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United Technologies (NYSE:UTX)

Q4 2011 Earnings Call

January 25, 2012 9:00 am ET

Executives

Gregory J. Hayes - Chief Financial Officer and Senior Vice President

Unknown Executive -

Analysts

Howard A. Rubel - Jefferies & Company, Inc., Research Division

Terry Darling - Goldman Sachs Group Inc., Research Division

Jeffrey T. Sprague - Vertical Research Partners Inc.

Samuel J. Pearlstein - Wells Fargo Securities, LLC, Research Division

Heidi R. Wood - Morgan Stanley, Research Division

Deane M. Dray - Citigroup Inc, Research Division

Joseph Nadol - JP Morgan Chase & Co, Research Division

Robert Stallard - RBC Capital Markets, LLC, Research Division

Myles A. Walton - Deutsche Bank AG, Research Division

Julian Mitchell - Crédit Suisse AG, Research Division

Ronald J. Epstein - BofA Merrill Lynch, Research Division

Cai Von Rumohr - Cowen and Company, LLC, Research Division

Douglas S. Harned - Sanford C. Bernstein & Co., LLC., Research Division

Operator

Good morning, and welcome to the United Technologies Fourth Quarter Conference Call. On the call today are Greg Hayes, Senior Vice President and Chief Financial Officer; and Maria Lee, [ph] Director Investor Relations.

This call is being carried live on the Internet and there is a presentation available for download from UTC's website at www.utc.com.

Please note the company will speak to segment results adjusted for restructuring and onetime items as they usually do. The company also reminds listeners that the earnings and cash flow expectations and any other forward-looking statements provided in this call are subject to risks and uncertainties. UTC's SEC filings, including its 10-Q and 10-K reports, provide details on important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements. [Operator Instructions]

Please go ahead, Mr. Hayes.

Gregory J. Hayes

Thank you, Trinita, and good morning, everyone. As we all know, there's plenty of uncertainty out there in the world economy. On the one hand, of course, you hear about the ongoing European debt crisis, continuing weak U.S. housing market and the high unemployment in key developed markets. On the other hand, there are some positive signs that the economic recovery looks to be gaining traction, especially here in the U.S., and the commercial aerospace market continues to have good growth prospects. Here at UTC, we know how to operate in this uncertain and uneven global economic times and we continue to be well positioned to meet our commitments.

As you saw on the press release this morning, UTC closed out a strong 2011. Full year sales were over $58 billion, up 7% from 2010 and 6% organic growth, with all 6 of our businesses growing organically. Earnings per share were $5.49 and that's up 16% year-over-year. And free cash flow was very strong at 113% of net income, with 67% return to shareowners through dividends and share repurchase. And we achieved all of this while continuing to invest for the long term. Company-funded engineering and development spend was $2.1 billion last year. That's up $312 million versus 2010, primarily at Pratt & Whitney, as we continue to develop 4 separate geared turbofan platforms. As well, total restructuring was $336 million, of which $148 million was in the fourth quarter, as we preemptively positioned the company to grow earnings this year despite over $0.40 of anticipated headwind. That headwind is going to come from foreign exchange, pension and additional DND investments.

Okay. On Slide 2, turning to fourth quarter results. Fourth quarter earnings per share was $1.47, that was up 12%. A continued focus on cost reduction and productivity drove segment margin expansion, even as we increased E&D investment. Organic growth of 2% was slightly better than our expectation, and we once again had robust free cash flow.

Full segment operating profit grew 2% on flat segment sales. Hamilton Sundstrand had another very strong quarter, with 11% sales growth and 12% operating profit growth on strength in both the aerospace and industrial businesses.

Sikorsky's profit grew 2% in the quarter, approximately $35 million below expectations, primarily due to fewer-than-expected military shipments. Segment operating margin expanded 20 basis points in the quarter with the benefits from cost reduction more than offset a $95 million increase in E&D. Restructuring and net onetime items were a benefit of $0.01 in the quarter, as restructuring charges of $0.11 were more than offset by net onetime items, which were a benefit of $0.12.

The $0.11 of restructuring was spread across most of the business units. Sikorsky is taking proactive steps to position the business to grow operating profit despite a decline in military volume in 2012.

Fire & Security continues to drive cost reductions and operations transformation to offset declining markets, particularly in the U.K., and to address continuing performance issues in their business.

The $0.12 benefit from net onetime items included favorable tax settlements of $0.13, and a gain from Carrier's ongoing portfolio transformation of $0.09, which more than offset a $0.05 charge related to the impairment of the equity investment in Asia at Fire & Security, and a $0.05 reserve related to legal matters. These legal matters concern potential penalties that the State Department and the DOJ might impose as a result of self disclosures that we've made over the last several years concerning certain export compliance matters.

As I mentioned, earnings per share in the quarter were up 12%. Excluding restructuring and onetime items in the fourth quarter of both years, earnings per share increased 9%. FX did not have an impact in the quarter year-over-year.

In the quarter, we also had a benefit from the operational tax rate of about $0.14, and that was partially offset by $0.04 of Goodrich deal costs and the $0.05 associated with minority joint ventures. Free cash flow in the quarter was 123% of net income. That's great performance. Even as we contributed $304 million in cash to our international pension plans. Even with the additional drop in discount rates this year, our global pension plans are 87% funded on a PBO basis. We spent $128 million on acquisitions in the quarter and there is no share repurchase. If you'll recall, we suspended share buyback in September as a result of the Goodrich transaction, after having already spent $2.2 billion in the year.

All right, Slide 3, looking at orders for a second. Pratt & Whitney's large commercial engine spares were down 16% for the quarter, following a 45% growth in last year's fourth quarter. That's really in line with expectations. For the full year, Pratt's spares orders were up 8%. Hamilton Sundstrand commercial spares orders were up 17% in the quarter, after 31% in last year's fourth quarter. For the full year, Hamilton's commercial spares orders were up 22%, very strong performance.

So orders for Pratt and Hamilton were about in line with what we expected, while Carrier and Fire & Security were a little bit off. Carrier's North American residential HVAC orders were down about 20% in the quarter, roughly in line with the market. You'll recall that fourth quarter of 2010 grew about 30%, driven by the expiration of the tax stimulus rebate. But Carrier did see orders decelerate over the quarter to lower-than-expected levels. And we continue to see a preference in customers' buying pattern for lower-featured, lower-efficiency products.

Fire & Security orders were down 2% organically, driven by our own products and service and installation businesses. At Otis, new equipment orders were up 2% at constant currency, on tough comparison in North America and slower growth in China. Otis' new equipment orders in China grew 7% at constant currency in the fourth quarter, after growing 31% in the third quarter. For the full year, China's new equipment orders were up over 20%.

We continue to see strong but moderating growth in the emerging markets, consistent with our expectations. Combined BRIC orders for the commercial businesses were up 8% this quarter, after growing 23% in the third quarter.

So despite a slowing world economy, 2011 was still a strong year for UTC, with 6% organic sales growth, EPS up 16% and robust free cash flow. All while we continued to make investments in this game-changing technologies and cost reduction.

I'll be back to talk about 2012, but first let me turn it over to Maria [ph], to take us through the details of the business units.

Unknown Executive

Thanks, Greg. Turning to Page 4. Otis delivered another solid quarter with profit increasing 5% on 3% higher sales. Operating margin reached 23% in the quarter, 40 basis points higher than prior year. The positive impact on operating profit from higher sales volume and continued cost reduction were partially offset by pricing and commodity headwinds. Favorable currency translation contributed 1 point of profit growth. New equipment sales increased 6% at constant currency, led by continued growth in emerging markets. Service sales were also up, with growth in contractual maintenance and repair.

At constant currency, new equipment orders were up 2% in the quarter with 7% growth in China, low single-digit growth in Europe and a decline in North America from last year's strong fourth quarter, which included the order for the World Trade Center transportation hub. Otis' new equipment backlog is up 8% year-over-year.

For the full year, operating margin expanded 20 basis points to a record 23.2%, with 9% profit growth on 7% sales growth. At constant currency, profit increased 4% on 3% sales growth.

On Slide 5. Carrier profits increased 10% on 9% lower sales, resulting in record Q4 margin of 9.8%, up 170 basis points from prior year. Organic sales were flat on continued moderation of growth in Transicold and the shutdown of our Toshiba Thailand factory due to the extensive flooding. The North American residential market is off to a slow start to the heating season and faces tough compares, as Greg mentioned. North American residential unit shipments of gas furnaces and split systems were both down double digit in the quarter.

The earnings headwinds from lower North American residential volume combined with the absence of earnings from Latin America following the fourth quarter transaction with Midea, was more than offset by nonrecurring credits to warranty and benefits expenses. Commodity headwind in the quarter was completely offset by pricing, following the recent price increase in the U.S.

For the year, Carrier grew earnings by $315 million, or 28%, a 9% organic sales growth. With operating margin at 12.2%, up 220 basis points from prior year, Carrier has reached its 12% margin target, a full year ahead of expectation.

UTC Fire & Security profit contracted 13% in the quarter on 2% lower sales. Organic sales were up 1%. Product businesses were up mid-single digit, and service and install businesses were down low-single digit due to continuing softness in the U.K. and America's businesses. Organic orders were down 2% year-over-year. Operating profit in the quarter contracted 13% at constant currency. Benefits from cost-reduction, as well as a gain on the sale of a guarding-related business in the U.K. were offset by continuing profit decline in the U.K. from lower sales and performance, combined with unfavorable sales mix. For the full year, operating profit was up $46 million and operating margin was 12.2%.

Turning to Aerospace on Slide 7. At Pratt & Whitney, sales were up 1% in the quarter, including 2 points of unfavorable foreign currency at Pratt Canada. Sales growth was driven by higher large commercial engine deliveries and industrial volume at Power Systems, partially offset by lower large commercial spares and reduced volume at Rocketdyne. As expected, large commercial spares were down 7% in the quarter on tough compares.

Operating profit in the quarter was down 2%. Higher E&D and unfavorable currency at Pratt Canada more than offset a favorable adjustment of about $0.04 due to a contract termination. Restructuring savings offset higher pension costs. For the full year, sales were up 4% and operating profit was down $100 million, in line with guidance.

Hamilton Sundstrand posted a strong quarter, with profit growth of 12% on 11% higher sales. Organic sales growth of 12% was the highest since Q2 2008. Sales growth was led by Aerospace OEM and Industrial businesses, both up about mid-teens. Commercial aftermarket was up mid-single digits versus a strong fourth quarter 2010.

Profit growth in the quarter was driven by benefits of increased volume, partially offset by unfavorable mix from higher OEM sales. Operating margin was up 10 basis points year-over-year to 17.9%. Commercial spares orders increased 17% year-over-year with book-to-bill at 1.1. Industrial orders were up 16%, with particular strength at Sundyne's oil and gas business. For the full year, sales were up 10%, profit was up $115 million and operating margins expanded by 40 basis points to 17.9%. 2011 was a record year for sales, earnings and operating margin at Hamilton Sundstrand.

Turning to Sikorsky on Slide 9. Operating profits grew 2% on 1% higher sales. During the quarter, Sikorsky shipped a total of 73 aircraft, 3 less than the fourth quarter 2010. 61 aircraft were based on military platforms and 12 commercial. On profit, strong aftermarket volumes and lower manufacturing costs more than offset the unfavorable impact of lower commercial aircraft deliveries and 2 Canadian maritime helicopters.

Of note during the quarter, Sikorsky signed a contract with the Brunei Ministry of Defense for 12 firm and 10 option S-70i aircraft, marking the largest order value to date for Sikorsky's International variant of the BLACK HAWK. For the year, Sikorsky delivered 274 aircraft. Operating profit of $820 million was up 12% on 10% higher sales. Operating profit was lower than expected, primarily due to lower military aircraft delivery.

With that, let me turn it over to Greg for wrap-up.

Gregory J. Hayes

Okay. Thanks, Maria [ph]. So a strong 2011, organic sales growth, record segment operating margin including double-digit margins at all 6 of our business units, EPS growth of 16% on top of robust cash generation. And we continue to expand UTC's presence in emerging markets, which now represents 21% of UTC sales. We also announced 2 transformational deals in 2011. First, of course, the acquisition of Goodrich, with complementary products and high aftermarket content, which will expand our presence in the fast growing Commercial Aerospace market. Integration and planning is going well, and there's no changes in our expectations for a midyear close of the deal.

The agreement to purchase Rolls Royce's share of IAE joint venture and to partner with the next generation midsized aircraft, ensures a smooth transition from V2500 production to the GTF, and further validates the GTF technology. With the creation of the new Propulsion and Aerospace Systems organization, we'll better coordinate our technology development and take advantage of synergy opportunities across all of these businesses.

Pratt & Whitney completed the first test program for the CSeries engine. Overall, 6 GTF engines have now completed more than 1,500 hours of testing and the engines continue to validate our performance expectations. Of course, our customers see the value in our engine and have ordered or taken options for more than 2,000 engines, and we continue to deliver production engines for the JSF. And during the year, we removed any doubt concerning the extra engine for the Joint Strike Fighter.

Hamilton Sundstrand last year supported entry into service of the 787 with our 9 systems, all performing extremely well. And at Sikorsky, the BLACK HAWK continues to gain traction in the International marketplace with over 50 orders from international customers in 2011.

We also announced last year the creation of the Climate, Controls and Security segment, and we'll begin reporting that segment in 2012. Geraud and his team are going to leverage their experience with Carrier's portfolio and operations transformation to drive continued productivity and margin expansion at the combined businesses. At Otis, operating margins of 23.2% were again a record, and we'll continue to lead the industry.

The transformational deals, new organizational structure and continued investment in game-changing technologies and cost reduction, position us well for consistent long-term earnings growth.

Okay. Let's take a look at 2012 for a second. There have been some puts and takes, but the overall economic data seems to be generally in line with our expectations that Louis laid out in December. And so today, we will reaffirm the 2012 EPS guidance of $5.80 to $6 per share for our base business excluding the Goodrich, the impact from Goodrich. That's earnings growth of 6% to 9% and sales of $59 billion to $60 billion.

Europe, of course, remains a question mark as we begin 2012, and we are seeing some pressure from the euro, which has traded as low as $1.26 versus the $1. We continue to keep a close eye on exchange rates and we expect FX to be a significant headwind in the first half of 2012, as the euro averaged $1.40 last year in the first half.

And Louis pointed out, there's always volatility in interest rates and we continue to see that in the fourth quarter. We'd estimated that the discount rates for our pension plan would be about 5%. In fact, the actual discount rate came in a little lower, at 4.7%. The impact of that was partially offset by better performance in the plan, but unfortunately, represents an additional $50 million of headwind for 2012 versus the guidance that Louis gave in December.

Also back in December, we had visibility of $150 million to $200 million of gains in 2012 that we planned to use to offset restructuring in our base business. We now see an additional $300 million of gains in the first half of the year 2012. We expect to use these additional gains to offset a portion of the Goodrich restructuring and deal costs, and this provides us some flexibility given the currency volatility and pension headwind. With the additional gains, we feel even better about 2012 than we did in December, although the first quarter will have its challenges.

As I mentioned earlier, we saw a slowdown in the order rates for the residential HVAC and the legacy F&S businesses. And that will put pressure on Climate, Controls & Security in the first half, which also faces tough compares. Carriers' operating profit, you'll recall, grew over 100% in the first quarter of 2011, driven by strength at Transicold and the restocking benefit of our residential HVAC business. We also saw a strength in our Toshiba businesses last year. But today, unfortunately, the Toshiba Thailand facility remains closed due to clean-up efforts related to the extensive flooding.

On the Aerospace side, order rates were in line with expectations in the fourth quarter, but they also faced tough compares in the first quarter. As you recall, commercial spares sales were up over 30% at Pratt last year and up over 20% at Hamilton in the first quarter of 2011. So a little bit of first quarter headwind and a little bit in half, we'll have to deal with it.

Turning to cash flow for 2012. We continue to expect free cash flow to equal or exceed net income for the full year. We have suspended our share repurchase program and we have a placeholder for acquisitions of $500 million for the year, excluding Goodrich and the IAE transaction.

With our industry-leading franchises, transformational deals and sustained structural cost reduction, we are well positioned for earnings growth in 2012 and beyond.

So with that, let's open up the call for questions. Trinita?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Howard Rubel of Jefferies.

Howard A. Rubel - Jefferies & Company, Inc., Research Division

Two items, Greg. First, you talk about $300 million in gains, and I think some of that comes from some asset sales that you've already announced. Could you highlight those? I think one of them is the Ecowash business and then there's another Carrier-related sale, I believe?

Gregory J. Hayes

No. We had identified $150 million to $200 million of gains to offset restructuring, and Louis talked about that in December. And I think those things that you're talking about were those gains that we have contemplated. This is an additional $300 million of gains and it's really related to settlement of some open tax years that we expect to happen here in the first half of the year. So this is truly incremental to what Louis had talked about. So we have seen $150 million to $200 million of gains, we now see roughly $500 million of gains.

Howard A. Rubel - Jefferies & Company, Inc., Research Division

And then just one item. Everybody dealing with Uncle Sam and the Department of Defense is facing challenges, and one of the uncertainties that you've had has been with the multiyear procurement of the U-860. How do you sort of see that playing out? And what sort of puts and takes have you sort of allowed for, with respect to that issue?

Gregory J. Hayes

Yes. Howard, it's a very good question. I think we have pretty well calibrated Sikorsky military for 2012, given what we expect to come out in the budget tomorrow. BLACK HAWKs will be down about 30 units, about 15% in sales at Sikorsky on the military side. So I think, we've already contemplated that as part of a multiyear 8. We're still negotiating multiyear, where we expect to have that done kind of midyear. I would point out on the military side though, it's not all gloom and doom. You do have good news on the Pratt side with the JSF. As I said, there's no extra engine. As we see it right now, we see about 10% growth in the military side of Pratt in 2012 on the back of the JSF production. So I think it's actually pretty good news.

Howard A. Rubel - Jefferies & Company, Inc., Research Division

And I guess C-17 is doing well, given the ongoing demand in Afghanistan.

Gregory J. Hayes

Yes. C-17, I think, so the aftermarket plays well as an OE, it continues -- we've got the C-17s going to India. And again, good, strong aftermarket there.

Operator

Our next question is from Terry Darling of Goldman Sachs.

Terry Darling - Goldman Sachs Group Inc., Research Division

Sort of jumping between calls here, so I apologize if you got into this. And if you did, I'll just come back. But I wonder, if you can touch base on Otis aftermarket. Growth was pretty anemic there. Can you update us on your thinking on China as well, with regards to the social housing dynamic over the next 12 months or so?

Gregory J. Hayes

Yes. If we take a look at service at Otis in the fourth quarter, it was only up about 1%. Really, a pretty decent on the maintenance side. Where we really saw softness was in modernization. That was actually down about 4% or so. Repair was up 4%. And, I think, regular maintenance was up 2 or so percent. So a little softer than what we had expected, but really on the modernization side. Europe continues to be the drag there, where we're just not getting traction on the mod orders that we had expected. At China, it's a little different story. Obviously, there was a slowdown, where we saw our growth going from 30% to 7% on the OE. But as we think about this, we really got very strong backlog going into 2012, up about 20% year-over-year. And we think again, we'll see mid-single-digit growth at Otis this year, driven by social housing. And again, the move from the Eastern Seaboard to the West of the country. I think social housing last year was about 5 million units. The government came out recently and revised the projection from 10 million down to 7 million units this year, but still pretty strong growth. And again, we don't really have a big concern about China slowing down dramatically this year. I think, again, the fourth quarter was probably to be expected, given what the government was doing to try and rein in the property speculation in China. But 7% growth is still pretty good and for the year, 20% growth in Otis in new equipment in China. So I don't think that story really changes fundamentally.

Terry Darling - Goldman Sachs Group Inc., Research Division

Okay. And then with regards to the first quarter comps that you talked about at Carrier. Does Carrier overall have negative organic growth in the first quarter or not that bad?

Gregory J. Hayes

No, no. It's not that bad. I think the issue that you have at Carrier is, last year, first quarter earnings, I think, were up $167 million. That's up over 100% year-over-year. And thus, you had F&S which grew, I think, at 36 or so. It was over $200 million between the combined businesses. And F&S also had the gain on the sale of its U.K. manned guarding business. So it's is a pretty tough comp. We will see Transicold down in the first quarter. We expect res to come back a little bit. We expect commercial to be okay. But I think, again, just with the pressures of Toshiba Thailand and the fact that we're not shipping anything there, earnings are going to be challenged. In fact, I would think in the first quarter, earnings will be down at CCS year-over-year. First half, we'll probably be flat and then for the rest of the year, we'll see the growth as we get traction on the restructuring and the continued market improvements throughout the year.

Terry Darling - Goldman Sachs Group Inc., Research Division

Okay. And then, Greg, just lastly, some chatter out there about how you might be thinking about asset sales to help to fund Goodrich and some chatter about strategic considerations on Sikorsky. And related to that, I guess, joint ventures and so forth. Can you just address that whole issue as well?

Gregory J. Hayes

Let me take it head-on because I think there's -- Louis said this back in December. And I think obviously as part of the Goodrich deal, we had hoped to issue about $4 billion of equity and $12 billion of debt. And we all know we hate to issue equity. At the same time, I hate to lose my credit rating. So we're going to go after this in a methodical fashion. We're looking at non-core assets to divest and we're going to continue down that path. We're going to work with the rating agencies over the next couple of months and come up with a plan that will hopefully reduce the amount of equity that we're going to issue, and we're going to lay that out for investors in our March 15 meeting down in New York. So we're continuing to work it. We're looking at non-core assets across UTC both on the commercial side and on the aero side. Let me just say that Sikorsky, as far as I can tell, is a core asset of UTC though. So I think we can probably put that speculation to bed.

Operator

Our next question is from Jeff Sprague of Vertical Research.

Jeffrey T. Sprague - Vertical Research Partners Inc.

Just a little on Fire & Security, Greg. I mean, what you said about Q1 is fairly clear. But just thinking about moving beyond that, a number of issues there. I think some of what you're dealing with maybe some stuff in backlog that you're not particularly proud of and need to work its way through. I just wonder if you can give us some thoughts on that. How long that drag persists? And how long it takes to kind of get after the SG&A that's also causing the cost headwinds relative to growth maybe being on the light side versus expectations?

Gregory J. Hayes

Yes, yes, Jeff, those are all good and fair questions. I would tell you, while we're disappointed with F&S's performance last year, I have to point out that we still had 12.2% margins. So it's not a broken business. But there certainly are opportunities for improvement. And I would tell you, first and foremost, it's in the field operations in Europe and primarily in the U.K. As we dissected this and Geraud and the team have been looking at the portfolio there, certainly, we were taking out some work at margins that were really just not acceptable and the performance on those contracts weren't very good. I think we cleaned a lot of that up in the fourth quarter. But it's probably going to be a tough 2012 at F&S, as we work our way through the rest of that portfolio. As Geraud is taking a look at the entire portfolio, he would expect to divest, I think, some of the non-core F&S assets this year. And I think you'll hear more about that in March. But fundamentally, the business is not broken. We have some opportunities. We know how to fix things. We go back to Collierville at Carrier back in 2006. That was a broken factory after the SEER 13 transition. I think, we made no bones about it. It was a problem. I would tell you, Geraud and the team, they fixed it. Today, that is a world-class factory. It's ace gold. I think you'll see the same kind of focus on the Fire & Security business in Europe that you saw on that particular problem. We'll get it fixed. It's just going to take a little bit of time. So I think most of the bad news is behind us, but certainly not all of it on F&S. So it will be a tough 2012.

Jeffrey T. Sprague - Vertical Research Partners Inc.

And can you just give us a bit more granularity on Transicold? Obviously, it's down in Q1. But what's actually going on with the orders there? And is that business kind of on track, it's kind of down for the year, maybe some geographic color around that also?

Unknown Executive

Sure. So on Transicold, if we look across the business, the orders in the fourth quarter were down low-double digits, with container down the most, down about 30%. And Europe Truck Trailer also saw some weakness, down low-double digits as well. And what you really see there is the impact of the economic conditions in Europe and the availability of credit for some of the customers. North America Trailer, Truck Trailer, however, was up over 100%. And now we see some of the trailer OEMs finalizing their Q1 delivery schedules, so we feel pretty good about that.

Gregory J. Hayes

Just to add, the orders there are pretty lumpy. Containers orders were down. I think, the fundamental structural issue in Europe is probably a bigger concern for the year, as we see creditors tighten up for credit availability to our customers. But overall, it will be down after a record year in 2011. But it's not a train wreck by any stretch of the imagination, so they're a very, very solid business this year.

Operator

Our next question is from Sam Pearlstein of Wells Fargo.

Samuel J. Pearlstein - Wells Fargo Securities, LLC, Research Division

If I had looked at where you started in December with your contingency of, call it, $130 million, it seems like both pension and FX probably absorbed most of that. Should I be thinking about it now with this additional potential gains as a cushion in the $300 million range?

Gregory J. Hayes

Well, really good, Sam. Yes, if you think about it, at the midpoint of the guidance range at $590 million, we had about $130 million of contingency. We've lost about $50 million of that to the higher pension costs with the lower discount rate. And the rest of it, if you take a snapshot of the euro today and the exchange rates, we probably lost another $70 million or $80 million. So the contingency at the midpoint is essentially evaporated. However, and we talked about this additional $300 million of gain. My own view is that, we'll use half of it or so on the Goodrich deal costs and restructuring, and the other half, we'll just build contingency for us. So really, what I'd like to think of it as that we still got $150 million of contingency because the bad news that we talked about so far on pension and FX is really covered by the other half of the gain. So we're kind of at the same spot that we were, even though the euro is lower and pension is worse 6 weeks later.

Samuel J. Pearlstein - Wells Fargo Securities, LLC, Research Division

Okay. And then in your slide, you talked about a couple onetime items that, I guess, weren't part of how you had it in the release. But can you size the gain on the contract termination at Pratt and on the U.K. guarding business?

Gregory J. Hayes

Yes. The Pratt gain on the contract termination was about $0.04. So I think the piece on F&S was about $0.01. That was a sale of our security, one of our security manned guarding businesses in the U.K.

Samuel J. Pearlstein - Wells Fargo Securities, LLC, Research Division

All right. And then the last question, how should we think about the Thailand piece of Carrier? How big of an impact is that? How much does that change things in 2012?

Gregory J. Hayes

Yes, I would say, we don't expect the factory to be back up in production until the second quarter. I think last year, we generated about $30 million of earnings there in the first quarter. So those earnings will go completely away. Obviously, it will have an impact a little bit into the second quarter, so we're probably going to lose almost half a year's production in the -- out of Thailand. So things are pretty tough first half.

Operator

Our next question is from Heidi Wood of Morgan Stanley.

Heidi R. Wood - Morgan Stanley, Research Division

A question a little bit on the cap on the balance sheet side. You started the year with a debt to cap at 31%, net debt to cap is 16%. I know you've got sort of a matrix of ideas that -- and you're working with the rating agencies on different alternatives. But can you give a sense as to maybe what the range of the balance sheet would look like kind of post facto?

Gregory J. Hayes

Yes, there's a lot more debt. Yes, I think, as you think about -- as you said, debt to cap is 31% today. We've got a lot of cash on the balance sheet, over $6 billion of cash. There's $1.5 billion of that cash that was going to go to pay for the IAE transaction, which we expect to close in the second quarter. So that cash is somewhat spoken for. I think debt to cap is going to migrate up towards the 50% post deal. And again, it's really a question of how much debt we have to issue versus equity. But you can kind of think of it in that 50% range. And then over the next 2 to 3 years, we'll bring it back down, as we pay off a big chunk of this. I think the good news is, cash generation was exceptionally strong for the year. We continue to see strong cash generation in 2012. And I think, Goodrich is going to be a better investment than anybody would have thought. I think, again, we think there's nothing but upside there, especially with their aftermarket businesses. So it's going to be a little lumpy. And again, I think, once we understand what we're going to be from a portfolio standpoint in March and we lay that out for you, you'll get to see what the real debt to cap looks like. But I don't anticipate it going north of 50%, when we're all said and done.

Heidi R. Wood - Morgan Stanley, Research Division

All right, great. And then a question on Hamilton. When should we start to -- when does the provisional spares in the 787 start to tick up and how's that going to affect the margins, if at all?

Gregory J. Hayes

Yes, we've actually started to see it in the fourth quarter. The big piece of the aftermarket growth at Hamilton in the fourth quarter was 787. We'll see some more incremental benefit this year. It's not real big. It's probably less than $0.02 of earnings out of that. But the big piece of what we're doing, though, especially with some of the initial airlines, we're providing a care package, which is our kind of nose-to-tail support. So the provisioning is going to be a little bit muted versus what you would normally see on a new program. But again, the economics of that program, we provide and we provision for the spares and the support and we get paid for that on an hourly basis. That actually is a pretty good deal for us. So we get a little bit of benefit this year, year-over-year, but it's not huge.

Heidi R. Wood - Morgan Stanley, Research Division

All right. And then last question, on the Pratt and Whitney, on the new engine shipments. Your large commercial deliveries were up 40% year-over-year in the fourth quarter and you, obviously, you had a good surge in the third quarter. Can you tell us a little bit on a quarterly basis, how the new engines shipments look over 2012?

Gregory J. Hayes

I don't know that I've got a breakdown of 2012. I think, if you think about that 40% improve or increase in 2011, a big piece of that, that's like 44 engines, I guess. Big piece of that was V2500s. I think we shipped about 27 of V2500s and 14 of the GP7000s. As you know, we only get about 1/3 of the revenue out of the Vs and 50% out of the GP7000. So it was nice shipments. I think, we're going to continue to see that kind of volume into 2012. But I don't know that we have -- I'm just looking here if we have that.

Heidi R. Wood - Morgan Stanley, Research Division

It makes sense, Greg, just as we think about it, given the production ramp in 2013, that we'd start to see it more and more in the back half of this year?

Gregory J. Hayes

I think what you're going to see is a continuation of what we saw in the third and fourth quarter at Pratt. You're going to continue to see Vs increase with the production line increasing at Airbus. And as the ramp rate on the A380 increases again, you're going to see the GP pickup at kind of the rates that we're seeing in the third and fourth quarter.

Unknown Executive

Just to add to that a little bit. For the whole year, at least, 2012, we do see total commercial engine shipments up low-single digits, with the Vs up almost 10% for the high-single digit.

Operator

Our next question is from Deane Dray of Citi Investment Research.

Deane M. Dray - Citigroup Inc, Research Division

Before the expected sale of these non-core assets, I know we're going to hear more about it in March, but might some of these sales be completed in 2012? And would there be gains on these transactions?

Gregory J. Hayes

Yes and yes. And again, I can't be too specific, Deane. Obviously, as we look at this, the key to any of these transactions is to actually get it completed this year, really, to fund the Goodrich deal. And whether we're going to use it to pay down debt or reduce the amount of equity, we're still working through that. But you would expect these businesses, although they're non-core, that doesn't mean they're bad businesses. In fact, I think, there could be some very good businesses out there that just aren't core but that will generate significant interest in the marketplace. It's going to take us some time. I would expect, again, we'll lay this out in a couple of months. We'll start to process around some of these divestitures, but it will probably take us most of the year, but our target right now is to have all of the divestitures done in 2012.

Deane M. Dray - Citigroup Inc, Research Division

Now, but the gains there, in theory, that would take you well above the contingency. So would that be potential more restructuring offsets?

Gregory J. Hayes

Yes. I think, again, those gains equal restructuring math is --we're going to try and continue to do that. But it's really hard to tell you what the gains are going to be out of these businesses. It's a little early.

Deane M. Dray - Citigroup Inc, Research Division

Of course. And then, just last question for me. I know you've got a question mark regarding the impact on Europe, but it didn't seem to have much of an effect in the fourth quarter. Could you just comment on what you're seeing real time in terms of customer behavior, destocking? Any color there would be helpful.

Gregory J. Hayes

It's really, an interesting thing about Europe is Carrier's business, the commercial HVAC business, in the fourth quarter was actually up 8% year-over-year. And it's not related to commercial construction activity in Europe, it's really related to just the push for energy efficiency in the replacement market. Otis was not quite the same story. Obviously, it's a bigger business for them. They had more pressure in Europe. But the fact is, I think, Europe is just -- it's going to be a tough road ahead. I think we've -- the good news about UTC, balance works. It's 25% of the sales come out of Europe. We don't expect much growth, but we don't expect any big surprises. Maybe just to kind of put it in context. In 2009, Europe was down 14% as was the U.S. and I think even Asia and emerging markets were down like 16% or 17%. In 2010 and 2011, we saw a 2% growth in the euro. So if you think about it, we're still down 10% from the peak. So there's still opportunities there, but I think it's going to be a very long, slow growth to recovery in Europe. And again, we'll see how this debt crisis plays itself out. I'm not all that concerned. A big chunk of what we do in Europe is obviously service-related, which seems to be pretty resilient.

Operator

Our next question is from Joe Nadol of JPMorgan.

Joseph Nadol - JP Morgan Chase & Co, Research Division

I'm a little confused on the EPS guidance. I just want to kind of walk through this again. Because your guidance, you didn't update us on the guidance including Goodrich. And it looks like half of the new gains are offsetting deal costs, but those weren't part of your x Goodrich EPS guidance. So, Greg, any -- I don't know, can you illuminate that a little bit?

Gregory J. Hayes

Sorry for the confusion. The way we have laid this out, we've got the base business of $5.80 to $6, right? 6% to 9% growth. And what we've done is, we've allocated half of this additional gain as contingency there, really, to cover the pension and FX impact. The other half, call it, $150 million, we'll use to offset either deal costs or restructuring at Goodrich, post close. So if you think about it, we talked about $0.50 of dilution related to Goodrich. I think that's probably $0.10 better on the low end, so probably only about $0.40. So if you want to take $0.40 off the top at the low end, you can figure out the Goodrich impact. The reason we're reluctant to give guidance specifically on the Goodrich dilution is we're still working through this equity issuance and the impact on that versus debt, as well as the impact associated with any divestitures. So we're trying to focus people on the base business for now. In another 1.5 months or so, I think you'll have a lot more clarity on this Goodrich. But if you're just trying to do the simple math today, I'd tell you, you can put a $0.10 off or take a $0.10 off the $0.50 we gave you in December.

Joseph Nadol - JP Morgan Chase & Co, Research Division

And the way to think about the $5.80 is to $6 is, basically, you lost $1.50 from the 2 items you mentioned and you picked that back up with half the gains we're talking about?

Gregory J. Hayes

Yes. I think that's the simplest way to think about it.

Joseph Nadol - JP Morgan Chase & Co, Research Division

Okay. And then over at Otis, your margins -- your adjusted margins have been up something like 15 straight years and your guidance this year calls for a bit of a downtick, and you've done that before and beaten numbers. So what's different this year that should compress margins?

Gregory J. Hayes

I think the big difference this year is the growth that we expect in new equipment. And as we've been talking about for the last 8 quarters is pricing has been pretty tough on new equipment, really, across the globe. And so as you see that growth in new equipment which -- I mean, I'll just take a look at my notes here. It's kind of up high-single digits, call it, 7% or so. You're not going to get a lot of conversion out of that. So sales will be up, but you're just not going to see a lot of bottom line conversion on those sales as most of those we got with really low margin.

Unknown Executive

So we're expecting service growth to be up mid-single digits. So the new equipment growth is outpacing the service growth. The other thing to just keep in mind is there will be some commodity headwinds, as well as FX headwind next year at Otis, so that will also impact margins.

Gregory J. Hayes

Yes. I think we've been telling people all along, a 20%-plus margins are always the goal even after the recovery. So when we get to a more normal split of new equipment versus service, I think you'll see a little bit of margin pressure. Margins are still going to be industry-leading. I think it's hard to argue with the success of Otis over the last 15 years.

Joseph Nadol - JP Morgan Chase & Co, Research Division

Okay. And then just finally, I hear you on the China -- the Otis China backlog going into 2012. And so you have some visibility there despite the reduction in the growth rate from the government side. But as we think about orders, what's your embedded expectation for Otis China orders in 2012? And I'd ask the same question on Pratt commercial spares. What order growth do you expect for the full year?

Gregory J. Hayes

I think, it will probably be double digit is what's in the base assumption. So we kind of figure that at the 10%, 12% kind of range for Otis, for new equipment. On the Pratt side for spares, it's about 5% growth for the year. And again, it's double that at Hamilton. And I would just point out, you got a lot more visibility at Pratt in terms of the engine overhauls, and when they're coming into the shop. So I think Pratt's got a lot more fidelity around that 5%. As you take a look at Hamilton with their 10%, that really is out of the back of what they consider to be a 5% growth in revenue passenger miles or available seat miles this year plus the price increase that went into effect on January 1. So a little bit better performance on the aftermarket at Hamilton. But I still feel pretty confident on the Pratt aftermarket given the visibility we have.

Operator

Our next question is from Robert Stallard of Royal Bank of Canada.

Robert Stallard - RBC Capital Markets, LLC, Research Division

I just have a follow-up on Joe's question about the Pratt aftermarket, Greg. Is there anything changing here? Are we seeing any sort of fundamental slowdown in the airline demand for engine spares or overhaul, is this really just down to tough comparison and maybe the end of initial restocking?

Gregory J. Hayes

Yes. I think that's exactly it. We actually -- we track heavy versus light overhauls and we continue to see, really, over the last 8 quarters, airlines are starting to do more and more of the heavy overhauls versus the light. I think it's almost 88% now on our heavy overhauls. So we have good visibility. Now you do have, of course, Pratt's got an older fleet. You see some 757s coming out of production. You see MD-80s , of course, being retired in America and such. So I think part of this is just the natural aging of the Pratt fleet. But also just the fact that we have that kind of a nice recovery second half of 2010, all the way through 2011. So you just have a much tougher compares.

Robert Stallard - RBC Capital Markets, LLC, Research Division

Okay. And then the second question, on the A320neo, I just wonder if you could comment on how your market share has been shipping up with the geared turbofan there, and what your expectations might be going forward?

Gregory J. Hayes

I think, again, we've -- obviously, we had a great start to 2011. It was a little bit of a slowdown in the middle of the year. But at the end of the year, I think we're still having at least 50% of the market and we still believe we can get 50%-plus as customers look at the value of the GTF versus the LEAP. So yes, it's going to be a the long slog as you know. I think that the best news is we've got orders for over 2,000 engines now in backlog that weren't there a year ago. So still, again, it's a tough market out there. We got tough competition with CFM. But again, the technology, the GTF technology will trump the other engine, we think, at the end of the day. We also, of course, have the benefits of the IAE transaction coming in here where, again, we'll take control of IAE hopefully here in the first half and can give us a very smooth transition, that will allow us to work with customers and our current V customers and try and convert some of those even to GTF on the follow-on orders.

Operator

Our next question is from Myles Walton of Deutsche Bank.

Myles A. Walton - Deutsche Bank AG, Research Division

On Sikorsky, you mentioned the profit shortfall of pure military deliveries in the quarter, maybe $25 million, $35 million of EBIT shortfall. But then on the 2012 outlook, it wasn't updated. So number one, there's no catch up; and number two, it would imply 2012 outlook is also implicitly lower.

Gregory J. Hayes

I would disagree with you on the second point. The fact is, we did miss some helicopters at end of the year. There were like 6 BLACK HAWKs that did not go. We're still 100% on contract to the U.S. government. So this is not a big issue in terms of production problems at Sikorsky. Again, we were on time. We hope to get these 6 aircraft out. We've gotten about half of them out in the first couple of weeks of January. The rest will go here in the first few months. So if you think about it, last year, we had their guidance up $25 million to $50 million. We still think they're going to be up the same to the same net amount even though the base is lower. So implicitly, their guidance should be up, that $35 million risk that you have out there.

Unknown Executive

And one thing to keep in mind is that, we talked about how the pension came in with the discount rate being lower, so there's higher pension headwind going into next year. So some of that will go to Sikorsky and that may offset some of the benefits.

Gregory J. Hayes

Mrs. Lee [ph] is exactly correct and I stand corrected there. So it's about $10 million of pension headwind out of that $50 million that we talked about. So if you think about it, there's probably $25 million of upside to Sikorsky on an absolute basis from where they ended last year. But again, I think, nothing's fundamentally wrong with the business. It will perform this year. We said Military is down, but we're seeing good strength on the Commercial side and then -- especially on the International Military side there. As we said, more than 50 orders last year from International customers, so that will continue.

Myles A. Walton - Deutsche Bank AG, Research Division

Okay. And then the 2012 cash outlook, Greg, it just seems like it could be very, very strong, and certainly more strong than the underlying EPS, when the Goodrich deal is said and done. Are there any puts and takes? Obviously, pension, it sounds like that will be a nice tailwind on a year-on-year basis from a cash perspective. D&A will be -- help cash conversion. How are working capital and cash taxes looking?

Gregory J. Hayes

I think, again, as you think about the base business, I think again we'll continue to deliver strong cash flows. It's a little early to say that we're going to exceed net income for the year for cash flows on the base business. But you'll see the same kind of performance year-on-year, I think, in 2012, that you saw in 2011. I think the good news in cash flow, the thing about fourth quarter performance, we actually saw inventory up, I think, it was $36 million or $37 million year-over-year on a 7% increase in sales. So I think good working capital performance, good inventory performance in the fourth quarter. Hope to get that traction or hope that traction will continue into 2012. Once we do the Goodrich transaction, obviously, there's a significant amount of amortization costs, which are non-cash charges. I think that's about, what, $300 million for a full year, $150 million. So obviously, that gives us a good visibility, that you're going to see a stronger cash post-acquisition than the typical normal cash equal to net income.

Myles A. Walton - Deutsche Bank AG, Research Division

Just a clarification, what was the -- in the quarter, the $250 million of other operating activities net versus $400 million headwind last year?

Gregory J. Hayes

I think those are primarily on the taxes side. The taxes, it'd just be, again, some refunds on taxes that we had not expected.

Operator

Our next question is from Julian Mitchell of Crédit Suisse.

Julian Mitchell - Crédit Suisse AG, Research Division

First, I guess, within the CCS business. You talked about the moving parts inside Transicold in Q4. I guess, what's embedded in your CCS expectations for Transicold, just the overall Transicold business in 2012? Obviously, it's had a decent sort of margin effect over the last kind of 12 to 18 months. For the year '12, globally in that business, do you still think sales and profits should be up?

Unknown Executive

I think overall for Transicold markets, we expect that they're down high-single digits. And so with the Container market down over 10%, that's we're seeing special strength there, now we expect down over 10%, U.S. Trailer up mid-single digits and Europe Trailer market down -- or flat to down 5%.

Julian Mitchell - Crédit Suisse AG, Research Division

Got it. And then just on Sikorsky, when you touched on it just now. But -- and there are a bunch of restructuring announcements sort of as you went through 2011. And obviously, end of the year, a little bit soft in terms of the profits number in the end. When you're thinking about the cost savings for '12, given the top line, is there kind of a fresh new restructuring plan kind of being dusted off for Sikorsky? Or will it be the same thing while we're going through the year sort of step-by-step?

Gregory J. Hayes

I think Jeff did a lot of preemptive restructuring. I think in the fourth quarter, we spent $37 million at Sikorsky to address what we saw as the coming volume declines on the military side. I think that right sizes the business for right now. If you see any further deterioration, obviously, I think there's always opportunity for additional restructuring. But I think again, that $37 million was really to be preemptive, to position us to grow earnings in 2012.

Operator

Our next question is from Ronald Epstein of Bank of America Merrill Lynch.

Ronald J. Epstein - BofA Merrill Lynch, Research Division

Just kind of going back to Otis again and demand. I think you talked a little bit about demand in China, but you've been adding capacity both in Brazil and India, and how are those markets playing out so far for Otis?

Gregory J. Hayes

Brazil has actually been very strong for us and India has continued to see growth as well. So those are big opportunities. They don't have nearly the scale that China has. If you think about China, there must be almost $2 billion of revenue. So these are our smaller businesses. But again, I think, the growth prospects that we've seen, we think we were building the factories, so that we can deliver, let's say, 10,000 units in India this year and I think that seems to be on track. In Brazil, we just put in a new factory there to meet the increasing demand, and I think there's been nothing on the horizon that indicates that we're not going to see that happen.

Unknown Executive

Just to note, the new equipment sales in Brazil were up over 30% in the fourth quarter. The orders were up mid-to-high teens. And India, the sales were a little bit down in the quarter, but that's -- we think the orders are still pretty strong there and the market is fundamentally strong.

Ronald J. Epstein - BofA Merrill Lynch, Research Division

Okay, okay. And then, maybe just a quick detailed question. In Fire & Security, you took those impairment on in equity investment, what was that?

Gregory J. Hayes

It was an investment in a manufacturer in China that we made several years. We actually took a small impairment charge in the third quarter on that. It's a small equity investment that we have. I think we have 30% or so of the business. It's still traded on the Hong Kong Exchange. And unfortunately, we have to mark it down to fair market value because on the Hong Kong Exchange, the stock has gone down significantly since the acquisition. Still a good business, it's just that we had to face the reality that the publicly-traded piece was trading in at a significant discount to what we considered to be fair value. So we had to take the write-down in the fourth quarter. But again, I think there's -- we'll work through that as part of this whole portfolio rationalization. Whether or not that stays as part of the CCS portfolio, I think we haven't decided yet. But we took a conservative accounting view towards it.

Ronald J. Epstein - BofA Merrill Lynch, Research Division

Okay. And then maybe just one last quick one for you. Clipper, what's going on with Clipper?

Gregory J. Hayes

Clipper is, sales last year were north of about $300 million. We took some orders here in the fourth quarter. We continue to deliver on the backlog. We continue to spend on the engineering side to build the next generation of wind power. This is yet a small piece of the business. It's part of Pratt Power Systems now. Peter Christman and Dave has continued to look at the business and work to improve that. But it's a very tough market out there. It's just going to be a tough story for a while on the wind side in the U.S.

Operator

Our next question is from Cai Von Rumohr of Cowen and Company.

Cai Von Rumohr - Cowen and Company, LLC, Research Division

So your legal expense, the $0.05, was that -- you mentioned for export disclosure, is that an FCPA issue?

Gregory J. Hayes

No.

Cai Von Rumohr - Cowen and Company, LLC, Research Division

It's not.

Gregory J. Hayes

It's not.

Cai Von Rumohr - Cowen and Company, LLC, Research Division

Okay, good. And then secondly, at Pratt you had huge volume in the final quarter, and yet you're still talking about high single-digit gains. I assume, like $700 million of that is kind of adding an IAE, but does that mean like 5% growth excluding that? Can you walk us through the pieces because I think you said, what, Military up 10%, that seems high. So how do we get to 5% or so excluding IAE?

Unknown Executive

So you're right. Organically, it is up more mid-single digit if we exclude the IAE transaction. We see commercial spares up mid-single digits. Greg mentioned that before. As well as Pratt Canada, up high-single digits and then Military up to 10% and that pretty much gets you there.

Cai Von Rumohr - Cowen and Company, LLC, Research Division

And how do you get Military up 10%? Because, what, C-17, F-22 are tracking flat to down.

Unknown Executive

Right. So the OEM shipments are actually down mid-teens. It has more to do with mix and there's more JSF that offsets the decline.

Operator

Our final question is from Douglas Harned of Sanford Bernstein.

Douglas S. Harned - Sanford C. Bernstein & Co., LLC., Research Division

I'm interested in understanding what you're seeing on pricing. If you look at 2012, the kind of pricing increases you might be looking for both in Pratt, Hamilton Sundstrand aftermarket, as well as Otis and Carrier.

Gregory J. Hayes

I think on the Aerospace side, it's pretty simple. When we put our catalog out the 1st of October. That took effect here 1st of January. It was roughly a 5% increase in spares prices. And as you know, that typically sticks. But especially at Pratt, you've got a big chunk of the business that's on long-term maintenance program. So they don't actually realize that full 5%, it's more like 3% or so, they'll probably realize net. Hamilton will get a little bit more even though, again, the percentage of theirs is on a long-term agreements. On the commercial side, pricing remains difficult at Otis on the OE side. It's true in China, it's true in Europe and it's true here in the U.S. And again, that's the price impression that we talked about and why you're going to see margin deterioration at Otis in 2012 on higher new equipment, just the pricing is very tough. Carrier is a little better story. Carrier actually did increase prices back in, I think, October again as commodities started to spike. We've seen that stick. In fact, there was no commodity impact in the fourth quarter because of pricing offsets. And I think again, for the full year 2012, we expect a similar story, not a lot of commodity headwinds. So it should be a, again, the residential side, despite of a poor market, everybody has the same input costs. We've said this before. I mean, copper is an input, compressors are an input, a little bit on the steel and everybody feels the same pressure. So again, I think as the market remains disciplined, we're able to realize those price increases.

Douglas S. Harned - Sanford C. Bernstein & Co., LLC., Research Division

But on Otis, are you seeing more competitive intensity on the OE side? How does it changed?

Gregory J. Hayes

I don't think there's any change really, this is for the last 8 quarters, I think, since we saw the downturn in 2009. We've continued to see very aggressive pricing from all the competitors. Be it Kone Oyj or in Schindler or all of the Chinese competitors. It's a very, very competitive OE market. I'll point out, Otis continues to have sound margins because we can leverage scale. And that's the beauty of Otis, right? Big, big factories, leverage scale in the factories, leverage scale on the supply chains.

Douglas S. Harned - Sanford C. Bernstein & Co., LLC., Research Division

And then if I can have one more, on Fire & Security. When you talk about shaping the portfolio, can you define what is core in Fire & Security? You've got a wide spectrum of businesses there. How do you think about what the core part is, and where there might be opportunities to shape it?

Gregory J. Hayes

I think, as you think about the Fire & Security portfolio, I think there were 61 acquisitions that we did since 2003. Obviously, I think some of the Fire & Security products are probably turning out to be much better than some of the installation businesses out of the security side. So I can't tell you which businesses we might divest. I will tell you that we're going to look at those business that have a good long-term growth prospects and have scale. In the U.S., not much scale on the installation side. We like the Fire business. It's a lot like Otis. It's about life safety, and that's what drives growth long term there, drives good margins. So I would tell you, Fire is core and we'll take a look at the rest of it. I still don't want to get ahead of ourselves here because we've some good service and installation businesses around the world that performed very well. There's some that don't perform as well. So to make sure, all we just need is to determine whether or not they're fixable and what the long-term growth prospects are before we make any decision.

Okay. Well, I want to thank everybody for listening on the call. We've got good momentum going into 2012, and we've got the transformational deals out there. The goal at UTC as always, we focus on what we control and we outperform peers.

So with that, I look forward to seeing everybody on the 15th of March, and Maria [ph] and Josh will be around to take your calls afterwards. Thank you very much.

Operator

Ladies and gentlemen, thank you for your participation. That concludes the presentation. You may disconnect and have a wonderful day.

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