Woodward, Inc. (WWD) Earnings

Management highlights

### Overall Performance - Woodward delivered strong Q3 results, with 21% year-over-year total net sales growth to $1.1 billion, 43% adjusted EPS growth, and significant margin expansion driven by pricing actions and early lean transformation productivity gains - Year-to-date free cash flow hit $196 million, up 23% year-over-year; $608 million has been returned to shareholders year-to-date via $553 million in share repurchases and $55 million in dividends ### Strategic Capacity & Footprint Updates - Announced a new licensed service facility partnership with Hayco for CFM LEAP engine line replaceable units (LRUs) in greater China/Asia-Pacific to support growing services demand - Completed on-schedule, on-budget expansion of the high-speed fuel injection production line in Glotten, Germany, already supporting growing demand from Rolls-Royce's MTU Solutions for power generation applications - Implemented footprint optimization: closing a recently acquired Canadian electronics facility, moving production/engineering to existing facilities in Poland and Bulgaria to capture cost synergies from the THSA acquisition; moving a Niles JDAM production line to the new Spartanburg facility to improve supply continuity and flexibility ### Automation & Productivity Initiatives - Deploying automation technology (including deburring cobots and lights-out machining cells for fuel nozzle parts for the GTF high-volume line) across global facilities to expand capacity, boost productivity, reduce incremental direct hiring demand - Targeting a reduction of ~1,000 incremental new hires by 2029 (equal to ~50% of projected hiring needs over the period, split between growth and attrition replacement), with no layoffs from automation; new hires will still be added to support growth and attrition ### Market Context - Commercial aerospace outlooks for OEM and services remain strong, with large recent aircraft orders; defense aerospace demand could accelerate, and supply chain visibility/predictability continues to improve despite remaining disruptions

Guidance

- Management raised full year FY2026 guidance following the strong Q3 performance and confidence in Q4 execution: - Aerospace sales growth is now expected to be between 21% and 23%, with segment margins of ~23.5% (the top end of the prior guidance range) - Industrial sales growth is now expected to be between 19% and 21%, with segment margins increasing to ~19% - Adjusted EPS guidance is raised to $9.30 to $9.50, from the prior range - Full year capital expenditures are still expected to reach ~$290 million, with the majority of the remaining spend concentrated in Q4 to complete the Spartanburg facility and purchase production equipment for new programs - Full year shareholder returns are now expected to reach ~$700 million via dividends and share repurchases - The adjusted effective tax rate is expected to be ~22.5%, and all other elements of prior FY2026 guidance remain unchanged

Segment performance

1. Aerospace Segment: - Q3 FY2026 net sales: $709 million, 19% year-over-year growth, contributing 64% of total Q3 net sales - Segment earnings: $170 million, with a segment margin of 24% (up from 21.1% year-over-year) - Commercial OEM sales grew 34% aligned with rising airframer build rates; commercial services grew 24% driven by strong demand across legacy, LEAP, GTF, widebody and regional platforms - Defense OEM sales declined 6% due to a one-time revenue recognition adjustment (would have grown mid-single digits excluding the adjustment); defense services grew 20% 2. Industrial Segment: - Q3 FY2026 net sales: $401 million, 26% year-over-year growth, contributing 36% of total Q3 net sales - Segment earnings: $88 million, with a segment margin of 22.1% (up from 14.9% year-over-year); core industrial margin (exiting China on-highway business) was 21.2% - Core industrial sales (excluding China on-highway) grew 19%: marine transportation up 24%, oil and gas up 11%, power generation up 19% driven by data center base and backup power demand - China on-highway sales came in at $40 million, better than expected, and added 90 basis points to segment margin in the quarter

Risks & headwinds

- Ongoing supply chain constraints remain: castings, forgings, and rare earth metals are identified as upcoming potential bottlenecks, with rare earth supply challenges expected to emerge within the next few quarters - A small number of problematic suppliers continue to create intermittent disruptions across both aerospace and industrial segments - Margin expansion could be impacted by ongoing inflationary pressures and unfavorable product mix shifts - Quarterly aftermarket results can be lumpy due to variation in airline purchase order timing and LRU delivery concentration - Long-term margin and growth outlooks are dependent on continued successful execution of automation, lean transformation, and capacity expansion plans, as well as favorable market conditions

Analyst Q&A

• Q: Analyst asked about the slight sequential slowdown in aftermarket growth, and trends for spare LRUs, questioning if there is underlying softness in customer demand. /

  A: Management stated input demand from airlines and MRO shops remains steady to increasing across LEAP, GTF, legacy, widebody and regional platforms, with no underlying slowdown. Spare LRU volumes are tracking exactly to long-term fleet-based forecasts, with no signs of pulled-forward demand or unfulfilled backlog; Q3 spare LRU volumes were elevated, and are expected to moderate slightly to first-half levels in Q4.

• Q: Analyst asked if the high 21% core industrial margin in Q3 is sustainable, or if it was driven by one-time factors. /

  A: Management explained the strong Q3 industrial margin was driven by operational execution and favorable product mix, with higher-margin business lines outperforming lower-margin lines in the quarter. A lower-margin growing business line is expected to return to its normal weight next quarter, so core margins will likely revert to the first half level around 18%, but the quarter demonstrates the long-term margin potential of the industrial segment as volume grows.

• Q: Analyst asked about the path for aerospace price increases going forward, after multiple quarters of upside surprises from contracting. /

  A: Management stated that all first-round post-2022 long-term agreement price negotiations have been completed, so pricing will moderate to more normal levels going forward. A 3% to 5% annual price increase is expected to be the new normal, with future margin expansion coming primarily from productivity gains from automation and lean transformation rather than large catch-up pricing adjustments.

• Q: Analyst asked if aerospace margins are still expected to expand in FY2027, even with headwinds from facility opening costs, mix shifts, and other one-time items. /

  A: Management confirmed that operational plans for FY2027 target margin expansion for the aerospace segment, and all business unit leaders are held to margin expansion targets. Investments in automation and lean transformation are on track to deliver productivity gains that will offset expected headwinds, with formal guidance for FY2027 to be released once annual planning is complete.

• Q: Analyst asked which segments benefit most from automation, and what ongoing supply chain weak points management is addressing. /

  A: Management explained automation is a manufacturing-focused improvement applied across all end markets equally, rather than targeted to a single segment. Top ongoing supply chain risks are castings/forgings and rare earth metals; the company has mitigated risk by re-engineering parts to use billet instead of castings where possible, and maintains rapid response machining centers to bail out struggling suppliers, though 5-10 problematic suppliers still cause intermittent issues.