Woodward, Inc. Q3 2026 Earnings Call

Welcome to the Woodward, Inc. third 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.

Thank you, operator. We would like to welcome all of you to Woodward's third quarter fiscal year 2026 earnings call. In today's call, Chip will comment on our strategies and related markets. Bill will discuss our financial results as outlined in our earnings release. At the end of the presentation, we will take questions. For those who have not seen today's earnings release and presentation materials, you can find them on our website at woodward.com. 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, and all comparisons are to the prior 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, 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, 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 to everyone joining us for our third quarter 2026 earnings call. I'm pleased to report that Woodward delivered another outstanding quarter, marked by strong financial and operational performance. This continued momentum is the result of focused and disciplined execution by our global team as we deliver on strong customer demand for our products and services across our aerospace and industrial markets. In the quarter, Woodward sales grew 21% year-over-year, adjusted EPS increased 43%. We delivered significant margin expansion, primarily driven by pricing actions. We are also seeing productivity gains from our lean transformation start to flow through our factories and improve margins. Industrial sales were up 26% in the quarter, the team did an excellent job leveraging fixed costs as volume increased across all primary markets.

Aerospace sales were up 19%, with commercial OEM keeping pace with airframer build rates, sustained commercial services growth, and strength in defense services. As we move through the final quarter of the year, we are well-positioned to deliver on anticipated growth across our markets. The growth trajectory in aerospace was reinforced last week at the Farnborough Airshow. In the many years I've attended the show, I can't remember another time when the industry remained so calm and collected during a period of such significant growth for current generation products and services. Several big aircraft orders were announced at the show. Commercial OEM and services outlooks are strong. There is a sense that defense demand could also accelerate.

All of this was taken in stride as airframers and engine OEMs look to component and service providers like Woodward to maintain focus and deliver on the demand created by the growing backlog. In this high-growth environment, it is helpful that supply chain visibility and predictability continue to improve. Disruptions haven't totally gone away, but we are working together with our suppliers and customers to manage through them. During Airshow Week, we announced a partnership with HAECO, establishing the third elite licensed service facility for Woodward LRUs on the CFM LEAP engine. This is an important step for our airline customers throughout Greater China and the Asia-Pacific region. Our services capacity strategy is well-defined for the next several years. We're now focused on executing that strategy to stay ahead of growing customer demand.

On the topic of capacity, we celebrated the recent completion of the expansion of our industrial segment high-speed fuel injection value stream in Glatten, Germany. The expanded production capacity is already supporting growing demand, particularly from Rolls-Royce's mtu Solutions division, serving power generation applications. I enjoyed being in Glatten with customers, community partners, and our amazing team members who completed this complex project on schedule, on budget, and without disrupting customer deliveries. It's a great example of how we're expanding capacity while maintaining the operational discipline our customers expect. We've also announced additional footprint optimization decisions to support future growth and improve efficiency. This includes the decision to close our recently acquired electronic products facility in Canada. Transfer production and engineering to existing Woodward facilities in Poland and Bulgaria. We're working through the transition and being thoughtful and respectful with our members.

This move will generate meaningful cost synergies while improving the returns on our THSA and related electromechanical product portfolio acquisition. We also decided to move one of our Niles JDAM production lines to our new Spartanburg facility to strengthen supply continuity for customers, provide flexibility, and support future growth. Earlier, I mentioned that we're starting to see productivity gains flow through our factories. One area of significant progress is our automation journey. Those of you who visited our Rock Cut facility saw the deburring cobots in action. This technology has become a platform for us. We are deploying it across Woodward plants. In another automation success story, we are working with a supplier to integrate machining, inspection, loading, and unloading into a lights-out cell for key fuel nozzle parts. This will deliver capacity for our GTF high-volume line, as well as efficiency and risk reduction.

Our automation investment objectives are fourfold: expand capacity, increase productivity, and enable growth, as well as reduce our direct labor hiring demand. We're targeting a reduction of approximately 1,000 incremental hires by 2029, in many cases, by automating repetitive, less desirable work. This represents about 50% of our projected hiring needs in that timeframe, equally weighted by attrition and growth. As with our lean transformation, this is not about replacing people. We will continue hiring to support growth and manage attrition. We'll just need fewer new hires who will gain long-term workforce efficiencies. Tying all this together from disciplined execution to investments in capacity and automated processes, we are on an exciting path for long-term growth and margin expansion. Based on a strong third quarter and confidence that we will continue to execute well in the fourth quarter, we are raising our earnings guidance for 2026.

Now over to you, Bill.

Thank you, good evening, everyone. As Chip mentioned, Q3 was an outstanding quarter. We achieved record performance in a number of areas. Net sales were $1.1 billion, an increase of 21%, reflecting strong demand and increased output in both aerospace and industrial. We achieved earnings per share of $2.40 compared to $1.76. Adjusted earnings per share were slightly better at $2.52, also compared to $1.76. Free cash flow was $87 million, bringing our year-to-date total to $196 million, for an increase of 23%. At the segment level, aerospace sales for the third quarter were $709 million, an increase of 19%. The strong growth was primarily driven by commercial aerospace. Commercial OEM sales increased 34%, with our output generally aligned with steadily increasing airframer build rates. Commercial services increased 24%, reflecting continued strength across the business.

This included high utilization of legacy aircraft, growing LEAP and GTF activity, and solid service demand across wide-body and regional platforms. Defense OEM sales declined 6% due to a one-time revenue recognition adjustment. Excluding the adjustment, defense OEM sales would have grown in the mid-single digits. Defense services grew 20%, driven by a large delivery of T700 spares and general improvements in castings supply. Aerospace segment earnings were $170 million or 24% of segment sales, compared to $126 million or 21.1% of segment sales. The meaningful margin expansion was driven by strong price realization and increased leverage from higher sales volume, partially offset by inflation and unfavorable mix. Price realization included a one-time retroactive pricing adjustment related to a contract that had been under negotiation for several quarters. This adjustment contributed approximately 100 basis points to aerospace margins in the third quarter. Turning to industrial. Segment sales for the third quarter were $401 million, an increase of 26%.

Core industrial sales, which exclude the impact of China on-highway, increased to 19%, driven by higher volume in all primary markets as well as price realization. Marine transportation sales were strong, increasing approximately 24%, with higher shipyard output driving OEM demand. Services also contributed to the growth. Oil and gas sales grew 11%, driven primarily by higher LNG infrastructure-related volume. Upstream capital expenditures are showing signs of recovery, particularly in the Middle East. Power generation sales increased 19%, driven by higher data center demand for both base and backup power. Third quarter China on-highway sales were better than expected at $40 million. We do not expect significant China on-highway sales in the fourth quarter as we complete the wind down of this business.

Industrial segment earnings were $88 million, or 22.1% of segment sales, compared to $48 million, or 14.9% of segment sales. The strong margin expansion was driven by increased leverage from higher sales volume and price realization, partially offset by inflation. Core industrial margins were 21.2% compared to 15.6%. The China on-highway business added approximately 90 basis points to segment margin in the quarter. At the consolidated Woodward level for the first nine months of 2026, net cash provided by operating activities was $352 million, compared to $238 million, largely driven by higher earnings. For the first nine months, free cash flow was $196 million, an increase of 23% over the prior year while increasing capital expenditures. Our capital expenditures totaled $156 million, and we expect a meaningful increase in capital spending in the fourth quarter. As we discussed last quarter, we are carrying higher inventory levels to support demand.

Our accounts receivable balance at the end of the third quarter was higher than expected due to collections timing. As of June 30th, 2026, debt leverage was 1.6 times EBITDA. Our strong balance sheet provides flexibility to act decisively as compelling opportunities emerge. Our capital allocation priorities remain unchanged. We continue to support organic growth, selectively pursue strategic M&A, and return capital to shareholders. In the first nine months of 2026, we returned $608 million to shareholders, $553 million through share repurchases, and $55 million in dividends. We now expect to return approximately $700 million to shareholders through dividends and share repurchases in the fiscal year. Turning to our 2026 guidance. Based on our strong third quarter performance and confidence in the fourth quarter, we are raising our 2026 earnings guidance. For 2026, we now expect the following.

Aerospace sales growth between 21% and 23%, with margins of approximately 23.5%, the top end of our previous range. Industrial sales growth increasing to between 19% and 21%, with margins increasing to approximately 19%. An adjusted effective tax rate of approximately 22.5%. Based on these updates, we are raising our adjusted EPS guidance to between $9.30 and $9.50. All other elements of our fiscal year 2026 guidance remain unchanged. This concludes our prepared remarks on the business and results for the third quarter of fiscal year 2026. Operator, we are now ready to open the call to questions.

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 *1 on your push button phone. Should you wish to withdraw your question, press *1 again. Your question will be taken in the order it's received. Please stand by for your first question, sir. Our first question comes from Gavin Parsons with UBS. Please state your question. Thank you.

Good afternoon. Afternoon, Gavin. Hey, Gavin.

On the aftermarket growth rate, obviously very difficult comps. That slowed down a little bit. Anything to call out in terms of either customer behavior or identify for the slowdown? If you could speak to how spare LRUs are trending relative to the elevated past few quarters, that'd be great.

Sure. The inputs that we've received from airline customers and other MRO shops have been fairly steady to increasing, I'd say, across the LEAP-GTF. Quite steady on the legacy, and wide body, and regional. No real slowdown that we see on inputs, which is good based on the macro environment that we're involved in. Inputs are strong, we like that. As far as spare LRUs go, from a macro standpoint, I'll say a few things, then I'll turn it over to Bill. From a macro standpoint, as part of our strategic planning, we were updating how the entire fleet ratios are looking for the spare LRUs compared to number of engines in the field. We're very satisfied that we're tracking well to the predictions and the model that we had at the start of the program.

We don't think there's an overdue backlog or pull forward or anything going on like that. We feel like we're tracking to the model largely over an extended period of time. Now, that can vary quarter to quarter based on when airlines place POs or when they decide to take action on crossing certain delivery concentration marks. I don't know, Bill, do you have anything else on that?

I'll just add, Chip, that in Q3, LRUs performed very well. They were strong. I would expect that going into the fourth quarter, that they'll remain level, elevated, but probably will come down slightly from what we experienced in Q3.

More like the first half?

More like the first half.

Yep. Great. Thank you very much.

You're welcome. Your next question comes from Scott Mikus with Melius Research.

Please state your question. Good evening, Chip and Bill.

Sorry if I missed this. I am juggling 4 earnings reports this evening. We've seen the engine OEMs comment that commercial aftermarket sales and orders continue to be strong in the legacy engine programs like the CFM56 and V2500. Seems like you're seeing the same, but flight activity's essentially flat year to date. Are you concerned that airlines or MRO shops are piling up excess inventory on the legacy platforms? And is there a risk that creates de-stocking maybe in 2027?

The way we look at this and we measure it is really on just sort of monthly inputs to our shop that we receive on the LRUs. V2500 fuel control, CFM56, HMU, GEnx, GE90, all of these LRUs inputs as we measure them per month. We see sort of a normal variation in noise, not anything that would say there's a trend. It's slightly up over time for the wide body. It's relatively stable for regional, and it's relatively stable for legacy narrow body. Does that get your question?

Yeah, that does. That helps. Another quick question now. Rolls-Royce actually put out a presentation for its power system segment, where they're talking about roughly a mid-teens growth rate for the next several years. You acquired L'Orange from them back in 2018. You have other power gen customers that are seeing strong demand. Is that mid-teens growth CAGR kind of the right way to think about your power gen and oil and gas revenues at the industrial segment for the next few years?

Yeah, I'm not really sure exactly what the content of that presentation was because people are now talking about sort of base grid power demand versus behind the meter demand and things associated with data centers. They're talking about them a little bit separately. For the data center demand, we do see that growing at quite a high rate. Whereas the demand for, I'd say, more generic grid-based power generation is a little bit less than that, but still reasonably strong. We are working very closely with each of our power gen customers on how to handle this good challenge associated with this demand. Last earnings call, I pointed out that for a number of years, I've said we have the right amount of capacity to deal with the power gen demand.

Sequentially, numerous customers have come to us and continued to increase their forecast for 2027, 2028 and beyond into the early 2030s. If all those cases are true, we'll have to expand capacity to be able to serve those levels of demand. Right now, we're in the process of having very detailed discussions with our customers about what the risk case is for all this demand and trying to make sure that we understand it, and we'll make a prudent allocation of capital to capture this fairly unique opportunity that we find ourselves with the right products on our side, on the right customer products to capture this demand. It's one of those things that I think we'll be in a better position to talk about what that looks like at our Investor Day.

All right. Got it. Thank you.

You're welcome. Your next question comes from David Strauss with Wells Fargo.

Please state your question. Thanks.

Good afternoon. Afternoon. Hey, Chip.

It sounded like there was this rev rec issue on the defense side. There was a benefit on the Aero margin side. As you guys calculate them, what were kind of the clean Incremental Aero margin, what was that this quarter?

Yeah. The exact incrementals, I'll have to get that. On Aero, backing out the pricing item, it would take their earnings rate from 24 down to 23%. I would expect those incrementals will still be pretty good there. On the rev rec item for Industrial, that did not have a margin impact. The incrementals are as reported.

Okay. I'm sorry. I thought it was a rev rec on the defense side. I didn't hear that correctly.

Right. Sorry. Okay. The defense- Yeah.

That is right. That is right, and it is on the Aero Defense side.

Aero Defense side. Oh, okay.

All right. Yeah. It looks like if you use calculated share and what you report, it is like 39% incrementals in Aero, I was just trying to get to a clean number there. On free cash flow, Bill, you talked about the receivable balance. I guess, as we have gone through the course of the year, you have raised your EPS guidance by a fair amount. The free cash flow guidance has kind of remained unchanged. I know there is a range there, but are you just seeing more of a working capital build this year than you would have anticipated? I know there is some working capital build, as you outgrow your expectation, but I would have thought maybe the higher EPS as we have gone through the year, that might lead to some sort of increase in the free cash flow guide.

Sure, David. First, The clean incremental is about 31%, just to cover that off.

Okay. Going to your question.

In our original guide, we assumed getting some efficiencies in our turns. I know we got it in us, I know we have the right initiatives lined up, and I know we're going to get there. We also started seeing clearly that the airframers were going to deliver on the rate increases. As we were sitting there. To get that turn improvement, it would cause us to have some changes in supply chain and our commercial team, then introduce the level of risk that with the demand growth we were seeing, we just weren't willing to take. While we're not getting efficiencies, we're also not getting worse. That added the investment inventory beyond what we had in our original guidance.

That's eaten up the EPS growth in the guidance that you're seeing is being eaten up by that, if that makes sense.

Got it. Okay. Thank you very much.

You're welcome. Your next question comes from Louis Raffetto with Wolfe Research.

Please state your question. Hey, good afternoon, guys.

Hello, Lou. Bill, I know you talked about, or Chip, maybe even talked about the fixed cost absorption in Industrial, obviously backing out the China on highway, that 21% margin in Industrial is impressive.

There's nothing one-time nature in there? Just trying to sort of balance that versus the sort of 14%-15% we saw last year, 17% in the first half of this year. Is there anything to note?

Lou, it is operational, but it had to do with one of our growing product lines, business lines here, not have as much growth this quarter and seeing some of the other business lines come through that had higher margin rates. The mix of business unit, the mix of products played favorably for us this quarter. I expect that the business unit I spoke that has a little more negative mix will come back next quarter, and I would expect that we see the core industrial earnings back to what you saw in the first half.

I'd just add that the industrial team has shown themselves to be very good at executing on volume leverage. As they continue to work Kaizen and respond to the customer demand in the gas turbine side, in the recip engine side associated with power gen, and the steady increase in marine and other applications, that they're well-positioned. As Bill said, we had some mix tailwind this quarter, I still like the direction that they're going and how they're performing.

18% is nothing to sneeze at.

We'll take it. Yeah. It certainly shows the potential of at least a large portion of the business, which is good to see.

Maybe, Bill, just one more. I know you mentioned you expect CapEx to step up a lot here in the fourth quarter, but are we really going to double CapEx again in the fourth quarter, more than double, I guess, to hit the guide?

Yeah. I've asked that question a few times myself, Lou, the team has come back. There's some big chunks, as you can imagine, that's associated with what we have to get done in Q4. It's primarily around finishing the Spartanburg facility, around purchasing production machinery for A350 spoiler. Again, those are pretty chunky. We've got line of sight to it. Five to 10 is in the mix there, but I think we will consume most of that, and get to the 290 that we guided towards on capital expenditures.

Thank you very much. You're welcome.

You're welcome. Your next question comes from Gautam Khanna with TD Cowen.

Please state your question. I thought I was on mute.

Just to follow up on that industrial question on profitability, what is possible over time in the industrial business? You guys have talked about 16%-18%, trending better than that, but I'm just curious, with all the initiatives you guys have implemented on SKU rationalization and pricing actions and just efficiencies. Over a longer period of time, what do you think is actually a possible level for the industrial segment to level out at?

Yeah, Gautam, we'll describe that in more detail at our Investor Day. I'd leave you with these thoughts, which is as we stand today in a growing demand environment where both we and our customers are able to get price. We are able to accelerate our lean transformation on the floors of our factories and get efficient in our supply chain, we can improve further from this point. We said mid-teens at the last Investor Day. We've been demonstrating better than that fairly consistently. As far as getting better from where we are today, we're obviously investing and challenging our teams and driving to continuously improve. However, don't know what the environment's going to be in the future yet. There are other factors that come into play. We like the investments we're making in automation.

We like the investments we're making in our lean transformation. Like you referenced, the product portfolio, we've really made some efficiency moves there to optimize the portfolio and how we serve customers and are able to run our factories. I believe we're on a continuous improvement journey. There's quite a bit more productivity in play, but there are other factors to deal with as well, and we'll give you a fulsome explanation of what we see at our Investor Day.

Thank you. Welcome. Your next question comes from Sheila Kahyaoglu with Jefferies.

Please state your question. Hi, guys.

This is Kyle on for Sheila. Thanks for taking the question. I guess just to circle up on the aerospace margins, I think you just said 31% core incrementals, and that's despite the OE gross kind of leading the pack in commercial. Maybe if you can talk about the puts and takes there, and then secondly, was that price already assumed in the full year guide? If you're feeling generous, can you tell us what end market and maybe even what customer that's related to? Thanks. I always feel generous, but I'm not that generous to give up the customer.

As it relates to the price overall, we're guiding for the full year for that to be close to 8% for the company. In third quarter, our price was 10%, and aero contributed more than a 10%, and then industrial less and brought it down to the 10%. That's kind of where those items came from, Kyle, and I can't remember the first part of your question.

I guess you referenced, Kyle, a core flow-through, which I would encourage us not to use that number. Bill was just cleaning up the flow-through number for one of the earlier questions in terms of removing that one-time price reconciliation from the financials.

Yeah. Thanks, Chip. Yeah, helpful and understood.

I guess just as you think about these kind of price negotiations that keep coming up better and better, it seems like quarter after quarter, whether there's still a sizable opportunity that exists out there. I know you guys have talked in the past that you'd expect price to moderate towards more typical levels, You guys keep surprising to the upside, Just curious. Thanks for the time. Sure.

I'll start and flip it to Bill real quick, but I'd say we've really made it through all of our LTA agreements for the first round that we closed out sort of post-2022. From now forward, it should moderate, and I'll let Bill kind of fill in the blanks there.

Yeah. Chip, I think you covered it. I think as we look at going forward, that I would expect price between 3% and 5% would be a more normal rate. Price will still play a role in margin expansion, along with working some of the other muscles as we talked about.

Yeah. It's up to us to fill in the rest with the productivity, which we're well deployed to achieve.

Thank you. Welcome. Your next question comes from Ken Herbert with RBC Capital Markets.

Please state your question. Yeah.

Hi, good afternoon. Chip and Bill, thanks for the question. I wonder if you could dig a little deeper on the defense OE side. Obviously, we can appreciate the one-time item in the quarter, but how do you expect that to step up sequentially into the fourth quarter as you think about the broader demand and where you're exposed on the munition side in particular?

I guess the way I described is no real change from prior quarters in terms of defense OE. We're seeing price roll through for some smart defense in Q3, but I think in Q4 that starts to moderate. We're not holding out defense OE as a large growth lever in this environment right this minute. Again, the future, we see a lot of potential for defense to have a longer run at these higher levels, especially in smart defense. We don't have any indication that's going to happen anytime soon. I think sort of a moderate performance in defense OE is what we can expect.

Okay. Just to clarify, for the commercial aero OE growth in the quarter, the up 34%, do you get a sense any sort of restocking or anything unusual beyond just the bill rate cadence on that? Maybe what are you seeing with sort of inventory levels of your product at your customers?

It feels like that sort of stocking level at the customers has returned to normal to slightly below what their MRP systems would like. We still feel a strong pull on delivery. A lot of this growth is due to our ability to get more product through the factory. A combination of working with our suppliers and inside our four walls, increasing that production is what led to that growth, plus some price. I don't see anything unusual. We feel like we're pretty much following the airframer rates. In some cases, their demand for our increased rate is ahead of their rate break, so we do sometimes see an earlier break in the demand for us.

Perfect. Thank you very much.

Welcome. Thank you. Your next question comes from Noah Poponak with Goldman Sachs.

Please state your question. Hey, guys.

Hey, Noah. Hey, thanks for taking the question.

How would you frame, at this point, what's possible or likely or realistic in your aerospace aftermarket growth rate of the next four to eight quarters compared to what you've been able to achieve in the last four to eight quarters?

Well, that sounds like a trick question. We like the long-term story, and what we shared at Investor Day last time was kind of a cartoon of graphs that showed that we believe that the Woodward case could likely grow at twice the rate of the overall market based on our product positions in terms of where the install base is growing. We still believe in that cartoon and those graphs. We believe we see the proof points along the way with the input we're seeing from LEAP and GTF, and how strong that the newer wide body products are performing. We believe that story is playing out in front of us. As far as exactly what happens in the next few quarters, we're not in a position to reveal that because it could be a little bit noisy up and down.

We believe we'll be in a position to update that chart for you at the Investor Day.

Just to add to that, it's obviously, again, the LRUs in those move can also make the quarters a bit lumpy.

Right. Yeah. The other thing I'd add, Noah, is that we've embarked upon these elite licensee relationships with really top of the shelf MRO providers, and we'll be working with them on provisioning and support of the agreements and things of that nature that will also provide some growth levers for the next year.

Okay. I appreciate that. I think the kind of medium to long-term algorithm is reasonably clear, but in the shorter term, just compares and there's a lot to triangulate. I wasn't trying to trick you, although I may end up tricking myself, I guess. You guys have spent a lot of time talking about narrow body contribution to this equation. How does your wide body exposure and its contribution to your medium to long-term aftermarket growth compare to narrow body in terms of the multiplier effect?

I'm not sure the best way- That's also a non-fair question.

to look at the multiplier effect. The multiplier effect is the hard part to answer. The multiplier for something like the 787 is comparing to something so old, it's not really very much into our MRO system because the large amount of the 767s, let's say, are in the freighter class and not many shop visits. I wouldn't get into the multiplier answer. From a GEnx and GE90 standpoint, these are the major customer platforms that we're on with significant LRUs that require a good amount of service, and those are very good businesses for us, and we work very closely with GE through the Convergence joint venture, to service those LRUs. We really like that business. It's doing very well and growing.

Okay. Just one last one. You guys have talked about 30%-35% incrementals in both segments, margin over time. Can we use that off of where you're now planning to end 2026? Maybe Aero has moving pieces that wash out and that's a yes, maybe industrial that's too high given what you just did in 3Q. How should I think about that?

That's a great question, Noah. The one that we are working through right now as we develop our annual operating plan for our fiscal 2027. It's a little premature for us to guide that because that is the guidance for next year, really, in terms of earnings growth. We've been saying that for a while, that those are the incrementals we believe in long-term. We've got to do the work to make sure that we're putting a robust plan out there for next year, and we'll guide accordingly.

Okay. Thanks very much. Welcome.

Your next question comes from Alexandra Mandery with Truist. Please state your question. Hey, nice results and thanks for taking my question.

In terms of automation, is there a particular segment or end market you see benefiting the most from increasing automation?

I think, from our standpoint, automation is a pretty generic way of approaching machining, assembly test, material flow, transport, and logistics. That really serves all end markets equally from a sort of an inside out standpoint. It's not really market-driven. It's more manufacturing-driven. I feel like it's spread equally amongst the end market that we serve.

For sure. Earlier you mentioned the supply chain. I guess, what are the weak points you might be seeing and what efforts, I guess maybe more specifically, have you taken with customers to kind of circumvent any supply chain issues in the future?

The ones that we're struggling with the most are the ones that the entire industry has on the forefront of their work list, so castings and forgings, as well as rare earth metals as we look forward. We haven't had a big problem yet with those, that's one that we all forecast coming to be a big challenge within the next few quarters. We and our customers and suppliers are all working together to try to allocate the right capacity to keep everybody building what they need to build a few quarters away from now on the rare earth. That's sort of an industry level work. As far as on the castings and forgings, we've been working very hard to transition from castings and forgings to billet that's hogged out on a CNC machine.

It's not a very efficient use of material, but it sure is a better way to ensure continuity of the supply chain. We've taken a lot of design for manufacturability approaches to control our own destiny on the supply chain. That all being said, we're still carrying five to 10 problematic suppliers that sort of pop up as problems in either the Aero or industrial segment, we just have to stay tuned to companies that run into trouble. For anything that has to do with machining, we have rapid response centers set up at three different sites. We've processed over 15,000 machine pieces through that network of ours, in order to bail out suppliers. We're very active on that front. Hopefully one day it doesn't require quite as much effort, but for now, that's what we're doing.

Perfect. Thank you. Welcome. Your next question comes from Scott Deuschle with Deutsche Bank.

Please state your question. Hi, good afternoon.

Bill, why was commercial aftermarket revenue down sequentially?

First of all, we feel good about that business and its continued strength. A part of what happened in Q3 was some good strength in Q2. We saw some shipments not get out of Q1, and in Q2, we were able to get out what we needed for Q2, as well as clear out some of the shipments for several reasons that got hung up, and we were able to get all of those out. That impacted Q3 from the sequential, but as you saw, the year-over-year was pretty strong. Again, we feel good about it, and I wouldn't read too much into it.

Okay. Just to make an attempt to follow up on Noah's question, do you think the aerospace business, Chip, do you think it will be able to drive at least some level of margin expansion in 2027, or is there doubt as to whether it can expand margins at all in 2027?

Our plans are to expand margins. We're measuring each of our product managers and each of our business unit VP GMs on a margin expansion target. We rolled all that up and wrestled around and played catch ball with it through our strategic planning process. We just got to get it orchestrated into an annual operating plan that we all like. Really, the target is margin expansion. I believe we can do it. It's not just like saying, "Do better." We have investments in automation and lean transformation productivity that need to bear fruit, and we're focused on doing that for FY 2027 without giving you a number.

Okay. Even with all these potential headwinds of spare LRU normalization, Spartanburg hiring, ERP costs, OE mix, all that, you think the business operationally still has?

Yeah the potential to expand margins?

All that. Okay. Yeah, all that plus the moves we're doing to improve the long-term performance of the business that require resource and investments to accomplish.

We think even with all those things going on, we have enough horsepower and capability to deliver margin expansion.

Okay. Then Chip, can you update us on where the business is at in terms of the size of LEAP and GTF revenue base relative to CFM56 and V2500?

We're still marching towards that crossover from a repair standpoint. I think as I said last time, we've already crossed it if you include repair plus spare LRUs. I think right on track. The one thing we didn't model was the legacy business hanging on this well in terms of both price, work scope, and volume. We're excited about the race that we're in.

Okay. Thank you. You're welcome.

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

Okay. Thank you very much, operator. Before we end the call, I want to let everyone know that we finalized the date of our Investor Day. It will be held on Thursday, March 4th, 2027 in New York City, and I look forward to seeing everyone there. Thanks everyone for joining today's call.

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