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Executives

Louis R. Chenevert - Chairman, Chief Executive Officer, President, Chairman of Executive Committee and Member of Finance Committee

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

Jesus Malave

Analysts

Joseph Nadol - JP Morgan Chase & Co, Research Division

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

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

Jeffrey T. Sprague - Vertical Research Partners Inc.

Carter Copeland - Barclays Capital, Research Division

Terry Darling - Goldman Sachs Group Inc., Research Division

Myles A. Walton - Deutsche Bank AG, Research Division

Ronald J. Epstein - BofA Merrill Lynch, Research Division

George Shapiro

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

Deane M. Dray - Citigroup Inc, Research Division

United Technologies (UTX) Q2 2012 Earnings Call July 26, 2012 10:00 AM ET

Operator

Good morning, and welcome to the United Technologies Second Quarter Conference Call. On the call today are Louis Chenevert, Chairman and Chief Executive Officer; Greg Hayes, Senior Vice President and Chief Financial Officer; and Jay Malave, 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 results from continuing operations except where otherwise noted. They will also 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. Chenevert.

Louis R. Chenevert

Well, thank you very much, Stephanie, and good morning, everyone. I'm pleased to be part of the call on this historic moment for our company. We've had a full week with many exciting developments. Greg will take you through the quarter results in just a moment. But first, let me start with an update on our major acquisitions and on our business transformation strategy.

Late last month, we closed on the IAE transaction and this morning we received the final regulatory approvals for the Goodrich acquisition. We anticipate closing later today or early tomorrow morning. These are transformational deals for UTC, setting the stage for strong earnings momentum. IAE brings tremendous aftermarket runway with the V2500, which now represents Pratt & Whitney's largest install fleet. There are over 4,500 V2500 engines in service with an average age of only 7 years, and we expect to deliver another 3,000 engines in the future. The IAE transaction further validates our game-changing GTF technology and strengthens our relationship with nearly 200 airline customers around the world, ensuring a seamless transition from the V2500 to the GTF-powered A320neo.

Turning to Goodrich. I'm very pleased we will close such a large transaction in just 10 months with limited required divestitures. Goodrich adds a very strong portfolio of complementary products and is a great fit with Hamilton Sundstrand. Bringing these 2 companies together will significantly strengthen our position in the growing aerospace segment and will allow us to develop more integrated systems for our customers and win greater content on next-generation aircraft. Since announcing the agreement, we have done significant integration planning. So we are ready to begin integrating Goodrich into our Propulsion and Aerospace systems organization. A team of more than 50 employees has worked relentlessly on integration planning with hundreds of employees lending additional support. The leadership team is in place and our extensive planning activities will make for a smooth transition for our customers, suppliers and employees.

Our large transactions, culture and people are key to success and I'm very happy with everything I see at this point. We have already identified all of the $400 million of run rate synergies that we expect to achieve by year 5, and leadership is looking up more. I am confident that Alain and the team will identify additional synergies as they work through the integration process.

We've completed the financing for Goodrich with a structure that was much better than originally expected. We issued the largest U.S. corporate bond offering since 2009, $9.8 billion at an average interest rate of less than 3%. We listen to our shareholders and we reduced our original need for equity issuance from $4 billion down to $1.1 billion of mandatory convertible units. We expect to pay down about 1/3 of the total [ph] purchase price by the end of 2012, using that proceeds from previously announced divestitures and cash from operations.

We have made great progress on the divestitures. We reached agreement to sell both Hamilton Sundstrand Industrial's business and Pratt & Whitney Rocketdyne this week. These are strong profitable businesses but we are streamlining the UTC portfolio to focus on our core of commercial building systems and aerospace.

In the second quarter, we classified another non-core asset, our fuel cell business, as held up for sale. And we continue to expect to complete the divestiture of Clipper imminently. As expected, during the regulatory process for Goodrich, we agreed to divest businesses totaling about $250 million of annual sales, including Goodrich's electric power systems business, pumps and engine control business. These are attractive businesses with great employees so we expect a robust auction process. We also agreed to sell Goodrich interest into the air engine control original equipment joint venture for Rolls Royce.

Let me sum up by saying, great progress on transformational changes that will generate real-long term value for our shareholders. This team is executing in a superb way.

Before I turn it over to Greg to take you through the second-quarter results, just a few comments on the year. It is certainly a challenging environment out there, with a slowing global economy, the euro trading near 1.2 and the late July close for Goodrich. Therefore, we are rebaselining our expectations for the year. We now expect sales of $58 billion to $59 billion, $3 billion lower than our prior expectation and earnings per share of $5.25 to $5.35 versus our prior expectation of $5.30 to $5.50 with FX and the late July close of Goodrich accounting for about $0.15 of additional headwind.

Now we know how to operate in a tough macroeconomic environment at UTC, and we are increasing our investment in restructuring this year to $500 million, up from $450 million. As always, we'll remain focused on what we control in the back half of the year, cost reductions, strong execution, investment in game-changing technology and the seamless integration of Goodrich and IAE into the UTC portfolio.

With that, let me turn it over to Greg.

Gregory J. Hayes

Okay, thanks, Louis. We're now on Slide 2 on the webcast. As you saw on the press release this morning, second-quarter earnings per share was up 15% year-over-year to $1.62. That included a benefit from a lower tax rate. Our tax rate in the quarter came in at 22.5%, primarily due to the timing of some legal entity reorganizations. Before one-timers, the tax rate contributed a $0.13 benefit versus our full-year expected tax rate of 29.5%.

In the quarter, we also faced $0.11 per share of headwind from higher pension costs, E&D investment and FX. But despite these headwinds, segment operating margin expanded 80 basis points, with Climate, Controls & Security leading the way with 230 basis points of margin expansion, evidence that we continue to focus on execution and cost control in this difficult economic environment.

UTC's organic sales growth of 1% reflects slowing sales in Europe, China and the commercial Aerospace aftermarket. There's clearly uncertainty out there. Europe continues to struggle with the debt crisis with no clear solution in place. Most indicators now point to a very modest growth in the U.S. this year with this looming fiscal cliff at the end of this year, which could further dampen growth prospects for next year. As we all know, China and India are also faced with slowing growth. China's reported second-quarter GDP slowed to 7.6%. That's still of course pretty strong but the lowest level we've seen since early 2009. We do know that the Chinese government is taking steps to stimulate the economy, including a second interest rate cut, but the government remains concerned about high property prices.

And despite this near-term slowdown, the urbanization trends and the long-term fundamentals are still in place in the emerging markets, and especially in China and in the central and western provinces. We have confidence in the long-term growth prospects of all these emerging markets.

Against this economic backdrop, though, we are lowering our second-half growth expectations for Otis, CCS and Pratt & Whitney. We're also lowering our expectations for the euro to a new U.S. dollar to euro rate of 1.20. This represents an additional $135 million of earnings headwind to our original guidance where we pegged the euro at 1.35 to the dollar. As Louis said, we continue to focus on what we control in the face of these challenges. So in the first half of the year, we invested $204 million in restructuring, with $93 million in the second quarter. The businesses continue to find way to reduce structural costs and we're once again taking up our estimates for restructuring for the year to $500 million, which will include Goodrich-related actions. That's up $50 million from our previous guidance.

As a result of the headwinds and changes we've discussed, we now expect sales of $58 billion to $59 billion, as Louis said, with organic growth of 0% to 2% versus our prior expectation of organic growth of 2% to 4%. We expect earnings per share of $5.25 to $5.35, of course, it's down from our previous guidance of $5.30 to $5.50. This guidance includes $3.6 billion of sales and a net $0.30 EPS dilution from the Goodrich acquisition. That's lower than our previous guidance of $4.5 billion of sales and $0.25 of net dilution, respectively. These changes are simply due to the late July close, which is a month later than we originally built into our plan.

So still a lot of moving parts, such as accounting conformity and amortization around the Goodrich deal and we'll be back to update you if necessary later in the quarter, but we don't anticipate any big changes at this point.

On Slide 3 now. Few more points in the quarter. Total sales were down 5% due to the impact of FX and net divestitures. Of note, Hamilton Sundstrand delivered another strong quarter with 9% organic growth on strength of both commercial and military aerospace. Earnings per share of $1.62 include $0.10 of net one-time gains, that's from the ongoing transformation at CCS. That was more than offset $0.06 of restructuring. Excluding restructuring and net one-time items in both years, EPS increased 13%. FX had a negative impact for the quarter of $0.05. As you know, we completed most of the financing for the Goodrich acquisition in early June. Interest expense and transaction costs related to the acquisition were $0.04 in the quarter. And free cash flow was 99% of net income. UTC continues to deliver strong, consistent cash flow and we're confident we'll deliver free cash flow equal to or in excess of net income for the year.

Order trends, now on Slide 4. As you can see, in this chart, CCS's North American Residential HVAC orders were up 4% in the quarter, which is in line with our full-year expectations. At Otis, new equipment orders were down 4% at constant currency, including China, which contracted 13%. But we did see improving trends late in the quarter as the initiatives the Otis team implemented have started to gain traction.

Pratt & Whitney's large commercial engine spare orders were down 15% for the quarter and Hamilton Sundstrand's commercial spares were down 10%. Although RPM's [indiscernible] passenger miles are increasing and load factors remain high, airlines continue to conserve cash and limit their spending on spares. Average sales per shop visit versus the prior year have dropped about $300,000 or $400,000 and we now expect Pratt & Whitney's commercial spares to be down about 10% organically this year versus our prior expectation of 5% growth.

So a solid second quarter with good execution in the business in a tough macro economic environment. I'll come back and talk a little bit more about the full year at the end, but let me turn it over to Jay to take you to the business unit results.

Jesus Malave

Thanks, Greg. Turning to Page 5. At Otis, operating profit was down 8% in the quarter and a 5% decline at sales with foreign currency translation, reducing both sales and profit growth by 5 percentage points. Operating margin was 22.7%, 70 basis points lower than prior year. At constant currency, new equipment sales were down low single digit with high single-digit sales growth in North America, more than offset by declines in Europe and China. Although China new equipment sales were down low single digit in the quarter, the rate of decline improved from the previous quarter.

Overall service sales were up, led by growth in modernization and contractual maintenance. Aggressive cost reduction actions partially offset the impact of higher commodity costs and continued pricing pressure mostly in Europe. At constant currency, new equipment orders were down 4%, with North America up double digits, Europe flattish and China down 13%. Thanks to enhanced communication and brand awareness efforts in China, Otis is beginning to stem the decline in new equipment orders and saw a solid growth in June. A much weaker euro, combined with the continued economic slowdown in Europe and soft new equipment volumes in China are putting pressure on Otis' profit growth. For the year, we now expect Otis sales to be down mid-single digit from up mid-single digit and profits to be down $175 million to $225 million compared to the previous guidance of up $50 million to $75 million. This guidance includes $175 million of unfavorable foreign currency translation versus $75 million previously, assuming a euro average of 1.20 for the balance of the year. Otis increased its restructuring efforts to reduce costs and continue making structural changes to position the business for future profit growth.

On Slide 6. UTC Climate, Controls & Security margins were up sharply to 15.7%, an increase of 230 basis points from prior year as profits increased 4% in the quarter on 11% lower sales. Organic sales were flat following 9% growth in the second quarter of last year. Organic growth was up mid-single digit in each of the America's residential and commercial HVAC businesses and flattish in Europe, Asia and the automation and controls businesses. Transicold was down double digits organically.

Profit growth was driven by restructuring and productivity, including savings from the consolidation of Carrier and Fire & Security. Global commercial HVAC orders were up mid-single digit overall but down low double digits in Europe. Transicold orders were down around 25% and Global Fire & Security products were down low single digit.

While CCS first-half earnings were in line with expectations, full-year guidance is being revised to growth of about $150 million from up $225 million to reflect increased FX headwind and weaker organic growth of around 2% due to softer end markets. When combined with the impact of divestitures and FX headwind, we expect reported sales to be down about 7%. Margin expansion will be strong, up about 180 basis points from productivity, cost reduction and the benefit from portfolio transformation.

Turning to Aerospace on Slide 7. At Pratt & Whitney, sales were up 5% in the second quarter including one point of unfavorable currency at Pratt Canada. Higher sales were driven by growth in the military and Pratt Canada businesses, partially offset by lower commercial aftermarket and lower industrial shipments at Power Systems. Large commercial spares were down 13% year-over-year, including the benefit from sales to third-party aftermarket parts companies.

Operating profit in the quarter was down 1%. Higher E&D, pension costs and lower commercial spares were partially offset by the benefit of higher military and Pratt Canada sales, restructuring savings and a gain from the sale of equity position in a commercial aftermarket venture of about $0.02 per share.

Commercial spares book-to-bill for the quarter was slightly below 1. As Greg stated, craft's conservation at airlines has impacted order rates and we now expect commercial spares to be down 10% organically versus up mid-single digits previously. As a result of the lower commercial spares outlook, Pratt's operating profit is now likely to be down $100 million to $125 million for the year as compared with down $25 million to $50 million previously. We now expect sales to be up mid-single digits versus prior expectations of about high single digits.

Hamilton Sundstrand delivered a solid quarter with profit growth of 14% on 7% higher sales. OEM sales were up mid-teens while aftermarket was flattish. Profit growth in the quarter was driven by a strong conversion and OEM growth and favorable mix. Operating margin was up 110 basis points year-over-year to 17.1%. Overall, commercial spares sales orders were down 10% year-over-year with declines in both parts and provisioning. Book-to-bill was below 1. For the full year, we continue to expect operating profit for the base business to be up $75 million to $100 million and sales up high single digit. We'll provide an update later in the year on total UTC aerospace systems guidance.

Turning to Sikorsky on Slide 9. Operating profit grew 5% on 9% lower sales. During the quarter, Sikorsky shipped a total of 51 aircraft, 44 aircraft were based on military platforms and 7 commercial. Lower sales were driven by 19 fewer aircraft deliveries, primarily lower U.S. government and international military deliveries. Mid-teens growth in aftermarket sales partially offset the impact of lower aircraft volumes. On profit, strong performance in aftermarket, favorable mix of commercial aircraft deliveries, including the absence of 1 Canadian Maritime Helicopter, offset the impact of the lower military aircraft deliveries. Productivity and restructuring benefits across the enterprise also contributed towards our second-quarter operating profit growth. For the full year, we continue to expect profit growth of $50 million to $75 million on a mid-single-digit sales decline.

With that, let me turn it back to Greg.

Gregory J. Hayes

Thanks, Jay. As I said earlier, these are really solid results in a very, very tough economic environment. Let me just talk about a few highlights in the quarter, just to add to some of the others we've already talked about. Pratt & Whitney secured an additional 410 orders for our GTF engine family at the Farnborough Air Show, including a SkyWest order for 200 Mitsubishi Regional Jet Engines. And we now have over 2,900 firm and option engine orders across the 4 GTF platforms.

We've also completed over 3,000 hours of testing and concluded the flight test program for the both CSeries and MRJ engine. We continue to expect the CSeries engine will achieve certification in the fourth quarter of this year.

Sikorsky signed a Multi-Year 8 contract in early July with the U.S. government. The contract calls for the production approximately 650 Blackhawk and Seahawk helicopters, including foreign military sales, and that is valued at about $8.5 billion through 2017.

On the commercial side of the business, Geraud and the team are progressing well with the integration of our new CCS organization. The combined impact of portfolio and operational transformation, along with the synergies from the integration, contributed to a record operating margin of 15.7% in the second quarter.

As far as the 2012 outlook, as we mentioned before, we're going to see earnings this year somewhere between $5.25 and $5.35 on sales of $58 billion to $59 billion. As for other elements of the guidance, while the timing of certain transactions reduced the effect of tax rate in the first half of the year, we continue to expect an operational tax rate of 29.5% for the base business for the full year 2012. And what that means is in the third and fourth quarter, we'll see an effective tax rate of about 32%. As I mentioned, we expect to invest about $500 million in restructuring, including Goodrich. That'll be more than offset by about $600 million of gains and other onetime items.

We'll come back and update you once we have more access to Goodrich, including our expectations for the new United Technologies aerospace systems segment.

And with that, let's stop and open up the call for questions. Stephanie?

Question-and-Answer Session

Operator

[Operator Instructions]

Our first question comes from Joe Nadol from JPMorgan.

Joseph Nadol - JP Morgan Chase & Co, Research Division

Could you -- just going up to 30,000 feet here, take us maybe on a -- from a walk -- from your old EPS guidance to your new. Middle of the range, you've gone from $5.40 to $5.30, but the operational things you're laying out there, it's looks like around $400 million of pressure in the segments and then the higher restructuring looks like a bigger impact. So could you give us a bridge and then where you are in terms of a contingency at your new number.

Gregory J. Hayes

Yes, okay, Joe. There are a lot of moving pieces here. So I'll try and go through this as succinctly as possible. So you think about -- we had a prior guidance of $5.40 and that concluded a contingency of about $200 million or $0.15. As we look at what's happened in the business is, we've taken about $0.20 of operating segment profit away. About half of that's at Otis as we've reduced new equipment and service sales down about $600 million of sales. The other half of the operational downward pressure is at Pratt and CCS. Pratt's down about $0.06 and CCS is down about $0.04. This is just the operational piece. The next piece, of course, is FX, which is another $0.10 of the takedown. On top of that now, you add in Goodrich about a $0.05 impact from the 1-month delay in closing, about $0.04 from additional restructuring. We also picked up about $0.04 as we moved UT Power to discontinued ops. We picked up another $0.10 with eliminations and other and some minority interest changes down below the line, so we've used up the contingency and at the midpoint of the new guidance, I would say, we don't have any contingency. That's why we really have the lower end at $5.25. Now we think again, we properly calibrated each of the businesses with these new guides, but there still is risk out there in the back half of the year. And again, I think we've also been conservative on the year at 1.20 -- and it's at 1.22, 1.23 today, hopefully, we'll get some lift out of that, which might add some contingency. But it's a little early to tell.

Joseph Nadol - JP Morgan Chase & Co, Research Division

Could you walk through the pluses are, the $0.04 and the $0.10, because that's where I was really getting at -- was -- what's the kind of offsetting all this other pressure?

Gregory J. Hayes

Yes, so if you think about CCS, I mean, we're taking sales down about $400 million operationally and earnings down about $100 million. You've got a benefit though offsetting that of about $50 million related to commodities and really that's just a takedown in sales in Asia where we used to think we'd see about mid-single-digit growth -- I'm sorry, high-single digit, now it's mid-single digit. Transicold, because of the order rates we've seen in the second quarter, has gone from down high-single digits to probably down near 10% and the F&S product lines are going to be up low single from mid single. So you add all that up, you'll get about $400 million of takedown in sales and $100 million of EBIT and then there's $50 million of offset for the net commodities. On the Pratt side, it's a little bit more complicated, but really it's about -- spares are going to be down about $350 million from what we've previously estimated. There's a couple of -- and on top of that, service will be down a little bit, so Pratt's sales will actually be down about $500 million, and there is about $200 million of earnings associated with that. Offsetting that, you've got restructuring savings of about $25 million. IAE will add about $50 million, it's a little better than what we had expected just because of some of the timing. And also E&D will be down about $50 million. Now some of these programs have moved to the right. So net-net, about $75 million of takedown at Pratt and about $50 million of takedown at CCS.

Joseph Nadol - JP Morgan Chase & Co, Research Division

Okay, that's helpful. Just -- second question, just digging into Otis. The margins took a -- improved a bit since some of the trends improved a bit sequentially from Q1 to Q2. What's -- as we look towards the rest of the year and into the margin pressure we really saw on Q1, do you feel like you've really gotten your arms around, I guess, the pricing pressure you are facing in Europe? I don't know if this labor inflation played a role in the service business? What can we expect there going forward?

Gregory J. Hayes

So yes, on top of the -- just the overall weakness that we've seen in sales, we have -- we are seeing some continued pricing pressure. If you think about the margin, it was down 70 basis points in the second quarter after being down 100 basis points in the first quarter, about 30 basis points of that takedown was related to the pricing, another 40 basis points was related to commodity. It's mostly rare earth. Going forward to the back half of the year we've got about $75 million of additional headwind from pricing in the current guidance. So on top of sales being down about $500 million, you've got another $75 million of bad news from pricing. And commodities give you a little bit of a benefit. Restructuring gives you a little bit of benefit. But overall, you're going to be down somewhere around $260 million or so from previous guidance with FX of $100 million.

Operator

Our next question comes from Howard Rubel from Jefferies.

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

Your Carrier and old Fire & Security business delivered terrific numbers in the quarter, Greg. Could you for a moment sort of talk about some of the successes that Geraud has been able to accomplish. It looks like some of them are coming through a little quicker than I would've anticipated.

Gregory J. Hayes

I think the integration of the CCS -- I'm sorry, CCS between Carrier and Fire & Security is going probably better than what we had originally anticipated. It's really just a tribute to Geraud and the team. They've been able to take out a lot more cost, a lot more quickly than what we had anticipated. But I think more importantly, they've been able to stabilize some of the other businesses at F&S where we saw issues last year, especially in Europe. We're not getting much traction on the top line with the F&S businesses. But the bottom line is getting better as there's more discipline around pricing, more discipline around the contracts that we're taking. So a lot of the bad news that we saw last year, bad news, surprises coming out of the U.K., for instance, again, sales aren't up in the U.K. but profits are now on the legacy F&S business just because of the discipline I think that Geraud and the management team has brought to the pricing process there.

Louis R. Chenevert

Maybe, Howard, if I could add, I think we're seeing the benefits of a very seasoned team that did profound transformation at Carrier before that, exercising their leadership skills with the F&S business and like the backlog in the U.K. is getting much better, I mean, much better margin on that backlog as we go forward. So Geraud is doing a superb job at leveraging all the best practices and implementing quickly across the board and he knows how to do transformation and he's executing very well.

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

Okay. And then just one follow-up one -- I can't resist on Sikorsky a little bit and talk a little bit about the Canadian Maritime helicopter. Sorry to do that. But it does look like it slipped again to the right. And how are you sort of accommodating or coming up with a solution that will, maybe, help out your numbers?

Louis R. Chenevert

Yes. Well, let me take that, Howard. First of all, the CMH program, I have to say, is the best maritime helicopter in the world. And it's basically ready to fly and we have made incredible progress. We're also working very closely with the customer to make sure that they get the product they're looking for, that it's a win-win. And I would say Mick Maurer and the team have at Sikorsky are aggressively working to make sure we deliver these helicopters and minimizing the impact of the business. Now what's very encouraging, just a heads up, is we saw some high interest at the Farnborough Air Show this year. This is the second air show, Paris was the same last year. We saw outside customers show interest in the platform as is. And we saw this interest renewed again this year by a couple countries. And in my view, while it's been a painful experience to this point, as we move forward and deliver these 28 helicopters. In my view, there's potential to deliver basically many, many new helicopters of the same configuration that we've now developed, we have. And it's all about working with the Canadian government now to make sure that we close on all the issues. So you need both parties, basically, to agree on tackling the issues. And I would say we're making substantial progress. Obviously, there's been some key deadlines that we had hoped meet and basically, at this point in time, both sides are working to make sure they ultimately get the helicopter that they badly need to replace their aging fleet.

Gregory J. Hayes

Just a follow-up to Louis's comments. We are still -- we have in the forecast this year for Sikorsky to ship 5 CMH. Right now, as Louis said, we're still negotiating with the Canadians around the final configuration of what those aircraft are going to be and we still plan to ship those 5 this year. But obviously, if those slip into next year, it gives us a little more headwind. I think there's nothing to do in terms of next year's issue around delivering the 19 helicopters financially until we resolve the contractual and configuration issues. But we clearly have an eye towards that, Howard, to see what we can do to help offset some of that what will be a pretty big headwind at Sikorsky next year.

Louis R. Chenevert

Just to close on this, Howard. We have, I think, a path to success that's developing. And in the upcoming webcast in the month of September, we should be able to give better color and update as to the progress we are making there.

Operator

Our next question comes from Douglas Harned from Sanford Bernstein.

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

I wanted to go back to CC&S. If you could describe a little bit more about the actions that have been taken. You talked about more discipline with respect to pricing in Fire & Security. But I'm trying to understand, the margins were very impressive. If you go across the subsegments within CC&S, where you saw the most success and what steps were taken? Were these organizational changes? Were there headcount reductions, facilities consolidation? What actions are taking place there?

Gregory J. Hayes

We talk a lot about CCS and the Carrier portfolio rationalization or reorganization that Geraud and team have been undertaking in the last few years. And some of that same magic I think you see that happening with the F&S portfolio. We did divest a couple of F&S businesses in the quarter, which helped margin a little bit. But I think importantly, at Carrier, CCS has been the operational transformation. What they've been able to do in the factories, continuing to implement the ACE operating systems, taking overhead out. And we've talked about what a great work they've done in Collierville, Tennessee with the lines there to reduce overhead, the breakeven point in the factory. But also, think about all the restructuring that's been done. We've moved a lot of work down to Monterey, and that's been very, very successful, transforming the commercial product lines. We've invested a lot in R&D. Again, I think we've got better products today, we're much more energy efficient and we're getting good pricing in the market for these new products. So I'd say it's a combination of portfolio, cost discipline, factory performance and product investment, all those things together have really contributed to this margin expansion that we're seeing. And, yet, for the full year, and Jay mentioned it earlier, we're probably going to get 180 basis points of margin expansion. We're talking about close to 14% margins this year, which was Geraud's goal for a year from now. So again, I think they're making great progress and a doing lot faster than any of us anticipated.

Louis R. Chenevert

And remember, the skill set was much more advanced at Carrier on the ACE discipline supply chain development. And by creating CCS, they've been able to leverage that skill set into what's the old Fire & Security that was really the last one to make progress on ACE and supply chain. So we've kind of jump-started these initiatives and we're seeing the good impact of the leadership being focused but also having done it before.

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

Well, if I think back a few years ago, George David often talked about a goal of 15% margins at Carrier and that seemed far off. I mean, are you -- is that a possibility here in the reasonable future?

Louis R. Chenevert

Well, as you know, it's my job always to stretch with big goals and impose on BUs, basically stretch targets and then they happily go deliver. And that culture is untouched at UTC. That's the way I run the business. And I think we're well on track with proving, basically, that we're going to deliver on these big goals.

Gregory J. Hayes

I think that what you may be -- you might think of, Doug, is, from a top-line standpoint, Geraud and team are going to deliver what will be close to 14% margins at organic growth of only about 2% this year. I think once we start to see some traction in the end markets, I think, obviously, there's got to be upside and Carrier demonstrated that back in 2010 when the markets came back and we got great operating leverage. So again, I think there is runway here at the end of the day.

Operator

Our next question comes from Jeff Sprague from Vertical Research Partners.

Jeffrey T. Sprague - Vertical Research Partners Inc.

Just wondering on a couple of things on Goodrich. How much of the incremental restructuring is at Goodrich? And does the timing change or business trends that you're seeing in aero aftermarket kind of change your view on what the accretion outlook is for 2013?

Gregory J. Hayes

No, I think, again, as we look at the combined Hamilton and Goodrich businesses, we're really pretty much on track to what we had expected for the full year this year. Nothing really out there that would tell us that there's going to be any the big impact or longer-term impact on the commercial aftermarket. I think Goodrich's second quarter, their aftermarket was up a little bit, which is better than what we even saw at Hamilton. So financially, I don't see an issue there. The restructuring, it's about $150 million roughly of restructuring we'll do this year. And that's -- some at legacy Goodrich and some at the legacy Hamilton businesses. So as we combine the headquarters down in Charlotte, there'll be some costs we'll be incurring up here in Connecticut. We're also, of course, looking at some rationalization. We'll take out the public company costs and all that. But I think Alain and the team have a clear line of sight to that $150 million this year and there will be more next year as we get into this. But I think the accretion number that we laid out, which is $0.50 to $0.55 next year from the Goodrich acquisition is still right about what we expected it. Again, I think interest costs are a little bit better. Obviously, you don't have any issue. A lot less equity makes that number a little bit better as well. So we're really on track, I think, financially on the Goodrich transaction as we enter day 1 here.

Louis R. Chenevert

And maybe to add, everything I thought this deal was when I announced it last September, I would say it's all of that or better today. I mean, the talent that's in there, the opportunities, the synergies, the customer response, the partner response, all good. So I'm very, very happy with closing such a large transaction in such a short period, and everything we mapped out up front got better.

Jeffrey T. Sprague - Vertical Research Partners Inc.

And I was wondering, just changing gears in the second question, the comment on Otis, June, China looked better, maybe not trying to overanalyze a month. But do you, in fact, kind of see and feel a real inflection and just kind of the tone of business there, whether it's -- what's going on competitively or how the government relations and the like are playing out and what do you think about the back half? Obviously, you gave your guidance, but just kind of the commercial success of Otis looking into the back half.

Louis R. Chenevert

Well, first of all, Otis a very strong franchise, as you know, with a great brand recognition. And I would say that the profound changes we have done in China, as far as leadership structure, reporting line, have had a good impact with the customer base and with the results. Certainly, as we went through the second quarter, we made a change with the President of Otis China now reporting to the President of Otis, Pedro Baranda. We also created a business development office that's now located in Shanghai. And remember, about a year ago, we had announced also the high-rise center of excellence was now in Shanghai. So there's a great team now in China that's complete, that is driving momentum, with the dealers, driving momentum with -- we adjusted the price as we declared earlier to reflect the realities of the competitive landscape, that's after the rare earth increase we did last year. And obviously, as the months have gone by, we're starting to see that the penalty that was in front of us with government opportunities has disappeared and basically, we are now bidding on the opportunities like the next tranche, [ph] Beijing Metro, et cetera. So I would say Pedro and the team -- Pedro has been to China twice in the last 6 weeks. I'm going to be with him at the September Chongqing's Mayor's Conference. We're going to opening the new factory in Chongqing that is going to be serving the Central and West regions. As you know, there's also been a big shift in mix from the basically traditional mix to more low-cost housing, where perhaps Otis had a bit of weakness. But now with the new factory, with the new product line and everything we put in place, basically, we feel very good that we have a guidance that Pedro can achieve going forward and more importantly resume our share position in that market. I think it's all coming together. And as a matter of fact, as we said, I mean, it's 1 month, but I would say, we continue to see similar momentum. June was a record month of sales for Otis in China, following a couple of very difficult months. July is off to a reasonable start. So I mean, it's early in Q3 and I'm not going to give details. But I would say, everything we've done as we monitor, and I'll be there personally later on in September, I would say it's coming together and Otis is a strong franchise and will deliver on its promises to its customer and shareholders.

Operator

Our next question comes from Carter Copeland from Barclays.

Carter Copeland - Barclays Capital, Research Division

Just a quick question on the aftermarket. Greg, I wondered if you might speak to differences in trends you might be seeing in wide-body versus narrow-body or even in spares versus MRO at Pratt.

Gregory J. Hayes

Yes, I think it's very platform-specific as we look at the Pratt issues in the aftermarket. I think what we have seen is -- actually, shop visits are now look to be coming down in the back half of the year from what we expected. And that's really primarily related to some of the actions that Delta and some of the others are taking at the legacy 757 fleet, where we're seeing planes parked and their engines parted out. So again, I think airlines are very focused on cost containment and the 757 fleet obviously is Pratt-powered primarily, we're seeing a bigger impact from that. The other piece that I guess catches us a little by surprise but probably shouldn't have is on the V2500. Again, to Louis's point, we've got 4,500 engines out there in service today. About 5 years ago, we put in an upgrade called the select program. And that's actually extended the time on wing about 2,000 to 3,000 hours. So some of the V2500 overhauls that we had expected this year are getting pushed into next year. So it's not just one thing. I think you've got a few retirements of 757s. You got better on-wing performance on the Vs and then you've got the 4000, which again we did a lot of work a couple of years ago, and they're also staying on-wing longer. So cash conservation by the airlines, better on-wing performances and some retirements, all that kind of added up to what we see for the aftermarket this year at Pratt now.

Louis R. Chenevert

And Carter, a little -- other comment, which is showing the signs of the airline are cautious as they shop content per visit perhaps reflect some of that. They don't book the full content that we would expect them to book, which means there's going to be shop visit sooner in the future because of that. And overall, I'm very pleased, as you know, with the IAE transaction. While it doesn't always get the spotlight, I think, as much as it should, it's a huge transformational deal. It's a large install base for Pratt with a big backlog. And those planes are flying. It's a young fleet. It's going to be around for a long time. And I think that has a very positive impact on Pratt aftermarket business for a long time to come.

Carter Copeland - Barclays Capital, Research Division

Great. And just as a second question, like Jeff, I don't want to get too hung up on single months. But you called out that the residential HVAC orders were up 4, how did that trend over the quarter and can you speak to what you're seeing in June?

Gregory J. Hayes

June or July?

Carter Copeland - Barclays Capital, Research Division

July, excuse me.

Gregory J. Hayes

No, I think -- as you think about it, it's been very lumpy year on the resi side here in the U.S. We started out and had a very slow first 2 months of the year and then a very, very strong March. And we ended March with great momentum. We saw orders up and then slowed down again in April, slowed down in May. And then with all of the heat across the U.S., we had a very, very strong June. And that continued into the first part of July here. Again, not surprising, when you look at the temperatures across the U.S., we've had a very, very good cooling season from that respect. So again, I think we're still expecting kind of 4% to 5% growth in res for the year. Could it be better? I think it will depend really upon the weather and restocking. Right now, channel inventories look to be about normal for this time of year. We're seeing good sellthrough from distribution. So I think it's -- there might be upside, but it's really too early to call on, and I think we're properly calibrated on that. And the other thing, of course, you've got to remember there's still the heating season in front of us when last year at the legacy Carrier business, there really was no heating business because of the very, very warm weather we had throughout the fall and early winter last year. So it's too early to call, but I'd say right now, we're cautiously optimistic on the market for the year.

Operator

Our next question comes from Terry Darling from Goldman Sachs.

Terry Darling - Goldman Sachs Group Inc., Research Division

Just probably a couple of follow-ups here. First, on the aftermarket, I'm wondering, from a timing perspective, number of the items that you called out here sort of seem transient in nature but could continue for a couple of quarters, obviously reflected in your guidance. Thinking about 2013, do you see bounce back there? Is it just purely contingent on where the demand in the market is, or how do you think about the aftermarket growth as you move into 2013?

Louis R. Chenevert

Terry, I guess it's way too early to give guidance on 2013. But let me give you just maybe a bit of color. Our goal is to grow earnings double digit year after year and we know the formula. I mean, it's probably a third organic growth, it's a third margin expansion and I think the track record of this team on margin expansion speaks for itself. And then the other third is how we deploy capital. So I mean, there's no doubt that with the changes we've done, with the transformational acquisition, we have some good momentum. And we will expect solid accretion from the Goodrich and IAE transaction next year and I think the game plan is in place. We're working to mitigate some of the headwinds like CMH but at the same time we have a great backlog, for example, on S-92, the backlog is at a record of $1.4 billion. So there's a lot of moving parts. This team is enthused, energized and stay tuned and I think we'll deliver UTC stellar results as we go forward.

Gregory J. Hayes

I'll just add. In terms of the aftermarket, one of the things that obviously drives airline behavior is oil prices. We have seen oil prices come down about 20% in the last 3 months. That takes about 6 months to find its way through in terms of ordering patterns at the airlines. The shop business, which were light -- we saw this back in 2010. Louis has always talked about the walls, [ph] spares, and spares over time are going to be there. I guess it's just a question of timing. So I can't tell you whether that's third or fourth quarter this year. Obviously, we think it's not going to happen. We'll see it at some point, but it is -- to Louis's point, way too early to think about what spares outlook is going to look like. The world is pretty dynamic given everything that's going on. But again, I think airlines are flying, flying the planes full. We've got a big fleet of V2500s out there. We've got a good fleet of legacy Pratt products, so spares will come back. I think it's just a matter of timing to your first point.

Terry Darling - Goldman Sachs Group Inc., Research Division

And I appreciate we are a long way away from 2013 guidance. But Louis, it doesn't sound like you see anything out there with regards to the ability to grow double digit at this point that you'd want to highlight for us. I guess the question is, in that context, 1/3 from capital allocation, are you thinking the Goodrich accretion, in that mix, in other words, do you think that organically, double-digit growth is possible?

Louis R. Chenevert

Well, you heard what I said before, and it's way too early to give guidance, but this is the culture of this company, to drive double-digit earnings growth and that's what we're focused on, I think we have the pieces coming together. Stay tuned.

Terry Darling - Goldman Sachs Group Inc., Research Division

And then maybe just lastly, non-res construction in the U.S. doesn't sound like you really changed your outlook there, bunch of data points on both the positive and the negative side from other players. How are you seeing that market at this point in and around that mid-single digit kind of longer term outlook?

Gregory J. Hayes

It's surprisingly strong. And I think again, to some of the early discussions, it's really -- we're still seeing the benefit from new product introduction and this pushed towards energy efficiency. So while there isn't much new construction going on, there remains a very robust retrofit market. And I think with the line of products that Carrier has in terms of the very, very energy-efficient chillers, they're gaining traction in that market. And that's really what I would attribute the results of this quarter and our outlook for the year to.

Operator

Our next question comes from Myles Walton from Deutsche Bank.

Myles A. Walton - Deutsche Bank AG, Research Division

First one, just clarification on net proceeds from the divestitures, now that you've kind of come to consummation on the major ones, is it still net about $3 billion or plus or minus?

Gregory J. Hayes

Yes. Probably $3 billion plus. Again, I think we've still got a couple of pieces to go here yet. I think Louis mentioned, we work very, very close on the Clipper divestiture. I think you'll see that in the next, I don't know, couple of days, couple of weeks. But net-net, I think that $3 billion plus is still very good number. That's of course after tax. There's a little bit of tax leakage on the industrials.

Myles A. Walton - Deutsche Bank AG, Research Division

And then the real question is on cash flow for the year. Just looking at the generation you had in the first half, which is great, and looking at the second half, which should have in absence of pension contributions that have been there in prior years. I'm just at a loss as to why cash won't be as good if not better than -- significantly better than the last couple of years' back halves because of the absence of that pension contribution.

Gregory J. Hayes

We're not going to change the guidance on cash flow but let me tell you...

Louis R. Chenevert

I thought you said better or equal.

Gregory J. Hayes

Yes. The cash flow is going to be very strong in the back half. And to your point -- there's no cash pension contributions. You also have the benefit in the back half of the year of the Goodrich amortization as we write up some of their inventory and other assets and take some charges around -- some amortization charges. So yes, cash will be very strong in the back half of the year and I think once we get the Goodrich deal consummated later today, we'll come back in September with either Louis or one of us will probably update you on cash flow and I would expect it to be better than what we are currently guiding to.

Myles A. Walton - Deutsche Bank AG, Research Division

And you mentioned the 1/3 of the deal price will be paid for from the assets or the divestitures plus cash from the cash flow. What's the pro forma cash position at the consummation?

Gregory J. Hayes

We've got about $6 billion of cash on the balance sheet today. And I think there's -- we've got another $16 billion of restricted cash out there, which will go to pay off the owners. What we're really going to do is you'll close most of these deals at the end of the year. I think debt to cap of the end of the year will go down to about 48% and we'll continue to pay down even into next year. But I think again there's plenty of cash both from Goodrich operations as well as the UTC operations this year. We've got some cash on the balance sheet. I think paying down 1/3 of this, this year is not going to be an issue. With Rocketdyne closing probably early next year as opposed to late this year.

Operator

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

Ronald J. Epstein - BofA Merrill Lynch, Research Division

Just wanted to just get a quick update on how it's going with the GTF, where we are in the development program and you've got multiple engines, right, or multiple platforms and maybe Louis could talk about that, what's going on with the GTF.

Louis R. Chenevert

Well, first of all, we're very happy with the traction of GTF in the market. And at this point in time, what we have seen is that the engine development is coming together nicely. All the advanced engineering we did and the technology readiness is paying off with, I would say, better than expected first time tests for all the engines we've got about, I think, it's 3,000 hours, we have even more cycles. We just did 2 very important tests. We did the flocking bird test on the GTF, which is the 5 1.5 pound bird and 1 2.5 pound, and we passed that with flying colors, maintained the performance required. We also did a large bird test. Those are all of the new FAA-required testing and that is basically passed very well. The large bird test. So there's only 1 test left, which is the blade-out test. All our modeling suggests we're on track. We're geared up to deliver this engine at the end of the year for the Bombardier application and every program behind. I would say, I always challenge the team because this program has gone remarkably well. And all the expertise we have in Pratt has come together to deliver what's been so far a very flawless program execution. So we're buttoned up, lined up on all the different platform. Everything is on track and you see it through the R&D investment. Obviously, it's a very intense period for R&D. And my commitment earlier was that 2012 was going to be the peak on R&D. And I would say that Dave and the team are holding to that commitment, that 2012 will be the peak on R&D. So everything is on track and I would say the customers, as we've won the different competition, the customers truly value the technology advantage of GTF and not only fuel burn, but noise reduction, emissions reduction and they feel very comfortable that our engine is coming together and we'll deliver on the promises. And every transaction, I would say, that Dave and the team have done, I have reviewed them with Greg and we're proud of wins we've got. We won on the merits of our technology and the platform and it's doing very well.

Ronald J. Epstein - BofA Merrill Lynch, Research Division

Now, maybe just 1 follow-on onto that. So far, everything's now about in [ph]. I mean, what -- how should we think about the potential investment and the whatever, a 90,000-pound-plus class engine for a wide-body. I mean, is this technology that can be moved up to that level? Is the company thinking about that?

Louis R. Chenevert

Well, I think what we have found out with the GTF architecture now is that it's also scalable. And I think that there's no doubt that the Pratt team has had discussions with some of the key players in the market that see the value of the technology. But you can expect that obviously, the operating discipline and the UTC discipline on program will apply. All this has to come together where it makes sense for the customers and the shareholders. And obviously even the GTF, and we have big partner content. Partners have been superb, by the way, whether it's the Japanese or MTU. And there's big appetite. As people see the success of our platform, there's big appetite to take on, basically, the portion of the program as a partner. And then that's something that's a big change over the last couple of years as people recognize we have a superior technology advantage in the market.

Operator

Our next question comes from George Schapiro from Shapiro Research.

George Shapiro

Louis, a kind of a long-term question. If I go back and look at Otis' history, you had 1 year of downturn, the last time being in '97 and the time before that, in '90, and then following that, a sharp snapback to record profits. My question is the difference is that you only made 10% margins then, and you're making over 20% today. So what is the risk to any steady margin degradation at Otis that would make this time kind of look like different than the 2 downturns we saw before?

Louis R. Chenevert

I've said that before as far as Otis margin, there's no doubt, Otis is a 20 plus percent return business. And I think nothing has changed. Obviously, we've had a soft patch in China over the last couple of months, I explained earlier on the queue that I think we have taken the right measures from a leadership structure, from the action with the dealer and it's starting to recover. I have high confidence in Otis' future results. I will also remind you that a big portion of the results always come from the aftermarket fees, which is paramount to Otis' base success. And that -- the install base has grown, by the way -- continues to be a huge opportunity and Pedro's hired recently 600 new mechanics that we are training to deliver the highest-value service to our customers. The unexplored territory is still the China aftermarket and I would say we're all over it at this point in time with the change in leadership we have done. Those guys are in the same time zone, they're there every day, they know the market. The nice thing about Otis is we're 95% localized in China. We are also a local leadership that understands the dynamic of our market. I think the changes we did allow to make decision on the spot, and I think that's going to start to create a lot of good momentum for aftermarket. So I think there's always pluses and minuses but nothing has changed as far as the fundamental of Otis being the leader in its segment and as you said before, there have been glitches before. We have another one. But I think Pedro's leadership is making a huge difference.

George Shapiro

I guess the thing I'm concerned about is the aftermarket, I'm sure, has been a big part of why the margins have gotten so high. And now you're talking about the pricing pressure. I mean, is that -- it would seem to be self-limiting, but can you provide some more color on how much down that might take the margins?

Gregory J. Hayes

George, I think the issue here is the aftermarket is very profitable. But we also make money on the OE side through all the factory cost reductions. And it's really been the balance between OE and the aftermarket that's been a success story of Otis over the last 7 or 8 years as they've driven these margins up, so -- and we've got this huge install aftermarket -- or install base of about 1.8 million elevators that we service around the world. And we also make money out of the OE side because we've been able to leverage the global scale of Otis. And even with sales which really haven't gone anywhere in 3 years, the margins have remained very strong, north of 20%. And I think if we get a little bit of growth, you're going to see the margins even improve further at Otis. So I'm not worried about a big long-term downturn in Otis margins. I think they have a focus on cost in everything that they do, they leverage global scale better than any other business that I'm aware of. And they've got their eye squarely on the goal of maintaining this industry-leading margin.

Operator

Our next question comes from Sam Pearlstein from Wells Fargo.

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

First question was just -- in CCS, was that $112 million of favorable adjustments expected when you gave your original year-over-year changes?

Gregory J. Hayes

Yes, it was.

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

Okay. And then secondly, related to George's question just on the Otis, you've highlighted, I guess, 3 different things in terms of the pricing issue, the brand issue and then the actual high-end residential pieces in China, and then I guess some of the pricing pressure and services in Europe. Could you just talk about what your assumptions are as you go through the remainder of the year in those different buckets? And really, is there any reason to think those trends continue into next year as well? Just trying to think about how much we can see Otis growing into the future periods.

Gregory J. Hayes

Yes, I think if you think about new equipment, we now think on a constant currency basis, sales will probably be flat for the year and service is only going to be up about 2 points. I think there is opportunity, obviously beyond that. I think one of the focus that Pedro and team have is reigniting top-line growth. Flat sales with China down is still pretty good, I think, and as China recovers, as the property market there recovers, there is upside in those markets. There's still long-term growth prospects in all these emerging markets. We talk about the 600 cities that are out there by 2025 that will more have more than 3 million people, and those are big opportunities for Otis in the next 15 years. And I think we're well positioned to capitalize on that. So I think it's a tough year this year. It's really a tough year because of the situation in Europe and some of the missteps we've had in China. To Louis' point, we've, I think, corrected those missteps in China, we're getting traction there, we'll recover our share, and Europe will get better eventually, whether that happens this year, next year, who knows. But I think we've got high confidence in Pedro and the team in terms of driving top-line growth, which we really haven't seen in 3 years.

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

And just a final question, just on Goodrich. Once that closes, really when will you be in a better position to talk about how we should think about the accretion into next year, the restructuring opportunities once you can get your hands on the books? Is that something September, October or is it going to wait until the December typical guidance?

Gregory J. Hayes

No, I think we'll have a pretty handle on September. We've got a couple of webcasts. Louis got one, I've got one and then we're going to have a -- we're going to host a half-day session up in Montreal at the end of September with all of the business units. And at that point I think Alain and team will be prepared to talk about next year. But I think again, we still feel good about this $0.50 to $0.55 that we've laid out for Goodrich accretion next year. And I don't think we've seen anything that would indicate that, that's going to be off by any order of magnitude. But again, I think by the end of September, we'll have our arms clearly around that.

Operator

Our final question comes from Deane Dray from Citi.

Deane M. Dray - Citigroup Inc, Research Division

Just want to make sure I calibrated correctly on the guidance change. And so it's $500 million of restructuring and $600 million in gains, does that mean $100 million will be falling through to EPS?

Gregory J. Hayes

Yes, we really got $100 million out there that could fall through to EPS. Obviously, if we decide to spend that on restructuring, that would take you from kind of that midpoint down to the lower end of the guidance range. But right now, we're keeping that $100 million as kind of our back-ocket contingency.

Deane M. Dray - Citigroup Inc, Research Division

Do you have a backlog of restructuring that you could implement? And what would you trigger you to add? You're seeing a number of companies this quarter increasing restructuring pretty aggressively.

Gregory J. Hayes

Yes, we've done -- by the end of this year, we will have done $2.5 billion of restructuring in the last 3.5 years. So it always amazes me that the units come up with new and good payback ideas. So right now, that $500 million that we have is fully subscribed and as we get closer towards '13 and then we kind of understand where the markets are going, there may be further call for additional restructuring. But again, I think the guys have been pretty aggressive in taking out structural cost to deal with the markets and that's why the margins are up this quarter, just continued cost [indisernible] and that's the formula until markets recover, we're going to focus on cost and restructuring and do what we do best.

Deane M. Dray - Citigroup Inc, Research Division

And anything else on the divestiture side? We know Clippers soon to have an announcement, fuel cell and then these required Goodrich divestitures. Anything else that you're contemplating?

Gregory J. Hayes

Yes, we're always looking at the portfolio, Deane. But I would think these are probably the biggest pieces. But as the year goes on, I think I would like to get a lot of -- any of the clean up of the portfolio behind us, so I'd say we're never done but we're certainly getting close to done.

Louis R. Chenevert

But the big elements of transformation will wrap up this year, it's that simple. That's where we'll leave it.

Well, thanks, everyone. The UTC strategy of delivering top-line growth through innovative products, global market reach is solidly in place. We'll keep investing in our game-changing technologies and emerging markets and we always maintained our focus on cost reduction and productivity through the ACE operating system. As end markets recover, we will capitalize on our operating leverage and deliver a solid earnings growth. We'll continue to generate strong sustainable cash flow and effectively deploy that cash through dividend, share repurchase and M&A. Goodrich and IAE transactions are historic, transformational changes to the UTC portfolio that I am proud of and confident we'll generate superior shareholder value for years to come.

Thank you for listening and we look forward to updating you on even more progress at the upcoming webcast through September. Thank you very much.

Gregory J. Hayes

Thanks, everyone.

Operator

Ladies and gentlemen, that does conclude today's conference. You may all disconnect and have a wonderful day.

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