Woodward - Q1 2026
February 2, 2026
Transcript
Operator (participant)
Ladies and gentlemen, thank you for standing by. Welcome to the Woodward Incorporated first quarter fiscal year 2026 earnings call. At this time, I would like to inform you that this call is being recorded for rebroadcast and that all participants are in a listen-only mode. Following the presentation, you are invited to participate in a question-and-answer session. Joining us today from the company are Chip Blankenship, Chairman and Chief Executive Officer, Bill Lacey, Chief Financial Officer, and Dan Provaznik, Director of Investor Relations. I would now like to turn the call over to Dan Provaznik.
Dan Provaznik (Director of Investor Relations)
Thank you, Operator. I'd like to welcome all of you to Woodward's first quarter fiscal year 2026 earnings call. In today's call, Chip will comment on our strategies and related markets. Bill will then discuss our financial results as outlined in our earnings release. At the end of our presentations, we will take questions. For those who have not seen today's earnings release, you can find it on our website at 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 two of the presentation materials.
As always, elements of this presentation are forward-looking, including our guidance, and are based on our current outlook and assumptions for the global economy and our businesses more specifically. Those elements can and do frequently change. Our forward-looking statements are subject to a number of risks and uncertainties surrounding 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 and 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.
Chip Blankenship (Chairman and CEO)
Thank you, Dan. 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 is 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 forecasts. Commercial services activity was robust across narrowbody, widebody, and regional platforms. LEAP, GTF, and legacy narrowbody repair volume was up year-over-year and relatively flat compared to the fourth quarter of 2025. Also, like the previous quarter, we experienced elevated spare LRU provisioning orders, and we were able to execute and deliver these orders to customers. Very strong execution by our aerospace team enabled us to capture growth profitably with 420 basis points 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 points 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 licensed support offerings, which will give our customers more choice and additional capacity to address the growth.
In our industrial segment, we recently announced an important strategic decision to wind down our China On-Highway product lines. As we've discussed in the past, the China On-Highway market has provided us limited order visibility, and overall performance has been inconsistent from a revenue and profitability standpoint. We have been evaluating strategic options for this business for quite some time. The decision to wind down by the end of this fiscal year supports our long-term growth strategy for Woodward's industrial segment. Throughout the year, we expect to see continued benefits from our focus on operational excellence. This includes further stabilizing our end-to-end supply chain to improve on-time delivery, increase inventory turns eventually, and increase resilience to better serve our customers. Our near-term strategic priorities are clear.
First, we will meet OEM demand growth, whether that is rate breaks for airplane and engine OEMs in aerospace or data center-related power generation demand increases for industrial controls and components. Second, we will provide world-class service to deliver on the promise of repair and overhaul of our Woodward product install base, whether that is aerospace legacy, LEAP, GTF or industrial gas turbine systems. Last but not least, we are shifting our R&D focus from baseline technology development to customer value demonstration on selected technologies to position Woodward for increased content on next single aisle platforms. From a capital allocation standpoint, our ongoing organic growth and strong balance sheet provide us with flexibility to evaluate potential inorganic opportunities that are a strategic fit with the right risk-adjusted returns while investing in ourselves and returning cash to shareholders.
Given the strength of our first quarter performance and our outlook across our markets, we are confident in raising our full-year sales and earnings guidance, which Bill will outline in his section after sharing more detailed financial information regarding our first quarter performance. Over to you, Bill.
Bill Lacey (CFO)
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 volumes during the quarter, primarily for China. This appears to have been driven by customer under-provisioning 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 and 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 investments. 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 volumes, strong price realization, and favorable mix, partially offset by inflation. Significant progress on our operational excellence pillar enabled us to increase output to meet strong customer demand and achieve improved operating leverage. The China On-Highway business added an additional 210 basis points of margin growth. As Chip mentioned in his comments, we announced that after a multi-year evaluation of strategic alternatives, including potential divestiture, we made the decision to wind down the China On-Highway business by the end of the fiscal year. This business often drove 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 in 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 winddowns, 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 winddown period. Non-segment expenses were $37 million for the first quarter of 2026, compared to $22 million. Adjusted non-segment expenses in the first quarter of 2025 were $28 million. There were no adjustments to non-segment expenses in the first quarter of 2026.
At the consolidated Woodward level, net cash provided by operating activities for fiscal 2026 was $114 million, compared to $35 million, largely driven by higher net earnings. Capital expenditures were $44 million for fiscal 2026. We expect capital spending to meaningfully increase over the remaining three quarters due primarily to the Spartanburg facility buildout as well as other ongoing automation projects. We generated strong free cash flow of $70 million in the first quarter, compared to $1 million, driven primarily by higher earnings related to the outperformance in the quarter. As of December 31st, 2025, debt leverage was 1.2 times 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 minus. For fiscal 2026, we now expect the following: aerospace sales growth to be between 15%-20%, with margins holding between 22%-23%. Industrial sales growth to be between 11%-14%, with margins increasing to be between 16%-17%. We are raising both Woodward-level sales and EPS guidance.
We now expect consolidated sales growth to be between 14%-18%, and EPS to be between $8.20-$8.60. Free cash flow is still expected to be between $300 million-$350 million. As Chip mentioned earlier, we expect to continue to maintain higher levels of inventory than we anticipated as we prioritize meeting customer 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 (participant)
Thank you. The question-and-answer session will begin at this time. If you are using a speakerphone, please pick up the handset before pressing any numbers. Should you have a question, please press star one on your touch-tone phone. If you wish to withdraw your question, press star one a second time. Your question will be taken in the order it is received, and please stand by for your first question. Our first question comes from the line of Scott Mikus with Melius Research. Your line is open.
Scott Mikus (VP of Equity Research)
Good evening, Chip and Bill. Very nice results. Quick question on the commercial aftermarket sales. Normally, we would see a sequential decline due to the fewer working days, another very strong quarter for LRU sales. But given that price increases are usually more pronounced in your second quarter, will the $245 million of commercial aftermarket sales in the first quarter be the low point for the year?
Chip Blankenship (Chairman and CEO)
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 LRUs shipping, so certainly that'll knock the peak of that revenue off. But we have modeled increasing repair and spare part 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.
Scott Mikus (VP of Equity Research)
Okay. And then presumably in the aero guide, there's some conservatism regarding Boeing and Airbus's production rates. If Boeing and Airbus do hit their production rates, could that drive more upside through higher initial provisioning sales for your aftermarket?
Chip Blankenship (Chairman and CEO)
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.
Scott Mikus (VP of Equity Research)
All right. Thanks for taking the time.
Chip Blankenship (Chairman and CEO)
Yeah, 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. The opportunities on the earnings side is from having more spare LRUs than we have in the forecast or more repair volume than we have in the forecast. That's kind of how I characterize the aero looking forward.
Scott Mikus (VP of Equity Research)
All right. Thank you.
Chip Blankenship (Chairman and CEO)
Welcome.
Operator (participant)
Our next question comes from the line of Scott Deuschle with Deutsche Bank. Your line is open.
Scott Deuschle (Director)
Hey, good evening. Bill, just to be clear, was the 5% increase in the aerospace sales outlook primarily an increase in the aftermarket, or was it more broad?
Bill Lacey (CFO)
Yeah. It was the first quarter driven, Scott. Given that that was mainly driven by commercial services, that is a fair conclusion.
Scott Deuschle (Director)
Okay. Then why does the margin guidance for aerospace not benefit from the higher aftermarket mix and operating leverage that's implied in what you just said?
Bill Lacey (CFO)
Yeah. So, as you see, it did flow through in Q1. In the remaining year, remaining portion of the year, we are seeing increased OEM sales. With that increased OEM sales, that mix will temper the margin rate going forward.
Scott Deuschle (Director)
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 looked like around 30% growth in both of them. So curious if you can unpack that and talk through the outlook from here.
Chip Blankenship (Chairman and CEO)
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, it's kind of the 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's some new unit impact to the growth.
But as well, the high utilization of the fleet that has Woodward fuel injection and control systems and pumps in it is seeing quite a bit of overhaul activity and service activity that uses our spare parts.
Scott Deuschle (Director)
Thank you.
Chip Blankenship (Chairman and CEO)
You're welcome.
Operator (participant)
Our next question comes from the line of Noah Poponak with Goldman Sachs. Your line is open.
Noah Poponak (Managing Director)
Hey. Good afternoon. Good evening, guys.
Chip Blankenship (Chairman and CEO)
Good afternoon, Noah.
Noah Poponak (Managing Director)
Should we interpret the total company full-year guidance revision as you left the remaining nine months of the year the same as the prior plan, roughly, and that the upside to the full year is basically the upside to the just 1Q?
Chip Blankenship (Chairman and CEO)
No, yes, that's correct.
Noah Poponak (Managing Director)
Okay. And so I guess the follow-up to that is, does that make sense? Was all of the upside in one Q 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?
Bill Lacey (CFO)
Yeah. Let me 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 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 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.
Chip Blankenship (Chairman and CEO)
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. 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 the things that would drive us to the top side of the guide. 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.
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.
Noah Poponak (Managing Director)
Okay. That makes sense. I appreciate that detail. And then could you quantify? Is it possible to quantify for us, either in absolute U.S. dollars or points of growth or anyway, what the LEAP and GTF contribution to the aftermarket was and what the initial spares LRU contribution to the aftermarket was?
Chip Blankenship (Chairman and CEO)
I don't think we're going to be quantifying that for you. But 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. This doesn't have as much of a weight per unit turned or anywhere near as a spare LRU. And so, we like the year-over-year growth that we saw from the LEAP GTF. It's still tracking to the plans that we've 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.
Noah Poponak (Managing Director)
So, Chip, it sounds like the LRUs can be chunky. 50 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 maybe in the LEAP GTF plan and also in the legacy aircraft and engine.
Chip Blankenship (Chairman and CEO)
Yeah. 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.
Noah Poponak (Managing Director)
Okay. All right. Thanks a lot.
Chip Blankenship (Chairman and CEO)
You're welcome.
Operator (participant)
Our next question comes from the line of Sheila Kahyaoglu with Jefferies. Your line is open.
Kyle Wenclawiak (Equity Research Senior Associate)
Hi, guys. Congrats on the great quarter. This is Kyle on for Sheila.
Chip Blankenship (Chairman and CEO)
Thanks, Kyle.
Bill Lacey (CFO)
Hey, Kyle.
Kyle Wenclawiak (Equity Research Senior Associate)
On the LEAP GTF mix, I know you also said legacy narrow-body was up year-over-year and also flat relative to the fourth quarter, obviously counterseasonal 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?
Chip Blankenship (Chairman and CEO)
Yeah. 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 all these operational factors helped us maintain a steady performance operationally. And that shows through in the financials.
Kyle Wenclawiak (Equity Research Senior Associate)
Okay. That's helpful. And then just one follow-on on the LRUs. And I think it was Bill's commentary. You mentioned you guys have more confidence that this was prior under-provisioning rather than pull forward related to tariff, say, in the prior year. Can you just kind of give us an update on why the kind of shift in signaling there and what you're seeing out of that customer base? Thanks, guys.
Chip Blankenship (Chairman and CEO)
Sure. I think the way I characterize it is there was an open window for trade, really, was what I think and the concern that that window might close is my hypothesis for why that activity was so strong in recent quarters. 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. Our team determined that those customers were a little bit behind the curve in provisioning. So that's kind of how we come up with that conclusion.
Operator (participant)
Our next question comes from the line of Gavin Parsons with UBS Financial Services. Your line is open.
Gavin Parsons (Equity Research)
Hey. Thanks, guys. Good afternoon.
Bill Lacey (CFO)
Howdy. Hey, Gavin.
Gavin Parsons (Equity Research)
Do you mind breaking down for us the growth rates by the aerospace subsegments assumed for the year?
Chip Blankenship (Chairman and CEO)
Yeah. I think we talked about that last quarter that I didn't do a very good job at that the year before. My hypotheses did not come to fruition. So I retired that process with last year. Look, we see strong demand in OEM, both defense and commercial. We see reasonably good demand on top of very hard comps coming up on the commercial services. And then defense services is kind of flattish. We're on the right programs in defense. It's just that MRO for us isn't growing very fast in defense. And well, that's as much color as I'd put on it at this time, if that's okay, Gavin.
Gavin Parsons (Equity Research)
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?
Chip Blankenship (Chairman and CEO)
So, we're reaching 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. We're putting more test cells into our Rockford facility. So, we have enough space in Rockford, but we needed more space in Prestwick.
As far as the Woodward facility buildout, that's what we have in our plans for our own in-house service footprint. We're partnering with some external MRO providers to give some more choice and some more capacity to customers. That's up and coming.
Gavin Parsons (Equity Research)
How does that agreement work in terms of revenue and margin contribution?
Chip Blankenship (Chairman and CEO)
So it's just like you might imagine for an independent provider 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.
Noah Poponak (Managing Director)
Great. Thank you.
Chip Blankenship (Chairman and CEO)
You're welcome.
Our next question comes from the line of Peter Skibitski with Alembic Global Advisors. Your line is open.
Peter Skibitski (Director)
Hey. Good evening, guys. And I think you guys usually disclose this in the queue, but how was pricing this quarter in terms of or relative to your 5% expectation for the full year? I imagine maybe with the LRUs, it was above the expectation.
Bill Lacey (CFO)
Yeah, Pete. This quarter, we saw at the Woodward level, price come in about 8%, so slightly higher than our 5%, which we would expect it to be a 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.
Peter Skibitski (Director)
Okay. I appreciate that. And then maybe one for Chip here. Hey, Chip, when you guys say you're investing in commercial aftermarket capacity, do you have a sense of 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, that maybe there's some, I don't know, PMA or somebody else is taking sales that you think are rightfully yours. So I was just wondering if you could illuminate that.
Chip Blankenship (Chairman and CEO)
Yeah. So, on LEAP GTF, we don't feel like we're missing out. 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 one 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 time.
So it's not necessarily a market-share-driven decision. We're just trying to stay ahead of the growth that we're predicting.
Peter Skibitski (Director)
Great. Thank you.
Chip Blankenship (Chairman and CEO)
You're welcome.
Operator (participant)
Our next question comes from the line of Louis Raffetto with Wolfe Research. Your line is open.
Louis Raffetto (SVP of Equity Research)
Hey. Good evening, guys.
Peter Skibitski (Director)
Hey, Louis.
Louis Raffetto (SVP of Equity Research)
Maybe just talk to the Free Cash Flow. 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. Just, can you help me walk through that again?
Bill Lacey (CFO)
Yeah. 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.
Louis Raffetto (SVP of Equity Research)
Okay. Great. Thank you. And then maybe just back to the question on the licensing, how are you thinking about balancing, expanding your capacity with extending these licenses?
Chip Blankenship (Chairman and CEO)
Yeah. 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 let some others bear those investments?" And then the other thing is, in some cases, it's sort of a win-win because some of our customers would prefer to do that work on-site to support either their array of customers or their own airline, let's say. And so for us, that's a win-win proposition where our materials, our work scopes, and our technical approach gets utilized, and somebody else does the wrench turning and the customer support.
I think it's a pretty efficient way to think about it where we're angling to do a significant amount of the work ourselves, but yet share in a percentage of it.
Louis Raffetto (SVP of Equity Research)
Great. Appreciate it.
Chip Blankenship (Chairman and CEO)
Welcome.
Operator (participant)
Our next question comes from the line of Gautam Khanna with TD Cowen. Your line is open.
Gautam Khanna (Analyst)
Yeah. Thanks. Good afternoon, I should say.
Peter Skibitski (Director)
Good afternoon, Gautam.
Gautam Khanna (Analyst)
I was curious, just in terms of bookings, if you will, in the quarter and since the quarter's end. Have you seen any? 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. Yeah.
Chip Blankenship (Chairman and CEO)
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 in our supply chain deliver that much output, continuing to work on our constraints and improve the 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.
In some cases, we're actually at the mercy of other supply chains to our customers where 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. 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. The orders are strong, and the orders support the high end of our guide.
Gautam Khanna (Analyst)
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?
Chip Blankenship (Chairman and CEO)
Well, it's considerably below the blended margin, obviously. But the opportunity for us to improve there is really at least twofold. One is if our customers can consistently remain at the higher rates and achieve the rate breaks that are in this year's plan, obviously, we'll get volume leverage, which is good. And then if we can get our supply chain aligned in such a way that we can build more efficiently, that we're clear to build for the entire week, all week, and we can run the schedule that we wanted to run at the start of the week, all of that will flow through in terms of waste reduction and impact our financials favorably. So it's really those two things that we need to come to fruition to keep improving our OEM margins on the commercial side.
Gautam Khanna (Analyst)
Is there any way you can give us a dimension for how profitable it is? Is it a 10% business? Is it a 5% margin business today?
Chip Blankenship (Chairman and CEO)
We have a variety of margins depending on which application it is and what type of product it is. We like to think about overall business lifecycle margin. That's what it's about, is getting this installed base out in the field so we can service it. That's probably all I'll say about that.
Gautam Khanna (Analyst)
Thank you.
Chip Blankenship (Chairman and CEO)
You're welcome.
Operator (participant)
Our next question comes from the line of Alexandra Mandery with Truist Securities. Your line is open.
Alexandra Mandery (Equity Research Associate)
Hi. This is Alexandra Mandery on behalf of Michael Ciarmoli with Truist Securities. Thanks for taking my question. I was wondering if you could seize the China On-Highway cost for the divestiture, and will there be any revenue spillover into FY 2027, and are expectations still around $60 million for FY 2026, kind of similar to the 2025 results?
Bill Lacey (CFO)
Yeah. So, as it relates to the wind-down costs, we're expecting somewhere between $20 million-$25 million of costs related to the restructuring. A lot of that will be related to people cost, 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 let's 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.
Alexandra Mandery (Equity Research Associate)
Okay. Great. And then you mentioned you're on the right defense programs, but defense aftermarket appears to be lagging behind defense OEM. Can you provide any additional color there, or are there other opportunities on the horizon that you guys are looking at?
Chip Blankenship (Chairman and CEO)
I guess the way I'd characterize our defense services is in some product lines, it's relatively steady. 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. Some product lines are steady, and then some are kind of lumpy. You can see some quarters we have single-digit to double-digit growth, and other quarters were flat to down. 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.
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.
Alexandra Mandery (Equity Research Associate)
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 availability a boost. How do you see this playing out, and what impact could you see for Woodward?
Chip Blankenship (Chairman and CEO)
Well, 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. That might be our first indication that could be an opportunity for Woodward.
Alexandra Mandery (Equity Research Associate)
Great. Thank you.
Chip Blankenship (Chairman and CEO)
You're welcome.
Operator (participant)
Mr. Blankenship, there are no further questions at this time. I will now turn the conference back over to you.
Chip Blankenship (Chairman and CEO)
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.
Operator (participant)
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.