Woodward, Inc. (WWD) Q1 FY2026 Earnings Call Transcript & Summary

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.