Woodward's Q4 2025 Earnings Call: Contradictions Emerge on LEAP and GTF Aftermarket Margins, Defense Growth, Commercial Aftermarket, and Capital Allocation

Date of Call: November 24, 2025

Financials Results

• Revenue: $3.6B for fiscal 2025 (full year), up 7% YOY; Q4 net sales $995M, up 16% YOY
• EPS: FY2025 EPS $7.19 vs $6.01 prior year; adjusted FY25 EPS $6.89 vs $6.11; Q4 EPS $2.23 vs $1.36; Q4 adjusted EPS $2.09 vs $1.41
• Gross Margin: Aerospace segment margin Q4 24.4% (expanded 520 bps); Aerospace FY margin 21.9% vs 19% prior year (up 290 bps); Core industrial margin FY25 15.2%, up 110 bps
• Operating Margin: Consolidated operating margin not explicitly provided; Aerospace FY operating (segment) margin 21.9% vs 19% prior year; Industrial FY (segment) earnings 14.6% vs 17.7% prior year

Guidance:

• Consolidated net sales growth 7%–12% for FY2026.
• Aerospace sales growth 9%–15%; Aerospace margins 22%–23% of segment sales.
• Industrial sales growth 5%–9%; Industrial margins 14.5%–15.5%.
• Adjusted EPS $7.50–$8.00 (≈61M diluted shares; ~22% tax rate).
• Adjusted free cash flow $300M–$350M; capital expenditures ≈$290M (≈$130M Spartanburg).
• Price realization ≈5%; nonsegment expenses ≈3.5% of sales.
• Plan to return $650M–$700M to shareholders in FY2026.

Business Commentary:

• Record Revenue and Growth Across Segments:
• Woodward, Inc. reported record annual revenue of $3.5 billion for fiscal year 2025, marking the first time exceeding this milestone.

• Aerospace sales increased 14%, driven by strong performance in defense OEM and commercial services, while Industrial segment sales grew by nearly 10%, with strong contributions from oil and gas and power generation sectors.

• Aerospace and Industrial Segment Performance:

• The Aerospace segment delivered double-digit sales growth, with 20% growth in the fourth quarter and a record 2.3 billion in sales for the full year.
• 
• Industrial segment sales reached $1.25 billion, with core industrial sales excluding China on-highway increasing by 10%.

• Growth was supported by strong operational execution, price realization, and strategic investments in manufacturing capabilities.

• Investment in Automation and Capacity Expansion:

• Woodward is investing robustly in automation and strategic projects, including a new facility in Spartanburg, South Carolina, with $130 million dedicated to this project in 2026.

• The investment aims to increase capacity and improve productivity, focusing on high turnover and repetitive tasks in support of future growth.

• Commercial Services and Aftermarket Dynamics:

• Commercial services revenue grew by 40% in the fourth quarter, driven by increased demand for spare end items and advanced purchases, with expectations for LEAP and GTF repair revenue to surpass legacy repair revenue by late 2026 or early 2027.
• Price realization is expected to contribute 5% in 2026, with Aerospace expected to outpace Industrial in price growth, reflecting strategic investments and operational improvements.

Sentiment Analysis:

Overall Tone: Positive

• Management repeatedly described 2025 as a "record" year, highlighted "all-time high adjusted earnings per share" and said they are "on track to deliver the 3-year sales and earnings targets," while providing confident FY2026 guidance and an expanded $1.8B repurchase authorization.

Q&A:

• Question from Scott Mikus (Melius Research LLC): The LEAP MRO network is more internal versus CFM56 — how can you tell whether a shipped fuel metering unit is going to aftermarket or OE channel and are you paid differently?
  Response: We track PO status and have clear visibility whether an item is an install or spare end item, so we know the channel.

• Question from Scott Mikus (Melius Research LLC): With your automation investments, is there anything structural that would prevent LEAP or GTF aftermarket margins reaching CFM56 or V2500 levels?
  Response: No structural impediment; we believe our designs, repair procedures and service solutions will allow us to achieve comparable profitability.

• Question from Scott Deuschle (Deutsche Bank AG, Research Division): What growth are you assuming for legacy narrow-body engine aftermarket in 2026?
  Response: Expect single-digit growth for legacy narrow-body aftermarket in 2026, with some price and constrained volume.

• Question from Scott Deuschle (Deutsche Bank AG, Research Division): Does the EPS guide include benefit from the recent share repurchase authorization increase?
  Response: Yes — expected repurchases are included in the EPS guidance.

• Question from Scott Deuschle (Deutsche Bank AG, Research Division): How much of your current power generation revenue is tied to Caterpillar and the growth outlook from that customer?
  Response: We don't disclose customer-level revenue; we supply multiple Caterpillar engine applications and grow with them, but no carve-out provided.

• Question from Kyle (Jefferies): On commercial aftermarket — given the pull-forward this year, what are you modeling for LEAP/GTF growth next year and is the spare-end-item surge repeatable?
  Response: We expect continued strong LEAP/GTF repair growth; the recent high spare end-item orders were lumpy and not prudently forecast to repeat, though we can capture it if it occurs.

• Question from Kyle (Jefferies): You guided ~5% price — is that more weighted to aerospace and aftermarket?
  Response: Yes, ~5% company-wide price realization with Aerospace slightly outpacing Industrial (JDAM and catalog growth contributing).

• Question from Noah Poponak (Goldman Sachs Group, Inc., Research Division): Can you quantify in dollars the amount of aerospace aftermarket that was lumpy or pulled forward in 2025 revenue?
  Response: It's hard to quantify precisely; some portion of roughly $50M year-over-year aerospace sales growth includes advanced purchases — details will be in 10‑K footnotes.

• Question from Noah Poponak (Goldman Sachs Group, Inc., Research Division): Where did LEAP and GTF aftermarket come in for 2025 versus 2024?
  Response: LEAP and GTF repair activity is approaching legacy levels and are expected to surpass legacy repair revenue in late 2026 or early 2027 (repair-only basis).

• Question from Noah Poponak (Goldman Sachs Group, Inc., Research Division): Aerospace segment margin guidance implies lower incrementals — is that due to OEM mix or something else?
  Response: Main driver is a larger OEM mix in 2026, which lowers incremental margin expansion versus 2025.

• Question from Christopher Glynn (Oppenheimer & Co. Inc.): On guided weapons — where are you with clarity long term and should growth be expected to level off or keep ramping?
  Response: JDAM volume rose substantially and is expected to remain level for a while; other guided-weapon programs have no orders yet but capacity studies indicate potential future opportunities.

• Question from Christopher Glynn (Oppenheimer & Co. Inc.): You mentioned global capacity investment for industrial aftermarket — is that focused on marine and can you elaborate?
  Response: We are building regional MRO presence (flag planting) to get closer to customers and expand service content for powerplant and marine applications.

• Question from Gavin Parsons (UBS Investment Bank): What are you assuming for OE destocking, parsed by airframe and engine?
  Response: Hard to parse by customer; broadly we could be destocked by our Q2 (end of H1) if OEMs/engines hit forecasted production rates.

• Question from Gavin Parsons (UBS Investment Bank): Will CapEx normalize after the A350 buildout or are you starting buildouts for a potential new single-aisle program?
  Response: Spartanburg is the near-term CapEx driver; potential NSA investments are under review and will be clarified at Investor Day — Spartanburg is main near-horizon project.

• Question from Michael Ciarmoli (Truist Securities, Inc.): Will Spartanburg have capacity to support programs beyond A350 and contemplate next-gen single-aisle?
  Response: Spartanburg has extra capacity for synergistic product lines but would not alone support NSA volumes; land has been bought for a possible sister facility if needed.

• Question from Michael Ciarmoli (Truist Securities, Inc.): As LEAP/GTF ramps, is there margin dilution in services due to learning curves or spare sales mix?
  Response: LEAP/GTF service margins are solid; any near-term margin pressure is primarily from OEM mix rather than inherent service margin dilution.

• Question from Gautam Khanna (TD Cowen): On LTSA versus spot aftermarket — is there a structural pricing/profit difference between selling spares into OEM networks versus direct MROs for LEAP versus CFM56?
  Response: No structural difference in contracting or repair economics across LEAP and CFM56 ecosystems; spare and repair contracting principles are broadly similar.

• Question from Gautam Khanna (TD Cowen): With more repair versus spares, is overall aftermarket profitability for 2026 expected to be softer than 2025?
  Response: We expect a solid blended service earnings profile in 2026; more spare end-item demand would provide upside but we are modeling a stable blended outcome.

• Question from Louis Raffetto (Wolfe Research, LLC): How will return of capital be balanced across the year — skewed or spread?
  Response: Plan is to spread returns evenly through the year while executing repurchases throughout fiscal 2026.

• Question from Louis Raffetto (Wolfe Research, LLC): Historically aerospace margins in Q1 are below the rest of the year — should we expect that again in fiscal '26?
  Response: Yes — Q1 is typically the lowest-margin quarter with sequential improvement through the year.

• Question from Louis Raffetto (Wolfe Research, LLC): On tax rate — you cited ~22%; are you assuming no outsized benefit from option exercises?
  Response: Correct — the ~22% effective tax rate assumes no large option-exercise tax benefits; such benefits could lower the rate if they occur.

Contradiction Point 1

LEAP and GTF Aftermarket Margins

It impacts expectations regarding the profitability of critical product lines, which directly affects revenue and investor expectations.

Are structural factors preventing LEAP or GTF aftermarket margins from reaching CFM56 or V2500 levels despite automation investments? - Scott Mikus (Melius Research LLC)

2025Q4: There's nothing structurally in the way of achieving margins similar to CFM56 or V2500. We're learning from the first units back, and we're confident in achieving the right profitability based on our design for repairability and service solutions. - Charles Blankenship(CEO)

What has the LEAP aftermarket performance been like in the first half, and what are your expectations for the second half and into 2026? - Noah Poponak (Goldman Sachs)

2025Q2: LEAP aftermarket volumes have doubled year-over-year for several quarters. The trend is expected to continue for the rest of the fiscal year, supported by the leap in GTF maintenance cycles and anticipated long-term stability in aftermarket activity. - Chip Blankenship(CEO)

Contradiction Point 2

Defense Segment Growth Expectations

It involves changes in growth expectations for the defense segment, which is a significant area for the company and impacts overall revenue growth.

What is the current status of guided weapons programs, and is growth expected to ease? - Christopher Glynn (Oppenheimer & Co. Inc., Research Division)

2025Q4: JDAM is substantially up, and others like SDB have capacity studies in progress. We have no specific orders but expect potential growth opportunities. - Charles Blankenship(CEO)

What drives the Aerospace segment margin in Q2? - Noah Poponak (Goldman Sachs)

2025Q2: Defense OE is expected to see strong growth again, driven by LTAMS, JDAM and several emerging programs. - William Lacey(CFO)

Contradiction Point 3

Commercial Aftermarket Growth

It affects expectations regarding the growth trajectory of the commercial aftermarket, which is a crucial component of the company's revenue.

What are the implications of lumpy demand in the commercial aftermarket for 2025? - Unknown Analyst (Jefferies)

2025Q4: We expect strong repair growth for LEAP and GTF, but don't forecast another lumpy demand surge like last year. - Charles Blankenship(CEO)

Can you break down the commercial aftermarket growth by platform or customer geography? - Scott Deuschle (Deutsche Bank)

2025Q2: Commercial aftermarket sales grew a strong 47% in Q2, driven by 52% growth in legacy narrow body platforms, while wide body sales were down. - Chip Blankenship(CEO)

Contradiction Point 4

Defense OE Margins

It involves changes in financial forecasts, specifically regarding defense OE margins, which are critical indicators for investors.

What growth rate are you expecting for the legacy narrow-body engine aftermarket in 2026? - Scott Deuschle (Deutsche Bank AG, Research Division)

2025Q4: Incrementals were around 30%, and the fourth quarter should see them back to the first-half levels as defense OE is expected to sustain growth with pricing improvements. - William Lacey(CFO)

What caused the sequential margin decline in Aerospace during Q3 and the margin improvement in Q4? - Scott Deuschle (Deutsche Bank)

2025Q3: The Aerospace decline was due to growth in defense OE, which has a lower margin. - William F. Lacey(CFO)

Contradiction Point 5

Capital Allocation and Cash Flow

It directly impacts the company's financial strategy and investor expectations on how they will allocate capital and manage cash flow.

How will capital returns to shareholders be balanced this year? - Louis Raffetto (Wolfe Research, LLC)

2025Q4: We plan to spread shareholder returns evenly throughout the year, with no specific concentration on any particular quarter. - William Lacey(CFO)

Is the $1.2 billion free cash flow target through 2026 still feasible given the reduced forecast for this year? - David Egon Strauss (Barclays)

2025Q3: We've increased the share repurchase authorization, so we'll buy back 10 million shares, which will run through the end of this year. - William F. Lacey(CFO)