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Woodward Inc (NASDAQ:WWD)
Q2 2021 Earnings Call
May 3, 2021, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Thank you for standing by. Welcome to the Woodward, Inc. Second Quarter Fiscal Year 2021 Earnings Call. [Operator Instructions]

Joining us today from the Company are Mr. Tom Gendron, Chairman and Chief Executive Officer; Mr. Bob Weber, Vice Chairman and Chief Financial Officer; and Mr. Don Guzzardo, Vice President of Investor Relations and Treasurer.

I would now like to turn the call over to Mr. Guzzardo.

Don Guzzardo -- Vice President of Investor Relations and Treasurer

Thank you, operator. We would like to welcome all of you to Woodward's second quarter fiscal year 2021 earnings call.

In today's call, Tom will comment on our markets and related strategies, and Bob will 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 again included some presentation materials to go along with today's call that are also accessible on our website. An audio replay of this call will be available by phone or on our website through May 17, 2021. The phone number for the audio replay is on the press release announcing this call, as well as on our website, and will be repeated by the operator at the end of the call.

I would like to refer to and highlight our cautionary statement as shown on Slide 3. As always, elements of this presentation are forward-looking or based on our current outlook and assumptions for the global economy and our businesses more specifically, including the ongoing COVID-19 pandemic. Those elements can and do frequently change. Please consider our comments in light of the risks and uncertainties surrounding those elements, including the risks we identify in our filings.

In addition, Woodward is 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 and related schedules. We believe this additional information will help in understanding our results.

Now, turning to our results for the second quarter. Net sales for the second quarter of fiscal 2021 were $581 million compared to $720 million for the prior year quarter. Net earnings and adjusted net earnings for the second quarter of 2021 were both $68 million, or $1.04 per share. For the second quarter of 2020, net earnings were $91 million, or $1.41 per share, and adjusted net earnings were $104 million, or $1.61 per share. Net sales and net earnings were up 8% and 64%, respectively, when compared to the first quarter of 2021.

Net cash provided by operating activities was $219 million for the first half of 2021 compared to $52 million for the same period of the prior year. Free cash flow and adjusted free cash flow for the first half of 2021 were both $206 million. For the first half of 2020, free cash flow was $23 million and adjusted free cash flow was $55 million.

Now, I will turn the call over to Tom to comment further on our results, strategies and markets.

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

Thank you, Don, and good afternoon, everyone.

The second quarter of fiscal year '21 showed improved results from our first quarter, and we believe our markets will continue to improve for the remainder of the year and into 2022. The aggressive actions we have taken to address this unprecedented crisis continue to drive strong cash flow, improve our liquidity and overall financial position, enable ongoing investments in opportunity for growth. While COVID-19 vaccinations gain momentum, increases in cases persist across the globe, continuing to drive uncertainty with respect to the pace of economic recovery.

Moving to our markets, Aerospace continues to feel pressure, although it is encouraging to again see the sequential improvement from the prior quarter. The sustained depression of global passenger traffic resulting from the pandemic continues to impact commercial aerospace markets. However, we are seeing positive indicators such as improving passenger traffic, increase in aircraft build rates and utilization, and the return to service of the Boeing 737 MAX. Importantly, production rates of the MAX, in which we have significant content, are expected to increase during the year. We are encouraged by these trends and expect the continued vaccine rollout to have a positive impact on commercial aerospace. Defense spending remains strong with respect to both OEM and aftermarket activity. We see continued strength in guided weapons through the remainder of this year with moderation expected next year.

Turning to our Industrial markets. In power generation, demand for gas turbines remain steady at historically low levels, although we anticipate a recovery in 2022. Aftermarket activity is starting to recover, largely driven by depleted inventories and resumption of maintenance projects. Global energy production continues the shift to natural gas and renewables to support initiatives to reduce emissions. In transportation, China natural gas truck demand continues to be strong, driven by favorable pricing and increased regulations to improve emissions. Government initiatives supporting natural gas trucks are also emerging in several other countries. The global marine market is showing signs of improvement with increases in both demand for new vessels and global freight pricing. Repair and overhaul projects, that were postponed due to the pandemic, are also beginning to pick up. The oil and gas market remains challenging; however, global demand and increase in oil prices are beginning to drive investment in drilling fracking in natural gas compression.

In summary, we delivered strong financial performance as our markets showed signs of economic recovery. We will continue to closely monitor the situation as we progress through the back half of the year. As the pandemic unfolded, we reacted quickly to navigate the uncertain market environment, reduce our cost structure, increase our focus on operational excellence and prioritize diligent cash management. In addition, we continue to gain market share in both our Aerospace and Industrial segments, and we won new programs during the downturn. We believe Woodward is emerging from this unprecedented crisis an even stronger company.

Now, before turning the call over, Bob Weber announced his intention to retire in January of '22. He will retire from his role as Chief Financial Officer, effective September 30th of this year and will serve as a Special Advisor to me for an interim period. I want to thank Bob for his dedication and valuable contributions during his more than 15-year tenure at Woodward. Under Bob's leadership, the Company has grown tremendously, and we have delivered exceptional value to our shareholders over his career. I truly appreciate the partnership and friendship we have built over the years, and I'm excited for him as he enters his next phase of his life. Bob, we wish Patty [Phonetic] and you all the best.

We also announced that Mark Hartman, who is currently our Senior Vice President, Finance and Corporate Controller, will be appointed as Chief Financial Officer, effective October 1st. I look forward to working with Mark in his new role and leveraging his extensive experience to drive Woodward's continued growth and success.

Now, I'll turn the call over to Bob to discuss our financials in more detail.

Robert F. Weber -- Vice Chairman and Chief Financial Officer

Thank you very much, Tom.

Aerospace segment sales for the second quarter of fiscal 2021 were $365 million, an increase of 23% from the prior year quarter. Commercial OEM and aftermarket sales remained weak compared to the prior year as a result of the pandemic, with commercial OEM down 30% and aftermarket down 42%. On the bright side, sequentially, commercial OEM was up 34% and commercial aftermarket was up 18%, driven by increasing build rates and passenger traffic. Defense OEM was down slightly in the quarter compared to a strong second quarter of the prior year, primarily due to lower sales of guided weapons, partially offset by higher sales in both fixed-wing and rotorcraft. Defense aftermarket sales were down compared to the prior year quarter, although activity and backlog remains solid.

Aerospace segment earnings for the second quarter of 2021 were $69 million, or 18.9% of segment sales, compared to $118 million, or 24.8% of segment sales, for the second quarter of 2020. The decline in segment earnings compared to the prior year was the result of lower volume, partially offset by cost reduction initiatives.

Turning to Industrial. Industrial segment sales for the second quarter of fiscal 2021 were $217 million compared to $246 million in the prior year period. Excluding the renewable power systems and related businesses, which I will refer to as RPS, Industrial segment sales for the second quarter of 2020 were $215 million. The slight increase in Industrial sales excluding RPS was primarily due to strong demand in the current quarter for China natural gas engines and the positive effects of foreign currency exchange rates, partially offset by weak oil and gas and the ongoing impacts of the pandemic.

Industrial segment earnings for the second quarter of 2021 were $28 million or 12.9% of segment sales compared to $26 million or 10.6% of segment sales in the prior year. The increase in Industrial segment earnings was primarily the result of cost reduction initiatives. For the second quarter of 2020, Industrial segment earnings excluding RPS were $25 million or 11.6% of segment net sales.

Industrial segment earnings as a percent of sales for the first half of 2021 were 14% compared to Industrial segment earnings excluding RPS of 11.8% for the same period of the prior year. The improved earning is a result of the many actions we have been taking to optimize our product portfolio and global footprint.

Non-segment expenses and adjusted non-segment expenses were both $10 million for the second quarter of 2021 compared to non-segment expenses of $28 million and adjusted non-segment expenses of $11 million for the same period last year.

At the Woodward level, R&D for the second quarter of 2021 was $28 million, or 4.8% of sales, compared to $35 million, or also 4.8% of sales, for the prior year quarter. The decrease in R&D was mainly due to the quarterly variability of project expenses and customer funding.

SG&A for the second quarter of 2021 was $44 million compared to $58 million for the prior year quarter, which included $17 million in merger and divestiture transaction costs.

The effective tax rate and the adjusted effective tax rate were both 13% for the second quarter of 2021. For the second quarter of 2020, the effective tax rate was 14.8% and the adjusted effective tax rate was 16.2%.

Looking at cash flows. Net cash provided by operating activities for the first half of fiscal year 2021 was $219 million compared to $52 million for the prior year period. Capital expenditures were $13 million for the first half of 2021 compared to $29 million for the prior year period. Free cash flow and adjusted free cash flow for the first half of 2021 were both $206 million compared to free cash flow of $23 million and adjusted free cash flow of $55 million for the prior year period. The increase in free cash flow and adjusted free cash flow was primarily related to effective working capital management and lower capital expenditures. We have reduced our leverage to 1.7 times EBITDA at the end of the second quarter compared to 1.9 times at the end of the prior year quarter.

Lastly, turning to our fiscal 2021 outlook. The ongoing rollout of vaccines across many countries is driving optimism for economic recovery. But the enduring turbulence caused by the COVID-19 pandemic, including significantly reduced global passenger travel and new viral variance continues to cloud near-term forecasts. While we believe many of our markets will improve for the remainder of this year and into 2022, we will continue to withhold guidance as we navigate the uncertain economic landscape.

This concludes our comments on the business and results for the second quarter of 2021. Operator, we are now ready to open the call to questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Your first question comes from the line of Robert Spingarn from Credit Suisse. Please state your question.

Robert Spingarn -- Credit Suisse -- Analyst

Good afternoon.

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

Good afternoon.

Robert F. Weber -- Vice Chairman and Chief Financial Officer

Good afternoon, Robert.

Robert Spingarn -- Credit Suisse -- Analyst

So, I have a couple of questions, but I wanted to start with just on the Aerospace margins. They are pretty good, and they are almost back to where you've been. And with the tailwinds you have for the rest of the year -- with just fundamentals improving, you're going to have a mix tailwind. Can you hit 20% plus margins here in fiscal third or fourth quarter?

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

Yeah. It's a great question. As we highlighted, we're not giving guidance. We definitely believe there will be an aftermarket tailwind coming as more aircraft are brought online, the utilization goes up. So, we're confident in our longer-term guidance for both segments. So, we're on the path to get there, Rob. So, we just have to see how the market materializes. And as we get the sales growth, we're going to lever that into improved profitability.

Robert Spingarn -- Credit Suisse -- Analyst

Okay. Tom, can you give us any detail, or Bob, on in the aftermarket, if the improvement -- or how we think about provisioning versus regular spare sales as that improves?

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

Yeah.

Robert Spingarn -- Credit Suisse -- Analyst

Is one stronger than the other?

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

Right now, it's stronger on the repair and overhaul side than on provisioning. But we do anticipate as we move later this year into next year, we'll start to see provisioning recover.

Robert Spingarn -- Credit Suisse -- Analyst

Okay. And then, Tom, I wanted to follow-up on your comment. I think it was your comment on MAX that the rates will rise throughout the year, throughout calendar '21. But I was hoping you could be a little bit more specific with your inventory position there and current rates? And then as demand recovers, I wanted to get a sense of how quickly you can ramp beyond 31, given that you're capacitized, I assume, for 52 or 57, and at that point is the gating factor just labor?

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

Yeah. So, you're correct on that. We're sized and to support the higher rates both for the MAX and the NEO. So, one of the good news as we come out of the pandemic is we have the capital equipment to support the highest rates that we anticipate that Airbus and Boeing will be going to. So, that's good news as we go forward.

We are onboarding new members to support the ramp-up. We put together some innovative and extensive training sessions to -- some of them are members we're bringing back that were either laid off or furloughed, others are new members moving forward. But we're very confident in our ability to onboard members to help support the ramp.

The ramp -- the other comment on inventory in the system, the inventory was depleted, so there's a combination. We will see some inventory increasing. We are on track and ahead of the production -- we will be ahead of the production rate ramp. There is still a lot of uncertainty around the production rates and so we're tracking with exactly what Boeing and Airbus are saying they want to achieve and -- but I think there is going be some volatility in those rates over the next six, 12 months.

Robert Spingarn -- Credit Suisse -- Analyst

Okay. And just, normally, what's your lead time relative to Boeing's delivery to the end customer?

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

Yeah. Normally, it's -- when you're in normal circumstances, it'd be on the order like four or five months.

Robert Spingarn -- Credit Suisse -- Analyst

Okay. All right. Thanks, Tom. Appreciate it.

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

Sure.

Operator

Your next question is from Sheila Kahyaoglu from Jefferies. Please state your question.

Sheila Kahyaoglu -- Jefferies -- Analyst

Hi, good afternoon, Tom, and Bob, congratulations again.

Robert F. Weber -- Vice Chairman and Chief Financial Officer

Thank you, again.

Sheila Kahyaoglu -- Jefferies -- Analyst

I maybe stick to one or two. Tom, I don't know, maybe this is for you. A little bit on the aftermarket we touched on it with Bob a little bit on the short-term, but also the longer-term on your aftermarket, how do you kind of think about it? What's provisioning been historically of your sales and what does it look like? Does the way you sell to airlines change because of the pandemic at all? Or because you've upped your MAX content, of course, and the A320, so maybe you could talk about aftermarket expectations both near term and longer term?

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

Sure. I'll start. Bob, chime in anytime.

Robert F. Weber -- Vice Chairman and Chief Financial Officer

Sure.

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

But, Sheila, the first, I kind of want to maybe lay some groundwork. As we look at the aircraft coming back into service, and I guess it goes without saying, most everybody knows that they bring in the newer more efficient aircraft back into service. They're retiring some of the older aircraft. And as we look forward, if we call it the demographics of the fleet, they're going to be very favorable in terms of the aircraft we have more content on. And so we're starting to see that just in utilization and aircraft being returned to service.

So, the point of that is longer term, we think we're going to have tremendous aftermarket revenue coming in as the aircraft are brought in service, airlines start taking new deliveries of the -- particularly the new narrow bodies and the new widebodies, where we have significant content. So, that's looking very favorable to us. And we anticipate as those utilization rates go up, we're going to start seeing more maintenance. And I think as you're well aware of, some of our, what we call legacy products that's pre-NEO and MAX narrow bodies, V2500, CFM56 are -- some of those are just in their first shop visit or come into the second. So, we think the maintenance activity will start picking up and again very favorable to us.

In terms of initial provisioning, as you would expect, the airlines -- they're preserving cash and being careful about that. But as we start moving in out of the pandemic, they start putting the planes into service, they start taking more of the MAX aircraft out of storage into service, we think we'll start seeing initial provisioning pick up and it's a definitely a good part of our aftermarket mix, maybe more in fiscal year '22 than the remainder of '21. I think it's going to take a little time for all those deliveries and for the airlines to start picking it up. But when we look out, it's kind of going back pre-pandemic. Our demographics are positive. Our market share has improved. Utilization of the equipment we are on is going up. That all signals improved aftermarket over the next years and I think it'll be very favorable to us.

Sheila Kahyaoglu -- Jefferies -- Analyst

Just staying on this topic then, I guess, -- I'm sorry if I missed it, did you mentioned what initial provisioning is of overall aftermarket sales? And as these MAXs ship out of inventory, would you expect any initial provisioning with them or those are all already allotted for?

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

No, Sheila, most of -- let's phrase this way, the MAX that are in storage, at least for the most part, have not been provision of Woodward equipment.

Sheila Kahyaoglu -- Jefferies -- Analyst

Okay.

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

So -- and it's kind of as they get taken up and the utilization starts going up, we expect that to come. But that's why I'm saying, it's more of a -- I think as we approach our fiscal year '22, we'll start seeing provisioning recover. It's been very low during the pandemic.

Sheila Kahyaoglu -- Jefferies -- Analyst

Okay. All right. Thank you very much.

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

You're welcome.

Operator

Your next question is from Gautam Khanna from Cowen. Please state your question.

Gautam Khanna -- Cowen & Co. -- Analyst

Yes, thank you, and congrats, Bob, again.

Robert F. Weber -- Vice Chairman and Chief Financial Officer

Thank you.

Gautam Khanna -- Cowen & Co. -- Analyst

I -- we -- I guess, we'll get you another comp [Phonetic] on another call though still. So, it's good time.

Robert F. Weber -- Vice Chairman and Chief Financial Officer

That's all right.

Gautam Khanna -- Cowen & Co. -- Analyst

All right. Okay, good. Well, hey, I was curious about, if you could talk about the exit rate on the aftermarket, was it -- do they get -- did it get better through the quarter in terms of growth, or is it pretty consistent, January, February, March? And what have you seen so far through the second calendar quarter, through April on the aftermarket?

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

Yeah. We're seeing, I would say, month-over-month the aftermarket improving. So, yeah, we're seeing the utilization -- we're tracking weekly utilization on all the aircraft we have content on and what's happening. We're seeing shop visits starting to increase. So, it's pretty much month-over-month, and we anticipate that continuing kind of in conjunction with aircraft coming back into service. So, as long as we see the steady improvement, I think you're going to see continued aftermarket growth.

Gautam Khanna -- Cowen & Co. -- Analyst

Okay. Could you say anything about the product types where you're seeing it? Is it on the actuation? Is it on the engine component? Is it across both? Any skew either way?

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

It's skewed toward the engines, Gautam. So, I'd say that's where traditionally the engines -- business supporting the engines has higher aftermarket than on the airframe. And that's just truly that the engines are always running, so you generate more time and more aftermarket revenue from engines. So, it is skewed that way.

Gautam Khanna -- Cowen & Co. -- Analyst

Okay. And then related to that, is there anything -- any picture, I mean -- is it broad based, or is it regionally stronger in the U.S.? I mean I just -- I'm curious, I imagine it is. It's just kind of we look at where the flight hours are highest, that's sort of tracking to your business or...

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

Sure. As you are aware, hours are the most in the U.S. and in China, and so that's definitely driving more of it.

Gautam Khanna -- Cowen & Co. -- Analyst

Okay. But forward visibility at this point into the second calendar quarter, is it pretty good? I mean, can you see through June, what the expected shop visits there supposed to be, or is it still kind of very, very short lead time in terms of aftermarket?

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

We're seeing forecast from our customers and the like for shop visits. But I would say there is still a fair amount of volatility in the market. And we're anticipating increasing aftermarket, increasing shop visits. We're planning for that. We're doing our own internal provisioning demand planning for that. But it is still volatile and there is still a fair amount of uncertainty around it. But our belief is, it's going to continue to pick up and we're getting ourselves prepared for that.

Gautam Khanna -- Cowen & Co. -- Analyst

Thanks, guys, very much.

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

Yeah. You're welcome.

Robert F. Weber -- Vice Chairman and Chief Financial Officer

Thank you.

Operator

Your next question is from Pete Skibitski from Alembic Global. Please state your question.

Pete Skibitski -- Alembic Global -- Analyst

Yeah. Good afternoon, Tom and Bob and Don.

Robert F. Weber -- Vice Chairman and Chief Financial Officer

Hey, Pete.

Pete Skibitski -- Alembic Global -- Analyst

Hey, guys. I just wanted to get a better sense, maybe Tom, for -- with two quarters left in the year where your lack of visibility stems from? Because I think consensus, in general, expect revenue to be up in the back half of the year for you guys. You've lapped the tough COVID comps. So, is it an issue where you expect revenue to be up in the back half of the year? It's just hard to kind of ballpark a range around the revenue, and then because of that, it's hard to ballpark a margin around that. Is that kind of the logic that drove you to not reinitiate guidance?

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

There is still -- even on the OE production rates, we're still seeing -- you will see variability in the rate and we're still being cautious that all the rates are going to be the matter achieved. So, there is a little uncertainty there. And there is definitely uncertainty in the aftermarket. All indicators are pointing to improvement, but it's a challenging time to really nail those down.

Second thing, as the -- definitely uncertainty wrapped around the MAX, how fast will the planes get delivered? Will China approve the MAX? What will the utilization be on those? There's a lot of factors that are still not solid. But as we're trying to say the indicators and the trend is going in the right direction and looks positive, but it's really still with all that variability, very difficult to pinpoint the exact forecast. And as you pointed out with the mix issues that you can have on the aerospace side there, it's hard to pin down the margins, but we are encouraged by the outlook.

Pete Skibitski -- Alembic Global -- Analyst

Okay. Bob, do you want to say something?

Robert F. Weber -- Vice Chairman and Chief Financial Officer

The only thing I was going to add is we were kind of focused on the Aerospace side, but there's a lot of equal uncertainty on the Industrial side as well. We've got the oil and gas and pricing has firmed up a little there. Our China natural gas is always kind of variable and so on. And we're seeing the marine market and that's very impactful to L'Orange, start to show some signs, but they're just -- too early to call, even on the Industrial side as well.

Pete Skibitski -- Alembic Global -- Analyst

That's funny. That was actually my second question. It was the marine markets, not a particular expertise of mine, but you read these articles about bottlenecks in ports and whatnot, and it's hard to know -- it seems like short-term negative, but it also seems like maybe a positive that there's a lot of ships out there with global trade picking up. So, I mean, is the order flow picking up for you guys in marine? Is visibility picking up? I was just wondering if you could maybe give us some clarity there and maybe how L'Orange has done kind of through the downcycle, that be great. Thank you.

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

Yeah. One that you're seeing is the utilization is increasing in the marine market, in particular, if you want to say in the freight carriers. So we're seeing that. We are encouraged by the order book, it's picking up. And we're also seeing LNG carriers order book picking up and utilization picking up on those. And those are very strong programs for Woodward, a lot of content on those.

The cruise market, it's kind of been dead, and we've got a lot of content on the cruise ships, particularly through L'Orange and through our traditional business. We're encouraged to see that they may be allowing cruises in the U.S. here, I think latest was maybe starting in July. As that gets firmed up, we think there'll be some maintenance activities kicking in, and that will be a positive. So, those are things like Bob highlighted. We see them coming. It's just exact timing is a little hard to predict.

But overall the marine market is recovering. The order books are picking up. They're long lead time orders, just so you know, I mean they're out, the order book goes out a couple of years lead time, so -- but it's in a positive trend and most important thing for us right now is the utilization, which drives the aftermarket, and that's encouraging.

Pete Skibitski -- Alembic Global -- Analyst

Okay. I guess, I didn't probably understand, cruise ships, it's a pretty good chunk of L'Orange's revenue?

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

No, it's a good part of the business. Good hi-tech products that go in there and good aftermarket associated with the cruise ships. And that, as you know, has been dead in the water. So...

Pete Skibitski -- Alembic Global -- Analyst

Yeah.

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

And along with that...

Pete Skibitski -- Alembic Global -- Analyst

No pun intended.

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

Yeah. Exactly. It'd also be fair, we always say cruise ships, ferries, all that has just been not happening in the pandemic. And as that recovers, that will be positive. And then like I said, the utilization of the cargo carriers and like [Phonetic] is improving, so that drives good business. And then we're encouraged by the order book. So, it's on a good track and hopefully second half of this year into the next year we start seeing some recovery in those which will be good for our Industrial segment.

Pete Skibitski -- Alembic Global -- Analyst

Okay. Just last one from me. Just on the guided weapons comments, fiscal '22, are we talking substantial declines, 50% type declines or lower-double digit type decline...

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

No...

Pete Skibitski -- Alembic Global -- Analyst

Okay. Got it.

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

No, we see some reduction in DoD orders for the smart weapons, which may be partially offset by foreign military sales, and the foreign military sales are not firm, but we anticipate moderation or a reduction, but it's not that dramatic as you were highlighting. So...

Pete Skibitski -- Alembic Global -- Analyst

Okay. Thanks very much guys.

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

Yup.

Robert F. Weber -- Vice Chairman and Chief Financial Officer

Thanks, Pete.

Operator

Your next question is from Christopher Glynn from Oppenheimer. Please state your question.

Christopher Glynn -- Oppenheimer -- Analyst

Thanks. Good afternoon, everybody. Bob, I'll hold on for a couple of days on congrats.

Robert F. Weber -- Vice Chairman and Chief Financial Officer

Okay.

Christopher Glynn -- Oppenheimer -- Analyst

So, on the -- just curious, you had for Industrial, a number of positive comments on utilization across transportation, marine and general turbo machinery, oil and gas, I believe, too. Are those kind of the best directional kind of indicators to think of in terms of fiscal second half having a little stronger volume than the first half?

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

Yeah. We definitely anticipate improvements in those sub-segments of Industrial, again, with some uncertainty wrapped around it, but we do see that. And then traditionally as we move into the fourth quarter of our fiscal year, it's generally one of our stronger quarters. So, we don't see that changing this year either. So it's positive on the outlook with uncertainty that the things materialize. But right now, they're at a positive trend. And you kind of saw that here in the second quarter where year-over-year, we're basically flat sales. So, normally we wouldn't say that's real positive, but during a pandemic, we think that's a positive trend with improvements coming.

Christopher Glynn -- Oppenheimer -- Analyst

Okay. And are there any revenue recognition timing issues related to COVID and commissioning any equipment or anything like that for Industrial?

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

Nothing that, I would say, is material.

Christopher Glynn -- Oppenheimer -- Analyst

Okay. And last one from me. On the aftermarket for Aerospace, you had a real nice sequential pick up. Some -- a number of others were kind of flat, maybe even down a little like business jet, including some of the bellwether. So, is that just depict the volatility out there in the market, or is there a structural aspect to your -- is that the demographic shift already kind of being reflected?

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

Yeah, I would say, because we are analyzing every week the fleet and the utilization of the fleet, and I definitely think it's the demographics, as we call it, the fleet are favorable to Woodward content, and I think that's what you're seeing. Longer term, we've highlight that for years going back to when we secured all the additional content on these new aircraft. And I think you'll start seeing that materialize over the next number of years, as they are in service and they start hitting maintenance cycles. So, we think that's a positive for us.

Christopher Glynn -- Oppenheimer -- Analyst

Interesting to see it out of the gate there. Thank you.

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

Yeah. You're welcome.

Robert F. Weber -- Vice Chairman and Chief Financial Officer

Thank you.

Operator

Your next question is from Chris Howe from Barrington Research. Please state your question.

Chris Howe -- Barrington Research -- Analyst

Good afternoon, everyone. Thanks for taking my questions.

Robert F. Weber -- Vice Chairman and Chief Financial Officer

Hi, Chris.

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

Hi, Chris.

Chris Howe -- Barrington Research -- Analyst

Hi. First off, starting with the China 6 regulations, we've been talking about it a lot last quarter. I know it's hard to get into the weeds with it for cautionary reasons on a quarter-to-quarter basis. But perhaps with these going into effect in July, can you talk about your expectations in the second half for this business and your outlook, in general, once the regulations are going into place? I know you mentioned there were some limitations to the potential upside there on the last call. Just wanted to gain the right perspective on that.

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

Yeah. Good question. The China 6 diesel regulations go into effect in July. The China 6 for natural gas are already in effect. But what's happening -- typically happens every time you have a new emission regulation, we call it kind of pre-buy, so you're seeing China 5 diesel is being purchased right now. And so that's having a little bit of an impact, it did here in the second quarter. As we move forward, though, and you look at China 6 diesel versus China 6 gas engine, the cost difference has been brought closer together, and the fuel price is very favorable to natural gas. So, the payback, not only in reduced emissions, but in operating cost to go to natural gas engine truck is greatly improved.

We have some -- just to give you kind of ballpark, these are market forecast for the truck -- the natural gas -- I'm sorry, all the heavy-duty trucks in China. Traditionally, over the last number of years, it might have been approximately 7% to 10% of the fleet was natural gas. Talking to our customers and our folks on the ground in China, believe that we might see on the order of 20% to 30% natural gas trucks as a percent of the total market going forward, which is a substantial market expansion and we expect to do very well in holding our market share or even growing the share. We have a very, very high performing system for China 6 diesel -- China 6 gas engines. So, the expansion of that will increase, and so as you go through the remainder of our fiscal year. But more importantly, as you go over the next couple of years, we expect the natural gas percentage of the total market to improve, and that's a positive for our business longer term as that happens.

So, overall, the outlook is good. A little volatility upfront or, as Bob and I would say, there is always volatility in the China market. So, we do see that. But the longer-term trend is very favorable as well.

Chris Howe -- Barrington Research -- Analyst

Okay. That's very helpful. And I have one follow-up. You answered some of my other questions on Industrial as it relates to perhaps areas that could recover in the future.

Moving to Aerospace though, commercial aftermarket should recover, first narrow, then widebody. As we kind of look at where we are now versus three months ago and we move to how we would term a new normal, which seems to be changing on a daily basis, but how should we think about incremental margins? It's been discussed a lot. Perhaps there could be outsized sequential improvement quarter-to-quarter, but as we move into fiscal year '22 and beyond, business is much stronger than it was pre-pandemic. What could we see as far as incremental margin in Aerospace? Thanks.

Robert F. Weber -- Vice Chairman and Chief Financial Officer

Sure. I'll take it, and Tom, can jump in if you want. From the margin standpoint, we've said the way you characterize it aftermarket should come first followed by OEM. But the build rates are improving, so it's not a huge shift in overall mix between aftermarket and OEM. But we do believe it will be a tailwind. We've kind of been looking at -- analyzing it in a lot of different ways, and it's very hard to kind of triangulate on, a lot of variables, obviously. But we do believe as we go into 2022 and beyond, we should see a tailwind. We've had people asking us if it's 25%, 27%, 30% segment margins, extremely difficult to quantify, but we do believe it will be a tailwind.

Chris Howe -- Barrington Research -- Analyst

That's all I have.

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

Could you repeat that, please?

Chris Howe -- Barrington Research -- Analyst

That's all the questions I have. Thank you.

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

Oh, OK, thank you.

Operator

Your next question is from David Strauss from Barclays. Please state your question.

David Strauss -- Barclays -- Analyst

Thanks. Good afternoon.

Robert F. Weber -- Vice Chairman and Chief Financial Officer

Hey, David.

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

Good afternoon.

David Strauss -- Barclays -- Analyst

The 42% I think commercial OE sequential growth that you saw this quarter, that was much stronger than what we've seen elsewhere. Was it -- was there any easy comparison issue or what exactly drove that? Was there anything there besides just MAX being really low and starting to come back for you all? But we would have seen that with other companies as well.

Robert F. Weber -- Vice Chairman and Chief Financial Officer

Yeah, just to check the numbers. What we gave, it was 40% -- 42% down year-over-year and 18% up for -- you're talking commercial aftermarket, right?

David Strauss -- Barclays -- Analyst

No, I'm talking actually commercial OE?

Robert F. Weber -- Vice Chairman and Chief Financial Officer

I'm sorry. So, that was down 30% year-over-year and up 34%.

David Strauss -- Barclays -- Analyst

Op 30%. Yeah, I mean that's still -- yeah, I got that number...

Robert F. Weber -- Vice Chairman and Chief Financial Officer

Pretty significant.

David Strauss -- Barclays -- Analyst

Yeah, still a lot more significant than what we've seen elsewhere.

Robert F. Weber -- Vice Chairman and Chief Financial Officer

Yeah. And as Tom pointed out, it will be kind of lumpy, the timing -- all depends on a lot of the timing of shipments and so on and so forth. But I don't know that we would expect it to stay at that level quarter-to-quarter.

David Strauss -- Barclays -- Analyst

Okay.

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

Yeah. The only thing I would add is if you're comparing to other companies, as these rates pick up, they're definitely on the programs we have gained high market share. And so it's -- to me it's not overly surprising that we have good recovery in there. First, maybe it's something -- it's more heavily weighted to legacy programs. So, that may be part of it.

David Strauss -- Barclays -- Analyst

Okay. How much of your new equipment -- commercial new equipment and aftermarket is business jet related at this point, and what are you seeing on the business jet side?

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

Yeah. Actually biz jets came through the pandemic a lot better than we thought sitting here a year ago. We -- the business jet market is a good market for us. We've got content -- many, many of them -- almost all the new aircraft out there. And that's actually held together pretty well. And the indicators are positive for increasing OE sales. One of the things we always track and is a good indicator is the used market, and it's the used market available -- once they're available -- earlier the newer aircraft available and the used market is very low right now, and surprisingly low in my view. And so we're starting to see some OE activity being forecasted and coming up. And right now it looks quite healthy going forward.

David Strauss -- Barclays -- Analyst

How much of your commercial -- your Aerospace business, Tom, is aftermarket you think at this point beside [Phonetic] business jet, how much is business jet?

Robert F. Weber -- Vice Chairman and Chief Financial Officer

We're probably -- I don't have that breakout. But we're somewhere in the -- a little bit north of 10% overall, business and general aviation.

David Strauss -- Barclays -- Analyst

Okay. And then the last one, Bob, I guess an update about how you're thinking about your cash balance and what there is to do there? I assume you don't want to be running with close to $300 million in cash on the balance sheet for too long.

Robert F. Weber -- Vice Chairman and Chief Financial Officer

Yeah, I know. We've kind of talked about, a, getting back to our pre-COVID policies and directions, if you will, where just kind of 50% of net earnings being returned to shareholders in dividends and share buybacks. But most importantly, we're focused on growth. And we've talked a lot about having the number of both organic growth opportunities, space and missiles is one of them we've called out. And also we have an inorganic funnel process like so many of our peers do and we're always looking at opportunities there. So, we've always been -- our model is a growth model. We believe that brings the most value to our shareholders. And so -- no, we won't let the cash pile up for very long.

David Strauss -- Barclays -- Analyst

Great. Thanks very much.

Operator

Your next question is from Noah Poponak from Goldman Sachs. Please state your question.

Noah Poponak -- Goldman Sachs -- Analyst

Hi, good evening, everybody, and congrats Bob and Mark on the announcement.

Robert F. Weber -- Vice Chairman and Chief Financial Officer

Thank you.

Noah Poponak -- Goldman Sachs -- Analyst

If I -- if we just looked at the sequential growth rates you had in the quarter in Aerospace, original equipment and aerospace aftermarket, how would you expect the fiscal third and fourth quarter growth rates to compare to that just directionally, about holding the same, faster or slowing down?

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

Well, a little bit -- chime in Bob as well, but a little bit, I'd say, the OE rates should pick up. The aftermarket in earlier is a little challenging to predict how we will not be as high of a growth rate as we just saw, but we'll continue to be very solid growth rate going forward. And hopefully in the next few quarters, we'll be able to give more color on that as we see things stabilize. But we do anticipate continuing increases in both sides of the market, OEM and aftermarket.

Noah Poponak -- Goldman Sachs -- Analyst

So, Tom, just to make sure we're speaking the same -- or talking about the same thing here. Are you saying you would expect that the rate of growth you had sequentially in commercial OE, which as David was just asking was surprisingly high. You're saying you expect to that to stay the same or even pick up or you're just saying more of that production rates are going to go higher, so that's going to have some healthy growth rate for a while?

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

Yeah. I think -- I guess what I'll say is that I think the production rates are going to go up and we'll see overall still improved growth rate over the first -- little over the second quarter. Yeah. I think we're saying [Speech Overlap] I expect the real growth proof. Yeah.

Noah Poponak -- Goldman Sachs -- Analyst

Interesting. Okay. With the commentary around guided weapons in fiscal '22, are you anticipating that will drive your total defense revenue to be down in fiscal '22, or could it still grow?

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

It's going to have a flattening effect on defense sales.

Noah Poponak -- Goldman Sachs -- Analyst

Okay.

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

Yeah.

Noah Poponak -- Goldman Sachs -- Analyst

It makes sense. And then just one more on these Aerospace margins. If I look back over the last several years there is -- there are some years where the second quarter is seasonally strong, third quarter steps back down, fourth quarter back up, it doesn't happen every year, but it happens a decent amount of years. Is there any seasonal strength in the second quarter here where 3Q would step down a little, and then 4Q back up, or the seasonality out the window at the moment?

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

There's a little bit of seasonality and it's really making sure the airlines are ready maintenance wise for summer season, and then later for holiday season. So, you do see a little bit of seasonality based on that.

Noah Poponak -- Goldman Sachs -- Analyst

So, if I use that and then I use the type of incremental margins you were just talking about a minute ago year-over-year, it would imply the third quarter Aerospace margin down a little bit and then the fourth quarter maybe sort of in the zone of the second quarter. Is that -- I guess...

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

And again, Noah, what I would say when I highlighted that, that's a normal year.

Noah Poponak -- Goldman Sachs -- Analyst

Okay.

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

With so any aircraft just getting back in service and I think -- I think the airlines, personally, I think they did a brilliant job of rotating assets and managing their maintenance cost and they did a best they possibly could during the pandemic. But there is a pent-up maintenance bubble coming, and that's another thing it's hard to forecast. But I absolutely believe you're going to see that hit, and it's just exactly when it hits, and I'm not sure it's going to follow normal seasonality. That seasonality is real, but I'm not sure it applies this year. So, I'd just be a little cautious on that.

Noah Poponak -- Goldman Sachs -- Analyst

Okay. Interesting. Okay. Thanks so much.

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

You're welcome.

Operator

Your next question is from Pete Osterland from Truist Securities. Please state your question.

Pete Osterland -- Truist Securities -- Analyst

Hey, good afternoon. This is Pete Osterland for Mike Ciarmoli. Is there any additional color you can provide just on directionally how you expect margins in Industrial to trend during the rest of the fiscal year? I know you previously called out that margins would take a step back in fiscal 2Q. But you expect that from this quarter's level they should be able to start showing sequential improvement again over the next couple of quarters?

Robert F. Weber -- Vice Chairman and Chief Financial Officer

They should, yeah. I mean we're going to have variability as we've kind of always had in the business. But some of the structural -- the actions we've taken, as we go forward, should definitely provide the tailwind side of the equation. The headwind side, as we're still not seeing any sales increases, and one of the things we said we really needed to get to our targets, targets being 16% to 16% plus, was some increase in sales. And so right now we're -- I think the buzzword is we are optimism -- optimistic with respect to the remaining quarters of the year and going into 2022. But we really need to see the sales increase to get any leverage to be able to enhance the margins. So, I think we'll see a tailwind. I don't think we're going to see our targets until we start to see much greater sales increases than we're seeing today.

Pete Osterland -- Truist Securities -- Analyst

Great. Thanks. And then just on costs, it looks like R&D was down about $4 million versus the prior quarter, and SG&A down about $12 million. Just wondering what was driving that decline and what is the good run rate for us to use over the next couple of quarters?

Robert F. Weber -- Vice Chairman and Chief Financial Officer

Yeah. Probably the midpoint between them. We've got -- we've always got a lot of timing of things, project expenses and things like that that pop in and out of the quarters. And so we have some variability. So, I would not say that the decline in both is sustainable. I think you'll see somewhere in the middle between the two as we go forward through the year. We're running at about a 4.8% rate, that's pretty low for us usually. So, I think it was mostly timing this quarter.

Pete Osterland -- Truist Securities -- Analyst

All right. Thanks a lot.

Operator

We do have a follow-up question from Christopher Glynn from Oppenheimer. Please state your question.

Christopher Glynn -- Oppenheimer -- Analyst

Yeah. Thanks. Also, I just had a little housekeeping to close out. One was on the corporate spend, but I'll take your SG&A comments as the answer to that. And then the tax rate for modeling purposes?

Robert F. Weber -- Vice Chairman and Chief Financial Officer

The forecasted for the full year, we haven't -- that's a -- good one always try to estimate. Tax rate adjusted was 13%, 16.2% in the prior year. We'll probably be above that 13% in the quarter, but not necessarily significantly. So...

Christopher Glynn -- Oppenheimer -- Analyst

Okay. Thank you.

Operator

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

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

Okay. Well, thank you for everybody joining us today and thank you for your questions, and we look forward to talking to all of you during our third quarter release. So, have a good day. Thank you.

Operator

Ladies and gentlemen, that concludes our conference call today. If you would like to listen to a rebroadcast of this conference call, it will be available today at 7:30 PM Eastern Daylight Time by dialing 1855-859-2056 for a U.S. call or 1404-537-3406 for a non-U.S. call, and by entering the access code 7934739. A rebroadcast will also be available at the Company's website www.woodward.com for 14 days.

[Operator Closing Remarks]

Duration: 57 minutes

Call participants:

Don Guzzardo -- Vice President of Investor Relations and Treasurer

Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President

Robert F. Weber -- Vice Chairman and Chief Financial Officer

Robert Spingarn -- Credit Suisse -- Analyst

Sheila Kahyaoglu -- Jefferies -- Analyst

Gautam Khanna -- Cowen & Co. -- Analyst

Pete Skibitski -- Alembic Global -- Analyst

Christopher Glynn -- Oppenheimer -- Analyst

Chris Howe -- Barrington Research -- Analyst

David Strauss -- Barclays -- Analyst

Noah Poponak -- Goldman Sachs -- Analyst

Pete Osterland -- Truist Securities -- Analyst

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