Earnings Call Transcript - CR Q4 2025

Operator, Operator

Welcome to the Crane Company Fourth Quarter 2025 Earnings Conference Call. I would now like to turn the call over to Allison Poliniak, Vice President of Investor Relations.

Allison Ann Poliniak-Cusic, Vice President of Investor Relations

Thank you, Madison, and good day, everyone. Welcome to our Fourth Quarter 2025 Earnings Release Conference Call. I'm Allison Poliniak, Vice President of Investor Relations. On our call this morning, we have Max Mitchell, our Chairman, President and Chief Executive Officer; Alex Alcala, Executive Vice President and Chief Operating Officer and incoming CEO; and Rich Maue, our Executive Vice President and Chief Financial Officer; along with Jason Feldman, Senior Vice President, Treasury, Tax and Investor Relations, who is on for Q&A. We will start off our call with a few prepared remarks from Max, Alex and Rich, after which we will respond to your questions. Just a reminder, the comments we make on this call will include some forward-looking statements. We refer you to the cautionary language at the bottom of our earnings release and also in our annual report, 10-K and subsequent filings pertaining to forward-looking statements. Also during the call, we will be using some non-GAAP numbers, which are reconciled to the comparable GAAP numbers in tables at the end of our press release and accompanying slide presentation, both of which are available on our website at www.craneco.com in the Investor Relations section. Now let me turn the call over to Max.

Max Mitchell, Chairman, President and CEO

Thank you, Allison. Thanks, everyone, for joining the call today. While we've got many exciting things to discuss today as we exit the fourth quarter, and we're already off to a fantastic start for 2026. Our performance last year and our initial guidance for 2026 show that we are consistently and reliably delivering on our commitments and our long-term value creation thesis. 4% to 6% core sales growth, and we were just at the high end of that last year, 35% to 40% core operating leverage and upside from capital deployment. And that's just the baseline. We're always working to over-deliver. All aspects of this thesis have continued to play out as expected and will continue. For the quarter, once again, we exceeded even our high expectations, underscoring the strength of our team's strategy, excellence in execution and a relentless commitment to delivering shareholder value. Adjusted EPS of $1.53 was up 21% over the prior year, driven by an impressive 5.4% core sales growth, reflecting broad-based strength at Aerospace & Advanced Technologies, and continued strong execution of process flow technologies. For the full year, adjusted EPS increased by 24%, driven by our outstanding teams delivering on customer expectations enabled by our sustained investments in advanced technologies and innovative solutions. In 2025 we also continued building on our strong track record of enhancing and shaping our portfolio by adding technologies and capabilities inorganically that will drive growth and support both existing and new customers. Having previously announced the signing with Baker Hughes on June 9th last year, we are excited to formally welcome the Druck, Panametrics and Reuter-Stokes brands to the Crane portfolio. Having closed on the acquisition of these brands on January 1st. As a reminder, Reuter-Stokes doubles the size of our nuclear business, adding industry-leading radiation sensing and detecting technologies for nuclear plant operations as well as for Homeland Security applications. Nuclear is an exciting market space today, and we see additional applications for the core Reuter-Stokes technology and a number of other high-growth adjacent markets. This business is being integrated into our Crane Nuclear business, which Chris Mitchell has successfully run for us over the last 6 years. Panametrics will operate as a stand-alone business unit in our Process Flow Technology segment reporting directly to SVP Jason Feldman. This business adds advanced ultrasonic flow meters and precision moisture analyzers, a really incredible portfolio of solutions that enables accurate measurement of liquids and gases across applications such as cryogenic gas storage, LNG transportation, wastewater treatment, chemical and petrochemical production. And lastly, Druck will be maintained as a stand-alone business unit reporting to SVP J. Higgs under the newly renamed Aerospace & Advanced Technologies segment. This new name better captures who we are today and our future strategic direction for this segment than the prior Aerospace & Electronics name. Still the same focus on proprietary, highly differentiated technologies with primarily sole-sourced positions, but continuing to expand our range of technologies and offerings and looking at adjacent end markets where our capabilities are similarly valued. We expect to selectively and carefully widen our aperture in this segment without losing focus on what differentiates us. Specifically the addition of Druck's complementary product line meaningfully strengthens our critical applications, including aircraft engine monitoring and hydraulics with strong positions in both single-aisle and widebody aircraft platforms as well as environmental control. Also expands our presence into ground-based test and calibration equipment for aerospace and certain other end markets, leveraging the same best-in-class pressure sensing technology. Another exciting news in addition to Druck, Panametrics and Reuter-Stokes business is closing January 1st. At the start of the year, we also closed on the acquisition of optek-Danulat, headquartered in Essen, Germany. Optek is the leader in in-line process control, optical sensing measurement solutions for biopharma, pharma and other demanding markets with annual sales of approximately $40 million. Optek is a perfect complement to our growing instrumentation business, my personal thanks to Jurgen Danulat for his trust in Crane as stewards of his legacy moving forward and to the outstanding team at optek. Just really a fantastic addition. The teams have hit the ground running across all businesses. The integration process is well underway, and the machine is fully in motion. Further, M&A activity is robust, and we continue to execute and cultivate accelerated opportunities. We see many opportunities progressing through 2026, but at this time, nothing additional is imminent in Q1. Alex will provide more detail on our core businesses as well as the recent acquisition shortly, but let me touch on the planned succession timeline that we announced last night. I want to congratulate Alex for being appointed as Crane's next CEO, and effective April 27th, 2026, at our next Annual Shareholder Meeting. And at that time, at the request of the Board, I will move to serve as Executive Chairman for a transitionary period expected to be no more than 2 years. Having partnered with Alex for more than a decade, I can confidently say he is the right leader to accelerate Crane's strong momentum. His deep operational expertise, proven ability to develop and execute complex strategic initiatives and unwavering commitment to our high-performance culture have been critical in shaping Crane into the market leader it is today and our proven performance across PFT and AAT. In my new role as Executive Chairman, I look forward to supporting Alex and the leadership team. As we continue driving strategic growth and long-term value creation. Coming off the incredibly strong performance in 2025 and turning to 2026, I remain highly confident in the strength and resilience of Crane's team and portfolio. Moving to 2026 guidance. I'd like to highlight that our guidance for 2026 includes a change to our non-GAAP presentation of adjusted EPS, which now excludes non-cash tax-effected acquisition-related intangible amortization. Rich will provide more on this during his remarks. By using this new convention for both 2025 and 2026, I'm pleased to announce our initial 2026 adjusted EPS guidance of $6.55 to $6.75. A solid 10% adjusted EPS growth at the midpoint when excluding the $0.16 benefit of one-time hurricane-related insurance recoveries that we received in 2025. As well as after-tax acquisition-related intangible amortization in both years. Importantly, I'm excited to share that we estimate that the acquisitions will be slightly accretive to 2026 earnings results. As I started with, there are many exciting developments across the company and our investment thesis is stronger than ever. Now let me pass it over to our Chief Operating Officer and incoming Chief Executive Officer; Mr. Alex Alcala to provide some color on the current environment, segment performance and recent acquisitions.

Alejandro Alcala, COO and Incoming CEO

Thank you, Max. I'm truly honored to have been appointed the next Chief Executive Officer of Crane. I'm enormously grateful for the Board and in particular, to Max for his trust and support over the years. I'm also thrilled that Max will continue as Executive Chairman, allowing me to keep benefiting from his tremendous experience and leadership. But this is not about me. It's about our leadership team and the 8,500 associates who execute every day, leaving the Crane culture of incredible intensity, focus and accountability. I've been fortunate to be part of the Crane journey for the past 13 years. We've transformed our portfolio, substantially improved our margins and our growth profile, and delivered significant shareholder value under Max's leadership. But I can tell you, I've never been more excited about our future and the progress we will continue to make for our customers, our associates our communities and our shareholders. Looking ahead, we will stay true to our journey, driving the Crane business system to deliver strong organic growth while also pursuing our strategy of accelerated inorganic growth. Over the years, I have literally traveled more than 1 million miles as part of this incredible journey with Crane, and I'm ready for the next million with this extraordinary team. Now some thoughts on the segments in the quarter as we look to 2026. Let me start with Aerospace & Advanced Technologies. These markets remained very strong. The backlog we built, along with the new programs and opportunities our Aerospace & Electronics teams have secured continues to provide us with great visibility into 2026 and beyond. On the commercial side, things continue to look healthy. Boeing and Airbus continue to ramp up production and aftermarket demand is still running at elevated levels, although the year-over-year comparisons have become increasingly challenging. On the defense side, there has been a lot of activity and interesting industry announcements over the past few weeks. Procurement spending remained solid, and there's a continued focus on strengthening the product defense industrial base given the heightened global uncertainty we continue to see. Given the level of activity we are seeing for 2026, we expect core sales growth for the year to be at the high end of our projections. And importantly, that growth should leverage at about 35% to 40% for the full year despite the less favorable mix, which is moving back to normal levels. Our guidance assumes OE sales will grow double digits year-over-year, partially offset by decelerating growth rates in the commercial aftermarket. We are excited for Druck to join the AAT segment and expect over the next few years that it will be incremental to both the segment's growth and margin profile. However, while it will be incremental to growth in 2026, we expect Druck to be dilutive to overall segment margin in the near term. Overall, we are on track for another outstanding year. And beyond this, we continue to develop new technologies, win new business and pursue additional opportunities across the segment. That gives us confidence we'll deliver above-market growth for the rest of the decade. A few highlights for the quarter in AAT. First, in our Defense Power business, we remain actively engaged and solidly positioned with defense vehicle OEMs collaborating on the combat vehicle programs. Second, Crane also continues to win funded next-generation military demonstrator programs for our brake control systems. We will also begin production for the F-16 brake control project in 2026 and have received two more follow-on orders, one from the United States Air Force and the other from a foreign military customer. And lastly, with elevated interest in air defense systems, we are actively pursuing new high-power AESA radar opportunities. Overall, our Aerospace & Advanced Technology segment is positioned to significantly outperform its markets over the next decade. We're extremely proud of what this team has accomplished and the momentum they've built. At Process Flow Technologies, we remain well positioned to outgrow the cycle. Over the past decade, we have deliberately repositioned our portfolio towards technologies and end markets that are higher growth and where we maintain leading competitive advantages and clear differentiation. Our latest acquisition enables us to continue that journey. Similar to Q3, we continue to see strength in segments such as pharmaceuticals, cryogenic power generation and water while chemical markets remain subdued at trough levels. Our disciplined approach and sharp focus enabled us to maintain leadership in this segment, as evidenced by our Q4 performance even given today's macro backdrop. A few highlights from PFT in the quarter. Our cryogenic business had another strong Q4, securing orders for several space launch customers. We continue to win and expand our share in this important vertical due to our excellence in engineering solutions, along with our ability to rapidly execute orders. Additionally, we continue to drive solid wins in pharma, securing another large order supporting capacity expansion to manufacture GLP-1 drugs. Our ability to deliver high-performance solutions for our critical pharmaceutical applications continues to set us apart in a competitive market and positions us for sustained growth in this segment. And lastly, despite the sluggish chemical industry, our teams continue to secure targeted opportunities within chemicals, winning key new project wins in the Middle East. Looking ahead to 2026 for PFT, given our fourth quarter orders remain sluggish, we are adopting a cautious view of 2026 demand levels to start the year and expect that core growth to be flat to low single digits for 2026. However, we do expect core leverage to still be within our targeted range of 30% to 35%, with the additions of Panametrics, Reuter-Stokes and optek-Danulat joining the PFT family, we fully expect over the next couple of years that they will be incremental to both segment growth and margins. In 2026, while they will contribute to growth in the short term, we expect them to be dilutive to margin. Overall, both businesses are strongly positioned for sustained success with the resilience and strategic foundation needed to deliver outstanding results in 2026 and beyond. Before I wrap up, I want to provide additional color on the acquisitions of Panametrics, Druck and Reuter-Stokes. The integration process is off to a strong start, and our outlook for these businesses is already exceeding our initial expectations. As Max mentioned, we now anticipate these businesses to be slightly accretive to earnings in 2026, compared to our original expectation of no accretion in year 1. We have been preparing for the last 6 months, and I personally spent a significant portion of this month visiting all these teams. And the CBS machine is already being deployed. I'm extremely confident that these businesses will become some of our best performing and most profitable businesses within Crane in the years ahead. As I think about the levers of focused improvement, the cost synergies will come from three major areas, all driven by CBS. Organizational simplification and focus. By operating these businesses as three independent entities, we're eliminating the top management cost layer. Product Line Simplification or 80/20, reducing complexity and eliminating work with limited return on investment; and traditional productivity improvements, driving efficiency through supply chain and lean tools and processes. In addition, all growth synergies are fully incremental upside to our financial model. We have dedicated teams in place and are off to a great start. I'm very confident we will meet or exceed our targets. Now let me turn the call over to our CFO, Mr. Rich Maue for more specifics on the quarter.

Richard Maue, CFO

Thank you, Alex. I really look forward to having as much fun with you as I've had with Max over the last decade. And Alex, I gave Max this same advice when he became CEO, borrowed from Michael Caine as Charlie Croker in the timeless movie classic, The Italian Job. It's a difficult job and the only way to get through it is if we all work together as a team. And that means you do everything I say. I'm kidding, of course. I'm not really. And to Max, borrowing Humphrey's Bogart's ever-famous line as Rick Blaine in the Academy Award-winning drama Casablanca, we'll always have Paris. Good morning, everyone. Let me start off with total company results. We drove 5.4% Core Sales growth in the quarter, reflecting the ongoing strength within the Aerospace & Advanced Technologies segment. Adjusted operating profit increased 16%, reflecting the impact of higher productivity and favorable pricing net of inflation. In the quarter, core FX-neutral backlog was up 14% compared to last year, again, continued strength at Aerospace & Advanced Technologies and core FX control orders were up 2%. From a balance sheet perspective, with the close of the acquisition of Druck, Panametrics and Reuter-Stokes, we ended the year with net leverage of 1.1x, which reflected 102% adjusted free cash conversion in 2025 and outstanding performance by our teams globally. And as Max noted earlier in January, we also closed on the acquisition of optek-Danulat, that brought our net leverage to 1.4x, leaving us well positioned for further M&A. A few more details on the segments in the quarter. Starting with Aerospace & Advanced Technologies. Sales of $272 million increased 15% in the quarter, nearly all of that growth organic. And even with the continued high level of core sales growth, our record backlog of just over $1 billion was up 25% year-over-year and was up slightly sequentially. Core orders were up 8%. Again, no surprises and continued strong demand broadly. Total aftermarket sales increased 1% with commercial aftermarket sales up 3% and military aftermarket down 3%. OEM sales increased 23% in the quarter with commercial sales up 27% and military sales up 18%, all in line with our expectations. Adjusted segment margin of 23.6%, expanding 50 basis points from 23.1% last year, primarily due to strong productivity, higher volumes and higher price net of inflation. At Process Flow Technologies. In Q4, we delivered sales of $309 million, flat relative to a year ago with core sales down 1.5% as we anticipated, offset by a slight benefit from the Technifab acquisition and 1.6 points of favorable FX. Compared to the prior year, core FX-neutral backlog at PFT decreased 7% and core FX-neutral orders remained soft, down 3% driven by the weaker chemical end markets as expected. However, adjusted operating margin of 22% expanded again and in the quarter was 170 basis points higher. Despite the headwinds on the top line, productivity is reading through as well as price. Moving to the non-operational items below the segments, along with some additional 2026 guidance matters. The start, as Max mentioned, beginning in 2026, we are excluding intangible amortization from our non-GAAP presentation of adjusted EPS. Following the significant increase in intangible amortization related to this month's acquisition activity, we believe that excluding it from adjusted EPS gives investors a better picture of Crane's free cash flow and also enables better comparison to the majority of our peer companies that use the same convention. Reconciliations recasting last year are in the slide presentation accompanying this call. Now moving on to a few non-operational items. Corporate expense for the full year of 2025 was $87 million, modestly up above our prior view of $85 million due primarily to M&A activity. For 2026, we anticipate corporate expense to be in the range of $80 million to $85 million. In Q4, we received $5.2 million of insurance recoveries from the Hurricane Helene flood. We had at one of our PFT sites or a $0.07 benefit to results in the quarter. With this final payment, the matter is now fully resolved with our insurers. Remember that our full year 2025 guidance included $9 million of insurance recovery related to Hurricane Helene with $6.7 million received through Q3. So $2.3 million or about $0.03 of the fourth quarter's insurance recovery was in our latest October guidance. The actual amount received was $2.9 million or $0.04 per share better than we had expected. Also keep in mind that for the full year, total insurance recoveries benefited adjusted results by $0.16, a benefit that will not repeat in 2026. Given the funding for the acquisitions of Panametrics, Druck, Reuter-Stokes, and optek-Danulat, we now anticipate full year 2026 interest expense of approximately $58 million. Lastly, we estimate our tax rate for 2026 to approximate 23%, slightly higher than what it has been historically. Looking at the cadence of quarterly results for the year, we expect Q1 2026 to be the seasonally softest quarter coming in roughly flat with the first quarter of 2025, lower than historical patterns given acquisition integration and increased interest expense. For the full year earnings split, we expect the first half of 2026 to represent about 45% of full year earnings with 55% weighted towards the second half. Overall, another outstanding year at Crane planned for 2026. And with that, operator, we are now ready to take our first question.

Operator, Operator

Our first question is from Scott Deuschle with Deutsche Bank.

Scott Deuschle, Analyst

Max, what are you going to do about your free time here?

Max Mitchell, Chairman, President and CEO

I'm going to remain busy, Scott, very, very busy. In addition to Executive Chair, I think you know, I've become a very popular Gen X influencer. I have my podcast that started and my OnlyFans page is going well. It's going to be...

Scott Deuschle, Analyst

I'm looking to hire someone from my team if you understand. I'll let you buy the Crane nuts. In all seriousness, Alex, I was wondering if you could speak to the pricing opportunity at Druck in 2026 and 2027. And specifically, I was curious if there are any meaningful LTAs coming up for renewal this year or next? And what type of price increase might be possible there?

Alejandro Alcala, COO and Incoming CEO

Thank you, Scott. I've been analyzing all three businesses—Druck, Panametrics, and Reuter-Stokes—and believe there is significant potential within our financial model. After working closely with the team for the past six months, I'm confident that our assessment of opportunities may be even more optimistic than we initially thought. I'm very positive about these acquisitions, as all three businesses offer substantial potential to enhance the Crane Business System. I mentioned previously about product line simplification, restructuring, and operational excellence. Regarding value pricing, Crane is well-positioned to leverage our differentiated technology. There is room for improvement across all three businesses, and at Druck, we expect to see positive changes beginning this year, continuing into the next year, as these adjustments take time. Similar to any aerospace business, there are existing contracts that will need to be renewed or renegotiated naturally. However, there are no significant obstacles preventing us from reaching our objectives in that area, Scott.

Scott Deuschle, Analyst

Okay. Rich, can you clarify what guidance contemplates as it relates to cost takeout at PSI? I think you've spoken about high single-digit million corporate cost takeout. And I wanted to clarify if that was in the guide or still on the comp.

Richard Maue, CFO

Yes, I think there's no change to what we've previously discussed. There are a few categories, which are the same ones that Alex mentioned. The cost or productivity aspect will clearly be one of them. Another will be on the commercial side, and then there will be leveraging the growth rates that we expect to utilize our operating cadence. So across all three, I would say there's no difference from what we previously communicated.

Operator, Operator

And our next question is coming from Myles Walton with Wolfe Research.

Unknown Analyst, Analyst

This is Greg Dahlberg on for Myles. First of all, I would like to say congrats to Max and Alex. So first one, I guess with the renaming of A&E to A&T, I think the aperture of what you would look at there. Can you go into more details, I guess, in terms of what adjacent tech and strategic direction this is actually referring to?

Alejandro Alcala, COO and Incoming CEO

Yes, Greg, this is Alex. So just a reminder, our business unit, Aerospace & Electronics was both a business unit name and segment name. So last year, we announced the promotion of J. Higgs, as Senior Vice President of the segment, and it's really positioning us to do more deals like Druck. So Druck would be a perfect example of the technologies that we would expand in, where it has a foot in traditional aerospace, but also gets us into lab-based calibration and even some high-growth industrial applications that are combined with the technology. So I think Druck would be a good reference of what you expect to see in that segment. And the model that we have right now in the structure allows us to keep adding not only bolt-ons, but stand-alone units to keep building out that segment similar to what we've done in PFT. You recall that when we changed the name to from fluid handling to process flow technologies, we were thinking about expanding our aperture, moving up the technology stack, having more differentiated products, and those have been the acquisitions we've done on that side as well with the sensing applications and now optics as well adding to that. And that's what you would expect to see high technology differentiated, improving our growth and margin profiles on both sides of the segments, growing both segments, doubling the size here in the next coming years is our goal that continues to create shareholder value and also optionality for the future.

Unknown Analyst, Analyst

And then just quickly on PFT. I know backlog declined sequentially for the second quarter in a row, mostly due to the chemical side. Can you just talk about what you're seeing? And I guess is there a time frame you'd expect that to start turning more specifically to the chemicals? And, I guess, more broadly your outlook for end markets in 2026 in PFT?

Alejandro Alcala, COO and Incoming CEO

Yes, Greg. Let me provide some insights on PST. We service various segments, and I'll start by discussing the areas and markets that experienced strong growth in 2025, which we anticipate will continue into 2026. In wastewater, primarily a North America-based business, we saw high single-digit growth, and we expect this to remain strong in 2026. Cryogenics also showed double-digit growth in 2025, continuing in the pharmaceutical sector. We're observing global growth, particularly in North America, driven by increased investments and reshoring efforts from pharmaceutical customers. The North America-based power generation sector gained momentum in 2025, and we expect that to extend across many of our segments and verticals, maintaining strong momentum. Regarding chemicals, which have been sluggish, we expect growth trends similar to those in 2025, though not uniform across regions. In the Americas and the Middle East, we experienced year-over-year growth in orders in 2025, and we anticipate modest growth to carry on in those areas. Our team is performing exceptionally well in these regions, where customers are benefiting from favorable feedstock energy prices and are seeing good returns on investments in capacity expansions, especially brownfields in the Middle East. These developments will continue at a moderate pace. Conversely, Europe, China, and the rest of Asia Pacific have not shown improvement and we do not expect changes there. Overall, our outlook for 2026 is to navigate through the current trough, remaining stable but not expecting a significant upturn this year. However, we will be prepared to capitalize on any opportunities if they arise, though this is not factored into our current guidance.

Operator, Operator

And our next question is coming from Jeff Sprague with Vertical Research.

Jeffrey Sprague, Analyst

Congrats Max and Alex, exciting news for both of you. Just a couple from me. First, just back on the deals. You kind of laid out the cost reduction opportunity and plan. I think there's also cost to get these bedded down and integrated given that they were carve-out entities. Could you just maybe speak to that the interplay between kind of cost to integrate versus cost out? And I would assume those sort of flip as we look into '27, '28?

Alejandro Alcala, COO and Incoming CEO

Yes, Jeff. So I mean there is some cost in and cost out on a net basis, it will be a cost out. The improvements in the margins will increase in '27, '28 as a lot of our actions to materialize and read through to the P&L. I've mentioned before, Baker Hughes operated these businesses as PSI. So it has that high-level PSI headquarter structure, which we're dissolving, shared services and finance, HR and IT. So that goes away, replaced by stand-alone business unit resources that we're adding. Overall on that basis, we expect once we're done to operate leaner and more profitable with all these ins and outs from a cost standpoint, and then driving improvements on top of that.

Jeffrey Sprague, Analyst

And then just thinking about what Rich shared on Q1, it sounds like the expenses could be heavy here in Q1. Maybe you could just give us a little bit of color on kind of the expected organic performance in Q1 versus kind of the deal impact in Q1 to get to kind of that relatively flat number.

Richard Maue, CFO

So legacy Crane organic, we'll be clearly up in A&E and likely down a bit in PFT in Q1 would be part of that dynamic in addition to the incremental interest expense that we have compared to last year in the first quarter. Sort of the, I would say, the big drivers, Jeff. There's also within Druck, Panametrics, Reuter-Stokes, there is seasonality, and they tend to be stronger in the second half than the first half historically.

Jeffrey Sprague, Analyst

Okay. Great. Understood. And then maybe just kind of stepping back just on the deal activity. So a lot of bandwidth still on the balance sheet. It sounds like you feel pretty comfortable with just the internal bandwidth to kind of execute all this. Maybe kind of address that, the ability for the organization to take on something else of size this year? Or should we expect maybe sort of smaller bolt-ons as the year is progressing here?

Alejandro Alcala, COO and Incoming CEO

Yes, Jeff. So the machine is working, right? At CBS, our funnel. We're integrating these four different businesses very well with resources. We have bandwidth to do more; I expect to do more in '26. I can tell you that we're also building capabilities constantly. We improved our capabilities not only to integrate but also our strategic resources that are evaluating adjacent is proactively increasing the potential targets. So we're only getting stronger on the M&A front and expect to accelerate that going forward. So funnel strong, nothing imminent in Q1, but expect to continue the momentum as we move forward. Plenty of bandwidth on our side.

Operator, Operator

And our next question is coming from Matt Summerville with D.A. Davidson.

Matt Summerville, Analyst

Thanks. A couple of questions. First, can you talk about 2026 with respect to the Aerospace segment, what you're expecting from an aftermarket volume standpoint for both OEM and military? And can you also sort of discuss whether there's any sort of government shutdown impact on any of the more material military programs for you guys?

Alejandro Alcala, COO and Incoming CEO

Yes. Thank you, Matt. I'll comment on it. Let me walk you through all the assumptions here on Aero in all the segments. So commercial OEM, as you would expect, will continue to be strong, high teens, Military OEM, mid-single digits, then to your question of aftermarket. On the commercial side, we're anticipating mid-single digits and on the military side mid- to high single digits. So continued momentum on all those fronts. As far as the government shutdown, the only thing that we've seen no change in orders or programs or funding, but we did see the flight test of the F-16 program get delayed a few months of being completed in January. We expect that to be complete more in the early second quarter. So that will delay a few months, the start of the shipments for the F-16, but that's all baked and factored into the guidance we provided. No other real impact right now that we see related to government shutdown.

Matt Summerville, Analyst

So as it pertains to kind of that $30 million sort of per year beginning '26 kind of target you laid out for F-16, is that lower than in 2015, meaning is your guidance assuming you don't fully capture that 30%, yet there's an opportunity albeit over a more compressed time frame for you to ultimately deliver that? And then can you just clarify for the PSI group of businesses, what for your 3-year cost synergy target would be, if you can remind us?

Alejandro Alcala, COO and Incoming CEO

Yes. So Matt, on the F-16. Yes. In our guidance, we're thinking more on F-16, though the annual rate is 3% this year, more like in the 20s, low 20s of revenue. There is an opportunity and a more compressed time line. But in our guidance, we've pulled that back a bit due to the few months shifting to the right. Related to the cost synergies, right? So this year, as we're starting off, we're moving fast with the actions. The teams are actually impressing me with their ability to embrace the Crane Business System machine, but it takes some time to read through. So if you're trying to do the math, we would expect like mid-single-digit growth and about 200 basis points of improvement in the margin profile this year. And then in the coming years, it'll be a little bit higher than the 200 basis points on a CAGR basis that gets us in that 5-year mark to achieve or beat the 10% return on investor capital. So about 200 basis points and then a greater number in the years ahead.

Operator, Operator

And our next question is coming from Amit Mehrotra with UBS.

Amit Mehrotra, Analyst

I wanted to ask about the power generation market for a moment. I believe you mentioned that Power Gen constitutes 10% of the portfolio within PFT, and you're also increasing nuclear exposure with PSI. This is clearly a significant area at the moment. Could you clarify the overall exposure to power generation and discuss how nuclear power generation is evolving?

Alejandro Alcala, COO and Incoming CEO

Thank you, Amit. As you mentioned, the traditional combined cycle power plants in our valve segment are significant and are driving our growth in the United States, particularly as we head into 2025. In terms of nuclear, we are essentially doubling our exposure with Reuter-Stokes. We have our core business, Legacy Crane Valve Services, and with Reuter-Stokes, we now refer to it as Crane Nuclear. This growth potential is quite appealing. You can think about it in four areas: the restarts of various nuclear plants like Poles or Crane Clean Energy, which was formerly Three Mile, will provide upside. We also have new construction opportunities with the AP1000 reactors from Westinghouse, where we maintain a strong market position, and there are anticipated projects in Europe. The third area involves our partnership with one of the leaders in small modular reactors; we are involved in the construction of the first SMR in Darlington, Canada, which is already underway, and additional reactors are in the planning stage depending on the success of the first. These small modular reactors utilize Reuter-Stokes's neutron sensing technology to measure the power output. Lastly, we are benefiting from an increase in license extensions. Five years ago, many nuclear plants were facing shutdowns, but now we see licenses being extended for about 50 years, which necessitates upgrades and investments. This is a positive trend that is poised to strengthen as we progress through the decade.

Amit Mehrotra, Analyst

Okay. And just as a follow-up. I want to revisit that 55% back half, I guess, obviously, 45% first half. And then you've given us the first quarter. It looks like just the way the math works, there's not a lot of growth year-over-year in 2Q implied by those comments as well. I don't know if I'm doing my math wrong or maybe there's the hurricane dynamic in there in terms of the comp. But can you just talk about that?

Richard Maue, CFO

Yes. Jason and Allison will catch up with you. But I would say that, yes, part of the headwind in Q1 and in Q2 clearly will be the insurance recovery. Those were included in our numbers, $0.16 on the year, and it was probably close to 50-50 in terms of first half, second half. Yes. But from a growth perspective, I'd rather hold off on commentary on individual quarters from a core growth perspective, frankly at this point.

Amit Mehrotra, Analyst

Fair. That's fair. Can I just ask 1 quick follow-up, if I don't mind, just on the synergies for PSI because you talked about PFT growth flat to up low single digits and then 35% to 40% incrementals. It doesn't feel in that number, there's a lot of synergies in there, but there's still 7, 8 points of margin gap. And so maybe this is just a timing thing or maybe it's conservatism but it would just be helpful to understand maybe if there's an opportunity for EBIT and PFT to grow disproportionately from revenue in 2016, just given maybe some of that margin gap that you can close? Or is that maybe more of a late '26,'27 thing?

Richard Maue, CFO

Yes. I would probably err towards what you closed with on your question. The 30% to 35% is on the legacy. And then as we continue to integrate the Druck, Panametrics, Reuter-Stokes, we'll start to see some of that incremental coming in more so in the second half versus the first half historically.

Operator, Operator

Our next question is coming from Nathan Jones with Stifel.

Nathan Jones, Analyst

Everyone. Congratulations to Alex. And unfortunately, Max, I can't see you're on the fan page.

Max Mitchell, Chairman, President and CEO

I'm not taking your request anymore.

Nathan Jones, Analyst

I guess, first on the acquisitions. I know you guys didn't include any revenue synergies in the deal model and in that kind of 10% ROIC target by year 5. But I also know that you anticipate getting some. So I'd be interested in getting some color around kind of where the most bright areas for you to generate revenue synergies are? If you can put any kind of financial framework around that of like would generate 100 basis points of revenue synergies or 200 or whatever the expectation might be over the next several years? Understanding that those are a little more squishy and maybe a little harder to track. But just any color you can give us on how you'll approach that? And if you can give any financial framework around effects.

Alejandro Alcala, COO and Incoming CEO

Yes, Nathan. I want to address your first question. We do anticipate some growth synergies in these areas, with varying impacts across the different businesses. For instance, Druck is in a very strong position commercially, although not as much on the military front. In our legacy core A&E, we have an excellent position as well, which will create synergies and growth opportunities. Traditional CBS commercial excellence, managing key accounts, channel management, and project pursuit funnel management will also enhance performance within the core business. Similarly, Panametrics and Reuter-Stokes have a strong position in power generation, and we are exploring adjacent markets such as homeland security and industrial applications, which present significant growth potential with the right focus. None of these synergies are factored into our current financial model or guidance. I'm not able to provide specific financial estimates at this point, but I assure you that these growth opportunities will manifest over time and will be reflected in our financial results.

Richard Maue, CFO

Yes. I think the confidence in the 4% to 6% growth range and the businesses moving us towards the higher end of that range comes from the adjacencies and other opportunities we already see. Therefore, we expect to be at or slightly above that high end when looking out a couple of years.

Nathan Jones, Analyst

And this is probably just a housekeeping one. I think it was maybe Jeff earlier on was talking about integration costs and the impact that might have on your reported numbers. Are you eating those in the reported results? Or are they adjusted out of the reported results.

Richard Maue, CFO

Yes. In response to Jeff's question, we will exclude costs that are directly related to the integration and ensure they remain visible. However, there are other investments necessary to advance the business in certain areas. For instance, if I need to hire in HR or IT, those ongoing costs are part of operations and cannot be excluded. This is what we meant in our response to Jeff's question.

Nathan Jones, Analyst

Yes, I understand. Can you just give us an idea of what the impact to free cash flow will be in 2026 from these expenses, not from the hiring, but from the costs to achieve synergies just to level set that for us.

Richard Maue, CFO

Yes. I don't have that off the top of my head here, Nathan. So we'll look to provide more color on that at the right time. I would expect our free cash flow, though, overall. Just stepping back, we had outstanding performance here in 2025 in our business, 102% on an adjusted basis. If we didn't adjust for certain items, we were at 98%. So it's not like we pulled the whole heck of a lot out to adjust. Our core business will continue in that 100% range is our view right now. In next year, I would say, including the acquisitions, it will be down a little bit, but we'll be within that 90% to 100% range without a doubt. If that helps.

Operator, Operator

Our next question is coming from Justin Ages with CJS Securities.

Justin Ages, Analyst

Congrats to Max and Alex on this new chapter. I have a question regarding the F-16. You mentioned that some of the wins are additional in the U.S. and with international partners. Is that layered on top, or do the international orders come after the U.S. orders are fulfilled, possibly not until 2027, when we might see the benefits from the F-16 international orders?

Alejandro Alcala, COO and Incoming CEO

Yes, Justin. Regarding the F-16, we view the $30 million in annual sales as something that extends the overall program timeline rather than significantly changing it. As foreign orders increase, the program benefits will continue for a longer period. We will first fulfill the needs of the United States Air Force and then add to that with foreign military sales, maintaining that annual rate of approximately $30 million.

Richard Maue, CFO

We have orders that exceed that annual rate today, so we don't need to wait for the orders. They are already in our backlog. Any additional orders will just extend the program, as Alex mentioned.

Operator, Operator

And our next question is coming from Jordan Lyonnais with Bank of America.

Jordan Lyonnais, Analyst

On Aero and the name change, how are you thinking about adjacencies or opportunities into IGT or Aeroderivatives? And then two, on the military side, is there any changes to your thinking on CCA's with the new group of on select on Tranche 2?

Max Mitchell, Chairman, President and CEO

You're breaking up just a little bit, Jordan, if you can say that again.

Jordan Lyonnais, Analyst

Apologies. Yes. Sorry, is this better?

Max Mitchell, Chairman, President and CEO

That's much better.

Jordan Lyonnais, Analyst

On CCAs, has that opportunity changed at all for how you're thinking about the program with Tranche 2 now coming online with a batch of 9 new contractors?

Alejandro Alcala, COO and Incoming CEO

I believe for the first part of your question regarding the AAT, we are exploring various types of adjacencies. Traditionally, our core business has focused on power control, but we are looking to expand into aerospace, similarly to how we approached sensing, with a range of opportunities in land-based applications. While I don't want to specify the adjacencies just yet, there are many that align with military and aerospace technologies, while also tapping into other high-growth markets. Regarding the second part of your question about CCA, if you mean collaborative combat aircraft, we are indeed involved in that area. We feel we are very well positioned, both with established primes and newer entrants. In fact, in previous quarters, we highlighted our strong position in a new program called Fury, where we anticipate significant growth ahead. This cycle has different sales dynamics and necessary pace, but all the demonstrators we've secured emphasize our position. We also have strong content with the new entrants, making us quite optimistic about that segment and our potential to benefit from it.

Operator, Operator

This concludes the Q&A portion of today's call. I would now like to turn the floor over to Max Mitchell for closing remarks.

Max Mitchell, Chairman, President and CEO

Fantastic. Alex, congratulations again. Thank you all for joining us today. Great call, great team, great performance. There's a great deal of momentum here at Crane. We delivered an exceptional 2025, and I couldn't be prouder of our teams. We continue to innovate, win critical projects and execute and deliver exceptional results. We also accelerated and delivered on our M&A efforts, adding differentiated technologies that further strengthen the Crane portfolio, and we're set up for an even stronger 2026 with a leadership transition that will drive a continued focus on transformation, execution and the relentless pursuit of improvement, relentlessly driving towards perfection while accepting the reality we will always fall short that is what pushes us forward driving change as a late great performer, Diane Keaton once said, What is perfection, anyway? It's the death of creativity, that's what I think, while change on the other hand, is the cornerstone of new ideas. As always, change at Crane is constant, and it remains the catalyst for fresh ideas, strategic evolution and continued outperformance. With our excellent strategy, exceptional talent, strong momentum, our progress speaks for itself, and truly, there's no limit to what we will accomplish in 2026 and beyond. Under Alex's leadership and the team. Thank you all for your interest in Crane and your time and attention this morning. Have a great day.

Operator, Operator

Thank you. This concludes today's Crane Company Fourth Quarter 2025 Earnings Conference Call. Please disconnect your line at this time, and have a wonderful day.