United Technologies Corp. [UTX] on Monday evening closed its acquisition of Rockwell Collins and said it would separate into three separate companies, with United Technologies housing the commercial and military aerospace businesses that are expected to have about $50 billion in sales by 2020.

The $23 billion cash and stock acquisition of Rockwell Collins, which was first announced in September 2017, gives UTC the scale it needs to be a pure aerospace company, allowing it to shed its people-moving, and climate control and fire and security divisions, company officials said on Tuesday.

The sale of the Sikorsky helicopter unit to Lockheed Martin [LMT] in 2015 was the right move for UTC but “it also left us sub-scale on the aerospace side,” Greg Hayes, chairman and CEO of UTC, said on an investor call Tuesday morning to discuss the Rockwell Collins deal and the pending breakup of his company. With Rockwell Collins, “we will now have an aerospace business that will have sales of roughly $50 billion by 2020 and that gives us the ability, I think, with that scale, to think about a standalone aerospace business.”

UTC Chairman and CEO Gregory Hayes. Photo: UTC
UTC Chairman and CEO Gregory Hayes. Photo: UTC

Including Rockwell Collins, the aerospace business of United Technologies had $39 billion in sales in 2017. The separation into three independent companies–United Technologies, Carrier and Otis–is expected to take 18 to 24 months to complete and still requires approval by UTC’s board, a successful filing with the Securities and Exchange Commission, a tax opinion from counsel, and completion of financing.

Hayes will oversee the transition and remain UTC’s chairman and CEO following the spin-offs, which are tax free, but are estimated to have between $2.5 billion and $3 billion in one-time costs, mainly due to overseas tax expense, changes to the corporate portfolios, which are globally distributed between “nearly 1,200 different legal entities,” and debt retirement expense, Akhil Johri, UTC’s chief financial officer, said on the call.

One of the strategic rationales for the pending separation is that each business will be more agile, have more flexibility for mergers and acquisitions, and create capital structures in line with their respective risk and return profiles.

UTC is combining its UTC Aerospace Systems business with Rockwell Collins to create Collins Aerospace Systems, which will be one segment of the aerospace portfolio, with 70,000 employees. The other will be the legacy Pratt & Whitney division, which develops and manufactures aircraft engines for commercial and military aircraft, including the F-35. UTC said its aerospace business has long-term potential to achieve operating margins in the mid-to-high teens.

Rockwell Collins reported its fiscal year 2018 results on Monday before the close of the acquisition, with sales of $8.7 billion. UTC Aerospace Systems posted $14.7 billion in sales in 2017 and P&W $16.2 billion.

UTC didn’t break out pro forma 2017 sales by product type but a slide presentation that was part of the analyst call shows that large commercial engines make up the largest sales category within the aerospace segment, followed by military engines, avionics, power & controls, and mechanical systems, with each accounting for relatively equal shares. The rest of the aerospace business is divvied up among interiors, aerostructures, and mission systems.

When UTC announced its agreement to acquire Rockwell Collins, it said the resulting aerospace division, which is now Collins Aerospace, would have nearly $5 billion in military aerospace systems sales.

Following the close of the Rockwell Collins deal, UTC updated its financial guidance for 2018, with sales expected to be $500 million higher at between $64.5 billion and $65 billion. Earnings are now expected to range between $7.10 to $7.20 earnings per share, 10 cents per share lower due to dilution from the shares used to acquire Rockwell Collins. In 2019, UTC expects the deal to add 15 to 20 cents to EPS, excluding acquisition related costs.

Free cash flow this year is expected to be between $4.3 billion and $4.5 billion, down from the prior outlook of between $4.5 billion and $5 billion.

UTC also said the acquisition will create more than $500 million in annual pre-tax cost savings by year four.

During the transition, UTC expects to at least maintain its dividend and not make significant share repurchases, Johri said. Small acquisitions to “fill in gaps” are still possible but the company’s main focus is to deleverage the balance sheet, he said.