Aerospace sales growth between 11% and 13% and a decrease in Industrial sales between 5% and 7%.

Now we expect adjusted EPS between $6.50 and $6.75 with Aerospace margins to be between 21% and 21.5%, and Industrial margins to be approximately 14.5%. We now expect the fiscal year 2025 adjusted effective tax rate to be approximately 17%. We now expect our 2025 free cash flow to be between $315 million and $350 million. We are lowering the free cash flow range as a result of increased working capital to support higher sales during a dynamic supply chain and production environment. All other aspects of our guidance remain unchanged. This concludes our comments on the business and results for the third quarter of 2025. Operator, we are now ready to open the call for questions.

[Operator Instructions] Our first question comes from David Strauss with Barclays.

Dave, before you jump in, I just want to make sure I clarify something. When I noted our third quarter sales of $915 million, I may have said 18%. I just want to be clear that, that is an 8% increase. Thank you, I'll turn it over to you, David.

Great. Jeff, I thought I heard you say that LEAP and GTF aftermarket volumes are now close to legacy volumes, though maybe I didn't hear that correctly. But I thought in the past, you talked about getting to those kind of levels a couple of years out from now.

Yes. So thanks for the question, David. In fact, they were getting close last quarter. This quarter, they've just got into the same neighborhood, ZIP code range, still short of the legacy total volume. And we forecast the crossover, which is what we said before in sort of the 2028 time period. So we're still sticking with that as our outlook.

The things that could make that happen faster is if the legacy fleet starts to see less hours and cycles. We'll see less investment as Boeing and Airbus continue to pump out the neos and MAXs to take the places of those aircraft. So right now, we're still calling 2028, but I do want the folks out there to know that LEAP and GTF volume is now having a meaningful impact on our commercial Aero services revenue and margin and we're very excited about that.

Our next question comes from Scott Deuschle with Deutsche Bank.

Bill, can you walk us through what drove the sequential margin decline in Aerospace in the third quarter and then the drivers behind the implied Aerospace margin improvement in the fourth quarter?

Yes, Scott, thanks. As you look at it, I think the incrementals are around 30%. Again, we typically advise that we look for incrementals between 30% and 35%. I do realize that the first half incrementals for Aero were in the 40s. What caused those incrementals to drop was the -- while we did have strong growth in aftermarket, we had very strong growth in our defense OE. That comes with a lower profit margin and therefore caused -- the unfavorable mix of that product line caused the decline in our incrementals.

As you highlighted, our -- as you look at our guidance and what that implies for 4Q, we do expect our incrementals to get back to the ranges that we saw in the first half of the year. We will still see -- we expect to see strong defense OE still, but that should come along with our smart defense program, realizing the price increases as we have moved into the newer lines. So that's what will -- the sustained growth in defense OE with the move in pricing. And also we expect to have another good quarter in our commercial aftermarket business.

Our next question comes from Noah Poponak with Goldman Sachs.

Lot of discussion of some new investments or maybe a few we hadn't fully calibrated here. So in the release, you also cite Aerospace investments impacting the third quarter margin. Can you talk more about what that was and why it seems like only 1 quarter? And then what are you actually spending $35 million to $50 million on in the free cash flow reduction? Can you be more specific there? And then how much and for how long are we talking about higher CapEx beyond this year and what's it for?

Yes, thanks for those questions. First of all, on the investments that we highlighted in our manufacturing space, it was not necessarily a hit to margin rate, more of a hit to margin dollars. But what those investments are, are to drive productivity. We are investing in our team leaders. We're investing in our operations supervisors, again, to work with our direct employees in order to help us to increase our activity.

We are also adding manufacturing engineers that will better allow us to implement our automation and allow us to get to the productivity benefits that we're looking for. Finally, we're adding in supplier engineers to continue to work with our supply base to make sure we can improve on those areas.

The second part of your question is around free cash flow and us lowering our range there. And the simple answer is we are investing more in working capital, specifically inventory. As we look at the need to meet the demands of our customer in the mix that they're looking for and get it there on time and understanding the capabilities of our process, we made the decision to invest a bit more in inventory to allow us to do that.

We continue to work that area. We are investing in resources and in processes and in systems so that going forward, we don't need to invest into [ both ] levels, and we expect that you will see that benefit as we get to 2026.

Okay. And Bill, you have a few years in a row now where the full year Aerospace margin lands higher than the prior year's fourth quarter, so the fourth quarter proves to be an exit rate that you build off of. The guidance implies the last quarter of this year will be in mid-'22s. Do we use that as the jumping-off point of what you expand next year?

No, not necessarily. Again, I think we are expecting to have a very strong Q4 in Aero. There's a few reasons for that. And as we get into '26, we'll talk a little bit more about the rate that you can expect for Aero for the total year. But we're very pleased with where the implied 4Q exit of Aero.

Our next question comes from Scott Mikus with Melius Research.

Nice [indiscernible] there and you displaced an incumbent supplier on the A350's spoiler actuation system, and that makes you a Tier 1 supplier to Airbus now. So do you see other opportunities to displace incumbents on current platforms or is this more of a one-off opportunity? And then for future aircraft engine plans -- programs, do you plan to pursue more work packages as a Tier 1 supplier? Or is the intention to primarily stay a Tier 2 supplier except where you have a differentiated offering?

Yes, Scott, thanks for the question. As you probably know and most people in the industry know, displacements in the middle of really successful aircraft programs are somewhat rare, so we wouldn't view that as a wave of opportunities in front of us. But the combination of that opportunity and acquiring Safran's North American electromechanical actuation business allows us to get into the Airbus Tier 1 supplier structure, which we think is a great place to be as we look toward the next single-aisle aircraft opportunity.

As far as Tier 1 and Tier 2 for us, we're kind of a little bit of a humble company. I mean, we're willing to do work at Tier 1 levels. We're willing and able to do systems, subsystems or components and where we can add value to customers and to products, we're willing to serve if we can make it a profitable high-return business for our shareholders.

Okay. And then 1 quick 1 for Bill. Do you happen to have the pricing in the quarter? And can you perhaps parse that out by Aero and Industrial?

Yes, so the total business, we saw about 7% price. And I would say that Aero contributed a little more than Industrial but both did a great job. We have said in the past that price for the year will be closer to 5%. Based on where we are, it will be closer to delivering 7% at the Woodward level for price for '25.

Our next question comes from Christopher Glynn with Oppenheimer.

Someone asked about the marine -- so the marine is doing better than you've talked about the long-term profile, given industry capacity kind of at that level. So just curious what's driving the upside this year. Maybe it's simply price, but also curious if you're taking share in some respect or building out the naval profile alongside commercial and merchant?

Chris, I think the easiest way to think about how marine is going for Woodward is that our customers are taking share as well as the capacity increases and orders from the shipyards and the services business. So it's like those 3 things. It's price, it's the platforms that we're on, their winning positions on the ships, and then the service opportunity from the utilization is quite strong.

Okay, great. And then the third quarter, did that see any of the new lots pricing in the smart weapons?

It will start in the fourth quarter.

Tax rates come down a good bit, a couple separate times during the year. Just wondering what's driving that and if we should be thinking of a new baseline beyond the current year other than the kind of 20% anchor.

Yes. With the level of stock options we have to support our members historically, with the record stock prices that we've had, we've seen a lot of those stock options that came in provides us with the tax benefit. And that's what really drove that rate down. As we continue to increase our net earnings, that's going to put pressure on our tax rate. And so I would expect a bit more pressure. But right now, with the stock price at the levels they are -- they've been at, that's causing us to get this benefit, which results in these lower tax rates. And hence, our upgrading or adjusting the guidance on that effective tax rate for '25.

Our next question comes from Gavin Parsons with UBS.

Wanted to just parse out the working cap investment this year and the CapEx investment next 2 years. And how much of that is for, say, existing programs versus new wins like the A350 or maybe investing in the growth rate of the Safran business?

Yes. Gavin, it's safe to say that all the inventory increase is with current programs. And it's really -- a lot of people talk about it in the industry. It's a factor of fluctuation in our own production system, fluctuation in demand from customers that have supply chain issues that maybe aren't ours and they're holding a number of our parts and inventory, and then how our suppliers perform and our desire not to make sudden movements with suppliers and lose that capacity that we've worked so hard to gain since COVID.

So a lot of things going on, a lot of management decisions, a lot of strategic thinking around how do we make sure we can serve customers and meet this demand. But as we look into FY '26, we feel like we do have expertise deployed to work that down and improve the overall process as things tend to stabilize a bit more in terms of what we see from our customers and what their desires are to have a more of a stable supply chain altogether. So that's work in process but we're just seeing the effects of that in the third and fourth quarter probably.

As far as the investments go, we're looking at the facility for A350 spoiler production. These types of facilities tend to run a couple of hundred million dollars that can be spread across a couple 3 years, and that's what we're looking at. We've got a lot of experience with this from building Rock Cut for LEAP and GTF programs. You can build a building for a lot less than that, but to build the capacity and capability to have a highly automated, vertically integrated production system in a factory like that, that's kind of what the price tag looks like.

And then also with our acquisition of Safran's electromechanical business, we'll be moving product to existing facilities and really working through making that an optimum supply chain and merchant system to serve Airbus and the other airframers.

Okay, that's great. I mean, just to put a finer point on the working capital, is that more to enable an acceleration in your growth or derisk your own supply chain visibility?

It really does both, so thanks for that.

Our next question comes from Louis Raffetto with Wolfe Research.

Bill, you ballparked quarterly sales rate for the Greenville divestiture. Could you speak to the impact to the Safran deal on results and then also what the cash usage was for this quarter?

Yes. For Safran, I think when it got announced, they sized the business. And we're focused on taking it, growing it and improving it. But again, the key matter about this acquisition was a strategic one to allow us to continue to grow our capability in this space, and that's what we're focused on. Louis, what was the second part of your question?

Just how much you spent on that deal? It will be in the K, was it just after the...

Yes. And again, it's a great deal for us and we're happy with that we have it and it's not something that we're covering right now.

Yes. I think the reason we sized the Greenville for you is to help you, going forward, on what the Industrial and Power Gen compares look like. There's really no macro impact on Aero for that deal. So we're really not going to disclose that level of information on that small impact.

Okay. And then maybe just latest on the China on-highway expectations for the rest of the year? I think you've gone from $40 million to $50 million. Are we at $70 million, I guess? Would love your top-down expectations.

We're not -- yes, we're around $60 million, and in 4Q, it will be somewhere around $10 million, around $10 million.

Our next question comes from Michael Ciarmoli with Truist Securities.

Maybe Chip, can you give a little bit more color on this A350 spoiler win? I mean, in terms of what the expected chipset content will be, I guess, my understanding, you've got to develop your own IP. When maybe those first sales are going to occur? And any kind of expected margin profile you could talk to? It sounded like maybe the existing incumbent on this walked away, just given their return profile. And I guess a couple of hundred million of investment sounds significant for just that 1 platform. Is this a broader play to position yourself for future kind of actuation spoiler wins on that next-gen narrow-body?

Yes, Mike, thanks for the question. The spoiler actuator business is quite substantial. The A350 program, if you look at Airbus's forecast for rate increases and where that aircraft is going and what the demand is for that is, it's a wonderful program to be a part of. When I look at the chipset content, so there are 14 actuators, 7 per wing and we have 12 of those. So we're -- it's a lot of hardware per chipset. It's going to take a bit of factory space because we're going to be vertically integrated.

It is a substantial investment but it's a manageable one. And we have a number of things we're looking at to add into that facility as we go forward. But as of now, we like the investment and our forecasted return on that for the A350 program. And we'll pile on that and we'll add things as we can and as we win them going forward.

Will this be margin dilutive as it ramps up out of the gate?

Quite often on programs, they can be margin dilutive, and a lot of that sometimes has to do with fits and starts and where is the program and where is the plane going to be when it enters production. We're not burdened with some of that in this case on a displacement. We know exactly what rate we have to catch when. And your question -- your earlier question was about when we would see revenue. We're -- we and Airbus are targeting 2028 entry into service for our hardware.

Our next question comes from Sheila Kahyaoglu with Jefferies.

Maybe just following up on the new facility. How do we think about the few hundred million? Is it '26 and '27 so $300 million over 2 years? And I know I'm making up numbers here. How do we think about the payback on that? And the commercial...

Yes. So I'll -- yes, we look at this to be about a couple of hundred million dollar investment, Sheila. And yes, it will be spread out over '26, '27. Some of it could leak into '28 but most of it will happen between those 2 years. Again, this will be -- we love this program. We think it's -- and it will have good returns for us, and it's a great portfolio of opportunity here with Airbus. And we think it's going to be a really good program.

Okay. And then on the defense continued outperformance there, any comments you can make on how long it lasts? How do we think about the JDAM contract in particular and its impact on profitability?

Yes. So first, smart defense, I want to make sure to say that all the products in our smart defense portfolio are performing well. Obviously, JDAM gets a lot of coverage as it should. And we -- these programs are tough, but we think through at least the first half of '26, we feel good about demand and we like the demand. It gets a little dangerous to take that view too much further than that, Sheila. So I'll say we feel good about this demand through the first half of '26.

Our next question comes from Gautam Khanna with Cowen.

I had a couple of questions. And perhaps -- I dropped so I'm just curious. Did you address China natural gas and what demand signals you're seeing from those customers?

Yes. We've reinstated that Q4 will be around $10 million. The overall economy continues to dampen the demand and the order rate in that business.

Okay. Any preliminary view on 2026, given fiscal '25 has been an unnaturally low year? What is normal?

No. We're going to continue to focus on our core Industrial business, and that will be our focus. And as we said, it's a dynamic volatile business and we will highlight that -- what we -- our view when we get to the end of the fourth quarter.

Okay. And big picture, have you seen any demand erosion from U.S. trade policy and all the changes we've had with U.S. trade policy since April anywhere in the portfolio?

I wouldn't say we've seen demand drop off. I think we've seen some maybe unnatural volatility and some delays and then spikes. We had some delayed China service orders earlier in the year. And then we've had some piling on of orders maybe at 1.5 to 2x the normal amount in third quarter and fourth quarter. So I think we've seen some unnatural volatility, but maybe not -- I wouldn't characterize it as like a drop-off in the demand or a long-term demand increase either way.

Our next question comes from David Strauss with Barclays.

So previously, you had this free cash flow target out through 2026 of $1.2 billion cumulative. Is that now off the table, given the reduction in the free cash flow forecast for this year and what you're talking about, it sounds like for CapEx next year?

Yes. David, I think sort of our underlying business and our plan, we still are -- we still see being able to deliver the $1.2 billion. But you did highlight a point, and that is that we are still figuring out what exactly the CapEx spend will be in '26 and that may have an impact on it. And we'll just come back to you at the end of the year with more clarity on exactly how that's looking.

Okay. And do you guys have any impact from or any benefit from Section 174 amortization going away as part of the Big Beautiful Bill?

From some of these elements on that bill around what we can do around some of the R&D expenses, around what we can do as we're billing the facilities and can accelerate that depreciation, a lot of those things will help. There's still a lot of -- we got high-level views of what that is, but exactly how it rolls out, we're going to have to spend a little more time, and we can give you a better understanding of the impact as we get to giving '26 guidance.

Our next question comes from Scott Deuschle with Deutsche Bank.

Chip, just to clarify an earlier comment you made, were you saying that LEAP and GTF aftermarket revenue is approaching legacy narrow-body aftermarket? Was the comment that total revenue from LEAP and GTF including OE is approaching legacy aftermarket? I just want to clarify that.

Well, good clarification question. The point I was making was that in the aftermarket, in the service business, which is comprised of spare end items, repair and overhaul as well as spare parts, in those categories, that LEAP and GTF are gaining and getting into the same ZIP code as the legacy, which is very exciting for us.

Okay. And then Chip, when we think about growth in power generation over the coming years, should we be looking at the growth at GE Vernova and Rolls-Royce when we think about your growth? Or are there any specific nuances with respect to Woodward's position that would drive a meaningful divergence between what those OEMs are looking at and then what you might look at?

I think broadly speaking, we see the same kind of growth they do, but it can get a little bit nuanced in terms of which platform wins which application because if a certain gas turbine wins, it starts to win more or a certain recip engine, this liquid wins, then our hardware may or may not be on those OEMs.

So broadly speaking, if you average the OEMs, I think you'd get something close to what we're seeing. So we're -- our product line is on gas engines. Our DFS business in Germany is on MTUs, reciprocating backup engine power. And we have a lot of control valves on GE Vernova, Baker Hughes and Mitsubishi gas turbines. So when you look at those OEMs and how they're doing and how they're forecasting growth, you can see how we can play in that market.

Our next question comes from Noah Poponak with Goldman Sachs.

Chip, in the beginning of the year in the initial guidance, if I recall, you had contemplated Aerospace aftermarket revenue growing low to mid-single digits. And year-to-date, it's now, I have it up 24%, I think that's right. The excess 20 points of growth, how much of that is pent-up demand, extended duration of the legacy fleet versus how much of that is sounds like maybe the LEAP and the GTF are coming along a bit faster than you planned at the beginning of the year?

It is a combination of both of those, Noah, as well as price. I just -- we see few signs of the legacy slowing down. And I think that's one of the bigger indications to us that we did see earlier in the year. I thought that would be flattish, except for price. And the shops and the airlines have found ways to send more units in for overhaul and repair and order more spare parts than we forecast that are modeled.

But then again, LEAP and GTF has -- that steep curve has continued to deliver more units into overhaul for us. So we like the results. And I think I said early in the year when I was questioned by a number of folks, are you just -- do you think that, that's going to happen? And what if there's more demand? And I said if there's more demand, we will be ready with the capacity to capitalize on that opportunity. And that's kind of how it turned out.

Do you have a sense from those customers of how long that now goes into the forward? Or is it just kind of hard to have that visibility in that business?

I think the challenge is it's all related to revenue passenger miles and how long airlines keep flying those legacy aircraft to make up for the delivery rates that are slower than they want them to be from the airframers. If there's -- if you listen to Southwest and United and American and Delta talk about U.S. domestic travel, it's not such a rosy picture.

If you listen to folks talk about what's going on in the rest of the world, there's some good demand in Europe and other places. So just keeping a close eye on that demand, I think, helps us understand how long the legacy fleet is going to be robustly invested in, if you will. Because once airplanes started -- will start to get part from the legacy fleet, more used serviceable material will be available, and while it could really, I think, eat into that business pretty quickly.

But for us on the Woodward side, the great news about that is that there's such a multiplier effect on LEAP and GTF in terms of how that fleet is accumulating hours and cycles that we feel like our growth profile is relatively secure. But I just -- maybe we're a few quarters ahead of that legacy fleet tailing off.

The 1 reminder you'll hear from a lot of folks in the OEM business is that, I don't know whether it's 40% or 50% of the CFM56-5s and -7s haven't seen their first shop visit yet. So those younger parts of the fleet still have a long way to go. The older parts of the fleet may get parked out when the demand curve turns a little bit or when the OEMs start producing at the rates they want to produce.

Our next question comes from the line of Gavin Parsons with UBS.

On LEAP, GE a week or 2 ago, said they expect a 25% shop visit CAGR through the end of the decade. Anything to keep in mind about your growth rate relative to that?

Sure thing. That's an exciting growth rate. I think the hours and cycles and utilization support that, obviously. For us, some of our LRUs are not necessarily correlated with a shop visit in terms of when we see them. We've been -- even though those -- our growth rates are substantial still and we have a steep growth rate, we don't necessarily correlate one-to-one with the shop visits in terms of removals of our different LRUs.

And we've kind of averaged that to talk about the service content of the LEAP and GTF being 5x what the prior legacy engine configurations were. And that kind of averages out the difference in shop visit rate from a fuel pump and a BSV actuator and things in an air valve. So right now, we're seeing pumps and fuel metering units and fuel nozzles come in. We haven't seen many of the other products yet. But over time, we will. I just don't know if 25% is a good number for us because we're not all that correlated to shop visits. We're more correlated directly to hours and cycles.

That's helpful. And on JDAM, I didn't see the step up in the budget. Do you guys have that contract locked in? Or just wondering your visibility on that going forward.

So we have POs from our customer and we're responding to those and fulfilling. I don't know what the locked in you're referring to, but we have POs from our customer.

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

I would just like to thank everyone for joining us for today's call. We'll see you next time.

Ladies and gentlemen, that concludes our conference call today. A rebroadcast will be available at the company's website, www.woodward.com, for 1 year. We thank you for your participation in today's conference call.